Tag Archives: alternative

A New Chinese ETF Is Better For An Arbitrage Or Just To Be Long Mainland China

Summary I’ve often written on the emerging spread between China-listed and Hong Kong-listed shares. This spread can form the basis of an arbitrage, but present ETFs have some problems in providing such arbitrage. However, there’s a new China ETF which might be better both for such an arbitrage and even just for a simple long for those wanting mainland China exposure. I’ve sometimes written about the widening gulf between Chinese shares quoted in Hong Kong (H shares) and their equivalents quoted in China’s Shanghai/Shenzhen exchanges (A shares). The last time I wrote about it was in my article titled ” There’s A Measure Of Irony In Today’s China Rally .” This spread between what are effectively the exact same shares started in November 2014, which coincided with the inception of a large bubble in Chinese stocks (quoted in China). One can follow this irrational spread by checking the Hang Seng China AH Premium Index and seeing how in years prior the index hovered in the 90-110 area as it should, and only recently it shot as high as 140-145. This means a basket of equivalent A shares is trading 40-45% above what their Hong-Kong quoted counterparts are going for. ( Source : FT.com ) I’ve said that a way to take advantage of this situation would be to arbitrage it by selling short an index fund composed of A shares and buying an index fund composed of H shares. My candidates for this were the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (NYSEARCA: ASHR ) for the short leg and the iShares China Large-Cap ETF (NYSEARCA: FXI ) for the long leg of the arbitrage. However, I’ve always had to warn that this is a very imperfect arbitrage, because the funds don’t have the same holdings – they just have some overlap where it matters. As such, this trade could only be taken for short periods of time, as any tracking error can accumulate over time. There Might Be A Better Way There is a new kind on the Chinese ETF block. I am talking about the CSOP China CSI 300 A-H Dynamic ETF (NYSEARCA: HAHA ). This ETF has unique characteristics, as follows: It replicates the CSI 300 Index, which is made up of A shares. However – and this is a key difference – whenever there’s an equivalent H share, and the H share is trading cheaper than its A share counterpart, the ETF buys the H share instead. Also, the fund carries a 75 bps expense ratio. And it’s managed by CSOP, which is the largest China A ETF manager globally, based in Hong Kong and with offices in New York. Due to the unique way this ETF is managed, it presents a much better way to implement the arbitrage I once used ASHR and FXI for. Here, the arbitrage would need to be structured as follows: A long position on HAHA. Together with a short position on ASHR, which tracks the CSI 300. The tracking error of this solution would be much smaller than the previous version, and it should correlate much better with changes to the Hang Seng China AH Premium Index. Furthermore, this ETF will probably also constitute a better alternative for those simply wanting direct exposure to China’s A share market/CSI 300. After all, it will include all of the necessary components, while also including the cheaper H shares if those are available. Not All Is Roses, Though There are a couple of issues which need to also be taken into account: HAHA is still a very recent and mostly unknown ETF, so its liquidity is very low. Furthermore, low liquidity can lead to large bid-ask spreads, much larger than either FXI’s or ASHR’s. This can be somewhat mitigated if the proper market makers tighten them, but at present, it’s clearly a problem, as it increases trading costs. Also, holding an ASHR short position, while being cheaper now, is still somewhat expensive. This is how the short rebate fee has evolved recently – as you can see, it still costs nearly 6%/year to keep an open short position: (click to enlarge) ( Source : Interactive Brokers) Conclusion There is a case to be made for using HAHA for an arbitrage to capture the Chinese A-H share spread in an arbitrage position. There is also a case to be made for using HAHA just to get long exposure to the Chinese CSI 300 index. However, a couple of problems remain in both cases, namely the lack of liquidity and thus larger trading costs, and the cost of keeping an ASHR short position open.

