Tag Archives: china

Does FlexShares’ New Corporate Bond ETF Stand Apart?

Corporate bond market has been hit by global growth concerns lowering the investor outlook on the credit worthiness of the corporations as well as looming interest rate hike. Further, there are concerns about corporate bond market liquidity (read: 3 Bond ETFs to Consider in a Market Slump ). In an attempt to take care of this situation and attract the investment grade corporate bond ETF investors, FlexShares – a unit of Northern Trust Corporation (NASDAQ: NTRS ) – has launched the FlexShares Credit-Scored US Long Corporate Bond Index Fund (NASDAQ: LKOR ) , which focuses on longer maturity corporate bonds. LKOR in Details LKOR follows a recently developed Northern Trust Credit-Scored US Long Corporate Bond Index. As per FlexShares, the index covers a liquid issuer universe, employs a proprietary model for credit scoring and optimizes the index’s constituents to maximize the credit score while maintaining duration, spread and other investment grade-like characteristics. More than 66% of LKOR’s holdings have maturities ranging from 20 to 30 years while more than 27% have maturities ranging from 15 to 20 years. This results in a weighted average effective duration of 13.25 years, as per the issuer. The ETF comprises 136 holdings with Apple Inc. ( OTC:APPL ) occupying the top position with 1.43% share, followed by Time Warner Inc. (NYSE: TWX ) with 1.34% share and JPMorgan Chase & Co. (NYSE: JPM ) with 1.29% share. The top 10 holdings constitute around 12.5% of the fund. As far as sector allocation is concerned, Industrials (23.7%), Consumer (20.8%) and Energy (18.9%) make up the top three positions. Considering country-wise allocation, the fund is heavily biased towards the U.S. with 87.6% share while Canada, U.K., Netherlands, Australia and Spain hold minimal shares. The fund is cheap as it charges only 22 bps in fees from investors per year (see all Investment Grade Corporate Bond ETFs here). How Does it Fit in a Portfolio? LKOR seems to have addressed the investors’ concern about the companies’ ability to repay their debt as economic slowdown in China and low commodity prices may lead corporations to face financial crisis. This is because the issuer has targeted corporate bonds with higher credit quality, lower risk of default and potential for higher yield and price appreciation. On the Standard & Poor’s ratings scale, the fund’s quality breakdown includes investment-grade ratings AAA (2%), AA (14.8%), A (36.6%) and BBB (46.6%). Moreover, the fund seeks to improve liquidity and transparency by excluding illiquid and smaller issuers. The question of liquidity is of high importance as banks, serving as brokers, have reduced their inventories of corporate bonds following post-financial crisis regulations, making bond trading difficult. It is for these reasons the issuer has stated that the ETF provides “a contemporary approach to optimizing credit risk, with improved transparency and liquidity relative to legacy corporate bond benchmarks”. ETF Competition LKOR definitely stands apart from other long term corporate bond ETFs as it addresses the present ailments in the corporate bond market. Still, there are a number of such ETFs that worth to mention due to their popularity. A couple of long term corporate bond ETFs includes the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEARCA: LQD ) and the Vanguard Long-Term Corporate Bond Index ETF (NASDAQ: VCLT ) . LQD tracks the iBoxx $ Liquid Investment Grade Index focusing on 600 highly liquid investment grade corporate bonds in the U.S. It has an asset base of $22.1 billion and focuses on all-term bond duration. On the other hand, VCLT follows the Barclays U.S. 10+ Year Corporate Index focusing on corporate bonds issued by industrial, utility, and financial companies, with over 10 years in maturities. It manages an asset base of $991 million. Both LQD and VCLT look attractive on the cost front with expense ratios of 0.15% and 0.12%, respectively. However, in terms of yield, VCLT (4.14%) is a better option than LQD (3.13%). Link to the original post on Zacks.com

Q3 ETF Asset Flow Roundup

