Tag Archives: greece

Is GREK Today’s Least Competitive Wealth-Builder ETF Investment?

Summary Days ago our article identified an ETF ranked at the best end of the scale posed in the title above, drawing Seeking Alpha reader attention. The ongoing EU vs. Greece drama now reaching a moment of (possible) truth has as one (or more) possible outcome(s) capable of defining an immediate tragedy. Hence the question being raised. And if this is not the worst possible choice of a long ETF position, is (are) there more threatening one(s)? Market-makers have to appraise them all, to do their jobs. We use their hedging actions to tell us what they think. It’s beyond our ken. Way beyond. Value analysis requires comparisons. Without appraisal of the bad, how do we know good? Yin and Yang are both essential. How does GREK look to market-makers? The Global X FTSE Greece 20 ETF (NYSEARCA: GREK ) presents market-makers with a challenging task of appraisal. In our recent article we posed the question this way: From a population of some 350 actively-traded, substantial, and growing ETFs is this a currently attractive addition to a portfolio whose principal objective is wealth accumulation by active investing? We daily evaluate future near-term price gain prospects for quality, market-seasoned ETFs, based on the expectations of market-makers [MMs], drawing on their insights from client order-flows. Following that article’s format where possible, let’s look at their appraisal of GREK. Yahoo describes it this way: The fund currently holds assets of $310 million and has had a YTD price return of -9.1%. Its average daily trading volume of 899,906 produces a complete asset turnover calculation in 29 days at its current price of $11.77. (The Bank of Piraeus may wish it had as long on withdrawals.) Behavioral analysis of market-maker hedging actions while providing market liquidity for volume block trades in the ETF by interested major investment funds has produced the recent past (6 month) daily history of implied price range forecasts pictured in Figure 1. Figure 1 (used with permission) The vertical lines of Figure 1 are a visual history of forward-looking expectations of coming prices for the subject ETF. They are NOT a backward-in-time look at actual daily price ranges, but the heavy dot in each range is the ending market quote of the day the forecast was made. What is important in the picture is the balance of upside prospects in comparison to downside concerns. That ratio is expressed in the Range Index [RI], whose number tells what percentage of the whole range lies below the then current price. Today’s Range Index is used to evaluate how well prior forecasts of similar RIs for this ETF have previously worked out. The size of that historic sample is given near the right-hand end of the data line below the picture. The current RI’s size in relation to all available RIs of the past 5 years is indicated in the small blue thumbnail distribution at the bottom of Figure 1. The first items in the data line are current information: The current high and low of the forecast range, and the percent change from the market quote to the top of the range, as a sell target. The Range Index is of the current forecast. Other items of data are all derived from the history of prior forecasts. They stem from applying a T ime- E fficient R isk M anagement D iscipline to hypothetical holdings initiated by the MM forecasts. That discipline requires a next-day closing price cost position be held no longer than 63 market days (3 months) unless first encountered by a market close equal to or above the sell target. The net payoffs are the cumulative average simple percent gains of all such forecast positions, including losses. Days held are average market rather than calendar days held in the sample positions. Drawdown exposure indicates the typical worst-case price experience during those holding periods. Win odds tells what percentage proportion of the sample recovered from the drawdowns to produce a gain. The cred(ibility) ratio compares the sell target prospect with the historic net payoff experiences. Figure 2 provides a longer-time perspective by drawing a once-a week look from the Figure 1 source forecasts, back over (almost) two years. Figure 2 (used with permission) What does this ETF hold, causing such price expectations? Figure 3 is a table of securities held by the subject ETF, indicating its concentration in the top ten largest holdings, and their percentage of the ETF’s total value. Figure 3 (click to enlarge) Well, maybe that’s what is causing such price expectations, but it seems more likely that international politics has more to do with it. So let’s depart from GRKZF, the Greek Organization of Football Prognostics SA, and turn to the Wall Street organization of stock price prognostics, or market-makers [MMs]. Sport is where you find it. Just how bad is the GREK outlook? We use the MMs forecasts for stock and ETF prices, implied by their self-protective hedging actions, plus the accumulated actuarial history of market price events following such prior forecasts as are seen today, to rank each subject. Figure 4 is a table of how the worst-ranking ten ETFs appear. Please remember, our ranking interest is in wealth-building, not wealth destruction. What works well in one direction may not work in the opposite. Shorting is not recommended. Figure 4 (click to enlarge) When we compare the wealth-building prospects for GREK (ranked 270th out of 340) it doesn’t come close to the terrors inherent in these last ten. Remember, the MMs role is to build a balance between buyers and sellers in every trade, so they have to find acceptable expectations at each end of an actionable array of prices. The actions produce the trade, the expectations are what produce the actions. Check the row of data beneath the top illustration of Figure 1. Its forecast upper end is 23.7% above the then-current price of $10.58. That compares to the ten-ETF average of Figure 4 of +29.4% in column (5). What of the risk exposure? When GREK in the past has been seen by MMs to have an outlook like today’s (a Range Index of 33, meaning twice as much upside as downside) its typical worst-case price drawdown experienced was but -16.3%. The worst-ten ETFs of Figure 4 managed -19.7% — a fifth of their capital gone, not just less than a sixth. And on top of that GREK had 42 out of 100 chances of seeing its price recover back into profit territory, while those other ETFs had but one chance in four of that happening (column 8 blue average). And they started, on average, from prior forecasts with Range Indexes of 26, with three times as much upside as down. See? GREK could be worse. ‘Course it could (needs to) be better. The average equity today offers a 29 Range Index with +12.5% upside. There is real credibility to that population forecast, since prior similar forecast hypothetical positions produced gains of +3.9% (net of 35/100 losses, not 58/100). GREK actually had prior net losses of -6.5% and negative credibility ratio (like the other worst ten ETFs) comparing upside forecasts to actual TERMD payoffs. Conclusion But those are historical comparisons. The past may not be prologue. Buyers must hope so. Besides, there is less than two years of GREK pricing for us to work with. Maybe Greece has just had a bad recent two years. We keep a ten-foot long pole at hand for just such occasions. Hope we don’t have to use it, not sure we would. 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.

