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Inside The Crash In China ETFs

China was hot and soaring among all stock markets across the globe for the most of this year thanks to rounds of ultra-easing policies. In fact, China was leading the global markets, attaining the best performing country spot for the first half. But the incredible run was washed away over the past few weeks as concerns brew over the longevity of the stimulus-driven rally and the real health of the economy. Further, worries over lofty valuations raised a panic alarm among investors after a one-year stupendous rally. What Let the Dragon Out Several factors led to horrendous trading in China. First, more than 40% of the mainland China companies halted trading in their shares, locking in up $2.6 trillion worth of shares. This is touted to be the largest wave of trading halts in the history of the Chinese equity market. Additionally, the world’s second largest economy is faltering with slower growth in six years, credit crunch, a property market slump, weak domestic demand, lower industrial production, and lower factory output. Corporate profits are also lower than a year ago. Further, a slew of recent measures including fresh interest-rate cuts, stock purchases by state-directed funds, looser margin-financing rules, central bank pledge of liquidity support, and suspension of new listings are not helping in any way to boost investors’ confidence. Lastly, deepening Greece crisis and Grexit fears shook investors across the globe, a creating risk-off trading environment. The combination of factors led to a dragonish sell-off in the Chinese market. The Shanghai Composite Index plunged over 8% in today’s session, extending its steepest three-week decline since 1992. With this, the index tumbled 32% since its peak in June 12 and wiped out more than $3.5 trillion in market capitalization. On the other hand, Hong Kong’s Hang Seng Index plunged as much as 8.6% on the day, making the biggest drop since November 2008. ETF Impact Quite expectedly, the terrible trading has been felt in the Chinese ETF world too. Funds in this space also saw big losses over the past one month, putting an end to their winning streaks, and landing them in the bear territory. China ETFs Performance Market Vectors China SME-ChiNext ETF (NYSEARCA: CNXT ) -43.54% db X-trackers Harvest CSI 500 China-A Shares Small Cap Fund (NYSEARCA: ASHS ) -43.49% iShares MSCI China Small-Cap ETF (NYSEARCA: ECNS ) -29.14% Guggenheim China Small Cap ETF (NYSEARCA: HAO ) -25.24% First Trust China AlphaDEX Fund (NYSEARCA: FCA ) -17.27% SPDR S&P China ETF (NYSEARCA: GXC ) -16.38% iShares FTSE China ETF (NASDAQ: FCHI ) -16.14% iShares MSCI China Index Fund (NYSEARCA: MCHI ) -15.57% iShares China Large-Cap ETF (NYSEARCA: FXI ) -15.08% PowerShares Golden Dragon China Portfolio (NYSEARCA: PGJ ) -13.92% From the above table, it should be noted that steep declines were widespread among the Chinese ETFs. Interestingly, A-shares ETFs have been the worst performers of the Chinese rout, followed by small caps. Large-cap focused funds and the broad market funds too saw double-digit declines over the past four weeks. Further, ETFs targeting specific sectors like Global X China Industrials ETF (NYSEARCA: CHII ), Global X China Materials ETF (NYSEARCA: CHIM ), Guggenheim China Technology ETF (NYSEARCA: CQQQ ), Global X China Financials ETF (NYSEARCA: CHIX ) and Global X China Consumer ETF (NYSEARCA: CHIQ ) also bore the brunt, declining 27.46%, 25.26%, 21.25%, 16.32% and 13.71% respectively. What Lies Ahead? Given the steep decline in all the corners of Chinese space and huge numbers of trading halts, fears are largely building up in the space. Morgan Stanley ‘s head analyst of emerging markets and global macro economy views this as the biggest bubble in the last 20-30 years, while others are anticipating that China’s market turmoil might be a bigger issue than the Greece crisis. It is not only destabilizing the economy but could also have ripple effects in the global markets if it continues for long. However, the stepped-up measures taken by the government lately will soon start to pay off providing a boost to the stocks. In addition, easy cheap money flows in contrast to tightening policy in the U.S. will allow Chinese ETFs to resume their impressive ascent. Further, continued selling has made the Chinese stocks inexpensive at current levels. This is especially true given the Shanghai Composite Index and Hang Seng Index have a P/E ratio of 18.91 and 9.7, respectively, compared to 21.3 for the S&P 500 index. So investors should wait until the Chinese market bottoms out and then cash in on the opportunity of the beaten down prices with any of the above-mentioned ETFs having a favorable Zacks Rank of 2 (Buy) or 3 (Hold). Original Post

