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Things Are Getting Junky For Brazil ETFs

S&P’s decision to place a non-investment grade rating on Brazil comes as the country is mired in a recession. With Brazil being one of the developing world’s most prolific issuers of sovereign and corporate debt, some emerging markets bond funds could also be stung by news of the downgrade. A month ago, global investors cheered when S&P rival Moody’s Investors Service did not place a negative outlook on Brazilian bonds. By Todd Shriber, The ETF Professor The iShares MSCI Brazil Capped ETF (NYSEARCA: EWZ ) closed modestly lower Wednesday, finishing the day a mere $0.50 off its most recent low, which is a more than 10-year low. Thursday could bring more glum price action for EWZ and other Brazil ETFs because Standard & Poor’s downgraded Brazil’s sovereign credit rating to BB+ from BBB- after the close of U.S. markets Wednesday, becoming the first of the major ratings agencies to slap a junk rating on Latin America’s largest economy. S&P may not be done downgrading Brazilian debt. “The negative outlook reflects what we believe is a greater than one-in-three likelihood of a further downgrade due to a further deterioration of Brazil’s fiscal position, potential key policy reversals given the fluid political dynamics, including a further lack of cohesion within the president’s cabinet,” said the ratings agency in a statement . In late July, S&P revised its outlook on Brazil’s sovereign credit rating to negative from stable, a move that served as a harbinger for the downgrade to junk territory. One Of Many Problems S&P’s decision to place a non-investment grade rating on Brazil comes as the country is mired in a recession with President Dilma Rousseff’s administration ensconced so deeply in corruption controversy that Brazil’s benchmark Bovespa has bled so much market value that Mexico could usurp its southern rival for the title of Latin America’s largest equity market . “We believe Brazil’s credit profile has weakened further since July 28, when we revised the outlook on Brazil to negative. At that time, we signaled increased execution risks to the corrective policy changes already underway, mainly stemming from fluid political dynamics in Congress associated with spillover effects from investigations of corruption at state-owned energy company Petrobras. We now perceive less conviction within the president’s cabinet on fiscal policy,” said S&P. EWZ entered Thursday with a year-to-date loss of 34.6 percent, by far the worst performance among the four major single-country ETFs tracking BRIC nations and more than 2 1/2 times worse than the comparable China and India ETFs. With Brazil being one of the developing world’s most prolific issuers of sovereign and corporate debt, some well-known emerging markets bond funds could also be stung by news of the S&P downgrade. For example, the $1.2 billion Market Vectors Emerging Markets Local Currency Bond ETF (NYSEARCA: EMLC ) allocates 8.4 percent of its weight to real-denominated debt, making Brazil the fund’s third-largest country weight. EMLC is in the midst of an eventful week. The ETF tracks a JPMorgan Chase & Co. index and earlier this week, the bank decided to remove Nigeria from its emerging markets bond benchmarks. EMLC allocated 3.1 percent of its weight to Nigerian debt . The Vanguard Emerging Markets Government Bond ETF (NASDAQ: VWOB ) has an 8.5 percent to Brazilian debt, also making the nation that fund’s third-largest country exposure . VWOB is only down 1.55 percent year-to-date, something of a minor miracle when considering the ETF’s exposure to debt issued by emerging and frontier markets that are either in recessions, have devalued their currencies or both. “Indeed, we continue to believe that economic weakness exacerbates execution risk. We now expect the contraction in real GDP to be deeper and longer, with another revision to our growth outlook. Our projections estimate a contraction of about 2.5 percent this year followed by another 0.5 percent contraction in 2016, before returning to modest growth in 2017,” adds S&P. A month ago, global investors cheered when S&P rival Moody’s Investors Service did not place a negative outlook on Brazilian bonds, though the ratings agency downgraded Brazil’s sovereign credit rating to Baa3, the ratings agency’s lowest investment grade. Fitch Ratings has a BBB rating on Brazilian debt, which is two notches above junk. Disclaimer: Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation. 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.