The third-quarter of 2015 was teeming with economic shockers that bulldozed risky investments worldwide but showered gains on some safe bids. While a hard landing fear in China was the actual culprit, a long-standing guesswork on the Fed’s liftoff timeline was a partner in crime. Yet, we admit that nothing could stand against the China issues that include sudden currency devaluation, multi-year low manufacturing data and a massive crash in the Chinese market. The resultant shockwaves, swooning commodities and the return of deflationary fears in the Euro zone also set the dark stage for the third quarter’s investing activity. The combined impact of these events led the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) , to lose about 7.7%, the PowerShares QQQ Trust ETF (NASDAQ: QQQ ) to shed 5.7% and the SPDR Dow Jones Industrial Average ETF (NYSEARCA: DIA ) to retreat about 8.4% in Q3. The iShares MSCI ACWI (All Country World Index) Index ETF (NASDAQ: ACWI ) was off about 9.8% in the quarter. Overall, the global market was quite disastrous for investors as most key indices endured the worst quarter in four years. In such a scenario, investors might thus want to check out the top and worst grossing ETFs of Q3 to see which products cashed in on the market crash and which lost out. Winners of Q3 The SPDR S&P 500 Trust ETF Though volatility rocked the show in the third quarter as China-led global growth fears and its ripples in the other emerging and developed economies muddled the market momentum, steady U.S. growth impressed investors. Also, the Fed’s reiteration of near zero interest rates at the end of the quarter resulted in strong inflows into the U.S. equity funds. The ultra-popular SPY led the way last month, gathering over $8.4 billion in capital. Not only SPY, another popular S&P 500 ETFs namely Vanguard S&P 500 ETF (NYSEARCA: VOO ) accumulated $4.45 billion in assets. U.S. Treasury Bonds – iShares 1-3 Year Treasury Bond ETF (NYSEARCA: SHY ) With the Fed still hesitating to hike the benchmark interest rates even almost after a decade, bond investing prevailed in Q3. Though September was a chancy month for the lift-off, a global market rout in August, a choppy global market and a still-low inflation level in the U.S. held the Fed back from catapulting a lift-off. This gave a big-time boost to the short-term U.S. Treasury bond ETFs. As a result, SHY garnered about $4.05 billion in assets in Q3. The SPDR Barclays 1-3 Month T-Bill ETF (NYSEARCA: BIL ) also piled up $1.66 billion in assets and made it to the top-10 asset scorers’ list (read: Guide to Interest Rate Hikes and ETFs: 4 Ways to Play ). Since the global macroeconomic environment was tumultuous in Q3, investors sought refuse in safe haven bids like intermediate-to-long term treasury ETFs. These offer investors safety along with a decent level of current income. Thanks to this sentiment, the iShares 7-10 Year Treasury Bond ETF (NYSEARCA: IEF ) and the iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ) attracted about $2.40 billion and $1.65 billion of AUM during the quarter (read: ETF Winners & Losers Post Dovish Fed Meet ). Hedged Global – Deutsche X-trackers MSCI EAFE Hedged Equity ETF (NYSEARCA: DBEF ) The global economy may be lagging, but investors’ penchant for currency-hedged global equity ETF investing is not. The policy divergence stemmed from the looming Fed tightening and the easy money policies in most developed economies made hedged international investments a compelling opportunity for U.S. investors and led them to pour about $2.38 billion in assets in DBEF. Several other Europe-based ETFs including the iShares MSCI EMU ETF (NYSEARCA: EZU ) and the Vanguard FTSE Europe ETF (NYSEARCA: VGK ) hauled in respectively $1.7 billion and $1.6 billion assets in Q3. Top Losers Emerging Market – Vanguard FTSE Emerging Markets ETF (NYSEARCA: VWO ) Emerging markets were hard hit in Q3 thanks to the double whammy of China-induced worries and the Fed rate hike tensions. This clearly explains why two top-notch emerging market ETFs namely VWO and the iShares MSCI Emerging Markets ETF (NYSEARCA: EEM ) saw assets bleeding in the quarter. The funds, VWO and EEM saw outflows of about $3.44 billion and $2.79 billion respectively in the quarter. Un-hedged Global – iShares MSCI EAFE ETF (NYSEARCA: EFA ) Since sooner or later the Fed is due for a policy tightening, investors started to dump non currency-hedged international ETFs like EFA. The fund shed about $1.13 billion in assets in the quarter. Gold – SPDR Gold Trust ETF (NYSEARCA: GLD ) Gold has slipped to multi-year lows on a stronger dollar, a still-muted inflationary backdrop worldwide and the slowdown in China, which is one of the largest consumers of gold. Though the recent global market rout offered gold the much-needed respite for a brief session on the metal’s safe haven appeal, the underlying fundamentals are weak. So, investors abandoned this product in Q3, resulting in about $922 million in net outflows. Link to the original post on Zacks.com

IBB Shockwave: Temporary Hiccup Or Start Of The Bear Market?

