Don Dion’s Weekly ETF Blog Wrap
Here’s some of what Don Dion blogged about on RealMoney this past week.
A Passage to ETF Profits
Posted 2/5/2010 3:53 p.m. EST
If you’re looking toward Asia for ETF plays, PowerShares India(PIN) is probably your best bet.
The International Monetary Fund recently said India is one of first nations to recover from the worldwide economic downturn, and added that conditions were right for it to start raising interest rates slowly. This signals that growth would remain robust despite moves to combat inflation, which is currently at a 13-month high.
Investors also seem less jittery about India than they do about Asia’s other economic dynamo, China. When China raised banks’ reserve requirements slightly and moved to reign in loose credit last month, local and world markets swooned. But when the Central Bank of India told lenders to increase cash reserves on Jan. 29, PIN and the other Indian ETF, Wisdom Tree India Earnings(EPI), actually gained on the day. Investors seem more confident in the Indian economy’s ability to grow without government stimulus.
Ultimately, India’s economy seems better prepared than China’s to come off government support. India doesn’t suffer from a real-estate bubble nor is there as much volatility-inducing speculation on the country’s stock market by foreign entities. Stemming inflation through tighter credit is healthy for the economy, and Indian stocks will benefit as the inflation rate comes down. Emerging-market investors should reduce their exposure to China and increase allocations to PIN for a less risky and potentially more robust play in the short- to mid-term.
I prefer PIN to EPI because of its larger allocation to Indian IT companies, and if investors want more detail on these ETFs, they can look here.
Can’t Stop Regional Bank ETF
Posted 2/4/2010 5:20 p.m. EST
Even amid today’s broad market selloff, the regional banking industry appears to be a source of strength. Throughout most of the day, the SPDR KBW Regional Banking ETF (KRE) has been beating not only large-cap financial ETFs like the SPDR Financial Select Sector SPDR (XLF) but the S&P 500 as well.
This action lends credence to my theory that the small banks will continue to be one of the strongest sectors going forward.
KRE’s outperformance today can be attributed to strength across a number of the fund’s top holdings that have managed to hold up well. Some holdings, such as Bank of Hawaii (BOH) and TCF Financial Corporation (TCB), have even managed to stay positive until late in the day.
The fund is also suffering a bit more than necessary due to a top holding, Webster Financial (WBS).
Recently, the Connecticut-based company has been working to shut down an elaborate embezzlement scheme that was discovered earlier this week. In total, the plan is estimated to have cost the bank $11 million. In response to this drama, Webster took a hit, dropping 6% today on the heels of a 4% drop yesterday.
Luckily, despite it’s ranking within KRE, the total impact that Webster’s troubles have had on the fund has been minimal. Due to the fund’s vast diversification, Webster accounts for less than 3% of the ETF’s total portfolio.
Going forward, I stand by the regional banks as a leadership sector. KRE will continue to prove especially strong, thanks in large part to its vast, well-diversified portfolio.
Storm Brewing in Chinese Real Estate
Posted 2/3/2010 2:13 p.m. EST
It’s time to say farewell to Chinese real estate and Claymore/AlphaShares China Real Estate ETF(TAO). Although the Chinese real estate industry saw a strong run-up throughout last year’s recovery, I am seriously questioning the longevity of this rally, and investors need to be prepared for what could be a gut-wrenching downturn.
The recent performance of TAO, which provides exposure to some of the largest property players in China’s housing market, gives credence to my calls for caution. The fund has fallen in both our long- and short-term momentum rankings.
Throughout the past months, a growing number of analysts and market commentators have offered their two cents regarding the housing industry in China. This week independent economist Andy Xie threw his hat in the mix, providing his own insight in a recent Bloomberg piece.
In his analysis, he comes to the conclusion that not only is the Chinese real estate industry facing a bubble, but it is set to burst. The eventual downfall is expected to stem from the government’s recent actions to rein in loans and speculation, which will ultimately tie off demand.
Sure enough, following the economist’s bearish forecast, evidence was released showing that Xie’s predicted downturn may already be in the works. Although real estate prices in China continued their upward trajectory though the close of 2009, the trend saw a slight reversal in the start of 2010, according to Shanghai Daily. Additionally, Shanghai’s new-home sales in January dipped a gut-wrenching 51% from the month previous.
The party in China’s real estate industry is coming to a close. Right now, the best thing for investors holding TAO to do is exit their positions and watch from the sidelines.
I would also exit iShares FTSE/Xinhua China 25 (FXI), which has shown similar momentum weakness and has exposure to real estate via financials. For the moment, Claymore/AlphaShares China Small Cap (HAO) remains relatively strong, and I would not completely bail on China yet.
