WisdomTree, State Street Draft Floating-Rate Treasury ETFs

Morningstar

Recently, two exchange-traded fund providers submitted paperwork with United States regulators seeking permission to create passively managed ETFs that would track the performance of the U.S. Treasury's floating-rate public obligations.

In January 2014, the U.S. Treasury Department is set to roll out floating-rate securities, which will be its first new product since introducing Treasury Inflation-Protected Securities in 1997. The issuance is aimed at expanding the department's investor base, financing the government at the lowest possible cost over time, meeting continued investor demand for government debt, and dealing with a significant amount of government bonds that are maturing.

Floating-rate notes are aimed at investors who are concerned about eventual interest-rate increases. Floating-rate notes likely also would pay out more than fixed-rate debt.

Now, with the auction scheduled for January, two different ETF issuers are preparing funds that would target floating-rate Treasuries.

First, on Nov. 8, State Street filed with the SEC seeking permission to create the proposed SPDR Floating Rate Treasury ETF FLTY, which would track an unspecified index tracking the market for U.S. Treasury floating-rate notes. The number of holdings in the proposed fund would be based on a number of factors, including the fund's size.

State Street did not detail a price tag for the proposed ETF.

Next, on Thursday, WisdomTree submitted paperwork with U.S. regulators seeking permission to create a passively managed ETF that would seek to deliver results corresponding with the performance of the market for the U.S. Treasury's floating-rate public obligations.

The proposed WisdomTree Floating Rate Treasury Fund would track a WisdomTree-managed, market-cap-weighted index of U.S. Treasury floating-rate public obligations. The securities' coupon rates initially are expected to reset weekly according to the result of the most recent 13-week T-bill auction plus a spread, subject to a minimum net yield of 0%.

Both proposed ETFs would use a representative sampling strategy, meaning that they would not hold all of the securities in their respective indexes.

WisdomTree did not provide a ticker symbol or expense ratio for its proposed fund.

ALPS Proposes Workplace-Equality ETF
On Friday, ALPS submitted paperwork with U.S. regulators seeking permission to create an ETF that would hold companies that support workplace equality for lesbian, gay, bisexual, and transgender employees.

The proposed Workplace Equality Fund EQLT would track an equal-weight index managed by Denver Investment Advisors that contains 140 publicly traded U.S. and foreign companies. The index provider uses publicly available lists and screening sources to identify companies with workplace policies that meet the index's criteria, along with the firm's own proprietary database. The criteria include nondiscrimination policies regarding sexual orientation and gender identity, and providing full benefits for same-sex spouses, domestic partners, and transgender individuals.

The proposed ETF would charge 0.75%.

Global X Launches Portugal ETF
On Wednesday, Global X rolled out the first-ever single-country ETF devoted to Portuguese stocks. Global X FTSE Portugal 20 ETF(PGAL) tracks an index of the top 20 companies that are either based in, principally traded in, or that generate their revenue primarily from Portugal. The new fund has exposure to a broad range of industries, including the utilities (26.0% of the fund's assets), consumer services (23.0% of assets), financials (15.5%), and energy (14.5%). But the fund is extremely concentrated. In fact, the top 10 holdings soak up nearly 80% of its assets. PGAL charges 0.61%.

ProShares Rolls Out Investment-Grade Hedged Interest-Rate ETF
On Nov. 7, ProShares debuted a passively managed ETF that holds investment-grade corporate bonds but contains a built-in hedge to protect the portfolio from higher interest rates.

ProShares Investment Grade--Interest Rate Hedged ETF(IGHG) is a sibling ETF to the firm's previously launched ProShares High Yield--Interest Rate Hedged ETF (HYHG), which rolled out earlier this year. IGHG tracks a Citigroup index that contains investment-grade corporate debt but also has a duration-matched short position in U.S. Treasury bonds. With this approach, the index targets a portfolio duration of zero. The index also limits each issuer to 3% of the market value of the investment-grade corporate position.

The new ETF charges 0.30%.

UBS Launches Another Leveraged Income ETN
On Wednesday, UBS rolled out yet another exchange-traded note offering leveraged exposure to an index containing securities that pay high levels of income.

UBS ETRACS Monthly Pay 2xLeveraged Diversified High Income ETN(DVHL) seeks to double the returns (for better or worse) of an NYSE-managed, multiasset index that it tracks. It also is aimed at offering investors income by churning out variable monthly coupons that are twice the index constituents' cash distributions. At the same time, the fees for this ETN are layered and path-dependent, so expenses likely will vary based on the index's trailing performance. And expenses can create a meaningful drag on the yield of this ETN relative to its underlying index. So investors should beware: They may well end up receiving yields that are substantially lower than the yield listed on DVHL's fact sheet. Plus, distributions are paid out monthly and taxed at ordinary income tax rates. This differs from unleveraged dividend ETFs, whose distributions typically are considered qualified dividends and taxed accordingly.