Summary IBB has corrected from its all time high by up to 30%. Hillary Clinton’s snowball was catched right in the eye of the pharma industry. The scare is partially unjustified. We look on pharma future growth figures and M&A activity that will drive the secular bull market higher. We believe that IBB is a good place to invest in the long term. We mention two recent picks where we expect further share price growth. iShares NASDAQ Biotechnology Index ETF (NASDAQ: IBB ) has corrected 30% from its all time high of around $401. Several investors start to ask if we have been in the bubble territory. We discuss in this article the facts why the pharmaceuticals industry will continue in a secular bull market towards 2020. We do have a correction now, but it is not the start of the bear market in our opinion. Let’s discuss this in more details. Chart Analysis The IBB bull market started a quick acceleration in 2012. Looking on the quick rise, it is normal to have a correction. No bull market runs up without any significant corrections. Now as China spends more money on drugs also IBB is more correlated with Shanghai SSE index as compared to 2007-2008. IBB data by YCharts Now that we have touched the famous 30% correction line, could we go lower to touch 50%? Let’s have a closer look on what drives this bull market. Pharma Revenues Total pharmaceutical industry revenues are expected to increase from $1.23 trillion in 2014 to $1.61 trillion in 2018. This corresponds to a growth rate of 6-8% annually. Such a 30% increase in revenues would drive the secular bull market higher. Some leading economies are also liberating their drug prices. In June 2015 the communist party in China decided to remove the price caps on a majority of the drugs. That serves as a step towards a more liberalized drug market. We wonder if they tweeted this news to Hillary Clinton. Hillary Clinton’s initiatives might cut the healthcare spending in the United States and set some drug price caps or limitations. We hope that her initiative would not be too disruptive for the industry – if it would be implemented one day. Increasing amount of regulations, restrictions and taxes is typically pushing the businesses to delocalize. These drug firms might also allocate differently their risk capital and not always in the benefit of the patients. For this reason we think that Hillary Clinton’s initiative would end up to be a good compromise. Speaking of delocalizations, we will surely see a wave of startups in China. Currently most big drug firms have large R&D centers in China and the pool of talent has been growing up rapidly. Belgium is no worse, there the politicians compete in attracting new pharmaceutical businesses in the country with tax breaks and benefits. Should Hillary read the tweet streams from Belgium? We think so because Belgium has the highest concentration of life science employees in the whole world and the highest number of Phase I to Phase III drugs in development per capita. Consequently, that has a huge impact on the nation’s economy. We talk later of one Belgian biotechnology company in particular where we hold a long position. Pharma Expenses A topic that is rarely covered in the press is pharma industry’s expenses, i.e. operational costs. Cutting cost is an excellent and quick way to improve the P&L. Well managed companies might be busy cutting down the purchasing and inventory costs and rationalizing the working processes to be more lean and efficient. Pharma industry is still far behind the traditional industries in this. Recent study shows that in 2014 only 32% of the pharma companies procurement organizations’ executives had a full leadership of their key spend areas. The savings generated were slumping down by 45% from year 2009. The study investigated some 185 pharma sector companies with an average revenue of $15 billion. 