PrefBlog

Eight European banks failed their stress test:

Eight banks failed the European Union stress tests after regulators said they had a combined capital shortfall of 2.5 billion euros ($3.5 billion).

The banks were found to have insufficient reserves to maintain a core tier 1 capital ratio of 5 percent in the event of an economic slowdown, the European Banking Authority said.

The assessments are the first by the European Banking Authority since it was set up earlier this year. Last year’s tests by its predecessor were criticized for not being tough enough because banks were shown to need only 3.5 billion euros more capital, a 10th of the lowest analyst estimate. Banks that fail the stress test must present a plan to raise more capital within three months.
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Rating company Standard & Poor’s own stress test, published in March, found European banks would need as much as 250 billion euros in fresh capital if faced with a “sharp” increase in yields and a “severe” economic downturn. In contrast, a survey of 113 investors by Goldman Sachs Group Inc. (GS) last month showed they expect banks to raise 29 billion euros after the tests.

It is not clear just how stressful the tests were – the last batch involved a rise in government yields, but no defaults – which was a rosy projection even at the time.

This test included what are referred to as write-downs on EU government bonds:

European Union regulators’ stress tests on the region’s banks include a 25 percent writedown on Greek government bonds. The market has already driven down the price of 10-year Greek debt to 52 cents on the euro.

Regulators didn’t include the possibility of a sovereign default in the tests even though credit-default swaps indicate about an 87 percent chance that Greece won’t be able to repay its debts. The tests included a 22.3 percent writedown on Portuguese 10-year securities, while they currently trade at 54 cents per euro.

“Current market expectations regarding sovereign risk are not incorporated in the tests,” Hank Calenti, a bank strategist at Societe Generale (GLE) SA in London, wrote in a note to clients today.

… but it is not clear to me whether these were actually write-downs, or merely market value adjustments (which affect the trading book but not the banking book). Last time ’round, the test included only a temporary decline in the market value of government debt, not a permanent impairment.

There is more discussion from the Peterson Institute:

Second, and perhaps more importantly given the importance of “tail-end events” for bank stress tests, it remains unclear what the “sovereign risk shock” will entail in terms of assumed haircuts for sovereign bonds. Here it is clear that the stress test focus on “a shock on [government bond] interest rates” in its sovereign component is a clever way to avoid explicitly stating the politically explosive number for just how large a haircut on sovereign bonds banks should be expected in the EU “adverse scenario.” On the other hand, as anyone can calculate the “implied bond haircut” from the assumed increase in the interest rate, the avoidance of any explicit reference to a default is clearly a political exercise.
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Several “press leaks” suggest that differentiated haircuts are being assumed in the EU stress tests, with some reports stating that Greek bonds will suffer a 17 percent haircut and Spanish bonds 3 percent. Other reports suggest that the implied Greek haircut could be 20 percent, 8 percent for Spanish bonds and 5 percent for Portugal.

C-EBS states merely:

The exercise also envisages adverse conditions in financial markets and a shock on interest rates to capture an increase in risk premia linked to a deterioration in the EU government bond markets.

… which is not the same thing as a default. This is more than just a little disingenuous. There is more than one dimension of risk in bonds, and recent prices are clearly a reflection of credit, not interest-rates.

So the Europeans will do what they do best:

Eurozone leaders will meet in Brussels on July 21 to discuss a second bailout package for Greece and the financial stability of the euro area, European Council President Herman Van Rompuy said on Friday.

The summit, which will start at 1000 GMT, could prove a critical moment in determining what role private sector creditors play in further aid to Greece, and how EU leaders will stem the threat of debt contagion to Italy and Spain.

“Our agenda will be the financial stability of the euro area as a whole and the future financing of the Greek program,” Van Rompuy said in a statement posted on Twitter.

“I have asked the preparatory work to be brought forward inter alia by the finance ministries,” he said, indicating that senior finance officials would meet ahead of time, probably on Wednesday July 21, to agree the agenda.

There’s an ownership change for Betapro:

Jovian Capital Corp. announced Friday it will sell its stake in exchange traded funds business BetaPro Management Inc. to a South Korean firm, confirming plans hinted at last week.

