ETF XRAY

The Simple Global ETF Portfolio

By Carl Delfeld of the Chartwell ETF Advisor

Do you wonder sometimes if we make investing far too complex and confusing? Exchange-traded funds were designed to be easy to use with all the advantages of simplicity, transparency, tax efficiency and low fees. While perhaps sub-optimal from a financial engineering point of view, the simple approach may work best for many investors.

Here are my picks for a portfolio of just three ETFs that span the globe.

iShares Dow Jones U.S. Total Market (IYY), 1,634 holdings, $15 trillion of market cap, top 10 holdings equal 17%

Vanguard FTSE All-World ex-US (VEU) 2,200 stocks, 48 countries, top ten equal 9.4%, large cap, 52% midcap, 38%, smallcap 10%, UK/Japan, 35%

Vanguard Emerging Markets (VWO) Brazil, 10.5%, India, 6.3%, Taiwan, 12.4%, China 10.5%, Russia, 10%, South Africa, 8.6%, Mexico 6.3%

Some may call this the "lazy portfolio" but others call it the "smart portfolio". Some of my clients use this as their core portfolio and then layer more creative and aggressive portfolios on top of it. Be careful to get professional advice from Chartwell or another advisor as to the proper proportions of each ETF that suit your investment goals. Find out more about this strategy by going to Chartwell ETF.

Steps to Building an ETF Portfolio

By Carl Delfeld of the Chartwell ETF Advisor

Here are some simple steps to building a global portfolio using exchange-traded funds. Be sure to tailor them to your own personal situation. If you work with a financial advisor, take them along to your next portfolio review.

Separate portfolios - not as US and international but rather as core and growth

Risk Management - trailing stop loss, max weighting

Achieve real diversification - currencies, precious metals, regions, sectors, inverse, regions, countries

Look “under the hood” of ETFs - understand the implications of market cap weighting

Pick the right countries - Heckman study of international mutual funds from 2001-2005 showed 88% of performance variation due to geographic asset allocation

Have a clear investment process such as a "core & explore" strategy and then stick with it through thick and thin.

Find out much more by joining the Chartwell ETF Advisor

Look Under the Hood of Financial ETFs

By Carl Delfeld of the Chartwell ETF Advisor

Is now the right time to load up with financial sector exchange-traded funds? Even if you think that markets have over shot on the sell side, you still need to do your homework by looking undert he hood of the ETFs you are considering.

Take the example of a global financial sector ETF versus an international financial sector ETF. You might think that the holdings in each ETF basket are quite similar but you would be dead wrong.

Below are the top five holdings of the iShares Global Financials ETF (IXG)

Citigroup (3.8%)
BOA (3.8%)
HSBC (3.2%)
AIG (2.6%)
JP Morgan (2.5%)
Mitsubishi UFJ (1.9%)

Compare this with the top holdings in the Wisdom Tree Int’l Financials ETF basket (DRF)

HSBC (7.3%)
Lloyds (3.3%)
RBS (3.2%)
Barclays (3.0%)
ING (2.7%)
BNP Paribas (2.6%)

Both of these ETFs were up more than 2% yesterday. Which, if any, should you invest in right now? Go to Chartwell ETF right now and find out.

Silver ETFs Can Be a Nice Hedge

By Carl Delfeld of the Chartwell ETF Advisor

Some limited portfolio exposure to silver exchange-traded funds can help reduce volatility and perhaps increase total returns over time. But keep in mind that day to day prices fluctuate sharply.

Don Dion in Seeking Alpha explains that SLV is the older of the only two U.S. ETFs that provide direct exposure to silver— that is, offering ownership of the metal rather than of stocks in mining companies or other firms that might benefit from strong silver prices. By investing in SLV, shareholders take a direct stake in 145 million ounces of silver bullion stored at a London branch of SLV’s custodian, JPMorgan Chase. I may just take a peek at the bullion next week while I am in London just to make sure that it is all there.

Silver was worth $15.82 an ounce as recently as November 7— a nice increase from last summer, when prices averaged less than $13. Prices did pull back to $14.22 early this week as risk-averse investors seemed to avoid investments that tend to be volatile. But this is exactly the opposite of what they should be doing since silver ETFs are a great diversifier for a global portfolio and may also enhance returns.

