Products September 26, 2019

Investment Product and Service Launches

Global X launches cannabis ETF; Wilmington Trust announces asset management brand; Columbia Threadneedle launches strategic-beta ETFs; and more.

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Art by Jackson Epstein
Art by Jackson Epstein

Art by Jackson Epstein

Global X Launches Cannabis ETF

Global X ETFs, the New York-based provider of exchange-traded funds (ETFs), has launched the 15th fund in its Thematic Growth suite.

The Global X Cannabis ETF tracking the Cannabis Index, POTX, aims to provide investors with an efficient tool to access leading companies across the cannabis industry.

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By tracking an index that specifically targets companies that attribute at least 50% of their revenue, operating income, or assets from the cannabis industry, POTX aims to offer investors a focused approach to investing in an industry that may benefit from further legalization efforts across North America and the rest of the world. Potential holdings include companies that are involved in the legal production, growth, and distribution of cannabis including industrial hemp, as well as companies operating legally in other areas of the cannabis industry, such as those involved in pharmaceutical applications, extracts, and derivative products, cannabidiol (CBD), and additional areas. Eligible holdings may only supply products and/or perform activities related to the cannabis industry in a manner that is legal under applicable national and local laws, including U.S. federal, state, and local laws.

The fund makes additional efforts to prioritize quality and appeal to discerning investors, including utilizing topflight service providers, and incorporating thorough screens of the potential universe of holdings for adherence to applicable regulatory and legal environments. POTX will charge a management fee of 0.50%.

“The cannabis industry is growing rapidly, with wide-ranging potential applications,” says Pedro Palandrani, research analyst at Global X. “With our Thematic Growth ETFs, we are hyper-focused on providing high quality, targeted access to investable emerging trends to accurately capture their future growth potential. Cannabis provides a unique opportunity to access a trend in its nascent stages, driven by advancements in medicinal and industrial uses, but with further upside potential given increasing efforts to legalize recreational use. As regulations evolve, we may see the emergence of enormous regulated markets, and we are thrilled to help a broad range of investors navigate this theme in a rigorous and compliant way.”

SSGA Rebrands ETFs to Portfolio Suite

State Street Global Advisors (SSGA) has added seven rebranded SPDR exchange-traded funds (ETFs) to the SPDR Portfolio suite. Introduced in 2017, the SPDR portfolio offering comprises 22 low-cost ETFs that provide access to a range of domestic and international equity and fixed income asset classes.

The seven rebranded funds added to the SPDR Portfolio suite comprise five fixed income and two international equity ETFs, representing $4.4 billion in assets. All seven have new names and ticker symbols to align with the SPDR Portfolio ETF suite and three funds have reduced net expense ratios, while the other four were reduced earlier.

“The SPDR Portfolio suite was initially launched to give investors greater choice in low-cost ETFs. With today’s additions to the lineup, we’re offering investors more fixed income and international equity ETF options to help investors refine their asset allocations,” says Noel Archard, global head of SPDR Product at State Street Global Advisors. “To meet the needs of a client base that is well-diversified across institutions, intermediaries and retail investors, we remain committed to offering products with a broad range of attributes.” 

Wilmington Trust Announces Asset Management Brand

Wilmington Trust has revealed a new brand, Wilmington Investment Management (WIM), to help expand access to its proprietary suite of asset management solutions, including alternative funds, separately managed accounts, and mutual funds, to retail and institutional investors. The new channel builds on the firm’s economics-led investment approach and addresses a market need for opportunities for growth with downside protection amid heightened market volatility.

Findings from the inaugural Wilmington Investment Management Investor Confidence Survey revealed consumer sentiment for strategies that offer the opportunity for growth with enhanced downside protection and low fees.

“We’re in a different economic environment than just a few years ago. We’re seeing now that the upside on many investments is limited and the yield environment is challenged,” says Tony Roth, chief investment officer. “As a result, we know investors need differentiated strategies that are risk-adjusted and fee sensitive in order to meet their specific needs. Our deeper understanding of global opportunities means we can offer a wider range of investors solutions and access to institutional-quality separate account managers around the world.”

