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Legg Mason And QS Investors To Launch Their First 4 ETFs

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Stable Belgium Can Give A Decent Profit

Summary EWK, an ETF based on Belgian shares, has significant relative strength. There are no serious threats to the Belgian economy. Government crisis and bankruptcies in the banking sector are in the distant past. The iShares MSCI Belgium Capped ETF (NYSEARCA: EWK ), based on the shares of Belgian companies, ranks extremely high in the ETF World Matrix with Cash list, edited by investment company Dorsey Wright. To gauge whether this extremely interesting ETF’s ranking is justified, it’s worth looking at what exactly the situation in the Belgium economy is like. First, we should explain how the ranking is done. Dorsey Wright compares selected ETFs with each other (one each for each). There are 34 ETFs that are ranked. The main factor is relative strength of each fund. Relative strength tells us how much the price of the company (or of the fund) grows in comparison to other companies (funds). The relative strength indicator, in conjunction with fundamental analysis is quite effective. Why? On the stock exchange, there is a principle of inertia: a company (or fund) that is growing strongly is hard to stop. Below, you can see top of the World ETF Matrix with Cash ranking order. EWK is in third position. The Guggenheim S&P 500 Equal Weight ETF (NYSEARCA: RSP ) is ranked first and the iShares Dow Jones U.S. ETF (NYSEARCA: IYY ) is second. (click to enlarge) Source: Dorsey Wright So, let’s take a glance at the fundamental situation in Belgium. The Political Situation The political situation in Belgium is now stable. Charles Michel has been at the helm of the government since 11th October, 2014. The Kingdom of Belgium is a federal parliamentary democracy under a constitutional monarchy. It is divided into 3 regions: Brussels – the Capital Region, the Flemish Region and the Walloon Region. Since 1993, there are three levels of government (federal, regional, and linguistic community). In 2012, the sixth state reform transferred additional competencies from the federal state to the regions and linguistic communities. It is worth recalling that a few years ago, Belgium was without a viable government due to a political deadlock between the Flemish and Walloons . This political crisis had paralyzed the country’s political apparatus from June 2010 till December 2011 (for 589 days, Belgium was without a federal government). In this period, the 20 biggest companies index, BEL20, went down 23%, and the 10-year bond yield went up from 3,097 to 5,910 (91%). Euronext Brussels BEL20 Index (BEL20) vs. BELGIUM 10-Year Bond Yield (10BEY.B) Source: Stooq The European Parliament is based in Brussels. For this reason, the city is often witness to protests. Economy and Finances Belgium is a small but highly urbanized and industrialized country. Poor in natural resources, it imports raw materials in great quantity and processes them largely for export. Exports account for around two-thirds of Belgium’s GDP. Almost 75% of its foreign trade is with other European Union countries, so the country is highly exposed to business tendencies in the EU. Belgium is the world’s most congested country, with drivers losing 51 hours a year , on average, to traffic jams (in Brussels, 74 hours). The cost of traffic jams in Belgium is 10.58 euros per hour , according to Leuven transport researcher Sven Maerivoet. Efficient mobility is a big problem for society of Belgium, and traffic jams are causing real harm to the economy. From Q2 2013, Belgium’s GDP growth rate is stable, but rather poor (0-0.5%). In Q2 2015, the country’s economy expanded 0.4% over the previous quarter. The indicator almost perfectly reproduces what is happening in the EU economy (please look at the chart below). The unemployment rate is projected to decrease from a ten-year high of 8.5% last year to 8.1% in 2016 as job creation in the private sector picks up – according to European Commission data. We can name it a “slow-moving recovery”. GDP growth rate: Belgium vs. the EU (click to enlarge) Source: Trading Economics What are the weaknesses of Belgium’ economy according to the European Commission’s “Country Report Belgium 2015” ? Chronic underutilisation of labour, with a low aggregate employment rate A high overall tax burden Competition in several key service sectors remains low One of the most interesting facts about Belgium’s labour market is presented at the chart below. Labour costs in the country are indirectly linked to productivity developments. Productivity and Wage Evolution (2009 = 100) It is no wonder that Belgium falls lower and lower on the index of economic freedom. Belgium – Index of Economic Freedom in 2015, Score: 68.8 (100 represents the maximum freedom) Source: Knoema What is worrying is that the country’s ability to make future payments on its debt is decreasing. Government debt as a percent of GDP (106.50% in 2014) is skyrocketing from 2008 and is higher than the EU average (92%). But what’s interesting is, it’s still below Belgium’s average level from years 1980-2014 (108.96%). Government Debt-to-GDP: Belgium vs. the EU (click to enlarge) Source: Trading Economics Public finances in Belgium are in a condition that is characteristic of those in almost all EU countries: poor, but stable. The country can only dream of having a budgetary surplus. (click to enlarge) We need to put a question mark on the 2015 budget. The Federal state budget deficit plan for 2015 was 8.50 bln EUR . As the end of July, it was 8.33 bln EUR. Yes, the budget deficit is seasonal (tax revenues are notably higher in the second half of the year than in the first half), but it seems that the first half of the year was a bit too wasteful. We should remember also that foreign investors own a majority of Belgium’s treasury certificates and linear bonds. This dependence makes the country very susceptible to a loss of market confidence. And what about ratings? Fitch Ratings : Rating AA affirmed, outlook negative (24/07/2015) S&P : Rating AA affirmed, outlook stable (17/07/2015) Moody’s : Rating Aa3 affirmed, outlook changed from negative to stable (07/03/2014) DBRS : Rating AA (high) confirmed, stable trend (13/03/2015) Japanese Credit Rating Agency : Rating AAA affirmed, outlook stable (01/07/2014) Rating and Investment Information, Inc . : Rating AA+ affirmed, outlook stable (31/08/2015) The Banking Sector In the years 2008-11, Belgium was struggling with a banking sector crisis, which revealed the incompetence of EU regulators and ratings agencies. In October 2011, the country nationalized big bank Dexia ( OTC:DXBGF ), which had passed stress tests year earlier. What’s the situation right now? KBC Bank ( OTCPK:KBCSF ) has repaid 7 bln EUR of federal loans, and it’s in good condition. Dexia is not an active bank. Fortis was rebranded as Ageas ( OTC:AGESF ), and is now an insurer (without toxic assets). What is interesting is that in the next three years, a great consolidation is expected in the Belgian banking sector – according to Ernst & Young’s “European Banking Barometer – 2015” presentation . According to the same report, Belgian bankers expect stabilization in the economy and in the banking market. The Real Estate Market If we look at the chart below, the bubble appears to be growing… (click to enlarge) … but property price levels remain moderate compared to those in other EU member states. Average price/m² of a 120 m² apartment located in the capital (in EUR) (BE – Belgium) Source: Global Property Guide Remember, of course, that in the charts above, we see the effects of extreme easing of monetary conditions in EU. Summary The political situation in Belgium is stable. The economy is in a slow recovery. Federal state finances are not in good shape, but where are they so (speaking about the EU)? The banking sector is recovering. Belgium does not stand out like on the plus side, but there are no serious threats for this country either. The investment mood has been very good, despite China’s fundamental problems. In fact, there are a few good reasons to invest in European equities . For example, quantitative easing provides support to consumption and money supply in the eurozone. Result? Better growth. Those who are already invested in the European and Belgian markets could patiently wait for further developments. For investors who like medium amounts of risk, invest in ETFs with exposure to Belgium. How to invest in the country There are some ETFs with exposure to stocks listed in Belgium. EWK has the largest exposure. 5 ETFs with the largest exposure to Belgium (click to enlarge) Source: ETFdb.com And here we have the most economical solutions: 5 cheapest ETFs with exposure to Belgium (click to enlarge) Source: ETFdb.com You may ask: Where is EWK in this ranking? Well, it’s in the 11th position, with ER = 0.47%. Not so bad. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Revisiting Eurozone ETFs As Economic Growth Falters

After a solid start to 2015, growth in the 19-member Euro zone economy lost momentum due to the Greek debt crisis and deterioration in many emerging market economies as commodities saw a slump and China witnessed a turmoil. The economy grew just 0.3% in the second quarter, down from a two-year record growth of 0.4% in the first quarter and well below the market expectation. This suggests that the Euro zone continues to lag recovery in the U.S., which recorded 2.3% growth in the same period. France and Italy – representing 40% of the currency bloc’s growth – were the major setbacks to the region’s growth in the last quarter. This is especially true, as France recorded zero growth in the second quarter after 0.7% in the first and Italy’s growth slowed to 0.2% from 0.3%. On the positive side, Spain once again turned out to be the outperformer with its quarterly growth increasing from 0.9% in the first quarter to 1% in the second. This was the highest growth rate among the Euro zone nations. Growth in Germany accelerated to 0.4% from 0.3%, while Greece unexpectedly grew 3.1% in the last quarter from 0.1% in the