Impressive Auto Earnings Put This Car ETF In Focus

The automobile sector has been riding on a host of favorable elements this year such as plunging oil prices, a recovering U.S. economy, rising consumer confidence and spending, increasing aging vehicles on the road, high incentives and discounts and easy availability of credit. While these factors led to better-than-expected earnings during the third quarter, it is only the stronger dollar that stood in the way of the sector to realize its full potential, leading to revenue weaknesses across the board. As per Earnings Trend report, earnings of all the automobile companies that have reported so far are up 30.7% year over year for the third quarter of the year, with 60% of the companies beating the Zacks Consensus Estimate. Meanwhile, revenues of all the companies are down nearly 1% for the quarter, with only 20% of them surpassing the Zacks Consensus Estimate (read: ETF & Stocks Riding on Auto Sector Boom ). Below we have highlighted in detail the third quarter results of some of the major auto companies that have reported recently. Auto Earnings in Detail The largest U.S. automaker, General Motors Co.’s (NYSE: GM ) adjusted earnings of $1.50 per share for the quarter beat the Zacks Consensus Estimate of $1.17 by a wide margin. Earnings increased 55% from 97 cents per share recorded in the third quarter of 2014. The robust year-over-year improvement was driven by solid performance in China and the U.S. However, revenues in the quarter declined 1.3% year over year to $38.8 billion, marginally missing the Zacks Consensus Estimate of $39.1 billion. The year-over-year decline was due to the adverse impact of foreign currency translation. The second-largest carmaker by sales, Ford Motor Co. (NYSE: F ) posted adjusted earnings per share of 45 cents in the third quarter, way above the 24 cents earned in the prior-year quarter (all excluding special items). Earnings per share were in line with the Zacks Consensus Estimate. Pre-tax income (excluding special items) surged 128% to $2.7 billion, marking a third-quarter record. Revenues increased 9.1% to $38.1 billion due to full-scale production of the F-150 and surpassed the Zacks Consensus Estimate of $35.4 billion. The automaker reaffirmed its pre-tax profit guidance (excluding special items) in the range of $8.5-$9.5 billion for 2015, significantly higher than $6.3 billion recorded in 2014. Automotive revenues, operating margin and operating-related cash flow are also expected to be higher than 2014. Japanese automaker, Honda Motor Co., Ltd. (NYSE: HMC ) reported earnings per share of ¥70.88 (59 cents) in the second quarter of fiscal 2016 (ended September 30, 2015) compared with ¥66.32 (61 cents) in the year-ago quarter. Earnings per share missed the Zacks Consensus Estimate of 63 cents. Consolidated net sales and other operating revenues escalated 15.6% year over year to ¥3.62 trillion ($30.19 billion). However, revenues fell short of the Zacks Consensus Estimate of $30.22 billion. The year-over-year increase can be attributed to higher revenues from all the businesses. For fiscal 2016, Honda expects revenues to increase 9.5% to ¥14.6 trillion ($123.7 billion) while operating income is likely to rise 2.1% to ¥685 billion ($5.81 billion). Another Japanese automaker, Toyota Motor Corporation (NYSE: TM ) posted earnings of ¥192.51 per share ($3.16 per ADR) in fiscal 2016 second quarter, compared with ¥170.54 per share ($3.28 per ADR) in the prior fiscal quarter. Earnings per ADR surpassed the Zacks Consensus Estimate of $3.09. The company’s consolidated revenues grew 8.4% year over year to ¥7.1 trillion ($58.2 billion) and outpaced the Zacks Consensus Estimate of $57.81 billion. However, Toyota lowered its consolidated revenue guidance to ¥27.5 trillion ($233.1 billion) from ¥27.8 trillion ($237.6 billion) for fiscal 2016. Nevertheless, the revenue guidance reflects a 1% improvement over fiscal 2015. The automaker’s net earnings are expected to be around ¥2.25 trillion ($19.1 billion) or ¥713.76 per share ($12.10 per ADR), reflecting an expected 3.5% improvement over fiscal 2015. Due to better-than-expected earnings, most of the auto stocks have been posting gains following their results. In fact, the exclusive auto ETF, the NASDAQ Global Auto Index Fund (NASDAQ: CARZ ) – which has a sizable exposure to the above mentioned stocks – returned more than 3% (as of November 6, 2015) since General Motors released its quarterly results on October 21. Let us take a look at this ETF in detail, which is expected to post gains in the coming days as well. CARZ in Focus This ETF tracks the NASDAQ OMX Global Auto Index, having exposure to automobile manufacturers across the globe. The product holds 37 stocks in the basket with General Motors, Ford, Toyota and Honda placed among the top five holdings with a combined allocation of nearly one-third of fund assets. In terms of country exposure, Japan takes the top spot at 36.3% while the U.S. takes the second spot having a 23.9% allocation, followed by Germany and South Korea with 16.4% and 8.8% allocations, respectively. The ETF is neglected with $40.8 million in AUM and sees light trading volume of around 9,000 shares. The product is a bit expensive with 70 bps in annual fees and currently has a Zacks ETF Rank #2 (Buy) with a High risk outlook. Link to the original post on Zacks.com

