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Inside The 2 New Innovative Biotech ETFs From BioShares

The biotechnology corner of the broader health care industry has been one of the best performing U.S. sectors this year despite some temporary glitches and rough trading in between. Encouraging industry trends, increasing merger and acquisition (M&A) activities, expansion into emerging markets and ever-increasing health care spending led the sector to easily outperform the broader U.S. equity markets. Encouraged by the high growth potential offered by this sector, issuers are launching innovative products to attract investors to this space. In fact, the new issuer – BioShares – has gone a step further to launch two new funds that look to provide exposure to two distinct groups of stocks – one focusing on earlier clinical trial stage companies and the second looking to provide exposure to advanced products stage companies with FDA approved drugs. The two passively managed funds – BioShares Biotechnology Clinical Trials Fund (NASDAQ: BBC ) and BioShares Biotechnology Products Fund (NASDAQ: BBP ) – follow an equal-weighted strategy which diminishes single-stock risk and results in a well-diversified portfolio. Also, both the funds charge 85 basis points as fees. BBC and BBP in Focus BBC tracks the LifeSci Biotechnology Clinical Trials Index to measure the performance of biotechnology companies with a primary product offering that is in a Phase 1, Phase 2 or Phase 3 clinical trial stage of development. These biotechnology clinical trial companies conduct clinical human trials with the ultimate aim of gaining FDA approval. With this focus, the fund presently holds a basket of 68 stocks focusing mainly on small caps. Auspex Pharmaceuticals Inc. (NASDAQ: ASPX ) occupies the top spot with 2.85% allocation, followed by 1.65% to Retrophin Inc. ( OTC:RTRX ) and 1.59% to Sage Therapeutics Inc. (NASDAQ: SAGE ). BBP, on the other hand, tracks the LifeSci Biotechnology Products Index to measure the performance of biotechnology companies with a primary product offering that has received U.S. Food and Drug Administration approval. The companies within the index have developed at least one drug that has been approved by the FDA and has gone into commercial production. Moreover, these companies primarily focus on sales and marketing to raise awareness of their new product launches. BBP currently holds a basket of 36 stocks with NPS Pharmaceuticals Inc (NASDAQ: NPSP ), ImmunoGen Inc. (NASDAQ: IMGN ) and Halozyme Therapeutics Inc (NASDAQ: HALO ) being the top three holdings, each with a little over 3% exposure. Companies forming part of BBP and BBC’s index should have a minimum of $250 million in market capitalization and a minimum average daily volume of $1 million. How Might it Fit in a Portfolio? The above two funds are an interesting choice for investors seeking to gain exposure to the high potential biotech space. The funds give investors a choice to select the group of biotech companies they want to invest in – as in earlier clinical trial stage companies or advanced products stage companies. These two groups of companies are typically found together in most of the Biotech ETFs currently trading in the market. Moreover, biotech companies are expected to continue benefiting from increased M&As in the space, boom in health care activities and an aging global population, reigniting higher health care utilization. Can it Succeed? The biotech space is moderately populated though there are a few competitors to these funds. There are presently six regular Biotech ETFs in the market. Among them, iShares Nasdaq Biotechnology Index Fund (NASDAQ: IBB ) is the largest and most popular fund in the space with an asset base of $6.5 billion and average trading volume of 1.4 million shares. The fund has returned 33.8% this year. First Trust Amex Biotechnology Index Fund (NYSEARCA: FBT ) and SPDR S&P Biotech ETF (NYSEARCA: XBI ) are two other funds which have garnered $1.9 billion and $1.4 billion in assets, respectively. Investors should note that all the above-mentioned ETFs charge less than the two new funds from BioShares. The expense ratios of IBB, FBT and XBI stand at 0.48%, 0.60% and 0.35%, respectively. Consequently, BBP and BBC might have a difficult time attracting investors from a price perspective. However, if the funds manage to deliver better returns than the veterans in the space, they might eventually gain popularity.

