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.

Advertisement

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.

Down 50% in 2 Days, TVIX Could Fall More Monday

After the VelocityShares Daily 2x Long VIX Short-Term ETN (TVIX) plunged 30% in Thursday, Credit Suisse, the sponsor of the controversial fund, reopened share issuance on a “limited basis.” The ETF proceed to fall again Friday for a 50% drop over two days.

The Swiss banking giant was blamed for the two-day decline, by Benzinga, because it had temporarily halting new issuance of TVIX shares last month.

“Beginning March 23, 2012, Credit Suisse may from time to time issue the ETNs into inventory of its affiliates to make the ETNs available for lending at or about rates that prevailed prior to the temporary suspension of issuances of the ETNs. Also, beginning as soon as March 28, 2012, Credit Suisse may issue additional ETNs from time to time to be sold solely to authorized market makers,” according to a written statement issued by the bank after Thursday’s close.

Benzinga says “the halt in TVIX share creations may have caused a massive spike in the ETN’s net asset value. The elevated NAV and ensuing plunge in TVIX indicates that, simply put, traders discovered said premium and exploited it.”

TVIX’s slide continued in after-hours trading where the ETN lost almost another 12% and was found at $9 at 8:30PM Eastern Time. That’s by far the the lowest price TVIX has ever traded at.

On Friday, the shares fell 30% to $7.16 on volume of 29.3 million shares, more than twice its daily average volume. That’s 62% of the 46.7 million shares outstanding. And with the shares still 7% above their indicative value of $6.70, according to VelocityShares, the ETN could see another decline on Monday.

ETF Reading List:

China’s PMI Data Could Hinder, Help These ETFs (HAO, FXI, MCHI) (Benzinga)

Happy Water Day? Maybe For Water ETFs (PIO, PHO, CGW) (Benzinga)

Yorkville High Income MLP ETF’s Yield 8.5% On Average (Investors.com)

Seriously? Credit Suisse to Allow New TVIX Creations (TVIX, CS) (Benzinga)

Avoid These ETFs For Now (FXI, TVIX, GDXJ) (Benzinga)

Six New Funds Track Emerging Markets

Updated 10 p.m.

In light of the huge inflows moving into emerging markets over the past two months, this past week saw the launch a total of six new ETFs to capture the trend. Typically, it takes three to six months for the Securities and Exchange Commission to approve a new ETF from a current ETF provider. So, these funds are a mixture of good foresight and the luck of good timing.

Two weeks ago, this blog reported that large-cap U.S. equity ETFs experienced heavy outflows last month, while emerging market ETF saw huge cash inflows.

Emerging markets go one step beyond with the first U.S. ETF to track the Peruvian markets. The iShares MSCI All Peru Capped Index Fund (EPU) began trading today on NYSE Arca. The fund tracks the index of the same name, which holds the top 25 Peruvian equity securities by free-float adjusted market cap. The index components are either in Peru, headquartered in Peru or have the majority of their operations based in Peru. Thirteen constituents are materials producers, providing significant exposure to commodities. Top three index constituent names as of March 31 are Buenaventura Minas, Southern Copper, and Credicorp. The expense ratio is 0.63%.

iShares quotes the IMF World Economic Outlook Database which this month said Peru has the fastest growing economy in Latin America and one of the lowest inflation rates in the region. The IMF also said Peru has the third lowest Emerging Market Bond Index spread in Latin America and an estimated economic growth rate of 3.5% in 2009. Peru’s Minister of Finance this month said Peruvian capital markets posted the best performance globally year to date in 2009. Can anyone verify this?

Friday saw the launch of the iShares S&P Emerging Markets Infrastructure Index Fund (EMIF) on the Nasdaq Stock Market. The eponymous index holds 30 of the largest publicly-listed companies in the infrastructure industries — energy, transportation and utilities — with the majority of their revenues derived from emerging market operations. Each constituents had a minimum market capitalization of $250 million. As of May 29, the index was comprised of companies from Argentina, Brazil, Chile, China, the Czech Republic, Egypt, Malaysia, Mexico, South Korea and the United Arab Emigrates. The annual expense ratio of 0.75%.

Meanwhile, if you think emerging market are due for a tumble, ProShares gave international investors a chance to short these markets with leveraged short ETFs that offer -200% returns. Thursday’s launches on the NYSE Arca doubled ProShares ultrashort international ETFs to eight:

• ProShares UltraShort MSCI Europe (EPV)
• ProShares UltraShort MSCI Pacific ex-Japan (JPX)
• ProShares UltraShort MSCI Brazil (BZQ)
• ProShares UltraShort MSCI Mexico Investable Market (SMK)

Earlier this month, ProShares launched the first of its 200% leveraged international ETF series with four similar funds. The new ETFs charge a managament fee of 0.95%.

For the four months ended April 30, iShares received 65% of all ETF and mutual fund emerging markets flows year-to-date, according to Strategic Insight. That shouldn’t have been difficult considering more than 70 of the more than 180 U.S. listed iShares ETFs have an international bent. This gives iShares the largest continent of international ETFs in the industry. Trading volumes in iShares emerging markets funds surged 119% for the five months ended May 30, compared with the same period last year to 16 billion shares.

According to iShares and Bloomberg, the ETFs with the hightest net inflows in May were

• iShares MSCI Brazil Index Fund (EWZ) with $1.5 billion in net new assets under management.
• iShares MSCI Emerging Markets Index Fund (EEM) with $1.08 billion new AUM.
• iShares FTSE/Xinhua China 25 Index Fund (FXI) with $1.02 billion new AUM.

Here’s an interesting tidbit about the lack of info coming from ProShares. IndexUniverse reportes that “ProShares’ Web site only provides data of the underlying indexes. Besides the prospectus for each, that’s the most recent detailed information available. And the benchmark data is only through March 31. Daily holdings are listed in totals of swaps held in the underlying index and cash.”

IndexUniverse does a nice break down of the ProShares international shorts.