Passive Index Funds Pushed To Be More Active Voice For ESG

Until recently, socially responsible investing has been a backwater in the investing world. But investors — particularly activist groups — now demand more environmental, social and governance (ESG) responsibility from corporations.=

According to a survey by Brown Brothers Harriman and ETF.com, 51% of investors say ESG carries some level of importance, up 14 percentage points from last year. There are 169 ESG mutual funds and 56 ESG ETFs, according to Morningstar.

“It’s definitely being driven by investor feedback or the appearance that you want to be ahead of the game on this,” said Scott Sacknoff, chief executive of SerenityShares, which manages the ESG-focused SerenityShares Impact ETF (ICAN). ICAN, which launched in April, has $4 million in assets and an expense ratio of 0.5%.

ESG’s increasing popularity has raised questions about whether stock and bond index fund managers could and should be doing more to use proxy votes to steer companies in the indexes toward higher ESG standards.

Morningstar recently published a paper examining the issue, “Passive Fund Providers Take an Active Approach to Investment Stewardship.”

The paper found that while European managers have been active for years through the two stewardship tools of engagement with corporate management and proxy voting, index managers in the U.S. and Japan have only recently begun this process.

Of the five U.S. fund managers surveyed, BlackRock, Vanguard, State Street Global Advisors, and Fidelity Investments said they were increasing their engagement efforts, despite the costs. Only Charles Schwab (SCHW) said it would not.

“While we don’t meet with individual companies, we do engage with issuers in a systematic way through our proxy voting,” a Schwab spokeswoman told IBD. “We have yet to see evidence that with a portfolio as large as ours (by number of companies), direct engagement would provide measurable improvements for shareholders.”

The Morningstar paper addresses the main issue: “It may be tempting to assume that (since) index managers are passive owners (they) have little incentive to devote resources to monitoring companies; after all, they tend to compete on fees and their primary objective is to match the performance of indexes.”

Another issue is that since index managers have no choice in the stocks they hold, why should they care what the companies do?

“That’s why we say they have a duty to influence these companies to promote better ESG policies,” said Hortense Bioy, Morningstar’s director of passive fund research in Europe and the report’s co-author. “Because they are stuck with these companies. They are long-term investors, and they own everyone in the market. So they have a unique responsibility to change these companies for the better. That is the whole argument. As opposed to active managers, who if they disagree with the way a company is run, they could just divest it and not care, and only invest in the ones they believe will outperform the market.”

While for the most part, index managers vote with corporate management, sometimes their huge shareholdings can result in visible change. In 2016, a shareholder proposal asking ExxonMobil to be transparent and disclose its risk to climate change wasn’t backed by BlackRock. Instead, BlackRock held private discussions with the oil company’s management asking for the same thing as the activists. But it saw no results, so in 2017, when shareholders put forth the same proposal, BlackRock publicly voted for it, helping it pass.

“BlackRock believes that engagement is the best way to drive change on important environmental, social and governance issues,” said BlackRock spokesman Ed Sweeney, adding the firm has been doing this since 2011. “As a long-term investor, we are willing to be patient with companies when our engagement affirms they are working to address our concerns. However, our patience is not infinite — when we do not see progress despite ongoing engagement, or companies are insufficiently responsive, we will vote against management. We view a vote against management as a sign of a failed engagement, not as the start of the process.”

While large asset managers are favorite targets of activist groups, their pressure doesn’t always bear fruit. In November, an activist shareholder group proposed that Vanguard Group divest itself of PetroChina and Sinopec Shanghai, two Chinese energy firms doing business in Sudan. The group accused the companies of genocide. Vanguard recommended its shareholders vote against the proposal. The proposal failed.

But what about returns?

“ESG started not to improve the world, it was started by big banks to get a handle on risk,” said Janet Brown, president of FundX, a San Francisco RIA, and manager of the FundX Sustainable Impact Fund.

“Research shows higher ESG scores lead to more efficient, better earning companies,” Brown said.  “About 2,000 academic studies show a positive correlation between higher ESG and positive returns.” She was citing a study in the Journal of Sustainable Finance & Investment published in 2015.

It’s not just academic studies. A 2017 survey by State Street found that more than 68% of institutional investors reported that integrating ESG into their process had “significantly improved their returns.”

