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Grexit Or Not, Buy These 3 European ETFs

The Greece predicament was at its worst last weekend, leading many to believe that its debt drama has climaxed. As the deal talk collapsed, prime minister Alexis Tsipras was forced to close the country’s banks for this entire week and impose capital controls. Daily withdrawals from automated teller machines was limited at 60 euros in an all-out attempt to prevent catastrophe. The breakdown has put Greece on the brink of a default, as the $1.8-billion payment to the International Monetary Fund (IMF) that was scheduled for June 30 will finally not be made. The fate of Greece’s eurozone membership now depends on Tsipras and his last-ditch efforts. A New Twist in the Greek Crisis The crisis took a dramatic turn when Tsipras called a snap referendum on July 5, wherein Greek citizens will have to vote for or against the terms of a bailout deal proposed by the country’s creditors – IMF, European Union and the European Central Bank (ECB). The prime minister called the referendum because the creditors are demanding tough economic policies, such as drastic tax hikes and sharp cuts to government spending, including pension cuts, in exchange for rescue funds. The government found the deal “humiliating”, and is urging all Greek citizens to vote against the proposal in the referendum so that it could open the doors for desirable bailout negotiations. Tens of thousands of protesters are out on the streets to back the government’s rejection of a tough international bailout. The latest news from the Greek front is that its finance minister Yanis Varoufakis has ruled out any possibility of paying an IMF installment, while Tsipras is trying again to work out a last-minute deal with the creditors. Even if Tsipras’ efforts in the eleventh-hour fail and Greece is compelled to exit eurozone, there would actually be not much to panic about. This is because the European financial system now has much less exposure to the cash-strapped Greece than it had in 2011 and 2012. Grexit concerns sent the Greek stock market into a free-fall territory on Monday’s trading session. The Global X FTSE Greece 20 ETF (NYSEARCA: GREK ), the only ETF targeting the Greek stock markets, fell 19.4% on a single trading day. The contagion has also spread worldwide. While Asia and the U.S. felt a ripple effect, the European stocks were the hardest hit (see: all the European ETFs here ). The blue-chip Euro STOXX 50 Index dropped as much as 5% on the day, representing the biggest one-day drop since 2011, led by countries having high debt and austerity policies. Investors could wait on the sidelines until the crisis drags the stocks. And when the cloud clears, the beaten-down prices might point to solid buying opportunities for many stocks and ETFs, irrespective of Greece’s withdrawal from or place in the eurozone. Further, the ECB is still pumping billions of dollars into the economy. And if this continues, the stocks might get a huge boost in the coming months. We can’t foretell whether Greece will win this debt battle like its heroic ancestors in the nick of time, but we do predict three European ETFs as having huge upside potential at the end of this drama. These funds have a top Zacks ETF Rank of 2 or a “Buy” rating, suggesting their outperformance over the coming months: First Trust Eurozone AlphaDEX ETF (NASDAQ: FEUZ ) This fund provides exposure to the eurozone stocks by tracking the NASDAQ AlphaDEX Eurozone Index, and employs an AlphaDEX methodology. It ranks stocks in the space by various growth and value factors, eliminating the bottom-ranked 25% of the stocks. This approach results in a basket of 150 stocks that are widely spread out across various components, with none holding more than 1.37% of assets. The fund is also spread out across sectors, with consumer discretionary, industrials, financials, utilities and materials taking the top five spots with double-digit exposure each. In terms of country allocations, Germany and France are leading with 23.3% and 22% share, respectively, followed by Italy (11.2%) and Spain (10.3%). FEUZ is unpopular and less liquid in the broad European space, with AUM of $15.3 million and average daily volume of around 141,000 shares. The expense ratio came in at 0.80%. The fund was down 3.1% in Monday’s trading session. iShares MSCI Italy Capped ETF (NYSEARCA: EWI ) This ETF tracks the MSCI Italy 25-50 index holding 26 Italian firms in its basket. It is heavily concentrated on the top two firms, Eni and Intesa Sanpaolo, with a combined 23.5% share, while other securities hold less than 8% of the total assets. Further, about 40% of the fund’s portfolio is allotted to financials from a sector look, while energy, utilities, industrials and consumer discretionary round off the top five with double-digit exposure each. The fund has amassed $1.1 billion in its asset base, and trades in heavy volume of more than 7.5 million shares a day, on average. It charges 48 bps in annual fees and lost 5.6% on Monday trading, making it attractively valued at the current levels. iShares MSCI Germany ETF (NYSEARCA: EWG ) This fund targets the German equity market and tracks the MSCI Germany Index. It is by far the largest and most popular German ETF, with AUM of over $7.5 billion and average daily volume of 5.5 million shares. The fund has an expense ratio of 0.48%. Holding 55 stocks in its basket, EWG is skewed toward the top firm – Bayer ( OTCPK:BAYZF ) – at 10%, while other firms hold no more than 7.58% of the assets. From a sector look, industrial takes the top spot at 22%, while financials, healthcare, materials and industrials make for double-digit allocation each. The ETF lost about 4% on the day. Original Post

