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Trans-Pacific Partnership Deal: Time For Vietnam ETF?

It looks like time has come for Vietnam to disentangle from the heavy reliance on China as a trading partner. The recently enacted Trans-Pacific Partnership (TPP) trade pact, reached after more than five years of negotiations between the member nations, will make Vietnamese goods reach the global market. TPP is the biggest trade agreement in history aimed at reducing tariffs and setting common trading standards for the 12 Pacific Rim nations, including the U.S., Canada, Japan, Australia, Brunei, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. According to Vu Huy Hoang , Vietnamese Minister of Industry and Trade, TPP will enhance Vietnam’s GDP by $23.5 billion in 2020 and $33.5 billion in 2025. In addition, it will boost the country’s exports by $68 billion in 2025. Currently, TPP member nations represent about 40% of global GDP and 30% of global trade. The deal will open up trading avenues for key export products of Vietnam such as textile, garment, footwear, and seafood in broader market such as the U.S., Japan, and Canada due to their ultra low import tariffs. So far, Vietnam’s trade balance was heavily biased toward China. In the first nine months of the year, China remained the country’s largest trade partner with trade revenues of approximately $50 billion, per Vietnam’s General Statistics Office. However, Vietnam is experiencing weakening demand from China due to its economic slowdown. Therefore, the deal comes at a perfect time. The deal is yet to be ratified by lawmakers in member countries. It is expected to easily pass through Vietnam’s legislature due to its favorable impact on the economy. Vietnam Economy Vietnam’s economy has already been benefiting from low energy costs and very low inflation. Last month, inflation dipped to zero for the first time ever, as per General Statistics Office. Average price gains were less than 1% in contrast to a five-year average of more than 9% till 2014. Lower energy costs led to a 29% rise in new businesses to 68,347 units in the first nine months of the year. Inexpensive labor and devaluation of the Vietnamese dong for the third time in a year by the country’s central bank have also been boosting the country’s exports and attracting foreign investments. Bloomberg data showed that the country’s exports went up 9.6% year over year to $120.7 billion in the first nine months of the year. In the same period, pledged foreign investment soared 53.4% while disbursed foreign investment rose 8.4% from year-ago levels. General Statistics Office estimates revealed that Vietnam’s GDP grew at the fastest pace of 6.3% since 2008 during the first half of the year. The growth is higher than 5.2% in the same period last year and 4.9% in 2013. The government is on track to reach the four-year high GDP growth of 6.2% this year. According to Asian Development Bank, Vietnam is likely to record the fastest growth in 2015 among the five major Southeast Asian countries tracked by the bank. Thanks goes largely to burgeoning private spending, export-led growth and increasing flow of foreign direct investment. Buoyed by the growth potential, World Bank has predicted that Vietnam’s extreme poverty rate (people living under the income level of $1.9 per day) will decrease to only 1% in 2017 from 2.8% in 2012. Moreover, people living under the income level of $3.1 per day are expected to decline to 6.7% in 2017 from 12.3% in 2012. ETF in Focus The TPP deal as well as the recent spate of optimistic economic data definitely turns our attention to the sole ETF focused on Vietnam (nearly 80%), Market Vectors Vietnam ETF (NYSEARCA: VNM ). VNM seeks to match the performance and yield of the Market Vectors Vietnam Index, measuring the performance of stocks listed in the Vietnamese stock index which generate at least 50% of their revenues from within the Vietnamese economy. The ETF holds 32 stocks, mostly from the financial sector (44%), followed by energy (16.3%) and consumer staples (14%). Its top three holdings include Vincom, Bank for Foreign Trade of Vietnam and Saigon Thuong Tin Commercial. The fund has amassed $425 million in assets and trades in a volume of 450,000 shares per day. It charges 76 bps in fees and returned about 8% in the last one month. Original Post

Does FlexShares’ New Corporate Bond ETF Stand Apart?