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ETFs That Track Gold Having A Better Year Than The Stock Market

fter a midsummer rally, gold is now having a better year than the S&P 500 index. And that’s good timing for some new gold ETFs that launched this year.

SPDR Gold Shares (GLD), the largest and oldest ETF in the world which tracks the price of gold, has surged more than 10% since July 7 for a year-to-date return of 16.9% through Sept. 7, according to Morningstar Direct. Meanwhile, SPDR S&P 500 (SPY), which tracks the stock market benchmark, is up 11.5% this year. IShares Gold Trust (IAU), GLD’s main competitor, is also up nearly 17%.

The main reason for the rally is the falling U.S. dollar, which has dropped nearly 10% this year. Some blame comments from President Trump, who said in April that the dollar was “getting too strong.”

But others think it has more to do with interest rates.

“Real interest rates started to go negative and that hurts the dollar. Both the five-year and the two-year (Treasury notes) are now negative,” said Frank Holmes, CEO and Chief Investment Officer of U.S. Global Investors, which launched U.S. Global Go Gold & Precious Metal Miners (GOAU) in June. “When the dollar falls, gold goes up.”

GOAU holds companies engaged in the production of precious metals either through mining or production and specialized financial firms called royalty companies. These royalty companies provide capital to fund exploration and production projects, and in return, receive a stream of royalties. GOAU is up 14% since its launch. It carries an expense ratio of 0.60%.

GraniteShares Gold Trust (BAR) also launched this year, on Aug. 31. Just like GLD and IAU, it holds actual gold bars to track the price of gold. Founded by Will Rhind, who managed GLD for 2-1/2 years before starting GraniteShares, BAR’s big selling point is it’s the lowest-cost gold ETF. It charges an expense ratio of 0.20%, vs. 0.40% for GLD and 0.25% for IAU.

“When you own gold as a hedge, you want the lowest-cost hedge,” said Rhind.

People flock to gold as a hedge when there’s uncertainty in the market. And there had been a lot of uncertainty lately, including deadlines to keep the government funded and raise the debt ceiling.

The Senate on Thursday approved a bill to avert a government shutdown and raise the debt ceiling for three months, as well as $15.25 billion in hurricane relief aid. In August, the president had said he was willing to risk shutting down the government unless he obtained funding for the wall he promised to build between Mexico and the U.S.

Gold hit its all-time high of $1,900 in 2011, during the last government shutdown threat.

“Another key motivation is we’re entering crash season, September and October,” said Brandon White, gold analyst at Bullion Management Group in Toronto. “We haven’t had a (stock market) correction for a number of years. So, people think we may be due for a downturn. So, take money off the table and move it into something that does well in market downturns, and precious metals do well.”

He added that annual gold production is expected to decline 40% going into 2018.

Then there is the saber rattling between Trump and North Korea, which is testing nuclear bombs and firing missiles. Wars always make gold prices go higher and geopolitical tensions are rising between the two countries.

All this has pushed the price of gold through the technical resistance line of $1,300, to $1,349 an ounce.

“A lot of people watching gold have been waiting for gold to challenge the $1,300-resistance line. It was tested three times last week,” said White. “When money managers consider an asset to revert to the upside from a downtrend, they will often wait for a 20% move. The resistance line was a key technical indicator that needed to be broken before sentiment turned. Now interest is back. It’s not so much a speculative trade as a defensive trade.”

And interest is definitely back.

Gold-backed ETFs saw net inflow of $1.6 billion in August, according to the World Gold Council. North American ETFs drove global inflow. GLD led inflow with $1.03 billion, or 3.2% of its assets under management, and IAU received $266 million, or $3.1% of AUM.

Emerging Market ETFs Rally in Spite of Trump Trade Threat

In the wake of Donald Trump’s election, emerging-market ETFs tumbled as investors feared that the new administration’s protectionist trade policies would hurt the countries in these markets. But then a funny thing happened. After ranking as one of the worst-performing sectors in the last quarter of 2016, emerging- market ETFs began the new year with a rally and are outperforming U.S. stocks.

So far this year, Vanguard FTSE Emerging Markets ETF (VWO) has jumped 10%, iShares Core MSCI Emerging Markets ETF (IEMG) leapt 10%, and the iShares MSCI Emerging Markets ETF (EEM) climbed 10% vs. 5% for the SPDR S&P 500 (SPY).

