Category Archives: PowerShares

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.

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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.

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.”

Pimco Total Return Wins Top Capital Link Award

The best and brightest in ETF Land were honored in New York recently.

The Pimco Total Return ETF (BOND) captured the top prize at Capital Link’s annual ETF conference in New York recently. BOND won the award for Most Innovative Exchange-Traded Fund in 2012. The award was presented at the 12th annual Capital Link Closed-End Funds and Global ETFs Forum at the Metropolitan Club last month.

The awards are based on nominations by a committee of analysts and industry specialists who actively follow the products. Capital Link isn’t part of the nominating committee nor can members of the committee be candidates for the awards. Capital Link also gave out awards to the closed-end fund industry, but that doesn’t interest me.

iShares cleaned up by winning the rest of the slate. iShares and Blackrock, its parent company, won Best Shareholder Relations by an Exchange-Traded Product (ETP) Sponsor. This is award to the sponsor who practices the best financial disclosure and is proactive in shareholder communications. iShares/Blackrock also won Best Investor Relations Website in 2012.

The award for Most Innovative Index/Index-based ETF in 2012 went to iShares Morningstar Multi Asset Income Index Fund (IYLD)

Ed McRedmond, senior vice president of institutional and portfolio strategies at Invesco PowerShares, was awarded for “Contribution to the Exchange-Traded Fund Sector” for the third time. He also won in 2008 and 2009. This is given to the individual whose work contributed most to the ETF sector in the given year. McRedmond was also recognized a week earlier at the 9th Annual Global ETF Awards with an “ETP Icon of the Industry Award” for the second time. The ETP Icons of the Industry Awards recognizes individuals who have helped promote the development of the ETP marketplace.

“Investor education has always been our hallmark at Invesco PowerShares, ” said McRedmond in a written statement. “We strive to build relationships using multiple touch points to educate investors about the many beneficial ways ETFs can be used as portfolio tools. It’s truly an honor to be recognized with these awards by the many wonderful and talented people we work with each day to further the development of the ETP industry, and reflects the cumulative efforts of all my Invesco PowerShares colleagues.”

McRedmond, who joined Invesco PowerShares in 2005, works to increase the awareness and usage of ETFs by working with analysts, due-diligence groups and portfolio managers.

The analysis team at Morgan Stanley Smith Barney won the Best Research Analyst/Team for Exchange Traded Products in 2012 for the second year in a row. The team consists of Michael Jabara, David Perlman, and Stephen Minar.

PowerShares Plans to Close 13 ETFs

Invesco PowerShares Capital Management plans to close 13 of its more than 140 ETFs in the new year. The Chicago fund firm said the funds due to close represent less than 1% of its more than $74 billion in assets under management.

At a Dec. 18, meeting, the PowerShares Board of Trustees voted to make the ETFs’ final day of trading on Feb. 26, 2013. Shareholders who do not sell their holdings on or before Feb. 26, 2013, will receive cash equal to the amount of the net asset value of their shares, which will include any capital gains and dividends, in the cash portion of their brokerage accounts on the liquidation date, which is currently scheduled for March 7. Shareholders will generally recognize a capital gain or loss equal to the amount received for their shares over their adjusted basis in such shares.

The affected ETFs are listed below:

  • PowerShares Dynamic Insurance Portfolio 
(PIC)
  • PS. Morningstar StockInvestor Core Portfolio (PYH)
  • PowerShares Dynamic Banking Portfolio (PJB)
  • PowerShares Global Steel Portfolio
 (PSTL)
  • PowerShares Active Low Duration Portfolio 
(PLK)
  • PowerShares Global Wind Energy Portfolio 
(PWND)
  • PowerShares Active Mega-Cap Portfolio 
(PMA)
  • PowerShares Global Coal Portfolio 
(PKOL)
  • PowerShares Global Nuclear Energy Portfolio 
(PKN)
  • PowerSh. Ibbotson Alternative Completion Portfolio (PTO)
  • PS. RiverFront Tactical Balanced Growth Portfolio (PAO)
  • PS. RiverFront Tactical Growth & Income Portfolio (PCA)
  • PowerShares Convertible Securities Portfolio (CVRT)

ING Likes Value Stocks, Emerging Markets and Europe in 2013

Just like the Christmas season, forecast season rolls around this time of year with investment advisors predicting what the new year holds and where we should all be putting our investment dollars. Ahead of us looms the fiscal cliff, a combination of tax increases and large government spending cuts that could chop as much as 4% out of the gross domestic product. Should the fiscal cliff go into effect it could put the current tepid economic recovery into jeopardy.

