Tag Archives: etfs

Emerging To…

Emerging economies are facing numerous structural headwinds. They are no longer a global growth engine. But the time to buy is when blood is running in the streets. What’s happening with emerging economies? Country size weighted by projected population in 2050. Source: Worldmapper.org It wasn’t supposed to be this way. The developing economies were supposed to lead the markets higher. The combination of population growth and development economics should have provided a turbo shot to older, mature, slow-growing developed economies. Bringing subsistence farmers into cities to work in factories has been a time-honored development formula. Increased productivity raises profits and provides higher wages, lifting the entire economy. Every emerging economy has emerged this way. But that train seems to have gone off the rails. Today, emerging economies are being buffeted by higher interest rates in the US, lower commodity prices around the world, and a slowdown in world trade. Their managed economies have managed to produce too many factories pumping out goods that no one wants, using borrowed money that no one expects to be repaid. And corruption reigns. Crony capitalist systems rely on influence rather than economics to get things done. And when the music stops playing and everyone grabs a chair, poor governance regimes are unlikely to respect the property rights of foreign investors. Developing (white) and World (GOLD) markets. Source: Bloomberg So, rather than leading the rest of the world higher, emerging markets seem to be pulling global markets down. Currency devaluation threatens to export global deflation. Their massive foreign exchange reserves – over $10 trillion, built up after the last emerging market crisis – have begun to decline. And planners seem to be skidding from one market intervention to another: banning short sales, banning insider sales, declaring market holidays, even prosecuting reporters as market manipulators. But the time to buy is when the blood is running in the streets. Emerging markets have been stagnant for over five years, even as stocks in the rest of the world push to new highs. Poor governance will not be sustained if these countries want to access global markets and global capital. Minsky’s dictum – every situation creates forces that lead to its own destruction – works to the upside as well as down. Mismanagement leads to new management in countries as well as companies. The only constant in the markets is change. And the expected rarely happens. Disclosure: I am/we are long EEM, FXI, GXC, EWZ. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Correction Seems Over: Time For China ETFs?

Concerns over the Chinese economy had reached a delirious pitch in August. Issues like credit crunch, shadow banking activities, faltering manufacturing activity and a weak domestic market had first surfaced in 2012 and led to a hard landing for the economy. These concerns kept bothering the economy at regular intervals during the last three years. But recently these swelled up to take a gargantuan shape and tormented business globally. The economy’s GDP growth rate skidded to 24-year low in 2014. With no let-up in the downbeat data flows from the Chinese economy, investors have now started to doubt its ability to deliver the growth target for this year. Still the Chinese stocks performed phenomenally in the first half of 2015 with some of the ETFs having almost doubled. A series of rate cuts and easy policy measures made this possible. But this astounding run had to have a finishing line somewhere and thanks to this logic, the Chinese equities fell in the trap of a steep correction from June. A host of factors prompted this correction. Among these, overvaluation concerns after a steep ascent for about one year, small doses of economic stimulus failing to boost the struggling economy and the Chinese securities’ regulator’s repeated warnings about riskier trading as well as tightened rules for margin lending triggered the sell-off. Apart from this, to arrest the market crash, the Chinese government stopped new companies from selling shares to the public, introduced a fund to be used for purchasing shares earlier this month and banned investors with an over 5% stake from abandoning their shares for six months. In fact, the Chinese stock market underwent heavy panic-induced sell-offs several times in the last three months – August being the cruelest – mercilessly lashing the global markets. Behind the recent bloodbath was the Chinese policy makers’ devaluation of the country’s currency yuan by 2% in mid-August, apparently to shore up export competitiveness. This along with a six-and-a-half-year low Chinese manufacturing data for August went against the risk-on sentiment among investors. The Shanghai Composite Index has plunged about 39 % since June 12 and Chinese stocks lost over $5 trillion in the recent rout. In the last one month (as of September 8, 2015), db X-trackers Harvest CSI 500 China-A Shares Small Cap Fund (NYSEARCA: ASHS ) lost over 33% while large-cap China ETF iShares China Large-Cap ETF (NYSEARCA: FXI ) was off over 13%. Almost all ETFs erased their gigantic gains earned in the beginning of 2015. ASHS is off over 5%, while one of the top performing Chinese ETFs of the first half Market Vectors ChinaAMC SME-ChiNext ETF (NYSEARCA: CNXT ) is now left with just 4% return. Is the Correction Over? After this high drama, there was only one question in every mind. When will the correction be over? And to soothe investors’ nerves, PBOC which is known for too much interference in the stock market commented that the China market crash is ‘ almost over’ aided by government intervention. Yuan is also settling against the greenback after a topsy-turvy August. To add to this, China announced that it would eliminate personal income tax on dividends for long-term shareholders holding stocks for over a year and halve the tax for those who hold between a month and a year, per Reuters. The move was steered to bolster long-term investments, ward off short-term turbulence from the market and bring in stability over there. Not only this, China intends to launch “circuit breaker” on one of the country’s benchmark stock indexes to calm the market. Per the new norm, a 5% one-day gain or loss in the CSI 300 index (before 2:30 p.m.) would close trading in the country’s all equity indices for 30 minutes. Shifts of over 7% would result in a closed trade for the rest of the day. Though this decision is yet to be confirmed by the market participants, it hints at policymakers’ efforts to put off pointless volatility in the market. As per Goldman , Chinese government invested about $236 billion during the last three volatile months to cool down the stock market tantrum. Notably, China’s margin debts almost halved to about 1 trillion yuan. Rallying Chinese Equities Assisted by government measures, Chinese stocks started rallying from this week and also helped to drive other global markets. While almost all Chinese ETFs added smart gains on September 8, we highlight three beaten-down ETFs that presently carry a Zacks ETF Rank #2 (Buy) and might tide over heavy losses incurred in the recent upheaval. Notably, CNXT and ASHS returned investors around 13% on September 8, but both ETFs are still guilty of high valuation. On the other hand, the P/E (ttm) ratio of below-mentioned ETFs hovers in the range of 12 to 14 times versus CNXT’s P/E of 32 times and ASHS’s P/E of 35 times. This indicates that the trio trades at a cheaper valuation and can be good picks at the current level. db X-trackers Harvest CSI 300 China A-Shares Fund (NYSEARCA: ASHR ) The fund provides exposure to the large-cap segment of China A-share equity market by tracking the CSI 300 Index. The 305-stock portfolio has accumulated $480 million in AUM and sees solid trading volumes of about 4.6 million shares a day on average. The fund is heavy on financial stocks (38.4%) followed by industrials (17.7%) and consumer discretionary (10.74%) stocks. The product charges about 80 bps in fees per year from investors. The fund lost about 25.5% in the last one month while it added about 11.6% on September 8. KraneShares Bosera MSCI China A Share ETF (NYSEARCA: KBA ) This fund follows the MSCI China A International Index, holding about 300 securities in its basket. It is widely diversified across each component with none of these accounting for more than 2.275% share. However, the product is slightly skewed toward financials at about 34%. The ETF has accumulated $10.9 million while it trades in light volumes of around 25,000 shares per day. Expense ratio comes in at 0.85%. The fund was up about 11% on September 8 while it lost 24.2% in the last one month. Market Vectors China ETF (NYSEARCA: PEK ) This fund tracks the CSI 300 Index and holds a large basket of 465 stocks. The portfolio is well spread out across various securities with none holding more than 3.48% of assets. From a sector look, more than one-third of the portfolio is allotted to financials, followed by industrials (18.0%) and consumer discretionary (10.3%). The fund has amassed $80.5 million in its asset base and charges 72 bps per year. Volume is light as it exchanges about 150,000 shares per day on average. The fund was up 9.9% on September 8, while it retreated about 23% in the last one month. Original Post