Part of the reason is that prior to the election, 2016 had been a pretty good year for emerging markets. Because many emerging markets are tied to commodities, the prior four years had been pretty bad because of falling commodity prices and slowing growth in China. But in 2016, commodity prices began to rise and China’s economic slowdown stabilized.

A big part of the postelection drop was out of concern for the economy of Mexico should Trump attempt to renegotiate Nafta and anxiety over trade barriers with China, according to Mitch Tuchman, chief investment officer at Rebalance IRA, a retirement investment advisor, in Palo Alto, Calif.

Robert Johnson, Morningstar’s director of economic analysis, said the recent performance is a continuation of last year’s rally. He also said companies and investors have begun to think that, in the wake of Trump’s mishandling of the immigration ban, he might not be able to implement his trade policies, especially as he gets pushback from industries hurt by trade bans and tariffs.

Also, since the trade policies haven’t yet been defined and investors think most emerging markets, besides Mexico and China, won’t be affected, they’re jumping back in.

“After five years of underperformance, emerging markets were oversold, and the election flushed out the remaining people hanging on,” said Gerald Laurain, chief investment officer with FTB Advisors, an RIA in Memphis, Tenn., with $4 billion in assets under management. “So now that they’ve established a low, the only place to go isup.”

J.J. Feldman, a portfolio manager at Miracle Mile Advisors, a Los Angeles-based RIA, said the valuations are much more compelling. The price/earnings ratio on the emerging markets is 12 vs. an expensive 18 on the S&P 500. He added that emerging- market stocks are yielding 2.25% vs. the S&P’s 2%.

Peter Schiff, CEO of Euro Pacific Capital, an asset manger in Westport, Conn., has a different angle. “When there is protectionism, America is the loser,” he said. “And tariffs will backfire. People are making the connection that it will weaken the dollar. Meanwhile, the euro is bottoming out and that is better for emerging markets.”

“Europe seems to be doing better, and it’s more important to China than the U.S.,” said Johnson. “There’s better growth there, no new rules and other markets they can sell into.”

So far through this year, the top country-specific ETFs are all in emerging markets. IShares MSCI Brazil Small-Cap (EWZS) has soared 30%, VanEck Vectors Brazil Small-Cap (BRF) surged 26%, iShares Brazil Capped (EWZ) is up 18%, Global X MSCI Argentina (ARGT) up 16%, and KraneShares CSI China Internet (KWEB) up 16%.

After a brutal two-year recession in Brazil, during which President Dilma Rousseff was impeached and replaced by Michel Temer, the country is finally expected to be on the road to recovery. Finance Minister Henrique Meirelles expects the Brazilian economy to return to a 2% annual growth pace by the last quarter of the year. Wall Street is forecasting a more realistic 0.2% growth rate in 2017 gross domestic product. Brazil’s economy is driven by resources and commodities. Its top commodity exports are oil, iron ore, soybeans, sugar cane and coffee.

While China is seeing its economy slowing, with GDP expected to post growth of 6.7% for 2016, that’s the kind of slowdown most country’s would kill for. Right now China is dealing with a cooling housing market, explosive growth in debt, and painful structural reforms instituted by President Xi Jinping.

“E-commerce is going well and that is tapping into a strong part of the economy,” said Rob Lutts, president and chief investment officer of Cabot Wealth Management, an RIA, in Salem, Mass. Lutts spends a lot of time traveling in China. “Investing in Alibaba is like investing in Amazon.com.”

Lutts said that China will have a big challenge over the next five years with a big debt bubble that will have to be distributed over the rest of the economy. This will bring the economic growth rate down to 5% by 2020. “They will have stress when the real estate bubble comes down in price, and that will hurt the smaller banks in the next six months.”

But Lutts is very bullish on India. For the fiscal year ended March 2016, India’s economy grew 7.9%, and Lutts said it could go higher. Indian Prime Minister Narendra Modi is instituting reforms to remove government obstacles to business and make the government more efficient. Lutts said his favorite way to invest in India is in the financial services sector.

