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What Are The Limitations And Consequences Of ETFs?

By Niall H. O’Malley of Blue Point Investment Management Before delving into the limitations and unintended consequences of Exchange-Traded Funds (ETFs) it is important to define an ETF. Where did these investment vehicles originate? How significant are ETFs to investors? The first Exchange Traded Fund was launched in January 1993 by State Street Global Advisors under the ticker symbol (NYSEARCA: SPY ). The ETF was designed to track the value of the S&P 500 Index. It is quoted at 1/10 of the value of the S&P 500. The ETF was marketed as a “spider”, shorthand for Standard & Poor’s Depository Receipt (SPDR), traded on the New York Stock Exchange. The popularity of the S&P 500 SPDR led to a family of products. Other fund management companies, such as Barclays – creator of iShares – and Vanguard, followed suit in short order and the universe of ETFs rapidly expanded. The S&P 500 SPDR is still one of the most popular ETFs. Its average volume exceeds 110 million shares on a daily basis, and its assets under management are over $171 billion. 1 How Significant are Exchange Traded Funds and Related Exchange Traded Products? As a financial innovation that is approaching its 22nd anniversary, it is fair to say Exchange Traded Funds and the related Exchange Traded Products have been revolutionary. Investors have entrusted over $2 trillion to this financial innovation. ETFs have grown in popularity since they offer investors cost effective diversification to markets, sectors, currencies and commodities. ETFs have evolved into a family of closely related investment vehicles known as Exchange Traded Products (ETPs). ETPs include Exchange Traded Notes, Leveraged ETFs, Inverse ETFs, Exchange Traded Commodity Pools, Exchange Traded Vehicles (ETV) and Active ETFs. The success of ETFs and other Exchange Traded Products is quite striking, especially when one considers the number of companies traded on the New York Stock Exchange and the NASDAQ, 6,251 2 , compared to the number of global ETFs and ETPs, 5,463. Most ETFs and ETPs are traded in the U.S. There are 1,686 ETFs and ETPs that invest in just U.S. securities and 3,777 that invest in varying levels of international securities. Over 95% of the ETFs and ETPs are passively managed. Once the exchange traded basket is established the composition of the ETP is on autopilot, i.e. it is not actively managed. Note: Exchange Traded Products is often used as an umbrella term. In the chart above Exchange Traded Funds growth is detailed in the top line and growth in other exchange traded structures is detailed in the bottom line. What Are Some of the Benefits of ETFs? Cost Effective Diversification The primary strength of Exchange Traded Funds is the cost effective passive diversification they offer an investor. As an example, exposure to the S&P 500 Index can be gained through the purchase on one share of the S&P 500 SPDR ETF rather than purchasing 500 separate securities. The expense ratio for the S&P 500 SPDR is 0.09% which is very low. The average institutional ETF expense ratio is 0.562%. ETF holdings vary widely from less than 10 securities to over 16,000 securities. An ETF, like a mutual fund, pools the assets of multiple investors; however, ETFs tend to be significantly less expensive and offer instantaneous pricing information during the trading day rather than once daily pricing as is the case with mutual funds. Each share in an ETF represents an undivided interest in the underlying securities less the expense ratio. To understand the pricing variations, an investor has to factor in the type of ETF. An additional consideration with mutual funds is the share class and whether a sales fee is taken. When considering mutual funds, the investor also needs to factor in the fee structure. The table below provides insight into the expense ratio variations in open end funds. Both mutual funds and ETFs are considered open-end funds, i.e. there is no limitation on the number of shares that they can issue. You will notice in the table below that passive ETFs do not have mutual fund sales commissions referred to as front-end load/ No load and back-end load/ level load. Deep Liquidity for Popular ETFs The larger ETFs offer deep liquidity, e.g. the iShares MSCI Emerging Markets