Tag Archives: management

Emerging Market Asset Flow Rebounds: ETFs In Focus

Emerging market equities seem to have gained some traction. The latest data from Bloomberg showed that emerging market ETFs experienced near $1 billion in net asset inflow last week ended October 9, driven mainly by movements in India, Mexico and Russia. This was a sharp rebound from the prior week ended October 2, when outflows from these funds more than doubled from the week-ago level. Inflows into emerging-market ETFs totaled $936 million last week, more than offsetting the $828 million in outflows over the previous two weeks. Stock funds gathered $982.4 million in assets but bond funds exhaled $46.4 million. Notably, the MSCI Emerging Markets Index rose 6.9% last week, the fastest pace since the week ended December 2, 2011. Per Bloomberg, India witnessed the biggest inflow with collections of $150.9 million, compared with an outflow of $25.4 million in the prior week. Stock funds accumulated $151.7 million while bond funds moved out $0.8 million. The huge inflow in Indian ETFs can be attributed to the Reserve Bank of India’s move to cut its key interest rate by 50 basis points (bps) to 6.75% in a bid to boost economic activity as well as the IMF forecast of India retaining the world’s fastest growing economy status. According to IMF, the Indian economy is expected to grow 7.3% in 2015, compared with 6.8% growth in China and 2.6% in the U.S. Mexico experienced the second biggest inflow. Investors added $135.9 million to this country’s ETFs last week, as compared to $35.3 million of redemptions in the previous week. Stock funds gained $141.4 million, while bond funds fell $5.5 million in the week. Latin America’s second biggest economy has been recovering from the oil price crash. Domestic strength, improving U.S. economy, decreasing unemployment rate and subdued inflation bode well for the Mexican economy. Russia recorded the third biggest movement with $133.9 million in inflows. Stock funds added $135.7 million while bond funds saw an outflow of $1.7 million last week. The surge in Russian ETFs can be attributed to the rebound in oil price and stabilization of the ruble, raising hopes that the nation’s economic situation may not deteriorate to the level apprehended. Below we highlight four emerging market ETFs that have experienced significant net asset inflow in the week ended October 9. Goldman Sachs ActiveBeta Emerging Markets ETF (NYSEARCA: GEM ) – $157.26 Million This recently launched smart beta ETF tracks the Goldman Sachs ActiveBeta Emerging Markets Equity Index, designed to generate returns by selecting equities based on four well-established attributes of performance – good value, strong momentum, high quality and low volatility. The fund has the highest exposure to Asia, ex-Japan (68%), followed by Europe, Middle East and Africa (18.3%) and Latin America (13.6%). About a quarter of the assets in its portfolio are tied to financial firms. The ETF has amassed roughly $184 million in its asset base while it trades in a volume of roughly 74,000 shares a day. It charges 45 bps in fees from investors per year. Vanguard FTSE Emerging Markets ETF (NYSEARCA: VWO ) – $139.29 Million This is the top asset grossing emerging market ETF, which follows the market-cap weighted FTSE Emerging Index that measures the performance of roughly 850 large and mid-cap companies in 22 emerging markets. This fund is highly focused on China (26.6%), followed by Taiwan (14.1%) and India (12.7%). Sector-wise, about a quarter of its total assets are related to financial services firms. VWO has garnered nearly $38 billion in assets and trades in a heavy volume of roughly 16 million shares per day. It charges 15 bps in annual fees and carries a Zacks ETF Rank #3 (Hold) with a Medium risk outlook. Market Vectors Russia ETF (NYSEARCA: RSX ) – $129.56 Million This ETF tracks the Market Vectors Russia Index, providing exposure to publicly-traded companies that are domiciled in Russia. The fund is heavily biased toward energy, followed by materials and financials. It has gathered around $2 billion in assets and trades in a hefty volume of nearly 12 million shares a day. It charges 63 bps in fees per year and carries a Zacks ETF Rank #4 (Sell) with a High risk outlook. iShares MSCI India (BATS: INDA ) – $119.14 Million INDA follows the MSCI India Index, which measures the performance of equity securities of the top 85% of companies in the Indian securities market. The fund gives the highest weight to the information technology sector, followed by financials and healthcare. It has garnered $3.8 billion in assets and trades in a solid volume of 2 million shares per day. It charges 68 bps in investor fees and carries a Zacks ETF Rank #2 (Buy) with a High risk outlook. Original Post