He thinks HDFC Bank is one of the best-managed banks in the world. It’s also the top holding of iShares MSCI India ETF (INDA), No. 3 in WisdomTree India Earnings Fund (EPI), No. 2 in iShares India 50 ETF (INDY) and No. 3 in PowerShares India Portfolio (PIN). The ETFs’ year-to-date gains range from 8.8% to 9.8%.

Overall, all the experts think that because Europe is growing and Trump’s policies are still undefined, emerging markets should keep rising throughout the year.

Orginally published in Investor’s Business Daily.

Investor cash pours into Hong Kong ETFs

All this talk about a bubble in the Chinese stock market isn’t scaring away investors from flooding the largest exchange-traded funds that track Chinese stocks with bucket loads of cash.

April saw HK$20.5 billion ($2.6 billion) flow into the Hang Seng H-Share Index Fund (SEHK STOCK CODE 2828). It was the largest monthly inflow since 2010 and the third-most among equity ETFs globally, according to data compiled by Bloomberg.

The Hang Seng H-share ETF holds the stocks of 40 of China’s biggest state-owned companies. Financials make up 67% of the portfolio. The fund is valued at about 10 times forward earnings, compared with the 17 multiple on the Shanghai Composite Index, according to Bloomberg.

The ETF’s shares rose 17% last month to HK$145.20, its third consecutive month of gains. Over the past four months, the ETF has received a total of HK$29 billion, its longest stretch since 2013. Total assets grew to HK$57.1 billion.

The U.S.-listed iShares China Large-Cap ETF (FXI) received $385 million last month, the biggest inflow in eight months. It jumped 16% in April, for a 51% return over the past 12-months.

One big reason for the rally is that Chinese companies trading in Hong Kong are priced at a significant discount to their dual-listed counterparts on the mainland. UBS said even though the Hang Seng China Enterprises Index leapt 17% in April, its largest jump since October 2011, Chinese A shares still trade at a 31% premium to Hong Kong stocks.

Investors are betting on more monetary easing in the world’s largest economy.  Since the November Shanghai-Hong Kong exchange link opened mainland stocks to foreign investors, mainland stocks have seen a flood of inflows. In addition, the People’s Bank of China has cut interest rates and reduced banks’ reserve requirement ratios twice in the past six months, sending more liquidity into the markets. Another rate cut is expected soon.

Over the past year, the Hang Seng China Enterprises benchmark soared 48% vs. the 119% surge of the Shanghai Composite Index’s A shares.

Originally published in Asia Times.

Comparing ETFs? Don’t Just Look At Expense Ratios

The rule when buying ETFs is that when all things are equal, buy the one with the lowest expense ratio. But remember that similar sounding ETFs often aren’t equal. This means don’t let the expense ratio be the only factor in choosing an ETF.

“Our belief is expenses and past performance matter, but more important is understanding what’s inside the portfolio,” said Todd Rosenbluth, S&P Capital IQ director of ETF research.

SPDR S&P 500 ETF (SPY) tracks the S&P 500 stock index and charges a tiny expense ratio of 0.09%, commonly called nine basis points. One hundred basis points make up 1 percentage point. Guggenheim S&P 500 Equal Weight ETF (RSP) also tracks the S&P 500. But it charges a fee of 0.4% of assets.

Look At The Performance

“You might ask ‘Who in their right mind would pay 40 basis points vs. 9?'” said Ron Delegge, founder of ETFguide. “But then you take a look at the 10-year return.”

RSP returned an average annual 9.42% in the past 10 years, compared with 7.85% for SPY, according to Morningstar. In fact, RSP beats SPY in all periods reported on Morningstar.com, from one month on.

The big difference between the funds is the way the indexes are weighted. SPY follows the S&P 500’s classic market-capitalization weighting, which multiplies the stock price by the number of shares outstanding to get a stock’s market value. The biggest companies get a larger weighting, comprising a greater percentage of the index than the smaller ones. Thus a $1 move in Apple (AAPL), with a 3.98% weighting, will lift or drag down the index much more than a $1 move in the shares of Diamond Offshore Drilling (DO), which has a weighting of just 0.01%.

But RSP gives every stock in the index an equal weighting of 0.2%. This means a $1 rise in Diamond Offshore’s stock moves the index just as much as a $1 increase in Apple’s shares. By giving greater weight to the smaller stocks in the index, this has a big effect on the fund’s performance. Year to date, RSP is up 2.25% vs. SPY’s 1.29%, 96 basis points more — after paying the expense ratio.

