Precidian’s McCabe: Nikkei ETF Is Step One

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Dan McCabe, president of New Jersey-based Precidian Investments, finally realized a long-standing dream of bringing to market a Nikkei 225 ETF earlier this year. It took a while, and he even dropped the firm’s former name, Next Investments, along the way.

The new fund, the Maxis Nikkei 225 ETF (NYSEArca:NKY), has already gathered almost $120 million in assets, and McCabe told Managing Editor Olivier Ludwig that the company has plans in the active ETF space and that it hopes to serve up innovative ETFs that do things like change the way distributions are made.


Ludwig: Why hasn’t a U.S. Nikkei 225 ETF happened earlier? After all, the first ETF was 18 years ago.

McCabe: I can’t give you a perfect answer to that. When people think Japan, they do think Nikkei 225. And, there were already exchange-traded products that represent this index in Asia and I believe in Germany, as well. It was just never brought to the United States because of licensing constraints.

Ludwig: And the licensing constraints that you talk about are coming more from the Japanese side?

McCabe: Absolutely, all from Nikkei. We were fortunate enough, through a very good relationship with Mitsubishi Asset Management, to procure a sublicense to be able to launch a Nikkei 225 ETF in the United States.

Ludwig: What’s the investment case you make to someone who’s looking at what’s out there and available to U.S. investors? I’m thinking about NYSEArca:EWJ from iShares, and NYSEArca:DXJ from WisdomTree. NKY, at 50 basis points, is cheaper than EWJ’s 54 basis points, but 2 basis points more than DXJ, I believe.

McCabe: I wouldn’t predicate any investment decision based on a difference of, what, 4 basis points. That’s kind of a silly way to look at it. But I do believe that this index is as different from those products as the Dow is from the S&P.

The Nikkei is a dollar-denominated index that is more of a domestic play for Japan. It is less weighted to financials than EWJ, for instance. The financial component of NKY is about 4 percent of the index, whereas with EWJ, I believe financials make up about 16 percent. So there are real fundamental weighting differences between these two products. And I believe that NKY is better positioned to benefit from a growth on domestic on-shore valuations, and that relates to the spending that’s going to happen because of the tsunami and because of the earthquake.



Ludwig: One of the things that caught our attention in the prospectus is that you stipulated usage of a replication strategy, but left open the possibility you could use sampling where replication wasn’t possible. Why was that included in the prospectus?

McCabe: The difference is their market structure is somewhat different than ours. These companies trade in round lots. So in order to fully replicate, you would need a complete perfect odd-lot portfolio, which, although it is available, it’s very difficult for certain market participants to be able to trade in that manner. So the optimization comes from the fact that you’re using a round-lot portfolio for creation and redemption.

Ludwig: So it’s not exactly like sampling that you might see in a large bond fund, for example?

McCabe: No, it’s not sampling like with an MSCI index. We’re going to be holding all 225 names, and our tracking should hopefully be very precise.

Ludwig: One of the things that might be alluring when you look at that WisdomTree Japan ETF, DXJ, is the currency hedging. Your ETF NKY will not be currency hedged. Why did you go about it this way? The yen is kind of an odd beast in the world currency markets. And if it appreciates, that’s good for a holder of NKY based in the United States, but it’s no guarantee that that will remain the case. In fact, the strong yen is probably bad for the Japanese economy, longer term.

McCabe: Actually no, because what happens if the yen strengthens is that they end up being able to purchase more commodities with fewer yen. So as they’re building and rebuilding from the calamity, the strong yen is really benefiting Japan.

Ludwig: Fair enough. And, a holder of NKY who watches the yen appreciate will watch their NKY returns higher as well?

McCabe: Correct.

Ludwig: Any plans to do a currency-hedged version of NKY down the road?

McCabe: Not necessarily out of the gate. Initially we think that this is the right product. It is a U.S. product. It will be traded in dollars and priced in dollars. There are Nikkei 225 products, like I said, that trade in other currencies. The majority of professionals are going to have the ability to hedge that currency exposure for themselves, if they wish.

Ludwig: What does the future hold for your firm, Precidian, now that NKY is live? You and I have talked at length about active ETFs, for example. I presume that would probably be part of the mix at some point, right?

McCabe: Yes, we’ve obviously worked on that for a very long period of time. And we’re hopeful that something will come to fruition there in the near term.

But we’re also looking at new structures that don’t exist in today’s market that would really be customer friendly.

Ludwig: Index-based strategies?

McCabe: They will be index-based strategies with different distribution models than exist today. And, not distribution channels—the actual distributions off of the ETF itself. So one of the things that we would like to work on is what we would call a managed distribution exchange-rate fund platform. The distribution product that we envision would be a wrapper that can be placed around today’s ETFs or indexes that will offer greater flexibility. We intend to manage the funds to create predefined distributions that will be tax efficient through a patented fund-management process. This will help to create new types of “yielding” vehicles. We want to do things other people can’t do in today’s world.

Ludwig: I won’t take up any more of your time, but I have to say, again, regarding the Nikkei 225 ETF, I’m still amazed that Europeans or Asians pulled this off first. America always extols itself as the great entrepreneurial culture. And here the U.S. is:The caboose on this, with your NKY.

McCabe: Hopefully we can bring it up from behind.


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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