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8 ETFs To Watch In December

Traditional investors may pin hopes on the Santa Claus rally in the most successful month of the year, i.e., December, but they should note that this time Christmas might be a little dull, defying the natural progression of the end-of-season rally. A consensus carried out from 1950 to 2013 has revealed that December has ended up offering positive returns in 49 years and negative returns in 16 years, with an average return of 1.59%, as per Moneychimp , the best of the year. But this year, the Fed is scheduled for a rate hike after a decade, provided the economic momentum remains the same. And though the move now seems well digested by the market, a certain shock is inevitable post lift-off. In any case, 2015 had been quite downbeat so far. Even historically strong months couldn’t live up to investors’ expectations. All these made December a keenly watched month for the investing legion. We thus pinpoint a few ETFs that are highly in focus and could hop or drop in December. iPath U.S. Treasury Flattener ETN (NASDAQ: FLAT ) As the Fed hikes the benchmark interest rate, the initial blow would be at the short-end of the yield curve. The investing world has already started to prepare for the move. As a result, yield on the 6-month Treasury note soared 15 bps, from the 0.27% level seen at the start of November to 0.42% on November 30. In the same time frame, the yield on the 10-year Treasury note rose just 1 basis point to 2.21%. In fact, in the recent sessions, yields on 10-year U.S. Treasuries declined, indicating a flattening of the yield curve. So, a keen watch on the inverse bond ETF FLAT is needed to earn some quick gains from the bond market. This product provides inverse exposure to the Barclays US Treasury 2Y/10Y Yield Curve Index, which delivers returns from the steepening of the yield curve through a notional rolling investment in U.S. Treasury note futures contracts. FLAT was up 1.3% in the last one month. ALPS Barron’s 400 ETF (NYSEARCA: BFOR ) This all-cap U.S. equity ETF could be in watch in December. The fund could be used as a representative of the total stock market performance in a volatile (expectedly) month. It is made up of high-quality U.S. stocks. Since the month of December is likely to stay volatile and large-cap stocks might be hurt by a rising greenback post Fed tightening, an all-cap quality U.S. ETF might be the key to win ahead. ALPS U.S. Equity High Volatility Put Write Index ETF (NYSEARCA: HVPW ) The markets are likely to be wobbly post lift-off, and volatility levels should spike. Going bull on high-beta stocks may lead you to losses then. If this happens, investors can have a look at alternative ETFs like HVPW. The fund looks to take advantage of the stocks with the highest volatility in the U.S. equity markets. As the volatility in a given stock rises, so does the price of the options traded on it. The underlying index of the fund seeks to generate income by selling put options on the most volatile stocks in a given two-month period, along with interest earned on T-bills. HVPW added over 0.6% in the last one month. Vanguard High Dividend Yield ETF (NYSEARCA: VYM ) Since income ETFs underperform when rates rise, this high-income U.S. equities ETF might fall out of investors’ favor in December. However, still-subdued inflation and global growth worries might keep the yields on benchmark 10-year U.S. Treasury from rising fast. If this happens, VYM may not be as hit as it is feared right now. As of November 30, 2015, the fund yielded about 3.09%, while the yield on benchmark 10-year U.S. Treasury is 2.21%. VYM is down about 0.9% in the last one month (as of November 30, 2015). iShares U.S. Preferred Stock ETF (NYSEARCA: PFF ) Even in a rising rate environment, there are ways beat to the benchmark Treasury yield and earn smart income. Preferred stocks are one such option. Preferred stocks are hybrid securities that are characterized by both debt and equity. They have a higher claim on assets and earnings than common stock. These securities are less volatile than stocks, and yield in the range of 5-6%. PFF yields 5.87% as of November 30, 2015, while it charges 47 bps in fees. The fund was up about 3% in the last one month. iShares Russell 2000 ETF (NYSEARCA: IWM ) Small-cap stocks are the barometer of domestic economic health. So, when the U.S. economy shifts gear in December and experiences policy normalization, small-cap stocks should be the most beneficial zone. While small-cap growth ETFs like the PowerShares Fundamental Pure Small Growth