Don’t Sell Your XLF

Yesterday a very bearish piece was published on XLF. But I think the author’s arguments are factually incorrect. XLF should perform well as rates normalize. Yesterday, fellow SA author James Stefurak published a piece on the F inancial Select Sector SPDR ETF (NYSEARCA: XLF ), explaining that now is the time to sell given that he sees 20%+ downside for the ETF. A variety of reasons are given for this bearishness but given that I steadfastly disagree with both the reasoning and final conclusion of the piece, please accept this article as my humble and well-intentioned rebuttal. The first point given for why XLF is doomed is concentration. Like most ETFs, XLF has a few key names that make up a significant proportion of the fund. This is normal and even if it wasn’t, the top three names only make up 25% of the fund. The author says if “something goes awry” with one of the top holdings the XLF will tank. That is, of course, true but that’s true of the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) as well or any other fund. I’m not sure what qualifies as “something going awry” but the author seems to imply that would mean a total liquidation of the holding. Not sure about you but playing for JPMorgan (NYSE: JPM ) or Wells Fargo (NYSE: WFC ) to go out of business and sink the XLF is probably not the highest probability trade I’ve heard of. The XLF isn’t really all that concentrated and besides, concentration is not a reason to sell by itself. If that were the case then all exchange-traded products would be off limits. Next up is the housing recovery and here, I see some efficacy in the arguments made. It is true the housing market is having a tough time producing sales due to a lack of inventory and high prices. This will crimp earnings for the big mortgage players going forward so the author is right about that. Where we differ is in whether or not this information is priced in. The author seems to think the market doesn’t yet know about this information but this has been going on for a year or more now; the market is well aware that mortgage originations are weak. He also draws comparisons to the financial crisis but these are quite short-sighted because the banking landscape is a completely different world than it was in 2008. Capital levels and controls are infinitely stronger and more robust and with regulators watching every move large banks make, the idea of another 2008 style meltdown is pretty far-fetched. Derivative exposure is the next reason to sell I’ll touch on here. This is one that bears have been pointing to forever as a reason that the world is going to explode. Yes, the dollar values are huge in the derivative market but that doesn’t mean that banks are on the hook for a quadrillion dollars in losses if the world economy sneezes. This “reason” for a selloff is ridiculous and has been touted for years to no avail. The derivative market is not a reason to sell because derivatives to a large degree are hedging instruments. There is no possible scenario where they all come due at once which is what bears continuously tout as the reason the stock market will collapse. It’s beyond the realm of possibility and should be ignored. Finally, the author claims that many financials are actually negatively correlated to interest rates and quotes this as yet another reason to sell. I was dumbfounded when I read this because regardless of whatever evidence may be presented, the market is telling you otherwise and that is all that matters. You don’t have to take my word for it; here are just three examples of where the financials rallied this year as rates moved up ( here , here and here ). It is important to note that this is not my opinion; this is hard evidence that the market likes when rates move up for financials. Presenting anything besides this isn’t intellectually honest. On the valuation piece, the author makes assumptions that I find entirely too bearish without presenting any basis for how the numbers were chosen. This removes the efficacy of the price target because the extreme bearishness has no basis presented. To quote the author: “We have a 12-month price target for XLF at $19.75 which represents an approximate 20% discount to current share price. This downside is conservative. We modeled various assumptions including equity market selloffs (12% U.S. equity market selloff), interest rate rises (the 3-month LIBOR at 35 basis points, the 30-year fixed mortgages of 4.50%, the U.S 10-year Treasury above 3%) and U.S. unemployment rate moving higher (to 5.8%, U-6 rate up to 11.3%) and a bottoming of the delinquency rate on Commercial Real Estate (FRED’s ‘DRCR’).” Based on what? A 12% selloff in equities would produce a sizable selloff in XLF but that’s true of any stock fund; that is not a reason to sell XLF specifically. Rates rising would be a positive, not a negative, as I already outlined. And unemployment is moving up towards 5.8%? Again, based on what? The Federal Reserve is projecting 5% out to at least 2017 so no offense to the author, but I’ll stick with that. Wrapping up, I see very little reason to sell XLF based upon the forecasts of the author’s piece. The evidence presented largely lacks substance in my view and in particular, the section on valuation. If equities in general sell off, of course XLF will go down. But other than that, forecasts for economic doom and gloom are not a reason to sell XLF. Before you run out and dump your XLF – which I think will perform very well as rates rise – please make sure you look at both sides of the argument. 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: I am long several names in the XLF but not long the fund itself.

