Author Archives: Scalper1

Most Vulnerable Asia-Pacific ETFs On China Issues

The summer 2015 woes of China have resurfaced in winter 2016, making global stocks go ballistic. While China shook the global markets in August when its policymakers devalued the country’s currency by 2% against the greenback, the latest Chinese economic data have been extremely weak to start the new year. Activity in China’s services sector expanded at its slowest rate in 17 months in December. There was a trading halt on the key Chinese bourses, with the indexes diving 7% to start the new year. The decline was the worst single-day performance since the 8.5% decline on August 24, 2015, which was the root of the global market rout last summer. Additionally, China’s central bank guided the yuan to a five-year low in offshore trading on Wednesday, which raised expectations of further weakness in the Chinese economy and sparked off fears of a currency war among the export-centric Asian nations. Many analysts are now projecting a free fall in yuan so that the currency can reach equilibrium . As a result, hordes of global stocks have been offloaded, leading them to the most awful start to a year in 16 years. Spiraling woes in the Chinese economy and apprehensions of a currency war in the near future, especially among its Asian neighbors, led the Asian shares to suffer their largest weekly decline in over four years. Export-centric Asian economies may be now forced to depreciate their currencies to stave off competitive pressure and rev up their exports, while growth issues in China have marred investing prospects of countries with close trade ties (see all Asia-Pacific emerging ETFs here ). In any case, the Asian region has been buckling under pressure for quite some time now, thanks to bleeding capital. Apart from slowing growth, the region faces threats from the Fed tightening and its ominous impact on the Asian currencies. A continued hike in interest rates will add to the strength of the greenback, which in turn would devalue a set of Asian currencies. Moreover, a few Asia-Pacific economies are commodity-rich and tend to underperform massively in a period like this, when commodities are slouching. All these offhand occurrences clarify the recent sell-off in the Asian shares. Below, we highlight a few Asia/Asia-Pacific ETFs which are highly susceptible to issues in China. These ETFs lost massively in the last five trading sessions (as of January 8, 2016) on the Chinese market upheaval, more specifically at the start of the new year. The funds are likely to bounce back more swiftly as soon as the doldrums in China calm down (see all Asia-Pacific (Developed) ETFs here ). iShares MSCI Australia ETF (NYSEARCA: EWA ) – Down 9.6% China is one of the largest trading partners of Australia, and thus acts as a key driver in the movement of the latter’s economy. This is why Australia ETF EWA retreated 10.4% in the last five trading sessions (as of January 7, 2016). The fund has a Zacks ETF Rank #4 (Sell). iShares MSCI South Korea Capped ETF (NYSEARCA: EWY ) – Down 5.2% Korea was also left in a quandary, as Chinese currency devaluation raised concerns over general trade. There are several South Korean companies, namely Samsung Electronics ( OTC:SSNLF ), Hyundai Motor ( OTC:HYMLF ), LG Corp. ( OTC:LGEAF ) and Daewoo which have big export markets and thus pared gains. Also, the nuclear test by North Korea had an adverse impact on the South Korean securities. EWY was down 5.3% in the last five trading sessions (as of January 7, 2016). The fund has a Zacks ETF Rank #3. iShares MSCI Taiwan ETF (NYSEARCA: EWT ) – Down 7.6% Apart from South Korea, the Taiwanese economy also thrives on exports. As a result, Taiwanese companies also recorded losses on fears of losing on currency competitiveness to China. Notably, Taiwan houses one of the largest semiconductor companies in the world – Taiwan Semiconductor. In short, South Korea and Taiwan’s stock markets will be hit by yuan devaluation in a passive way. This Zacks Rank #3 ETF lost 8.3% in the last five trading sessions. iShares MSCI Singapore ETF (NYSEARCA: EWS ) – Down 4.8% Singaporean securities were under pressure lately on issues in the neighboring country China. This happened even after Singapore reported faster-than-expected expansion in the economy. EWS has a Zacks ETF Rank #3 (Hold). Original Post

