Tag Archives: nreum

RSX: Bear Thesis In Progress

Summary The Greek drama and news that sanctions on Iran could be lifted put serious pressure on oil prices. The Ruble will continue to weaken. The Saudi deal does not impact the short thesis. I’ve recently written an article on the Market Vectors Russia ETF (NYSE: RSX ), where I outlined my bear thesis on the Russian market. The situation evolved fast. When the initial article was published, Brent oil was trading near $63. As I am writing this article, Brent oil trades at $57.50 after it touched $55.60. This was a spectacular movement, and I even got a message from a reader who was wondering whether it was time to buy RSX. The rationale of such thesis is quite simple – oil often rebounds after big moves. I think that this reader was not the only one wondering whether the plunge in oil was the opportunity to buy RSX at cheaper prices, so I decided to write a follow-up on my initial thesis. The Russian ruble – not as weak as I expected My initial thesis consisted of three main points: Russian ruble will weaken, the economy will continue to suffer and oil will drop. I will revisit them one by one. Since June 26, the ruble tumbled 4% against the dollar. The movement against the basket of currencies, which consists of dollar and euro, was more modest. I expected that ruble would be weaker. Many factors affect the value of the Russian currency, but the main factor is the price of oil. The oil price is the key variable for both the Russian economy and the Russian budget. It’s the price of oil in rubles that matters for the Russian budget. In the end of 2014, several Russian officials stated that the “comfortable” price of oil was 3600 rubles per barrel. However, as oil plunged and ruble tumbled, stabilization of the national currency became a top priority. Back in June 26, the oil price denominated in rubles was 3467. As I’m writing this article, the price of oil fell to 3277 rubles. In my initial article, I stated that the Russian budget was stretched. At the same time, the Russian Central Bank started to buy dollars at the open market to bring the country’s reserves back to $500 billion. I think that the price of oil in rubles will soon drift towards 3400-3500 level – either by forces of the market or with a little help from the Russian Central Bank. Even if oil prices stay at current levels, this will lead to further weakness of the ruble and put pressure on dollar-denominated RSX. The economy – deal with Saudi Arabia does not change the big picture Many readers already know that Saudi Arabia decided to invest up to $10 billion in Russia over the next five years. Some people speculate that some of this money could end up on the stock market. In my view, this will not be the case. What is important is the duration of the deal – five years, and the sectors – agriculture, medicine, logistics, retail and real estate. While the economy matters a lot when you buy a Russian market ETF, the fate of the actual holdings of this ETF matters more. The majority of the money will be spent on agricultural projects, and there is no agricultural producers in RSX’s holdings . Among related companies, Uralkali, the Russian producer of potash, accounts for just 2.02% of RSX’s holdings. All in all, I think that this news do not change the bear thesis. The oil plunge The Greek drama and news that sanctions on Iran could be lifted put serious pressure on oil prices. In my view, the story is far from its end. I think that oil still has room to fall, especially if the nuclear deal with Iran is successful. As I highlighted in my initial article, I believe that there is a structural imbalance between supply and demand. In my opinion, the strength of oil prices’ reaction to negative news confirms this thesis. Bottom line Let me guess your ultimate bullish argument: in a five-year period, Russian market will be higher as oil rebounds, sanctions are lifted and investors realize how cheap Russian stocks are. That may be true. However, a bearish thesis on a country is by definition not designed for five-year time frames. In shorter time frames, the bearish thesis remains valid. I expect that weaker ruble, poor economy and falling oil will continue to put pressure on RSX. Disclosure: I am/we are short RSX. (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.

