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Revisiting Eurozone ETFs As Economic Growth Falters

After a solid start to 2015, growth in the 19-member Euro zone economy lost momentum due to the Greek debt crisis and deterioration in many emerging market economies as commodities saw a slump and China witnessed a turmoil. The economy grew just 0.3% in the second quarter, down from a two-year record growth of 0.4% in the first quarter and well below the market expectation. This suggests that the Euro zone continues to lag recovery in the U.S., which recorded 2.3% growth in the same period. France and Italy – representing 40% of the currency bloc’s growth – were the major setbacks to the region’s growth in the last quarter. This is especially true, as France recorded zero growth in the second quarter after 0.7% in the first and Italy’s growth slowed to 0.2% from 0.3%. On the positive side, Spain once again turned out to be the outperformer with its quarterly growth increasing from 0.9% in the first quarter to 1% in the second. This was the highest growth rate among the Euro zone nations. Growth in Germany accelerated to 0.4% from 0.3%, while Greece unexpectedly grew 3.1% in the last quarter from 0.1% in the first quarter. Outlook Remains Bright It can be said that the Euro zone has shown strong resilience in a tough environment, which was disturbed by Greece, China and the commodity turmoil. The outlook for the region remains solid heading into the second half of the year given the numerous economic tailwinds that the Euro zone is enjoying. These include ultra-cheap money flows, a boost to liquidity from the European Central Bank’s (ECB) quantitative easing program, a weaker euro and lower oil prices. Improving economic and business activity as well as growing consumer confidence is fueling growth in the 19-member economy. The Euro zone successfully emerged out of the four straight months of deflationary spiral in April and inflation is above the zero level. Notably, annual inflation was 0.2% in July. Further, unemployment across the Euro zone has been falling and remained steady at a three-year low of 11.1% as of June. Given several monetary tools in place, the Euro zone is expected to show strength in the coming months providing a boost to the stocks and ETFs in the region. As a result, we have taken a closer look at some of the ETFs that have the largest exposure to the Euro zone economies. These funds have generated decent returns so far in the year and could continue to do so. iShares MSCI EMU Index Fund (NYSEARCA: EZU ) This product provides exposure to the EMU member countries (those European Union members that use the Euro as currency) by tracking the MSCI EMU index. EZU is one of the most popular ETFs in the broader European space with AUM of nearly $10.9 billion and average daily volume of roughly 6.5 million shares. It charges investors 0.48% in annual fees. The fund holds about 243 securities in its basket with none holding more than 3.15% share. The ETF is a large cap centric fund as about 82% of the portfolio is concentrated on this market cap level. The product has a definite tilt toward financials at 24%, followed by consumer discretionary (14.4%), industrials (13.1%) and consumer staples (10.5%). From a country look, France and Germany take the largest share in the basket with 32.4% and 29.2%, respectively, while Spain, the Netherlands and Italy round off the top five. The fund has returned about 7.1% so far this year and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook. SPDR EURO STOXX 50 ETF (NYSEARCA: FEZ ) This fund follows EURO STOXX 50 Index, which measures the performance of some of the largest companies across the components of the 20 EURO STOXX Supersector Indexes. The fund appears rich with AUM of nearly $4.7 billion, and average daily volume of more than 2.5 million shares. Expense ratio came in at 0.29%. Holding 53 securities in its basket, the product is pretty well spread out across components with no firm making up for more than 5.09% of assets. The ETF is skewed toward financials, as it takes about more than one-fourth of the total assets, while the other sectors receive modest exposure. In terms of country allocation, France and Germany are leading with 36.2% and 30.6% share, respectively, followed by Spain (12.7%), Italy (8.0%), the Netherlands (7.6%), Belgium (3.7%) and Finland (1%). The fund is up nearly 5.6% in the year-to-date time frame and has a Zacks ETF Rank of 3 with a Medium risk outlook. SPDR STOXX Europe 50 ETF (NYSEARCA: FEU ) This ETF is quite similar to FEZ having amassed $280 million in its asset base and trading in volume of less than 74,000 shares per day. It charges 29 bps in annual fees and holds 56 stocks in its basket. While the fund tracks the same index, it is slightly different from FEZ in terms of sector and country holdings. Here, financials and health care take the top two spots in terms of sectors with over 24% share each while consumer staples and energy round off the top four with double-digit exposure each. Country weights for the top three are United Kingdom (35.4%), Switzerland (23.1%) and Germany (14.7%). The product is up 6.1% so far this year and has a Zacks ETF Rank of 3 with a Medium risk outlook. iShares Currency Hedged MSCI EMU ETF (NYSEARCA: HEZU ) For investors looking to manage currency risk while remaining invested in the Euro zone stocks, HEZU might be a good option. The fund follows the MSCI EMU 100% USD Hedged Index and is a play on the popular unhedged fund ( EZU ) with a hedge to strip out the euro currency exposure. The fund holds 263 well-diversified securities in its basket dominated by financials (24.4%) and followed by consumer discretionary (14.7%), industrials (13.3%) and consumer staples (10.7%). The ETF has amassed $1.8 billion in its asset base since its debut a year ago and trades in good volumes of more than 941,000 shares a day. The fund charges 50 bps in annual fees from investors and has delivered impressive returns of over 15% so far this year. It has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating. Bottom Line Given the encouraging trend, Euro zone will likely get a boost in the coming months. So investors could jump into this space and could ride out the strength with any of the above-mentioned ETFs. Original Post