41% of the companies were based in the U.S. So, the investors should better check how the spend dollars are controlled when investing in individual big pharma companies. A good control over the expenses is the key for creating very profitable businesses. This is why we wanted to discuss this largely uncovered reality of non-optimally managed spends in the pharma industry. There is an opportunity of billions of dollars in savings. Such a greater discipline could have a great impact on IBB over the upcoming years through higher net profitabilities. M&A’s Are Booming There have been a triple amount of mergers and acquisitions in H1 2015 as compared to H1 2014. We have already seen $221b worth of pharmaceutical deals in H1 2015. This hasn’t been considered yet in the long term industry forecasts. It is a very recent news. These M&A’s will give a further necessary tailwind for IBB. These deals will increase the industry’s key players’ profitability through operational synergies. Risks & Opportunities There are many risks and opportunities and we want to highlight here just a few: Risks Hillary Clinton’s initiatives to push down the healthcare spending in the U.S. Patents expiry on several blockbuster drugs Changing regulatory requirements Rich industry valuations: IBB is trading at a PE of 25.19 and Price/Sales ratio of 7.72 Opportunities Increased focus on Orphan indications with higher margin opportunities Drug price cap removal in China Emerging digital healthcare applications market (drug administration, patient monitoring, etc.) Faster drug development with more modern technologies available in R&D Increase of aging patient populations We believe that by balancing out the risks and opportunities the overall picture is quite positive for the pharma industry. The digital healthcare applications will become a hot market in our opinion. Speaking of the healthcare industry in the wide sense we have covered prior some surgical robotics companies. This is a good example of how the modern technology can revolutionize the market segments and bring benefits to the patients and payers. The readers may have a look on TransEnterix as one example. How To Invest? Surprisingly, we are not holding IBB in our portfolio. Such index is better suited for a passive investor. We prefer to pick individual names and do lots of due diligence on them, that we partially publish at SA articles. We currently have two promising companies in our radar with an imminent share price catalyst in Q1-16. If you want to learn more you can read our articles on Mast Therapeutics and TiGenix. Wake-Up Calls for Two Hidden Gems TiGenix has run up already over 44% since our exclusive article at SA but its valuation is still at a ridiculous level in our opinion. TiGenix (OTC: TGXSF ) already published on 23rd August 2015 that their Phase III study primary end-point was met with the final and full results coming out in Q1-16 for a treatment of perianal fistulas in Crohn’s disease. Their Cx601 allogeneic expanded stem cells drug seems to be very safe as no difference was observed between the drug and placebo groups. The peak sales potential is estimated at $900m and TiGenix trades currently at a market cap of $182m. We think that is making no sense and the share price might have quite a lot of potential to go up with the final Phase III results coming out in Q1-16. We covered Mast Therapeutics (NYSEMKT: MSTX ) at SA on 28th September 2015. It has went up quite a lot after our article was published. It is again an example of a very misunderstood company with a good pipeline drug MST-188 running in late Phase III to treat sickle cell patients. SCD patients have had no proper drug for the past 17 years and this is the first one we expect to arrive on the markets. Both these micro-cap stocks offer a good example of what we look for when picking individual names across the biotechnology sector. We are having long positions with both. Conclusions We believe that IBB is in a secular bull market. This index could still correct lower than the latest 30% drop from the all time high. Eventually, the increased industry revenues towards 2018, recent tripling in M&A activity and a better control over the spend dollars could send IBB to much higher levels. We believe that active investors might be more successful in hand picking individual companies instead of buying IBB. This would go along with a higher risk. Disclaimer: Please do your own research prior to investing and taking investment decisions. This article is provided for informal purposes only and any information mentioned may change at any time without a notice. Please consult your investment advisor for finding a proper allocation for your portfolio that is adjusted with your risk levels and personal situation. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.