ETF (NYSEARCA: EEM ) – founded by Barclays and now managed by BlackRock – has an average daily volume that exceeds 60 million shares and assets under management exceed $36 billion. However, not all ETFs are highly liquid. In fact, liquidity varies widely among ETFs. Important liquidity considerations are the average trading volume, assets under management, plus the strength of the counterparties – authorized participants – that create and redeem the ETF shares. Another consideration is the complexity of the ETF in terms of the number of securities held. Each security is dependent on a functioning market for price discovery which can be interrupted by trading halts and “flash crashes”. New Investment Approaches Investors, both individual and institutional, can use ETFs to gain rapid, cost effective diversification to markets, sectors and various strategies, e.g. growth and/or value. The explosion of the ETF universe has expanded the toolset available to investors. A popular investment approach is a combination of active and passive investing. Investors may also take an active management approach incorporating individual securities or actively managed funds. This is referred to as “seeking alpha”. The investor is seeking a return above the market return represented by market indexes. Some investors prefer to pursue a purely passive approach with ETFs and ETPs which limits down side risk offering a weighted average return. What are Some Limitations and Unintended Consequences of ETFs? Short-term Trading, Taxes and Lower Realized Price Perhaps the biggest ETF limitation is behavioral. ETFs are credited with being less work. All an investor has to do is buy the basket of securities represented by an ETF and the benefits of diversification are gained. While it is true that ETF investing involves less work, it creates an unintended consequence of creating less conviction in the face of adversity – a market selloff. This increases the chance that the investor will become more reactive and short-term oriented. For taxable investors, this introduces the higher short-term capital gains rate. It is important to note that taxes are not the only cost. A potentially even greater cost is incurred when an investor sells during a market selloff and realizes a loss. Performance Limitation – The Best Return is an Average/Weighted Average Return If you had a child, would you encourage them to get Cs in school? The frequent encouragement from parents is to seek As and Bs. Why does the same rule not apply to your investments? How often does an index double? The answer is not that often. When an investor invests in an ETF, it is important to realize that they are electing to receive an average return for the invested amount. An average grade in school is a C. The return of an ETF is the weighted average of the underlying securities less the expense ratio. In short, while the ETF assets benefit from diversification there is a performance limitation. A Less Transparent Issue – Tracking Error & Counterparty Risk An ETF’s market price can trade at a premium or a discount to the value of its underlying securities. Wider bid/ask spreads occur when an ETF or security is thinly traded which creates additional investment costs. The creation and redemption of ETF units is dependent on counter parties that are referred to as authorized participants. An ETF fund manager enters into contractual relationships with one or more authorized participants. Authorized participants create ETF fund shares in large increments – typically 50,000 fund shares. The authorized participant or participants seek to minimize pricing differences between the market value of underlying ETF securities and the net asset value of the ETF. Authorized participants seek to arbitrage the pricing differences but are dependent on functioning markets and stability of their broker dealer operations. Flash crashes and other market disruptions associated with high frequency trading arbitrage can create tracking error. Structure Risk As the popularity of ETFs has grown, it has given way to an alphabet soup of Exchange Traded Products which include alternative ETFs, Exchange Traded Notes (ETNs), alternative ETFs, exchange traded vehicles (ETVs), exchange traded commodities or currencies (ETCs), and other types of structures. It is important to note that the product