Most Factor Anomalies Are Not Persistent

Smart-beta indices are constructed to exploit “anomalies” that reward exposure to risk factors beyond what would be expected as “necessary compensation” under the Capital Asset Pricing Model (“CAPM”). Of course, any factor that results in nominal outperformance must be considered on a risk-adjusted basis, since taking on higher risk should engender a greater reward – and investment researchers at S&P Dow Jones Indices think at least some factor “anomalies” aren’t anomalies at all, but just rewards for greater-than-understood risk-taking. Even still, among the remaining anomalies, the researchers think many are “disappearing,” “statistical,” or “attenuated” – and only a few are truly “persistent.” Writing on behalf of S&P Dow Jones, academic Hamish Preston and S&P Dow Jones Index Investment Strategy professionals Tim Edwards and Craig Lazzara express these views in an October 2015 research paper titled ” The Persistence of Smart Beta .” Disappearing Anomalies Disappearing anomalies don’t last. A great example shared by the paper’s authors is the so-called “Weekend Effect” that was popularized by Frank Cross in 1973. Mr. Cross discovered that if investors had bought stocks at their closing prices each Monday and sold them at their closing prices each Friday – avoiding the weekend and the Monday trading session – they would have dramatically outperformed a “buy and hold” strategy from 1950 to the time of his research. But then, almost immediately after the Weekend Effect became well known, the anomaly didn’t just disappear, it reversed. The Weekend Effect rebounded in 1984, only after another academic research paper called it into question – and then, when a paper called “The Reverse Weekend Effect” was published in 2000, the old Weekend Effect returned. As soon as investors gained knowledge of the Weekend Effect, it reversed. When knowledge of the reversal became widespread, the reversal reversed. Now, it’s taken as a given that the Weekend Effect was a coincidence – hence, it was a disappearing anomaly. Statistical Anomalies Perhaps a better approach is for investors to keep knowledge of anomalies they discover secret – that way, they may be less likely to disappear. This is what David Dolos did when he discovered that applying the price movements of the 1720 South Sea Bubble – second only to Tulip Mania in episodes of old-school irrational exuberance – to the Dow Jones Industrial Average inexplicably produced outsized returns. Mr. Dolos never told anyone about his discovery, and he reaped the rewards in anonymity until 2007, when the system broke down. Why? Well first off, David Dolos didn’t exist. The story is made up, and although the 1720 South Sea Bubble was real, the South Sea Bubble effect was data-mined into existence. As the paper’s authors note, modern computing power can easily produce “false positives” – i.e., anomalies that are purely statistical in nature. In order for an anomaly to be persistent, it must make logical sense. Attenuated Anomalies Momentum is one of the most popular factors. Academic research supports its outperformance, and the concept of momentum stocks – stocks that are going up – outperforming non-momentum stocks makes logical sense. The momentum anomaly is known to anyone who cares to know about it, and yet this knowledge hasn’t caused the anomaly to disappear – instead, it has reinforced it. The downside is that since investors have become aware of the momentum anomaly, its drawdowns have been bigger. This is what the S&P Dow Jones authors mean by an “attenuated anomaly.” In 1997, Mark Carhart published a study that showed adding momentum to the famous Fama-French three-factor model boosted returns. This caused more money to flow into momentum stocks, ultimately leading to bigger drawdowns during crashes. Persistent Anomalies Are there any truly persistent anomalies? The authors say there is at least one: Low volatility. But they conclude with a word of caution: “So far, the investment and attention directed toward low-volatility strategies has not been sufficient to temper their returns or attenuate their risk/return profile.” So far. As the well-known disclaimer goes: ” Past performance does not necessarily predict future results. ” For more information, download a pdf copy of the white paper. Jason Seagraves contributed to this article.

