Tag Archives: EEM

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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SPDR Jumps 32.3% in 2013

Last year was a banner year for U.S. stocks and the ETFs that tracked them.

All results are total returns, with dividends factored in

ETFs Flooded With New Money

Investors flooded ETFs with new money last week, pushing most of the cash into equity funds, even as they pulled dollars out of commodity and bond ETFs.

The $16.7 billion of net inflows that came in during the five days ended July 12 was the largest weekly total of the year, according to a report Morgan Stanley released Tuesday.

The SPDR S&P 500 ETF (SPY) was the star of the week. The ETF better known as the Spyder dramatically reversed its net outflows for the previous 12 weeks by bringing in half of the industry’s total net inflows for the week with $8.37 billion. It was the Spyder’s largest net inflow since the week of March 12, 2012.

With the Spyder leading the way, U.S. large-cap ETFs generated net inflows of $15.1 billion over the last 13 weeks, the most of any category, said Morgan Stanley. The Spyder accounted for 54% of that total. The total net inflow for all U.S. equity ETFs was $17.3 billion and the combined net inflows for all of ETF Land was $29.0 billion.

Year-to-date, total ETF assets in the U.S. have increased by 11% to $1.5 trillion. Net inflows year-to-date total $92.2 billion.

The commodity ETF category saw the biggest net outflows, losing $636 million for the week. However, all of that came from the SPDR Gold Trust (GLD), which posted a weekly net outflow of $900 million. Over the past 13 weeks, commodity ETFs have seen net outflows of $11.73 billion, with GLD accounting for $9.62 billion. The Gold Trust hasn’t posted a net inflow in the past 32 weeks, bringing its market capitalization down to $38.78 billion.

Emerging-market ETFs was the second-worst category, with net outflows for the week at $624 million and for the 13 weeks at $11.05 billion. The iShares MSCI Emerging Markets ETF (EEM) posted the second largest net outflows for the week and 13-week periods at $386 million and $7.03 billion, respectively. In a reflection of the faltering economy in China, the iShares MSCI China ETF(MCHI) had a net outflow of $246 million last week.

Fixed-income ETFs also went negative, posting weekly net outflows of $419 million. For the 13 weeks ended July 12, bond ETFs saw net outflows of $511 million as investors moved into short-duration fixed income and U.S. equity ETFs, said Morgan Stanley.

Among the ETFs market participants expect to fall, the Spyder saw the largest increase in short interest, at $2.0 billion, according to Morgan Stanley. This is the highest level the leading ETF has been at since April 15, and is nearly 10% about the one-year average.

Even as the CurrencyShares Euro Trust (FXE) gained 6.3% over the past year, it continues to be one of the most heavily shorted ETFs as a % of shares outstanding, says Morgan Stanley.

Small ETFs Struggle as 18 Funds Hold Half of Industry’s Assets

If you’re looking for a reason why many of the ETFs launched last year failed to raise the $30 million in assets necessary to turn a profit and stay open take a look at the $10 Billion Club.

While there are more than $1 trillion in assets in the entire U.S. ETF industry, the majority are confined to about 100 funds, “leaving the other 1,300 ETFs in the dust,” says ETF Database.

Yesterday, I said many investors remain risk-adverse in today’s volatile market, leaving them squeamish about buying into hypertargeted ETPs. They prefer to stick with big, liquid funds tracking well-known indexes both because they understand what the index tracks and because they can get out quickly in an emergency. Other reasons why small, niche funds are having a hard time gathering assets is because institutional investors and investment advisors are restricted to buying products with minumum requirements for assets under management, average daily volume and age of the fund.

This leaves just 18 ETFs holding nearly half the assets of the entire ETF industry, according to ETF Database, which calls the group the $10 billion club because they all have more than that under management.

It’s no surprise who tops the list:

SPDR S&P 500 (SPY)
SPDR Gold Trust (GLD)
Vanguard MSCI Emerging Markets ETF (VWO)
iShares MSCI EAFE Index Fund (EFA)
iShares MSCI Emerging Markets Index Fund (EEM)
iShares S&P 500 Index Fund
(IVV)
PowerShares QQQ (QQQ)

The big surprises to my eyese were the iShares iBoxx $ Investment Grade Corporate Bond Fund (LDQ) and the iShares iBoxx $ High Yield Corporate Bond Fund (HYG).

Apple’s Worth More Than Top 5 ETFs Combined

I don’t have anything to say about Steve Jobs that hasn’t already been said, except that there’s no doubt he was a genius. Much like Apple’s Think Different ad campaign, a genius isn’t just smart, but someone who sees or hears things so differently from the conventional wisdom that he completely changes the paradigm. While Dizzy Gillespie and Charlie Parker didn’t invent jazz, the BeBop they created was a sound so completely different than what had come before that they forever changed the way jazz was played. So while Jobs didn’t create the personal computer, MP3 player or the cell phone, his vision completely changed the way those industries operate.

Over the course of the many Steve Jobs accolades, I stumbled upon the fact that Apple’s market capitalization, at around $355 billion, is larger than the 5 largest ETFs combined. At the end of September, that was $247.5 billion, according to the National Stock Exchange.

The top five ETFs in order of size are:
SPDR S&P 500 (SPY) – $81.2 billion
SPDR Gold (GLD) – $64.1 billion
Vanguard MSCI Emerging Markets (VWO) – $39.8 billion
iShares MSCI EAFE (EFA) – $35.0 billion
iShares MSCI Emerging Markets (EEM) $27.5 billion.

Apple’s stock movement alone has more of an impact on the stock market than there five combined. Which I think nicely puts into perspective the common fallacy that ETFs have the potential to destroy the market.