“Would I be willing to pay more for those returns?” asks Delegge. “Definitely.”

Of course, SPY could just as easily outperform RSP in periods when the market favors large-cap stocks or other factors that can be found in SPY but not RSP.

But S&P 500 trackers aren’t alone. “One example that is much maligned is PowerShares FTSE RAFI U.S. 1000 ETF (PRF), said Michael Krause, president of AltaVista Research in New York, which runs the ETF Research Center website. “I calculate that cumulative since its inception in 2006, PRF has outperformed iShares Russell 1000 ETF (IWB) by 14 percentage points.”

ETF Research Center pegs PRF’s average annual return since 2006 at 8.9% vs. 8.1% for IWB.

PRF’s expense ratio is 0.39%, while IWB charges 0.15% of assets.

Not Alone

This trend happens a lot among the industry ETFs. SPDR S&P Homebuilders ETF (XHB) and iShares U.S. Home Construction ETF (ITB) sound like they track the same industry, meaning they should post similar results. XHB charges 0.35%, while ITB charges 0.45%, so XHB seems like a better choice.

Yet only 35% of the XHB holdings are actual homebuilding companies, and 28% building products. The rest of the stocks are home furnishing producers and retailers, home improvement retailers and household appliance makers. However, homebuilding companies make up 71% of the ITB portfolio, with building products at 13%.

ITB has risen by an annual average of 25.72% in the past three years vs. 21.01% for XHB. Year to date, ITB is up 8.32% vs. XHB’s 6.74%. That more than compensates for the extra 10 basis points.

“Cheaper hasn’t been better as of late,” said Rosenbluth.

Originally published in Investor’s Business Daily.

WisdomTree Wins ETF of Year at ETF.com Awards As ProShares Walks Away With 4 Statues

It’s award time again.

Much like Spring follows Winter, although reports of more snow this weekend are leading some to question that, the ETF industry starts its period of self-congratulations on the heels of the Oscars, Grammys and Golden Globes.

ETF.com, the self-proclaimed world’s leading authority on exchange-traded funds, started the season off with their second annual awards banquet.

“Our awards try to recognize the products that make a difference to investors,” said Matt Hougan, president of ETF.com. “The ones finding new areas to put money to work.” The awards are determined by a panel of experts chosen by ETF.com.

Held at The Lighthouse restaurant at New York’s Chelsea Piers March 19, ETF.com wins the prize for best party location. With picture windows overlooking the Hudson River, guests of the cocktail hour took in the sunset over New Jersey before the ceremony started.

The WisdomTree Europe Hedged Equity (HEDJ) was the big winner, grabbing the prize for ETF of the Year, while the Market Vectors ChinaAMC China Bond (CBON) won Best New ETF. Not quite sure what the difference is between those two awards, but obviously both funds stand out from the crowd of 117 ETFs issued in 2014.

However, ProShares swept the evening, as the single provider that won the most awards. The twin funds ProShares CDS North American HY Credit (TYTE) and CDS Short North American HY Credit (WYDE) claimed the awards for both Most Innovative New ETF and Best New Fixed-Income ETF.

“We designed these ETFs for investors who want high yield credit exposure that is isolated from interest rate risk,” said Steve Cohen, ProShares managing director.

The fund was also nominated for Best Ticker of the Year with its homophones for “tight” and “wide”. However, the awards announcer had a chuckle by claiming they really were pronounced “tighty whitey”, a reference to his jockey shorts. Best Ticker was awarded to HACK, the PureFunds ISE Cyber Security ETF.

ProShares also won Best New Alternative ETF for the ProShares Morningstar Alternative Solution (ALTS) and Most Innovative ETF Issuer of the Year.

“We are always striving to deliver new and innovative products to allow investors to build better portfolios,” said ProShares Chief Executive Michael Sapir.

Lee Kranefuss, the man who created the iShares brand of ETFs and built them into the largest ETF issuer in the world won the 2014 Lifetime Achievement Award.

In the only speech of the night — thank goodness — Kranefuss said, “ETFs allow people to take control.” He likened ETFs to iTunes, saying “no longer are you limited to what the record company puts out.” He said he’s often been asked if he thought the ETF industry would take off like it has in the 15 years since iShares launched.

