ETFs: passive debate rages

17th February 2011

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Landers, who runs BlackRock's Latin American investment trust, said BlackRock's combined mutual funds, investment trusts and ETFs – BlackRock owns iShares, the world's largest ETF provider – made it the biggest investor in the region with about $20 billion under management.


Shah, who co-runs the BlackRock Emerging Markets fund and helps manage the BlackRock Latin American investment trust, said: ‘The most liquid markets suffered outflows from passive investors. That's what's happened. Passive funds have built up big positions with [big creations] of ETFs.'


He said that this ‘causes more volatility'.


The Ibovespa index which tracks 50 Brazilian companies dropped about 8% from a 71,633 point peak on 12 January to 65,771 on 8 February.  

Landers said that the disappointing performance of the Brazilian market in 2010 was due the circumstances of one company, Petrobras, the largest listed company which saw its share price fall by 25%. However the performance at the beginning of 2011 was due to investor fears related to events in Egypt and across the middle east.

Landers said: ‘We remain very positive in our outlook for the country – it has a strong top down story with lowest valuations in the region and a re-emerging middle class that is boosting domestic consumption.'

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Citywire writer Rob Mackinaly earlier in the week Tweeted about  Watch for US – 13 of 23 launched in July are on the list of likely failure and Have traders been using ETFs to hide insider dealing?


On the Wall street Journal online

xchange-traded fund companies generally sharpened their aim in terms of matching market returns last year, but many ETFs still missed by wide margins, according to a study by Morgan Stanley Smith Barney.

Exchange-traded funds, baskets of stocks or bonds that trade on stock exchanges, are typically designed to match the performance of a benchmark like the Standard & Poor's 500-stock index or the Barclays Capital U.S. Aggregate Bond Index. In reality, ETFs almost never precisely accomplish that goal. Investment fees, changes to indexes and tweaks by investment companies to make ETFs cheaper and easier to trade can all play a role.

These performance discrepancies, often called "tracking error," don't necessarily mean investors come out behind, but they can mean ETFs aren't completely living up to marketing promises. Fund companies frequently brag about accuracy in their advertising.

Morgan Stanley Smith Barney said ETFs that target the U.S. stock market missed benchmark returns by 0.57 percentage point on average in 2010, compared with 0.84 percentage point in 2009. Among international funds, which tend to have higher costs and target securities that are harder and more expensive to trade, discrepancies were wider but also narrowed from 2009. On average, international ETFs missed their mark by 1.1 percentage points versus 1.94 percentage points in the prior year.

Such distinctions may seem small, but they can be a big deal to ETF companies, which compete to lure investors by touting performance differences between funds. Those differences can amount to as little as a few hundredths of a percentage point each year.

The recent report didn't address why funds' tracking error improved, and Morgan Stanley Smith Barney didn't immediately respond to requests for comment. Executives at ETF firms BlackRock Inc. and Vanguard Group speculated that declining market volatility or growth in ETF assets, which helps funds to own more stocks and bonds in any given index, may have been contributing factors.

Some ETFs still missed by big margins, with 11 funds off by more than three percentage points. The worst offender: SPDR S&P Emerging Europe ETF, which returned 14.6% in 2010, compared with the 20.5% return of the S&P European Emerging BMI Capped Index that it follows. State Street Corp., which oversees the ETF, said the shortfall reflects the fact that the fund holds just 91 of the 234 stocks in the index. Amid a strong rally, the fund missed out on some of the gains.

In fact, there is an advantage to such skimping, especially for funds that focus on stocks that are difficult or expensive to trade. Funds typically try to make it as easy as possible for dealers that traffic in ETF shares to buy and sell the stocks the funds hold, something the dealers need to do to make sure ETF shares trade at accurate values. If the task becomes too difficult, investors may end up paying big mark-ups, when they themselves trade ETF shares. While those mark-ups won't necessarily be reflected in an ETF's performance numbers, they come out of investors' pockets all the same.


joe stalin

Feb 17, 2011 at 08:29

ETF's have a lot to answer for it is not just emerging markets its oil commodities and food stocks such as rice sugar and wheat. They have proliferated dramatically over the last couple of years



Feb 17, 2011 at 08:29

He probably means hedge funds and others who use algorithm driven computer programs to trade automatically . They move in and out of ETFs , driven by technical analysis signals.

I agree about the Brazil story and piled in last year when it was cheap.




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