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The Specter Of Risk In The Derivatives Of Bond Mutual Funds

By Fabio Cortes, Economist in the IMF’s Monetary and Capital Markets Department Current regulations only require U.S. and European bond mutual funds to disclose a limited amount of information about the risks they have taken using financial instruments called derivatives. This leaves investors and policymakers in the dark on a key issue for financial stability. Our new research in the October 2015 Global Financial Stability Report looks at just how much is at stake. A number of large bond mutual funds use derivatives-contracts that permit investors to bet on the future direction of interest rates. However, unlike bonds, most derivatives only require a small deposit to make the investment, which amplifies their potential gains through leverage, or borrowed money. For this reason, leveraged investments are potentially more profitable, as the gains on invested capital can be larger. For the same reason, losses can be much larger. Derivatives offer mutual fund managers a flexible and less capital intensive alternative to bonds when managing their portfolios. When used to insure against potential changes in interest rates, they are a useful tool. When used to speculate, they can be bad news given the potential for big losses when bets go wrong. Strong growth in the assets of bond mutual funds active in derivatives The assets of large bond mutual funds that use derivatives have increased significantly since the global financial crisis. As you can see below in Chart 1, we now estimate they amount to more than $900 billion, or about 13 percent of the world’s bond mutual fund sector. While existing regulations in the United States and the European Union on mutual funds impose clear limits on cash borrowing levels, the amount of leverage that can be achieved through derivatives exposure is potentially large, often multiples of the market value of their portfolios. This may explain why mutual funds accounting for about 2/3 of the assets in our sample disclose derivatives leverage ranging from 100 percent to 1000 percent of net asset value in their annual reports. This range may be also conservative as these are the notional exposures of derivatives adjusted for hedging and netting at the fund manager’s discretion. What makes them sensitive to higher rates and volatile financial markets Although these leveraged bond mutual funds have not performed differently to benchmarks over the past three years, their relative performance has occurred in a period of both low interest rates and low volatility, which may mask the risks of leverage. This is because the market value of a number of speculative derivatives positions could have been unaffected by the relatively small changes in the price of fixed income assets. In addition, limited investor withdrawals from leveraged bond mutual funds may have also masked the risks of fund managers having to sell-off illiquid derivatives to pay for investor redemptions. In our analysis we find that a portion of leveraged bond mutual funds exhibit both relatively high leverage and sensitivity to the returns of U.S. fixed-income benchmarks, depicted in Chart 2 below. This combination raises a risk that losses from highly leveraged derivatives could accelerate in a scenario where market volatility and U.S. bond yields suddenly rise. Investors in leveraged bond mutual funds, when faced with a rapid deterioration in the value of their investments, may rush to cash in, particularly if this results in greater than expected losses relative to benchmarks (and the historical performance of their investments). This could then reinforce a vicious cycle of fire sales by mutual fund managers, further investor losses and redemptions, and more volatility. Improve disclosure: regulators need to act Making a comprehensive assessment of these risks is problematic due to insufficient data; lack of oversight by regulators compounds the risks. The latest proposals by the U.S. Securities and Exchange Commission to enhance regulations and improve disclosure on the derivatives of mutual funds is a welcome step. There is currently no requirement for disclosing leverage data in the United States (and only on a selected basis in some European Union countries). Implementing detailed and globally consistent reporting standards across the asset management industry would give regulators the data necessary to locate and measure the extent of leverage risks. Reporting standards should include enough leverage information (level of cash, assets, and derivatives) to show mutual funds’ sensitivity to large market moves-for example, bond funds should report their sensitivity to rate and credit market moves-and to facilitate meaningful analysis of risks across the financial sector.

