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DXGE: The Euro Advantage

DXGE is a relatively new fund with solid returns since its inception. DXGE is weighted towards cyclicals in the best performing EU economy. The fund utilizes a U.S. Dollar hedge to protect against Euro volatility. There are several good ways to invest in Europe through individual country ETFs or by NYSE-ARCA listed European companies. One recent listing is the WisdomTree’s Germany Hedged Equity ETF (NASDAQ: DXGE ) . The German economy is, by far, the best performing industrial EU economy. The Euro has been weakened by extraordinary quantitative easing and by the continuing Greek debt impasse. A weak Euro benefits the German export economy greatly; however, currency volatility can work against an economy, too. Even hedging a portfolio will not eliminate currency risks entirely, but properly managed it will dampen volatility. In particular, it might ‘buy a little time’ for the investor to react should currency volatility suddenly work against a portfolio. According to WisdomTree: The Index and the Fund are designed to provide exposure to equity securities in Germany, while at the same time hedging exposure to fluctuations between the value of the U.S. dollar and the Euro . Germany has a $3.6 trillion dollar economy, 6th largest by World Bank GDP purchasing power parity calculations, with 2015 estimated 1.8% annualized growth and 15th per capita PPP-GDP at $44,469.00. According to the Deutsche Bundesbank Monthly Report , the economy grew 0.3% in the first quarter, down from the previous quarter’s reading of 0.7% but rebounded in the second quarter: … The German economy has recovered more quickly than expected from the cyclical lull in the middle of last year… …Bundesbank economists write that the economy has returned to a growth path underpinned by domestic and foreign demand… …Although foreign trade is currently being hampered by dampening global dynamics, it is simultaneously being buoyed by the euro’s depreciation and the strengthening economic recovery in the euro area. …In this setting, Bundesbank economists estimate that growth of 1.7% in Germany’s real gross domestic product (GDP) this year could be followed by a rise of 1.8% in 2016 and 1.5% in 2017. In calendar-adjusted terms, this would be equivalent to expansion rates of 1.5% in 2015 and 1.7% in both 2016 and 2017… In other words, in spite of all the issues in Europe and Asia, the German economy is still expected to grow. (click to enlarge) The top ten holdings should give the investor a good grasp of Germany’s global corporate dynamic. Of the fund’s top ten holdings 15.959% are automotive companies . The largest holding is Daimler AG ( OTCPK:DDAIY ) at 6.4195%; Daimler has 279,972 employees in production facilities in Europe, North and South America, Asia and Africa. Bayerische Motoren Werke ( OTCPK:BAMXY ) follows at 5.47505% of the top holdings; BMW employs over 100,000 in 14 countries. Lastly is Volkswagen ( OTCQX:VLKAY ), at 4.06418% of the top weighted companies, with 592,586 employees in 31 countries. (Data from WisdomTree) Financials comprise two of the top ten holdings accounting for 18.825%. Allianz ( OTCQX:AZSEY ) is a global financial services company, employing 147,000 in over 70 countries; accounting for 5.96224% of the fund. Muenchener Rueckversicherungs ( OTCPK:MURGY ), at 4.06405%, promotes itself as a global ‘one stop’ primary and re-insurer with 43,000 employs world-wide. Industrials have two companies in the top ten holdings. BASF ( OTCPK:BFFAF ), at 5.11571%, is a diversified manufacturer of both industrial and consumer products with 112,000 employees globally. Siemens ( SIE ), 5.10539%, manufactures industrial equipment, provides financial solutions for industrial customers and also has a consumer products division. Siemens employs over 343,000 in 300 countries. Industrials account for 19.191% of the top ten holdings. There’s an important point to be made here. Since a large portion of manufacturing and services are located outside of Germany, it’s reasonable to assume that if cost reductions are necessary they will be spread out globally. Thus work force reductions, if needed, can be widely distributed, minimizing the impact on local economies. The most telling statistics are the weightings which favor an expanding economy. Cyclicals such as Consumer Discretionary, Financials and Materials, account for a combined 51.42%. Cyclically sensitive sectors such as Telecom Services, IT, and Industrials, account for a combined 28.31%. Lastly, defensive holdings such as Consumer Staples, Utilities and Health Care, account for a combined 20.27%. In total, over 75% of the most heavily weighted holdings are cyclicals or semi-cyclical. Germany’s largest exports are: Autos at 11.22% of all exports; Vehicle Parts, 4.12%; Medicaments, 3.64% and Aerospace, 2.44%. It should also be noted that Engine Parts are 7th at 1.09%; Delivery Trucks, 12th at 0.90% and Transmissions, 13th at 0.87% of all exports. This is indicative of final auto assembly completed outside of Germany. Among the top export partners are: France at 8.81%; United States, 8.14%; China, 6.35%; United Kingdom, 6.21% and Netherlands, 5.84%. (click to enlarge) (Data from OEC) Of those top ten export destination, two present a serious problem. First is the continuing conflict in Ukraine, for which Germany is the leading moderator for a resolution. Russia’s top imports from Germany are automobiles, vehicle parts and machinery. Next is China which has been experiencing slowing growth. China imports automobiles, vehicle parts, aerospace products and machinery. Combined, Russia and China account for 18% of German industrial exports. (click to enlarge) The German export economy has an advantage by the weak Euro. Hence, German companies should reflect quarter over quarter earnings growth which in turn should reflect in equity market gains. Also job and wage growth, consumer spending and other domestic metrics should fare better than the EU as a whole in an uneven global economic environment. (click to enlarge) The fund holds $405,900,000 of assets in 78 equity holdings, as well as a short-long currency forward contract hedge. The ETF itself has 13,550,000 shares outstanding with a recent market price of 29.52 and a Net Asset Value of $29.96, thus trading at a discount to the NAV of about 1.49%. The average daily trading volume is approximately 140,487 shares. There are two competing currency hedged funds; three have nearly equal positive one year returns, one of which is the WisdomTree Fund. Three others have negative year returns. The table below compares the annualized returns of the Deutsche X-trackers MSCI Germany Hedged Equity ETF (NYSEARCA: DBGR ) and the iShares Currency Hedged MSCI Germany ETF (NYSEARCA: HEWG ). Note that WisdomTree uses its own underlying Germany Hedged Equity Index , while the X-Tracker and iShares utilize the MSCI Germany Hedged Index Fund (Mkt) 1 Month 3 Months Year to Date 1 Year 3 Year WisdomTree DXGE -3.55% -7.67% 15.86% 9.81% Incepted 10/17/13 X-Trackers DBGR -3.74% -8.21% 12.19% 10.36% 12.40% iShares HEWG -4.22% -8.58% 10.88 9.89 Incepted 1/31/14 In conclusion, this is a well-constructed single country focused fund, hedged against Euro weakness, with particularly good potential while the weak Euro gives its exports a price advantage. 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. Additional disclosure: CFDs, spreadbetting and FX can result in losses exceeding your initial deposit. They are not suitable for everyone, so please ensure you understand the risks. Seek independent financial advice if necessary. Nothing in this article should be considered a personal recommendation. It does not account for your personal circumstances or appetite for risk.