“Not really,” said Kranefuss, “we just put out the best products we could put out.”

The other award winners:

Best New U.S. Equity ETF – iShares Core Dividend Growth (DGRO)
Best New International/Global Equity ETF – Deutsche X-trackers Harvest MSCI All China Equity (CN)
Best New Commodity ETF – AdvisorShares Gartman Gold/Euro (GEUR) and AdvisorShares Gartman Gold/Yen (GYEN).
Best New Asset Allocation ETF – Global X /JPMorgan Efficiente (EFFE)
ETF Issuer of the Year – First Trust
New ETF Issuer of the Year – Reality Shares
Index Provider of the Year – MSCI
Index of the Year – Bloomberg Dollar Index
Best Online Broker for ETF-Focused Investors – TD Ameritrade
Best ETF Offering for RIAs – Charles Schwab
Best ETF Issuer Website – BlackRock

Emerging Market ETFs See 5 Months Of Inflow

Emerging-market exchange traded funds have seen five straight months of inflow from investors, especially into Asian markets, reversing last year’s trend, while European equity funds have seen outflow.

With the U.S. equity markets hitting all-time highs, market analysts consider Asian markets cheap in a world with few bargains. They are encouraged by recent stabilization of the Chinese economy, improving fundamentals throughout Asia, and optimism over the recent elections in India and Indonesia.

In addition, the Federal Reserve’s tapering of its quantitative easing strategy has not resulted in higher Treasury yields, which many fear would mean more expensive borrowing costs for emerging-market countries.

“There is also a lot of excitement over the Shanghai-Hong Kong Stock Connect,” said Richard Peterson, who is the managing director of MarketPsych.com, a behavioral finance consultancy based in New York.

The program is expected to start in October. Global investors will for the first time be able to trade the Shanghai A shares, which are now available only to Chinese investors via the Hong Kong stock exchange. Chinese investors will also be allowed to trade the previously unavailable Hong Kong H shares.

In August, emerging-market equity ETFs, including China funds, received inflow of $4.7 billion, according to BlackRock ETP Research. Inflow was down from the $6.3 billion posted in July, on expectations of rising U.S. interest rates, which could pull investment money out of Asian and back to the U.S. Still, over the past five months emerging-market ETFs have gathered $17.6 billion.

Vanguard Attracts Flow

Vanguard FTSE Emerging Markets ETF (ARCA:VWO), the largest emerging-market ETF tracked by research house XTF, recorded $1.7 billion in inflow over the last three months. The $49 billion VWO is up 8% this year. It has an expense ratio of 0.15% and a yield of 2.47%. The fund has 43% of its assets in emerging Asia and 21% in Latin America.

Subtracting the outflow of the first three months of the year, emerging-market equity’s net inflow of $11.6 billion as of August has surpassed the $10.4 billion of redemptions posted in 2013, said BlackRock. Last year’s net outflow came on the heels of a Chinese banking crisis, an overheated property market, fear of a hard economic landing in China, and regional currency weakness based in anticipation of rising U.S. interest rates.

IShares MSCI Emerging Market ETF (ARCA:EEM), the second largest emerging-market ETF, with $41.9 billion in assets, had net inflow of $2.01 billion the past three months, according to XTF. The fund is up 5% this year. It has an expense ratio of 0.67%.

BLDRS Emerging Markets 50 ADR (NASDAQ:ADRE) is the second best performing ETF in the emerging-market category, up 13% year to date. The fund tracks the performance of about 50 emerging-market American depositary receipts. This ETF charges an expense ratio of 0.3% and had a yield of 3.5%.

“We are seeing in Europe grave concerns about the economic rebound and a lot of political uncertainty in Latin America,” said Andrew Karolyi, faculty director of the Emerging Markets Institute at Cornell University’s Johnson Graduate School of Management. “People withdrawing capital from Europe need to deploy it somewhere, and Asia looks like the least bad option.”

For full article see Investor’s Business Daily.

Biotech ETFs Bounce Back After Three-Month Correction

Biotechnology exchange traded funds surged this week on news that drug giant Merck agreed to buy Idenix Pharmaceuticals for $3.85 billion, leading investors to believe the biotech sector has bottomed out after three months of misery.

