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Guide To China Yuan ETF Investing

The month of August 2015 can find a place in history solely because of China’s yuan devaluation by about 2%. The step, taken on August 11, shook the global markets and almost all asset classes as the Chinese currency yuan posted the largest single-day decline since the historical devaluation in 1994 , after the country arranged its official and market rates in a line. Notably, the Chinese authorities follow a trading band around the official reference rate it sets each day for the value of the yuan against the dollar. The Chinese central bank defended its currency intervention ‘as a free-market reform’, but the move was criticized by U.S. lawmakers and viewed as a mean of taking undue favor in exports. Global experts had apprehended a currency war in the near future, especially among the Asian tigers and true to their fears; Vietnam has already widened its currency band from 2% to 3% to stay competitive on the export market. A slew of discouraging economic data from China has been blamed for weakening yuan. Its exports plunged 8.3% year over year in July, falling widely short of analysts’ expectation of 1.5% decline and deteriorating from the 2.8% drop-off recorded in June. Protracted slowdown in its manufacturing sector and a 24-year low economic growth in 2014 made this devaluation a targeted step to boost a sagging economy, as per several market experts. Impact Per Bloomberg , China’s foreign-exchange reserves are likely to see a $40 billion plunge per month. Not only this, a Bloomberg survey expects the currency to fall 1.6% to 6.5% against the greenback for the balance of 2015. Also, to restrain the incessant flight, the Chinese central bank is expected to intervene at regular intervals over the next three months. This move will be to ensure that the currency is stable and will be allowed to devalue within the specified range since an acute plunge in yuan would deteriorate the already worse case of a capital flight. Yet to be a Reserve Currency If this is not enough, the International Monetary Fund put its decision of using Chinese yuan as a reserve currency on hold for a year post this evaluation episode. Analysts believe that yuan will find it hard to make an entry into the basket of reserve currencies, presently formed by the dollar, yen, euro and the pound, unless it can move and trade freely. Future Move More Market Oriented The Chinese government announced that the renminbi’s central parity rate will follow the previous day’s closing spot rates more closely from now onward. This indicates China’s intent to make its currency more market driven. As a result, a section of analysts believe that the actual motive behind this currency move was to prepare yuan as a reserve currency. As stated earlier, the Chinese central bank assured the market that it would promptly intervene into the currency market if depreciation crosses the 3% mark. Options to Play In this backdrop, investors might be worried of investing in Chinese yuan as it is hard to get a handle on the currency’s future returns in one way or another. Though the future movements in yuan could be both ways, yuan-based investments should be closely watched before thronging the space in quest of alternative currency exposure. While Chinese stocks are too risky at this time owing to overvaluation concerns and excessive government interference, Chinese yuan ETFs could be a low risk choice. But great caution needs to be exercised to play this arena. WisdomTree Dreyfus Chinese Yuan Fund (NYSEARCA: CYB ) The most popular Chinese yuan fund is CYB from WisdomTree. The product invests in short-term, investment grade instruments in order to be reflective of both money market rates in China available to foreign investors, and changes in the value of the yuan against the dollar. The product charges investors 45 basis points a year but sees decent average volumes of 50,000 shares a day on AUM of over $93 million. The fund currently has a Zacks ETF Rank #3 (Hold) with a low risk outlook. In the last 10 days (as of August 20, 2015), the fund lost about 4.2% and is down 2.2% so far this year. Market Vectors-Chinese Renminbi/USD ETN (NYSEARCA: CNY ) For investors seeking an ETN way to target the Chinese currency, CNY is the right option. This product tracks the S&P Chinese Renminbi Total Return Index which looks to track the performance of the Chinese currency against the U.S. dollar, by rolling three-month non-deliverable currency forward contracts. The fee is a bit higher at 55 basis points a year while volume comes in below 5,000 shares a day, suggesting wide bid ask spread and ever-increasing total costs. The product is down 2% so far this year and lost over 6.7% in the last 10 days (as of August 20, 2015). The ETN currently has a Zacks ETF Rank #3. CurrencyShares Chinese Renminbi Trust (NYSEARCA: FXCH ) This product looks to track the price of the Chinese Renminbi net of Trust expenses. The product has amassed about $7.7 million in assets while it sees weak volumes of around 1,000 shares a day, suggesting a wide bid ask spread. On the positive side, the ETF has the lowest expense ratio at just 40 basis points a year in the Chinese currency ETF space. The fund has lost 2.3% this year and retreated 2.4% in the last 10 days (as of August 20, 2015). This fund also carries a Zacks ETF Rank #3. Original Post

