Tag Archives: VWO

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.

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.

U.S. Large-Caps’ Net Cash Inflows Top Bonds

Net cash inflows in U.S.-listed ETFs surged to $55.8 billion in the third quarter, far exceeding the average quarterly inflows of $33.8 billion seen over the last three years, according to the ETF research team at Morgan Stanley Smith Barney. With $133.4 billion for the first three quarters of the year, ETF net cash inflows are “on pace for the biggest year on record,” says Morgan Stanley. This would beat the $174.6 billion that poured into U.S.-listed ETFs in 2008.

Investors made a big switch to risk as ETFs following U.S. large-cap indices received $11.0 billion, the largest net cash inflows for the quarter, compared with $8.1 billion for fixed income ETFs. This was a big change from the previous quarter when fixed income ETFs received about $19 billion. ETFs tracking high-yield corporate bonds topped the fixed-income segment with inflows of $4.4 billion, according to Morgan Stanley.

With 20 new ETFs launched in the third quarter, and another 11 in October, the number of ETFs stands at the extremely cool total of 1,234. Total assets in the U.S. ETF market, as of Oct. 25, were $1.3 trillion, a 21% increase since the beginning of the year.

The top three funds in terms of net cash inflows were the SPDR S&P 500 ETF (SPY), with net inflows of $7.4 billion, the SPDR Gold Trust (GLD), with $4.1 billion, and the Vanguard MSCI Emerging Markets ETF (VWO), with $3.9 billion, according to Morgan Stanley. Currency ETFs experienced the largest net cash outflows for the quarter, at $71 million. For the first nine months of the year, currency ETFs have seen outflows of $2.0 million. Most of the outflows came from ETFs bullish on the U.S. dollar, while most of the inflows went into funds bullish on the euro vs. the dollar.

Blackrock continues to be the market leader with 280 U.S.-listed ETFs and $528.4 billion in assets. This accounts for a 41.7% share of the market, says Morgan Stanley, down from 48% at the end of 2008. State Street Global Advisors, with $235.8 billion in 116 ETFs holds 18.6% of the market, down from 27% at the end of 2008. Vanguard had $231.6 billion in 65 ETFs, giving it a market share of 18.3%, up from 8% at the end of 2008. Through the first three quarters of the year, Vanguard has had net cash inflows of $41.2 billion, the most of any provider, says Morgan.

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.

5 Excellent ETFs for Emerging Markets

Emerging-markets stocks are short of breath, which is understandable. Over the previous two years, and for most of this millennium, the stock indexes in up-and-coming countries blew away the Dow Jones industrial average, the Nasdaq 100 index, Standard & Poor’s 500-stock index and other popular benchmarks in the developed world. But now it’s 2011, and emerging markets are backtracking. The benchmark MSCI Emerging Markets Index, which measures 21 emerging-markets country indexes, has lost 5.2% so far this year. The S&P 500, by contrast, is up 1.7% (all return figures are through March 17).

This might warn you to stay away from emerging markets, or if you’ve been investing profitably in these nations, to bring your money home. We disagree. Instead of cashing out, this is an excellent time to enter emerging markets or to increase your stake, and using exchange-traded funds is a great way to do so. The future remains bright for Asia, Eastern Europe and South America, a group of markets headed by the BRICs — Brazil, Russia, India and China — and also featuring such prosperous countries as South Africa, South Korea and Taiwan.

There’s no denying the present problems. A big reason for the emerging markets’ decline so far in 2011 is high inflation, fueled by record or near-record prices for oil and other basic materials, plus soaring food costs. To keep inflation from getting out of control, central banks in some developing countries have raised interest rates and may push them higher. Rising rates slow economic growth by increasing the cost of borrowing. At least one analyst fears that the emerging nations may not raise rates enough to tame rising prices. “We think the primary driver [for the stocks’ decline] is a lack of emerging-market central-bank inflation-fighting credibility in the face of mounting food-driven pricing pressure,” says Alec Young, Standard & Poor’s international stock strategist.

Turmoil in the Middle East and North Africa and the devastating earthquake, tsunami and nuclear-power-plant crisis aren’t helping matters. Though most African and Middle Eastern countries are classified as frontier markets, which are less liquid and more lightly regulated than emerging markets, some investors worry that non-democratic countries that do have the status of emerging markets may also suffer disruptions. And the disaster in Japan has the potential of slowing growth all over the world because of disruptions in the global supply chain.

Nevertheless, the reason to invest in this group still holds: Most of the world’s growth for the next ten years will come from emerging economies. With a few exceptions, they are not drowning in debt, and they didn’t suffer badly from the credit meltdown. They have young, growing middle classes that are buying cars and houses and like to spend their newly earned discretionary income as they please. If all pans out, says Michael Gavin, Barclays Capital’s head of emerging-markets strategy, developing-markets stocks will return an annualized 10.5% through 2021. Those kinds of returns are worth shooting for.

A Broad Index ETF

To earn the return of the MSCI Emerging Markets Index, buy Vanguard MSCI Emerging Market Stock ETF (VWO). You start with the advantage of the lowest expense ratio in the emerging-markets sector, 0.22%, plus you get a dividend yield of 1.8%. The top countries by weighting are China, 17.6%; Brazil, 16.3%; South Korea, 13.7%; Taiwan, 11.2%; South Africa, the only African country in the index, 7.5%; Russia, 7.4%; and India, 7.2%. The fund is down 5.2% this year, but has returned an annualized 43.8% over the last two years, and 12.7% annualized since its creation in 2005.

This ETF doesn’t carry the risks that a manager may pick the wrong stocks or the wrong countries. The drawback is that because it invests only in large and mega-size companies, many of which do big business in the U.S. and Europe, you aren’t making a pure and direct investment in the growth of emerging nations. But so far that hasn’t been much of a drag on results.

To read about the other four ETFs:

  • WisdomTree Emerging Markets Equity Income Fund (DEM)
  • WisdomTree Emerging Markets SmallCap Dividend Fund (DGS)
  • SPDR S&P Emerging Asia Pacific ETF (GMF)
  • iShares S&P Latin America 40 Index Fund (ILF)

Go to Kiplinger.com.

Vanguard Takes 4 of 5 Best for 2011

Steven Goldberg at Kiplinger.com writes a lot about ETFs. He starts out his article on the 5 best ETFs for 2011, telling you the worst ones to buy.

He doesn’t like tiny ETFs that invest in a single industry or a single country. I don’t like tiny ETFs, too much risk with an unproven idea. But single industry ETFs can be quite useful. Do you think the oil industry is going to rally this year? Buy the Energy Select Sector SPDR Fund (XLE).He doesn’t like exchange-traded notes, which are essentially debt instruments backed only by the company that issues them. These can be risky too, as in the case of Lehman ETNs. However, I think for most firms, credit risk is not an issue.

Goldberg thinks the majority of ETFs are little more than high-priced gimmicks. Definitely true for some. However, he doesn’t like the WisdomTree family of ETFs, which weights holdings based on dividends or earnings rather than on the more-traditional basis of market capitalization. I think dividend-weighted indexes have less volatility and don’t fall as much in market crashes. I do agree that actively managed ETFs aren’t ready for prime time, either.

Goldberg likes:

  • Vanguard Mega Cap 300 Growth (MGK), he says put 40% of your portfolio in this.
  • iShares MSCI EAFE Growth Index (EFG)
  • Vanguard Total Stock Market ETF (VTI)
  • Vanguard Europe Pacific (VEA)
  • Vanguard Emerging Markets Stock (VWO)