Author Archives: Scalper1

China ETF Investing: Will It Buoy Up Or Dip Down In 2016?

What a terrible start to the year 2016 for Chinese securities! After what the Chinese economy and securities went through in 2015, everyone thought that the New Year would unfold somewhat better days. But no one had predicted 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 (read: 5 China ETFs Up At Least 20% in Q4 ). The most recent massacre is being blamed on hints of further shrinkage in the Chinese manufacturing sector in December. The Caixin/Markit purchasing managers’ index declined to 48.2 in December, representing the 10th successive month of factory output contraction. The data was much worse than 48.6 in November and well below the market’s expectation for 48.9. To complicate the global trading scene, news of Saudi Arabia cutting off diplomatic ties with Iran joined China-led worries to start the year. Needless to say, global stocks followed the downing trend and volatility and safe haven assets like gold rose on January 4. Investors should note that this was the first trading halt on the Chinese indexes after the Chinese securities regulators introduced a “circuit breaker ” to calm the jittery market. Per the rule, a 5% one-day gain or loss in the CSI300 index (before 2:30 p.m.) will close trading in the country’s all equity indices for 30 minutes. Shifts of 7% plus would result in closed trade for the rest of the day. What’s in Store for 2016? China may be leaving no stone unturned to shore up its market and the economy, but there are a number of headwinds still facing the Chinese economy, including shadow-banking activities, credit crunch and money laundering from mainland China to other peripheral destinations like Macau (read: Should You Short China ETFs Despite Rate Cuts? ). A group of economists believe that the government’s excessive focus on anti-corruption activities may hold back GDP growth. This along with a weak domestic market and global growth worries hurting the export profile took investors’ worries over the Chinese economy to a delirious pitch. With no let-up in the downbeat data flows from the Chinese economy, investors have now started to doubt its ability to deliver above-par growth numbers. Most analysts are not hopeful of the Chinese market. UBS stayed very cautious on China and believes that “China’s stock markets will see no gain in 2016.” UBS expects the Chinese economy to contract from 2015’s projected growth of 6.9-7% to 6.2% in 2016. Weak corporate earnings as depicted by the worst earnings in the third quarter of 2015 in almost five years, deteriorating property construction, and overcapacity in industrial and mining sectors will drag down China’s economy and the markets, per barrons.com. In the third quarter, the decline in profits was pronounced in the energy (down 58%), material (down 34%) and transportation (down 10%) sectors. Per Credit Suisse, Chinese companies’ credit worthiness is also deteriorating. Coming to the savior circuit breaker, Deutsche Bank (NYSE: DB ) does not approve of this system and believes that this method will simply increase volatility in the market resulting in a liquidity crunch. Yet another brokerage house Goldman (NYSE: GS ) also sees no respite “after China New Year sell-off.” If this is not enough, analysts expect further sell-off ahead due to the looming expiry of a six-month lockup period on share sales by big shareholders. Notably, to arrest the market crash, the Chinese government banned investors with over 5% stake, from abandoning their shares for six months. Now these shareholders may start running out of Chinese stocks when the embargo is lifted on Friday, per BBC . Goldman Sachs expects this lockup to account for about 5.8% of the total A-share free-float market cap. ETFs Thrashed in New Year Almost the entire Chinese market was in the red on January 4 led by the Market Vectors ChinaAMC SME-ChiNext ETF (NYSEARCA: CNXT ) (down 12.11%), the db X-trackers Harvest CSI 500 China-A Shares Small Cap Fund (NYSEARCA: ASHS ) (down 9.89%), the Market Vectors China ETF ( PEK ) (down 8.87%), the db X-trackers Harvest CSI 300 China A-Shares Fund ( ASHR ) (down 8.5%) and the Golden Dragon Halter USX China Portfolio (NYSEARCA: PGJ ) (down 4.62%). Is There Any Way to Win the Slump? All in all, China investing is full of risks. But it’s not that there is no silver lining. After all, the Chinese currency yuan received a privileged reserve currency status from IMF recently and joined the league of the major currencies, namely the U.S. dollar, pound, euro and yen. The GDP growth rate, though tapered from earlier years, is still way better than many emerging and developed economies. Plus, the economy is shifting mode from export-driven to consumption-oriented to ward off foreign issues. It’s just that the transition has been anything but smooth. China has not yet embarked on any outright policy easing. So, policymakers still have ways to check further weakening of the economy. Yes, these are all long-term phenomena. Over the short term, the market is expected to remain rocky. So, investors can have an inverse exposure to the Chinese market via the Direxion Daily CSI 300 China A Share Bear ETF (NYSEARCA: CHAD ) (up 8.76% on January 4), the ProShares UltraShort FTSE China 25 ETF (NYSEARCA: FXP ) (up 6.7%) and the ProShares Short FTSE China 50 ETF (NYSEARCA: YXI ) (up 3.5%). Link to the original post on Zacks.com