structures of the newer ETPs in turn create unique risks for investors. From a structure and regulatory perspective, ETFs are open-ended investment companies that offer investors an undivided interest in the underlying securities of the fund less expenses. The same is not true with Exchange Traded Notes (ETNs). An an ETN is just a credit obligation from the issuer, i.e. there is no collateral. The credit obligation is only as good as the balance sheet of the issuer. This became a painful lesson for investors in the Lehman Brothers ETN products as they did not own the underlying collateral, and therefore, became unsecured creditors in the Lehman bankruptcy. Alternative ETFs give investors the potential to invest in investment options that are leveraged and/or inversely correlated to its index benchmark. Typically, alternative ETFs are designed to generate daily returns that are a positive or negative multiple of its benchmark, e.g. stock indexes, currencies and commodities. The math of daily settlements introduces the risk of significant tracking error, and introduces a tax liability that does not exist with traditional ETFs. The primary collateral for alternative ETFs are the derivative contracts and money market instruments used to create the leveraged or inverse exposure. Local Firm Participation A Bethesda, Maryland firm, ProShares, is the world’s largest provider of leveraged and inverse ETFs. ProShares has grown from one fund in 2006 to over 145 alternative ETFs. Another Bethesda, Maryland, based firm is AdvisorShares which offers 28 actively managed ETFs. Actively managed ETFs were first approved by the Securities and Exchange Commission in 2008. The actively managed ETF adds an active management component to the ETF structure that has otherwise been passively managed. T. Rowe Price has received regulatory approval to issue actively managed ETFs. Legg Mason has also received approval from the Securities and Exchange Commission to begin issuing actively managed ETFs. Investment Considerations Before making any investment, it is important to identify your goals and understand the limitations and opportunities associated with the investment you are considering. Do you want the weighted average return? Faced with a market selloff do you have conviction about your investment? Are you familiar with the fund manager? What is the underlying collateral? Exchange Traded Funds and Products have expanded the investable universe for investors. One of the most important benefits that ETFs and ETPs offer is their ability to diversify a portfolio. This is especially true in emerging and developing markets where investment options may not otherwise be accessible. Whether investing in an ETP or a listed company, it is important to research your investment. Due diligence is a key consideration that should not be overlooked whether investing passively, actively or in a blended approach. Sources: – https://www.spdru.com/?internalR edirect=https%3A%2F%2Fwww. spdru.com%2F&_new_user=1#/ content/debunking-myths-and-common-misconceptions-of-etfs – https://www.spdru.com/?internalR edirect=https%3A%2F%2Fwww. spdru.com%2F&_new_user=1#/ content/9-questions-every-etf-investor-should-ask-before-investing – https://www.fidelity.com/learningcenter/investment-products/etf/ drawbacks-of-etfs – http://www.forbes.com/sites/ rickferri/2013/09/02/etf-fees-creephigher/ – https://www.fidelity.com/ viewpoints/active-trader/no-stopping-ETFs – http://www1.nyse.com/about/listed/ nya_characteristics.shtml – http://www.lipperweb.com/ Research/Fiduciary.aspx – http://etfdb.com/compare/marketcap/ – http://www.ici.org/pdf/per20-02.pdf – http://www.etfgi.com/index/cookie Endnotes : 1 ETF Database Top 100 ETFs by Assets 10/16/14 NYSE 3,296 and NASDAQ 2,955 as of 10/16/14 2 ETFs 3,868 and 1,595 ETPs

Niska Gas Storage Partners LLC (NKA) Q3 2015 Results – Earnings Call Webcast

The following audio is from a conference call that will begin on February 02, 2015 at 09:00 AM ET. The audio will stream live while the call is active, and can be replayed upon its completion. How did this change your view of ? More Bullish More Bearish It Didn’t This impact ( ) More Bullish More Bearish Unchanged Thanks for sharing your thoughts. Submit & View Results Skip to results » Share this article with a colleague

Dividend Growth Stock Overview: Aqua America, Inc.