On Monday, the big pharma drugmaker offered the tiny biotech $24.50 a share, a 239% premium to its closing price Friday, in order to acquire Idenix’s portfolio of three early-state hepatitis C drugs.

The news sparked a rally in the biotech sector and biotech ETFs. PowerShares Dynamic Biotechnology & Genome Portfolio ETF (PBE) jumped 8.4% Monday, to advance 11% for the week ending June 10. It now has about 9% of its assets in Idenix.

SPDR S&P Biotech ETF (ARCA:XBI), now with 4% in Idenix, leapt 6.8% Monday, for a 14.6% gain over the past five days. Overall, biotech sector ETFs rose an average of 5% over the past week.

Big 2013 Move, Then Pullback

Last year, the biotech sector was one of the best areas of the market, posting a bigger return than the S&P 500. But since February, the sector has undergone a significant retrenchment. First, it started out as a flight from risk in a sector many said was in bubble territory.

The timing was prescient. Over the next three months, a string of biotechs suddenly imploded. In early March, Geron, a biotech with no products, plunged 62% after U.S. regulators halted the trial of its only experimental drug.

In April, Cytokinetics’ shares lost more than 60% after its experimental treatment for Lou Gehrig’s disease failed to work better than a placebo in a clinical trial.

Then the first week of May saw three biotechs all report failures with their leading drug candidates.

“These unexpected blowups and the overall flight from risk hurt the small-cap biotech sector with valuations under $1 billion,” said Ron Garren, an oncologist and editor of BioTechInsight.com, an online biotech stock newsletter in Carmel, Calif.

“They got decimated and some lost more than half their value. Of course, some were overvalued to begin with.”

From late February to May 8, iShares Nasdaq Biotechnology ETF (NASDAQ:IBB), which tracks all the biotechs on the Nasdaq, and PBE each tumbled 18%. XBI sank 29%.

Over the past month, XBI climbed 21% for a year-to-date return of 15%. PBE is up 14% for an 18% gain this year. IBB, the biggest biotech ETF with $5.2 billion in assets, advanced 10% the last 30 days for a 10% return year-to-date.

ProShares Ultra Nasdaq Biotechnology ETF (NASDAQ:BIB) is a leveraged fund that seeks to post a daily return twice the results of the Nasdaq Biotechnology Index.

It fell 35% during the biotech correction, but gained 21% over the past month. Year to date, BIB is up 16%, but its return over the past 12 months is 82% compared with the 32% return for the average biotech ETF.

Opportunity Seen

“As the yields on dividend stocks begin to dry up, risk stocks look more attractive, and after the biotech beat down, I think these stocks are a great opportunity,” said Garren.

“There has been an incredible amount of work in immunotherapies and cancer. Also, there are big opportunities involved in fatal diseases that need therapies.”

China Stock Market: Decline Presents Opportunity

The Tiananmen Square massacre, in which Chinese troops killed hundreds of pro-democracy protesters, occurred 25 years ago last week. While the Chinese government didn’t give their people democracy, it did give them capitalism.

Just 18 months after the massacre, in December 1990, the government opened the Shanghai Stock Exchange.

Since then, China has become one of the world’s fastest-growing economies. According to the World Bank, the per capita growth of China’s gross domestic product since Tiananmen Square is 8.8% on an annualized basis.

“While the Chinese government reacted harshly to the protesters in Tiananmen, it’s made a concerted effort to increase growth and wealth over the past 25 years, which has had a huge impact on the population,” said Jonathan Brodsky, managing director of Advisory Research, a Chicago asset management firm with $11 billion under management.

“The pro-growth initiatives, which have been a powerful tool of the government to maintain stability, were accelerated in the face of Tiananmen.”

Brodsky runs Advisory Research Emerging Markets Opportunities Fund , which has more than 20% of its assets invested in China. The fund was up 9.5% this year going into Monday.

On the 25th anniversary, June 4, 2014, the Shanghai Composite Index closed at 2024, a 1,924% rise from when the market opened. However, even though China posted phenomenal growth over that period, the stock market has experienced enormous volatility on a fairly regular basis. The index is down 66% from its peak of 6092 on Oct. 16, 2007.