Head-To-Head: S&P 500 ETFs Vs. Dow ETFs

Fears of a hard landing in China slaughtered the global markets last week. China itself saw all its gigantic gains recorded this year going down the drains, and logged the largest one-day plunge since 2007 on August 24 daring all government-backed measures to contain the slide. Back-to-back shockers from China, be it currency devaluation or a six-and-half-year low manufacturing data for August spurred this panic-induced sell-off. The benchmark Shanghai Composite Index dropped 8.5% on Monday. Though China sought to restrain the rout by allowing the pension funds to invest about $97 billion in the market, there was hardly any relief in store. Also, lack of precision by the Fed on the policy tightening timeline roiled the market momentum. The fright among investors was so acute that other global markets followed the footsteps of China. The otherwise steadier U.S. stocks hurtled down, European markets crashed and the Asian stocks fell to a three-year low. Meanwhile, commodities plunged to a 16-year low level while the infamous oil touched a fresh six-and-a-half year low of below $40/ barrel. Emerging markets raised panic alarms leading to an exorbitant exodus in capital. Thanks to this massacre, the U.S. stocks futures logged their largest weekly decline since 2011 in the week ended August 21 and are expected to remain southbound until this jittery market calms down. All major U.S. indices remained in deep red and went into the correction zone , per analysts. The S&P 500 index is lost 12.5% from its May high on a broad-based global slowdown. Dow Jones Industrial Average plummeted about 14.6% (as of August 25) since it hit a high in May thanks mainly to a free fall in oil prices and now both have entered the correction mode. However, Dow was a relatively worse performer than the S&P 500. Momentum Gain However, to contain this slide, China slashed the one-year lending rate by 25 bps to 2.75%, the deposit rate by 25 bps to 1.75% and the reserve ratio by 50 bps to 18%. This, along with a bargain hunt, showered the much-needed gains on Wall Street. As a result, both S&P and Dow advanced close to 4% and captured the highest single-day gain in about four years. Below we highlight four S&P and Dow-based ETFs and analyze their performance and outlook. S&P 500 ETF SPDR S&P 500 ETF (NYSEARCA: SPY ) SPY seeks to track the S&P 500 Index before fees and expenses. The performance of the S&P 500 Index is considered a mirror image of the U.S. equities, as the index represents stocks of the 500 most-valued companies in the U.S. The $171.5 billion SPY has proportionate exposure in almost all sectors with maximum emphasis on Information Technology (20.0%). The sectors like Financials (16.8%), Health Care (15.5%), Consumer Discretionary (12.8%) and Industrials (10.0%) also make up double-digit allocation. The fund is highly liquid trading with over 115 million shares daily. It charges 9 bps in fees. The fund has very low company-concentration risk with no firm accounting for more than 3.6%. SPY is down about 5.3% this year and lost 6% in the last five trading sessions (as of August 26, 2015). The fund has a Zacks ETF Rank #3 (Hold). iShares Core S&P 500 (NYSEARCA: IVV ) This fund also looks to track the S&P 500 index and has AUM of around $68.5 billion. The fund is well spread out across sectors and security. IT, Financials, Health Care and Consumer Discretionary have double-digit exposure in the fund. The product is also devoid of company-specific concentration risks. The fund trades in volume of about 4.1 million shares a day while charges 7 bps in fees and expenses. The ETF lost about 5.7% in the last five trading sessions and 5.3% so far this year. The fund has a Zacks ETF Rank #3. DOW ETFs SPDR Dow Jones Industrial Average ETF (NYSEARCA: DIA ) DIA seeks to match the performance of the Dow Jones Industrial Average Index. The index is price weighted and measures the performance of 30 large cap stocks traded in the U.S. markets. Industrials, Financials, IT, Consumer Discretionary and Health Care all hold double-digit exposure in the fund. However, it is subject to company-specific concentration risks as it invests more than half of its portfolio in the top 10 holdings. This $11.1 billion-fund trades in large volumes of over 5 million shares daily and charges 17 bps in fees. It has lost over 8% so far this year and 6.1% in the last five trading sessions (as of August 26, 2015). The fund has a Zacks ETF Rank #3 with a Medium risk outlook. iShares Dow Jones U.S. ETF (NYSEARCA: IYY ) This $935 million-ETF also tracks the Dow Jones U.S. total market index. This fund has a proportionate exposure in almost all sectors with maximum emphasis on IT (19.0%), Financials (18.1%), Health Care (14.8%), Consumer Discretionary (13.4%), and Industrials (11.0%). Unlike DIA, this 1,255 stocks – fund invests less than 15% share in the top 10 holdings. Probably this is why the fund lost less than DIA. IYY charges 20 basis points as fees and shed 5.9% in the last five trading sessions and over 5.3% so far this year. Outlook Overall, the market may be a little uncertain, but such a sharp sell-off will open up the doors for future gains in the U.S. All four products went into an oversold territory indicating a turnaround. Moreover, latest rate cuts by China should also provide some boost to these equity indices. However, investors should also not that the current prices of the aforementioned ETFs are below their short- and long-term moving averages hinting at further bearishness. So, edgy investors might stay on the sidelines as of now and especially exercise caution when it comes to the Dow ETFs as this spectrum appears more volatile than the S&P 500. Original Post