Portfolio ETF (NYSEARCA: PXSG ) and the iShares Russell 2000 Growth ETF (NYSEARCA: IWO ) have already started rallying, we believe these could be high-risk choices, as smaller-capitalization and growth stocks are highly volatile in nature and succumb to a slowdown once the Fed hikes rates. So, investors can keep a close watch on small-cap blend ETFs like IWM. This Zacks Rank #2 (Buy) ETF was up over 3.2% in the last one month. WisdomTree International Hedged Dividend Growth ETF (NYSEARCA: IHDG ) While the Fed is preparing for a hike, other developed economies of the world and a few emerging economies are going the opposite direction. Due to growth issues, global superpowers like Europe, Japan and Australia are presently pursuing easy money policies. While stocks of the concerned region are likely to soar, a currency-hedged approach is essential to set off the effect of a surging greenback. IHDG serves both aspects. Moreover, IHDG takes care of investors’ income too, as the fund selects dividend-paying companies with growth features in the developed world ex-U.S. and Canada. This Zacks ETF Rank #3 (Hold) ETF was up over 1.9% in the last one month and yields 1.86%. Market Vectors ChinaAMC SME-ChiNext ETF (NYSEARCA: CNXT ) China, the epicenter of the global chaos in summer, should also be in focus in December. In any case, this segment is exhibiting excessive volatility lately, throwing shocks and surprises now and then. While Chinese stocks and ETFs soared at the start of November on a flurry of economic and demographic policy easing, it suffered its worst decline since summer to conclude the month. News about securities regulators’ probe into brokerages caused a stock market rout in China. On the positive side, the IMF agreed to declare yuan as a reserve currency, which hints at a stable economy. So, Chinese ETFs are on the fence now, with possibilities and perils on either side, and investors may be interested in tracking its course in December. Original Post

Which Markets Currently Offer Value And Which Are Best To Avoid?

Summary Analysis of world equity indices can give an idea as to which equity markets provide good investment opportunities and which are best to avoid. Currently, investors should be very alert about investments, particularly on British, Brazilian, Canadian, Mexican and Russian stock exchanges. On the other hand, Chinese H-Shares, South Korean and Vietnamese equities have the capacity for a positive surprise. However, the indisputably best investment opportunity seems to lie in Japan as Abenomics is in full swing. As globalization and new technologies evolve, differences between individual countries are inevitably diminishing. Greater interconnectedness causes local risks to easily spread around the globe and short-term profit opportunities to be quickly seized. However, investors can still find long-term economic moats if they fully understand the underlying timeless principles of equity investing. First of all, they have to realize that the progress of the fundamental value of an investment is strongly correlated with earnings of that investment in the long run. Therefore, investors should focus their attention in this direction and not get fooled by any incidental events. Second, it absolutely crucial to know by heart Warren Buffett’s famous mantra: ,,Price is what you pay, value is what you get.” And third, be aware that proper diversification is a must, otherwise you may face a nervous breakdown in this rapidly changing world. Recently, in light of growing economic and geopolitical tensions, I have been thinking about the geographical allocation of my portfolio. In order to complement broadly discussed issues in financial media, I decided to identify which markets currently offer generally good investment opportunities based on valuation multiples, return on equity and earnings growth analysis of major world equity indices. Price-To-Earnings Looking at the comparison of current PE ratios below, we quickly spot Russian MICEX and several Asian indices among the lower multiples on the left side of the chart and Mexican Mexbol, Brazilian Bovespa and British FTSE on the right side of the chart with higher multiples. Even though PE ratio is widely used valuation metric, it has limitations and hence should be taken with caution. Current Enterprise Value To Trailing Twelve Months EBITDA Especially in the cases of Russia and China, PE indicators may be very misleading since we have heard that the recent Chinese stock frenzy was largely fueled by borrowed money. As a better valuation indicator can then serve EV/EBITDA ratio as it adequately