Fund Manager Says Sell High Yield and Emerging Markets

Frank Barbera, portfolio manager of the Sierra Core Retirement Fund, last week chatted with me about the market. Barbera runs a fund of funds that is very risk adverse and seeks to protect capital in a down market. During the 2008 crash, his fund fell just 2.8% vs. the 37% plunge in the S&P 500.

Over the last few weeks, Barbera has see such a decline in high-yield bonds that he’s exited all his positions and is now cutting back on emerging-market debt. He also sold all his holdings in emerging-markets equities, such as iShares MSCI Emerging Markets Index (EEM).

Barbera says anything linked to China has experienced a substantial decline, with emerging markets posting poor relative strength for the past six months. “There’s been no bounce,” he says, “We think Asia might slow down from both rising interest rates and higher-than-reported inflation.”

Because China’s currency is pegged to the U.S. dollar, he says our low interest rate policy is being exported to Asia and causing a lot of instability. Asia’s inflation problem and the enormous housing boom in Asia and Australia are a result of the U.S.’s loose monetary policy.

“With the reckless lending practices in those real-estate markets, we are preparing for a big downturn,” says Barbera. “Something is going to give and give big.”

He says the estimates for China’s bad loans could be as high as $5 trillion, which is nearly 100% of China’s GDP, sparking a deep recession and very hard landing. He adds that areas with strong real-estate markets, such as Australia , Hong Kong and Vancouver could soon deflate and see significant slow down.

He recommends getting rid of high-yield bonds and emerging-market debt and equities and says it’s time to move into short-term high-grade AAA corporate bonds.

Last month, I wrote about getting out of iShares iBoxx $ High Yield Corporate Bond Fund (HYG) and the SPDR Barclays Capital High Yield Bond ETF (JNK). Since then HYG has gained 2.2% and JNK 1%.

For short-term high-grade bond ETFs check out Barclays 1-3 Year Credit Bond Fund (CSJ), which has an expense ratio of 0.2%, and the SPDR Barclays Capital Short Term Corporate Bond ETF (SCPB), which charges 0.125%

If Korea Becomes a Developed Nation

Index providers put a lot of time and effort into deciding whether countries are classified as developed or emerging nations.

The choice, to an outsider, seems simple. The U.S. is a developed country, and China is emerging. But breaking that down into a rule-set is more of a challenge. Each of the major index providers looks at a different set of criteria to make its determination.

With billions of dollars tied to each market, these classification systems matter, and countries lobby index providers hard to convince them that they meet this or that criteria.

For ETF investors, the index provider that matters most in this regard is MSCI, which dominates the market for both developed and emerging market international ETFs. MSCI has an annual review process for evaluating economic development status based on economic development, size and liquidity requirements, and market accessibility criteria. It maintains watch lists of countries that are under consideration for status changes.

In the middle of 2010, Israel jumped from emerging to developed status in the MSCI system, as it finally was judged to fully meet MSCI’s criteria for developed markets. Based on a 2008 consultation report from MSCI, the country’s graduation was primarily held up by concerns about market accessibility, but currently, the only remaining issue of concern, MSCI says, is the Tel Aviv Stock Exchange’s settlement cycle, which is shorter than is normal for a developed market. The issue is considered a minor one and did not prevent the country’s promotion to developed status.

Among other things, the promotion pushed Israel out of the broadly followed MSCI Emerging Markets Index and into the pre-eminent benchmark for measuring developed international equity performance, the MSCI EAFE (Europe, Australasia and the Far East).

Investors always want to know what will happen to a country’s market when a graduation event takes place. Viewed from a static ETF-only lens, the answer is simple. On April 30, 2010, there was roughly $60 billion in ETF money invested in the MSCI Emerging Markets Index via the Vanguard Emerging Markets ETF (VWO) and the iShares MSCI Emerging Markets Index Fund (EEM). Israel had a 4 percent weight in the index, meaning the funds likely had in the area of $2.4 billion invested in Israeli equities at the time. When MSCI promoted Israel, those funds had to sell.

The next countries likely to graduate in the MSCI system may be bigger deals. In both 2009 and 2010, MSCI decided after careful review to leave both South Korea and Taiwan in the emerging markets index. They won’t be up for review again until June 2011. If chosen, they would make the switch in the middle of 2012. If that happens, MSCI would have to decide whether to make the transition over a period of time in a step process, or all at once.

Both countries meet many of the requirements MSCI has of developed nations. Korea satisfies the criteria in economic development, size and liquidity, but it fails on three levels: the lack of an offshore currency market for the Korean won; investor accessibility; and continued anti-competitive practices. With no active offshore currency market, investors need to exchange their money into won during Korean trading hours in order to trade. However, the limited trading hours means Korea’s market is mostly closed when Western markets are open. Meanwhile, a rigid identification system limits investor accessibility in the use of omnibus accounts. For instance, instead of Fidelity Investments having one account, it needs to set up separate accounts for each mutual fund that wants to trade in Korea, creating a very inefficient system. Finally, stock market data continues to be subject to contractual anti-competitive practices as a way to keep trades on the Korean market.

Taiwan also meets the economic development criteria, along with the size and liquidity requirements. However, market participants have said Taiwan’s overall market accessibility is comparable with that of Korea’s. MSCI said the “lack of full convertibility of the new Taiwan Dollar and restrictions associated with the Foreign Institutional Investors identification system were raised as areas where significant progress is still required.”

But if South Korea and Taiwan resolve these issues, the impact will be large.

For the full story go to IndexUniverse.com.