A Popular Emerging-Markets Consumer ETF Rocked By Currency Volatility

By Patricia Oey EGShares Emerging Markets Consumer (NYSEARCA: ECON ) has enjoyed strong inflows since its launch in 2010, thanks to its portfolio of high-quality consumer firms that have direct exposure to one of the main drivers of growth in the emerging markets: the rise of the middle class. This exchange-traded fund invests in 30 large-cap consumer companies domiciled in the emerging markets (which in this case excludes Taiwan and South Korea). Many of these companies, such as Brazilian brewer and soft drink company Ambev (NYSE: ABEV ) , Mexican convenience store operator and coke bottler FEMSA (NYSE: FMX ) , and Russian grocery chain Magnit, are well-run, market-dominating companies with industry-leading profit margins. Over the five-year period ended June 30, 2014, this fund’s index generated significantly higher annualized returns relative to the market-cap-weighted benchmark MSCI Emerging Markets Index (20.0% versus 9.2%) on slightly less volatility. This was because the weaker areas of the emerging markets, such as China large caps and commodity names, are not included in this consumer fund. However, while most of this fund’s constituents are high-quality companies, many are domiciled in countries that have experienced an uptick in currency volatility, especially over the second half of this year. Like most funds that invest in foreign equities, ECON does not hedge its foreign-currency exposure, so the returns of this fund reflect the change in the prices of individual securities as well as the change in the value of their respective local currencies versus the U.S. dollar. Relative to the MSCI Emerging Markets Index, this fund is heavy in countries such as South Africa (19% versus 8%), Brazil (15% versus 11%), and Chile (7% versus 2%). All of these countries have recently experienced sharp declines in the value of their currencies against the U.S. dollar. This is attributable, in large part, to falling commodity prices. Commodities comprise a significant portion of each of these countries’ exports. In South Africa, miner strikes over the past few years have weighed on commodity exports. More recently, power outages, which have an impact on all business sectors, are further exacerbating the nation’s current accounts deficit. In Brazil, the economy remains weak and there is uncertainty regarding the policies of new finance minister Joaquim Levy. While Levy has promised to impose more fiscal discipline, he will face many challenges given the Brazilian economy’s numerous structural issues. As for Chile, this copper-rich country is still struggling from the fallout of the commodity bubble. In the near term, it is likely the economies of these countries will remain weak, which may result in more currency volatility. Fundamental View The investment thesis for this fund is a logical one: Emerging-markets consumers increasingly are reaching middle-class status and have more disposable income to spend on items from cars and electronics to packaged foods and beverages. Other growth drivers include the rise of consumer credit, urbanization, and relatively young populations in a number of emerging markets. Personal incomes are growing rapidly as well. According to the International Labour Organization, from 2000 to 2010, real wages rose 86% and 13% in Asia and Latin America, respectively. This compares with 6% real wage growth in the developed economies over this same span. The rapid growth in Asia was driven primarily by China, where real average wages have more than tripled over that period. This fund’s Mexican holdings, which account for about 16% of its portfolio, include companies such as FEMSA and Grupo Televisa (NYSE: TV ) . These companies are highly profitable, have durable competitive advantages, and possess the economies of scale needed to service regional markets. Mexico’s current leadership is working on a reform program to address long-standing issues such as inefficiencies in the labor market, underinvestment in the state-owned energy sector, and the government’s dependence on oil revenue–all of which may help unlock Mexico’s growth potential and drive growth for this fund’s Mexican holdings. ECON is trading at 24 times trailing 12-month earnings, a significant premium to the MSCI Emerging Markets Index’s 13 times trailing 12-month earnings. This is partly attributable to a higher earnings outlook for ECON’s holdings relative to the MSCI benchmark’s holdings. There is also strong investor demand for the firms in ECON’s portfolio, as there are relatively fewer consumer names in emerging markets–consumer companies account for about 17% of the MSCI Emerging Markets Index, which is lower than their 23% weighting in the S&P 500. However, while ECON’s price/earnings premium over the MSCI Emerging Markets Index has widened over the past three years, ECON’s P/E premium versus an index of global consumer firms and U.S. consumer firms has been relatively steady over the same time period, which suggests that ECON’s current valuations are not expensive relative to its global consumer peers, although consumer firms as a group are a little pricey–they are trading at P/E multiples slightly higher than their 10-year average. Portfolio Construction This ETF tracks the Dow Jones Emerging Markets Consumer Titans Index, which is a modified market-cap-weighted index that includes 30 leading emerging-markets companies that are in the consumer goods and consumer