Expense Ratios Matter: Why The iShares Russell 3000 Index ETF Underperforms

Summary IWV has delivered very similar returns to those of VTI and SCHB in previous periods. The holdings are fairly similar throughout the ETFs, except IWV offers a higher expense ratio. Over the long term, it will be difficult for IWV to beat VTI or SCHB due to the slightly higher expense ratios. The iShares Russell 3000 Index ETF (NYSEARCA: IWV ) is a great barometer for the performance of the U.S. market. The fund offers investors excellent diversification and should be a solid long-term investment. There is only one problem with IWV; it has been surpassed by Vanguard and Charles Schwab offering extremely similar funds with lower expense ratios. That’s too bad for IWV, since the ETF’s expense ratio of .20% is still much better than the average. Looking at returns since the Schwab U.S. Broad Market ETF (NYSEARCA: SCHB ) was introduced and reinvesting all dividends, IWV has struggled to keep up. The Schwab U.S. Broad Market ETF and the Vanguard Total Stock Market ETF (NYSEARCA: VTI ) have steadily outperformed by a small amount. Over about five and a half years, IWV is up 120%, but SCHB is up 122.5% and VTI is up 123%. I put together a chart comparing the expense ratios of the ETFs. Even though .20% isn’t high for an ETF, it is high compared to the best options in the space. The .15% per year would be .825% over the span of 5 years. Unfortunately, IWV has trailed by more than the expense ratio. However, it has explained a significant portion of the difference in these extremely similar ETFs. The following chart turns the total returns into a CAGR (compound annual growth rate), which makes it easier to compare the difference in returns on an annual basis with the annual expense ratios. IWV was underperforming SCHB by about .22% annually and VTI by .27% annually. When you consider a difference in expense ratios of about .15%, it is more than half of the difference. They can’t deviate too far The returns of the Vanguard Total Stock Market ETF, the Schwab U.S. Broad Market ETF, and the iShares Russell 3000 Index ETF are going to be highly correlated for the foreseeable future, because the ETFs have very similar portfolios. Since the underlying securities are very similar, the ETFs should remain very similar, except for the long-term drag caused by the expense ratio. Holdings The charts below show the top 10 holdings for each ETF. (click to enlarge) (click to enlarge) (click to enlarge) When you look at the holdings, there is a lot of similarity between IWV and SCHB. VTI has more differences in the portfolio, but the holdings are still extremely similar. All three have the same top ten companies and when they are in different orders the difference in the allocations is still extremely small. Will IWV go up? I would certainly expect IWV to increase in value over the years. The correlation is going to be phenomenally high with ETF’s like VTI that I have selected as core holdings for my portfolio. However, if I had the option to short IWV with no maintenance costs on the position outside any dividends and could put the cash from the short into VTI or SCHB, I would happily make the trade and leverage it in an attempt to benefit from the difference in expense ratios. If your brokerage only allowed investing in ETFs and neither VTI nor SCHB was available, IWV would be a viable option. However, if I were in a situation like that, I’d be looking for any way to change the brokerage. The strangest conclusion I’ve found myself writing I expect IWV to see substantial growth over the years as a diversified investment in the U.S. economy, but I also expect it to consistently underperform SCHB and VTI. For purposes of tagging my expectations for positive returns compared to cash, I’d have to put down a “buy” rating. However, under all conceivable circumstances, I would rather buy SCHB or VTI. If markets were really efficient and there were no costs on trading (frictionless markets), I’d be shorting IWV to go long SCHB and expecting the position to be market-neutral (beta of 0) and to produce alpha around .15-.16% per year based on the total dollar value of the positions. 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.

