Tag Archives: europe

Looking For Juicy Income? New EU Dividend ETF Is Here

European stocks may have been battered by the long-running Greek debt crisis, but when it comes to earning juicy dividends, they don’t turn down investors. If you look at both the MSCI Europe Index (which tracks large- and mid-cap companies across 15 developed markets in Europe) and the STOXX Europe 600 Index (a benchmark of small, midsize and large companies in Europe), dividend yield is handsome at 3.4% (as of August 31, 2015). This compares with a dividend yield of 2.1% paid by Standard & Poor’s 500 Index companies (as of September 17, 2015). There are mainly two good reasons for the European companies to pay fat dividends. Firstly, it is the weaker euro which helps ballooning up exports and therefore the companies’ top lines. Secondly, the European Central Bank’s €1.1 trillion ($1.2 trillion) or €60 billion-a-month quantitative easing program has instilled positive sentiment into the economy. At this juncture, investors should definitely take a look at the newly launched MSCI Europe Dividend Growers ETF (NYSEARCA: EUDV ) by ProShares. EUDV tracks the performance of the MSCI Europe Dividend Masters Index focusing on 51 MSCI Europe companies that have increased dividend payments each year for at least 10 consecutive years. The index contains a minimum of 25 stocks which are equally weighted. No single sector can compose more than 30% of the index and no single country may compose more than 50% of the index. The index has a dividend yield of 3.07%. Seadrill Ltd. (NYSE: SDRL ), BHP Billiton Plc (NYSE: BBL ) and Amec Foster Wheeler Plc ( OTC:AMCBF ) are the top three holdings in the fund with a share of 2.16%, 2.13% and 2.07%, respectively. The top 10 companies constitute 20.4% of the fund. As far as sector allocation is concerned, Industrials (19.54%), Healthcare (17.6%) and Consumer Staples (17.43%) make up the top three positions. Considering country-wise allocation, the fund is heavily biased toward U.K. with a 49.49% share while France and Switzerland occupy the second and third positions with 11.6% and 9.61% shares, respectively. The fund charges 55 bps in fees. How Does It Fit In A Portfolio? The fund provides a good opportunity for income-hungry investors willing to put capital in a market that is experiencing heightened manufacturing and trading activities. In August, the Markit Eurozone Manufacturing Purchasing Managers’ Index (“PMI”), which measures the performance of the manufacturing sector, came in at 52.3, which is a tad lower than 52.4 in July, but much higher than 50.7 last year. Meanwhile, Services PMI rose to 54.4 in the month from 54.0 in July. A PMI reading below 50.0 indicates sluggish activity, but a reading above that level indicates increasing activity. On the other hand, Eurozone’s trade surplus in July surged 48.1% to €31.4 billion ($35.5 billion) from €21.2 billion ($24 billion) a year ago, setting a new record. Exports went up 7% on a year-on-year basis while imports rose only 1% in the month on falling energy costs. In the first seven months of the year, exports also escalated 7% year over year while imports grew 2%, leading to a surplus of €146.5 billion ($165.8 billion) compared with a surplus of only €97.1 billion ($109.9 billion) in the period January-July 2014. Enhanced manufacturing and trading activities bode well for the companies paying hefty dividend to its stakeholders making this fund a lucrative option. ETF Competition Although ProShares specifically targets companies that have a good track record of year-over-year dividend growth, there are a couple of funds worth mentioning here that also track the high dividend-paying equity market in Europe. These are the WisdomTree Europe SmallCap Dividend ETF (NYSEARCA: DFE ) and the First Trust Dow Jones STOXX European Select Dividend 30 Index ETF (NYSEARCA: FDD ). DFE tracks the WisdomTree Europe SmallCap Dividend Index targeting the small-cap dividend-paying companies in Europe and manages a robust asset base of $1 billion. On the other hand, FDD with an AUM of roughly $178 million replicates the STOXX Europe Select Dividend 30 Index targeting high dividend-yielding companies across 18 European countries. Notably, the STOXX Europe Select Dividend 30 Index consists of companies from the STOXX Europe 600 Index having a positive five-year dividend-per-share growth. DFE and FDD are almost equally costly with expense ratios of 0.58% and 0.60%, respectively. However, on the yield front, FDD does a better job at 4.55% compared with DFE (2.68%). Link to the original publication on Zacks.com

