Archive for March, 2010
Dion’s Wednesday ETF Winners and Losers
Welcome to Don Dion’s Daily ETF Winners and Losers. Be sure to stop by each day to get a feel of what’s rising and what’s falling when it comes to ETFs.
iShares MSCI Switzerland Index Fund(EWL) 1.6%
EWL is seeing some strong gains today. Aiding the fund is optimism that the EU will help troubled Greece. The broad Swiss markets are being lead by major banks including UBS(UBS) and Credit Suisse(CS). These two firms account for nearly 10% of the fund’s total portfolio.
United States Oil Fund(USO) 1.5%
USO gained in light of the weak U.S. dollar. Prices tapped 11-month highs before being stifled by a report from the Energy Department that showed supplies had risen more than previously forecast. Oil drillers followed crude prices higher, helped by news that President Obama will announce plans to allow offshore drilling.
SPDR Gold Trust(GLD) 1%
A mixed market is helping precious metals score some nice gains today. Gold, silver, platinum and palladium have all managed to lock in positive numbers. Leading the group is palladium with other physically-backed precious metal ETFs like GLD following close behind.
iPath Dow Jones-UBS Sugar Total Return Subindex ETN(SGG) -8.2%
Sugar, as tracked by SGG led the losers today when news that Brazil and India were expecting bumper crops next season. According to Businessweek, sugar is on the path to see its biggest quarterly drop since 1985. Already, the fund has slipped over 30% in 2010. In the past sugar prices have risen thanks to ongoing drought conditions in India, but meteorologists predict that this will not be the case this year. A dissipating El Nino weather pattern is being seen as a positive for the nation’s monsoon season.
iPath Dow Jones-UBS Grains Total Return Subindex ETN(JJG) -3.5%
Grains and JJG are taking a beating today as analysts are predicting record-breaking production. Farmers are planning to plant a record 78.1 million acres of soybeans this year.
United States Natural Gas Fund(UNG) -1.3%
Energy was mixed today after President Obama announced plans to expand oil and gas drilling on the coasts of the North America. While oil saw gains, the futures prices for natural gas and UNG have stumbled. These losses can be attributed to the Energy Information Administration’s weekly storage report.
Claymore/AlphaShares China Real Estate ETF(TAO) -1.0%
Though China-focused ETFs saw strength yesterday, funds designed to track the nation have lagged today. One industry taking a hit is China’s real estate market, which is tracked by TAO.
The nation’s Shanghai Composite Index, not tracked by any ETFs, is down over 5% this quarter, making it one of the worst performing Asian markets.
All prices as of 2:15 p.m. EST
The ETF for Betting on RIM’s Earnings
Research In Motion(RIMM) will report earnings after the market’s close Wednesday, and the results could give a boost to iShares S&P North American Technology-Multimedia Networking Index Fund(IGN).
RIM’s earnings are expected to be $1.28 per share; revenue is projected to be $4.31 billion.
RIM is most famous for producing the popular Blackberry cell phone, which was an early leader in the now-burgeoning smartphone sector. The Blackberry has managed to retain much of its popularity recently despite the enormous success of Apple’s(AAPL) iPhone.
So far this year, IGN has risen 7.1%, outperforming the S&P 500. RIM’s earnings and industry outlook may add to the fund’s gains.
IGN allocates 7.9% of its assets to RIM and holds other mobile phone makers, such as Motorola(MOT). If RIM’s earnings report creates a favorable outlook for the industry, it could lift other holdings in IGN.
A better-than-expected report would confirm that smartphones continue to increase their share of the mobile phone market. This would improve the outlook of companies in IGN that manufacture phone components and operate networks allowing smartphones to run complicated applications and download large quantities of data.
Due to the popularity of smartphones, many networks have even reported problems from an excess of demand for data transfers. This trend has continued to the extent that many smartphones now come equipped with the capability to download data from Wi-Fi internet connections in addition to wireless phone signals.
The percentage of smartphones shipped with Wi-Fi capabilities is expected to increase from 55% in 2009 to 65%-70% in 2010, according to an ABI Research analyst. As the technology gains ground, it’s not only handset manufacturers that will benefit from the expansion. Chipmakers are also expected to be beneficiaries of the growth and, according to Reuters, the companies that will see the most benefit are Broadcom(BRCM), Atheros Communications(ATHR), Qualcomm(QCOM) and Marvell Technology(MRVL). Qualcomm is a top 10 holding in IGN, accounting for 6.2% of the fund.
