Category Archives: Stock Market

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.

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What Happens When HACK Gets Hacked By Insider

Investors in the PureFunds ISE Cyber Security ETF (HACK) woke up Aug. 1 to find their fund had a new name, ETFMG Prime Cyber Security ETF, and tracks a new index.

a stunning development, the fund’s advisor, ETF Management Group, had rebranded the entire family of PureFunds ETFs with the ETFMG name, and began following indexes from a new firm called Prime Indexes.

Since the change, $36 million has flowed out of HACK, which has $1.1 billion in assets, according to Morningstar Inc. The outflow has coincided with a pullback in cybersecurity stocks and the ETFs that invest in them.

While HACK’s old and new indexes both track the same securities, there were some slight changes in the new index to conform with a new methodology and improve implied liquidity, said Sam Masucci, chief executive of ETF Management Group. The change had little effect on the share price.

The story highlights the issues small asset managers without infrastructure can run into. ETF MG is known as the advisor. It provides the infrastructure for operating the ETF and portfolio management, as well as manages the third-party relationships with outsourced services, such as custodians, legal and auditing. ETF MG has 13 funds on the market.

PureFunds was the sponsor, covering most of the costs. Typically, the sponsor’s role is branding, marketing and consumer education. ETF MG is now the sponsor.

Unlike the ETFs of most small asset managers, when HACK launched in 2014 it was an immediate hit. It quickly gathered $1 billion in assets. Andrew Chanin, Pure Funds’ chief executive, was lauded as an ETF wunderkind. Altogether, PureFunds launched eight funds with ETF MG, six of which will continue under the ETF MG name. The other two were closed in July.

“People come to us with ideas that we turn into ETFs and operate. We are a comprehensive service company,” said Masucci. “Their role is market education. With more than a dozen partners, we’ve only had one that went this direction.”

Masucci said the dispute started in April when the board voted to lower the fund’s expense ratio to 0.6% from 0.75% in order to better compete with First Trust Nasdaq Cybersecurity ETF (CIBR), which charges 0.6%. At the point, HACK had $950 million in assets, while CIBR had $218 million.

“I alerted Andrew, and the Nasdaq and Andrew sued us,” said Masucci. “When Andrew sued us he violated provisions in our agreement precluding him from taking any actions that interfered with the operation of the fund. We would have not terminated them if they had not sued us.”

Masucci also said that Chanin did not originate the idea for the fund. He said that came from Kris Monaco and his team at ETF Ventures, a division of ISE, which was later acquired by Nasdaq. Masucci said Nasdaq disbanded the ETF Ventures team. Monaco, who was instrumental in creating the index that PureFunds ISE Cyber Security tracked, is one of the founders of Prime Indexes, which is providing the new index for the fund.

Chanin disputes the claims by ETF MG. He said PureFunds and ISE were partners and they hired ETF MG, not the other way around. And that it was PureFunds and its partners that helped cover the fund’s expenses.

In the complaint filed in the Superior Court of New Jersey, PureFunds claims that ETF MG was retained to “empower” PureFunds to launch their ETFs. PureFunds alleges that ETF MG “trumped up false securities violations” with the purpose of obtaining control of the PureFunds business to pocket millions in annual revenue. It also alleges that ETF MG reduced the “profit” that PureFunds was to receive from “their ETFs.”

“The pressure on asset managers to reduce their fees is as great as it’s ever been,” said Ben Johnson, Morningstar’s director of global ETFs research. “The vast majority of flows are going into the ones with absolute rock-bottom expense ratios. That’s the trend.”

HACK has risen 10.4% this year, but is down 4.8% in the past three months. CIBR, which was launched in June 2015, is up 8.3% this year, but also down 4.8% the past three months.

CIBR now has $275.6 million in assets.

The two funds have similar top holdings. HACK’s 39 holdings as of Aug. 15 were topped by Cisco Systems at 4.75%, Palo Alto Networks at 4.49% and Symantec at 4.12%. CIBR top holdings were Palo Alto Networks at 6.87%, Cisco Systems at 6.31%, and Akamai Technologies at 6.09%.

The other funds affected by the change, with assets and expense ratios:

This was originally published in Investor’s Business Daily.

Why Shark Tank’s Mr. Wonderful Puts Most Of His Cash In ETFs

When people see Kevin O’Leary, Mr. Wonderful on the TV show “Shark Tank,” they see a man willing to invest thousands of dollars in risky startups based on only a 10-minute presentation.

