ETF Update: Shorting Small Caps, New ETCs, Not All Sector ETFs Are Created Equal, Emerging Market Giants, ETF Review

Shorting Small Caps

It appears as if investors are nervous about the future of small-cap stocks and the ETFs that carry them. Jesse Emspak for Investor's Business Daily reports that investors shorted small-cap ETFs as high as 114% of assets, as of September 17. This is a 6.6% increase since August, according to data from State Street Global Advisors.

ETFs can be sold short easily because they trade throughout the day like stocks. Because they are valued intraday, exchanges release short interest data mid-month. Short interest is a good indication of how much investors are betting an investment will drop in value. Short interest shriveled the most in the finance sector, as those ETFs showed a 55.9% decrease in the short assets held.

New ETCs

Last week, London-based ETF Securities launched a range of exchange-traded commodities (ETCs) on the London Stock Exchange, allowing access to commodity futures at differing maturities. The ETCs will track 29 individual commodities and baskets of commodities, with two maturities available that would give investors access to energy, agriculture, precious and base metals, Reuters reports. The only difference between ETCs and ETFs is that ETCs are securities and not funds.

The first ETCs to track DJ-AIG Commodity Indexes were listed on the LSE in September last year. Since then, the existing 29 ETCs tracking DJ-AIG Commodity Indexes have accumulated more than $1.2 billion in assets.

Not All Sector ETFs Are Equal

We've mentioned before that not all ETFs that cover a specific region or sector are created equal. Even if the stocks are similar, ETFs can behave differently. In funds weighted by market capitalization, bigger companies tend to have more sway. In equal-weighted funds, all companies have the same impact.

They'll do better when the smaller ones shine. One sector that illustrates that point clearly is in biotechnology ETFs. Although these ETFs' performance hasn't been too exciting recently, they're still worth watching. Let's examine five biotech ETFs:

SPDR S&P Biotech (XBI) XBI is up 29.8% year-to-date. It's top three holdings are Myriad Genetics (MYGN) at 3.6%, Biomarin Pharmaceutical (BMRN) at 3.4% and Alkermes (ALKS) at 3.5%.

PowerShares Dynamic Biotech & Genome (PBE) PBE is up 11.6% year-to-date. It's top three holdings are Imclone Systems (IMCL) at 5.7%, Amgen (AMGN) at 5.3% and Gilead Sciences (GILD) at 5.3%.

First Trust AMEX Biotechnology Index (FBT) FBT is up 11.6% year-to-date. It's top three holdings are Vertex Pharmaceuticals (VRTX) at 6.7%, Biogen Idec (BIIB) at 5.9% and Amylin Pharmaceuticals (AMLN) at 5.7%.

iShares Nasdaq Biotechnology (IBB) IBB is up 11.3% year-to-date. It's top three holdings are Amgen (AMGN) at 10.5%, Gilead Sciences (GILD) at 7.2% and Celgene (CELG) at 6.4%.

Biotech HOLDRs (BBH) BBH is down 3.3% year-to-date. It's top three holdings are Genentech (DNA) at 38.7%, Amgen (AMGN) at 20.7% and Gilead Sciences (GILD) at 15.1%

What should jump out at readers is how different the many of the holdings and their weightings are in the different biotech ETFs. That's one factor behind some of the wide ranges of performance. Another factor is the bid-ask spread.

As with stocks, there's a difference between what a market maker will charge an ETF buyer and what that same dealer will pay a seller. The difference is the "bid-ask spread," and for investors, the smaller the spread, the lower the cost, reports Ben Levisohn for BusinessWeek. As a general rule, when an ETF sees little trading activity, bid-ask spreads can get wide.

Emerging Market Giants

Emerging markets ETFs have been superstars lately. However, these areas can be laden with volatility. For those looking to invest in larger companies to hopefully offset some of the riskiness, consider the PowerShares FTSE RAFI Emerging Markets (PXH).

PHX tracks the FTSE RAFI Index that follows the largest companies among the emerging markets based on four fundamental factors of firm size such as book value, cash flow, sales and dividends, reports Zoe Van Schyndel for The Motley Fool. The expense ratio for PXH is also on the larger end at 0.85%.

Countries who make up the assets are usual suspects like Brazil, China and South Korea. Financials and telecommunications make up around half, while energy and materials also place high. Top stocks include Rostelecom (ROS), Posco (PKX), and PetroChina (PTR). PXH's main competitors include the iShares Emerging Markets Index (EEM) and the Vanguard Emerging Markets Stock ETF (VWO).

For full disclosure, some of Tom Lydon's clients own EEM.

ETF Review

Last week, U.S. equity ETFs issued $1.2 billion. Futures-related ETFs issued $396 million, nonfutures-related ETFs issued $3.6 billion and short ETFs issued $201 million. The leading issuers were DIAMONDS Trust, series 1 (DIA), which issued $2.0 billion; iShares Russell 1000 Growth Index (IWF), which issued $493 million; and Vanguard REIT Index ETF (VNQ), which issued $400 million, according to a Trim Tabs Weekly Liquidity Review for Forbes.

The leading redeemers were iShares Russell 2000 Index (IWM), which redeemed $965 million; SPDRs (SPY), which redeemed $626 million; and Materials Select Sector SPDR (XLB), which redeemed $523 million.

As of September 28, 2007, 560 ETFs in the U.S. were offered by 17 ETF providers, with assets totaling about $554 billion. Fifteen new ETFs were launched during September.

International and size-based ETFs experienced considerable asset growth, respectively gaining $18 billion and $17 billion, with sector, commodity, style, specialty, and fixed-income ETFs all adding more than $1 billion each. Of the 17 managers, Barclays had the largest assets under management at $311 billion across 139 ETFs, followed by State Street with $133 billion in assets under management across 60 ETFs, according to a State Street Global Advisors newsletter.