Although Nokia(NOK) leads the pack in terms of sales of Wi-Fi-capable phones, RIM and Motorola, both components of IGN, also produce phones that can use Wi-Fi.
IGN is an ideal way to access the growth coming from innovations in smartphone technology that will create demand for new phones and more network usage.
The ETF has suitable liquidity for the retail investor and trades with an average daily volume of roughly 115,000 shares. Additionally, IGN has an affordable expense ratio of 0.48%. The fund also has a nicely balanced distribution among its 31 holdings.
An ETF with a similar focus is the PowerShares Dynamic Networking Portfolio(PXQ). However, PXQ has a higher expense ratio of 0.6% and a less liquid daily trading volume of about 31,000 shares. It also lacks exposure to handset manufactures RIM and Motorola, as it focuses mainly on the companies that build and service networks.
Investors that want to play the earnings report of RIM after the closing bell today and also want to play the continued popularity of smartphone technology should choose IGN.
Leaving Gold for Platinum
When it comes to playing precious metals, no shiny material gets more press than gold. This yellow metal has consistently been looked to in times of turmoil as the ultimate play on market uncertainty.
As the global economy started its journey down the road to recovery last year, increasing skepticism over the rally’s longevity, plus inflation fears, sent investors pouring into the gold market, boosting prices to record-breaking levels.
Because of its chemical make-up, gold is too soft to serve any industrial use. Given this quality, the metal’s price is not affected by the performance of the market, thereby making it an ideal way to protect against market downturns and uncertainty.
In order to gain access to this “barbarous relic,” investors have long had the option of buying up physical gold and storing it in a vault. Today, however, investors have been increasingly turning to the wildly popular physically backed gold ETFs, gold miner ETFs and gold mutual funds currently available.
Some of the more popular products available today include the iShares COMEX Gold Trust ETF(GLD), the Market Vectors Gold Miners ETF(GDX) and the Tocqueville Gold Fund (TGLDX).
Unfortunately for gold bugs holding these funds, as the global market has continued higher, a lot of the fear that served as fuel for the metal’s rally has fallen by the wayside as the U.S. dollar has strengthened. In response, gold prices have leveled off. At the height of its popularity, the metal was breaking the $1,200 per ounce level. Recently, though, the price of an ounce of gold hovered closer to $1,100.
Gold’s stumble can be viewed as a sign that the average investor’s appetite for risk is returning. Rather than seeking out the safety and security that gold provides, investors have turned their attention to riskier asset classes. This flight to risk includes taking on more industry dependent precious metals as a part of their portfolio. One of the more popular options has been platinum.
Typically, platinum prices will lag gold in times of trouble, while outperforming in times of market strength. Today, it appears we are in the midst of the latter scenario.
Platinum, unlike gold, serves industrial purposes and is becoming more essential each day. Demand forecasts for the metal look strong given its use in the production of household items such as LCD televisions, as well as its use in the production of catalytic converters for automobiles.
Though the outlook for platinum looks optimistic, investing in the metal using ETF has not always been easy.
Prior to 2010, aside from a few illiquid exchange-traded notes, ETF investors looking for exposure to platinum had very few options available. This all changed in the first quarter when two new products were launched, allowing investors access not only to physical metal, but to the miners responsible for its production as well.
The ETF Securities Physical Platinum Shares(PPLT) made waves as one of the first official fund launches of 2010.
This instrument, like GLD, tracks the price of physical platinum. In the past month, its performance against GLD highlights investors’ flight to risk. Since inception through March 30, PPLT is up nearly 4% while GLD treads in negative territory.
Investors who are more interested in tracking companies responsible for the production of platinum can turn to the First Trust ISE Global Platinum Index Fund(PLTM). This instrument, which made its entrance into the ETF arena in early March, is the first fund designed to track major domestic and international platinum metals group miners.
Top positions include Aquarius Platinum, Anglo Platinum, MMC Norilsk Nickel(NILSY) and Impala Platinum Holdings.
Be aware, however, that this fund is brand new to the industry and may take some time before it gathers enough steam to be stable.