But the truth is, O’Leary’s a man who’s invested the bulk of his fortune in ETFs. In addition to “Shark Tank,” he heads O’Shares, an ETF family created to meet his specific investing needs.

The seven ETFs track indexes created by FTSE Russell that follow O’Leary’s investing criteria. Each company in the indexes must have 1) attractive operating metrics as defined by return on assets; 2) 20% less volatility than the market; 3) pay dividends. The portfolio must have no more than 5% in any one company and no more than 20% in a sector.

“People see me on ‘Shark Tank’ and think I’m the Wild West,” said O’Leary. “But I’m not. I’m an extremely conservative investor. My concern is preservation, and I want to make 5% a year forever. It’s not easy to do.”

O’Leary made his millions as a founder of Softkey, a publisher and distributor of CD-ROM-based software. It later bought Learning Co. and took its name. In 1999, Mattel acquired the company for $4.2 billion.

He put most of that money into a trust for his children that would pay out 5% every year in perpetuity. He wanted the trust invested 100% all the time and rebalanced every January back to 50% equity and 50% fixed income. He used the five investing criteria he would later use for the ETFs and said there could be no leverage or derivatives.

The annual 5% payout couldn’t come from return of capital, only interest, dividends or capital appreciation. When bonds paid 6.5%, the target 5% payout was easy to make. But as the yield on U.S. Treasuries fell, making 5% became a challenge without inordinate risk.

“Over the years, I’ve used every asset class: private equity, hedge funds, even alternative asset classes like owning forests,” said O’Leary. “You name it, I’ve done it.”

He said he found it interesting and frustrating that no matter who he hired or how successful, after about seven years, the manager’s strategy would blow up or go flat. He then decided to build his own mutual funds, and noted that his managers were using ETFs to “plug holes in periods where they needed to do allocations.” He tried to use ETFs for his trust, but every index violated at least one of his criteria, usually an outsize weighting in one stock.

He then went to the folks at FTSE Russell and asked them to make an index based on his criteria that would cover the equity portion of the stock/bond portfolio. They said “no.” They don’t make indexes for individuals, but they would test his idea to see if it had market potential. Out of that came O’Shares FTSE U.S. Quality Dividend ETF (OUSA). While capital preservation and yield are the fund’s mandate, not benchmark outperformance, in 2016 it beat the S&P 500: 12.3% vs. 11.96%. The yield on OUSA is 2.3%, compared with the S&P’s 1.9%. The expense ratio is 0.48%.

“Kevin’s approach to looking at dividend growth and cash flow is something that we think adds benefit to our equity weightings,” said Rob Stein, chief executive at Astor Investment Management, a Chicago RIA with $2 billion under management. The firm builds portfolios exclusively out of ETFs. “We believe O’Shares’ approach makes sense for analyzing stock selection, so we don’t have to drill down in individual stock selection. It’s a concept that makes sense to us and it’s being done rigorously.”

For geographic diversification, O’Leary asked FTSE Russell to build O’Shares FTSE Europe Quality Dividend ETF (OEUR) and a currency-hedged version O’Shares FTSE Europe Quality Dividend Hedged ETF (OEUH), which removes the effect of currency fluctuations. Then came O’Shares FTSE Asia Pacific Quality Dividend ETF (OASI) and its hedged version O’Shares FTSE Asia Pacific Quality Dividend Hedged ETF (OAPH). In 2016, OASI beat the MSCI AC Asia Pacific Index 7.82% to 5.21% and yielded 2.8%.

O’Leary then asked Russell to build O’Shares FTSE U.S. Small Cap Quality Dividend ETF (OUSM).

While on “Shark Tank,” O’Leary has invested in 40 companies, but he said he wouldn’t put any of them in his trust. They are too high-risk.

“I love the ETF industry and the innovation that is going on in it,” said O’Leary. “And I’m proud to be a part of it.”

Originally published in Investor’s Business Daily.

She is Belle of ETF.com Awards

Women might not have broken the ultimate glass ceiling in American politics, but they took the top prizes at the ETF.com Awards.

Yes, it’s awards time again for the ETF industry and starting off the festivities was ETF.com, a Web site full of stories, tools and fund analysis.