In a press briefing at ING’s offices Tuesday, Paul Zemsky, ING Investment Management’s chief investment officer of multi-asset strategies, said he expects the fiscal cliff to be resolved by the end of this year, with a negative impact of just 1% to 1.5% to GDP. He expects to see an end to the payroll tax holiday and the Bush tax cuts for the highest-income brackets. He also expects capital gains taxes to rise to 20% and dividend taxes to revert back to taxpayers’ regular rate from 15% now. Should the Congress wait until after the new year, Zemsky expects to see a major sell off in the equity markets. “It could be as much as a 10% drop, but we would expect this to be a V-shape bounce because the government would have to fix the problem. We would consider this a buying opportunity should it happen.”

Stocks remain cheap relative to bonds, said Zemsky, and both U.S. and global equities are attractive investments right now with price-to-earnings ratios around 15. Zemsky said the housing market has bottomed and is poised to rise, however investors have not yet realized this. As housing prices bottom, this makes collateral stronger, said Zemsky, adding now is the time to increase investments in U.S. financial stocks.

Overall, ING expects 2013 will bring modest growth in the U.S., continued growth in emerging markets and the end of the European recession. Zemsky’s overall forecast predicts U.S. GDP to see 2% to 3% growth next year, which will lead to 5% to 7% earnings growth in the S&P 500. He expects the S&P 500 to grow 8% to 10% next year with a year-end target price between 1550 and 1600. U.S. value stocks and emerging market equities look especially attractive in 2013.

The most popular ETFs tracking these areas of the market are the SPDR S&P 500 (SPY), the Financial Select Sector SPDR (XLF) and the Vanguard MSCI Emerging Markets ETF (VWO). Click here for a list of ETFs that track U.S. value stocks.

Zemsky added that it might be time to begin overweighting European equities. He said people are too negative on Europe. While there is still risk in there, he said the Euro Zone is beginning to stabilize and this could lead to higher equity prices. Click here for a list of ETFs that track European stocks.

As for the bond market, Christine Hurtsellers, ING’s chief investment officer of fixed income and proprietary investments, said the U.S. market is not pricing in any changes in policy from the U.S. Federal Reserve Bank. She says it’s time to underweight U.S. Treasury bonds and high quality investment grade U.S. credit. She recommends moving into emerging market debt, especially high-grade sovereign debt. The PowerShares Emerging Markets Sovereign Debt Portfolio (PCY) covers this market.

High Yield ETFs Take a Tumble

High-yield corporate bond ETFs tumbled today.

“This looks to be an exit trade from this asset class,” said Chris Hempstead, director of ETF execution services at WallachBeth Capital in a note, rather than a move to receive delivery of actual bonds.

Specifically, Hempstead’s desk has been very active in SPDR Barclays Capital High Yield Bond ETF (JNK), which dropped 1.3% to $38.19; iBoxx $ High Yield Corporate Bond Fund (HYG), which fell 1.4% to $87.59; PowerShares Fundamental High Yield Corporate Bond Portfolio (PHB), down 0.4% to $18.46, and SPDR Barclays Capital Short Term High Yield Bond ETF (SJNK), down 0.6% to $29.70.

After a redemption of about $725 million in the SPDR Barclays Capital High Yield Bond ETF last week, allegedly for delivery of actual bonds, Hempstead says the pace of selling in high yield ETFs needs to be closely monitored.

So far this year, each of these funds has seen a significant increase in assets, for a total of more than $6 billion year-to-date. With the iBoxx fund holding $14.8 billion in assets under management, the SPDR high yield ETF holding $11.2 billion, the PowerShares ETF at $943 million and $119 million in the SPDR short-term high yield, all the funds have about doubled their assets since January 2011, says Hempstead.

“We are watching closely to see how well the Street can absorb a short-term exit strategy from these funds,” said Hempstead in a note. “How would the fixed income world respond to a heavy and swift sell-off in an ETF product space that has seen a steady inflow of assets for almost 18 months?”

He adds the products have started trading at a discount to their respective NAV, which is not uncommon, but they have a tendency to trade at a premium for longer periods than at a discount.