VNQI: International REITs For Diversification

Summary The Vanguard Global Ex-U.S. Real Estate ETF offers investors a fairly unique risk exposure. To improve portfolio diversification, ETFs like VNQI make sense as a small allocation. The best way to establish international diversification, in my opinion, is to focus on the map. Rather than focusing just on emerging vs developed markets, investors should look at the individual countries to ensure proper diversification. Investors should be seeking to improve their risk adjusted returns. I’m a big fan of using ETFs to achieve the risk adjusted returns relative to the portfolios that a normal investor can generate for themselves after trading costs. One of the funds in my portfolio is Vanguard Global ex-U.S. Real Estate ETF (NASDAQ: VNQI ). I’ll be performing a substantial portion of my analysis along the lines of modern portfolio theory, so my goal is to find ways to minimize costs while achieving diversification to reduce my risk level. When I first looked at VNQI, it seemed like a great way to add a very unique exposure to my portfolio that would be not be duplicated by any of my other holdings. Since then, my perspective has been changing. This is still a good fund, but I think I weighted it too heavily in my portfolio. Expense Ratio While Vanguard funds are known for low expense ratios, this is ETF has the highest expense ratio of any of my holdings at .24%. I accepted that higher expense ratio strictly because I wanted the highly unique exposure and there are only a few liquid competitors in this niche of the market. Regions The following chart breaks down the regional exposure of the ETF. It is a useful chart, but it is remarkably vague about the specific exposures. For instance, I can tell that this fund offers me some emerging market exposure, but I can’t tell exactly which countries we are talking about. If an investor wants to ensure that their international diversification is giving them the full benefits of diversification, they will want to check the individual country allocations. Country Allocations I grabbed the following chart from Charles Schwab: (click to enlarge) This map is much easier for me to read. The allocations look fairly reasonable. Japan certainly appears to have a high weight relative to the amount of actual land there, but the country has a very developed market and makes sense as a key holding for the portfolio. As we go down the list the allocations to individual countries begin to rapidly decline which is another favorable factor in my opinion. Since the inclusion of the ETF is intended to diversify my portfolio, I want a diversified group of holdings. As you’ll see in the holdings section, the individual holdings are low enough in weight that the country allocations may be a larger factor than the individual holdings which include many companies you’ve probably never researched. Highlights Since I was a big bear on China, I like to see China with a lower weight in my international investments. After fierce selling and the falls we saw over the last couple months, the strength of my conviction is weakening and I’m more willing to accept exposure to China in my portfolio. I don’t think I’m to the point of actively seeking it, but I can deal with about 8.7% to China and 8.7% to Hong Kong. Missing Allocations Notice that only one small part of Africa is present and there are no allocations to Latin America. If you’re trying to build a thoroughly diversified international position for the portfolio, it would be wise to consider including ETFs that have these areas. That doesn’t mean investors should avoid VNQI, it just means the ideal compliments to VNQI will likely include exposures to Africa and Latin America. REITs The other thing investors should remember is that this international allocation is investing in REITs. In the domestic market REITs and regular equity markets can diverge quite substantially over years so investors would be wise to consider including allocations to the normal corporate international market. Holdings I built the following chart to represent the top 10 holdings. If you don’t recognize several of these names, don’t worry. I don’t recognize them either and I’m holding quite a bit of VNQI. I selected the ETF because of the country allocations and the REIT structure rather than the individual companies. (click to enlarge) Conclusion The Vanguard Global Ex-U.S. Real Estate ETF offers investors a fairly unique risk exposure. The fund is best used as part of a diversified portfolio and it should not be the only international equity ETF in a portfolio. I would favor complimenting the ETF with other funds that offer exposure to Latin America or Africa as well as some normal equity exposure to other develop markets.

