Tag Archives: chinese

U.S. Treasury ETFs Rise On Yuan Devaluation

The global investing world across asset classes was caught off guard on August 11 as Chinese policymakers devalued the country’s currency by 2% against the greenback to boost its waning export profile. The step resulted in the largest single-day decline since the historical devaluation in 1994 , after China arranged its official and market rates in a line. As a result, yuan has now plunged to a four-year low level. The Chinese central bank defended its currency intervention ‘as a free-market reform’, but global experts apprehend a currency war in the near future, especially among the Asian tigers. Most export-centric economies are likely to resort to currency devaluation to rev up their exports. However, yuan devaluation took the global markets in its grip as most asset classes were in red. In fact, the move was criticized by U.S. lawmakers and viewed as means of taking undue favor in exports. Bloodbath in global equities, commodities and currencies spurred a flight to safety for a valid reason. Several ETFs on safe haven assets including greenback-based PowerShares DB US Dollar Index Bullish Fund (NYSEARCA: UUP ) and gold bullion-based SPDR Gold Shares (NYSEARCA: GLD ) added gains on August 11. UUP gained 1.5% after hours and GLD added 0.5% in the key trading session. Here investors should note that the UUP’s strength came mainly on the back of Yuan devaluation and the looming Fed rate hike concern; a safe haven criterion played a lesser role for its ascent. On the other hand, though gold advanced for a day, we are skeptical about its momentum as the metal is due for a southward ride (presumably) in the near term due to a number of issues. In fact, this yuan devaluation will likely curb the import demand of gold from China (a key gold consuming nation) as a feebler currency will turn imports pricier. U.S. Treasury: True Safe-Haven In such a backdrop, investors started to position themselves for the imminent volatility in the risky assets and started to park their money in the safer U.S. treasuries, despite the Fed rate hike worries. Most U.S. treasury ETFs, specially the long-dated ones, added considerable gains on August 11. Yields on the U.S. benchmark 10-year notes, slipped to 2.15% on August 11 from 2.24% the day before. Below we have highlighted four Treasury ETFs that have hogged investors’ attention lately and added gains despite the looming rate hike concerns. Vanguard Extended Duration Treasury ETF (NYSEARCA: EDV ) This fund provides exposure to the long-term Treasury STRIPS market by tracking the Barclays U.S. Treasury STRIPS 20-30 Year Equal Par Bond Index. The fund holds 71 bonds in total with effective maturity of 25.2 years and average duration of 24.8 years. Expense ratio comes in at 0.12%. The product has amassed $379.2 million in its asset base. Its gains came in at 2.14% in the yesterday’s session (on August 11). Pimco 7-15 Year U.S. Treasury Index Fund (NYSEARCA: TENZ ) The fund looks to track the returns of the BofA Merrill Lynch 7-15 Year US Treasury Index. The index is unmanaged and tracks the performance of the direct Sovereign debt of the U.S. Government with at least $1 billion in outstanding face value and a remaining term to final maturity of at least 7 years and less than 15 years. The fund has amassed over $24 million in assets so far and charges 15 bps in fees. The fund holds 15 bonds in total with effective maturity of 9.03 years and average duration of 7.89 years. TENZ was up over 2.8% in the last session. iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ) The ultra-popular long-term Treasury ETF – TLT – tracks the Barclays Capital U.S. 20+ Year Treasury Bond Index and has AUM of $4.92 billion. Expense ratio comes in at 0.15%. Holding 29 securities in its basket, the fund focuses on the top credit rating bonds with average maturity of 26.82 years and effective duration of 17.35 years. The fund was up 1.6% on August 11. SPDR Barclays Capital Long Term Treasury ETF (NYSEARCA: TLO ) The fund considers U.S. treasuries that have a remaining maturity of 10 or more years. The $201 million-fund holds 45 securities with average maturity of 24.98 years and effective duration of 17.23 years. The fund charges 10 bps in fess and was up about 1.5% on August 11. Bottom Line Having said this, we would like to note that the bond market is in a volatile mood. Especially the U.S. fixed income space is in a tug of war between safe haven demand and the imminent Fed rate hike. Though U.S. benchmark yields fell lately, any hint at Fed policy normalization will once again push up interest rates. So, edgy investors need to be hawk-eyed before playing the safe-haven fixed-income securities in this choppy market. Original Post