Fed Rate Hike Wait May End Today: ETFs To Gain And Lose

After keeping the interest rates at near-zero levels for seven years, the Fed is expected to exit the historic loose monetary policy era at the FOMC meeting to be concluded later today. Per the latest Wall Street Journal poll, about 97% of the economists believe that the Fed will raise rates today while the rest expect the Fed to wait until next year. The probability of a lift-off today is 87% as per private economic forecasters and 83% according to CME Group. Since the Fed has indicated a gradual path for rates hike, the market is speculating at least a quarter percentage point increase in interest rates today. The Fed officials gave strong signals of a December lift-off in recent months. This is especially true, as the U.S. economy has now emerged from the financial crisis and the Great Recession, and is on a firmer footing. With back-to-back months of solid jobs growth, unemployment rate at a seven-year low and moderate inflation, chances of the first rate hike in almost a decade is now looking more real. Additionally, stepped-up economic activities, rising business and consumer confidence, increasing consumer spending, and recovering housing fundamentals will continue to fuel growth in the world’s second largest economy. Further, major headwinds that have plagued the financial market seem to have faded with substantial positive developments in the global economy. In particular, the Chinese economy is showing signs of stabilization while the Japanese and European central banks have ramped up more stimulus measures to revive their economies. Given the improving fundamentals, the historic turn is widely expected, but a collapse in oil prices, which is raising fears of deflation, is weighing heavily on the Fed action. That being said, several ETFs are in focus on the upcoming Fed decision. A few ETFs will be rewarded if the Fed raises rates or signals a hawkish outlook while a few will be severely impacted. Let’s have a look to those: ETFs to Gain SPDR S&P Regional Banking ETF (NYSEARCA: KRE ) A rising interest rate scenario would be highly profitable for the financial sector as a whole. This is because the steepening yield curve would bolster profits for banks, insurance companies and discount brokerage firms. In particular, the ultra-popular KRE, having an AUM of $2.7 billion and average daily volume of 4.7 million shares, will benefit the most. The product follows the S&P Regional Banks Select Industry Index, charging investors 35 basis points a year in fees. Holding 93 securities in its basket, the fund is widely spread out across each security with an equal-weight approach of around 1%. The product has a Zacks ETF Rank of 2 or “Buy” rating with a High risk outlook. PowerShares DB USD Bull ETF (NYSEARCA: UUP ) Rising interest rates will pull in more capital into the country and lead to an appreciation of the U.S. dollar. UUP is the prime beneficiary of a rising dollar as it offers exposure against a basket of six world currencies – euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. This is done by tracking the Deutsche Bank Long U.S. Dollar Index Futures Index Excess Return plus the interest income from the fund’s holdings of U.S. Treasury securities. In terms of holdings, UUP allocates nearly 57.6% in euro while 25.5% collectively in Japanese yen and British pound. The fund has so far managed an asset base of $1.2 billion while it sees an average daily volume of around 2.1 million shares. It charges 80 bps in total fees and expenses, and has a Zacks ETF Rank of 3 or “Hold” rating with a Medium risk outlook. Deutsche X-trackers MSCI EAFE Hedged Equity ETF (NYSEARCA: DBEF ) The diverging policy in the U.S. and the rest of the world will definitely compel investors to recycle their portfolio into the currency-hedged ETFs. For those seeking exposure to the developed market with no currency risk, DBEF could be an intriguing pick. The fund follows the MSCI EAFE U.S. Dollar Hedged Index and holds 931 securities in its basket, with none accounting for more than 1.92% share. The product is skewed toward the financial sector with one-fourth of the portfolio while consumer discretionary, industrials, consumer