Will The Fed And China Bring GLD Back Up?

Summary The FOMC will convene again next week. China has been stocking up on gold in the past few years. Will China’s strong demand for the yellow metal save GLD? The U.S. GDP for Q2 will also be released this week. Will it move the price of GLD? The recent plunge in the price of SPDR Gold Trust (NYSEARCA: GLD ) brought the gold ETF to its lowest level since 2010. The weakness of China’s economy, the expectations of a rate hike by the Federal Reserve, the recovery of the U.S. dollar , and the general bearish sentiment in the commodities markets are keeping gold down. Even the recent news of the high growth in China’s gold accumulation hasn’t stopped the price of GLD from falling. Let’s examine some of these issues with respect to the general direction of GLD. The Fed and GLD The bets around the first rate hike of the Federal Reserve continue. For now, the market still places very low odds on a rate hike in September: the implied probabilities are only 19% — slightly higher than back in late June, albeit this probability is still low; for the October meeting the odds are 36% and for December the odds are 56%. St. Louis Fed President Bullard recently stated that the odds of a rate hike in September are actually better than even. Also, the Fed inadvertently published that staff economists also expect a rate gain this year. In any case, a rate hike, even just 0.25%, will have more of an impact on the market expectations, which could drive further down the price of GLD. In a related story, the San Francisco Fed released a paper , in which the current U.S. inflation does not signal a statistically significant deviation from the inflation target, considering the high monthly volatility in inflation estimates. This paper is optimistic about the progress of U.S. inflation that will eventually rise to the Fed’s target of 2%, even though it wasn’t able to bring inflation to this level over the past three years. This week, the FOMC will convene again. The FOMC isn’t expected to change its policy in the upcoming meeting, but it will show if the FOMC members are turning more dovish and getting ready for liftoff in September. One factor, among several, that could impact members’ decision about the timing of the rate hike is the upcoming GDP report for the second quarter. The current expectations are for the GDP for Q2 to show a growth rate of 2.7% — any negative surprise of lower growth rate could reduce the odds of a rate hike anytime soon and tilt the scales back to the doves in the Fed. China stocking up on gold China has finally revealed the amount of gold it has been stocking up in the past several years. The amount of gold rose from 1,054 tons back in April 2009 to 1,658 tons in June 2015 – 57% increase during the entire period or an average annual gain of around 8%. This puts China as the fifth biggest hoarder of gold among all countries. China also bought gold at a faster pace than any other country. This accumulation rate seems impressive, but a more detailed examination reveals the country has also increased its foreign exchange reserves during that period from a net worth of $2,008 billion to around 3,609 billion as of June 2015 for an 84% growth. But even if we were to consider the net value of gold, which also grew during that period (back in April 2009 gold price was $890 per ounce) then the value of China’s gold reserves from its foreign exchange reserves only inched up from 1.4% to 1.5%. So it remained relatively flat. In other words, the country hasn’t increased its share of gold from total foreign reserves. Moreover, China is already facing too many problems in keeping up the high surplus in its current account to further grow its foreign reserves. China’s economic growth is on shaky ground and so relying on China to drive GLD’s price back up to its former glory days may be questionable at best. Despite the negative sentiment related to the gold market, GLD could surprise and make short-term recoveries, especially if the FOMC were to present a more dovish statement and the U.S. GDP comes in short of market expectations. Even so, it will need a real change in the direction of the U.S. economy for the FOMC not to raise rates this year. Finally, as long as the FOMC considers normalizing its monetary policy in the coming months, GLD’s long-term outlook doesn’t seem positive. For more please see: Gold’s Flash Crash – What Happened to My Precious (Metal)? 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.

