Tag Archives: management

Top-Ranked ETFs To Tap India’s Growth Story

Finally, a slew of economic reforms including four rate cuts this year have started to pay off and stimulate growth in Asia’s third-largest economy. This is especially true as India picked up momentum with 7.4% growth in the second quarter (ending September). While this is far below the year-ago growth of 8.9%, it is up from 7% recorded in the first quarter and the market expectation of 7.3%, as per Reuters. Bright Spots A major boost to the economy came from solid progress in the manufacturing, mining and service sectors. Agriculture, industrial, automobiles and consumer durables are witnessing strong growth while investments are also showing signs of recovery. Additionally, current account deficit has narrowed and the currency has moved up significantly. Further, lower oil prices and rising consumer spending have added to economic strength. In particular, the current account deficit has narrowed sharply to around 1.3% of GDP in fiscal 2014-2015, below 1.7% in fiscal 2013-2014. Trade deficit in the first seven months of the current fiscal (April-October) contracted to $77.76 billion from $86.26 billion. Though inflation rose to 5% in October from 4.41% in September, it is expected to decline once the festival season ends. The central bank expects inflation to reach 6% by January 2016 and then moderate to 5% by March 2017. Given the positive developments, India has now become the world’s fastest-growing economy, outpacing China, and remains a bright spot given that most emerging economies are struggling to revamp growth. The Reserve Bank of India expects the country’s economy to grow 7.4% annually for fiscal 2015-2016 and the World Bank projects economic growth of 7.5% for the current fiscal year, followed by further acceleration to 7.8% in 2016-17 and 7.9% in 2017-18. The Organization for Economic Co-operation and Development (OECD) also sees robust growth prospects in India compared to the other emerging markets. It expects GDP growth to remain above 7% in the coming years fueled by more structural reforms. India ETFs to Buy Based on a speedy recovery and bright outlook, we recommend investors to buy India ETFs at least for the short term. For interested investors, we have found a number of top-ranked ETFs in the broad emerging Asia-Pacific space targeting India that have a Zacks ETF Rank of 2 or ‘Buy’ rating and are thus expected to outperform in the upcoming months. Among these, the following five funds could be good choices to play in the coming months and have potentially superior weighting methodologies which could allow them to continue leading the emerging Asia-Pacific space in the months ahead. iShares MSCI India ETF (BATS: INDA ) This ETF follows the MSCI India Total Return Index and charges 68 bps in fees per year from investors. Holding 72 stocks in its basket, the fund is highly concentrated on the top two firms – Infosys (NYSE: INFY ) and Housing Development Finance Corp. ( OTC:HSDGY ) – that together make up for 20.2% of total assets. Other firms hold no more than 6.63% share. Further, the product is slightly tilted toward the information technology sector at 21.7% while financials, consumer staples, health care, and consumer discretionary round off the top five. INDA is the largest and popular ETF in this space with AUM of over $3.5 billion and average trading volume of more than 2 million shares a day. The fund is down 7.9% in the year-to-date time frame. WisdomTree India Earnings Fund (NYSEARCA: EPI ) This product tracks the WisdomTree India Earnings Index, holding 238 profitable companies using an earnings-weighted methodology. Reliance Industries and Infosys occupy the top two positions with a combined 17.9% of assets while other firms hold less than 5.8% share. The fund is heavy on financials with one-fourth share, while energy and information technology also get double-digit allocation in the basket. The fund has amassed nearly $1.7 billion and trades in volume of more than 4.8 million shares a day. Expense ratio came in at 0.83%. The fund has lost about 9% over the trailing one year. iShares India 50 ETF (NASDAQ: INDY ) This ETF provides exposure to the largest 53 Indian stocks by tracking the CNX Nifty Index. It is pretty well spread out across components with none of the securities holding more than 7.73% of assets. With respect to sector holdings, financials takes the top spot at 26%, closely followed by information technology (16%), consumer discretionary (11%) and energy (10%). The product has managed assets worth $814.9 million and trades in good volume of nearly 320,000 million shares a day. It is the high cost choice in the space, charging 93 bps. The product shed 8.4% in the trailing one-year period. PowerShares India Portfolio (NYSEARCA: PIN ) This fund offers exposure to the basket of 50 stocks selected from the universe of the largest companies listed on two major Indian exchanges by tracking Indus India. The top two firms – Infosys and Reliance Industries – take double-digit exposure each while the other firms hold no more than 5.6% share. From a sector look, the fund is tilted toward energy and information technology, each accounting for over 20% share, followed by financials (12.1%) and health care (10.8%). The fund has amassed $431.7 million in its asset base and trades in solid volume of around 1.3 million shares a day on average. It charges a higher expense ratio of 85 bps and has lost 7.7% in the year-to-date timeframe. Market Vectors India Small-Cap Fund (NYSEARCA: SCIF ) This fund targets the small cap segment and tracks the Market Vectors India Small-Cap Index. In total, it holds 135 securities in its basket with none making up for more than 3.21% of assets. Here again, financials occupies the top position from a sector look at 28.3% while industrials, consumer discretionary, and information technology round off the next three spots. The fund has so far amassed $203.5 million in its asset base while charging 89 bps in annual fees. Volume is good, exchanging around 105,000 shares in hand a day. Bottom Line Given the current trends and favorable dynamics, India will likely get a solid boost. So a solid play on the country might be a good idea. This is especially true if investors take a closer look at the top-ranked ETFs in the space for excellent exposure and some outperformance in the coming months. Original Post