staples and healthcare round off the top five with double-digit exposure each. Among countries, Japan takes the top spot at 24%, closely followed by the United Kingdom (18%), Switzerland (10%) and France (10%). The ETF has an AUM of $13.0 billion and trades in solid volume of more than 4.1 million shares a day. It charges 35 bps in fees per year from investors and has a Zacks ETF Rank of 3 with a Medium risk outlook. iPath U.S. Treasury Steepener ETN (NASDAQ: STPP ) As yield rises, bonds and the related ETFs fall. But this product directly capitalizes on rising interest rates and performs better when the yield curve is rising. The ETN looks to follow the Barclays U.S. Treasury 2Y/10Y Yield Curve Index, which delivers returns from the steepening of the yield curve through a notional rolling investment in U.S. Treasury note futures contracts. The fund takes a weighted long position in two-year Treasury futures contracts and a weighted short position in 10-year Treasury futures contracts. STPP charges 0.75% in fees and expenses while volume is light at around 1,000 shares a day. Additionally, it is an unpopular bond ETF with an AUM of just $2.6 million. ETFs to Lose SPDR Gold Trust ETF (NYSEARCA: GLD ) Gold will continue to remain under immense pressure as higher interest rates would diminish gold’s attractiveness since the yellow metal does not pay interest like fixed-income assets, and the product tracking this bullion like GLD will lose further. The fund tracks the price of gold bullion measured in U.S. dollars, and kept in London under the custody of HSBC Bank USA. It is the ultra-popular gold ETF with an AUM of $21.6 billion and average daily volume of around 6.1 million shares a day. Expense ratio came in at 0.40%. The fund has a Zacks ETF Rank of 3 with a Medium risk outlook. iShares Mortgage Real Estate Capped ETF (NYSEARCA: REM ) Mortgage REITs could be in more trouble if the Fed starts raising rates as short-term rates would rise faster than the long-term rates, thereby leading to a tight spread and lower profits for mREIT companies. REM is the most popular mortgage REIT ETF with an AUM of $819.2 million and average daily volume of less than 1 million shares. The ETF tracks the FTSE NAREIT All Mortgage Capped Index and holds 38 securities in its basket with large allocations to the top two firms – Annaly Capital (NYSE: NLY ) and American Capital Agency (NASDAQ: AGNC ). These firms collectively make up for 26.4% share while other securities hold no more than 8.5% share. The fund charges investors 48 bps a year in fees and has a Zacks ETF Rank of 3 with a Medium risk outlook. iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA: HYG ) The high-yield corner of the fixed income world is the most watched area ahead of the Fed meeting. This is because the exit from the rock-bottom interest rate policy would raise yields on the Treasury notes, thereby fading the sole lure of the high-yield bonds. HYG is the largest and most liquid fund in the high-yield bond space with an AUM of over $14.4 billion and average daily volume of around 9 million shares. It charges 50 bps in fees per year from investors. The fund tracks the iBoxx $ Liquid High Yield Index and holds 1,009 securities in the basket. Effective duration and average maturity came in at 4.340 and 5.44 years, respectively. The ETF has a Zacks ETF Rank of 4 or “Sell” rating with a High risk outlook. iShares MSCI Emerging Markets ETF (NYSEARCA: EEM ) The end of a cheap and an abundant dollar era would pull out more capital from the emerging markets, stirring up concern for most nations. Additionally, a prolonged weakness in commodities has been dampening the appeal for these markets. The most popular emerging market ETF – EEM – tracks the MSCI Emerging Markets Index and charges 68 bps in annual fees from investors. Holding 846 securities, the product is widely spread out across various securities with none holding more than 3.51% of assets but is tilted toward the financial sector at 27.5%, followed by information technology (21.2%). Among the emerging countries, China takes the top spot at 26.3% while South Korea and Taiwan round off the next two spots with double-digit exposure each. The fund has a Zacks ETF Rank of 3 with a Medium risk outlook. Original post