Silver is definitely not for investors looking for high returns or stability. Rather, investors seek out silver because, like other precious metals, it generates returns that are almost completely independent from the broad stock market. In fact, Dion points out that some economic events that hurt stock prices may boost silver prices — for example, quickly rising inflation may lead to a stock market sell-off even as investors scramble to buy up hard assets.

Learn if and where silver belongs in your portfolio by joining the Chartwell ETF Advisor

Weak Dollar ETFs Gain Following

By Carl Delfeld of the Chartwell ETF Advisor

While the US greenback showed some strength last week, it ended on a sour note leading to more investors looking for exchange-traded funds that go up when the dollar goes down.

The dollar fell 0.2 per to $1.4870 against the euro, within a cent of the all-time low at $1.4966 it hit on Friday according to the WSJ. The dollar also fell 0.4 per cent to $2.0688 against the pound and 0.2 per cent to SFr1.1000 against the Swiss franc.

The dollar also fell sharply in Asian trade to a low of Y108.11 against the yen amid reports in the Japanese press that China would use its foreign exchange reserves to buy Japanese stocks through the China Investment Corporation, its sovereign wealth fund.

Investors have many ETF options to play the falling dollar. Rydex Investments offers CurrencyShares, an ETF grouping that tracks the price of 8 currencies. Each ETF buys foreign currency that is held in a bank in London and shares go up or down based on the foreign currency's value compared to the dollar. There is also the PowerShares DB G10 Currency Harvest (DBV) that tracks 10 currencies, going long on the top three currencies with the highest interest rates and going short on the "top" three currencies with the lowest interest rates. Crude but effective.

But watch out for the inevitable dollar rally. America's current account deficit has gone from 6.5% of GDP to 4.5% and our nation's trade deficit has also improved from 5% of GDP to 4% of GDP. If the Fed does not keep cutting interest rates, global markets may sit up and take notice.

Find out what ETFs you need to manage your currency exposure by joining the Chartwell ETF Advisor.

Northern Trust Plans 19 Global ETFs

By Carl Delfeld of the Chartwell ETF Advisor

Northern Trust, known for its wealth management, private banking and custodian business, is the newest entry into the world of exchange-traded funds with a filing to the SEC for 19 new ETFs.

Jesse Empak of IBD writes that Northern Trust plans a total of 19 ETFs representing as many countries. Eight are focused on emerging markets, while the rest track indexes in Europe, Australia and Japan. The emerging-markets ETFs track China, Hong Kong, Israel, Malaysia, Russia, Singapore, South Africa and Taiwan.

In the filing to the SEC, Northern Trust does not include Hong Kong or Singapore on the list of emerging markets. In Europe, the ETFs track the BEL 20 in Belgium, the CAC40 in France, the DAX in Germany, the ATHEX 200 in Greece, Ireland's ISEQ 20, the MIB in Italy, the AEX-index in the Netherlands, PSI 20 in Portugal, and the U.K.'s FTSE 100. In Japan, the ETF will use the TOPIX index, while in Australia it'll use the ASX 200.

The ETFs for Ireland, Portugal and Greece would be the first ETFs to track these markets though iShares is rumored to be shortly introducing ETFs for these markets as well as for Thailand and Israel. Most likely, Northern Trust will compete with iShares country ETFs on price just like Vanguard is using its lower expense ratios to increase its market share among individual investors.

Find out if emerging market ETFs will bounce back by joining the Chartwell ETF Advisor.

Mid-Cap ETFs Hit Home

By Carl Delfeld of the Chartwell ETF Advisor

Mid-cap stocks and exchange-traded funds seem to get lost between the large caps and small caps. This is a big mistake since midcap ETFs contain companies which have market caps ranging from $2 billion to as much as $10 billion, are typically faster-growing than the market's giants but less volatile than small caps. There bigger size also provides more stable and predictable earnings visibility than small caps which tend to more volatile and unpredictable with plenty of earnings surprises both up and down.

Nathan Slaughter writing in Seeking Alpha points out that mid-caps can offer greater upside potential than large-caps and less volatility than small-caps. According to Morningstar, mid-cap growth companuies and ETFs have been the single best performing corner of the domestic market over the past five years with average annual returns in excess of +19%.