Handicapping Bubbles And Shocks

Tail risk, the risk of an asset or portfolio moving more than three standard deviations away from its current price, appears to be increasing around the world. And some investors feel ill-equipped to manage this risk. This according to our latest poll of institutional investors. Last week, we released the results of the Allianz Global Investors RiskMonitor survey, a comprehensive look at views on portfolio construction, asset allocation and risk. This year we queried 735 institutional investors around the globe representing a variety of different institutions: pension funds, foundations, endowments, sovereign wealth funds, family offices, banks and insurance companies. The findings of this year’s survey reinforced our view that global risks are increasing amid a complicated economic, geopolitical and monetary policy environment. In particular, this challenging climate was underscored by the survey results, which showed that two-thirds of the respondents believe that tail-risk events are likely to be more frequent due to the interconnectedness of global financial markets. In addition, two-thirds of the survey participants also assert that tail risk has become an increasing worry since the 2008-2009 global financial crisis. Specifically, 62% believe tail risk is a “high” or “very high” risk. And 41% of the institutional investors surveyed believe a tail-risk event is “likely” or “very likely” in the next 12 months. Yet far fewer are “confident” or “somewhat confident” that their portfolios have appropriate downside protection for the next tail-risk event. Known Unknowns? Where are they seeing the biggest risks? The institutional investors we surveyed believe the most likely cause of future tail-risk events include oil-price shocks, sovereign-debt default, European politics, new asset bubbles and a euro-zone recession. However, this view varies by region. In the Americas, investors polled believe oil-price shocks are most likely to be the cause of the next tail-risk event, followed by US politics and European politics. In Europe and the Middle East, new asset bubbles are believed to be the most likely cause of the next tail-risk event, followed by geopolitical tensions in Europe and sovereign-debt default. Meanwhile, in the Asia-Pacific region, oil-price shocks are perceived to be the most likely cause of the next tail-risk event, followed by sovereign-debt default and a euro-zone recession. Interestingly, the timing of the release of the study coincides with an escalation of the ongoing debt crisis in Greece. That volatile situation aligns with the view that a sovereign-debt default and European politics are probable causes of future tail-risk events. Heading for the Grexit? So could Greece’s problems trigger a tail-risk event? Today, in light of the recent deterioration in negotiations between Greek government officials and Greece’s creditors, we see a material rise in the risk of a mistake by either side. We now have less confidence in a constructive outcome than we’ve had previously. As a result, we see increasing potential for a “Grexit” – Greece intentionally leaving the European Monetary Union – or a “Graccident” – Greece accidentally exiting. The accidental exit could occur if there’s a run on the banks, which would trigger the termination of emergency liquidity assistance from the European Central Bank. We believe that the ECB’s quantitative easing program and Outright Monetary Transactions will temper a lot of the bond and currency volatility, and some of the stock-market volatility. However, a “black swan” event remains a possibility. This is relevant because, despite heightening risks, only 36% of institutional investors we surveyed believe they have access to the appropriate tools or solutions for dealing with tail risk. This lack of preparedness could be a recipe for bigger problems down the road for investors without sufficient risk management baked into to their portfolios. Obstacles hindering the adoption of appropriate tools include concerns about cost and a lack of understanding of tail risk.