Allianz Makes The Case For Alternative Investments

By DailyAlts Staff With interest rates at rock-bottom lows, the three-decade bull market in bonds is clearly in its last days. Meanwhile, stock markets from Asia to the Americas are undergoing various bouts of volatility, and valuations remain stretched, indicating recent bearishness may be far from over. These factors, along with the diverging policies of world central banks, are causing investors in traditional assets to rethink their allocation strategies. Allianz Global Investors makes “The Case for Alternatives” in the latest edition of the firm’s Analysis & Trends white paper series. Financial Repression Financial repression occurs when real interest rates are negative. In this way, savers can’t grow their wealth merely “risk-free,” and thus they’re forced to choose between losing ground to inflation or investing in riskier assets. Typically, financial repression has been the result of inflation outpacing the nominal interest rates on government bonds. But due to unprecedented monetary experiments, most European nations now have negative nominal yields on their sovereign debt. This isn’t something traditional “60/40” investors ever bargained for. (click to enlarge) Obviously, bond investors need to look elsewhere for income when they’re faced with negative nominal yields. According to Allianz, this has resulted in the growing popularity of “low-risk, low-return” alternative strategies to replace the role that bonds once played in investors’ portfolios. Monetary Consequences The negative yields on European bonds are a direct consequence of the European Central Bank’s policy of “quantitative easing” – i.e., buying bonds with newly minted money. When the central bank expands the money supply to buy bonds, it bids down interest rates. This not only props up the bond market, it also lowers the risk-free rate of return, thereby encouraging investors into riskier assets – like stocks. This is why Allianz says “ongoing expansionary monetary policy globally” should “support risky assets longer-term” – but in the meantime, “investors should be prepared for increasing volatility.” The Alternatives Universe Allianz GI points out that “alternatives” are not an asset class of their own, but a “universe” of investments that includes all of the following (and more): Commodities Currencies Real assets (timberland, fine wine, art) Intangible assets (patents, royalty streams) Private equity Alternative strategies The graphic below plots a variety of alternatives on two axes: The up/down axis considers liquidity from the perspective of the investor and the investment vehicle, while the left/right axis considers liquidity in terms of the underlying assets. For example, ’40 Act long/short equity funds are liquid from the perspective of the investor, and also in terms of their underlying assets. But while publicly traded REITs are just as liquid from the investor’s perspective (or nearly so), their underlying assets are far less liquid. Choosing the Right Alternatives Alternatives should be attractive to investors who realize the traditional “60/40” stock/bond diversification is unlikely to provide its traditional benefits going forward. Bonds are set to lose ground as interest rates rise, and stocks, which had been pumped up by monetary accommodation, are likely to come under increasing pressure, too. Whereas the income from bonds used to provide a cushion for “60/40” portfolios, even during bear markets, the ultra-low yields on U.S. and especially European bonds won’t have that effect in the immediate future. The question, then, is which alts should investors consider? According to Allianz, investors have two choices: Allocate broadly to alternatives via a custom advisory service; or Add single alternative strategies in order to achieve a specific investment objective. Allianz breaks down the alternative strategies pursued by hedge funds into four broad classes: Event driven, relative value, macro, and long/short equity. Given each strategy is designed to provide returns with limited correlation to the broad markets, and the broad markets have been bullish for years, the coming volatility and presumed end of long-time bull markets in stocks and bonds should result in a positive environment for many alternative strategies. For more information, download a pdf copy of the white paper .