Investors looking to add this asset class to their portfolio may wish to try to pick some stocks but a wiser choice may be to go with an ETF such as the Vanguard Mid-Cap ETF (AMEX: VO).

Tracking the MSCI U.S. Mid-Cap 450 Index, this ETF contains both growth and value with a basket of 400 or so stocks and also avoids the overconcentration of its top names with its top ten holdings only represent a miniscule 5.8% of assets.

In terms of sectors, the ETF is heavily weighted towards the financial, consumer discretionary, and information technology sectors but has a bit less than the S&P 500's 20% allocation to the finance sector. It also sports a low expense ratio of 0.13% of assets.

Austrian ETF at Heart of Europe

By Carl Delfeld of the Chartwell ETF Advisor

The Austrian exchange-traded fund, iShares MSCI Austria (EWO) has done rather well over the past few years being favored as the best play on Eastern Europe by serving as a gateway between these fast growing emerging markets and Western European markets.

The end of the cold war in 1989 and the recent entry of many of Austria's eastern and southern neighbours into the European Union have put the this smallish country of 8 MM people country back at the heart of the continent and brings back memories of its historical role as an imperial dealmaker.

For several reasons, Austria and its exchange-traded fund has benefited more from Europe's opening to the east than any of the other older EU members, in several ways.

First, the Economist points out that its trade with central and eastern Europe (CEE) has jumped over the past decade and a half, helping to reduce its trade deficit. Second, and more important, Austria's stock of direct investment in central and eastern Europe zoomed from from almost zero in the early 1990s to nearly $28 billion in 2004, equivalent to 8% of Austria's GDP

Furthermore, while a decade ago much of its investment was concentrated on manufacturing, now the biggest chunk goes on financial intermediation, property and services. This reflects its growing role as the nexus of support services for Eastern European countries. The eastern opening, together with those of Austria's EU entry in 1995, EU economic and monetary union in 1999 and the entry of ten new EU members in 2004 have all boosted economic growth considerably and buoyed its stock market and the ETF (EWO) that tracks it.

Vienna still has the regal feel of an imperial capital, much grander than its current size and stature but the country benefits economically and politically by not being France or Germany which tend to throw there weight around the councils of Europe. Austria's market is trading at just 12 times 2007 earnings according to data from Reuters but watch out for the high concentration of its top three companies in its ETF (EWO).

Find out if the time is right to add Austria to your global portfolio by joining the Chartwell ETF Advisor.

Japan Corporate Earnings a Drag on ETF

By Carl Delfeld of the Chartwell ETF Advisor

The Japanese market, and the ETFs that track it such as the iShares MSCI Japan (EWJ), is down 6 per cent so far this year in dollar terms, continues to disappoint investors even though it is trading at the low end of historical valuations. Now weak aggregate corporate profits are also a problem. Year-on-year operating profits for top-tier companies rose 6 per cent in the first half and full year forecasts will be lower. Analysts are similarly gloomy, having marked expectations progressively lower in the past six months.

The outlook is especially poor for non-manufacturers (excluding banks) where profits fell 3.4 per cent, according to Morgan Stanley. Banks may have reported smaller sub-prime exposure than their US peers, but top it up with domestic consumer finance woes and the dent is sizeable: financials’ profits were down 5.6 per cent.

The Financial Times notes that the second half looks even harder as remaining supportive factors, including a cheap yen, look less certain. The yen has been strengthening in recent weeks and on Wednesday hit Y109/US$1, above the level of most corporate assumptions for the second half. Goldman Sachs estimates that a 10 per cent move in dollar/yen foreign exchange rates affects pre-tax profit growth by just 2 per cent compared with 5 per cent in the 1990s. But even though higher oil prices are less damaging than was once the case, they still erode profit margins.

What will be the catalyst for growth and higher stock prices. Exports to China are slowing as has margin expansionand recently top-line growth. That will be harder to sustain if the US consumption slows down. One plus is that the Japanese market is undoubtedly getting cheaper: using companies’ own forecasts, it is trading at only 17 times this year’s earnings. Still, the yen ETF may be a better Japan play than its stockmarket.

