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2 Better Ways To Play Chinese Growth

The WSJ recently featured an article about the silver lining in Chinese growth. Even though the GDP growth rate had fallen below 7% to 6.9%, there was evidence of rebalancing away from the same old, same old lending-based model of infrastructure spending to the household sector (emphasis added) : There is robust growth in China if you know where to look, some contrarian investors believe. Monday’s gross domestic product report offered the latest sign that the world’s second-largest economy is slowing. But the gloom is overdone, said some portfolio managers who are focusing on the nation’s booming service sector: Their purchases amount to a bet on Beijing’s efforts to engineer an economic rebalancing, toward a consumer-led, service-driven economy from one dominated by manufacturing and trade. While slowing Chinese economic growth and declines in the country’s use of materials such as copper, nickel and cement have rippled through financial markets, some traders say some less-publicized metrics paint a more upbeat picture. To name a few, box-office sales are up more than 50% this year, Internet traffic through mobile devices has nearly doubled and railway passenger traffic and civil aviation are increasing steadily, government data show. The most recent numbers highlighted the Chinese economy’s increasingly dual nature. China reported its economy expanded at a 6.9% annual rate in the third quarter, its slowest pace since the global financial crisis. At the same time, the services sector expanded 8.4%, accounting for more than half of China’s GDP growth for the first time , according to official statistics. For years, US investors have either bought FXI or commodity-related vehicles as a way to play Chinese growth. Now that there is growing evidence of growth rebalancing, those vehicles may not be the most appropriate anymore. Consider this chart of two “New China” versus “Old China” pairs. (click to enlarge) The first is a long position in PGJ (NASDAQ Golden Dragon Index) versus a short position in FXI (FTSE China 50), which is depicted in black. The Golden Dragon Index is far more heavily weighted in consumer services and technology, which are also consumer e-commerce oriented (think Baidu (NASDAQ: BIDU ), etc.), while the FTSE China 50 Index is tilted towards financials, which represent “Old China” finance and infrastructure plays. The second pair is a long position in the Global X China Consumer ETF (NYSEARCA: CHIQ ) and a short position in the Global X China Financials ETF (NYSEARCA: CHIX ), depicted in green. In both cases, these pairs tell the story of progress of growth rebalancing towards the consumer sector of the economy. Even if you don’t want exposure to China, monitoring these pairs is a useful way of seeing how rebalancing is progressing in real time. Disclaimer: The opinions and any recommendations expressed in this blog are solely those of the author. None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

Should You Be Weary Of Inverse Commodity ETFs?

Last week, we touched on potential markets that might finally be breaking out of the slow moving commodities sell off that’s been going on for around a year. In that post, we do what we do every month, looking at the difference in performance between the commodity futures market (Dec. contract) to its commodity ETF counterpart. This time around, we got to thinking it might be interesting to look at the flipside of that…. How inverse ETFs have performed against those same futures markets. Here’s what we found: (click to enlarge) At first thought, you might think that the ETFs are outperforming the futures counterparts until you realize that those inverse ETFs should all be positive due to the fact that the futures contract they supposedly track are negative. So, technically, if you shorted the December 2015 futures market at the beginning of the year you would have made 22.57%, while the 3x inverse Crude ETN DWTI (NYSEARCA: DWTI ) is down -13.34% YTD. The same can be said about natural gas, but to a lesser extent; the inverse ETF is up 5%, while the futures contract is down -21.02% (Disclaimer: Past performance is not necessarily indicative of future results). Part of the reason for the major disparity in returns is because most of these ETFs follow the front month contracts while the ETF prices are affected by the role in contract each month. Here’s etf.com’s description of the inverse crude ETF DWTI . “Since DWTI tracks an excess return version of the S&P GSCI Crude Oil Index, returns will reflect both the changes in the price of WTI crude oil and any returns from rolling futures contracts.” Be careful though to go off of 10 month or even 12 month returns ( Ben Carlson on A Wealth of Common Sense has a great post on this ), because as an investor, if you would have picked the absolute perfect time to get out of the market (Aug. 24th) you would have been up 97.88%, while the futures contract would have been down -33.31% (you would be up that percentage if shorting). (Disclaimer: Past performance is not necessarily indicative of future results) Chart Courtesy: Barchart Our point: Unless you’re making a career out of trading these markets, trying to time when to enter and exit a commodity market is dangerous and can be costly. Case in point, the first sentence of the DWTI ETF… Like most geared inverse products, DWTI is designed to be used as a tactical trading tool, not as a buy-and-hold investment. But that doesn’t mean that you shouldn’t have access to strategies that allow you to reap the gains. If you haven’t guessed what’s coming next, we’re about to name drop Managed Futures. These strategies are built to seek return drivers off of rising and falling markets. This is how the industry did as a whole during crude’s collapse. (Disclaimer: Past performance is not necessarily indicative of future results) Source: Newedge Data through Jan. 12th, 2015 Our firm is dedicated to searching through the managed futures space in order to find the best strategies out there. Some managers will tell you where they think commodities are going; some will tell you they let the algorithms do the talking. In our experience, we like to know that they have a feel for the market but at the end of the day they leave the emotions out of the decision making. Ultimately, we, nor they, can tell you where commodities are going, but that’s the beauty of Managed Futures strategies; they don’t know, but it doesn’t matter if prices fall or rise, it’s more about capturing the trend as it continues to fall of rise. P.S. – To understand where Alternative Investment return drivers come from, download our whitepaper, ” The Truth and Lies in Alternative Investments. ”