DBGR: Industrial Engine Of The EU

Germany is the cornerstone of EU industrial output. The majority of German products and services are considered top-of-the-line, globally. The weak Euro will make Germany’s best exports price competitive in every advanced economy market. Export economies are currency sensitive. In fact, export economies are almost always under the suspicion of purposely taking actions to weaken their currencies in order to be more ‘price competitive’. This is particularly true when the global economy slows. In the case of commodities, the competitive pressures are now even more intense. When demand for, say, iron ore or copper declines, the mining industry must clear inventory. Sometimes the problem is more complex; crude oil, for instance. Presently, not only has demand slowed, but production has continued on full tilt. ‘Semi-manufacturing’ trade is also complicated by currency imbalances. The trade of semi-completed products may be more expensive in one direction, but less expensive at the point of sale. So the middle manufacturer pays more for the parts and then receives less for the sale. That’s a nutshell description; the semi-manufacturing trade is far more complex. Having a common regional currency mitigates the problem and an entire region has a little more of a ‘currency hedge’. This is particularly so for an economy which manufactures discretionary durable goods and then exports globally. Take Germany for instance. Germany engages in the semi-manufacturing trade, markets and then distributes its products around the world. Hence, the German economy, a Eurozone member, benefits from a weak Euro. Germany’s economy had recovered strongly from the global credit collapse in 2008. Through innovative renegotiations with trade unions, and increasing production efficiency the economy has ‘motored ahead’ of its fellow EU members. Is the right time to take a share in the German economy? Deutsche Asset & Wealth Management , a German-based financial services company, offers an opportunity through its X-trackers portfolio of funds : the MSCI German Hedged Equity ETF (NYSEARCA: DBGR ) . (click to enlarge) According to X-trackers: The fund “… seeks investment results that correspond generally to the performance, before fees and expenses, of the MSCI Germany U.S. Dollar Hedged Index …” Further, by hedging the tracking index mitigates “… exposure to fluctuations between the value of the U.S. dollar and the euro. ..” A word about hedging: in this case, it doesn’t hurt to hedge, but over the long term it may not be all that helpful. The European Union has its very strong economies as well as its very weak economies. Every leading global economy will have its ‘ups and downs’: the U.S., China, Japan as well as the European Union. The EU has a strong core including Northern Italy, the Nordic members, France, Germany and the U.K. Even Spain seems to be well on track towards better economic times. The point is that having a hedge is a little extra insurance. So then, does the fund itself have a good foundation? First off, it’s well concentrated with 56 holdings, totaling about $149,344,364.00 in assets. The fund first listed on the NYSE on June 9, 2011, and has semi-annual distributions; management fees are in line with the industry average, at 0.45%. The table below makes an interesting comparison of annualized returns since listing. Average Annualized Returns 1 Year 3 Years Since 6/9/2011 listing Market Share Price 1.74% 6.43% 2.83% Net Asset Value 1.51% 6.10% 2.86% MSCI Germany U.S. Doller Hedged Index 1.77% 6.38% 3.22% MSCI Germany Index -9.26% -0.21% -1.42% The next important observation is the way the fund allocates its capital. This is summarized in the pie chart below and does not differ much from the MSCI Germany Index allocations as demonstrated in the table below the pie chart. MSCI Germany Index Allocations Discretionary 20.54% Financials 18.23% Health Care 15.30% Materials 13.44% Industrials 12.18% Info Tech 8.79% Telecom 5.4% Consumer Staples 3.97% Utilities 2.15% Data from MSCI The discretionary sector is composed of really solid companies but the sector also serves as