Corporate bond market has been hit by global growth concerns lowering the investor outlook on the credit worthiness of the corporations as well as looming interest rate hike. Further, there are concerns about corporate bond market liquidity (read: 3 Bond ETFs to Consider in a Market Slump ). In an attempt to take care of this situation and attract the investment grade corporate bond ETF investors, FlexShares – a unit of Northern Trust Corporation (NASDAQ: NTRS ) – has launched the FlexShares Credit-Scored US Long Corporate Bond Index Fund (NASDAQ: LKOR ) , which focuses on longer maturity corporate bonds. LKOR in Details LKOR follows a recently developed Northern Trust Credit-Scored US Long Corporate Bond Index. As per FlexShares, the index covers a liquid issuer universe, employs a proprietary model for credit scoring and optimizes the index’s constituents to maximize the credit score while maintaining duration, spread and other investment grade-like characteristics. More than 66% of LKOR’s holdings have maturities ranging from 20 to 30 years while more than 27% have maturities ranging from 15 to 20 years. This results in a weighted average effective duration of 13.25 years, as per the issuer. The ETF comprises 136 holdings with Apple Inc. ( OTC:APPL ) occupying the top position with 1.43% share, followed by Time Warner Inc. (NYSE: TWX ) with 1.34% share and JPMorgan Chase & Co. (NYSE: JPM ) with 1.29% share. The top 10 holdings constitute around 12.5% of the fund. As far as sector allocation is concerned, Industrials (23.7%), Consumer (20.8%) and Energy (18.9%) make up the top three positions. Considering country-wise allocation, the fund is heavily biased towards the U.S. with 87.6% share while Canada, U.K., Netherlands, Australia and Spain hold minimal shares. The fund is cheap as it charges only 22 bps in fees from investors per year (see all Investment Grade Corporate Bond ETFs here). How Does it Fit in a Portfolio? LKOR seems to have addressed the investors’ concern about the companies’ ability to repay their debt as economic slowdown in China and low commodity prices may lead corporations to face financial crisis. This is because the issuer has targeted corporate bonds with higher credit quality, lower risk of default and potential for higher yield and price appreciation. On the Standard & Poor’s ratings scale, the fund’s quality breakdown includes investment-grade ratings AAA (2%), AA (14.8%), A (36.6%) and BBB (46.6%). Moreover, the fund seeks to improve liquidity and transparency by excluding illiquid and smaller issuers. The question of liquidity is of high importance as banks, serving as brokers, have reduced their inventories of corporate bonds following post-financial crisis regulations, making bond trading difficult. It is for these reasons the issuer has stated that the ETF provides “a contemporary approach to optimizing credit risk, with improved transparency and liquidity relative to legacy corporate bond benchmarks”. ETF Competition LKOR definitely stands apart from other long term corporate bond ETFs as it addresses the present ailments in the corporate bond market. Still, there are a number of such ETFs that worth to mention due to their popularity. A couple of long term corporate bond ETFs includes the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEARCA: LQD ) and the Vanguard Long-Term Corporate Bond Index ETF (NASDAQ: VCLT ) . LQD tracks the iBoxx $ Liquid Investment Grade Index focusing on 600 highly liquid investment grade corporate bonds in the U.S. It has an asset base of $22.1 billion and focuses on all-term bond duration. On the other hand, VCLT follows the Barclays U.S. 10+ Year Corporate Index focusing on corporate bonds issued by industrial, utility, and financial companies, with over 10 years in maturities. It manages an asset base of $991 million. Both LQD and VCLT look attractive on the cost front with expense ratios of 0.15% and 0.12%, respectively. However, in terms of yield, VCLT (4.14%) is a better option than LQD (3.13%). Link to the original post on Zacks.com

