Tag Archives: SPY

Why Buy A More Expensive ETF When A Similar Cheaper One Is Available?

 

Yet two of the biggest ETF providers, BlackRock’s iShares and State Street Global Advisors, offer funds that charge significantly more than other funds they offer with similar exposures. Why would an investor choose the more expensive fund?

A prime example is iShares MSCI Emerging Markets (EEM), which tracks the MSCI Emerging Markets Index, the most widely followed benchmark in the emerging-market sector. It charges an expense ratio of 0.72%.

But the company offers a very similar fund, iShares Core MSCI Emerging Markets (IEMG), which only charges 0.14%. What’s the difference? While the MSCI Emerging Markets Index is primarily made up of large-cap stocks, the cheaper fund follows a multicap index, the MSCI Emerging Markets Investable Markets Index, which holds more than twice as many components, including all the stocks in the first index plus midcap and small-cap stocks.

With broader market exposure and a lower expense ratio, IEMG, which was launched in October 2012, is the more popular fund, with $40 billion in assets. But even with its drawbacks, EEM (which dates back to April 2003) still weighs in with $37.7 billion in assets.

Why does iShares continue to offer such an expensive fund — and why does it still attract investors?

Five years ago, iShares launched its Core Series of ETFs, a suite of 10 equity and fixed-income funds aimed at the buy-and-hold investor with dramatically lowered expense ratios. There are now 25 Core ETFs. The majority have expense ratios lower than 0.1%, and none is higher than 0.25%.

“IShares launched their Core Series at a time when they were losing market share to Vanguard because many of their core products chiefly were not priced competitively,” said Ben Johnson, Morningstar’s director of global ETF research. “It was part defense, part offense to stop the bleeding of the market-share losses to Vanguard.”

And fees play a major but not absolute role in the returns of the similar but not identical emerging-market ETFs, much as one would expect. In the year ended Oct. 31, EEM actually inched higher with a 25.64% return vs. 25.58% for IEMG. But over time, the cheaper fund has posted better results: an average annual 5.6% vs. 5.06% for the past three years and 4.92% vs. 4.22% for the past five years. The difference is practically the difference in the expense ratios.

Funds like EEM that track established benchmarks seem to be attracting traders and institutional investors who hold ETFs for shorter periods of time and aren’t as concerned about the expense ratio. Traders may use these ETFs because they are more available for borrowing to sell short and have a much deeper options and swaps ecosystem.

“There is an appeal for that product, which they are more familiar with and continue to use,” said Todd Rosenbluth, director of ETF and mutual fund research at CFRA Research. “For others the appeal is the considerably more volume and greater liquidity.” EEM trades 49 million shares a day, while IEMG has an average daily volume of 7 million shares.

Rosenbluth says the situation is the same with iShares MSCI EAFE (EFA), which tracks the widely followed benchmark for the developed nations, the MSCI EAFE Index, and has an expense ratio of 0.33%. That compares with iShares Core MSCI EAFE (IEFA). The core fund tracks the broader MSCI EAFE IMI Index and charges only 0.08%.

EFA is much more liquid, with average daily volume of 15 million shares vs. IEFA’s 4 million shares.

Meanwhile, State Street, realizing it was already late to the game where investors were demanding lower fees, decided that it would take too long to build assets and get onto important trading platforms if it created a new line of funds, said Matthew Bartolini, head of SPDR Americas research.

Instead, the firm decided to restructure a group of existing funds that already had assets and a user base. They rebranded 15 funds to make a consistent suite called the SPDR Portfolio, cut the fees, split the share prices so that they all started at $30, and if needed changed the index. Well-known funds such as SPDR S&P 500 (SPY) and SPDR S&P MidCap 400 ETF (MDY) weren’t changed for the same reasons EEM still exists.

“In order to be successful and have an impact for clients in a low-cost arena, you can’t just cut fees,” said Bartolini. “So we restructured 15 funds across every key asset class in equity and fixed income and aggressively cut costs to be the lowest or match the lowest price in the marketplace.”

The upshot is that traders might prefer the older indexes even if they’re a bit more expensive, while buy-and-hold investors might prefer the cheaper versions.

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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.

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.

Fidelity Takes on State Street

Reading List for Monday, Jan. 7:

Fidelity’s new push into ETFs means it’s getting into the ring with cross-town rival State Street Global Advisors. The Boston Herald says Fidelity “is getting less and less business from investment advisers because it used to be that an investment adviser would pick a basket of mutual funds and Fidelity would be 30 percent or 40 percent of them.”

Wall Street Sector Selector does some technical analysis on the SPDR S&P 500 (SPY) and concludes “U.S. stocks and ETFs now face a moment of truth after the recent powerful rally.  Technical resistance and fundamental headwinds persist along with ongoing political uncertainty. “

Ari Weinberg explains in WSJ.com how ETFs lend out their securities for some extra cash. International securities regulators are in a tizzy over how this could cause potential disruptions in the market. But ETFs in the U.S. are much more stable than the derivative-based ETFs in Europe, so it’s not much of a concern on this side of the pond.

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.