Overcoming a weak Wednesday, equity markets trended higher on the week; investors bought beaten-down shares as fears over the contagion in Europe temporarily subsided. The bulk of the week’s gain came on Thursday as the Dow gained 2.8% and the S&P 500 gained 3% on upbeat comments from the ECB as well as strong data from the U.S. and China. Shares of BP remained in focus as the company issued dividends despite political pressure from the Obama administration. In the commodity markets, gold retreated from its all time high last week to finish around the 1,230/oz. mark while oil trended higher to around $74/bbl.
It was an interesting week in the ETF industry as well, as a handful of new funds launched and the pipeline continued to fill. Below we profile some of the most interesting stories in the world of ETFs over the past week:
How Much Exposure To BP Is In Your ETF? at Hard Assets Investor:
Since British Petroleum’s rig exploded off the Gulf Coast, the company has lost nearly half of its value, and with oil continuing to spew from a mile beneath the surface, it doesn’t look like BP will recover anytime soon. But BP was not the only company that had heavy involvement in the failed rig. Transocean, Andarko Petroleum, Halliburton, and Camerons International all have major ties to the oil spill, with their four respective stocks losing a significant amount of value since the leak began. With BP taking the full blame for the incident, many investors are left wondering how this will effect their portfolios. Luckily, the effect has not been very drastic on most broad-based funds. Most ETFs in the energy sector prefer U.S. domiciled companies, and the funds that do have a global weighting typically only have weightings between 1% and 2%. But four ETFs have been hit particularly hard due to their high allocation to BP. The iShares S&P Global Energy Index Fund (IXC), SPDR S&P International Energy Sector ETF (IPW), WisdomTree International Energy Sector Funds (DKA), and iShares MSCI United Kingdom Index Fund (EWU) have been the hardest hit by the BP decline. While many are quick to attribute the drops in the ETFs to BP, there are other factors in play; the energy sector as a whole has been down almost 20% since April 20th.
A ‘Flash Crash’ Lesson at The Wall Street Journal:
In a fascinating article, Tom Lauricella argues that on days like May 6, “investors need to stop thinking of exchange-traded funds as mutual funds and instead think of them more like stocks or bonds.” Noting that ETF prices are determined by supply and demand present in the market and not necessarily the underlying NAV, Lauricella seeks to highlight some lessons investors should learn from the recent “Flash Crash.” When the traditional arbitrage mechanisms broke down briefly last month, chaos broke out in the ETF world. This piece provides some insights on what went wrong, and how investors can avoid getting burned by a similar phenomenon in the future.
Troubles At Johnson & Johnson Infect PPH at ETF Database:
With the recent European Crisis and the Deepwater Oil Spill snatching up the headlines, many have overlooked the news out of Johnson & Johnson. The firm was recently forced to recall millions of children’s cold and pain medicines due to the fact that manufacturing issues may have put metal particles into the products; JNJ has plummeted 11.2% since hitting its 2010 high last month. The formal recall was aimed at over 136 million bottles of medicine that contained metal particles and more active ingredients than approved. In another strike against the firm, the FDA found bacteria in the raw materials used to produce the medicines. Aside from public outrage, JNJ is in hot water with government officials for allegedly hiring a contractor to pose as consumers to buy the products rather than issue a massive recall. The FDA is now looking into criminal penalties against JNJ. While these issues have been bad for health and biotech funds, the Merrill Lynch Pharmaseuctical HOLDR (PPH) has been hit especially hard, being that it allocates 25% of its assets to JNJ. If JNJ were to suffer criminal penalties, the firm as well as PPH will be especially hard hit.
Disclosure: no positions at time of writing.