It Is A Good Time To Invest In The YieldCo ETF

Summary The renewable energy market is growing and yieldcos are gaining traction. The Global X YieldCo ETF remains insulated from the Chinese stock market weakness. Better performance than peers. The Global X YieldCo Index ETF (NASDAQ: YLCO ) is an ETF investing in YieldCos. This ETF provides a good chance of increasing investor returns, since it invests in the high yielding yieldcos as their underlying asset. In addition to investing in yieldcos which are considered a less risky way of earning stable dividends, this ETF also provides the benefit of diversification. The renewable energy market is set to grow at a rapid pace and will account for the lion’s share of electricity capacity going forward. YLCO has been battered recently due to a sharp fall in the overall energy sector. This has led to a jump in their yields as prices have declined. After drawing strong investor interest, the situation has reversed with investors shunning these securities. SunEdison (NYSE: SUNE ) which runs 2 yieldcos has said that it will not drop further projects into its yieldcos, given the sharp price erosion. Other companies such as Trina Solar (NYSE: TSL ) have also halted their plans of listing a yieldco. However, my view is that this is a temporary hiccup due to a combination of high exuberance for yieldcos and an overall selloff in energy prices. YLCO is currently trading down 27% since its listing in May 2015. Given the current slump in yieldco prices, I think it should be a good time to build some position in this safe bet. Why you should invest in this YieldCo ETF Underlying assets are yieldcos, which are growing – YieldCos are considered a safe bet given their low risk profile and ability to generate stable and predictable cash flows. They are also less volatile than renewable energy stocks. Even when the entire energy market is going through a severe downturn, I believe yieldcos are a good bet as they should continue paying their dividends since their cash flows are relatively immune from recessions. The growth story is also strong as the renewable energy industry is set to continue over the long term. No exposure to the Chinese market – The Chinese market turmoil has strongly affected the global commodity industry, with many commodity producers trading at multi year lows. There is a fear that the Chinese economy may face a hard landing leading to global slowdown. The global YieldCo ETF does not have any exposure in the Chinese market. The ETF has its maximum exposure in the U.S. market followed by the U.K. These two economies are performing well relative to other regions, such as Japan and Europe. A better shield to downside risks than individual holdings – YLCO has lost 27% since inception. Given below is the YTD performance of some of its top holdings, suggesting the ETF’s performance was better than most of its constituents. % of Holding YieldCos YTD performance 12.45 Brookfield Renewable Energy Partners (NYSE: BEP ) -10% 8.32 Terraform Power (NASDAQ: TERP ) -38% 7.68 NRG Yield Inc (NYSE: NYLD ) -45% 7.36 Nextera Energy Partners (NYSE: NEP ) -27% 6.53 Abengoa Yield (NASDAQ: ABY ) -27% Data as on 13th October’15 closing The renewable Energy Market is booming – There is an increased awareness about the renewable energy usage and its benefits in reducing the effects of global warming. Countries like India have large power deficits and rely on coal for their energy needs. Now these countries are at the forefront of an energy revolution, shifting largely towards solar, wind and other renewable forms of energy for their power needs. The U.S. has also made its stand clear by passing its recent ‘Climate Action Plan’. All of this speaks of a booming renewable energy demand. It is estimated that renewable energy could account for almost 80% of the world’s energy supply within four decades. The market for yieldcos is growing – YieldCos have proven to be a success amongst the shareholders, primarily due to their stable dividend growth and relatively lower risk profile. With the growing renewable energy market, more yieldcos are coming into existence. After the success of SunEdison’s ( SUNE ) Terraform Power, the company has also listed another yieldco specializing in developing economies – Terraform Global (NASDAQ: GLBL ). There was also a joint yieldco by SunPower (NASDAQ: SPWR ) and First Solar (NASDAQ: FSLR ) called 8point3 Energy Partners (NASDAQ: CAFD ). Likewise, Canadian Solar (NASDAQ: CSIQ ) is also thinking of forming a yieldco before year end. Stock performance & Valuation YLCO gave better returns than some of its top holdings, as shown in the table above. The YTD performance was also better than solar ETFs like the Guggenheim Solar ETF (NYSEARCA: TAN ) and the Market Vectors Solar Energy ETF (NYSEARCA: KWT ). The stock is currently trading at ~$11 which is 26% low than its all-time high price. The ETF was listed in May 2015 with an expense ratio of 0.65%. (click to enlarge) Source: Google Finance What could go wrong The energy stocks have taken quite a beating in recent days and yieldcos have not been immune to this fall. The slowdown of the Chinese economy has not only hurt the Chinese energy demand growth, but also the growth in other countries due to secondary indirect effect as their exports to the Chinese economy has declined. As we can see from the graph above, the stock price decline has happened in line and is following the trend in the broader energy market. If conditions get worse, the ETF could also lose more value. The project business is a highly capital intensive business, where developers resort to large amount of debt. Any problems in the sponsor company to honor their debt might lead to a slowdown in the yieldco business. Some of the yieldcos are now adopting a more prudent growth strategy to take into account the market turmoil. Some of the solar companies have also put their plans to do yieldco in cold storage. This might help YLCO as the competition for renewable energy assets will reduce, thereby making existing yieldcos more attractive. Conclusion The current weakness in the energy sector has caused major downturn in the energy sector. I believe this will cause the weaker players to close shop and only good quality stocks would survive. The major advantage of YLCO is that it does not have any exposure in the Chinese market, which is experiencing a major slowdown. Though it will not be totally isolated from the Chinese slowdown effects, it will still not be very drastic. Also the investment case for renewable energy market continues to be strong and YLCO insulates its investors from the volatility of directly investing in this sector. I think this is a good time to build a position in this yieldco ETF. Share this article with a colleague