Emerging Market ETFs Slip To 52-Week Lows

Emerging markets have been out of investors’ favor over the past several months piling up heavy losses. Notably, the MSCI Emerging Markets Index plunged 20% since its peak last September, indicating that it has entered into a bear territory and will drop further. This is mainly due to slow economic growth, China turmoil, low commodity prices, falling exports, sluggish currencies, strong dollar, rising Treasury yields, and a looming interest rate hike. The worries deepened in recent weeks following solid July jobs data that raised the chances of the Fed pulling its trigger on the first rate hike in almost a decade, as early as next month. The end of a cheap and an abundant dollar era would pull out more capital from these markets, stirring up trouble for most emerging nations. Further, China’s surprise decision to devalue the yuan in order to boost its export competitiveness has triggered the broad sell-off in the emerging markets this week. This is because devaluation of the yuan means cheaper Chinese exports, lower prices for commodities and lower stock prices (read: ETFs to Move on Yuan Devaluation ). The bearish trend is expected to persist in the months ahead given that the emerging markets will continue to struggle from twin attacks of an interest rate hike and lower commodity prices. As a result, the World Bank lowered its 2015 growth forecast for these nations to 4.4% from 4.8%, and the International Monetary Fund cut its growth outlook to 4.2% from 4.6%. Moreover, recent economic data suggests that growth in emerging markets stagnated in July and employment fell for the fifth successive month. This is especially true as Markit Emerging Market PMI number of 50.2 for July remained close to 49.6 recorded in June, suggesting that emerging markets are growing at a meager 4% annually. This growth rate has been the weakest since 2002 excluding the 2008-09 global financial crisis and the 2013 “taper tantrum”. In this tough environment, emerging markets stocks and ETFs have been on a wild ride over the past several months. While most of the products have seen terrible trading, we have highlighted four ETFs that slipped to 52-week lows in the last session and could see steeper falls in the days ahead. All these funds currently have a Zacks ETF Rank of 3 or “Hold” rating. SPDR S&P Emerging Markets Dividend ETF (NYSEARCA: EDIV ) This fund provides exposure to the stocks from emerging market countries that offer high dividend yields by tracking the S&P Emerging Markets Dividend Opportunities Index. It has accumulated $370.6 million in its assets base and trades in an average daily volume of roughly 68,000 shares. Expense ratio came in at 0.49%. In total, the fund holds 121 stocks in its basket with none holding more than 3.39% of total assets. The product is slightly skewed towards financials at 26.9%, followed by telecom services and information technology with 18.1% share each. Taiwan accounts for one-fourth of the portfolio while South Africa and Brazil round off the next two countries with double-digit allocation each. The ETF dropped to a 52-week low of $28.45 per share, plunging 18.7% over the past three months. PowerShares FTSE RAFI Emerging Markets Portfolio ETF (NYSEARCA: PXH ) This ETF follows the FTSE RAFI Emerging Markets Index, a benchmark that seeks to track the performance of the largest emerging market equities on four fundamental measures – book value, cash flow, sales and dividends. Holding 338 securities in its basket, the fund allocates no more than 3.5% in a single security. Financials (32.1%) and energy (23.2%) take the top two spots while other sectors make up for a single-digit allocation in the basket (read: Can Emerging Market ETFs Defy U.S. Rates Hike? ). In terms of country holdings, about one-fourth of the portfolio goes to Chinese firms while Brazil, Taiwan and Russia round off the next three spots with double-digit exposure each. The fund has amassed $387.8 million in its asset base, and trades in a good volume of around 220,000 shares a day. It charges 49 bps in annual fees from investors. PXH lost 16.7% over the past three months and touched a new 52-week low of $16.63 per share. iShares MSCI Emerging Markets ETF (NYSEARCA: EEM ) It is the most popular and widely traded emerging market ETF with an AUM of $24.2 billion and average daily volume of more than 47.6 million shares. The fund tracks the MSCI Emerging Markets Index and charges 68 bps in annual fees from investors. Holding 846 securities, the product is widely spread out across various components with each holding less than 3% of assets. However, the product is tilted towards the financial sector at 29.4%, followed by information technology (17%). Among the emerging countries, China takes the top spot at 23.9% while South Korea and Taiwan round off the next two spots with double-digit exposure each. The fund slid to a 52-week low of $35.78 per share, representing a loss of about 13% over the past three months (read: ETFs to Lose or Gain from Solid July Job Data ). Vanguard FTSE Emerging Markets ETF (NYSEARCA: VWO ) This fund tracks the FTSE Emerging Index and holds 1,022 securities in its basket. Like the other counterparts, this ETF is also spread out across various securities as none holds more than 3% of assets. Here again, financials is the top sector accounting for 28%, followed by technology (13%), energy (9%) and consumer staples (9%). Chinese firms dominate the fund’s portfolio at nearly 26%, closely followed by Taiwan (14%) and India (12%). VWO is also by far the most popular fund having an AUM of $43.8 million and an average daily volume of 11.5 million shares. It charges 15 bps in annual fees and expenses. The ETF shed 12.2% in the past three months by touching a new 52-week low of $37.04 per share. Original post