Managing ETF Liquidity

Over the years, certain ETFs have had problems with pricing in the face of extreme market events. If you use ETFs, then you should read the article to better understand the potential drawbacks to using ETFs; but there are also drawbacks to traditional funds as well as individual issues. A fundamental building block for how I view just about everything is to try to give myself as many options as possible, and it relates here. By Roger Nusbaum, AdvisorShares ETF Strategist ETF.com had a detailed post titled ” How Illiquid Are Bond ETFs, Really? ” Over the years, certain ETFs have had problems with pricing in the face of extreme market events. This first came to the fore in the fall of 2008 for fixed income funds, when the bond market didn’t function correctly for a short while (subjectively you may think a long while, as the markets for commercial paper and floating-rate preferreds were devastated). Since then, there have been a couple of other instances where ETFs “didn’t work” for a very short period. Part of the equation, as we learned in 2008, was that ETFs trade more regularly than the things they track. However, this can be true for fixed income markets, for example, but typically not for domestic equities, which is a point Dave Nadig explores in great detail in the above-linked article. If you use ETFs, then you should read the article to better understand the potential drawbacks to using ETFs; but there are also drawbacks to traditional funds as well as individual issues. One solution is to not invest at all, which I am not dismissive of, but the drawback there would be the need for a much higher savings rate. It has been three months since that 1000-point down open for the Dow, when a lot of these ETF issues popped up again in conjunction with investors and advisors getting whipsawed badly as stop order selected based on an inefficient open where funds traded at very wide discounts. As an “oh by the way,” if you missed it, the NYSE and Nasdaq will no longer accept stop orders. The idea that investment products have drawbacks is not a new one as far as this blog is concerned, but maybe it is correct to that the drawbacks are evolving, or we are learning more about them at least as far as ETFs are concerned. Where there is risk that ETFs may not price correctly or efficiently, it makes sense to position yourself where you are not subject to the risk, specifically being in the position where you must sell when one of these extreme market events is under way. This is not a comment about timing the market, but more like “Ok, the market just fell 8% in ten minutes, it’s probably not a good time to sell for the monthly withdrawal or rebalance.” (Assuming speculating on an extreme market event is not part of the investment strategy.) I also think this is an argument against an all-something (ETF, traditional fund, individual issue) portfolio, as opposed to having various types of products. It is also about cash management. Most advisors will tell you not put money into the stock market that you might or will need within five years, like a down payment for a house or college tuition, with the idea being that five years may not be enough time to recover from a large market decline. While keeping five years of cash on hand as part of an investment strategy in retirement is not ideal, it makes sense to stay ahead of the regular withdrawal need by a couple of months or so. That way, an intention to sell on the morning of August 24th can be pushed back to avoid participating in temporarily extreme trading. Emergency needs can also be mitigated. We talked about this before, but in addition to regular spending, there are one-off events that can be budgeted for very easily, and that do seem to come up semi-regularly. Examples of this includes new tires, vet bills (one of our dogs tore her cruciate in October), something with the house and so on. I am a fan of segregating several months of emergency funding, maybe assuming $1000/month, and all the better if not all of it gets spent, but it is another way of not selling today because you have today to pay for something. A fundamental building block for how I view just about everything is to try to give myself as many options as possible, and it relates here. ETFs offer access and ease of diversification, so instead of avoiding them, understand the drawbacks, insulate against those drawbacks and use different types of products. It doesn’t really matter if an ETF traded at a 20% discount to its IIV for 40 minutes on August 24th, except to the person who sold in the middle of that because he “had to.”