In the end, although platinum has had an impressive run against gold recently, it would be unwise to transition entirely to the white metal from the yellow. On the contrary, it is important to hold onto defensive plays in order to prevent against unexpected market turmoil. However, in times of strength, exposure to an industry dependent precious metal like platinum will prove a nice addition for risk hungry investors.
Dion’s Tuesday ETF Winners and Losers
Welcome to Don Dion’s Daily ETF Winners and Losers. Be sure to stop by each day to get a feel of who’s gaining and who’s losing when it comes to ETFs.
iShares Thailand Investable Market Index Fund(THD) 2.6%
Asian nations have dominated the winners today with both China and Thailand leading the pack. The iShares Thailand Investable Market Index Fund has flip-flopped quite a bit over the past few days as protestors continue to face off against the nation’s government. Though today’s rise has been comforting, political tensions in the area will likely keep this fund volatile for some time.
iShares FTSE/Xinhua China 25 Index Fund(FXI) 1.4%
As evidenced by an impressive performance from the GlobalX China Financials ETF, the broad strength seen today from China can be largely attributed to the nation’s financial industry.
The Bank of Communications, the nation’s fifth largest lender by assets, has helped lift this sector today after posting a more than 5% increase in its net 2009 profit. In FXI, the Bank of Communications accounts for 4% of the index.
Market Vectors Vietnam ETF(VNM) -1.2%
Interestingly, while ETFs focused on Asian nations have commanded top positions today, there were also losers, with some of the heaviest losses across the ETF arena seen in VNM. The dip comes after Vietnam released its growth data and though it saw its economy expand nearly 6% in the first quarter of 2010, the growth numbers fell behind the data from the end of 2009. Inflation has also been a concern as well.
Market Vectors Junior Gold Miners ETF(GDX) -1.2%
Gold prices have slumped today thanks to strength from the U.S. dollar as well as an optimistic consumer confidence report for March. Gold bullion has struggled against today’s positive news regarding the economy’s strength, and the junior gold miners have taken the biggest hit.
iShares MSCI Spain Index Fund(EWP) -1.3%
Euro country ETFs have taken a hit today in light of euro weakness as well as the continued confusion regarding the Greek bailout. Most of Europe appears supportive of a plan to provide Greece with support, but Germany remains a formidable roadblock standing in the way. The biggest loser among the ETFs designed to track the members of the 16-nation bloc is the iShares Spain Index Fund.
Market Vectors Steel ETF(SLX) -0.8%
The Market Vectors Steel ETF has lost some ground today despite news that top iron ore producers had convinced Japanese steelmakers to agree to a quarterly pricing schedule. Major ore producers underlying SLX including Rio Tinto and Vale saw slight gains on the news, but steelmakers around the globe felt the burn as investors fearing rising production costs fled the industry.
All prices as of 2:15PM EST
Japan ETF Will Hedge Currency Risk
On April 1, ETF investors will gain access to a new investment strategy for Japan when the WisdomTree Japan Total Dividend Fund(DXJ) begins hedging its yen exposure. This will allow foreign investors to invest in Japan as if they were domestic investors unconcerned about currency exchange rates.
At a time when the Securities and Exchange Commission is increasing its scrutiny of ETFs that use of derivatives out of concern that they amplify risk, the revamped WisdomTree offering reminds investors that derivatives can also be used to reduce risk.
When investors buy an ETF that holds stocks priced in domestic currency, they are taking on equity market risk. They benefit if the price of those assets increases and they lose if the price of those assets decreases. While there are many factors that go into determining whether those assets rise or fall in price, the direct risk is the price.
When investors buy an ETF that holds stocks priced in a foreign currency, they take on an additional risk. In addition to the equity risk, there is also the risk of the currency value rising or falling vs. the investor’s home currency. This opens up four possible scenarios: both equities and the currency rise, both fall, or a combination of the two.
Today, this effect can be clearly seen in the European country ETFs that hold securities priced in euros. The iShares MSCI Germany Index Fund(EWG) tracks the MSCI Germany Index. The index is up 3.1% in 2010 when priced in euros, but it’s down 3.3% when priced in dollars. EWG has done slightly better due to tracking error and is down 2.7%.
The major difference is caused by the currency losses in the euro — CurrencyShares Euro(FXE) is down 5.9% thus far in 2010. Although a U.S. investor’s holdings in German stocks have increased 3.1%, the value of the euro has declined so much that the total return is negative.