Optimal Global Equity Allocation WIth Individual Stocks

Summary Even a smallish portfolio stock can be well diversified internationally. Individual investors typically do not rely on asset correlations in their investment decisions. Portfolio risk-return efficiency can be enhanced by exploiting asset correlations. An “optimized” portfolio doesn’t neutralize stock risk: returns are likely to issue from well-known risk factors. In previous articles, I have discussed both minimum volatility portfolios and domestic equity allocation . In the former article, we saw both that accounting for the volatility and correlation how expanding the equity set can lead to better investment outcomes in terms of terms Sharpe ratios (risk-reward efficiency). In the latter article, we saw how a collection of individual stocks with a bit of discretion can perform better than a portfolio of risk-diluted ETFs. This article blends the two approaches by creating a stock-based portfolio with some of the qualities of an allocation-based strategy, but using individual stocks. The goal is to develop a portfolio of 20-50 stocks – this is about the number needed to create a reasonably diversified portfolio whilst remaining tractable enough to manage. Individual investors with small portfolios typically reduce risk through large-cap and dividend stocks, emphasizing careful stock selection over portfolio construction. In contrast to that intuitive and legitimate approach, the idea here is to reduce risk by exploiting the statistical covariance of the entire global equity market. This will be done using constrained mean-variance optimization. The next section describes the process and structures that define the solution portfolio, but if you want to use this article as a “quick pick list” for risk-efficient stocks with low correlation, feel free to jump down to results and discussion. Investable Universe With over 37,000 equities to invest in worldwide, security selection is a daunting process. Like most ETF benchmark indices that number needs to be winnowed down for reasons of both tractability and investability. What might be considered the closest proxy for the world portfolio, (NYSEARCA: VT ), has only about 7,300 securities. In this exercise, the initial pool screened for stocks with at least 3 analyst estimates left about 6,200 assets. This screen acts as an implicit liquidity screen, and biases the sample toward large-cap stocks and well-followed small/mid-caps. The next screen limits stocks to those with dividend yield greater than the median (1.9%) and the forward earnings yield (EPS/price) is likewise greater than the median (5.25%). The expected dividend has to be less than expected profit, and book value must be positive. This leaves about 1,100 stocks. The equities are divided into 4 market capitalization based classes: micro ( Additional disclosure: I own some of the stocks in the solution portfolio as similar optimization techniques belong to my normal repertoire of security selection.