The SPDR SSGA Gender Diversity Index ETF, with the ticker (SHE), swept the ceremony by walking away with four of the top awards, more than any other ETF has taken home in the history of this specific award ceremony. The fund won Best New ETF, Most Innovative New ETF, Best New U.S. Equity ETF and Thematic ETF of the Year.

girl-v-bull

Fearless girl courtesy of SSGA

Were the judges trying to soften the blow women took on the political plane this year? Possibly. State Street Global Advisors, the sponsor of the fund, is responsible for installing the “Fearless Girl” statue near Wall Street on International Women’s Day last month. The statue represents the lack of gender diversity on Wall Street and the executive suites of U.S. corporations in general.

State Street said it created SHE, as the Gender Diversity Fund is affectionately known, to “invest in large-capitalization companies that rank among the highest in their sector in achieving gender diversity across senior leadership. SHE offers a means to invest in companies that have demonstrated greater gender diversity within their sector, providing investors with a tool to inspire change and make an impact.”

According to a 2015 paper from MSCI ESG Research, companies in the MSCI World Index with strong female leadership saw a return on equity of 10.1% per year compared with 7.4% for companies lacking suck leadership. We would be remiss if we failed to point out that on State Street’s board of directors only three of the 11 are women.

It appears the “Fearless Girl” is creating a lot of buzz too, as she stands facing the famous “Charging Bull” statue of Wall Street. The Bull’s creator thinks the girl statue violates his artistic rights and changes the meaning of his statue, which represents the strength of America and the market.

The Best ETF of 2016 was actually the VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL). This award is given to a fund that did its job particularly well in a particular year. In 2016, this fund surged 25%, at least 10 percentage points more than its main competitors in a year when high-yield bonds were posting great returns.

I’ll just let ETF.com explain how the fund works: “Typically, investors hold bonds at different tranche levels, and as soon as a bond falls out of the investment-grade bucket, every insurance company must sell all of it, pushing these bonds into oversold territory, the result is that these downgraded bonds tend to outperform almost immediately after being downgraded – the very juice ANGL is extracting. What’s more these newly downgraded bonds don’t carry that much more default risk.”

For full list of ETF.com awards click here.

Interactive Brokers Aims For Best Platform, Lowest Price

Interactive Brokers Group has broken into the top ranks of online brokers, excelling in several categories deemed important to investors.

Interactive (IBKR) joins four other brokers in the top five for overall customer experience in Investor’s Business Daily’s annual ranking of online brokers.

The nation’s largest electronic broker in terms of daily average revenue trades, Interactive won top marks for low commissions and fees, trade reliability, site performance, equity trading tools, mobile platforms/mobile trading opportunities, options trading platform, portfolio analysis and reports, and ETF choices.

The message seems to be getting out to investors. In 2015, when the stock market ended slightly lower, the Greenwich, Conn., company saw the number of accounts grow by 18%, and 1% in December alone, to 331,100. Client equity increased 19% year over year to $67.4 billion.

Comprising two segments, a global electronic broker and a market maker, the firm processes trades in securities, futures, foreign-exchange instruments, bonds and mutual funds on more than 100 electronic exchanges around the world.

Hungarian immigrant Thomas Peterffy founded the firm in 1977 and launched the Interactive Brokers platform in 1995. Since then it has become one of the leading brokers for professional and semiprofessional investors, as well as institutions.

Biggest And Cheapest Broker

Still serving as chairman and chief executive, Peterffy said his firm is the largest and least-expensive stock broker in the world. In December 2015, the firm recorded 628,000 DARTs and an average commission per client order of $2.09 for securities and $6.33 for options. For orders of 100 shares, it charges just $1. He also said the average amount charged for a margin loan is 1.3%, which undercuts all of the firm’s competitors.

“Our philosophy is to offer the best platform at the lowest price,” Peterffy said in an interview with Investor’s Business Daily. “We don’t sell our customers orders, but seek to execute them at the best possible price. The total transaction cost on 2.5 trillion stocks, including market impact and fees, was 0.8 basis points.”

He said the firm sits in a sweet spot between investment banks and online brokers.

“The online brokers don’t need all the sophisticated stuff we provide, and the big investment banks will not take people with less than $5 million,” Peterffy said. “Our target clients are sophisticated individuals or institutional traders and investors.”

Over the past year, Interactive added a lot of research, news providers and analyst ratings to the platform. It also introduced a portfolio builder that allows clients to screen stocks based on fundamental and technical data, assemble portfolios that automatically rebalance and lets them back-test the portfolio’s performance over various time periods.