6 Inverse Leveraged ETFs Soaring To Start 2016

As fresh signs of a slowdown in China and a relentless slide in crude sparked off fears of a global slowdown, the U.S. stocks posted their worst five-day start to the year in history. The S&P 500 index plunged 6% while Dow Jones tumbled 6.2% last week. The tech-heavy Nasdaq Composite index, which outperformed last year, lost 7.3%. Additionally, a strong dollar, geopolitical tensions in the Middle East and weak corporate earnings are weighing heavily on investor sentiment. This is especially true as earnings in the S&P 500 are projected to decline 5.3% for Q4 2015. This would mark three consecutive quarters of a year-over-year decline in earnings since Q1 2009 to Q3 2009, as per the earnings Factset . Amid myriad woes, investors have little reason to believe that the bull market will complete its seventh year on March 9 and thus shunned U.S. equities. According to etf.com , investors pulled out $5.8 billion in capital from U.S. equity ETFs. This has resulted in huge demand for inverse or leveraged inverse ETFs for investors seeking to make big gains in a short span. In fact, many products provided outsized gains (over 30%) in the first week of 2016, though these involve a great deal of risk when compared to traditional products. Below, we have highlighted five such ETFs that crushed the market last week and should continue doing so at least for the near term if global sentiments remain volatile. These products either create an inverse long/short position or leveraged inverse long/short position in the underlying index through the use of swaps, options, future contracts and other financial instruments. Direxion Daily S&P Biotech Bear 3x Shares (NYSEARCA: LABD ) This product seeks to deliver thrice (3x or 300%) the inverse (opposite) daily performance of the S&P Biotechnology Select Industry Index. The fund has amassed $33.4 million in its asset base and average daily volume of more than 632,000 shares. It charges investors 95 bps in annual fees and expenses. The ETF delivered whopping returns of 51.8% in the first week of 2016. VelocityShares 3x Inverse Crude ETN (NYSEARCA: DWTI ) This product provides three times inverse exposure to the daily performance of the S&P GSCI Crude Oil Index Excess Return. The ETN is a bit pricey as it charges 1.35% in annual fees while average daily volume is solid at 1.4 million shares. It has managed $374 million in its asset base and surged 38.4% last week. ProShares UltraProShort Nasdaq Biotechnology (NASDAQ: ZBIO ) This fund seeks to deliver thrice the inverse performance of the NASDAQ Biotechnology Index. It has accumulated $12 million in its AUM and charges 95 bps in annual fees. Average trading volume is moderate, exchanging about 73,000 shares a day in hand. The fund gained nearly 38.1% in the same time frame. Direxion Daily FTSE China Bear 3x Shares (NYSEARCA: YANG ) This fund provides thrice the inverse return of the FTSE China 50 Index. The product has AUM of around $82.8 million and sees good trading volume of 251,000 shares a day on average. Expense ratio came in at 0.95%. YANG returned nearly 36.2% over the past one-week period. Direxion Daily Semiconductor Bear 3x Shares (NYSEARCA: SOXS ) This ETF provides three times inverse exposure to the PHLX Semiconductor Sector Index. It charges 0.95% in annual fees and trades in average daily volume of more than 117,000 shares. It has managed $45.9 million in its asset base and gained 33.3% last week. Direxion Daily Natural Gas Related Bear 3x Shares (NYSEARCA: GASX ) This product provides three times inverse exposure to the natural gas segment of the equity market, which tracks the ISE-Reverse Natural Gas Index. It has amassed $3.8 million in its asset base while volume is paltry at around 8,000 shares. Expense ratio came in at 0.95%. GASX was up 31.5% in the first week of 2016. Bottom Line As a caveat, investors should note that such products are extremely volatile and suitable only for short-term traders. Additionally, the daily rebalancing – when combined with leverage – may force these products to deviate significantly from the expected long-term performance figures. Still, for ETF investors who are bearish on the equities and oil for the near term, either of the above products could make an interesting choice. Clearly, a near-term short could be intriguing for those with high-risk tolerance, and a belief that the “trend is the friend” in this corner of the investing world. Original Post