Seoul-based Mirae Asset Global Investments Co. will acquire Jovian’s approximately 58% interest in the ETF business, among other things, based on an enterprise value of about $150-million. Jovian’s portion of the purchase price is expected to be about $90-million.
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The Mirae deal includes: Jovian’s interest in BetaPro; AlphaPro Management Inc. (a subsidiary of BetaPro); BetaPro’s 40% interest in BetaShares Holdings Pty. Ltd. (the parent company of an Australian ETF company); Jovian’s wholly owned subsidiary Horizons Exchange Traded Funds Inc.; and Jovian’s wholly owned subsidiary JovInvestment Management Inc.

Jovian’s interest in ETF manager Hahn Investment Stewards & Co. Inc. is not part of the deal.

The amazing thing about this business is that you only have to make one good, well-publicized market forecast to be set up for life (if they’re not well publicized, you just talk about it all the time; then it will be well-publicized to your clients). The latest example is Meredith Whitney:

Time is running out on the credibility of Meredith Whitney, who has yet to acknowledge that her eight-month-old prediction of widespread defaults this year in the market for state and local government debt is proving unfounded.

Defaults fell 60 percent in the first half of 2011 compared with the same period last year, including a $12.5 million Austin, Texas, apartment project that made a late payment in June, according to Distressed Debt Securities Newsletter.

Whitney, the analyst who rose to prominence by predicting Citigroup Inc.’s 2008 dividend cut, predicted “hundreds of billions of dollars” of municipal defaults within 12 months in a Dec. 19 “60 Minutes” broadcast, fueling a wave of selling in the $2.9 trillion market. Instead, the number has fallen as cities slashed spending to balance budgets and state lawmakers stepped in to guard against insolvency and local bankruptcies.
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Whitney, 41, who started New York-based Meredith Whitney Advisory Group LLC in 2009 after leaving Oppenheimer & Co., predicted 50 to 100 “sizable” municipal defaults as states slashed spending, in the interview with CBS Corp.’s “60 Minutes.” As for timing, she said it would be “something to worry about within the next 12 months.”

“There’s absolutely nothing about our thesis that has changed,” she said on July 12 in an interview with Tom Keene on Bloomberg Radio’s “Bloomberg Surveillance” show in New York. “There are not enough revenues to go around and service all of the debt obligations or debt commitments outstanding.”

Whitney also sought to amend her prediction in the radio interview, saying that she said in December “you’d start to see defaults within 12 months.” She didn’t respond to telephone calls and e-mails seeking additional comment.

DBRS confirmed RBC:

The Bank’s ratings are underpinned by its highly diversified business model. This is reflected in its resilient performance, generating average annual ROE of 17.6% since 1994 and a minimum annual ROE over this same period of 11.9% (2009). RBC’s diversified model consists of a superior domestic franchise, growing international businesses (wealth management and capital markets) plus solid credit and financial risk profiles.
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The Bank’s operations are divided into six segments: Canadian Banking, Wealth Management, Insurance, International Banking, Capital Markets and Corporate Support, which represented 51%, 13%, 6%, minus 2%, 32% and minus 1% of pre-tax earnings in H1 2011, respectively.

CIBC has bought a 41% interest in American Century Investments:

CIBC (TSX: CM) (NYSE: CM) announced today that it will acquire a 41% equity interest in American Century Investments, a major U.S. asset management company with US$112 billion under management and a track record of solid earnings and strong investment performance. Total consideration is US$848 million. The 100% cash transaction will be immediately accretive and CIBC’s share of American Century earnings is expected to contribute approximately 15 cents per share of earnings in 2012 on a cash basis.

CIBC is purchasing the minority interest held by JP Morgan Chase & Co. pursuant to a shareholder agreement using a pre-determined valuation methodology conducted by an independent third party.

According to the investor presentation, American Century is:

• Ranked 3rd among its peer group by Morningstar with 65% of assets holding four- or five-star ratings
• 84% of rated funds in first or second quartile rankings by Lipper
• Named “Best Large Mutual Fund Company” by Lipper in 2009

The emphasis on “assets” in the first point is interesting, since the similar statistic for CIBC Asset Management is presented by number of funds. Figures don’t lie, but liars can figure! I note that five out of nine 5-star funds are from the “LIvestrong” class, which are target date funds and another is the Zero-Coupon 2015 Fund.

According to Bloomberg:

Kansas City-based American Century, founded in 1958, has $112 billion in assets under management and was named the “Best Large Mutual Fund Company” at the 2009 Lipper Fund Awards. American Century’s majority shareholder is the Stowers Institute for Medical Research.