Investor’s Marketplace

Another feature Interactive introduced last year to help set itself apart is transparency. Interactive now lets clients see the number of shortable shares available in real time without having to call the broker. It also lets clients see the lending rate at which stocks may be borrowed to be shorted. You won’t find this at the wirehouses.

In 2015, it also launched a service called the Investor’s Marketplace, which gives clients one-stop shopping access to investors and third-party service providers around the globe. It’s a place where traders, investors, financial advisors, fund managers, research analysts, technology providers and business developers can advertise, explore and do business with each other.

Part of the Investor’s Marketplace will be the Hedge Fund Marketplace, where qualified investors may view and download information posted by participating hedge funds, including private placement memoranda, subscription information and performance summaries.

As of June 2015, the Marketplace had more than 300 advisors, brokers, money managers and hedge funds, 120 research providers, 75 administrative service providers and 295 participating technology providers.

In 2016, the company planned to relaunch Covestor, an online money manager it acquired in 2015. Covestor lists money managers and traders who run investment portfolios. Clients will be able choose a money manager and set up accounts that mirror the managers’ portfolio, essentially trading along with the manager.

To View IBD’s Full Best Online Brokers Report

This was originally published in Investor’s Business Daily.

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Can China ETFs Continue Their Ascent?

China ETFs’ recent gyrations are enough to give one whiplash. Many have behaved like the Shanghai Composite Index recently. After soaring 152% over the previous 12 months — 60% this year alone — to a seven-year high on June 12, the benchmark for mainland China’s stock market hit a significant speed bump.

Last week the index stumbled 13% into a much-anticipated correction. A 5% rally the first three days of this week gave way to selling Thursday, cutting the week’s gain so far to 1%.

“The sheer increase in prices this year is something that makes me want to stand back,” said John Rutledge, chief investment strategist for Safanad, an investment house in New York. “I don’t know any fundamental reason why prices should have doubled this year, and that price behavior sounds like a bubble.”

Rutledge is referring to the fact that the Chinese economy’s growth rate has slowed to a six-year low of 7%. But if fundamental analysis can’t explain it, macroeconomics can. With central banks all over the world cutting interest rates, there is flood of liquidity looking for returns.

The first thing to know is that there are two markets in China. The Hong Kong market, which has long been open to global investors, trades what are known as H-shares. Then there are the mainland markets in Shanghai and Shenzhen. They trade A-shares, which had been limited to domestic investors.

But last year the Shanghai and Hong Kong markets created a system that let global investors buy A-shares and domestic investors buy H-shares. This change has brought a lot of money to the mainland markets.

On top of that, the People’s Bank of China, the country’s central bank, has cut interest rates three times since November, and more cuts are expected.

Finally, throw in a slowdown in the Chinese real estate market. It led the Chinese government to encourage investments in stocks by making it easier for Chinese retail investors to open accounts and buy stocks on margin.

Loss Of Liquidity

And a loss of liquidity sparked last week’s correction. First, Chinese regulators, worried that the market was getting overleveraged, tightened the rules on margin trading. Then a slew of initial public offerings sucked up a lot of cash.

There’s no doubt that China is risky. But gains could resume if the economy picks up and government stimulus programs continue. And index provider MSCI is evaluating A-shares for inclusion in its emerging markets index. That could spark demand by many funds that track MSCI indexes.

If you want China A-Shares in your portfolio, investing in ETFs is the way to go. KraneShares offers four ETFs focused on China. Its Bosera MSCI China A ETF (ARCA:KBA) holds more than 300 large-cap and midcap stocks on both the Shanghai and Shenzhen stock exchanges.

KraneShares says that these are the stocks that would be included in an MSCI emerging markets index. KBA is up 40% year to date and 126% in the past 12 months. It has an expense ratio of 0.85%.

Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ARCA:ASHR) tracks the CSI 300 Index, which holds the largest and most liquid stocks in the A-share market. It’s up 35% year to date and 129% for the past year. It charges 0.8% of assets for expenses.
Market Vectors ChinaAMC A-Share ETF (ARCA:PEK) also tracks the CSI 300 index but charges less: 0.72%. It’s up 39% year to date and 132% in the 12 months. The big difference is that ASHR is more liquid and offers a 0.2% yield, while PEK offers none.

As liquidity improves in July, David Goldman, managing director of investment firm Reorient Group, sees a market recovery and a move back up beyond the 5,000 level for the Shanghai Composite.

“Economic fundamentals are clearly improving, and so are regulatory incentives for stock market growth,” he wrote this week.

Originally 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.