In the case of Japan, the iShares MSCI Japan(EWJ) is up 7.9% year to date, while CurrencyShares Japanese Yen(FXY) is up 0.6%. In the past month, however, FXY is down 3.9% and EWJ is up 5.7%. Priced in yen, the MSCI Japan Index gained 8.2% in the past month.
As mentioned before, DXJ will continue to hold a portfolio of Japanese stocks, but starting April 1 the fund will offset the currency risk to Japanese yen by selling forward contracts. If DXJ had been using this strategy in the past month, it would have returned something closer to the MSCI Japan Index’s 8.2% return, instead of 4.4%
Earlier this year, WisdomTree launched the WisdomTree International Hedged Equity Fund(HEDJ). The portfolio is the same as WisdomTree DEFA Fund(DWM) but comes with currency protection. DWM charges 0.48% in fees, while HEDJ charges 0.58%, an added cost of 0.1% for currency protection against multiple currencies. The cost to investors for this currency protection is nothing. For DXJ, there’s only one currency to hedge, and the yen is one of the most widely traded currencies in the world.
The new hedged ETF option increases the choices for investors. Let’s look at four possible scenarios.
When both a nation’s currency and its stock market rise, investors can buy an unhedged foreign stock ETF and gain exposure to both. The updated DXJ, however, will be a bad choice in this scenario because the foreign investor will give up currency gains.
When a nation’s currency and its stock market fall, investors want to hold neither stocks nor currency.
When a nation’s currency falls but its stock market rises, investors previously might have chosen to stay out of that market, because the currency decline could overwhelm the rise in stocks. However, with DXJ, investors can benefit from a rise in Japan’s stock market while avoiding losses from a decline in the yen.
In the final scenario, a nation’s currency rises but its stock market falls. In this case a fund like DXJ will suffer the largest losses, because it will be hurt by the currency change and by the declining value of the stocks. In such a case, investors will either want to stay out of the market or hold only the currency.
Lastly, one interesting use for DXJ would be if Japan enters a period of hyperinflation. Japan’s large debt burden, which has grown during a 20-year period when the economy has basically been stagnant, has some investors wondering whether serious inflation is in the country’s future.
An extreme case of hyperinflation occurred recently in Zimbabwe. Investors buy all types of assets during hyperinflation to escape currency devaluation, including equities, which have some real value behind the shares. Zimbabwe was no different, and the country’s stock market appreciated 322,111% in 2007, while the currency officially depreciated by about 12,000%.
An American investor who put $10,000 in the Zimbabwe stock market at the start of the year would have seen his or her portfolio grow to $32 million, ignoring the currency depreciation. Once the currency was returned to dollars, the investor would be left with a still healthy $270,000. If the investor hedged his or her exposure, though, the return would have been the full $32 million.
For those investors who worry about currency devaluation in Japan in the long run but expect Japanese stocks to rally, DXJ is the ETF to consider.
ETF Regulators Drop the Hammer
As the Obama Administration transitions from the successful completion of health care overhaul to the daunting task of financial regulation, ETFs are once again coming under fire. Not one, but two regulatory agencies are turning up the heat on some of the most popular and actively traded segments of the ETF industry.
Both the Securities and Exchange Commission and the Commodities Futures Trading Commission have announced plans to look into the role that derivatives play in the structure and trading of ETF products.
While both of these agencies have targeted ETFs in the past, the latest effort promises to have the momentum of broader financial reform behind it. Regulatory changes could dramatically impact the availability and trading of certain commodity ETFs and leveraged ETFs. This is a situation that investors should continue to monitor closely.
The SEC’s effort, announced last Thursday, is targeting leveraged ETFs that financial regulators have been warning investors against since last spring.
Leveraged ETFs utilize derivatives to allow investors to make bullish and bearish bets. Aimed at sophisticated investors, leveraged ETFs have proved hazardous for buy-and-hold investors.
Regulatory warnings during 2009 touched off a wave of lawsuits and caused some investment managers to abandon the funds altogether.
The SEC announced last week that it would be conducting a review of derivative-based ETF products, and that it would be putting a freeze on the release of additional derivative-based ETF products while the review was completed. Readers interested in reviewing the press release can do so here
The SEC review, however, will also include derivative-based commodity ETFs. Since some commodity funds such as the United States Natural Gas ETF(UNG) and the United States Oil ETF(USO) have had to periodically register with the SEC for new shares, the SEC has been closely involved with the growth of many commodities ETFs.