American Century is known for its focus on growth stocks, or shares in companies whose profit is expected to grow faster than the broader market, fund industry consultant Geoff Bobroff said in a telephone interview.

The growth-oriented American Century Ultra Fund (TWCUX) was once considered the company’s flagship product, Bobroff said. Its assets have fallen from $23.8 billion in 2004 to $6.5 billion as of June 30. Ultra has returned 5.3 percent annually in the past five years, beating 64 percent of competing funds, Bloomberg data show.

“One has to puzzle over why CIBC would want a minority stake, unless it saw the opportunity to either buy more or use American Century as a platform for the entry of its own products into the U.S.,” Bobroff said.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 8bp, FixedResets losing 14bp and DeemedRetractibles winning 23bp. Volatility was fair, volume was average-to-sub-par.

Fitch had better prepare for a crowd of sans culottes shouting ‘a la lanterne’:

Greece’s credit rating was cut three levels to Fitch Ratings’ lowest grade for any country in the world as the company followed rivals and said that a default is a “real possibility.”

The move to CCC from B+ “reflects the absence of a new, fully funded and credible” program by the International Monetary Fund and the European Union, the ratings company said yesterday in a statement in London. It also reflects “heightened uncertainty surrounding the role of private creditors in any future funding, as well as Greece’s weakening macroeconomic outlook.”

BIS continues its drive to make finance a cooperative game with its release of a Report on asset securitisation incentives:

The Report recognises regulators can play a role in establishing a framework for securitisation that ensures that it is conducted in a prudent manner, continues to be an alternative funding source for institutions, and contributes to the availability of credit to support the real economy. They can do this by building a regulatory and supervisory framework which addresses the misaligned incentives and conflicts of interest and which supports enhanced disclosure and transparency for investors. The Report encourages policy makers, regulators and supervisors to strive for internationally and cross-sectorally consistent supervisory frameworks, and to develop and implement regulations in a timely manner. The Report further sets out three recommendations (some of which build on earlier work of Parent Committees). These recommendations specify that:

• Authorities should employ a broad suite of tools to address misaligned incentives, which may include measures to improve loan origination standards, and to align compensation arrangements with long-term performance and asset quality.
• Authorities should encourage markets to improve transparency to ensure that investors, other market participants, and supervisors have access to relevant and reliable information.
• Authorities should encourage greater document standardisation and less product complexity, which should assist in reducing information asymmetries and stimulating liquidity in secondary securitisation markets.

OSFI is requiring quarterly disclosures of new information:

Enhancements to the Basel II Framework strengthen disclosure requirements under Pillar 3 in several key areas, including: securitisation exposures in the trading book; sponsorship of off-balance sheet vehicles; resecuritisation exposures; and, pipeline and warehousing risks with regard to securitisation exposures. Revisions to the Basel II Market Risk Framework incorporate additional disclosure requirements under Pillar 3 including disclosures on the incremental risk capital charge, the comprehensive risk capital charge and the stressed value-at-risk (VaR) requirement
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Further, while the Basel II text5 indicates that qualitative disclosures that provide a general summary of a bank’s risk management objectives and policies, reporting systems and definitions may be published on an annual basis, it is OSFI’s view that the qualitative disclosures enable investors and other users of financial statements to have a better understanding of the quantitative disclosures that are required in quarterly reports. As such, OSFI expects that the first quarter of fiscal 2012 disclosures should include full qualitative disclosures in Pillar 3 enhancements and revisions to complement the required quantitative disclosures.

These enhancements are described in the BCBS document Revisions to the Basel II market risk framework. It is noteworthy that the BCBS has entirely missed the whole point of the credit crisis: the aging of trading inventory. If a bank has a significant position in its trading book that it hasn’t turned over in three months, I want to know that. And if they’ve got stuff in their trading book that they haven’t turned over in a year … well then, that’s not really trading inventory, is it? That’s banking, not trading.

Tim Kiladze of the Globe noted that, in contrast to the European ETFs discussed on July 11, Canadian ETFs are less risky, and less profitable:

Because most Canadian ETFs are more vanilla, the fees earned are lower. Generally, for low cost products, ETF providers here will earn 5 to 7 basis points, while higher cost products bring in 20 to 30 basis points. Leveraged ETFs can earn more because they typically charge higher management fees that typically range from 1 to 1.25 per cent.