an excellent example of why individual investors should suffer the tedium of going through the holdings when practicable. First, one of the sector’s top holdings is Volkswagen AG ( OTCPK:VLKAF ). The ’emission control bypass scandal’ has made global headlines. No doubt there will be seemingly endless fines, testimonies and restitutions. However, not to justify it by any means, but for the purpose of being objective, this scandal should be viewed in a larger context. For example, the environmental damage pales in comparison to the Exxon (NYSE: XOM ) Valdez or the BP (NYSE: BP ) Gulf of Mexico deep-water platform accident. It took Exxon and BP years to make restitutions on many levels. In terms of automobile liability, GM (NYSE: GM ), Toyota (NYSE: TM ) and Takata ( OTCPK:TKTDY ) oversights have resulted in death, serious injuries and huge recalls. To date, thankfully, there have been no reports of death or serious injury caused by the emission get-around-cheat. The point is that, most likely, Volkswagen will make restitutions and emerge a better company for it. Discretionary 20.913% Ticker Fund Weight Market Cap (In USD Billions) Yield Payout Ratio 5 Year Sales Growth Price/ Earnings Primary Business Daimler OTCPK:DDAIF 7.265% $91.988 3.25% 33.98 10.47% 11.00 R&D, production, marketing and sales of trucks, light trucks, automobiles; global BMW OTCPK:BAMXF 3.133% $68.25 2.95% 31.24 9.67% 10.57 Autos, light trucks, motorcycles under BMW, MINI and Rolls-Royce; global Continental OTC:CTTAF 2.341% $48.29 1.47% 24.43 11.42% 16.80 Full range of tires; also auto components, safety technology, powertrain, interior components; global Volkswagen VLKAF 2.244% $72.02 3.87% 37.20 13.99% 10.31 Autos, light trucks, parts and specialized components; financial services, fleet management under major brand names; global Adidas OTCQX:ADDDF 1.823% $20.54 1.66% *26.00 6.96% 28.49 Athletic footwear, apparel, equipment under Taylor-Made, Adidas Golf, Adams, Ashworth, Reebok; global Prosieben OTCPK:PBSFF 1.0324% $11.59 3.26% 81.40 0.82% 25.17 Media; commercial TV with 6 channels, internet video, games, music, e-commerce; Europe Averages 2.97% $52.11 2.74% 39.0142 8.89% 17.06 * as a percent of operating cash flow Data from Reuters, Yahoo Finance Data from Reuters, Yahoo Finance There’s also an example of a ‘hidden risk’ in this sector. It suffices to say that, in a complicated ‘merger’, Porsche Automobile Holdings SE acquired majority ownership of Volkswagen Group and Volkswagen Group acquired the Porsche Brand . The important point is that any restitution VW will undoubtedly make will affect the holding company, Porsche Automobile Holdings; a smaller holding of the fund. However, the point is that when making the decision to include a fund in a long-term portfolio, it’s worth the time and effort to uncover any links in the holdings. Financials 18.41% Ticker Fund Weight Market Cap (In USD Billions) Yield Payout Ratio 5 Year Sales Growth Price/ Earnings Primary Business Allianz OTCQX:ALIZF 7.147% $80.13 4.21% 48.77 1.19% 11.60 Holding company of PIMCO and Allianz Group; financial services, insurance asset management, reinsurance; global Deutsche Bank DB 3.110% $35.00 3.24% *9.823 -1.49% NA Investment Bank, retail through corporate, manager of this fund; global Muenchener Rueckver OTCPK:MURGF 2.989% $33.57 4.16% 41.87 3.54% 10.04 Holding company for Munich Health and Asset; ERGO insurance; Munich Re; primarily insurance as reinsurance; global Deutsche Boerse OTCPK:DBOEF 1.460% $16.58 2.67% 49.12 0.98% 18.42 Managing company for Xetra, Eurex, Clearstream, Market Data and Analytics; cash, electronic and specialist trading Vonovia OTC:VONOY 1.256% $14.08 **NA **NA **NA 19.94 Fmr: Deutsche Annington Immobilien: residential real estate management; Germany Commerzbank OTCPK:CRZBY 1.021% $13.48 **NA **NA -9.20% 20.92 Private and corporate banking services mainly Europe Averages 2.83% $32.48 3.57% 37.396 -1.00% 16.184 *as a percent of operating cash flow ** no information available; excluded from average Data from Reuters , Yahoo Finance Financials Holdings Less than 1% accounting for 1.423% Deutsche Wohnen AG ( OTC:DWHHF ) 0.792842% Hannover Rueck ( OTCPK:HVRRY ) 0.630016% Data from Reuters , Yahoo Finance Aside from Deutsche Bank, the financials are dominated by insurance, reinsurance, including world-class companies Allianz and Muenchener Rueckver (holding company of Munich Re ), REITs and also asset exchange corporation Deutsche Boerse . Hence, the fund’s financial holdings mostly avoid the European banking sector. Health Care 15.06% Ticker Fund Weight Market Cap (In USD Billions) Yield Payout Ratio 5 Year Sales Growth Price/ Earnings Primary Business Bayer OTCPK:BAYRY 9.364% $104.00 1.91% 51.08 6.27% 26.43 Healthcare, Crop-Science, Material-Science; Bayer Business and Technical Services and Currenta Fresenius OTCQX:FSNUY 2.411% $38.078 0.67% 19.03 10.62% 28.43 In and outpatient hospital care Manages Fresenius Medical Care; Fresenius Kabi, Fresenius Helios Fresenius Vamed * Fresenius Medical Care FMS 1.595% $27.99 1.04% 55.46 7.08% 24.08 Division of Fresnius SE; focus on kidney and dialysis; products for dialysis, renal disease and treatments; global Merck MRK 1.166% $149.845 3.43% 47.74 9.02% 14.29 Pharmaceuticals R&D, production, market & distribution, vaccines, therapies; animal health; global Averages 3.63% $79.98 1.76% 43.328 8.25% 23.31 *division of healthcare holding Fresenius Data from Reuters , Yahoo Finance The fund leads off the sector with a major, world class player in Bayer, accounting for about 62% of the health care sector’s weight. Once again it’s important to point out some overlap. Fresenius Medical Care is a subsidiary of Fresenius . Both are solid, established and well based holdings. However, the investor must keep in mind that, in a sense, Fresenius Medical Care is counted twice in that sector; once on its own and once as part of the parent company. Qiagen (NASDAQ: QGEN ) is a smaller but no less interesting holding in that it provides the means by which DNA, RNA or proteins are extracted from cells and analyzed; 0.520327% of the fund. Materials 12.80% Ticker Fund Weight Market Cap (In USD Billions) Yield Payout Ratio 5 Year Sales Growth Price/ Earnings Primary Business BASF OTCQX:BASFY 6.439% $71.78 3.84% 49.76 7.95% 13.33 Functional materials and solutions; performance products; agricultural solutions; water management Linde OTCPK:LNEGY 2.447% $27.621 2.30% 51.12 8.74% 22.43 Gas engineering in healthcare, medical, food processing; cylinder packaged or liquified Heidelberg Cement OTCPK:HDELY 0.974% $14.64 1.04% 16.00 2.08% 15.40 Building materials; cement and aggregates, ready-mix concrete, mortar Averages 3.29% $38.01 2.39% 38.96 6.26% 17.053 Data from Reuters , Yahoo Finance Data from Reuters , Yahoo Finance The major component holding of the sector is the renowned BASF, which covers every major subsector of the materials industry including agriculture, electronics, nutrition, plastics and textile materials. BASF accounts for about 50% of the sector holdings. Industrials 11.96% Ticker Fund Weight Market Cap (In USD Billions) Yield Payout Ratio 5 Year Sales Growth Price/ Earnings Primary Business Siemens OTCPK:SIEGY 7.011% $87.62 3.81% *44.16 1.86% 14.56 Global, diversified, covering over 200 countries, manufactures turbines, automation technology, power transmission, renewable energy technology Deutsche Post OTCPK:DPSTF 2.396% $33.44 3.31% 68.21 3.23% 21.38 Logistics services; mail, freight and supply chain and contract logistics, warehousing services Averages 4.70% 60.53% 3.56% 56.185% 2.55% 17.97 *as a percent of operating cash flow Data from Reuters , Yahoo! Finance Data from Reuters , Yahoo! Finance Siemens accounts for nearly 60% of industrials. The company is participates in nearly every industrial subsector; automation, renewable energy, healthcare, mass transportation, consumer appliances and others. It’s worth mentioning Deutsche Post is an example of how innovative thinking in privatization may not only be successful, but independently and sustainably profitable. IT 8.92% Ticker Fund Weight Market Cap (In USD Billions) Yield Payout Ratio 5 Year Sales Growth Price/ Earnings Primary Business SAP SAP 8.850% $96.427 1.55% 42.53 10.47% 28.12 Enterprise management software solutions; cloud services Infineon OTCQX:IFNNF 1.475% $17.00 1.47% 36.29 11.95% 25.34 Industrial semiconductor solutions; power