This is not the first time that the SEC has announced that it would be taking a special interest in the growth of derivative-based commodity funds. Last summer, as regulators promised to monitor the markets of commodities with “finite supply,” the SEC exacted a telling toll on shares of UNG.
As interest in natural gas spiked last summer, a rush of investors into UNG prompted fund managers to request the creation of additional shares. When the SEC initially denied this request, shares of UNG traded to a premium.
So this isn’t the first time that the SEC intends to shape the ETF industry. ETF investors have experienced the kind of disruption that regulatory uncertainty can cause.
In the meantime, the CFTC is mulling its own plans to employ stricter position limits on the various futures-backed ETFs and ETNs. The regulation will affect funds that are designed to track commodities of finite supply. This is being done in an effort to prevent an ETF from becoming so big that it distorts the marketplace.
This will not only affect energy ETFs, such as USO, but also other derivative backed funds designed to track metals such as gold and nickel. Though there are no immediate plans in place to investigate “soft” commodities such as cocoa and sugar, it may only be a matter of time before they are included in the discussion as well.
The CFTC has been attempting to impose stricter position limits for derivative-based commodities ETFs for some time now. Impending position restrictions have caused ETFs to shut down (the case of DXO), restructure (the cases of DBA and DBA) and change their underlying indexing (the case of UNG, which switched to swaps when the CFTC made moves to put limits on the US exchange-traded market for natural gas futures).
Position limits will place a cap on the number of futures contracts any single fund can carry, ultimately limiting their size. This will pose an issue if a futures-backed fund grows so large that it reaches this limit. At that point it would be unable to generate any additional shares, leading to the emergence of a premium.
Noticeably absent from the renewed focus on leveraged- and commodity- backed ETFs is the Financial Industry Regulatory Authority. Last summer Finra issued warnings over the dangers of using leveraged ETFs.
On Monday, Finra told Reuters that, though it was not a fan of restricting product innovation, it had its eye on the ETF product pipeline to see if new regulation is required.
Though the SEC and CFTC may take two different approaches to ETF regulation, both agencies are targeting the broad range of funds that use derivatives to achieve their objectives. Some ETFs, positioned in the crosshairs of both agencies, could be particularly vulnerable.
The PowerShares DB Gold Double Long ETN(DGP) not only tracks a “finite” commodity, it also does so using leverage. Holding this fund amidst this ongoing regulatory storm will likely prove risky.
As the SEC and CFTC continue to crack down on the ETF industry, investors need to be more cautious than ever when managing their investment portfolio. Unless you are a sophisticated investor using leverage or commodity futures-backed ETNs and ETFs to achieve a specific goal, these types of funds should be avoided until this regulatory storm blows over.
In the meantime, investors should continue to turn to the funds that stand by the original three tenets of the ETF industry: transparency, liquidity, and low cost.
Dion’s Daily ETF Thermometer
Welcome to Don Dion’s Daily ETF Thermometer. Be sure to stop by each day to get a feel of the ETFs that were hot and those that were cold.
Investors started off this shortened week of trading strong, sending all three major indices higher. The ETFS Physical Palladium Shares(PALL) led the pack, scoring some of the most impressive gains across the industry.
iPath DJ-UBS Copper Total Return Sub-Index ETN(JJC) and iPath DJ-UBS Aluminum Total Return Sub-Index ETN(JJU) both had solid gains going into late trading and the PowerShares DB Base Metals ETF(DBB), which holds one-third of assets in each metal, plus a third in zinc, was trading higher as well.
At the London Metal Exchange, copper inventory has fallen for 18 days, nickel for six. In addition to stronger demand, the weaker U.S. dollar is broadly supportive of commodity prices.
On the other side of the spectrum, the iPath S&P 500 VIX Short Term Futures ETN(VXX) suffered some of the biggest losses on the day. VXX continues to trend lower as implied volatility falls, indicating more optimistic investor sentiment. As it moves beyond the mid-point of its historic range, it could retest the extreme lows of the mid-teens last seen in May 2008.
The threat of regulation from Washington continued to weigh on the financial industry sending funds including SPDR KBW Regional Banking(KRE) and SPDR KBW Bank(KBE) lower.