Learn more about why Japan does have a place in your portfolio by joining the Chartwell ETF Advisor.

Net Flows to Money Markets Since August Top $100 Billion

By Carl Delfeld of the Chartwell ETF Advisor

While many exchange-traded funds are suffering declines, net investment flows by the world's large equity managers tracked by EPFR Global are leading to the building up of sizable cash positions.

EPFR comments that with sub-prime and global credit fears being fueled by almost daily news of fresh write-downs in the financial sector and evidence mounting that the US economy will slow going into next year, investors retreated from equity funds during the second week of November and shift into the relative safety of Money Market Funds.

All of the major EPFR Global-tracked equity fund and ETF groups posted net outflows for the week ending November 14, with $5.58 billion pulled out of emerging markets equity funds and $5.07 billion out of funds geared primarily to developed markets. Money Market Funds, meanwhile, absorbed $10.1 billion, bringing net inflows since the beginning of August over the $100 billion mark.

Global equity managers did put fresh money into Germany and South Korea Country Funds and injected over $2 billion into Financial Sector Funds and ETFs. During the second week of November they pumped $2.47 billion into Financial Sector Funds – nearly all of that money by way of ETFs – which took year-to-date flows back into positive territory. They also moved aggressively back into US Small Cap equity. Latin American funds and ETFs are year-to-date still sitting on a net gain of 60.76%.

Do you think some of these markets are oversold? Join ChartwellETF.com for a second opinion.

Giving Japan its Due

By Carl Delfeld, President, The Center for a New American Diplomacy

As part of a deal with North Korea in the six party nuclear disarmament talks; President Bush has decided to take North Korea off the U.S. list of state sponsors of terror.

This decision was made over the strong protests of Japan primarily because of North Korea’s stonewalling on providing Japan with any information on a score of its citizens kidnapped by North Korea during the 1970s and 1980s. Some of the abductees were schoolchildren on their way home from school. Sure sounds like terror to me. Meanwhile, North Korea has more than a hundred nuclear missiles aimed at the heartland of Japan.

If Japan tells us this issue is of the utmost political sensitivity, we need to listen and not run roughshod over the wishes of a critical ally especially when the deal at hand with North Korea is by most accounts deeply flawed.

Rather, our top priority in the Asia-Pacific region should be to invigorate and dramatically broaden the scope and the intensity of the Japanese-American partnership. With the global war on terror and the rise of India and China, the relative amount of media and Congressional attention paid to relations between Japan and America has dwindled. This is unfortunate since the alliance remains as former U.S. Ambassador to Japan Michael Mansfield aptly put it: “the most important bilateral relationship - bar none”.

This statement is even more on the mark today given the wide range of issues that the robust partnership can tackle more effectively together. From regional trade issues, to fighting poverty, to making multilateral institutions more effective, to seeking more transparency and cooperation regarding regional security issues; the vital interests of both countries and the region as a whole largely coincide.
Here are just a few of the issues that need attention, publicity and action.

1) Japan deserves our unequivocal and full backing to be a permanent member of the United Nations Security Council. The window of opportunity for getting this accomplished is closing fast.

2) The need to rapidly expand the current joint effort to fund and upgrade technologies regarding missile defense.

3) With the U.S. defense budget under acute pressure and Japan’s navy now more than three times the size of the UK’s, it makes sense for both countries to escalate cooperation to maintain a strong deterrence in the region. The bickering and acrimony over our bases in Okinawa also need to be resolved quickly.

4) Establish a free trade zone between the two countries. China is now Japan’s largest trading partner but the complementary nature of America’s and Japan’s economies is an important consideration. In addition, China is rapidly moving up the technology ladder and over time will manufacture domestically rather than import from Japan.

5) Encourage closer cooperation over yen/U.S. dollar exchange rates could avoid sudden and disruptive movements and allow a steady and orderly increase of the undervalued yen.

6) Jointly fund and manage economic development, conservation projects and humanitarian efforts in the region. Both countries are generous donors to the region and have the infrastructure to act quickly on a large scale.

The issue of North Korean abductees is just as important to Japan as the issue of the MIA-POW issue was to our relations with Vietnam. We need to stand firm with Japan on this one, no matter what the short-term costs. The people of Japan are watching whether our words match our actions. Freedom is not a bargaining chip, it is at the very heart of our nation’s foreign policy.