control, automotive, security solutions United Internet OTC:UDIRF 0.596% $11.173 1.20% NA 13.06 23.43 Internet access, subscription provider and mobile internet services in Germany. Averages 3.64% $41.53 1.41% 39.41 11.82% 36.85 *as a percent of operating cash flow Of the 8.92% of the total IT holdings, 8.850% or over 99% is weighted by SAP a premier global name in enterprise, analytics, and mobile technology in nearly every business sector; aerospace, financial, consumer products mining and minerals and others. Telecom Services 5.407% Ticker Fund Weight Market Cap (In USD Billions) Yield Payout Ratio 5 Year Sales Growth Price/ Earnings Primary Business Deutsche Telekom OTCQX:DTEGY 5.110% $80.547 3.04% 100.09 -0.61% 33.36 Telecom and IT services in Germany, Europe and the U.S.; internet and mobile Telefonica Deutschland OTCPK:TELDF 0.297% $16.630 4.60% *57.63 8.07% NA Retail and business telephony services and small business solutions Averages 2.70% $48.59 3.82% 78.86 3.73% 33.36 *cash flow per share The fund weights Deutsche Telekom at 5.11% of the 5.407% of the sectors holdings; almost 95%. There’s good reason since not only is it the major telecommunications service provider in Germany, it also has a global reach in Europe and the U.S. providing broadband, mobile and corporate system solutions. Consumer Staples 3.999% Ticker Fund Weight Market Cap (In USD Billions) Yield Payout Ratio 5 Year Sales Growth Price/ Earnings Primary Business Henkel & Co KGAA * Vorzug 1.785% *$45.104 1.25% 32.07 *3.89% 30.06 Beauty care, home care, adhesives ( * Vorzugsaktien = preferred shares) Henkel & Co KGAA OTC:HELKF 0.893% $45.104 1.56% 32.07 3.89% 25.72 Common of the above company Beiersdorf OTCPK:BDRFY 0.823% $28.785 0.83% 25.69 1.80% 30.68 Cosmetics, personal care products, skin care Metro OTCPK:MTTRY 0.498% $10.108 3.46% *614.58 *NA *194.81 Holding Company hypermarkets, Metro Cash & Carry, Real hypermarkets, Media Market and store brands Averages 1.00% $28.00 1.78% 28.88 2.85% 28.82 *omitted The average Consumer Staples sector weighting is about 1.00%. Once again, due diligence is in order. The larger part of the top weighting is Henkel & Co. preferred shares at 1.785%, while a lesser amount, 0.893% are the common shares. The company is worthy of its position in the fund, no doubt; but the point is that in essence, it weights the sector’s holding more than might be expected. The company seems to be a mix of consumer staples as well as consumer discretionary products and markets household products as well as having retail and professional cosmetic distribution. Utilities 2.90%% Ticker Fund Weight Market Cap (In USD Billions) Yield Payout Ratio 5 Year Sales Growth Price/ Earnings Primary Business E.ON SE OTCQX:ENAKF 1.719% $18.906 5.60% *5.77 6.88% NA Energy via fossil, nuclear and renewables; energy commodity trading; exploration and production; Europe, CEE, U.K. RWE AG OTC:RWNEF 0.571% $7.623 8.21% 61.97 -0.64% 7.22 Electric & gas, energy commodity trading, lignite mining, nuclear, fossil, renewable electricity generation U.K., CEE, SEE Averages 1.15% $13.26 6.91% 33.87 3.12% 7.22 *as a percent of operating cash flow The lightest weight is the Utilities sector, accounting for 2.90% of the fund total and of that nearly 60% E.ON , which seems to be a run-of-the-mill energy company with good reach, covering generation, exploration and distribution in Europe, U.K., Russia, central and eastern Europe. It’s important to conclude with a few notes on the fund. First, it’s a solid investment with the potential for capital appreciation and continued distributions. The holdings, especially those top-weighted best-in-class companies anchor the fund’s NAV. Lastly, as a Eurozone industrial export economy, Germany has the added advantage of having a weak Euro on its side. In the case of this fund, the ‘overlapping’ holdings may be justified by their market capitalization and capital flow. In all fairness, though, since the fund uses a ‘passive’ approach, it merely emulates the MSCI index holdings. This means that the index is, essentially, governing the fund’s holdings. All said and done, the fund may be summed up in a word: Außerordentlich! Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.