Investors holding the iShares MSCI Thailand Investable Market Index Fund(THD) felt a burn despite a revised 2010 growth forecast. Markets have struggled as protestors continue to face off against the nation’s unpopular Prime Minister, Abhisit Vejjajiva.
Hot
1.ETFS Physical Palladium Shares(PALL) 4.2%
2. iPath Dow Jones-UBS Sugar Total Return Subindex ETN(SGG) 3.8%
3. iPath Dow Jones-UBS Copper Total Return Subindex ETN(JJC) 3.5%
4. PowerShares DB Base Metals(DBB) 3.6%
5. United States Oil Fund(USO) 2.8%
6. Market Vectors Steel ETF(KOL) 2.8%
Cold
1. iPath S&P 500 VIX Short Term Futures ETN(VXX) -0.7%
2. iShares MSCI Thailand Investable Market Index Fund(THD) -0.7%
3. SPDR KBW Bank(KBE) -0.7%
4. iShares Dow Jones U.S. Home Construction Index Fund(ITB) -0.7%
5.SPDR KBW Regional Banking(KRE) (KRE) -0.5%
6.iShares Barclays 20+ Year Treasury Bond Index Fund(TLT) -0.4%
Note: All prices as of 2:15 p.m. EST
Vietnam ETF Troubled By Inflation Fears
An increase to the minimum wage in Vietnam will weigh on Market Vectors Vietnam ETF (VNM), which has dipped over the past two weeks and is now in negative territory for the year. VNM is down 1.7% year to date, while the iShares MSCI Emerging Markets (EEM) is down 1%.
Much of the recent downside in VNM can be credited to the fund’s performance in the latter part of March. Since March 12, VNM is down by almost 7%. But given that the fund experienced a steep two-month decline beginning in October 2009, VNM trails EEM by more than 15% over the past six-months.
The Vietnamese government announced a 12.3% increase to the minimum wage on Friday. The increase in monthly pay will be valid for government workers and workers in state-owned enterprises, but the effects of the change will be felt by the entire economy.
The wage increase is significant for the country’s economy because it adds to concerns about inflation in Vietnam and because more money now will be chasing the same number of goods. Inflation already is at a 12-month high in the country after reports from March show that consumer prices increased by 9.5% so far this month.
Despite the mounting pressure of inflation, the State Bank of Vietnam said last week it won’t be raising interest rates in April.
Growth has been robust this year, with gross domestic product increasing at an estimated 5.8% in the first quarter. However, a widening trade deficit and now the continuing and potentially worsening inflation issue muddle the future outlook.
To make matters worse, Fitch also recently stated that it may decrease its rating on the country’s debt because of a continued lack of confidence in the dong, the Vietnamese currency. The dong is widely traded in Vietnam on a black market that values the currency below its official exchange rate with other currencies. The government has twice devalued the dong in the past few months and may need to do so again in the near future.
Altogether, the risk-reward ratio of investing in the Vietnamese markets is tipping in an unfavorable direction.
Sound individual investments can still be found in the country though, according to Mark Mobius of Templeton Asset Management, which has sizable investments in the country.
But for now, I would advise exchange-traded fund investors to steer clear of investing in a broader market Vietnam fund such as VNM. If investors have the time and the will they can likely still find value in researching and investing in individual Vietnamese companies but the overall market picture looks unfavorable.
Investors looking to quench their appetite for investment in Southeast Asia should look to iShares MSCI Thailand Investable Market Index (THD), in which a relatively cheap equity market is still attracting foreign investment despite ongoing political tension. The fund is up by 10.6% year to date, driven by sharp gains in the March.
Two other strong options for the region are MarketVectors Indonesia Index ETF (IDX), which is up by 13.3% year to date, and iShares MSCI Malaysia Index (EWM), which has increased 6.9%.
Five ETFs to Watch This Week
This holiday-shortened week may see light trading ahead of the Easter holiday, but the fallout from last week’s Greek bailout deal may linger. Earnings from Research in Motion(RIMM) will be big news mid-week.
Currencyshares Euro Trust(FXE)
The euro seemed poised for a free-fall at the end of last week after European Central Bank President Jean-Claude Trichet called an IMF bailout “very, very bad” on Thursday, but by the end of the day he was praising the Franco-German-IMF agreement and said the ECB would extend the weakened collateral regulations for another year. The euro rebounded sharply on Friday, but still finished the week with solid losses.