Are You Afraid Of Rising Interest Rates? Here’s A Possible Solution

Summary The yield curve is an important graph that offers key information about the economy. Given that investors in a bull market are afraid of rising interest rates, other opportunities are being looked at. The Steepener and Flattener ETNs offer opportunities to take advantage of an increase in interest rates. The Fed recently decided to keep interest rates flat. But I believe interest rates will not remain flat forever. Therefore, it is worth taking a look at how someone could protect themselves against the rise of interest rates in the future. This article will focus on the characteristics of the yield curve with an emphasis on the Steepener ETN (NASDAQ: STPP ) and the Flattener ETN (NASDAQ: FLAT ). ETNs are structured products that are issued as senior debt notes, while ETFs represent a stake in an underlying commodity. These two ETNs are perfect opportunities to protect any investor against rising interest rates, as this surge will have an adverse effect on the stock market (NASDAQ: QQQ ). The Yield Curve The yield curve is a graph in which the yield of fixed-interest securities is plotted against the length of time they have to run to maturity. Here’s the current U.S. yield curve: (click to enlarge) Source: Treasury.gov . The short-term interest rates are administrated by the FOMC , while the long-term interest rates are created by the forces in the stock market. The Yield Curve Spread The yield curve spread is the yield differential between two different maturities of a fixed instrument. For example, the difference in yield between a two-year Treasury note and a 10-year Treasury note would create another line, a so-called spread. The later-maturity leg is considered a back leg and the leg that matures first is called the front leg . The spread between the two- and 10-year Treasury instruments has shown significant patterns over the last few decades, as seen here: Source: Forbes . The spread increases during bubbles, such as the tech bubble (1999-2001) and the mortgage crash (2007-09). This indicates that this strategy (taking advantage of the difference between the two- and 10-year yields) can be played out from time to time when equity markets might be under threat and heading toward a bear or bull market. This pattern is perfectly described below: (click to enlarge) Current times make things interesting, as interest rates are expected to increase in the future. This is a situation that has happened over and over again the last few decades: (click to enlarge) Source: Fed . As the graph above depicts, interest rates cycled upward and downward during the bull and bear periods of the economy. Yield Curve Strategies – Steepener and Flattener Source: Created by author. Flattener Strategy A flattening curve is a situation where the yields on the short-term and long-term dated treasuries are converging. In other words, they are coming closer together. From a bank perspective, this is not always considered favorable as banks borrow money at short-term rates while lending it out at long-term rates. When the yield curve converges, the short- and long-term yields come closer to each other and thus diminishing the profit for the bank. Yet, the steeper the yield curve gets, the higher the differential between long-term yields and short-term yields. That means more profit for a bank. When the yield curve becomes more flat, the iPath U.S Treasury Flattener ETN comes into play as it tracks the spread between the two-year and 10-year yields. One should not forget that these ETNs are leveraged, as a 0.1% move in the spread will indicate a 2% price change for FLAT . The flatter the yield curve gets, the better for the Flattener ETN. Steepener Strategy When the differences in yield in the short and long term are diverging (i.e., getting more steep), the iPath U.S. Treasury Steepener ETN is another option. The objective of this product is to hold a weighted long position in the two-year Treasury future and a weighted short position in the 10-year future, in contrast to the flattener. With a steepener you buy the spread, while with the flattener you sell the spread. They are opposites: Negative Rates As this article assumes rates will eventually go up, a potential scenario with negative rates — even though it has been deemed unlikely by Janet Yellen — should not be ignored. That’s because some economists believe the economy is still not growing as expected, and negative rates would basically indicate that anyone who wanted to borrow money would get paid. This would act as a potential strong stimulus to the economy. Even though it might appear to be an unlikely scenario at first, there are places in Europe that currently have negative rates in place, such as Switzerland. In the Fed’s projections, a negative Fed Funds rate was deemed plausible: Source : Fed . Summary Investors do not have to worry about a potential increase in interest rates as there are good investment vehicles to protect themselves against these potential rate hikes. As the yield curve has shown many predictable signs of explaining the economy , it’s important to keep an eye on how the yield curve develops over time. I currently do not hold positions in either ETN. However, both are on my watch list as I consider them splendid investment opportunities for when the equity markets dwindle lower or when the Fed finally decides to start increasing the Fed rate. Liquidity is a minor issue with both ETNs, but when interest rates eventually increase I expect liquidity to increase as well. 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.