How To Avoid The Worst Sector Mutual Funds: Q3’15

Summary The large number of mutual funds has little to do with serving your best interests. Below are three red flags you can use to avoid the worst mutual funds. The following presents the least and most expensive sector mutual funds as well as the worst overall sector mutual funds per our Q3’15 sector ratings. Question: Why are there so many mutual funds? Answer: mutual fund providers tend to make lots of money on each fund so they create more products to sell. The large number of mutual funds has little to do with serving your best interests. Below are three red flags you can use to avoid the worst mutual funds: Inadequate Liquidity This issue is the easiest to avoid, and our advice is simple. Avoid all mutual funds with less than $100 million in assets. Low levels of liquidity can lead to a discrepancy between the price of the mutual fund and the underlying value of the securities it holds. Plus, low asset levels tend to mean lower volume in the mutual fund and larger bid-ask spreads. High Fees Mutual funds should be cheap, but not all of them are. The first step here is to know what is cheap and expensive. To ensure you are paying at or below average fees, invest only in mutual funds with total annual costs below 2.37%, which is the average total annual cost of the 632 U.S. equity sector mutual funds we cover. Figure 1 shows the most and least expensive sector mutual funds. Rydex provides three of the most expensive mutual funds while Vanguard mutual funds are among the cheapest. Figure 1: 5 Least and Most Expensive Sector Mutual Funds (click to enlarge) Sources: New Constructs, LLC and company filings Investors need not pay high fees for quality holdings. The Fidelity Select Consumer Staples Portfolio (MUTF: FDFAX ) earns our Very Attractive rating and has low total annual costs of only 0.94%. On the other hand, the Vanguard Specialized Funds REIT Index (MUTF: VGSNX ) holds poor stocks. No matter how cheap a mutual fund, if it holds bad stocks, its performance will be bad. The quality of a mutual fund’s holdings matters more than its price. Poor Holdings Avoiding poor holdings is by far the hardest part of avoiding bad mutual funds, but it is also the most important because a mutual fund’s performance is determined more by its holdings than its costs. Figure 2 shows the mutual funds within each sector with the worst holdings or portfolio management ratings . Figure 2: Sector Mutual Funds with the Worst Holdings (click to enlarge) Sources: New Constructs, LLC and company filings Fidelity appears more often than any other providers in Figure 2, which means that they offer the most mutual funds with the worst holdings. Our overall ratings on mutual funds are based primarily on our stock ratings of their holdings. The Danger Within Buying a mutual fund without analyzing its holdings is like buying a stock without analyzing its business and finances. Put another way, research on mutual fund holdings is necessary due diligence because a mutual fund’s performance is only as good as its holdings’ performance. PERFORMANCE OF MUTUAL FUND’S HOLDINGS = PERFORMANCE OF MUTUAL FUND Disclosure: David Trainer and Max Lee receive no compensation to write about any specific stock, sector, or theme. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.