This week, we’ll see how investors digest the news. The deal creates a backstop for Greece, but only as a last resort and with unanimous approval. Germany won very strict standards and the Greece economy is not in good shape.
iShares S&P North American Technology-Multimedia Networking Index Fund(IGN)
Research in Motion is the second largest holdings in this ETF, with 7.7% of assets. The company was upgraded by J.P. Morgan from “neutral” to “overweight” last Friday, and RIMM reports earnings after the bell on Wednesday. Analysts predict the Blackberry maker earned $1.28 in the quarter-ended February.
Although IGN does not hold any shares of Apple(AAPL), the Saturday launch of the iPad will generate buzz for the technology sector and RIMM is likely to benefit to some degree.
iPath S&P 500 VIX Short-Term Futures Index(VXX)
This ETF is making a push to become the worst performing ETF of the first quarter, worse than even inverse leveraged ETFs in the strongest performing sectors.
As of Friday, VXX was running neck and neck with Direxion Daily Real Estate Bear 3X(DRV).
Aside from a brief rally in January and February, this ETF has been losing all year. It also had the inopportune fate to be created at the peak of volatility, a month before the market bottom in March 2009.
Further, as the name implies, the ETN tracks futures contracts, which has opened the fund to problems of contango, not unlike UNG. Also, since it trades below $25 per share, Barclay’s can initiate a 1-for- 4 reverse split.
Finally, the SEC may be tightening regulations on ETFs that use derivatives, according to a news release from the agency last week.
iShares: MSCI South Korea(EWY)
The sinking of a South Korean naval vessel on Friday sank shares of EWY. This appears to be the most deadly of several naval battles stretching back to the mid-1990s, and also the worst for South Korea.
That’s the reason why EWY took a hit compared to previous incidents in the past decade which had little effect on shares. Shares are likely to bounce back, but the situation is worth watching given the U.S. military commitment to South Korea.
Market Vectors Russia ETF(RSX)
Mobile Telesystems(MBT) reports on Wednesday. The firm is the tenth largest holding in RSX, with 3.8% of assets. MBT provides telecom services in Russia and some nearby countries. Analysts are looking for $1.15 per share in earnings.
MBT has been one of the leading stocks in RSX’s portfolio and is one of the reasons RSX leads the country ETFs, although its lead over India ETFs shrank last week, however. Good earnings from MBT will be necessary to keep RSX in the lead.
Don Dion’s Weekly ETF Blog Wrap
Don Dion posts his current insights on the stock, bond, commodity and currency markets in his RealMoney blog, anticipating which ETFs will be in play next.
In the following three blogs from the past week Don commented on Oracle’s bullish comments about the software sector, an agriculture ETF with exposure to emerging markets and acquisitions, and a euro-dollar strategy.
Look to the Oracle
Posted 03/26/2010 10:49 a.m. EDT
Oracle(ORCL) moved markedly lower this morning following the release of earnings after yesterday’s bell, but there’s more to this earnings report than first meets the eye. ETF investors can gain exposure to the strong software industry over the longer term using either the iShares S&P North American Technology-Software Index Fund (IGV) or the PowerShares Dynamic Software Portfolio (PSJ). ORCL is a top component in both ETFs.
While Oracle’s profit fell 10.5% last quarter, most of the losses can be credited to the firm’s absorption of struggling Sun Microsystems. Months of wrangling over regulatory issues didn’t help the software maker last quarter. In its earnings report, however, the company noted that it expects Sun to make a “significant contribution” to revenue in the current quarter.
Both IGV and PSJ count ORCL among their top holdings, with 9.04% and 4.96% allocations, respectively. Year to date, the funds are both higher — IGV is up 4.42% while PSJ is 6.23% higher. The more significant numbers, however, are the returns for IGV and PSJ for the one-month period ended March 25. During that period, IGV and PSJ gained 6.97% and 5.69%, respectively — the funds are picking up steam.
The primary difference between the two funds is that IGV employs a modified cap-weighted strategy while PSJ charges a bit more but screens for factors like fundamental growth, stock valuation, investment timeliness and risk factors. The practical impact of this difference is that IGV has a higher percentage of assets dedicated to top holdings like Oracle, Adobe (ADBE) and Microsoft (MSFT), while PSJ has a broader portfolio that is more equally balanced.