DVHL tracks an index that is diversified across geographic regions, which means it holds international equities and emerging-markets bonds, in addition to domestic securities. The benchmark also is diversified across asset classes and sectors, containing equities, bonds, master limited partnerships, business development companies (BDCs), REITs, preferred stock, and high-yield bonds. The target weightings are as follows: 60% equities and 40% bonds. Within equities, BDCs would make up 15% of the index, energy MLPs would make up another 15%, mortgage REITs would comprise 7.5%, REITs would make up 7.5%, U.S. stocks would be another 7.5%, and international stocks would amount to 7.5%. Then, within the fixed-income allocation, municipal bonds, high-yield bonds, emerging-markets bonds, and preferred stocks each would make up 10% of the index. The index gains some of its exposures through ETFs.

At launch, UBS stated that twice the yield of the underlying index is 13.6%, although as we note above, the yield that investors actually receive undoubtedly will be less.

The ETN has an opaque pricing structure. Its monthly leverage reset is less frequent than the daily reset that most leveraged exchange-traded products use. Even so, we still caution investors, since we hold the view that ETNs that employ monthly resetting of leverage are not suitable for the average investor. Only investors who understand the risks involved, including the effects of compounding arithmetic and volatility's impact on returns, should consider investing.

WisdomTree Files for 5 Narrow, Currency-Hedged Japan ETFs
On Nov. 8, WisdomTree submitted paperwork with U.S. regulators seeking permission to create five currency-hedged ETFs focusing on specific slices of Japan's economy.

All five proposed ETFs would track WisdomTree-managed indexes and are aimed at investors who have poured assets into WisdomTree Japan Hedged Equity Fund (DXJ), which has exploded as the Japanese government has pursued significant efforts to grow that country's economy, including quantitative easing and spending to weaken the yen.

Currency-hedged ETFs devoted to Japan, for instance, are aimed at neutralizing the fluctuations of the value of the yen relative to the U.S. dollar. They track indexes containing companies that are expected to do better when the value of the yen goes down and do worse when the value of the yen increases. And as the yen falls, Japanese companies that are large exporters are expected to do well. However, an unhedged portfolio of Japanese stocks could neutralize this benefit, as the depreciation of the yen could hurt returns. But by holding a hedged basket of those Japanese names, an investor gets the exposure without the currency headwind.

The proposed WisdomTree Japan Hedged Health Care Fund would hold a hedged basket of Japanese health-care companies, the proposed WisdomTree Japan Hedged Capital Goods Fund would hold Japanese capital goods firms, the proposed WisdomTree Japan Hedged Tech, Media and Telecom Fund would hold Japanese technology, media, and telecommunications companies, the proposed WisdomTree Japan Hedged Financials Fund would hold Japanese financial companies, and the proposed WisdomTree Japan Hedged Real Estate Fund would hold Japanese REITs, real estate management and development companies, homebuilders, buildings-products manufacturers, and construction and engineering firms.

According to the filing, the proposed Japan-hedged ETF would hedge currency exposure using forward currency contracts or futures contracts. WisdomTree did not detail expense ratios or ticker symbols for the proposed funds.

Another New ETF Issuer Throws Hat in the Ring: Exceed ETFs
On Wednesday, a New York-based money manager filed with the SEC seeking to be able to begin issuing actively managed ETFs.

Exceed ETFs, whose CEO is Joseph Halpern, submitted a filing spelling out that its first proposed ETF would be named the Exceed Market Opportunity ETF. That proposed fund would invest in U.S. dollar-denominated fixed-income government and corporate debt, and would seek to protect against a portion of market losses and provide enhanced returns on market gains up to a maximum return at the end of a specified term.

ERNY Financial Rebrands as Reality Shares
Back in April, an ETF issuer hopeful named ERNY Financial submitted paperwork with the SEC seeking permission to create both actively managed and passive ETFs. Now, the San Diego-based firm, which is run by former Morgan Stanley Smith Barney wealth manager Eric Ervin, has rebranded itself as Reality Shares. And on Tuesday, the firm filed with U.S. regulators seeking permission to create two passively managed ETFs and one actively managed ETF with the Reality Shares name, all focused on dividend growth.

Reality Shares Isolated U.S. Dividend Growth Index ETF and Reality Shares Isolated Global Dividend Growth Index ETF would track Reality Shares-managed indexes of large-cap stocks, with the global fund containing only U.S., European, and Japanese companies. The indexes are constructed in such a manner as to try to isolate dividend growth of the stocks in the index while trying to minimize the impact of changes in their stock prices.

Meanwhile, the proposed Reality Shares Isolated Dividend Growth ETF would use proprietary trading strategies to isolate and capture the growth in the level of dividends expected to be paid on a portfolio of U.S., European, and Japanese large-cap stocks while minimizing the proposed fund's exposure to those stocks' price fluctuations.

Robert Goldsborough does not own shares in any of the securities mentioned above.

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