Those numbers differ drastically from Deutsche Bank’s report, which estimated profits around 60 basis points for traditional ETFs. Mr. Seif said that the big difference between North America and Europe is that the securities held in ETFs here don’t earn much money by the way of securities lending. The Deutsche Bank report’s authors estimated 26 basis points on securities lending.

Why such a big difference? In Europe, investment banks are the big providers of ETFs, with everyone from UBS to Deutsche Bank to Credit Suisse selling their own suite of products. Here in North America, the big ETF providers are largely independent fund management firms such as Claymore, Horizons BetaPro, Vanguard and State Street.

The NYSE / Deutsche Bourse deal is basically done, with a minimum of cry-babyism. Speaking of crybabies, the milkfare bums are whining about competition.

DBRS confirmed BNS:

Other acquisitions, albeit more modest, include an advisor to ultra-high net worth clients and their families and a few global wealth management divisions. BNS has also been expanding its insurance offering by introducing new products and building additional retail insurance centres. DBRS expects Scotiabank will continue to expand its wealth management businesses in order to maintain proportional growth among its other segments such that the risk profile of the Bank does not materially change in the medium term. Global Wealth Management accounted for 15% of pre-tax earnings (excluding the gain related to the write-up of the original investment in DundeeWealth Inc. and the Other segment) in H1 2011.
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Scotiabank has a significant cost advantage relative to its Canadian banking peers. Although this differential has been narrowing over the last few years, it nevertheless is a key success factor and a contributor to earnings growth. Since 2000, except for one year, Scotiabank has had the lowest expense ratio of the largest five Canadian banks.

It was a quiet day for the Canadian preferred share market, with PerpetualDiscounts up 1bp, FixedResets down 1bp and DeemedRetractibles gaining 10bp. Volatility was low. Volume was slow.

This is cool: Capital Structure Arbitrage-Implied Index Trading:

In this paper, we develop long-short trading strategies derived from the work of Merton [1974], which provides theoretical relationships between equity, equity volatility, and credit. We then apply the strategies to index products structured primarily based on U.S. investment grade assets.

We find that an optimized Merton-based strategy results in significant trading profits when applied over the span of time for which data is available. Furthermore, we find that trading profits can be enhanced by incorporating information derived from short-term volatility. Given the unlimited number of index combinations spanning different asset classes, geographies and tranche levels, we recommend that further work be allocated to the promising area of capital-structure arbitrage implied index trading.

Click for Big

Figure 2 shows a graphical summary of the relationship among the CDX Investment Grade index, S&P 500, and the VIX. There are a few general qualitative observations from this graph. First of all, high levels of CDX IG are typically accompanied by high levels of volatility. This suggests that volatility may be a reasonable predictor for the credit spread. Another important observation is that the slope of CDX.IG as a function of SPX changes over time and over different market conditions. The time-varying relationship is expected, since credit spread is fundamentally a stationary process, while the equity index is obviously non-stationary. This time-varying relationship makes it difficult to directly use the slope as the hedge ratio in the credit-index index arbitrage.

Overview of Merton Model

In a seminal paper, Merton [1974] proposed a structural model that provides a theoretical relationship between a firm’s equity value and its credit risk. The key concept behind the Merton model is that default occurs when the firm’s asset value falls below its debt value. Hence, investment in a firm’s equity can be viewed as purchasing a call option on the firm’s assets, with the value of the debt as the strike price. The Merton model makes the same assumptions as in the Black-Scholes options pricing framework, such as the log-normal distribution of asset value.

Italian regulators are ratcheting up pressure on short-sellers:

Italy’s market regulator has recommended to stakeholders who have lent shares in Italian companies to retrieve them, Consob head said on Wednesday, confirming reports of a move aimed at curbing short-selling. “Yes, we’ve exercised moral suasion by asking all those who have lent shares to retrieve them,” Consob Chairman Giuseppe Vegas told journalists on the sideline of a conference.

He added the request was not binding.

More opinions on the Yellow / Trader / Apax deal:

Moody’s has trouble wrapping its head around the [Trader] company’s strength as it moves into the digital environment.

“While this is a plausible proposition that has been successfully executed in the U.K. and elsewhere using the Trader brand, there is some uncertainty that the same formula can be applied in Trader’s circumstances in Canada,” the rating agency noted.

“Trader will have to grow its per digital customer yield and increase market penetration, neither of which is a given.”

Moody’s ultimately slapped a B3 rating on the name.