Both funds, however, will help investors capture the recent run in software. Reading the details of Oracle’s report, the outlook looks positive. In its report, the company noted that revenue from new software licenses was higher for the second quarter in a row.
Software licenses are a good indicator of how the sector will perform in the months ahead. An increase in software licenses indicates that companies are increasing spending on new tech projects. More contracts can mean more growth years ahead of when they are signed.
Don’t let ORCL’s early-morning trading get you down on software. Inside the company’s earnings report are plenty of reasons to be bullish on the sector in the months ahead.
An Agri-ETF for Harvesting Profit
Posted 03/25/2010 9:01 a.m. EDT
Fueled by top components like Potash(POT), Monsanto(MON), Mosaic(MOS) and Deere(DE), the Market Vectors Agribusiness ETF(MOO) continues to gain momentum.
MOO is a well-balanced, low-cost, tax-efficient way to gain exposure to 46 global agribusiness firms. Many of the companies in the portfolio are non-U.S. based, including some in Malaysia and Indonesia, offering investors access to rapidly growing markets that are not generally easy to tap into.
Lower costs for raw materials have also benefited many of MOO’s top components – from POT to DE – as revenues have outpaced many analysts’ expectations. Demand from developing countries like China and India should also continue benefit the high-quality agribusiness firms that line MOO’s portfolio.
Recently, bidding wars have also helped to fuel MOO’s performance. Earlier this month, MOO benefited from a takeover tussle involving four of the fund’s components: Yara International, CF Industries(CF), Terra Industries(TRA) and Agrium(AGU). Eventually, CF Industries came from behind to win the battle for Terra after fellow suitor Yara announced it would not increase its $4.1 billion bid.
MOS, which makes up nearly 8% of MOO’s portfolio, has also been cited as a potential takeover target. Firms like Cargill, Vale (VALE) and BHP (BHP) have all been rumored to have the potash firm in their sights.
So, MOO continues to benefit from acquisitions, emerging-market demand and an improving global market. During the one-month period ending Mar. 24, MOO jumped 3.88%. Year to date, this agriculture ETF is up 2.67%. Perhaps most impressively, during the one-year period ending Mar. 24, MOO rallied more than 53%.
Opportunities still abound in MOO, and I think this ETF would make a good addition to a well-diversified portfolio. With exposure to agricultural chemicals, operations, equipment, livestock operations and biodiesel, as well booming emerging economies, MOO should continue to reap the rewards in the months ahead.
How to Play the Euro-Dollar From Here
Posted 03/24/2010 04:53 a.m. EDT
The International Monetary Fund meetings will commence tomorrow, and after a terrible day for the euro, it’s certainly worth investigating where investors should go from here.
I have written a number of posts recently on which ETFs investors can use to short the euro and/or capitalize on the strength of the dollar .
This morning I urged readers to “Short the Euro, but Carefully ” using the ProShares UltraShort Euro ETF(EUO). As the euro sunk to a 10-month low against the dollar today, EUO gained more than 2.6%. Another one of my favorite dollar bets, the PowerShares DB US Dollar Index Bullish(UUP), also rallied 1.29%.
But where should investors go from here? EUO was a good play for short-term traders, but I want to caution investors against holding it too long — even if, like me, you’re convinced the euro will weaken further against the dollar.
On the Website for EUO, ProShares explains it best: “This ETF seeks a return of -200% of the return of a benchmark (target) for a single day. Due to the compounding of daily returns, returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period.”
Leveraged ETFs have a compounding error over time, so it is important for EUO traders to keep it short, while understanding the risks.
While I believe the euro will weaken further tomorrow, which would help boost EUO, unless you have a very strong conviction about a weaker euro and you aren’t adverse to risk, I would caution against using EUO. Investors and the news media will be tuned to the IMF meetings over the next two days, and I believe that there could be volatility in the euro — and consequently, EUO — which could be uncomfortable.
A more conservative bet is UUP, which also added gains today due to the yen’s weakness against the dollar. Even with a positive export report from Japan yesterday, the dollar gained against the yen — a trend that is likely to continue for the rest of the week.
There’s no use in betting against the strength of the dollar over the next two days, and investors would be wise to take advantage of its strength with UUP.