Summary Aqua America provides water and wastewater services to 3 million customers across 8 states. The company seeks to grow through acquisitions; it completed 13 acquisitions in 2014. Aqua America has increased dividends for 22 years, and over the past 5 years, it has grown dividends at an average rate of nearly 7.6%. About Aqua America Aqua America (NYSE: WTR ) is a holding company that, through its subsidiaries, provides water and wastewater utilities to 3 million customers across 8 states. The company owns and operates over 1,440 public water systems, and 187 wastewater treatment plants and collection systems. Aqua America originated as the Springfield Water Company in 1886 when a group of Swarthmore College professors were granted a charter to supply water to residents of Springfield Township, PA. Having started in Pennsylvania, half of Aqua America’s customers are in that state with the remaining customers distributed over Illinois, Indiana, New Jersey, North Carolina, Ohio, Texas and Virginia. Aqua America’s strategic objective is to grow in the fragmented water utility industry through acquisitions. The company completed 13 acquisitions in 2014. The most recent acquisitions were the Caroline Water Company, which serves 3,000 people in Caroline County, VA; Texas H2O which serves 3,300 customers in the suburbs of the Dallas-Fort Worth metropolitan area; and the Spartan Village water and wastewater systems – serving 650 customers – from the New Jersey village government. In 2013, the last year for which full-year figures are currently available, Aqua America’s income was $221.3 million, up 12.6% from 2012; and its income per share was $1.25, up 11.6% from 2012. Aqua America’s customer base was up 1.3% to 941,000 customers. One area of concern is the company’s high level of debt. At the end of 2013, Aqua America had $1.5 billion in long-term, fixed-rate debt with an average interest rate of 5%. Another area of concern is the degree to which Aqua America’s organic income growth is dependent on rate increases granted by local and state regulatory authorities. The company is a member of the S&P Mid Cap 400 index and the S&P’s High Yield Dividend Aristocrats index, and trades under the ticker symbol WTR. Aqua America, Inc.’s Dividend and Stock Split History (click to enlarge) Aqua America has paid quarterly dividends since 1944 and increased dividends annually since 1992. Last year, Aqua America announced a dividend increase of 8.6%, from 15.2 cents to 16.5 cents per share, at the beginning of August. The stock went ex-dividend with the increased dividend in mid-August. I expect Aqua America to announce its next dividend increase in early August 2015. Aqua America has a history of moderate dividend increases, with annual dividend growth in the mid-single digit percentages. From 2009-2014, Aqua America grew its dividend from 44 cents to 63.4 cents per share, for a 5-year compounded annual dividend growth rate (CADGR) of 7.58%. Aqua America’s 10-year and 20-year CADGRs are 7.99% and 6.83%, respectively. Aqua America has split its stock eight times since 1986. In September 1986 and June 1996, Aqua America conducted 3-for-2 stock splits. This was followed by a 4-for-3 stock split in January 1998, and 5-for-4 stock splits in December 2000, December 2001, and December 2003. In December 2005, Aqua America split its stock again, this time 4-for-3. And most recently, the company split its stock 5-for-4 in September 2013. Over the 5 years ending on December 31, 2014, Aqua America stock appreciated at an annualized rate of 16.93%, from $12.22 to $26.70. This beat both the 13.0% annualized return of the S&P 500 and the 14.9% annualized return of the S&P Mid Cap 400 index during this time. Direct Purchase and Dividend Reinvestment Plans Aqua America has both direct purchase and dividend reinvestment plans. The company has created a very favorable pair of plans for investors. The company pays nearly all of the fees associated with purchasing stock, including through dividend reinvestment. There are no fees to setup an account, or to purchase stock – either directly or through dividend reinvestment. The minimum investment for new accounts is $500, either in a single purchase or in 10 monthly installments of at least $50 each. The plan permits both purchases by check or automatic debit. The most attractive feature of Aqua America’s dividend reinvestment plan is the discount. The company currently offers a 5% discount on the purchase price of shares bought through the dividend reinvestment plan. This will reduce your cost basis and is taxable, but is extremely beneficial to you as an investor. Aqua America is one of a very few companies that offers shares purchased through dividend reinvestment at a discount to the market price. Finally, when you go to sell your shares in the plan, you’ll pay a transaction fee of either $15 or $25, depending on the type of sell order you request. You’ll also pay an additional fee of 12 cents per share sold. Furthermore, if you place your sell order through a representative on the phone, you’ll pay an additional fee of $15. Helpful Links Aqua America, Inc.’s Investor Relations Website Current quote and financial summary for Aqua America, Inc. (finviz.com) Information on the direct purchase and dividend reinvestment plans for WTR