Sentiment Sours

Investor sentiment has soured on China for a variety of reasons. Top of the list is that China’s economy has slid from the phenomenal growth rate of 10% a year to the merely great annual rate of 7%. Part of this is related to the declines in the economies of its trading partners in the developed world.

Domestically, the country is suffering from a bubble in the real estate market, a slowdown in consumer spending and high debt levels in the Chinese banking industry. Add to that China’s shadow banking industry, which sells Chinese consumers lightly regulated, obscure investment products, and you can see significant risk to the economy.

Problems Already Discounted?

“The problems are not new and they are fully discounted, maybe more than fully discounted, creating one of the best opportunities to buy China in a decade,” said Jim Oberweis, president of Oberweis Asset Management in Chicago. The firm manages $5 billion in assets, including the Oberweis China Opportunities Fund . The fund gained 60% last year but is down 4.9% year-to-date.

Among ETFs, iShares China Large-Cap ETF (FXI), which holds 25 of the biggest Chinese stocks, currently trades at a price-earnings ratio of 7.6 and a price-to-book value of 1.1, while the S&P 500 has a P/E of 17, according to Morningstar. The fund is down 3% year-to-date, after rallying 5.3% over the past three months.

Global X China Financials ETF (CHIX), which has a P/E ratio of 6, is down 5.9% year-to-date, following a 6.6% rally over the past three months.

IShares MSCI China ETF (MCHI), with a P/E of 9, is down 3.8% year-to-date, after rising 2.3% the last three months.

Originally published in Investor’s Business Daily.

Equity and Bond ETF Inflow Plays Tag With the Stock Market

With the S&P 500 index posting a 32% gain in 2013, it’s not surprising that exchange traded funds (ETFs) holding U.S. equities, especially large-capitalization stocks, received the biggest net cash inflow last year.

But with U.S. stocks falling in January, 2014 has seen ETF investors fleeing U.S. stocks and buying such categories as bonds and emerging-market stocks. Amid all this activity, equity ETFs tied to nonmarket-cap-weighted indexes have bulked up.

Despite the stock market rally in 2013, net issuance, or net cash inflow, into ETFs fell 3% to $179.87 billion as investors pulled money out of bond funds, according to the Investment Company Institute. In 2012, fixed-income ETFs posted record annual net inflow of $52.32 billion. But net inflow plunged 77% last year to $12.20 billion as fears grew that the Federal Reserve Bank will soon reverse its quantitative-easing strategy and allow interest rates to rise. Bond prices fall when interest rates rise.
When Federal Reserve Chairwoman Janet Yellen speaks and the markets move, huge sums of money flow between stock and bond ETFs. AP

When Federal Reserve Chairwoman Janet Yellen speaks and the markets move, huge sums of money flow between stock and bond ETFs. AP View Enlarged Image

“One consistent trend for a while is investors have been repositioning their portfolio for the rising rate environment,” said Michael Iachini, managing director of ETF Research at the Charles Schwab Investment Advisory. “They’ve moved out of Treasuries and are investing in short-term debt instruments from high-yield issuers.”

Equity inflow in 2013 grew 26% to $166.84 billion. Of that total, 62% of inflow, or $104.03 billion, went into ETFs holding domestic equities. The rest went into international funds. But that trend reversed in the first two months of 2014.

Broad-based U.S. equity ETFs recorded net outflow of $21.08 billion. SPDR S&P 500 ETF (SPY), which received the most inflow last year, $16.32 billion, posted net outflow of $19.00 billion in Q1 2014, according to BlackRock, which offers iShares ETFs and tracks industry statistics. More surprising was that bond ETFs saw net inflow of $17.64 billion, more than all of last year combined.

“One thing that happened in the beginning of January was that long-term interest rates came down and stabilized,” said ICI senior economist Shelly Antoniewicz. “It turned out the resolution on the debt ceiling wasn’t going to be an issue and people became more comfortable with the Fed’s policy of reducing the bond buying program.”

One of the biggest reversals in asset flow has been in emerging-market stocks. In 2013, ETPs (exchange traded products) holding emerging-market stocks posted net outflow of $10.92 billion, according to ICI. Things really picked up steam this year. In the first two months of 2014, emerging-market ETPs recorded net outflow of $12.58 billion.

For the full story go to Investor’s Business Daily.