The mission of the Center for American Diplomacy is to change priorities with more focus on the Asia-Pacific region and emerging market countries.

Will China and India Close the Science Gap?

By Carl Delfeld of the Chartwell ETF Advisor

China and India comfortably led the world in scientific exploits before the 15th century. China surpassed Europe in its understanding of chemicals, industry and shipbuilding while India leapt ahead in mathematical ingenuity.

Why did they both lose their steam? And now that they have regained their mojo, what impact will technology have on their economies and stockmarkets tracked by exchange-traded funds like the iShares China (FXI) and the Morgan Stanley India (IIF) and China (CAF) funds?

A great article in the Economist by Simon Cox addresses this issue and what the furure might hold. In his book “The Lever of Riches”, Joel Mokyr settles on a simple explanation for China's technological stagnation: the country's imperial state lost interest. Its purposes were better served by continuity than by progress, and there was no rival source of power and patronage to pick up the threads it dropped. Roddam Narasimha of India's National Institute of Advanced Studies reaches a similar conclusion for India. “Up to the 18th century, the East in general was strong and prosperous, the status quo was comfortable, and there was no great internal pressure to change the global order,” he writes.

Ironically, while one out of every three software engineers in the world are Indian, India has only 24 personal computers for every 1,000 people, and fewer than three broadband connections. China has impressive numbers in terms of budgets and educating engineers and such but some question whether the quality of product is world class. Nevertheless, it presses on and by 2020, China aims to spend a bigger share of its GDP on research and development (R&D) than the European Union.

An unexpected twist of the tale may be that the challenge presented by the rise of India and China will lead to America, far from complacent, to redouible its efforts and maintain its lead. Keep in mind that all the Nobel prizes for science went to Americans in 2006.

If you happen to live in the Los Angeles area, I will be speaking this evening at 6:30 PM at the Pierpont Inn in Ventura on building a global ETF portfolio.

HSBC Credit Report Stops Global ETF Rally

By Carl Delfeld of the Chartwell ETF Advisor

The European DJ Stoxx 50 this morning is trading +0.87%. Asian-Pacific stocks rallied as well today with Japan +2.47%, Hong Kong +4.90%, China +4.18%, Australia +1.28%, Bombay +4.69%.

Country exchange-traded funds also jumped to a strong start this morning but weak credit numbers from HSBC stopped the rally cold.

HSBC recorded a $3.4bn charge for the three months ending September against its US consumer finance business, $1.4bn more than would have been expected if first half trends had continued. Of that $1.4bn, half related to non-mortgage loans.

Stephen Green, Chairman, said in an article by Maggie Urry in the Financial Times that problems with bad debts were spreading from the mortgage business to other loans, such as credit cards and for car purchases, as consumers found it harder to get credit and delinquency rose. He said that while delinquency rates were up, he noted that they were still lower than the level seen in previous downturns.

At the end of the third quarter, $1.6bn or 3.2 per cent of the bank’s US branch based mortgage book were two or more payments in arrears, up from $1.1bn at the end of June. Worse, $3.2bn or 8.2 per cent, of its Mortgage Services portfolio were that far in arrears, up from $2.6bn at the end of the second quarter.

Mr Green said, “I don’t think anybody knows” when the market would begin to recover, but the group now expected “more prolonged weakeness” which would last at least through 2008 and probably into 2009.

Belgium a Bank Heavy ETF

By Carl Delfeld of the Chartwell ETF Advisor

Those investors looking to gain global banking and financial exposure at low valuations should look at the Belgium ETF (EWK).

Belgium, which broke away from the Netherlands in 1830, sometimes presents investors with solid value. King Albert II reigns over this industrious nation with Dutch –speaking Flemings in the north and French-speaking Walloons in the south. Belgium sits at the crossroads of Europe and is home to both NATO and the European Union.

The Belgium ETF (EWK) contains 23 companies with the insurance and banking behemoth Fortis leading the way with 23% of the basket. Financials and banks make up more than 50% the holdings of the Belgium ETF with materials, food and telecom companies adding an additional 22%.