Feeling Unfulfilled By The Volatility Tease?

Summary Futures touched backwardation a couple times this week. Investors should realize their risk/reward before jumping head first into the shallow end of the pool. Markets appear to be normalizing mid-week. Feeling unfulfilled by the volatility tease? You’re not alone. Monday was the big headline this week with the market going gaga for Greece. By mid-week volatility ETPs had given up some of their gains but remained elevated. In this ultra-low volatility environment investors forget that the historical mean for the VIX is around 17. By simply reverting to the mean, the ProShares Ultra VIX Short-Term Futures ETF (NYSEARCA: UVXY ) managed to gain an impressive 40%+ at its peak on Tuesday. However, the pundits were out on Monday already saying to short volatility. I would just question the insight behind such as suggestion. Had you waited until Tuesday, you would have had a better opportunity. These types of one day scenarios are really a volatility trader’s best friend. The markets knew this was coming and still overacted. Economic data out of the U.S. continues to be good and if you have followed my past articles, I have always recommended looking to economics to guide your VIX trading. I continue to seek events that cause over 5-10% backwardation as the optimal risk vs. reward scenario. With that being said I did sell a couple UVXY calls on Tuesday. However, I really wanted this to turn into something more but it appears the market has other plans. Every tick the market took higher really just made me more angry. Can we please just get a good freak out already? In this article I will review the basics of UVXY and go over what I am watching for during the next few months. UVXY (click to enlarge) VIX futures did dip into slight backwardation during the week. (click to enlarge) If you are unfamiliar with volatility products, UVXY will gain premium when futures are in backwardation similar to how the ProShares Short VIX Short-Term Futures ETF (NYSEARCA: SVXY ) benefits from contango. For more information on these two terms, click here . UVXY invests in front and second month VIX futures contracts and will rise when futures rise. Ultimately it will lose value over time, which is why my strategy is to wait for a spike and then enter into short positions through options. It had been just shy of five months since backwardation presented itself. Outlook What this spike in volatility should have showed volatility investors is that market complacency is beginning to wear off. Monday was nothing more than a trigger happy reaction to news that had already been expected to happen. Given the positive economic data, I fully expect liftoff of rates in the September Fed meeting. Any slowdown in growth that coincides with rising rates could trigger another knee jerk reaction from the market. Even though we are in the expansion phase of the business cycle, in my opinion this market will tread water and possibly move slightly higher. If you look at the S&P action this year gains have been minimal and so has volatility. This has been despite record margin debt and record share buybacks from companies. Even more concerning to me is that some of these buybacks are built on margin! Companies will eventually have to repay that debt. What will be left to support earnings growth? Earnings growth is the bedrock of stock market appreciation. We will see an increase in EPS from buybacks but the higher stock prices go, the less effective buybacks become. It has been very quiet on the political front for a long time. Certainly there are angry countries out there preparing to go to war or not pay their debts? Although these things are poor for humanity they make for good volatility investment opportunities. Conclusion It was refreshing to finally have a down day in the market and see UVXY spike. However, traders should not instantly jump on these types of scenarios but rather let it play out a little to make sure you are making the right decision. I am looking forward to a much more volatile end of the year. October is the best month for volatility when looking at seasonality. You have the Feds on deck in September. Too bad the government isn’t shutting down this year. That sure was fun and profitable. Eventually the market will have several tragedies coincide with one another and it will make for a more profitable opportunity to short volatility. Those that entered trades this week, best of luck and remember to manage your risk. I am still at 80% in cash just waiting for a better opportunity in the VIX futures market. My retirement portfolio is performing well with my Citi (NYSE: C ) recommendation but suffered from my Micron (NASDAQ: MU ) purchase before earnings. I was able to cut losses after earnings but my performance for the year resembles that of the S&P 500. Sometimes you just need to be able to look back and realize you made mistakes and move on. Going all in on a little spike in volatility may be profitable a couple times but it will eventually come to bite you. Patience is key, especially in this market environment. I understand that you have to take what you can get, but always remember that capital preservation is your number one priority. Best of luck to you in the coming months! I look forward to getting back to volatility analysis. For free real time updates you can follow me here on Seeking Alpha and on Twitter. Often times during these events I only have time to write an Instablog, due to editing times. If you aren’t a real time follower it will not notify you of Instablog posts. Disclosure: I am/we are short UVXY. (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: Only a couple calls short on UVXY