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U.S. Weekly Fund Flows – Investors Shrug Off The Market Rally, Are Net Redeemers Of Fund Assets For The Week

By Tim Roseen The markets rallied during the fund-flows week ended April 20, despite major oil producers’ failure to agree on a production freeze over the weekend. The major U.S. indices hit new 2016 highs during the week as investors cheered a drop in unemployment claims (the lowest since 1973), and banks rallied after oil strengthened and the dollar continued to weaken against its major trading partners. The rally was supported by companies broadly beating lower expectations at the beginning of this quarter’s earnings reporting season and on news that China’s first-quarter GDP growth of 6.7% was in line with expectations. While U.S. industrial output for March declined for the sixth month in seven – supporting fears of weakness in the manufacturing sector, the Empire State Index for April jumped to its highest level in over a year – showing signs of improving business activity in the New York Federal Reserve district. Modest declines in U.S. oil rig counts during the week and a reported labor strike in Kuwait helped prop up crude oil prices, despite a failed freeze agreement during the Doha, Qatar talks over the weekend. During the week, the Dow Jones Industrial Average closed above the 18,000 mark for the first time in nine months as investors kept their attention on better-than-expected earnings reports, despite the oil price dropping once again below $40/barrel. Investors appeared to be willing to take on more risk, bidding up emerging markets and out-of-favor sectors, with energy, materials, and industrials chalking up strong returns for the year to date. While IBM (NYSE: IBM ), Netflix (NASDAQ: NFLX ), and other tech firms’ earnings disappointed the markets at the end of the flows week, weighing on tech issues, a sixth straight week of declines in domestic oil supplies and a strong rebound in March existing home sales helped push U.S. stocks to 2016 closing highs and oil to a $42.63/barrel close. Nonetheless, for the week, fund investors were net redeemers of fund assets (including those of conventional funds and exchange-traded funds [ETFs]), pulling out a net $32.4 billion for the fund-flows week ended Wednesday, April 20. The headline number, however, was slightly misleading. Investors padded the coffers of taxable bond funds (+$3.5 billion) and municipal bond funds (+$0.6 billion) while being net redeemers of money market funds (-$32.0 billion) and equity funds (-$4.5 billion). For the second week in a row, equity ETFs witnessed net outflows, handing back $1.6 billion. Despite the equity rally during the week, authorized participants (APs) were net redeemers of domestic equity ETFs (-$1.2 billion), withdrawing money from the group for the first week in eight. As a result of the impasse between oil-producing nations for an output freeze, APs – for a second consecutive week – were also net redeemers of non-domestic equity ETFs (-$0.4 billion). The Industrial Select Sector SPDR ETF (NYSEARCA: XLI ) (+$401 million), SPDR S&P Retail ETF (NYSEARCA: XRT ) (+$400 million), and SPDR MidCap 400 ETF (+$322 million) attracted the largest amounts of net new money of all individual equity ETFs. At the other end of the spectrum, SPDR S&P 500 ETF (NYSEARCA: SPY ) (-$2.9 billion) experienced the largest net redemptions, while PowerShares QQQ Trust 1 (NASDAQ: QQQ ) (-$641 million) suffered the second largest redemptions for the week. For the sixth week running, conventional fund (ex-ETF) investors were net redeemers of equity funds, redeeming $2.9 billion from the group. Domestic equity funds, handing back $2.6 billion, witnessed their eleventh consecutive week of net outflows, while posting a weekly gain of 1.04%. Meanwhile, their non-domestic equity fund counterparts, posting a 1.33% return for the week, also witnessed net outflows (-$290 million) for a third week in four. On the domestic side, investors lightened up on large-cap funds and small-cap funds, redeeming a net $2.0 billion and $440 million, respectively. On the non-domestic side, international equity funds witnessed $264 million of net outflows. For the third week in a row, taxable bond funds (ex-ETFs) witnessed net inflows, taking in a little over $1.7 billion. Corporate investment-grade bond funds witnessed the largest net inflows, taking in $0.7 billion (for their third week in a row of net inflows), while government Treasury and mortgage funds witnessed the second largest net inflows (+$0.4 billion) of the macro-group. Flexible portfolio funds witnessed the only net redemptions of the group, handing back $211 million for the week. For the twenty-ninth week in a row, municipal bond funds (ex-ETFs) witnessed net inflows, taking in $425 million this past week.