Columbia Threadneedle Launches Strategic-Beta ETFs

Columbia Threadneedle Investments has expanded its exchange-traded fund (ETF) suite with the launch of Columbia Research Enhanced Core ETF and Columbia Research Enhanced Value ETF. These strategic beta portfolios are said to offer investors and advisers access to the firm’s quantitative investment research strength in a cost-efficient manner.

“Today, many investors recognize the limitations of traditional benchmark investing and are looking for a more thoughtful approach to passive investing,” says Marc Zeitoun, head of Strategic Beta at Columbia Threadneedle Investments. “RECS and REVS were designed with the benchmark investor in mind. They are built on the strength of our quantitative research and the active insights that underlie our strategic beta solutions.”

RECS and REVS are designed to outperform the Russell 1000 Index and Russell 1000 Value Index, respectively, by marrying proprietary investment research with market-capitalization weighting. The ETFs aim to optimize equity exposure by eliminating stocks from the benchmark that are rated unfavorably by the Columbia Threadneedle quantitative research team.

RECS seeks to track the firm’s Beta Advantage Research Enhanced US Equity Index, which typically consists of 325 to 400 stocks of large-cap U.S. growth and value companies. REVS seeks to track the firm’s newly created Beta Advantage Research Enhanced US Value Index, which typically consists of 250 to 290 stocks of large-cap U.S. value companies. RECS and REVS are sector-neutral relative to their respective Russell index. The indices the ETFs seek to track are rebalanced semi-annually.

RECS and REVS are managed by Christopher Lo, senior portfolio manager, and Jason Wang, head of Quantitative Research.

“We are offering optimized equity exposure, with the potential for enhanced returns, at a price comparable to funds that track broader benchmarks,” says Zeitoun. “With the launch of these two ETFs, we continue to enhance our strategic beta offering with strategies powered by our expertise and insight.”

RECS and REVS have total expenses of 15 and 19 basis points, respectively.

Avantis Investors Creates First ETFs

Avantis Investors by American Century Investments has launched its five-inaugural low-cost, broadly diversified exchange-traded funds (ETFs): Avantis International Small Cap Value ETF (AVDV), Avantis International Equity ETF (AVDE), Avantis Emerging Markets Equity ETF (AVEM), Avantis U.S. Equity ETF (AVUS) and Avantis U.S. Small Cap Value ETF (AVUV). Listed on the NYSE ARCA, the new ETFs are designed to fit seamlessly into investors’ asset allocations.

“While we know investors have a lot of choices available to them in the marketplace, we believe there is still considerable demand for broadly diversified solutions that seek low rebalancing costs, capital gains and fees,” says Avantis Investors Chief Investment Officer Eduardo Repetto, PhD. “We are excited to speak with clients about these capabilities and learn what else we can do to help them meet their financial goals.”

Avantis Investors’ ETFs share a common approach built upon an academically supported, market-tested framework that aims to identify securities with higher expected returns, based on their current market prices and other company financial information. As part of its portfolio management and trading processes, the team analyzes whether the perceived benefits of a trade overcome its associated costs and risk. This approach aims to harness return premiums while seeking to control implementation costs and mitigate portfolio risk to generate enhanced returns over time.

Data and Research September 26, 2019

Municipal DB Plans Face Increased Cost Pressures

While this is in part due to expected market performance and changing demographics, S&P Global Ratings points to plan sponsor actions that cause funding challenges for pension and OPEB costs.

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Since the Great Recession, municipal defined benefit (DB) plans have taken center stage as one of the key sources of long-term credit risk in what has historically been a remarkably stable, low-risk asset class, S&P Global Ratings notes.

The 2008 financial crisis and subsequent economic downturn led to steep declines in asset values for U.S. municipal pension funds, followed by a period of inconsistent and often below-target investment performance. S&P Global Ratings believes these issues have frequently been exacerbated by underfunding, where many municipalities continue to contribute less than actuarially recommended rates to their pension funds and where states have often failed to update statutory formulas in a timely manner to better align with actuarial recommendations.