accounts for the level of leverage. Compared to the previous chart, we can clearly observe the shift of Chinese A-Shares index Shanghai Composite to the expensive zone of the chart. Nevertheless, notice that Chinese H-Shares index Hang Seng remained on the relatively cheap side of the chart. Price-To-Book P/B is another popular financial ratio used to gauge market valuation of a stock. However, some assets may be not worth buying even when they trade below their book value. Although Russian equities are boasting with extremely low valuation multiples, they are cheap for good reason. The stiffness of the local business environment and the risk of losing the whole investment due to eventual nationalization of assets are simply too high. Return On Common Equity Moreover, Russian equities together with Brazilian, Canadian and British have the lowest Return on Equity in the given sample. ROE is an important profitability measure and a critical weapon in many value investors’ arsenals. In 1972, Buffett implied that he desires a rate of return on equity of at least 14%. Nine years later, he identified the average rate of return on equity of American companies at 11%. To the last day of October this year, ROE of the S&P 500 totaled 12.5%. 3 Years Earnings CAGR Because of the strong relationship between earnings and market prices in the long-term, one should also assess earnings growth. The following chart captures earnings growth (in %) for the most recent 3 continuous years, ending on the last trading day of October 2015. As you can see, profitability of Russian, Brazilian, British, Canadian and Mexican companies suffered significant losses in recent years, while several Asian indices led the earnings growth. Undoubtedly the most notable rise in earnings was recorded in Japan as the yen heavily depreciated during the given period. Japanese economic miracle 2.0? The fact that the Japanese economy is slowly heating up after long period of deflationary pressures has already been noticed by several renowned economic journals . In order to spur the yet fragile economic recovery, Japan’s Prime Minister Shinzo Abe last week rolled out additional fiscal stimulus. Whether we will witness the second ‘Japanese economic miracle’ can be hardly predicted, but for now, it is quite obvious that Abenomics has considerably changed the course of the third largest world economy. Furthermore, most of Abe’s reforms greatly emphasize the importance of corporate efficiency with a particular focus on ROE. This could help Japanese shares move even higher in the upcoming years. The Bottom Line Probably the best way how to invest in a country’s equity market is through some ETF. The most liquid ETFs with exposure to Japan’s equity market are the iShares MSCI Japan ETF (NYSEARCA: EWJ ) and Japan Hedged Equity Fund (NYSEARCA: DXJ ). Based on the comparison charts above, Chinese H-Shares seem to be surprisingly a good value play even despite the concerns about a slowdown of the Chinese economy. Favorite ETFs consisting of securities listed on the Hong Kong stock exchange include the iShares China Large-Cap ETF (NYSEARCA: FXI ), iShares MSCI China Index Fund (NYSEARCA: MCHI ), SPDR S&P China ETF (NYSEARCA: GXC ) and Guggenheim China Small Cap ETF (NYSEARCA: HAO ). South Korean equities also do not look bad and could be substantially boosted by potential monetary response of local central bank as I wrote about earlier this year . ETFs that could eventually thrive are the iShares MSCI South Korea Capped ETF (NYSEARCA: EWY ), Deutsche X-trackers MSCI South Korea Hedged Equity ETF (NYSEARCA: DBKO ) and the WisdomTree Korea Hedged Equity ETF (NASDAQ: DXKW ). However, not all country ETFs suitably track broad equity indices’ fundamentals. For example, the only ETF providing sole exposure to the Vietnamese equity market – Market Vectors Vietnam ETF (NYSEARCA: VNM ) – mismatches the returns of the national stock market index Vietnam Ho Chi Minh Stock Index (VN Index) by a great deal. Hence, thorough analysis of specific investment instrument should never be neglected as it can easily hamper your original investment objective. With respect to high valuations and weak profitability, the most popular ETFs that should be shorted or avoided by long-only investors are the iShares MSCI United Kingdom ETF (NYSEARCA: EWU ), iShares MSCI Canada ETF (NYSEARCA: EWC ), iShares MSCI Mexico Capped ETF (NYSEARCA: EWW ), Market Vectors Russia ETF (NYSEARCA: RSX ) and iShares MSCI Brazil Capped ETF (NYSEARCA: EWZ ). Note: All presented figures in the charts were exported from Bloomberg Terminal as of 10/30/2015.