S&P 500 ETFs Vs. Ex-Sector ETFs

The replication of the broader U.S. market – the S&P 500 index – may be surging lately on Fed-induced optimism, but on the year-to-date frame it is still a laggard (as of October 15, 2015), having slid about 1.6%. Relentless global growth worries, be it over China, Europe, Japan or the emerging market block, and occasional issues in some specific corners of the domestic market hit the index hard this year. Even if the market rebounds in the final quarter of the year on hopes of persistent inflows of cheap dollar from the Fed, cheaper valuation and the seasonal tailwind of the all-important holiday season, the odds are not out of the way. After all, the S&P 500 index is made up of large-cap stocks which are largely tied to the global perspective. This is where the idea of the Ex-Industry S&P 500 ETFs launched by ProShares comes from. As of now, ProShares has four ETFs, namely the ProShares S&P 500 Ex-Financial ETF (NYSEARCA: SPXN ), the ProShares S&P 500 Ex-Health Care ETF (NYSEARCA: SPXV ), the ProShares S&P 500 Ex-Technology ETF (NYSEARCA: SPXT ) and the ProShares S&P 500 Ex-Energy ETF (NYSEARCA: SPXE ). As the names suggest, all these ETFs provide exposure to the companies of the S&P 500, with the exception of those companies included in the financial, healthcare, technology and energy sectors, respectively. How Do These Fit in a Portfolio? Notably, Financials, Medical, Technology and Energy account for about 20.7%, 13.7%, 20.6% and 4.1% of the S&P 500 index, respectively. So, if a particular sector is underperforming at a given period of time, investors can easily chuck that out from the broader S&P 500 index by investing in that ex-sector ETF. What could be a better example than the energy sector, which has been a pain for the last one and a half year in the marketplace, and is still not showing any definite sign of a recovery anytime soon? In such a situation, an ex-energy S&P 500 ETF – SPXE – could an intriguing pick. The technique is equally gainful even at the time of short-selling. If a sector is outperforming the broader market, investors can easily short-sell that particular ex-industry ETF and earn smart gains. The aforementioned sectors outperformed/underperformed the broader market index this year and in previous years as well by a wide margin. The chart below can be used to understand the trend: ETFs YTD Return 1-Year Return 5-Year Return Financial Select Sector SPDR ETF (NYSEARCA: XLF ) -5.34% 5% 60.3% Energy Select Sector SPDR ETF (NYSEARCA: XLE ) -12.7% -16.4% 16.6% Technology Select Sector SPDR ETF (NYSEARCA: XLK ) 1.3% 11.2% 73.8% Health Care Select Sector SPDR ETF (NYSEARCA: XLV ) 1.1% 13% 121.4% SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) -1.6% 7.3% 71% Moreover, the issuer noted that investors might have enough sector exposure from the other holdings, and so, could be intrigued by an ex-sector ETF. Below, we highlight the concerned ETFs in detail so that investors can get a fair idea of which ex-sector ETF can emerge as a game changer and when. As far as competition goes, the newly launched funds should receive their share of success ahead, given that their underlying idea is novel. SPY in Focus This most popular ETF with $131 billion of assets charges 9 bps in fees. IT (20.6%), Financials (16.1%), Healthcare (14.4%), Consumer Discretionary (13%) and Industrials (10.2%) get doubt-digit exposure in it. Energy has a relatively low exposure of 7.4% in the fund. SPXN in Focus This new 441-stock fund charges 27 bps in fees and has amassed about $4.1 million of assets, having debuted in late September. IT (24%), Healthcare (18.3%), Consumer Discretionary (15.5%), Industrials (11.9%) and Consumer Staples (11.6%) are the top sectors with double-digit weight. The product has a P/E ratio of 23.59 times. Given the low interest rate environment and the potential pressure on the financial companies’ net interest margin, some investors might choose to pick this fund at the current level. SPXV in Focus This 446-stock fund also has $4 million in assets. Here, IT (23.6%), Financials (19.6%), Consumer Discretionary (15.2%), Industrials (11.7%) and Consumer Staples (11.4%) get doubt-digit exposure. The product has a P/E ratio of 20.50 times. Occasional sell-offs in healthcare stocks on overvaluation and pricing issues can be opportune times for this fund. SPXT in Focus This 428-stock fund has a P/E of 22.10 times. Financials (21.5%), Healthcare (19.7%), Consumer Discretionary (16.6%), Industrials (12.8%) and Consumer Staples (12.5%) get doubt-digit exposure in the fund. While the technology sector saw great momentum lately, this high-growth sector normally succumb to a slowdown if global growth concerns flare up or a flight-to-safety trend sets up. SPXT can be an answer to these sector-specific tough times. SPXE in Focus This 462-stock ETF has a P/E of 22.01 times. IT (21.6%), Financials (18%), Healthcare (16.4%), Consumer Discretionary (13.9%) and Industrials (10.7%) get doubt-digit exposure in it. This should be the most-eyed fund now, given the relentless energy price slump. Original Post