services industries. Since its inception, ECON’s portfolio has had low turnover. However, following its annual rebalance in September 2013, ECON’s weighting in Chinese companies rose to 16% from 6% because of a change in classification of Chinese p-chips (non-government-controlled Chinese companies listed in Hong Kong) from Hong Kong companies to Chinese companies. New additions include two companies with Narrow Morningstar Economic Moat Ratings–Hengan International (a personal-care products company) and Belle International (a footwear manufacturer and sportswear retailer)–along with unrated Want Want China (a snack food company) and China Mengniu Dairy. ECON’s larger China allocation came primarily at the expense of its India allocation, which fell to 7% from 10% after this year’s reconstitution. South African media firm Naspers (ECON’s largest holding at 10%) also can be considered a China play. It has a 34% stake in the China Internet company Tencent Holdings, and this represents a significant portion of Naspers’ market value. Fees This ETF’s 0.84% expense ratio makes it one of the most expensive emerging-markets ETFs. Alternatives ECON’s portfolio has better exposure to emerging-markets consumption trends relative to other similar choices. IShares MSCI Emerging Markets Consumer Discretionary (NASDAQ: EMDI ) has a heavy 30% weighting in South Korean auto and consumer electronics companies; these firms serve the global marketplace and have relatively lower exposure to the emerging-markets consumer. Also, EMDI, by design, invests only in consumer discretionary firms, whereas ECON has about a 50/50 exposure to consumer discretionary and consumer staples firms, making ECON less volatile. The other option is WisdomTree Emerging Markets Consumer Growth (NASDAQ: EMCG ) , which launched in September 2013. This fund is slightly different in that it has a 60% allocation in consumer firms and a 40% allocation in firms likely to benefit from consumer spending, primarily banks and telecoms. EMCG also screens for companies with relatively stronger earnings growth outlook, higher historical returns, and lower valuations. The fact that this fund employs numerous quantitative screens makes it difficult to predict how much the portfolio may change during its annual reconstitution. We recommend investors monitor EMCG’s live performance for at least a year before considering this fund. Disclosure: Morningstar, Inc. licenses its indexes to institutions for a variety of reasons, including the creation of investment products and the benchmarking of existing products. When licensing indexes for the creation or benchmarking of investment products, Morningstar receives fees that are mainly based on fund assets under management. As of Sept. 30, 2012, AlphaPro Management, BlackRock Asset Management, First Asset, First Trust, Invesco, Merrill Lynch, Northern Trust, Nuveen, and Van Eck license one or more Morningstar indexes for this purpose. These investment products are not sponsored, issued, marketed, or sold by Morningstar. Morningstar does not make any representation regarding the advisability of investing in any investment product based on or benchmarked against a Morningstar index.

The Various Flavors Of Long/Short Equity Funds

History seems to favor long/short strategies. Just take a look at the 20-year track record of long/short hedge funds. Cumulatively, long/short plays have bettered the S&P benchmark by 62 percent with a third less volatility. This article first appeared at wealthmanagement.com . You have to wonder why anyone would want to launch a domestic long/short equity fund these days. The S&P 500 Index has climbed 15 percent in the last 12 months. Buying a low-cost index tracker like the SPDR S&P 500 ETF (NYSEARCA: SPY ) or the iShares Core S&P 500 ETF (NYSEARCA: IVV ) seems like a no-brainer. Despite this, alternative asset managers persist. First Trust Advisors recently debuted the First Trust Long/Short Equity ETF (NYSEARCA: FTLS ) , an actively managed exchange traded portfolio that exploits forensic accounting to find its investment targets. What’s that, you say? Well, as First Trust’s Ryan Issakainen puts it, the fund’s managers use a proprietary methodology that measures the aggressiveness of a publicly traded company’s accounting practices. Firms with low-quality earnings (read: “aggressive accountancy”) tend to be associated with lower future stock returns compared to more conservative companies. Higher-quality earnings, in this model, portend better returns. FTLS buys high-quality stocks while shorting the low-quality ones. Over FTLS’ brief life, there seems to be something to the quality notion. The fund was launched on Sept. 9 and, through Nov. 20, has outdone the S&P 500 by nearly 60 basis points (0.57 percent, to be exact) with significantly less volatility. The question is, of course, can this last? History seems to favor long/short strategies. Just take a look at the 20-year track record of long/short hedge funds. Cumulatively, long/short plays have bettered the S&P benchmark by 62 percent with a third less volatility. (See Chart 1.) A caveat here. Hedge funds labeled as “long/short” could be trading in myriad investments, including equities, bonds, currencies or options. We need to take a closer look at equity-only portfolios. And we should concern ourselves with publicly traded products. Searching for long/short equity portfolios in the mutual fund or ETF realms requires some discernment. There’s a lot of