Lessons Learned From The Rise Of ETFs

For a large part of the 1980’s, 1990’s and the early 2000’s, hedge funds were equated with enormous financial success. Serving as investment vehicles primarily marketed towards the wealthy, hedge funds use a plethora of aggressive investing strategies in an effort to generate outsized returns. These strategies worked very well for the funds and for their clients for a short while. Yet, as the Securities and Exchange Commission (SEC) began to change the rules and monitor the actions of these funds more closely, the hedge fund game changed forever. In 2004, hedge fund managers were required to register their operation formally with the SEC and tie their name to that of their firm. This was mainly intended to keep portfolio managers accountable as fiduciaries. Then, after the global financial crisis in 2008, lawmakers in Washington D.C. took more decisive action to protect domestic financial markets. The Dodd-Frank Wall Street Reform Act of 2010 passed and brought with it more significant regulations to the United States’ financial sector. The restrictions on hedge funds were far more severe than what happened in 2004, such as extensive screening of investors and the presentation of sensitive data on trading positions. Because of the more stringent regulations, the risks that hedge funds once were able to take became almost impossible. Most notably, the Volcker rule has been placed into effect, which placed higher restrictions on speculative investments and proprietary trading that do not benefit the customers of funds. The success of the exchange-traded-fund (ETF) blossomed. ETFs are low-cost funds that track market indexes, asset classes, or commodities and are publicly traded like stocks. There is a stunning cost difference between ETFs and hedge funds. Hedge funds require a significant amount of active management and they usually charge a two percent annual management fee and a 20 percent fee on all profits (aka “two and twenty”). ETFs, however, charge anywhere between less than one and six percent on the basket of securities. Additionally, ETFs have the potential to attract the same clientele that hedge funds have traditionally won over: high net worth individuals. With high tax efficiency and low fees, ETFs are a no-brainer for high net worth portfolios. Understanding their advantageously low costs and taking into account the massive losses hedge funds incurred during the crisis, ETFs became a very desirable investment vehicle. Following 2008, total account balances in ETFs grew at an exponential rate and have continued to grow at an enormous annual rate of around fifteen percent compared to that of hedge funds’ annual rate of around nine percent. This past summer marked a big milestone for ETFs because total account balances for ETFs over took total account balances for hedge funds. (click to enlarge) Assets under management (The Economist) What this highlights above all is a shift in demand from active to passive investment management. In recent years, active investment managers have seen large fluctuations in their ability to beat passive funds. Ben Johnson, Morningstar’s director of global exchange-traded-fund research notes that “more than anything, fees matter” when seeking compounded capital gains. The theoretical debate on whether passive or active investing is truly more advantageous in the long run has been going on for quite some time at this point. First, we must discuss Modern Portfolio Theory (MPT). MPT dictates that investment diversification should play a complimentary role. Indeed, each investment in a given portfolio should play off the successes or failures of other investments to maximize return. MPT teaches us that there is a possible combination of assets that assumes very little risk and comparatively large return. This is all well and good, but one of the main assumptions of MPT is information efficiency and that is where the theory gets tricky. Given efficient markets, then all known factors will be priced into different stocks making it nearly impossible to beat the market in any case. Information asymmetry, the exact opposite as information efficiency, is actually the case, the effort, let alone the capital, necessary to achieve the proper asset diversification that mitigates a significant amount of risk and generates sizable returns. With the facets of MPT in mind, we can now begin to weigh in on active and passive investing aspects. Active investors assume more financial risk when trying to beat market indices, but passive investors take a significantly lower amount of risk when riding along with the successes or downfalls of markets. While the difference in returns of these two investing styles can be enormous, it is often enough that active investors, in fact, find themselves unable to generate returns that properly justify their assumed risk. (click to enlarge) Active vs passive performance (Forbes) What is so specifically important about the ETF versus hedge fund account balance trend is that when it comes to assuming financial risks, most investors don’t seem to really want to make double-digit returns when it means that their losses could be of equal magnitude. Kenneth French, Finance Professor at the Tuck School of Business at Dartmouth College, has commented extensively on the chance of investors doing better than indices. Indeed, Professor French’s Efficient Market Hypothesis (EMH) postulates that in the indefinite long run it is impossible to beat the market without acquiring high-risk investments. It would appear that the people are beginning, more so, to agree. Even if beating the market is possible in the short run, it takes effort. Stretching that effort into the long run and observing that beating the market is nearly impossible, it would seem that the effort is not worth it. ETFs are here to stay for the long-term. As more people want to find a cost and effort-effective way to participate in the markets and gather sizable returns, the more popular ETFs will continue to grow.