The Chartwell ETF Advisor has noticed that the Belgium stock market is undervalued trading at 1.6 times book with a forward price earnings ratio of 10.5. It enjoys low interest rates and according to data from EmergingPortfolio.com, global money managers were increaseing their Belgium weightings.

Emerging Market FDI Soaring with ETFs

By Carl Delfeld of the Chartwell ETF Advisor

It has been a tough week for emerging market exchange-traded funds like Brazil (EWZ), South Afruca (EZA) and Taiwan (EWT) but investors can take some solace that investment and FDI flows rremain robust.

The $1.21 billion that investors steered into emerging market funds and ETFs took year-to-date inflows up to $13.5 billion, over three times the full-year total for 2006.

Richard Gnodde, Co-CEO of Goldman Sachs International points out in the FT that Since 1990, cross-border capital flows have grown more than 10 per cent annually. Over that period, capital inflows to emerging markets have grown twice as fast as inflows to developed countries. Investment flowing to developing countries now accounts for nearly half of world total FDI inflows, compared with only 20 per cent in 1990. Even excluding China, the share doubled to 32 per cent.

A good example of this trend is the recent Industrial and Commercial Bank of China ’s $5.5bn investment in 20 per cent of Standard Bank of South Africa. It is the largest-ever overseas investment by a Chinese company, it is also the largest foreign direct investment in Africa.

While emerging markets are still somewhat tied to Europe and America, the trade and investment flows between emerging market countries are growing faster and should cushion any blow from any economic slowdown.

Emerging Markets Continue to Attract Fund Flows

By Carl Delfeld of the Chartwell ETF Advisor

Emerging markets and the exchange-traded funds that track them continue to attract sizable flows from big global money managers. According to EPFR Global, For the fourth week in a row the diversified global emerging market equity funds and ETFs posted the biggest inflows of any major equity fund group.

The $1.21 billion that investors steered into these funds took year-to-date inflows up to $13.5 billion, over three times the full-year total for 2006. Asia ex-Japan funds and ETFs also absorbed over $1 billion despite posting a collective portfolio loss of 3.96%, the worst showing among the major emerging markets fund groups, and have now taken in 115% of last year’s record-setting inflows.

Once again investors gravitated towards the larger emerging economies. Inflows into Brazil, Korea, China, Greater China and Russia Country Funds totaled $878 million while BRIC equity funds took in another $480.6 million. That represented 56% of the week’s net inflows into all emerging markets funds, up from 30.5% the previous week. With oil prices testing the $100 a barrel mark Russia Country Funds turned in the fourth best weekly performance among pure country funds behind energy major Saudi Arabia (+9.59%), Indonesia (+4.96%) and Vietnam (+1.62%).

One large emerging market that did not fare well was Mexico, which paid for its tight integration with the US economy as investors pulled the equivalent of 7.48% of their beginning of the week assets under management from Mexico Country Funds. That weighed on Latin America Equity Funds, which took in $105 million, well below their year-to-date weekly average of $225 million. EMEA Equity Funds also posted modest inflows.

“Investors globally have been gravitating to the sounder economic and fiscal story that emerging markets represents, but the ever-weakening dollar, if it turns into a destabilizing rout, could even damage the current rosy sentiment of investors towards emerging markets,” says Brad Durham, a managing director of EPFR Global.

Find out which emerging market ETFs should be in your portfolio by joining the Chartwell ETF Advisor.

ETF Update Shows Strong Growth

By Carl Delfeld of Chartwell ETF Advisors

Exchange-traded funds continued their growth in assets during the month of October acccording to a useful ETF Snapshot produced by State Street Global Advisors.

As of October 31, 2007, 586 ETFs in the US with assets totaling approximately $584BN were managed by 18 ETF managers. US industry assets increased from approximately $554BN in September 2007. There were 26 new ETFs launched during the month of October.

During the month, 9 of the 10 category types experienced growth. Barclays Global Investors (BGI) had the largest AUM with $338BN across 141 ETFs, followed by State Street with $129BN across 64 ETFs.

The highlights for October are below.

International ETFs continued to gain assets, climbing 13.6% for the month to $172BN

Growth ETFs had the largest asset change for the month gaining 10%, while Small Cap ETFs lost 6.2%.