dirt in the long/short category. Some funds labeled “long/short” are, in fact, market-neutral portfolios—meaning they target a zero beta. Not so with true long/short products: Beta, while potentially mitigated by short sales, isn’t eliminated entirely. Among long/short domestic equity mutual funds ranked by Morningstar, this year’s top five include: Logan Capital Long/Short Fund (MUTF: LGNMX ) — Buying targets include large-cap stocks with potential for rising earnings growth along with those delivering high dividends. Short sale targets include companies with deteriorating financial positions across all capitalization tiers. Schwab Hedged Equity Fund (MUTF: SWHEX ) — Invests by taking long and short positions in stocks based on a proprietary rating system that evaluates fundamentals, valuation and momentum. Highly-rated stocks are bought; low-ranked issues are sold short. CBRE Clarion Long/Short Fund (MUTF: CLSVX ) — Concentrating in the real estate sector, CLSVX managers rank companies using proprietary criteria, then finance long exposures in excess of the fund’s net asset value with short sales of low-ranked stocks. AmericaFirst Defensive Growth Fund (MUTF: DGQAX ) — Another concentration product, this fund focuses its buying interest on defensive, non-cyclical equities, namely consumer staples and healthcare. Short sale candidates are drawn from any industry. Natixis Tactical U.S. Market (MUTF: USMAX ) — Fund managers use a risk model to throttle this fund’s exposure to the domestic market. A positive risk-return tradeoff warrants overexposure through derivatives, while a negative signal triggers a beta-reduction strategy. Clearly, there was a price paid by mutual fund shareholders for long/short equity exposure over the last 12 months. None of the top five funds outdid the S&P 500’s total return, even though most cranked out positive alpha. The reason for the seeming disparity? Beta. Alpha measures a fund’s return against the beta-adjusted benchmark. Four of the five funds were less volatile than the S&P index. Then there’s the annual expense. Long/short plays aren’t cheap. On a market-weighted basis, investors in these five funds forked over 1.9 percent to the portfolio managers. Exchange traded funds boast lower holding expenses, but pickings in the domestic long/short equity sector are pretty sparse. There’s a suite of four thematic QuantShares ETFs that are lumped into the long/short category, but they’re really market-neutral portfolios. Among more than 1,600 extant exchange traded products, there are only two—with the exception of the new FTLS portfolio—that can be properly tagged as domestic long/short equity ETFs: ProShares RAFI Long/Short ETF (NYSEARCA: RALS ) — An index tracker based on the Research Affiliates Fundamental Index (RAFI). Long positions are undertaken in companies with better fundamental metrics—i.e., RAFI weights—relative to their market cap weights, while stocks with smaller RAFI weights are shorted. ProShares Large Cap Core Plus (NYSEARCA: CSM ) — CSM aims to outperform the S&P 500 while maintaining a market-like beta. The fund tracks the Credit Suisse 130/30 Large Cap Index which overweights highly ranked stocks on the long side, financed by short sales of issues with low or negative expected alpha. Long/short ETFs, as you can see in Table 2, are a mixed bag. The smallish RALS portfolio hasn’t benefitted from the past year’s beta bonanza, while CSM took advantage of it in spades. This shouldn’t be a surprise. RALS, most often thought of as an absolute value play, equally weights its long and short exposures. CSM, in contrast, skews to the long side: 130 percent of its net asset value is committed to long positions, 30 percent to shorts. CSM’s asset base, at $487 million, is nearly eight times larger than that of RALS, tilting the long/short ETF category’s market-weighted expense to 51 basis points (0.51 percent), a quarter of the expense borne by investors in the five mutual funds featured in Table 1. The First Trust FTLS fund comes to market with an expense ratio of 99 basis points, cheap by mutual fund standards but pricey when measured against ETFs. FTLS expects to be 80 to 100 percent invested in long positions, complemented by short positions ranging from zero to 50 percent. “As of October 31,” says First Trust Portfolio Manager Mario Manfredi, “the fund had long positions equal to 99.6 percent of NAV and short positions equaling 20.1 percent, for a net market exposure of 79.5 percent.” It’s early days for the fund, but the metrics look promising. FTLS exhibits an r-squared (r2) coefficient of 94 against the S&P 500, with a beta of 83. If the fund continues on its present trajectory for a full year, an alpha north of five could be expected. Not quite that of CSM, but certainly better than RALS. Presently, FTLS goes tradeless about a third of the time. In 17 of the last 53 trading sessions, there’s been zero volume. That doesn’t worry Manfredi. “It’s not unusual for a newly launched ETF to have limited or no trading volume on many days,“ he says. “In our experience, as an ETF gradually builds a track record, interest grows and trading volume follows. We feel that alternatives as an asset class are here to stay, as demonstrated by the growth in assets and overall strategies over the last six years. We have a strong sales and marketing team who we are very confident will drive interest in the fund by working with advisors to help them fulfill their clients’ objectives.” Disclosure: None