Q:  One of the unique features of the emerging markets is that, with the exception of the top four or five companies, the companies have very small market caps. Is that the reason for using the modified market capitalization weighting?

A: That’s one of the reasons, and that approach is necessary to avoid buying just two or three stocks when you buy a fund. Also, the index providers can put in place very stringent liquidity requirements, so that every company has to trade a certain amount of average daily volume, regardless of its market cap. That’s the case in Russia, where in addition to a $150 million market cap hurdle, there is a requirement of $1 million dollars of average daily volume along with a minimum trading history period before new IPOs can be included in the index.

Q:  What types of investors usually choose these ETFs?

A: Many of the ETFs have trading characteristics that fit into various models used by financial professionals. The Gold Miners ETF, for example, has a beta 2 to gold bullion and is often used tactically within commodity portfolios. Financial professionals are also using the ETFs within sector rotation strategies, pairs trading, and hedging against individual stock. Options trading on our ETFs have also been quite robust. The ETFs are also designed for individual investors, including those playing long-term stories or using sophisticated targeted trading strategies. Overall, our ETFs offer ways to participate in a larger global story and can be viewed as single-stock ideas in the form of a fund vehicle for individual investors.

Alternative energy, for example, provides targeted exposure to companies worldwide that are principally engaged in the industry. That’s quite attractive to investors given the big picture and the challenge in picking stocks for this captivating theme. It can be very frustrating to identify a great investment idea, and to end up owning the poorly performing companies or the wrong stocks. So the basket approach of the ETFs is a way to eliminate stock exposure risk.

Q:  Could you highlight the differences between an ETF and an index fund or a closed-end fund?

A: ETFs are very tax efficient. When there are redemptions within a traditional openended mutual fund, the portfolio manager needs to sell off individual stock positions to raise cash. These transactions can trigger capital gains, which are passed on to investors. With the ETF structure, this is done with in-kind transactions between the fund and the authorized participants, which is a tax efficient approach. The tax consequence primarily comes when an investor sells off their position for a gain.

Another difference is that various strategies can be used with ETFs. They can be traded throughout the day, and can be used as stocks in many ways.

Q:  The Russian market closes in the New York morning. How do you price the equities that you own in the ETFs?

A: In the case of Russia, there are five ADRs listed in New York that the market is most familiar with. The London-listed shares would be more difficult for individual investors to access, even more so with the six Russian shares that trade in Moscow. The fund offers easy exposure to the performance of those stocks, and when the U.S. markets are open, we’ll use the closing prices of those stocks plus a foreign currency fluctuation component in deriving the intra-day NAV value of our fund.

But the international ETF trade is truly supply and demand and a matter of price discovery. At the end of each day, Van Eck calculates the fair value of the fund to reflect to investors the portfolio’s worth at the end of the U.S. trading day.

Q:  If I’m an investor who has missed a surge in the U.S. but I know that the European or the Russian stocks will go up tomorrow in sympathy with U.S. stocks, I can buy your ETF today to get a better price tomorrow. Would that be a valid and legal reason to invest in the fund?

A: You’ll find that there is a lot of speculation about where the foreign markets will open on the next day, and whether that includes sympathy to the direction of the U.S. markets. Investors may find that if the S&P 500 is up or down 10%, that move would be built to a large degree into the price of the ETF. That means that Russia is likely to open higher or lower. And if the price of the ETF is trading significantly higher or lower than the prices of the stocks in the basket, that would indicate that the market’s building the next day’s prices of the foreign stocks into the ETF’s price. But it’s mostly price discovery based on where the market is, and of course, the supply and demand.

Q:  What are the major risks associated with the ETF products and how do you mitigate them?

A: We start by trying to identify if the index is built with solid weighting methodologies, and if it can offer diversified exposure within the particular sector, industry, and country. We have also established close relationships fund specialists and key market makers to ensure that the ETFs trade evenly with the markets and with sufficient depth and liquidity. This is especially important given the volatility characteristics.

Of course, there are certain risks that we cannot control, such as the political risks in Russia or the volatility of the gold mining companies. What we can control, however, is the design of the baskets. And all of us should be aware that the country-related risk or sector risk is part of the ETF’s nature. So it is very important for the investor to know how the ETF fits within an overall diversified portfolio.