SEC Proposals To Lower Liquidity Risk In Mutual Funds

Periods of large investor withdrawals may spell doom for both fund houses and investors. Many funds have piled up hard-to-sell assets, which are non effective during such periods of withdrawals. The five-member Securities and Exchange Commission (“SEC”) unanimously voted last week to recommend new rules to help the multitrillion asset-management industry with effective liquidity risk management. These additional safety measures will require mutual funds and ETFs to implement new plans to manage liquidity risks. The proposal calls for funds to keep a minimum amount of cash or cash equivalents that can be easily sold within three days (down from seven days currently required for mutual funds). Moreover, fund families may charge investors who redeem their holdings on days of increased withdrawals. The move comes as part of five initiatives framed by the SEC to minimize risks imbedded in such funds and adequately shield them from any financial shock. Since the financial crisis, the asset management sector has been under increasing regulatory scrutiny. The proposals came after the Fed and IMF warned that certain funds may be incapable of keeping up with investor redemptions if there is a market rout. Addressing the Redemption Challenges The challenge is to meet shareholder redemptions during periods of stress and ensure smooth functioning of the funds amid large withdrawals. The SEC targets lower overall systematic risks in the $60 trillion asset-management industry and protection of investors’ interests. “Promoting stronger liquidity risk management is essential to protecting the interests of the millions of Americans who invest in mutual funds and exchange-traded funds,” said SEC Chair Mary Jo White. “These significant reforms would require funds to better manage their liquidity risks, give them new tools to meet that requirement, and enhance the Commission’s oversight.” The Reforms Under the proposal, mutual funds and ETFs must implement liquidity risk management programs and enhance disclosure regarding fund liquidity and redemption practices. These would lead to timely redemption of shares and collection of assets by investors without hampering day-to-day running of the funds. Further, the open-end funds will have to allow the use of “swing pricing” in certain cases. Swing pricing is a liquidity management tool designed to reduce the dilution impact of subscriptions and redemptions on non-trading fund investors. This step would enable mutual funds to reveal the fund’s net asset value (NAV) costs related to shareholders’ trading activity. In addition, the proposed reforms would put a 15% cap on investments that can be made in hard-to-trade assets. As reported by The Wall Street Journal , some of the largest U.S. bond mutual funds have 15% or more of their money invested in such illiquid securities. Need for Covering Liquidity Risks Assets are deemed liquid when an investor can buy or sell large quantities rapidly at an expected price. During market rout, investors may engage in intense panic selling, for which funds must have adequate the liquidity or return cash to investors. For instance, there are fears of bond liquidity once the Fed decides to hike rates. There is a growing concern that a massive exit from bonds may freeze the markets as the number of sellers may not match the number of buyers. An ideal market would have the right level of liquidity at the right price. Redemption of bonds will increase the sell-off and then fund managers will have to sell the less liquid assets to match investors’ cash demands. However, if a mutual fund or an ETF holds illiquid bonds, the price swings will be rapid and would create a vicious cycle as price drops will again end up in selling pressure. Funds with High Liquidity & Low Redemption Fees In such scenario, investors may buy funds that offer high liquidity and low redemption costs. As for liquidity, substantial stock holdings would provide the edge during a debt market sell-off. While withdrawing money from mutual funds, there are certain charges or penalties that investors may have to bear. The charges may include sales load and 12-b1 fees. While selling a fund, investors may have to incur Deferred Sales Charge (Load). There may be funds that carry no sales load, but have 12-b1 fees, which are operational expenses between 0.25% and 1% of the fund’s net asset. Funds may also charge redemption fees. It is different from sales load since it is not paid to a broker but directly to the fund. The SEC has set a 2% maximum ceiling on redemption fees. 3 Funds to Buy Hence, funds carrying no sales load and low expense ratio stuffed with substantial stock holdings in its portfolio should be safe picks. We have narrowed our search based on favorable Zacks Mutual Fund Ranks. The following funds carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or Zacks Mutual Fund Rank #2 (Buy) as we expect the funds to outperform its peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance. The minimum initial investment is within $5000. The funds have encouraging returns for each of the 1, 3 and 5-year periods. The Fidelity Small Cap Growth Fund (MUTF: FCPGX ) seeks long-term capital appreciation. Under normal circumstances, FCPGX invests at least 65% of its total assets in the common and preferred stocks of companies located in at least three countries in Europe, Australia and the Pacific Rim. FCPGX offers dividends, if any, and capital gains, if any, at least annually. Fidelity Small Cap Growth carries a Zacks Mutual Fund Rank #1. While the year-to-date and 1-year returns are 9% and 18%, respectively, the respective 3- and 5-year annualized return is 16.6% and 16.7%. Looking at asset allocation, over 97% is invested in stocks, while it holds 2.8% as cash. Annual expense ratio of 0.90% is lower than the category average of 1.34%. The VALIC Company I Health Sciences Fund (MUTF: VCHSX ) invests the majority of its assets in common stocks of healthcare products, medicine or life sciences related companies. VCHSX focuses mainly on investing in large and mid-cap companies. A maximum of 35% of VCHSX’s assets is invested foreign companies. VALIC Company I Health Sciences carries a Zacks Mutual Fund Rank #2. While the year-to-date and 1-year returns are 13.5% and 26.4%, respectively, the 3- and 5-year annualized returns are 29.9% and 29.7% respectively. Looking at asset allocation, nearly 94% is invested in stocks, while it holds 5.1% as cash. Annual expense ratio of 1.09% is lower than the category average of 1.35%. The Bridgeway Small-Cap Growth Fund (MUTF: BRSGX ) aims to provide total return on capital over the long term. BRSGX invests in a broad range of small cap growth stocks that must be listed on the New York Stock Exchange, NYSE MKT and NASDAQ. Bridgeway Small-Cap Growth carries a Zacks Mutual Fund Rank #1. While the year-to-date and 1-year returns are respectively 6.8% and 12.7%, the 3- and 5-year annualized returns are a respective 16.9% and 16.4%. Looking at asset allocation, 99.5% is invested in stocks. Annual expense ratio of 0.94% is lower than the category average of 1.34%. Link to the original article on Zacks.com