Category Archives: etf

Hungary Too In The Rate-Cut Club: ETFs In Focus

Hungary slashed its benchmark three-month deposit rate to a new low of 1.20% from 1.35%. It also lowered the overnight lending rate to 1.45% from 2.1%. The overnight deposit rate is now in negative territory from 0.1%.to -0.05%. The central bank took the step citing low imported inflation, European Central Bank (ECB) easing measures and continued slump in oil prices. Meanwhile, the bank also lowered its forecast for inflation this year. The bank now expects inflation to be around 0.3% as compared to the previous expectation of 1.7% announced in December. The target inflation the bank seeks to achieve is 3%. Thus, it plans to set a benchmark rate at such levels, which can be maintained for an extended period to reach its inflation target. Earlier this month, the ECB came up with a more intensified economic stimulus and opted for multiple rate cuts and the expansion of its quantitative easing program to boost the economy. Meanwhile, several other countries are undertaking easing measures and cutting rates. Last week, Norway indicated that it could join other European countries Sweden, Denmark and Switzerland in sub-zero levels of interest rate. On the other side of the pond, the Fed kept a dovish stance and dialed back its number of rate hikes to two instead of four as was projected last December. The rate cut measures by the Hungarian central bank, which was undertaking initiatives like cheap lending to small firms, subsidized funds to retail banks and buying government bonds, represent a huge shift in policy. Although the possibility of further rate cuts can’t be excluded, the central bank warned that too low rates may be counterproductive, forcing the banks to tighten lending conditions. Keeping these points in mind, we highlight four ETFs – RevenueShares Global Growth ETF (NYSEARCA: RGRO ), Cambria Global Value ETF (NYSEARCA: GVAL ), Guggenheim MSCI Emerging Markets Equal Weight ETF (NYSEARCA: EWEM ) and EGShares Low Volatility Emerging Markets Dividend ETF (NYSEARCA: HILO ) – that have high exposure of 11.7%, 7.7%, 5% and 4.8%, respectively, to Hungary. RGRO This ETF looks to track the RevenueShares Global Growth Index comprising the top five developed and top five emerging countries in the Standard & Poor’s Global Broad Market Index based on year-over-year GDP growth from the prior two quarters. The fund charges 70 basis points a year and has 95 stocks in its basket. Energy takes 21% of the fund’s exposure followed by basic materials and financials. As much as 74% stocks in the fund are large caps. The fund has total assets of $2.1 million with paltry volumes of less than 1,000 shares. It has gained 6% so far this year (as of March 23, 2016). GVAL GVAL seeks to match the performance of the Cambria Global Value Index. With 126 stocks in its basket, the fund is well diversified with none of the stocks holding more than 3% weight while financials has the highest exposure at 23%. With total assets of $65.7 million, the fund has average volume of 17,000 shares and an expense ratio of 69 basis points. It has returned 3.3% so far this year. EWEM EWEM is based on the MSCI Emerging Markets Equal Country Weighted Index and has 346 stocks in its basket with none holding more than 4% of total assets. The fund has an AUM of $11 million and trades in average volumes of 5,000. Financials dominates in terms of sector exposure, accounting for an almost 39% of total assets. The fund charges an expense ratio of 76 basis points. It has gained 7.1% in the year-to-date period. HILO HILO is based on the EGAI Emerging Markets Quality Dividend Index and has 49 stocks in its basket with none holding more than 2.3% of total assets. The fund has an AUM of $17.3 million and trades in average volumes of 6,000. Financials dominates in terms of sector exposure with telecommunication services and materials rounding off the top three. The fund charges an expense ratio of 85 basis points. It is up 9.8% in the year-to-date period. Original post