Investing In A Turbulent Market

Summary In turbulent times, investors need a plan and stick with a few basic rules. Assess macro conditions to guide investment decisions. Recognize the fact that danger and opportunities usually go hand in hand. Actively tweak winning odds to our favor as frequently as we can. It’s been two months since I left my role as a systematic global macro manager to focus on a few equity strategies I have been developing over the past few years. The timing was not great as world equities have been in a tailspin. Many blame China, the US Federal Reserve, and anemic world economic growth as the causes of the selloff. To me, they are just excuses. The real culprit of the market downturn is the investor jitters. Disciplined investors should follow some basic principles for investing in a turbulent environment. Here are some rules I follow: 1. Assess macro conditions to guide investment decisions 2. Recognize the fact that danger and opportunities usually go hand in hand 3. Actively tweak winning odds to our favor as frequently as we can. Assessing Macro Conditions to Guide Investment Decisions An old saying “rising tide lifts all boats” has found new meaning in stocks since 2009. Central banks around the world injected trillions of dollars into the world financial system. Ample money supply is undeniably one of the most important reasons for the current equity bull market. An equity investor should have done well if he recognized this simple macro factor. Therefore, accurately assessing the global macro environment is instrumental in performance. Differing opinions of economic conditions are the root cause of investor anxiety. So where are we now? China, as the world economic growth engine for the last decade, is facing some headwinds. It needs to absorb the excess from multi-decade economic expansion, rein in speculation, transition its economy from low-cost manufacturing to service and consumption, and steady investments and long-term growth to a sustainable level. Such a transition is not going to be easy and painless at all times. As someone who grew up in China before the reform began in earnest, I often found investors not giving enough credit to the success of China’s economic policies that has elevated a poor country with food rationing to a world economic powerhouse. Over the past 20 years, there were many calls of hard landing in China by market “gurus,” but none materialized. There is a certain arrogance to those calls. Is China facing hard landing again this time? I doubt that! Just as we like to say in the West “quiet water runs deep,” people in the East like to say, “narrow water runs far.” Publicizing policies has never been a strong suit of running things in China. Nevertheless, I believe China has economic means and a deep bench of highly skilled policy makers to navigate choppy waters. Everyone can make mistakes, but so far, there is no indication that China won’t be successful again in turning the ship around this time. In my view, they are proactively using policy tools to minimize the negative impact in a changing world. Investors are fickle. Before the two-day US Federal Reserve policy meeting last week, futures market implied a 30% chance of an interest rate hike in September. The market was right, the Federal Reserve did not hike interest rates. At the same time, investors reacted poorly to the decision as the US dollar sold off and interest rates dropped immediately after the announcement. Was the decision a surprise or was it expected? Investors cannot make up their mind. In my view, the timing of the Fed rate hike is not that important. There is no urgency to a rate hike in the absence of inflationary pressures. Nevertheless, barring significant economic deterioration, we will get a rate hike in December. Otherwise, Chairman Yellen’s credibility will be at risk as she previously indicated a hike this year. Given that outlook, I suspect both US dollar and interest rates will trade higher in the next two months. Moreover, according to some studies, a 25 basis points hike will only roughly translate into a 0.1% decline in GDP growth. There is simply no reason to be fixated on that. Accurate macro assessments can not only help us achieve long-term profitability, but also guide our short-term trading. A number of recent selloffs in global equity markets were in sympathy to selloffs in the Chinese equity market. Given the Chinese National Day is coming on October 1, an imminent meltdown in China is almost impossible. Therefore, any significant selloff could create short-term buying opportunities. Recognize the Fact that Danger and Opportunities Usually Go Hand in Hand Novice investors tend to chase markets and hang on to losers too long. It is much better to pick up quality names in a down market when everyone else is selling. In addition, losers tend to go down less than quality names precisely because some investors cannot psychologically part with losers, and instead sell stocks with gains to raise funds during a market downturn. Do not be afraid of selling losers! Better yet, pick up some winners in a down drift by selling losers for harvesting capital losses to reduce realized capital gains. Furthermore, global economic conditions are getting better, not worse – Europe is finally getting ahead of its sovereign debt crisis, the US economic growth is intact, China is working out short-term pains for long-term gains, the weak energy price should largely be stimulative to growth, and global monetary policies will remain accommodative for the foreseeable future. Therefore, there are opportunities to be had in the current passing danger. Actively Tweak Winning Odds to Our Favor as Frequently as We Can I consider myself as a long-term investor as I look to profit from fundamental research and typically hold stocks for an extended period of time. Fundamentals never play out overnight. However, I question the effectiveness of the “buy, hold and do nothing” strategy in the current market environment where information is so readily available through the internet, media, and social networks, affecting investor psyche constantly, and generating market volatility. Because of daily marks to market, professional hedge fund managers cannot sit idle and do nothing during market turbulence. I would argue that individual investors who look after their own portfolios should also be actively looking for ways to increase winning odds by using available tools such as listed equity options. Here are a few suggestions: a. If one wants to buy 100 shares of stock XYZ, he can sell one contract of put option at a strike price lower than or close to the current stock price. At maturity, if the stock price is higher than the strike price, one gets to keep the put option premium; otherwise, one acquires the stock at a price lower than the current price. b. When a stock in a portfolio has appreciated significantly, one should consider selling some covered calls to lighten up the load. At maturity, if the stock price is higher than the strike price, one effectively sells the stock at the strike price plus option premium; otherwise, he gets to keep the option premium. c. In fact, instead of following the red-hot “dividend investing” strategy, a) and b) can be viewed as a “create-your-own-dividend” strategy on any stock. With weekly options, one can aim to generate 10% annual yield by selling options. That’s 10% income and/or cushion one doesn’t have if he does nothing. d. During a market downturn, instead of buying quality stocks outright, one can buy calendar spreads, i.e. buying long-term calls against selling short-term calls at appropriate strikes to further reduce risk. e. Shorting high beta, richly valued stocks can be a more effective hedge than shorting index futures in the portfolio. There are many strategies that can be deployed day in and day out to generate consistent returns or opportunistically in turbulence when everything is out of whack. But one should always have a plan to deal with different market conditions and follow a set of rules so that he is not caught off guard. Let me know what you think. 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. I have no business relationship with any company whose stock is mentioned in this article.