ALPS Adds New Twist To Equal-Weighted ETF Products

By DailyAlts Staff ALPS Holdings has been a leader in providing innovative investment products and customized solutions since its founding in 1985. On July 1, the firm added two new products to its repertoire: The ALPS Sector Leaders ETF (NYSEARCA: SLDR ) and the ALPS Sector Low Volatility ETF (NYSEARCA: SLOW ), both of which are equal-sector weighted, to avoid the loss of diversification benefits associated with over- or under-weighting particular sectors. Equal-Weighted Investing One of the major knocks against market capitalization-weighted indexes is that they inherently overweight overvalued stocks, and underweight undervalued stocks. In addition, they have a significant bias toward the largest companies in their respective universe. For instance, if the S&P 500 Index were equal-weighted, Apple would account for just 1/500 of the index’s total, as opposed to the roughly 4% it constitutes on a cap-weighted basis. Smart beta products provide an alternative approach to weighting investments. Most smart beta strategies use “factors” such as value, momentum, quality or low volatility to determine their investment weights, but a simpler approach is to weight all investments within an index or fund equally. Thus, equal weighting ends up avoiding the large-cap, or even mega-cap bias that many capitalization weighted indices have. The ALPS ETF Approach The new ALPS ETFs are part of the ALPS Factor Series. They’re “smart beta” products in that they select investments according to fundamental factors, including growth, quality, and low volatility. But investments held by the ETFs are weighted so that each business sector has equal representation – this mitigates the risk of being overly concentrated in an overheated sector, or being underweight an undervalued sector. “Rather than investing in pure market-cap indexes, which are usually tilted towards specific sectors, our equal sector weighting methodology may provide a better foundation for building diversified portfolios,” said portfolio manager Michael Akins, in a recent statement. “As a result, investors and advisors may achieve better risk adjusted returns.” Both ETFs will track S-Network indexes, which are designed to provide equal-weight exposure of selected investments across sectors and across securities. Both funds exclude REITs, and when evaluating sectors, combine the telecommunications sector with the information technology sector to form a single sector of the two. The ALPS Sector Leaders ETF will track the S-Network Sector Leaders Index – this index picks the 5 stocks from each of nine GICS sectors which, per the prospectus, demonstrate the best growth potential based on key characteristics associated with growth and quality, then equal weights all 45 stocks in the portfolio. The ALPS Sector Low Volatility ETF will track the S-Network Sector Low Volatility Index – this index picks the 5 stocks from each of nine GICS sectors that that have the lowest trailing twelve-month volatility as of the last trading day of November, then equal weights all 45 stocks in the portfolio. “It’s become clear that there’s an important place for the equal sector weighting strategies in most investment portfolios, particularly in volatile markets,” said Mr. Akins, who is also a Senior VP at ALPS Advisors and its Director of ETFs. “We’re excited at the prospect of applying the approach toward these historically proven factors and markets.” The management fee and expense ratio for each fund is 0.40%. For more information, visit alpsfunds.com .

While The Athens Exchange Is Closed, The Greece ETF Show Goes On

Investors can still trade Greece through an ETF while Athens Stock Exchange was closed. GREK showing larger discount to net asset value. Investors should understand risks of ETFs that track international markets. Exchange traded funds try to reflect the performance of an underlying market. However, there are times when an ETF may diverge from the net asset value, especially with international markets. For example, the Global X FTSE Greece 20 ETF (NYSEArca: GREK ) is was trading at a 10.4% discount to its NAV on Monday, according to Morningstar data. GREK plunged 8.9% Monday on over four times its average daily volume after Greece rejected austerity measures demanded by international creditors in a referendum vote over the weekend. The Greece ETF has been swinging in volatile trading over the past week . ETFs, more or less, consistently reflect the movement of their net asset value, or combined value of all securities in an ETF’s portfolio divided by the number of ETF shares outstanding, as market makers or authorized participants create or redeem ETF shares by buying or selling baskets of underlying securities for ETFs. Since ETFs trade like any other stock on an exchange, the ETF’s price can fluctuate throughout the day. ETFs typically update their underlying trading value, calculating the approximate NAV every 15 seconds throughout the trading day. In domestic equity ETFs, the NAV works as intended. The NAV provides a fair value of the ETF, which basically means the fund is trading in line with its underlying assets with little or no tracking error. This also allows investors to get a better view of whether or not they are over or underpaying an ETF. When the ETF’s price is lower than the NAV , the ETF is said to be at a “discount” – the ETF is valued less than the fund’s overall holdings. If the ETF’s price is above the NAV, the ETF is said to trade at a “premium” – the ETF is trading higher than what the underlying holdings are worth. However, the NAV gets cloudier when looking into other markets. For instance, international markets are not open in the same time zone as U.S. markets, but foreign stock and bond ETFs are still trading on U.S. exchanges. Since the NAV is taken based on the last price at which it was traded, the NAV may not move during normal hours. Consequently, the NAV for international ETFs, along with most commodity and fixed-income funds, may represent a stale number as these markets don’t necessarily trade during normal U.S. market hours. In the case of Greece, the Athens Stock Exchange has been closed for at least a week, following the June 28 decision by the Systemic Stability Council for a week-long closure of the country’s banks and local stock market, according to ekathimerini . The Greek bourse remains closed Monday. Consequently, the traded value of GREK has deviated considerably from its NAV – the ETF is currently trading at a much lower value to its constituents due to the underlying market closure. The last time something similar occurred was during the so-called Arab Spring of 2011 when Egyptian markets were shut down for two months, but U.S. investors were still able to trade shares of the Market Vectors Egypt Index ETF (NYSEArca: EGPT ) . Nevertheless, GREK ETF investors may still get a general sense of where the ETF is going through indirect means. For instance, Coca-Cola HBC, which makes up 21.4% of GREK, dipped 3.9% over the past week while the National Bank of Greece (NYSE: NBG ), which makes up 9.5% of GREK, saw the value of its American Depository Receipts pare recent gains to fall flat for the week. Max Chen contributed to this article . 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.