Have The Robots Broken The Stock Market?

As more and more economic data comes out, it is becoming clear that China really isn’t having much of an impact on the US economy. Today’s initial jobless claims is about as real-time as it gets, and they’re near all-time lows. So now, Monday’s flash crash is becoming an even hotter topic. Here’s my experience, and why more human involvement might not be such a bad thing. The markets were sloppy last week, and we went out on a bad note. Sentiment was very negative. And when Chinese stocks continued to crash on Sunday, it looked like we might be on the verge of something nasty. Uncertainty was everywhere. And then the robots took control. I watched the futures market almost all night on Sunday, and we were seeing 100-point moves in the Dow Futures contract within a few minutes. This was not human controlled. And it was not rational. I reached out to a friend of mine who has some experience in High Frequency Trading, and here’s what he said to me: ” I am beginning to wonder if certain algorithms don’t get confused during these liquidity events. This week’s trading looked like momo [momentum] algos chasing price which turned into a positive feedback loop on itself until the system just crashed. ” That statement resonated with me. After all, I’ve traded through the rise of the robots, and I used to specialize specifically in illiquid markets, but I don’t recall anything quite like this other than the Flash Crash of 2010. When I woke up on Monday morning and watched the market open, I’d never seen so many broken positions. There were dozens of ETFs trading at 25-50% discounts to their NAV. I was buying the Schwab U.S. Mid-Cap ETF (NYSEARCA: SCHM ) at a 25% discount. (click to enlarge) That is, I was playing market maker with my small asset management business in a broken market, because I looked at the prices and I knew for a fact, without seeing the Intraday Indicative Value of the ETF, that we were trading at irrational discounts. The robots failed to do that. Humans like myself, who have traded in these kinds of markets before, are like first responders. We run into the fire when everyone else is running away from it. Had there been more human market-making involvement that morning, I doubt this price discrepancy would have even occurred. I am certainly not against the rise of the robots and the technological progress we’re making, but some of the developments of the last few years do make me wonder if we’re relying a bit too much on the robots at times… Disclosure: My firm is net long SCHM (and has been for a long time) in many accounts. P.S. – I should add that this does not add credence to some of the commentary that ETFs are illiquid or inefficient products. In fact, ETFs traded precisely how we should have expected them to. And when some underlying positions didn’t open, many irrational sellers sold into the panic. This was not a product error. This was a human error. I wasn’t the only one who recognized this error in real-time.