Consumer Discretionary assets surged 42% to $1.8BN, followed by Financials, up 13.4%.

Collectively, Barclays, State Street and Vanguard accounted for approximately 87% of the US-listed ETF market.

Growth outperformed in all capitalization segments of the market (DJ Wilshire indexes only) both for the month and YTD.

Information Technology led all sectors and gained 7.2% for the month while financials was the worst performing sector, falling 1.8%.

Find out how to use ETFs to build global portfolios at Chartwell ETF Advisors.

Australian ETF Up on Takeover Rumors

By Carl Delfeld of the Chartwell ETF Advisors

News of a possible takeover for Rio Tinto from Australian rival BHP Billiton has helped the Australian ETF (EWA) get off to a postive note on Thursday morning. Rio Tinto and BHP are two of the top holdings in the Australian ETF basket.

Rio surged 16.7% after BHP confirmed it had sent a letter to the Rio board to discuss a possible merger, but the approach was rejected. BHP rose 6.4%. The news of a possible mega-merger in the mining sector kickstarted hopes for further deals, sending mining stocks sharply higher across the board.

The Australian ETF (EWA) has also benefited from being at the sweet spot of the commodity and Asian trading theme. BHP, the company with the largest weighting in the ETF basket, recently reported huge new exploration opportunities. Mr. Marius Kloppers will soon occupy the CEO chair so capably executed by Chip Goodyear. The talented management team of BHP should continue to drive growth in a conservative manner without costs getting out of hand.

The Australian ETF has been a consistent performer as part of Chartwell ETF's model portfolios and was added to its Asian Opportunity portfolio yesterday.

ProShares Launches China Ultra Short ETF

By Carl Delfeld of the Chartwell ETF Advisor

ProShares launches today an exchange-traded fund that moves inversely to a well known index of 25 "H" shares of Chinese comopanies that trade on the Hong Kong stock exchange. The UltraShort FTSE/Xinhua China 25 ProShares (FXP) seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the FTSE/Xinhua China 25 Index. It has an expense ratio of 0.95%.

The iShares FTSE/Xinhua 25 ETF (FXI) fell almost 10% on Monday after China effectively reversed itself by pulling back a proposal to allow mainland citizens to buy shares in Hong Kong. On Tuesday it rebounded but Wednesday brought more selling pressure as it lost another 4.8%. FXI is still probably the best way to get at Chinese companies. FXI contains 25 of the largest and most liquid Chinese companies available to international investors and all the shares trade on the Hong Kong Stock Exchange. Eight of the largest ten companies in the index are H-shares and they collectively account for 46% of the index.

FXP needs to be used carefully since it magnifies movements in the index. Another option to hedge China exposure is to purchase a put option on FXI.

Playing the Water Shortage with ETFs

By Carl Delfeld of the Chartwell ETF Advisor

A growing and hopefully profitable investment theme is the lack of water around the world and companies that are trying to do something about it. A good way to play this theme is through a basket of companies which where exchange traded funds come into the picture.

Dan Pritch writes in Seeking Alpha that the main ETF that garners attention is PowerShares Water Resources (PHO), which launched in 2005. Additionally, he mentions the Powershares Global (PIO), Claymore (CGW) and First Trust ISE Water Index Fund (FIW).

These ETFs stand to benefit from the continued infrastructure boom in the developing world, where the standard of living of citizens attempts to reach parity with those in the developed world. Right now, 1 in 6 people on this planet do not have access to clean drinking water and as we know America is not immune from water shortages. Note the drought in the South and continued problems in the West. It seems that increased spending on water infrastructure is inevitable.

The top 10 holdings of PHO make up less than half of its weighting and that these are primarily small cap stocks. Here they are:

FRANKLIN ELEC INC (FELE)
IDEX CP (IEX)
ITRON INC (ITRI)
LAYNE CHRISTENSEN (LAYN)
ROPER INDUST INC (ROP)
TETRA TECH INC (TTEK)
VEOLIA ENVIRONN ADS (VE)
WATTS WATER TECH A (WTS)

Find out what other new technology ETFs are in Chartwell ETFs New Venture portfolio.