How Greece Is Impacting The Financial Markets

From my perspective, the greater risk to investors is not their relative exposure to the country of Greece in their portfolios, but their relative exposure to other countries. I contend that international stocks, particularly within Europe and also including certain emerging markets, are an attractive asset class for risk-adjusted return potential over the intermediate- to long-term. Any pullbacks in international equity strategies (and European-based strategies in particular) as a result of the ongoing Greek drama, may present an attractive entry point, or re-entry point, for some investors. A lot of the volatility witnessed across global stock markets thus far in 2015 can be attributed to the ongoing soap opera involving Greece, the European Union and the International Monetary Fund. Greece, arguably the most notorious of the P.I.I.G.S. (Portugal, Italy, Ireland, Greece and Spain) countries, has been confronting a mountain of debt issues – currently estimated at 320 billion Euros – within the country for years. If that number is not staggering enough, consider these other economic statistics plaguing the country of Greece: Gross Domestic Product has fallen by 25% since 2010 A Debt-to-GDP ratio of 177% An unemployment Rate of 27% More than 20% of the Greek population is over the age of 65 – making it the world’s 5th oldest nation – and only 14% of the population is under the age of 15 (Data sources: BBC News, ECB, IMF, Green National Statistics Agency, Bloomberg.) With Greece in need of another bailout, or debt restructuring, to avoid defaulting on a significant repayment to the IMF at the end of June (and more to come thereafter), and Greece Prime Minister Tsipras opposing additional austerity measures (ex. pension cuts and potential increases to the age of retirement for these purposes in Greece) that may be a part of any new debt deal, many market participants are now bracing for the increased likelihood that Greece will leave the Euro – whether on their own or at the request of the EU. Germany, as the largest member of the EU, which Greece reportedly owes $56 billion alone, is showing signs of diminished interest in saving Greece again. This dubious view is shared elsewhere in Europe which suggests that this standoff may remain until the end of June deadline. While it is unknown if either party will blink first, or if the proverbial can will be kicked further down the road, we, at Hennion & Walsh, believe that it is appropriate for investors to consider the impact that a Greece exit from the Euro (now being referred to by many as the Grexit) would have on their portfolios and financial markets overall. Using a couple of the larger and more popular international equity exchange-traded funds below, including one Europe-specific strategy, as proxies, it would appear as though investors may not actually have that much exposure to Greece if they are investing in international equities through these types of product structures. FTSE Europe ETF (NYSEARCA: VGK ) has a 0.07% allocation to Greece as of May 31, 2015, according to Morningstar. iShares MSCI EAFE ETF (NYSEARCA: EFA ) has a 0.00% allocation to Greece as of May 31, 2015, according to Morningstar. From my perspective, the greater risk to investors is not their relative exposure to the country of Greece in their portfolios but rather their relative exposure to other countries that may be impacted by either a Greek default or a further extension of credit to this debt-burdened country. To this end, any funds “saved” by not allowing for any future Greece bailouts could be applied to additional quantitative easing measures or other economic stimulus programs within the Eurozone. It is worth noting that the fear of contagion throughout the Eurozone also adds to the volatility in the region each time a potential Grexit is in the headlines. I contend that international stocks, particularly within Europe and also including certain emerging markets, are an attractive asset class for risk-adjusted return potential over the intermediate-longer term. I would even suggest that having Greece ultimately leave the Euro would provide some certainty to international investors and relieve Europe of one of the anchors holding down their own economic recovery. Thus, any pullbacks in international equity strategies, European-based strategies in particular, as a result of the ongoing Greek drama may present an attractive entry point, or re-entry point, for some investors. Disclosure: Hennion & Walsh Asset Management currently has allocations within its managed money program consistent with the investment theme discussed in this article. This post is for educational purposes only and should not be considered as a solicitation to purchase or sell any of the securities or investment themes mentioned. International investments have their own unique set of risks that should be understood before considering an investment. As a reminder, all investment decisions in our view should be made consistent with an investor’s financial goals, tolerance for risk and investment timeframe. 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.