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In this year’s annual survey of the 15 largest American cities, S&P Global Ratings continues to see a mixed picture in terms of where the largest cities stand with respect to their pension and other post-employment benefit (OPEB) liabilities. Primary fixed costs are generally high and in many cases poised to rise considerably in the coming years due to poor pension funding levels, actuarial assumptions and methods that defer meaningful funding progress into the future, and movement toward the adoption of more conservative actuarial assumptions that revise funding levels downward and require higher employer contributions. S&P Global Ratings expects that cities with poorly funded pension plans will continue to struggle with cost pressures. On the other hand, it continues to observe many cities that are proactively addressing their pension and OPEB liabilities through meaningful reforms that, though often more costly in the short term, will better position them in the long run to meet their obligations without impairing their fiscal health.

According to the survey report, pension, OPEB, and debt service spending is high among the 15 largest U.S. cities, exceeding 25% of governmental expenditures on average in the most recent fiscal year. S&P Global Ratings expects spending on pensions and OPEBs to continue to rise well into the future for the largest U.S. cities, as many pension plans are poorly funded or employ funding practices that defer costs into the future. Further, it expects that changing demographics—an increasing number of retirees relative to active employees—along with rapidly rising medical costs will create greater cost pressure from government OPEB plans.

Beginning in fiscal 2017, Government Accounting Standards Board (GASB) Statements Nos. 74 and 75 required more uniform reporting standards and greater transparency around OPEB liabilities. At the median, OPEB costs represented only 1.3% of expenditures among the 15 largest cities in fiscal 2018, though this only measures actual contributions. S&P Global Ratings finds that most OPEB plans are funded on a pay-as-you-go basis, where the sponsoring government is paying for benefits directly from its operating budget. These municipalities are not prefunding the plans by accumulating assets in a trust to earn investment income that will be available to cover future benefit payments.

“The common use of pay-as-you-go financing for OPEBs exposes cities to cost acceleration and volatility. We expect that OPEB spending will be a more significant cost pressure in the future than in the past as Baby Boomers continue to reach retirement age, as longevity improves, and as rising medical costs continue to outpace general price inflation,” the report says. The firm notes that many states allow for greater flexibility to reduce OPEB liabilities by directly cutting benefits, changing eligibility and vesting requirements, or shifting costs onto employees, but these types of measures represent cuts to total employee compensation and to that end may be politically contentious.

DB plans are sensitive to funding setbacks if they realize investment losses or if investment returns fall below the rate of return assumption, as they are heavily dependent on investment earnings to pay for future benefits. S&P Global Ratings says this sensitivity is worth underscoring at this moment given that the U.S. is currently well into what is now the longest economic expansion since World War II and economists are forecasting a 30% to 35% chance of a recession in the next 12 months. In addition to placing funding levels at risk, recessions and accompanying market volatility can place upward pressure on required contributions through the remainder of the plan funding horizon. The effects on the near-term budget will depend on the severity of investment shortfall in a market downturn scenario, the length and the severity of the recession, and its effects on revenue performance, as well as plan-specific characteristics. In general, the report says, cities with more aggressive target investment allocations and aging demographics are at the greatest risk.

Two other key factors S&P Global Ratings attributes to slow funding progress include contribution practices that are not actuarially based or that otherwise defer funding progress and an ongoing movement toward pension reform, one component of which has been the adoption of more conservative liability measures that result in weaker funding levels. In particular, the firm has seen a clear trend across the sector toward lowering investment rate of return assumptions in light of a generally more bearish assessment of long-term economic growth and expectations for weaker market returns.

Most of the 15 largest cities in its survey have reduced their return assumptions for at least one of their pension plans within the last few years. S&P Global Ratings views the move to more realistic actuarial assumptions, particularly more conservative rate of return assumptions, favorably, though it will also result in rising plan contributions. It says the costs of unrealistic assumptions are much greater in the long run, particularly if aggressive assumptions result in systematic underfunding that is allowed to compound over many years, generating a much larger problem down the road.

For the the cities’ largest pension plans, the survey found funding levels were more or less stable from 2016 to 2018, on average improving by 5.4% over the three-year period. Plan funding practices, investment performance, and, in the case of Houston, the issuance of pension obligation bonds (POBs) are key factors that S&P Global Ratings attributes to the largest year-over-year changes. The average and median funded ratios for the 15 cities’ largest pension plans were 66% and 70% in fiscal 2018, respectively.

The survey report is here. Registration is required.

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