Speaking of Moody’s they put the US on Review Negative:

Moody’s Investors Service put the U.S. under review for a credit rating downgrade as talks to raise the government’s $14.3 trillion debt limit stall, adding to concern that political gridlock will lead to a default.

The Aaa ratings of financial institutions directly linked to the U.S. government, including Fannie Mae, Freddie Mac, the Federal Home Loan Banks, and the Federal Farm Credit Banks, were also put on review for cuts, Moody’s said in a statement today.

The U.S., rated Aaa since 1917, was put on review for the first time since 1995 on concern the debt limit will not be raised in time to prevent a missed payment of interest or principal on outstanding bonds and notes even though the risk remains low, Moody’s said. The rating would likely be reduced to the Aa range and there is no assurance that Moody’s would return its top rating even if a default is quickly cured.

DBRS has released its Split Share Funds Quarterly Report – Q2 2011:

Q2 2011 was the first quarter since Q2 2010 that the average downside protection for split shares rated by DBRS decreased. Notwithstanding the declines over the past three months, the average downside protection of DBRS-rated preferred shares was about 51% at the end of Q2 2011, a signifi cant increase over the 45% and 40% averages at the end of Q2 2010 and Q2 2009, respectively. As a result of the additional buffer of downside protection built up over time, it is expected that the negative performance during Q2 2011 will generally not result in negative rating actions for preferred shares or securities rated by DBRS.

It was a mixed day in the Canadian preferred share market, with PerpetualDiscounts winning 25bp, FixedResets up 16bp and DeemedRetractibles down 8bp. Not much volatility. Volume was average.

PerpetualDiscounts now yield 5.45%, equivalent to 7.08% interest at the standard equivalency factor of 1.3x. Long Corporates now yield about 5.2% (!) so the pre-tax interest-equivalent spread is now about 190bp, a significant widening from the 175bp reported on July 6, as preferreds did not participate in the extraordinary 15bp week’s decline in long corporate yields.

Trader Corporation is issuing USD junk bonds:

One deal has launched in the high-yield market this morning as issuance remains slow. Trader Corporation, a Canadian online automotive marketplace, announced a US$275m seven-year non-call three senior secured offering via RBC sole books. The roadshow begins tomorrow with pricing expected late next week. Proceeds will fund the acquisition of Trader Corp by Apax Partners.

So what’s the better bet for junk? Yellow Media, Trader Corp, or Ireland?:

A late-day rally in U.S. stocks faded after Ireland’s debt rating was cut to junk at Moody’s Investors Service, overshadowing signs the Federal Reserve had not ruled out further stimulus efforts.

The Standard & Poor’s 500 Index lost 0.1 percent to 1,318.06 at 3:33 p.m. in New York after climbing as much as 0.6 percent. The benchmark gauge tumbled 2.5 percent in the previous two days, its worst back-to-back slump since March. Moody’s cut Ireland’s government bond rating one notch to Ba1 from Baa3, spurring concern Europe’s debt crisis is worsening.

DBRS confirmed CM:

CIBC’s current strategy should contribute to earnings stability and improved capital levels, thereby better positioning the Bank for future downturns. As capital is freed up from the reduction in the run-off book, DBRS would like to see resources deployed in less volatile businesses that are a natural extension of existing capabilities. The latest financial crisis provided CIBC with the opportunity to purchase CITI Cards Canada Inc.’s Canadian MasterCard portfolio which DBRS believes is consistent with CIBC’s desire to accelerate growth in its core banking business by strengthening its number one position in credit cards and being a dual credit card issuer in Canada.

DBRS assigned some Allied Irish notes as Default:

In respect of the Notes, the High Court has declared that the subordinated liabilities order (SLO) issued by the High Court on 14 April 2011 under the Credit Institutions (Stabilisation) Act 2010 is effective as of 22 April 2011. The SLO amends the terms of the subordinated debt, including interest due, so that it is payable only at the option of AIB; and the maturity date of the Notes has been extended to June 2035. Additionally, in accordance with the amendments, AIB announced that no payment of interest that would have been due to holders of the Notes on 25 June 2011 will be made by AIB.

The downgrade reflects the halting of interest payments on the Notes by AIB and DBRS’s expectation that the future interest payments of these outstanding subordinated instruments will be halted, as allowed by the High Court. Further, the downgrade considers the aforementioned extension of the final maturity date. Given that bondholders are unlikely to receive interest as agreed upon and that the expected maturity has been extended, DBRS views these actions as disadvantageous to bondholders, which is considered a default under DBRS policy.