My ‘Wisdom’ On Smart Beta And Factor Investing

The latest installment from Tadas Viskantas’s series on “financial blogger wisdom” (is that an oxymoron?) asked a bunch of smart people (and also me) about smart beta. I was short: Smart beta and factor investing are the newest versions of high(er) fee active management promising the fairy tale of “market beating” returns in exchange for higher fees and usually delivering lower returns (after taxes and fees). Regulars know I am not a big fan of Smart Beta and Factor Investing (sorry to all my friends in the industry who love these approaches!). For the uninitiated, Smart Beta basically involves taking an index fund and changing it so it captures a “smarter” type of return. For instance, you might take a market cap weighted index fund like the S&P 500 and equal weight it so that it doesn’t expose you to the procyclical tendencies of the market cap weighted fund which will tend to be overweight the riskiest stocks at the riskiest points in the market cycle. The evidence that this is countercyclical is weak as Vanguard has shown and as I expressed in my new paper . Further, you will generally pay higher taxes and fees in these funds without a high probability of better results. For instance, the equal weight S&P 500 has a pretty mixed performance versus the market cap weighted S&P as it’s performed better on a 10-year basis, but underperformed on all periods shorter than 10 years. The nominal returns are slightly better over longer periods, but that’s only because the equal weight fund has a much higher standard deviation with 95% of the total correlation. So, the intelligent asset allocator has to ask themselves why they’d pay for 95% of the correlation while guaranteeing higher taxes and fees without a reasonably high probability of better risk-adjusted performance? Should you really pay higher fees for the empty promise of “market-beating returns”? I say no. The same basic story can be laid out for factor investing. There’s a great irony in the idea that the founder of the Efficient Market Hypothesis says you can’t pick stocks that will beat the market, but you can construct index funds that will be comprised of the stocks that will beat the market. The problem is no one knows what are the right stocks to put in a “momentum” index before they earn the momentum premium. And just like active mutual funds, no one should pay a premium for an asset manager who claims that they can construct an index that will be comprised of stocks that will benefit from “market beating” returns in the future. You just end up guaranteeing higher fees and taxes in exchange for the empty promise of market-beating returns. To me, these are just the new forms of “active” investing charging people higher taxes and fees for indexing strategies that won’t outperform.

3 Tips For Investing In Emerging Markets

By Tim Maverick Having been a neglected asset class for some time, emerging market stocks are enjoying a healthy rebound so far in 2016. The story of how we got here is a familiar one. When developing stock markets got overbought, they became overvalued. As a result, nervous investors – mainly from the United States – dumped those assets. But the selloff led to a sharp 180-degree turn – emerging markets then traded at a 28% discount to developed countries. Research Affiliates, founded by noted investor Rob Arnott, explains that emerging market stocks have only been cheaper than current levels six times. Each of those periods sparked an average five-year return of 188%. That should grab any investor’s attention. So what’s the best way to invest in emerging stock markets? Based on my decades of experience as both an advisor and an investor, I’ve compiled three quick tips to help you make sense of this market trend . Tip #1: Do NOT Use Index Funds I’m not a fan of index funds in general… but especially when it comes to emerging markets. It’s a sure-fire way to be unsuccessful. Why, you ask? First, because indices severely restrict your investable universe. And they’re usually restricted to the most overbought and overvalued stocks. Case in point: The Institute of International Finance points out that only $7.5 trillion out of a total of $24.7 trillion in emerging market equities are covered by indices from MSCI and JPMorgan (NYSE: JPM ). The rest are simply ignored as if they don’t exist. Yet, it’s those ignored stocks that usually boast the best bargains and room for growth. Tip #2: Avoid The Closet Index Trackers Even if you do avoid index funds directly, there’s another problem: “Closet trackers.” These are fund managers who like playing it safe. They couldn’t care less about outperforming the benchmark index for their shareholders. These managers have at least 50% of their funds in index stocks, so their funds will mimic the underlying index. Needless to say, that’s not what you want. Worryingly, a study from the World Bank revealed that 20% of equity funds were index trackers or closet trackers. This is a complete waste of money from an investor’s viewpoint. You’re paying for active management, but you’re not getting it. One example of a mutual fund company that usually goes off the beaten track and often invests in smaller companies is the Wasatch Core Growth Fund No Load (MUTF: WGROX ). Though I do not own their emerging market fund, I do own their frontier markets fund – Wasatch Frontier Emerging SmallCountries Fund (MUTF: WAFMX ) – for exposure to the smaller frontier markets. Please note: The fund is closed to new investors if you try buying it through your brokerage, but if you go directly to the fund company, it’s still open. Tip #3: Get Local Exposure If you truly want exposure to developing markets, guess what? You’ll need to own shares in local companies. And while it may seem like a clearer route to a profit, don’t do what many U.S. advisors espouse and have your sole exposure through multinational companies. Yes… there are many great multinationals with huge emerging market businesses – a company like Colgate Palmolive Co. (NYSE: CL ) comes to mind – they’re not the best way to gain exposure to developing markets’ economic growth. I like to use this analogy when explaining this point to clients: Let’s say a Japanese investor wanted exposure to the U.S. economy. His broker recommends Toyota Motors Corp. (NYSE: TM ). After all, Toyota sells a lot of cars in the United States. Silly, right? Toyota shares aren’t a good way to play the overall U.S. economy, as the stock only represents a very select fraction of market success. Neither is investing in emerging markets solely through multinationals. Investing in emerging local companies is the best way to profit from more specific foreign trends. There are all manner of resources available these days for researching foreign companies and stocks. It does take a bit of work, but the rewards can be well worth the time. Alternatively, you can leave the work to proven, active fund managers. Regardless of which route you prefer, now is a good time to build positions in emerging markets. Original Post