I have written a couple of times recently about some new ETF products coming to market. This morning I found an article on Marketwatch from earlier in the week about 17 news funds in process from State Street.
This is good and bad. The good is that access is available to all sorts of segments of the stock market or other asset classes. The bad is the potential distortions caused by duplication. I don't know how many homebuilder ETFs there are (I think two?) nor do I know if any new ones have been filed before but it makes sense to think there could be a couple more.
Toll Brothers (TOL) has a $5 billion market cap, Lennar (LEN) has a cap of $10 billion, Pulte (PHM) is also at $10 billion. I don't follow this group very closely (which is probably the subject for another article all by itself) but these three names seem to get a lot of coverage on bubble vision yet they are quite small.
There could be demand for these stocks from other homebuilder ETFs, UITs (check the comments from recent posts for input from Market Participant for more insight about UITs), the various cap and style ETFs that have come or are coming like the latest bunch from Rydex.
The notion of too much supply is a real problem the looms in the future. I'm not sure yet what the consequence is of too much supply of access, broadly speaking, but too much supply, narrowly speaking, probably means prices go down. For example I believe in the fundamental story unfolding in commodities but a lot of investment products have been or will be created. Econ 101 tells us that too much supply will dwarf demand and cause prices to fall. But what about the fundies? What about the supply?
Fortunately I don't have to be the first one to figure this out and neither do you. If you want to be diversified you will always have some exposure. At different times you may have a lot or a little exposure, this should ebb and flow over time.
If the entire theme crashed in a vacuum what would be the impact on your portfolio? If every commodity related position you have cut in half in one day how much would your overall portfolio decline? If you don't like the answer, you have too much.
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8 comments:
Er, what are UITs, please? I couldn't find anything about them on Market Participant.
I'd be curious to hear your take on REITs. Roughly, how much exposure do your clients have? Have you reduced exposure recently in light of recent performance and rising interest rates. Can't believe the REIT index closed out 1Q with a nearly 15% gain.
Best, Parkite
UIT is unit investment trust. They are not exchange traded.
MP left comments on my blog about them.
Most clients own one REIT at about 3% of the portfolio. A couple of people own two REITs. I haven't made any changes here in a while.
Yahoo finance has IYR up just under 15% for the quarter. My one REIT up just under 20% (got lucky).
http://www.sec.gov/answers/uit.htm
UIT's are hybrid between a closed and fund and an ETF. Investment advisors sell them to personal clients. UIT's tend to have costly sales fee's of around 5%, and kick back a portion of this as commission to brokers. UITs are a bad investment, mostly sold by greedy investment advisors who enjoy getting kickback "incentive fee".
Because of the personal sales aspect of UIT's, UIT portfolio's tends to have interesting themes and strategies that would be of interest to potential customers. Because UIT's are passive, you can't sell the "value" of the management team to the client. You can only sell the merits of the portfolio. Kind of like an ETF.
IIRC the earliest ETF's such as HOLDR's are actually structured as unit investment trusts, which is why HOLDR's never change their portfolio and can only be sold in round lots of 100.
Market Participant
I like REIT's a lot, they give you the advantages of owning real estate without the hassle. IMHO the best way to get exposure is via a REIT ETF such as ICF or VNQ.
Also of interest are Business Development Companies like Gladstone Capital (GLAD), and Allied Capital (ALD). BDC's are flow-through entities that do equity financing/mezzanine lending. So they payout almost all their income as dividends. ALD for example has a 7.7% yield and GLAD with 7.5%.
As part of the financing process BDC's also do development consulting with their customers. Essentially a BDC is a venture capital/private equity REIT.
Market Participant
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