Oil ETFs In Focus On Oil Output Freeze Talks

Oil has been the most talked-about commodity over the past one-and-a-half years, with wild swings in its prices. Last month, oil price slipped to a level not seen in more than 12 years, thanks to growing supply and falling global demand. In fact, the commodity has plunged about 70% since the summer of 2014. This is because oil production has risen worldwide with the Organization of the Petroleum Exporting Countries (OPEC) continuing to pump at near-record levels, and higher output from the likes of U.S., Iran and Libya. Additionally, a strong U.S. dollar backed by a rate hike has made dollar-denominated assets more expensive for foreign investors and has thus dampened the appeal for oil. On the other hand, demand for oil across the globe has been falling given slower growth in most developed and developing economies. In particular, persistent weakness in the world’s biggest consumer of energy – China – will continue to weigh on the demand outlook. In order to stabilize the oil market, the biggest oil producing countries – Saudi Arabia and Russia – along with Qatar, Venezuela, UAE and Kuwait have stepped in and agreed to freeze oil output at the January level, provided the other countries join the initiative. The move is the first deal between OPEC and non-OPEC producers in 15 years, but might fall apart as Iran has been trying to boost production after the sanctions were lifted last month. As per the Iranian newspaper, Shargh, Iran’s OPEC envoy said that it is “illogical” for the country to join the oil output freeze deal. This is especially true as the country was producing at least 1 million barrels per day below its capacity and pre-sanction levels since 2011. Meanwhile, the other countries increased their production during the same period and are now hovering around record levels. However, Iran might be offered special terms as part of the deal according to Reuters. Even if the deal is cut and global producers freeze oil output at January levels, the world will still have about 300 million excess barrels per year than needed. Thus, it would be difficult to rebalance the oil market. However, it will undoubtedly infuse some confidence and might reduce the supply glut later in the year. Further, a renewed optimism to restore growth in China, Europe and Japan could drive oil demand in the coming months. Market Impact The potential deal initially sparked a rally in oil price on Tuesday with Brent crude rising as much as $35.55 per barrel. But the gains were pared after Iran’s prospects of joining the deal started looking dull. Notably, Brent crude is trading around $33 per barrel while U.S. crude is hovering below $30 per barrel at the time of writing. This has put oil ETFs in focus for the coming days. These ETFs might be easier plays for investors seeking to deal directly in the futures market. Below, we have highlighted a few popular oil ETFs that could be interesting plays in the coming days, given the volatile trading in oil. United States Brent Oil ETF (NYSEARCA: BNO ) This fund provides direct exposure to the spot price of Brent crude oil on a daily basis through future contracts. It has amassed $93.9 million in its asset base and trades in a good volume of roughly 206,000 shares a day. The ETF charges 75 bps in annual fees and expenses. BNO lost 1.6% in Tuesday’s trading session. United States Oil ETF (NYSEARCA: USO ) This is the most popular and liquid ETF in the oil space with AUM of over $3.1 billion and average daily volume of around 38.4 million shares. The fund seeks to match the performance of the spot price of West Texas Intermediate (WTI or U.S. crude). The ETF has 0.45% in expense ratio and lost 0.2% on the day. iPath S&P Crude Oil Total Return Index ETN (NYSEARCA: OIL ) This is an ETN option for oil investors and delivers returns through an unleveraged investment in the WTI crude oil futures contract. The product follows the S&P GSCI Crude Oil Total Return Index, a subset of the S&P GSCI Commodity Index. The note has amassed $625.3 million in AUM and trades in solid volume of roughly 4.4 million shares a day. Expense ratio came in at 0.75% and the note was up 1.3% on the day. PowerShares DB Oil ETF (NYSEARCA: DBO ) This product also provides exposure to crude oil through WTI futures contracts and follows the DBIQ Optimum Yield Crude Oil Index Excess Return. The fund sees solid average daily volume of more than 830,000 shares and AUM of $419.3 million. It charges an expense ratio of 78 bps and lost 1.8% in Tuesday’s trading session. Original post