Indexing Pioneer Vanguard Skeptical Of Smart Beta

Vanguard revolutionized investing with its low-cost, passive indexing products. But after the TMT (tech, media, and telecom) blowup of 2000-2002, when cap-weighted indexes became overstuffed with overvalued dot-coms, critics began maligning cap-weighted index funds as “dumb beta.” The alternative, in their view, was to weight stocks according to factors other than market cap – so-called “smart beta.” Smart-beta strategies have been hailed as the “new paradigm” in passive, index-based investing. But Vanguard, the indexing pioneer, disagrees: The firm’s Don Bennyhoff, Fran Kinniry, Todd Schlanger, and Paul Chin – authors of an August 2015 white paper titled ” An Evaluation of smart beta and other rules-based active strategies ” – insist that smart-beta strategies are in fact active strategies, and that market cap is still the best basis to weight the components of an index. How Active is Smart Beta? In Vanguard’s view, smart-beta strategies should be considered “rules-based active strategies,” by definition , since their security-selection and -weighting methodologies can produce “meaningful security-level deviations” – i.e., “tracking error” – versus a broad cap-weighted index. In the August 2015 white paper, Mr. Bennyhoff and his co-authors looked at the “active share” of smart beta ETFs and index funds. “Active share” is a measure of how much an index’s holdings deviate from a cap-weighted baseline, which in this case was the Russell 3000 – an index of the 3000 largest U.S. stocks, including the mid-to large-cap Russell 1000 and the small-cap Russell 2000: Source: Vanguard. All data as of December 31, 2014. In general, the more stocks in the index or portfolio, the less the “active share.” Smart-beta ETFs and funds had “active share” that ranged from a bit less than 30% to roughly 60%, generally much more than cap-weighted indexes, but less than “traditional, actively managed equity funds.” Smart-beta strategies also had less “active share” than ETFs focused on specific risk factors like value, momentum, and size – and its exposure to these factors that provides much of smart beta’s appeal, in Vanguard’s analysis. Which Factors and When? Vanguard admits that the performance of alternatively weighted indexes has been “compelling” over time. For instance, the alternative FTSE RAFI Developed Index returned an annualized 7.2% from 2000 through 2014, with a Sharpe ratio of 0.42. The cap-weighted FTSE Developed Index, by contrast, returned just 4.2% per year with a Sharpe ratio of 0.26. This relationship holds for most regions, too. But particular risk factors fall into and out of favor, and as a result, the performance of smart-beta strategies – relative to the broad market – has deviated substantially over time. Should investors only concern themselves with certain factors, such as dividends, cash flow, book value, sales, and volatility? Or should they consider all factors, which are too numerous to list? Vanguard says market cap-weighting captures all of these factors through the market-pricing mechanism – a compelling argument. Taking the Gloves Off Near the end of the white paper, Bennyhoff et al. take off their gloves: Smart beta doesn’t represent a “new paradigm” of indexing nor a “smarter” way to invest. The strategies’ excess returns can partly – in some cases largely – be attributed to “time-varying factor exposures,” which make smart-beta strategies effectively active and not passive. “We found little evidence that such smart-beta strategies have been able to capture any security-level mispricings in a systematic and meaningful way,” the authors wrote. An index of securities is supposed to represent “the risk-and-reward attributes of a market” or segment thereof. In Vanguard’s view, market-cap-weighting isn’t broken, and therefore isn’t in need of fixing. For more information, download a pdf copy of the white paper . Jason Seagraves contributed to this article.