Greece’s ‘No’ Vote Means Little To These Funds

Some experts have argued that it is more about Greece’s crisis than being a Greek crisis, as it had been 5 years back. Yes, the financial world is now interconnected and no investor prefers uncertainty. The crisis will obviously impact Greece, but this time it is assessed to have limited or momentary impact on other key markets, some believe. Nonetheless, risk-averse investors may not be convinced by those beliefs. True, there are certain contradictory opinions as well. More importantly, the contradictory view has more to do with the impact on the US. According to some, uncertainty may compel the US Fed to withhold from raising rates perhaps in September. Also, the dollar may trend north. However, there are also others who cite that the US economy has limited direct exposure to the US. On that note, to make safe investments on the international zone, India and Japan may emerge as the right destinations. While funds have not enjoyed a very positive run in the first half of 2015, the Japan Stock fund category led the gains and was joined by 10 other foreign fund categories in the top 15 gainers. India had been a strong performer last year. Though the gains are not at par this year, the country has officially stated that it is “well insulated” from the Greece crisis. Before we pick the potential mutual funds from Japan and India, let’s look at Greece’s latest developments. An Overwhelming “No” On Sunday, 61% of Greece citizens voted against adopting further austerity measures offered by lenders. This poses serious questions about the economic future of the nation and whether it will continue to use the Euro. On the other hand, lenders will also have to ponder about their next move, which may have serious implications for the common currency bloc. This is in keeping with Prime Minister Tsipras’ recent statement and the position of his left-wing Syriza party. Time and again, Tsipras’ government has presented their own terms for an agreement and multiple negotiations have failed to break the deadlock. The Prime Minister has said that he would continue negotiations, backed by a fresh mandate. It is likely that he will continue to push for softer austerity measures and a renegotiation of existing terms. What Lenders May Do Leaders from the Eurozone have indicated that the immediate resumption of talks is unlikely. Now, Germany and France have asked Greece to offer serious proposals to hold fresh financial aid talks. Lenders now have to consider whether they will take extreme positions or agree to a compromise. German Chancellor Angela Merkel and French President Francois Hollande want Greece to be quick to secure a cash-for-reform deal with creditors; thereby avoiding Grexit. Say Yes to These Funds Shockwaves of the Greece vote may be felt in domestic markets and also across the world. However, foreign diversification is an important consideration for any investor. Both the Indian and Japanese stock markets did trend south following Greece’s ‘No’ vote, but they are expected to see limited effect. Japan: Keep Calm and Carry On Japan Finance Minister Taro Aso has said that Japan is prepared to respond to market developments related to the Greece crisis. Previously, he had said that declines in Japanese stocks were less likely to spread and the yen would not spike. Also, there will not be much impact even if Greece defaulted but chose to stay in the Eurozone. Reportedly, Bank of Japan officials said that the market reactions did not require emergency liquidity injection. However, the BOJ is ready to mobilize short-term funds in emergency market operations if the crisis deepens. Japan is said to have little direct connection with Greece. A Nomura economist explains that exports to and imports from Greece each are just 0.1% of Japan’s respective totals. Also, Japan’s financial institutions have just 37 billion yen worth of exposure to Greek debt, the loss of which will be easily offset by annual profits. Separately, Japan economy has enjoyed a handful of positive economic indicators this year. The Bank of Japan had noted that Japan’s economy is in a “moderate recovery trend”. The country’s benchmark Nikkei index has also soared to multi-year highs. The Rydex Japan 2x Strategy Fund (MUTF: RYJHX ) seeks to give returns that correspond to two times the performance of the fair value of the Nikkei 225 Stock Average. RYJHX invests in common stocks having market capital within the range of those listed in the index. Rydex Japan 2x Strategy H currently carries a Zacks Mutual Fund Rank #2 (Buy) . RYJHX boasts year-to-date and 1-year return of 29% and 16.5%. The 3 and 5 year annualized returns are 24% and 14.6%. The annual expense ratio of 1.54% is lower than the category average of 2.05%. There are no sales loads. The Matthews Japan Fund (MUTF: MJFOX ) invests most of its assets in preferred and common stocks of firms located in Japan. MJFOX may invest in companies of all sizes, but the adviser expects them to be mid to large-cap firms. Matthews Japan Investor currently carries a Zacks Mutual Fund Rank #1 (Strong Buy) . MJFOX boasts year-to-date and 1-year return of 23.6% and 16.1%. The 3 and 5 year annualized returns are 19.1% and 14.9%. The annual expense ratio of 1.03% is lower than the category average of 1.47%. There are no sales loads. India: “Well Insulated” from Greece Crisis Meanwhile, another potential investment destination should be India. India’s chief economic advisor Arvind Subramanian said: “This is a drama which is going to play out for some time. We are well protected in at least three ways: Our macro-economic situation is more stable. We have (forex) reserves. We are an economy which is still an attractive investment destination”. The minor direct linkage with Greece will let India escape with little impact. The only impact may be momentary. What may happen is growing risk aversion toward emerging markets may curtail some fund flow to the Indian market for the short term. However, it remains a market with low exposure and instead, Indian equities or funds will now provide a good buying opportunity. The Matthews India Fund (MUTF: MINDX ) seeks long-term capital growth. MINDX invests majority of its assets in stocks and convertible securities of firms based in India. Though MINDX invests in companies of all sizes, the adviser expects MINDX to invest in mid to large-cap companies. Matthews India Investor currently holds a Zacks Mutual Fund Rank #1. MINDX boasts year-to-date and 1-year return of 7.6% and 25.8%. The 3 and 5 year annualized returns are 24% and 10.7%. The annual expense ratio of 1.12% is lower than the category average of 1.76%. There are no sales load. The Eaton Vance Greater India Fund (MUTF: ETGIX ) seeks long term capital growth. ETGIX invests most of its assets in Indian equities and companies surrounding India. A minimum 50% of its assets are parked in Indian companies. ETGIX invests a maximum 5% of its assets in companies situated in countries other than India, Pakistan or Sri Lanka. Eaton Vance Greater India A currently holds a Zacks Mutual Fund Rank #1. ETGIX boasts year-to-date and 1-year return of 6.4% and 14.5%. The 3 and 5 year annualized returns are 16.2% and 4.8%. The annual expense ratio of 1.88% is however higher than the category average of 1.76%. ETGIX carries a front end sales load of 5.75%. Link to the original article on Zacks.com