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Portfolio > ETFs

Focus on Claymore

By Staff Writer

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Having launched nine exchange-traded funds over the last few months, Claymore Securities has been one of the busiest ETF issuers of 2007 so far, and it’s far from done. Christian Magoon, the company’s senior managing director of product development, takes time to discuss the ETF business with Research readers.

Research: Claymore’s ETFs are not the typical traditional index funds. Tell us more about your investment philosophy.

Magoon: Claymore’s initial goal in the ETF business has been to provide access to unique investment strategies through a diverse group of index providers. Prime examples of this are the Claymore ETFs that seek to follow indices based on intellectual property valuation (OTP and OTR) or a sector rotation philosophy (XRO). Each ETF’s underlying index employs a set of fundamental selection and weighting criteria — derived by independent index providers — to drive a systematic, rules-based approach in an attempt to outperform the reference index.

There’s growing interest in investing in companies that don’t damage the earth. How does the Claymore LGA/Green ETF (GRN) play on that theme?

Unlike more speculative approaches that are promoted as pro-environment, GRN may serve as a core portfolio component for environmentally conscious investors. The index provider, Light Green Advisors (LGA), has pioneered a new type of green, eco-friendly investing that recognizes leading companies in every industry who are affecting real environmental progress. Together, the actions taken by these leading companies can have a dramatic impact on society’s collective carbon footprint.

The companies in LGA’s Eco*Index demonstrate a progressive reduction to their environmental impact. The Eco*Index uses an environmentally based scoring system to evaluate and rank the conduct of all companies in the S&P 500. E-scores are developed using third-party data provided by the Environmental Protection Agency (EPA) and other environmental organizations to evaluate corporate expenses associated with compliance with U.S. environmental statutes and the cost of corporate toxicity.

The Best Independent Research (BIR) ETFs take a novel approach because they screen stocks based upon financial data obtained from five different research shops. Tell us more.

BIR is an exclusive consortium of five independent research organizations [Ativo, Channel Trend, Ford Equity Research, Columbine Capital and Thomas White International] that have been consistently ranked by third-party evaluators among the top tier for the performance of their equity research picks. The indices designed by BIR use a proprietary composite ranking methodology to uniquely join five independent perspectives. BIR has licensed this methodology to Claymore for a large- to mid-cap approach (BST), a mid-cap value approach (BMV) and a small-cap core approach (BES).

The BRIC ETF (EEB) is one of Claymore’s most popular ETFs. What’s the case for investing in volatile emerging economies?

The BRIC ETF has been a successful market entrant because Claymore provided the marketplace with a convenient opportunity for transacting in the “four horsemen” of the emerging markets. The four BRIC countries (Brazil, Russia, India and China) were identified several years ago, which set the stage for some very ambitious expectations over the next 40 to 50 years. As of mid-April, the fund had $180.8 million in assets.

Around February, the MACROshares (UCR and DCR) got bad publicity because there was an usually large discrepancy between their market price and their net asset value (NAV). This is something not typically seen with traditional ETFs. What was the issue and has it been resolved?

Premiums and discounts are not typically seen in traditional ETFs, but MACROshares are not an exchange-traded fund. Instead, they are a new and unique product structure.

The reference price used to determine the per-share underlying value for UCR and DCR is West Texas Intermediate Crude Oil and is represented by the front month oil futures contract traded on the NYMEX. Each month, the reference price for UCR and DCR “rolls” to the next succeeding month’s futures contract as the current front month contract nears expiration. Since the price of oil for delivery pursuant to longer-term futures contracts has recently been higher than the price of oil for delivery pursuant to the front month futures contract, premiums for UCR and discounts for DCR would develop if, in fact, the market were to price in such longer-term futures contracts. The marketplace seems to have become more comfortable with the nature of the MACROshares structure, and the premiums on UCR and discounts on DCR have traded in a relatively narrow range over the past few months.

One of the problems facing new ETFs is the question of investment merit. Just because you can index anything doesn’t mean you should. At what point are certain investment themes just plain bad ideas?

Sponsors of investment products must be responsible in their product development efforts. Investment themes that are “just plain bad” ideas include those that truly have no foundation, are misleading in their nomenclature or violate reasonable thresholds regarding liquidity, diversification and long-held principles of investing. It’s for these reasons that we believe the concept behind the index is the most important factor we analyze. Every evaluation we conduct and every strategy we deploy starts with the question, “Is this good for investors?” We believe that each concept, at its core, must make sense from a fundamental investment perspective and it’s the first test for every strategy we evaluate.

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Ron DeLegge is the San Diego-based editor of www.etfguide.com.

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