Guide To Middle East ETF Investing

Investing in the Middle East stock market might look to be daunting at this moment when the price of crude oil, which accounts for the lion’s share of the region’s revenues, continues to plunge and is currently trading near its six-year low. Geopolitical tension and depleting foreign reserves are some of the other issues disturbing the investment climate in the region. However, there is a potential upside to this dismal economic environment. Tumbling oil price has in fact led to the development of the non-oil sector in the Middle East, such as agriculture, banking, finance and tourism. If we look at the Purchasing Managers’ (“PMI”) Indices of two prominent Middle East economies – Saudi Arabia and United Arab Emirates – non-oil business activity in the region actually looks robust. The PMI index measures the performance of the non-oil private sector and is derived from a survey of 400 companies, including manufacturing, services, construction and retail. PMI in Saudi Arabia increased to 58.7% in August from 57.7% in July, while PMI in United Arab Emirates rose to 57.1% from 55.8% in July. Notably, both are higher than the PMI of 53.1% in the U.S. in the same month. According to an insight from Standard Chartered Bank, the long-term growth outlook for oil-rich regions in the Middle East remains positive. This is largely due to the higher emphasis laid by the governments of the region on long-term development objectives achieved through diversification. The insight highlights demographics and the rapid expansion of trade corridors as the two key factors driving growth in the region, particularly in banking and financial services. The International Monetary Fund (IMF) expects population in the 25 years age bracket to rise to 720 million from 445 million in 2000 in the Middle East and North Africa (“MENA”) region during the next five years. Coming to the question of trading partnerships, Saudi Arabia is currently the largest market for U.S. exports in the Middle East while the U.S. is the largest trading partner of Saudi Arabia, according to Saudi Arabian General Investment Authority (“SAGIA”). According to Standard Chartered Bank, the Middle East enjoys a tripartite trading relationship with Africa and India, which is currently valued at $200 billion and is anticipated to increase manifold to $2.7 trillion by 2030. In the midst of these positive developments, it seems reasonable to capitalize on the growing non-oil sector in the Middle East through ETF investing, as it is difficult to access the market when most of the businesses in the region are state-owned. Although Saudi Arabia – the biggest stock market in the Arab world and the largest among the Gulf States – opened up its door to foreign direct investment a few months back, ETF investing always remains a safer route as it helps investors to mitigate one company’s average performance with stellar results from other companies. Below we highlight three ETFs, which offer higher exposure to the non-oil sector in the Middle East as well as to organizations holding the key to future growth. WisdomTree Middle East Dividend ETF (NASDAQ: GULF ) Launched in July 2008, this ETF follows the WisdomTree Middle East Dividend Index, which measures the performance of the companies that pay regular cash dividends. It holds a basket of 74 stocks with the largest exposure to the top three firms – Qatar National Bank, First Gulf Bank and Industries Qatar – which collectively make up for more than 23%. This resulted in financials dominating the fund’s portfolio at 62.6% while telecom and industrials round off the top three with 16.7% and 13% allocation, respectively. The oil sector accounts for a meager 2% of the fund. The fund has amassed nearly $26 million in its asset base while trading in a small volume of roughly 10,000 shares a day. It charges 88 bps in fees from investors per year. The product has, however, lost 10.9% so far in the year and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook. iShares MSCI UAE Capped (NASDAQ: UAE ) Launched in April last year, this ETF follows the MSCI All UAE Capped Index, which measures the performance of large, mid or small-capitalization companies in UAE. Having a portfolio of 31 stocks, the fund’s top three holdings include Emaar Properties (16%), Abu Dhabi Commercial Bank (9.5%) and DP World (8.4%). Again, this ETF is heavily biased toward financials with 70% allocation, while industrials and healthcare have allocations of 17.3% and 5.3%, respectively. Energy has a very low exposure in the fund with only 3.6% share. The ETF has garnered around $30 million in assets and trades in an average volume of roughly 15,000 shares. It charges 62 bps in fees and was down 7.6% in the year-to-date time frame. The fund carries a Zacks Rank #3 with a High risk outlook. iShares MSCI Saudi Arabia Capped (NYSEARCA: KSA ) Launched only last month, this ETF tracks the MSCI Saudi Arabia Investable Market Index 25/50 Index, which measures the performance of the large, mid and small cap segments of the Saudi Arabia market. With a portfolio of 58 stocks, KSA’s top three holdings are Saudi Basic Industries (18.8%), Saudi Telecom (9.1%) and National Commercial Bank (7.8%). Notably, Saudi Basic Industries is one of the largest chemical companies in the world and Saudi Telecom is the largest telecommunications company in the Middle East and Africa (“MEA”) region. This ETF is not as heavily exposed to financials as the other two funds with 33.3% share. Materials and telecom sectors occupy the next two spots with 30.1% and 11.1% shares, respectively. It has minimum exposure to the energy sector (1.3%). Being a new entrant, the fund has gathered only around $4 million in assets and trades in a paltry volume of 2,000 shares. It charges 74 bps in fees per year and was up 3.8% in the last five days. Original Post