2 Words Of Caution For The VelocityShares Daily Inverse VIX Short-Term ETN

There are some articles on SA which have recommended purchasing the XIV, based on its pronounced outperformance of the market. However, investors who are tempted to initiate a position in this ETF should be very well aware of its extremely high risk. XIV can go to zero on a single day. It lost 71% in the summer of 2011, while the market lost 16%. There are some articles on SA which have recommended purchasing the VelocityShares Daily Inverse VIX Short-Term ETN (NASDAQ: XIV ). These articles emphasize the exceptional returns of this ETF since its introduction 5 years ago, as well as its pronounced outperformance of the S&P (288% vs. 78%). However, investors who are tempted to initiate a position in this ETF should be very well aware of its extremely high risk. Therefore, I consider it irresponsible of those who recommend it without mentioning its risk. First of all, XIV aims to replicate, net of expenses, the inverse of the daily performance of the S&P 500 VIX Short-Term Futures index. Therefore, XIV exhibits great performance when the market rises and volatility is low. Even better, when the market is in a calm status, the VIX futures exhibit a marked contango structure (the prompt futures are much cheaper than the distant futures) and hence XIV gains about 5% per month only from rolling its futures (buying back the ones that are about to expire and selling those of the next month). This is the strength of XIV; even if volatility is flat, XIV gains about 5% per month thanks to the contango structure, which is an exceptional return. Unfortunately, reality is not so simple. To be sure, there have been periods in which the market has remained fairly flat, along with the volatility index, but XIV has not made a profit. For instance, last summer the market remained flat from July to September but XIV lost about 5% during that period. This weakness comes from the fact that XIV buys additional VIX futures when they increase in value and sells more VIX futures when they decrease in value. This inefficient operation of buying high and selling low is dictated by the primary goal of the ETF, which is to replicate the inverse of VIX on a daily basis. To make a long story short, XIV has to buy high and sell low on a daily basis just to accomplish its official goal and this handicap can fully or partly offset its profit from contango, depending on the magnitude of the daily moves of VIX. While this is an important handicap that has not been mentioned in any article, the main weakness of XIV is its extremely high risk. More specifically, when the market experiences a significant correction, XIV collapses. For instance, while the S&P lost 16% in the summer of 2011, XIV lost 71% during that period, plunging from 19 to 5.5. This is an extreme loss, particularly given that it resulted from a normal market correction of just 16%. It would be interesting to check the performance of XIV during the bear market of 2008 or the flash crash but unfortunately (?) the ETF was introduced only in late 2010. Nevertheless, as a 16% market correction led to a 71% dive of XIV, it is reasonable to assume that the bear market of 2008, with a total loss of about 55%, would have destroyed XIV. Indeed the issuer of XIV explicitly warns investors that the ETF can go to zero on a single day (!) with extreme volatility. Therefore, the ETF holders should not use it as a long-term part of their portfolio but only as a hedging instrument on a small scale. To sum up, XIV greatly profits from the contango structure of VIX futures, particularly in a strong bull market like the ongoing bull market of the last 6 years. However, the ETF is obliged to buy high and sell low only to accomplish its stated goal of replicating the inverse of VIX. Even worse, the ETF will be completely devastated on a single day with extreme volatility or during a strong bear market. Therefore, investors should weigh the risk/reward ratio before initiating a position in this ETF. 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.