Thre was similar action on Irish Life & Permanent:

DBRS Inc. (DBRS) today has downgraded the Dated Subordinated Debt rating of Irish Life & Permanent plc (IL&P or the Group) to “D” from “C”. Today’s downgrade follows the execution of the Group’s note tender offer.

The default status for the purchased and now-extinguished notes reflects DBRS’s view that bondholders were offered limited options and that a distressed exchange has now occurred, which is considered a default under DBRS policy, as discussed in DBRS’s press release dated 8 June 2011.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts winning 12bp, FixedResets up 1bp and DeemedRetractibles down 8bp. Volatility was good. Volume remained very low.

Is your country falling apart? Blame the short sellers!

Italy’s financial-market regulator moved to curb short selling after the country’s benchmark stock index fell the most in almost five months and bonds tumbled on investor concern Italy would be the next victim of the region’s debt crisis.

The regulator known as Consob ordered last night that short sellers must reveal their positions when they reach 0.2 percent or more of a company’s capital and then make additional filings for each additional 0.1 percent. The measure takes effect today and lasts until Sept. 9.

Another good technique is to bury the critics in paperwork:

Credit-ratings companies may be forced to disclose the internal analyses they use when they decide to cut a European Union government’s rating, the region’s financial services commissioner said.

Nations may win the right to check the data used by the companies in advance of downgrades of their sovereign ratings, Michel Barnier said in the text of a speech in Paris speech today. The measures may be included in legislation to rein in the ratings firms, he said.

But life is tough when you’re squaring the circle:

European finance chiefs clashed over how to dig Greece out of its financial hole just as markets battered the bonds of Spain and Italy, opening a new front in the debt crisis.

Finance ministers weighed how to get private bondholders to maintain their exposure to Greek debt in a way that doesn’t prompt credit-rating companies to declare a formal default.

Forcing bondholders to chip in would be “fatal,” Austrian Finance Minister Maria Fekter told reporters before a crisis meeting in Brussels today.

Late news is that maybe the taxpayers will foot the bill:

European finance ministers revived the prospect of bond buybacks to ease Greece’s plight and declined to rule out a temporary default, struggling to contain the debt crisis as investors pounded Italy, the continent’s third-largest economy.

Prodded by investors and the European Central Bank, the euro’s guardians said a bailout fund set up last year may be used to buy bonds in the secondary market or enable Greece to retire its debt at a discount. They offered another cut in rates on its emergency loans.

For all their recent problems, US brokerages have always been a far better and far more profitable place to work than those in Canada. Here’s why:

A headhunter put Muller in touch with Morgan Stanley, which was then looking for a quant strategist to drum up business. Muller had bigger aspirations and cut a deal with Derek Bandeen, a prop-trading executive. Muller had two years to get a profitable trading system running. If he failed, he would perform the strategist’s job. PDT was born.

The CSA has released a staff notice titled MARKETING PRACTICES OF PORTFOLIO MANAGERS:

We identified a number of deficiencies in the preparation, review and use of marketing materials by the PMs we reviewed.
Generally, the deficiencies were grouped into one of the following areas:
1. Preparation and use of hypothetical performance data
2. Exaggerated and unsubstantiated claims
3. Policies, procedures and internal controls
4. Use of benchmarks
5. Performance composites
6. Holding out and use of names
7. Other performance return issues
8. Disclosure related issues

Interesting piece on ETFs:

Using Deutsche Bank’s numbers, and then comparing them to a recent McKinsey & Co. analysis of Europe’s fund management industry, the Financial Times found that ETF’s likely account for 13 per cent of the Europe’s €9-billion in fund profits. More importantly, the profit margins on ETFs are sky high — 55.5 basis points of assets under management for ETFs versus 12.5 basis points for traditional funds.

And within ETFs, there’s a difference in profit margins between synthetic ETFs and physically replicated ETFs. The first type posts profit margins of 69 per cent, while the latter has profit margins of 64 per cent.
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Past studies have found that over 50 per cent of assets under management in European ETFs are now placed in synthetic ETFs.

Makes sense. All the MER on funds goes to the salesman.

It was a mixed day on the Canadian preferred share market, with PerpetualDiscounts up 13bp, FixedResets ahead 1bp and DeemedRetractibles losing 9bp. Volatility was good. Volume was extremely light.