VCR: An ETF For Both Traders And Long-Term Investors

Summary The sector specific exposure makes the ETF a reasonable pick for investors who expect the sector to outperform. The low expense ratio makes it a viable long-term holding for the buy and hold investor. The biggest weakness for a buy and hold strategy here is that the dividend yield would be insufficient to provide retirement income without an enormous portfolio. Investors should be seeking to improve their risk adjusted returns. I’m a big fan of using ETFs to achieve risk-adjusted returns relative to the portfolios that a normal investor can generate for themselves after trading costs. I’m working on building a new portfolio and I’m going to be analyzing several of the ETFs that I am considering for my personal portfolio. A substantial portion of my analysis will use modern portfolio theory, so my goal is to find ways to minimize costs while achieving diversification to reduce my risk level. In this article, I’m reviewing the Vanguard Consumer Discretionary ETF (NYSEARCA: VCR ). Does VCR provide diversification benefits to a portfolio? Each investor may hold a different portfolio, but I use the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) as the basis for my analysis. I believe SPY, or another large cap U.S. fund with similar properties, represents the reasonable first step for many investors designing an ETF portfolio. The correlation is about 88%, which is low enough that I’m expecting some diversification benefits, but I would not expect it to be dramatic. Standard Deviation The standard deviation of annualized returns for VCR was 12.8% compared to SPY at 12.1%. So VCR is slightly more volatile but using it as a small part of a portfolio would get past even that problem. For instance, using VCR at 10% would have brought the annualized volatility down to 12.0%. Yield and Taxes The distribution yield is 1.11%. Simply put, the ETF doesn’t make much sense for retiring investors who want to use portfolio yields as a large part of their retirement income. Sure, they could sell shares to generate income, but that may create a temptation to change the portfolio strategy at the wrong time. Expense Ratio The ETF is posting 0.12% for an expense ratio. That is not bad compared to other ETFs, though it is slightly higher than SPY at 0.09% and higher than a few of the other more popular Vanguard ETFs. Market to NAV The ETF is trading at a 0.02% premium to NAV currently. I don’t see that as being a big enough issue to matter. A few very small ETFs may see their values deviating from NAV but this Vanguard fund should be staying very close to NAV. Largest Holdings The diversification within the ETF would be weak compared to a whole market ETF, but given that this is a specific sector allocation for consumer discretionary stocks, the diversification is better than many investors might expect. (click to enlarge) Through diversification it may be possible (just barely) to lower portfolio risk by adding the ETF due to the correlation. However, the most logical argument for adding the ETF to the portfolio is an investor believing that this sector is set to outperform based on analysis of macroeconomic factors. A belief that the sector is likely to do well would be a great rationale for holding the ETF; however, it would imply more of a short to intermediate term trading mentality rather than a long-term core holding. Does That Make it Bad for Retail Investors? I would not go that far. The volatility is reasonable and the expense ratio is low. So long as the expected returns are keeping up with the market, there is no reason to say the portfolio is unsuitable for a long-term buy and hold investor. I think it makes an ideal fit for a trader who is moving their assets based on macroeconomic analysis, but it is still a reasonable option for the buy and hold investor as well. The thing those investors should remember is to take advantage of the benefits of lower correlation by rebalancing their portfolio. If it is tax exempt, that could be accomplished easily by buying and selling. If the portfolio is not tax exempt, it may be better to adjust exposure by simply adding cash and buying the fund that has fallen below the ideal weighting. Conclusion This is a solid all-round ETF for any investor who wants to add an emphasis on the “consumer discretionary” sector to their asset allocations. As a sector ETF, it would work well for traders, but the low expense ratio and reasonable level of volatility make it a fine choice for the long-term buy and hold investor as well. The one concern for the buy and hold investor may be the weak dividend yields which would be insufficient for retirement income. 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.

Direxion Files To Launch Innovative Hedged Equity ETF

By DailyAlts Staff The problem with actively managing an ETF is that regulators require daily disclosure of their holdings, and this would potentially allow fund-watchers to “front run” and undermine the ETF’s investment strategies. Eaton Vance’s NextShares “ETMFs” – exchange-traded managed funds – attempt to address this problem by doing away with the daily disclosure requirements, but this also causes the proposed ETMFs to be priced during the trading day at a discount or premium to their net-asset value, rather than in the traditional dollars-and-cents format. Thus, while the idea is good, it may take some time to get investors used to the pricing mechanism. Other proposed “active ETF” formats have yet to be approved by the SEC, but Direxion’s new long/short ETF sidesteps these problems by rebalancing its long holdings on a quarterly basis and actively managing its short exposure in a way that would be difficult (if not impossible) to “front run” – it limits its short positions to the S&P 500 index, rebalancing as often as once a day. Thus, daily disclosure will only allow fund-watchers to “front run” the new ETF’s short portion, and with the market for S&P 500 derivatives so huge, front-runners will have a minimal impact, at most. Direxion filed paperwork with the SEC on July 30, announcing its plan to launch the Direxion Credit Suisse U.S. Hedged Equity Index ETF . The fund, which is expected to launch on or around October 13, will give investors the chance to buy into an exchange-traded long/short equity strategy designed to shift exposure according to the current stage of the global economic cycle: Over-heating, Slowdown, Contraction, or Recovery. Direxion starts with the 1,500 biggest U.S. stocks, by market cap, and filters them for those with characteristics that have previously outperformed during the current stage of the global economic cycle. It selects the 100 stocks with the largest market caps that meet the criteria, and then adjusts its short exposure to the S&P 500 from 0% to 100% of the long position, based on rolling 3-month risk-adjusted return and mean-reversion indicators of the S&P 500. This is also the methodology of the Credit Suisse U.S. Hedged Equity Index, the new ETF’s benchmark. Although Direxion’s new ETF is innovative, it isn’t the first equity-hedged ETF on the market. According to ETF.com , ProShares, First Trust, and Credit Suisse operate similar funds, including the ProShares RAFI Long/Short ETF (NYSEARCA: RALS ), which debuted on December 9 and has a five-star rating from Morningstar.