first quarter. Outlook Remains Bright It can be said that the Euro zone has shown strong resilience in a tough environment, which was disturbed by Greece, China and the commodity turmoil. The outlook for the region remains solid heading into the second half of the year given the numerous economic tailwinds that the Euro zone is enjoying. These include ultra-cheap money flows, a boost to liquidity from the European Central Bank’s (ECB) quantitative easing program, a weaker euro and lower oil prices. Improving economic and business activity as well as growing consumer confidence is fueling growth in the 19-member economy. The Euro zone successfully emerged out of the four straight months of deflationary spiral in April and inflation is above the zero level. Notably, annual inflation was 0.2% in July. Further, unemployment across the Euro zone has been falling and remained steady at a three-year low of 11.1% as of June. Given several monetary tools in place, the Euro zone is expected to show strength in the coming months providing a boost to the stocks and ETFs in the region. As a result, we have taken a closer look at some of the ETFs that have the largest exposure to the Euro zone economies. These funds have generated decent returns so far in the year and could continue to do so. iShares MSCI EMU Index Fund (NYSEARCA: EZU ) This product provides exposure to the EMU member countries (those European Union members that use the Euro as currency) by tracking the MSCI EMU index. EZU is one of the most popular ETFs in the broader European space with AUM of nearly $10.9 billion and average daily volume of roughly 6.5 million shares. It charges investors 0.48% in annual fees. The fund holds about 243 securities in its basket with none holding more than 3.15% share. The ETF is a large cap centric fund as about 82% of the portfolio is concentrated on this market cap level. The product has a definite tilt toward financials at 24%, followed by consumer discretionary (14.4%), industrials (13.1%) and consumer staples (10.5%). From a country look, France and Germany take the largest share in the basket with 32.4% and 29.2%, respectively, while Spain, the Netherlands and Italy round off the top five. The fund has returned about 7.1% so far this year and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook. SPDR EURO STOXX 50 ETF (NYSEARCA: FEZ ) This fund follows EURO STOXX 50 Index, which measures the performance of some of the largest companies across the components of the 20 EURO STOXX Supersector Indexes. The fund appears rich with AUM of nearly $4.7 billion, and average daily volume of more than 2.5 million shares. Expense ratio came in at 0.29%. Holding 53 securities in its basket, the product is pretty well spread out across components with no firm making up for more than 5.09% of assets. The ETF is skewed toward financials, as it takes about more than one-fourth of the total assets, while the other sectors receive modest exposure. In terms of country allocation, France and Germany are leading with 36.2% and 30.6% share, respectively, followed by Spain (12.7%), Italy (8.0%), the Netherlands (7.6%), Belgium (3.7%) and Finland (1%). The fund is up nearly 5.6% in the year-to-date time frame and has a Zacks ETF Rank of 3 with a Medium risk outlook. SPDR STOXX Europe 50 ETF (NYSEARCA: FEU ) This ETF is quite similar to FEZ having amassed $280 million in its asset base and trading in volume of less than 74,000 shares per day. It charges 29 bps in annual fees and holds 56 stocks in its basket. While the fund tracks the same index, it is slightly different from FEZ in terms of sector and country holdings. Here, financials and health care take the top two spots in terms of sectors with over 24% share each while consumer staples and energy round off the top four with double-digit exposure each. Country weights for the top three are United Kingdom (35.4%), Switzerland (23.1%) and Germany (14.7%). The product is up 6.1% so far this year and has a Zacks ETF Rank of 3 with a Medium risk outlook. iShares Currency Hedged MSCI EMU ETF (NYSEARCA: HEZU ) For investors looking to manage currency risk while remaining invested in the Euro zone stocks, HEZU might be a good option. The fund follows the MSCI EMU 100% USD Hedged Index and is a play on the popular unhedged fund ( EZU ) with a hedge to strip out the euro currency exposure. The fund holds 263 well-diversified securities in its basket dominated by financials (24.4%) and followed by consumer discretionary (14.7%), industrials (13.3%) and consumer staples (10.7%). The ETF has amassed $1.8 billion in its asset base since its debut a year ago and trades in good volumes of more than 941,000 shares a day. The fund charges 50 bps in annual fees from investors and has delivered impressive returns of over 15% so far this year. It has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating. Bottom Line Given the encouraging trend, Euro zone will likely get a boost in the coming months. So investors could jump into this space and could ride out the strength with any of the above-mentioned ETFs. Original Post