NUGT Rides On The Cautious Case For Gold

The Direxion Daily Gold Miners Bull 3x Shares ETF (NYSEARCA: NUGT ) and other gold ETFs might see some sort of stability in the next couple of weeks as gold buyers take cautious views ahead of the Federal Reserve meeting holding next week. The fear in the market before now was the Fed will raise interest rates this month, and the fear has been forcing downward pressure on gold. The WSJ notes that spot gold was trading down 0.02% at $1,121.27 a troy ounce in Europe this morning; yet, the fact that China bought 16 tons of the bullion in August suggests that fears about the situation in China are overblown. Now, weak economic data from last week suggests that the Fed might hold off the rate hike until December. If the Fed waits until December before raising Interest rates, the price of the yellow metal will stabilize as investors breathe a sigh of relief. However, the stability doesn’t mean that gold prices will soar because stable gold prices ahead of a Fed meeting could easily be the calm that precedes a storm. The cautious case for gold The last couple of weeks have seen some analysts take side on the bullish case for gold while other analysts camped on the bearish side of gold. The next couple of weeks however, are likely to see analysts finding common ground in the cautious case for gold. Adrian Ash, head of research at BullionVault says that the bullion has had its slump and it has missed the rally in global stock prices. In his words, “After riding out the risk-off slump in productive commodities last month, gold missed most of today’s risk-on rally.” Lukman Otunuga, a research analyst at FXTM notes that gold has support at $1,110 and that economic data will influence where gold ETFs such as NUGT are heading next. In his words, “if data from the United States this week is robust, then more pressure may be seen for gold which may trigger a selloff to the next relevant support at $1,110 [an ounce]… The major catalyst for a potential heavy selloff in gold continues [to] revolve around whether the Federal Reserve begins to raise U.S. interest rates this year.” Commerzbank sums up the bearish case for gold because the effects of demand and supply in the physical gold market has been mixed. The firm says “In the run-up to the Fed’s meeting next week, market participants are likely to be exercising restraint, so we are unlikely to see any pronounced price fluctuations”. A balanced market, in the meantime NUGT and other gold backed ETFs are not likely to see much changes going forward because the bulls and bears are exerting almost the same amount of pressure on the market. Howie Lee, an investment analyst at Phillip Futures opines that “We are long-term still bearish on gold, but current market conditions may suggest that gold bulls are in control of the market in the near term.” Link back to the original article on Learn Bonds

How To Find The Best Style ETFs: Q3’15

Summary The large number of ETFs hurts investors more than it helps as too many options become paralyzing. Performance of an ETFs holdings are equal to the performance of an ETF. Our coverage of ETFs leverages the diligence we do on each stock by rating ETFs based on the aggregated ratings of their holdings. Finding the best ETFs is an increasingly difficult task in a world with so many to choose from. How can you pick with so many choices available? Don’t Trust ETF Labels There are at least 67 different All Cap Blend ETFs and at least 281 ETFs across twelve styles. Do investors need 23+ choices on average per style? How different can the ETFs be? Those 67 All Cap Blend ETFs are very different. With anywhere from 4 to 3794 holdings, many of these All Cap Blend ETFs have drastically different portfolios, creating drastically different investment implications. The same is true for the ETFs in any other style, as each offers a very different mix of good and bad stocks. Large Cap Value ranks first for stock selection. Small Cap Blend ranks last. Details on the Best & Worst ETFs in each style are here . A Recipe for Paralysis By Analysis We firmly believe ETFs for a given style should not all be that different. We think the large number of All Cap Blend (or any other) style ETFs hurts investors more than it helps because too many options can be paralyzing. It is simply not possible for the majority of investors to properly assess the quality of so many ETFs. Analyzing ETFs, done with the proper diligence, is far more difficult than analyzing stocks because it means analyzing all the stocks within each ETF. As stated above, that can be as many as 3794 stocks, and sometimes even more, for one ETF. Any investor worth his salt recognizes that analyzing the holdings of an ETF is critical to finding the best ETF. Figure 1 shows our top rated ETF for each style. Note that there are no ETFs currently under coverage in the All Cap Growth or All Cap Value styles. Figure 1: The Best ETF in Each Style (click to enlarge) Sources: New Constructs, LLC and company filings How to Avoid “The Danger Within” Why do you need to know the holdings of ETFs before you buy? You need to be sure you do not buy an ETF that might blow up. Buying an ETF without analyzing its holdings is like buying a stock without analyzing its business and finances. No matter how cheap, if it holds bad stocks, the ETF’s performance will be bad. Don’t just take my word for it, see what Barron’s says on this matter. PERFORMANCE OF ETF’S HOLDINGS = PERFORMANCE OF ETF If Only Investors Could Find Funds Rated by Their Holdings The Arrow QVM Equity Factor (NYSEARCA: QVM ) is the top-rated Large Cap Blend ETF and the overall best ETF of the 281 style ETFs that we cover. The worst ETF in Figure 1 is the State Street SPDR S&P 600 Small Cap Growth (NYSEARCA: SLYG ), which gets a Neutral rating. One would think ETF providers could do better for this style. Disclosure: David Trainer and Max Lee receive no compensation to write about any specific stock, style, 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.