Crude ETFs Track Surging Oil Prices

By Carl Delfeld of the Chartwell ETF Advisor

Exchange-traded funds that track oil prices have done so inconsistently. The Claymore Oil Up ETF (UCR) is up 22% since its inception in November last year while West Texas Intermediate crude is up 45%. UCR is up 1.14% in mid-day trading.

Crude oil prices surged to fresh highs on Wednesday amid renewed dollar weakness as investors sought refuge from a second wave of credit turmoil. Nymex December West Texas Intermediate gained $1 at $97.70 a barrel while ICE December Brent rose $83 cents to $94.09 a barrel in volatile trading shortly after the release of the latest US weekly inventories data

US crude stocks fell 0.8m barrel last week and stocks at Cushing, Oklahoma, the delivery point for WTI, as a bullish factor for prices.

The closure of several North Sea oil production platforms because of bad weather helped drive prices up and ConocoPhillips and BP were expected to reduce production in the area ahead of a powerful storm.

Europe Gains on US in ETF Competition

By Carl Delfeld of the Chartwell ETF Advisor

While the US has been at the center of the exchange-traded fund revolution, Europe is gaining fast.

Of the 953 ETFs listed on world exchanges, 549 are listed in the US but a surprising 336 are listed in European markets with most on the London Stock Exchange. In terms of assets, however, America has a more commanding lead with almost $500 billion versus a bit over $100 billion for Europe. The average fund holding in Europe is around $10 million, compared to the U.S. with averages around $100 million per fund. Barclays Global Investors is still leading the industry, with $350 billion in ETF assets.

The SPDR ETF (SPY) which tracks the S&P 500 is still the largest ETF in terms of assets with $82 billion followed by EFA, EEM and QQQQ.

So far in 2007, the US has rolled out 175 new ETFs while Europe has launched 103 ETFs. The number of innovative ETFs is growing at such an extreme rate that every theme, sector and region is getting exploited for a new product, reports Deborah Brewster for the Financial Times.

Learn more about the world of ETFs by joining the Chartwell ETF Advisor.

China's Market Mess

By Carl Delfeld of the Chartwell ETF Advisor

The last few turbulent days for investors in China are a glaring reminder of China’s alphabet market mess. When Chinese investors look to the rumors of government intervention for guidance on when to buy or sell stocks rather than market fundamentals, you know you have a serious problem on your hands.

First, China effectively reversed itself by pulling back a proposal to allow mainland citizens to buy shares in Hong Kong led to a sharp sell off. Second, on PetroChina’s first day of trading yesterday, while its share price almost tripled on the Shanghai exchange, its “H” share equivalent on the Hong Kong exchange fell 8%. The result: PetroChina is trading at 57 times earnings in Shanghai and 22 times earnings in Hong Kong.

Even stranger is that the Communist government for some reason continues to sit on 87% of PetroChina’s shares despite the obvious demand on the part of private investors to pay top dollar. Why not completely privatize PetroChina and use the proceeds to deal with China’s massive environmental challenges.

The recent volatility and confusion on both the Shanghai and Shenzhen markets probably has augmented the role of Hong Kong as the market of choice for global investors and I’ll bet that most Chinese individual investors would prefer to invest through it as well. National pride - this is why China’s leadership pulled the proposal to allow its citizens to invest through Hong Kong.

While the market-oriented British oversaw the Hong Kong market with a light touch, the Chinese Government sees the markets as a means to control money flows. Therefore, they have created a confusing and destabilizing alphabet soup of share classes that thwart market forces because they are not fungible due to China's heavy- handed capital controls.

First are the A-shares listed in Shanghai and Shenzhen which are available to Chinese investors and certain qualified foreign institutional investors. Next are H-shares which are for the Chinese companies listed in Hong Kong. The A-shares are trading at a sharp premium to H-shares. This seems a bit odd considering the 143 mainland companies traded in Hong Kong are generally China's largest and thought to be of the highest quality. Then there are the B-shares which are available to foreign investors and trade in US dollars in Shanghai and in Hong Kong dollars in Shenzhen.

A bit confused? It gets worse when you look at the valuations of individual companies listed in more than one market. The 42 companies actively traded in both the H-share and A-share markets are much more expensive in Shanghai and Shenzhen than in Hong Kong. The 86 companies with both A- and B-shares have the same pattern with, on average, the B-shares much cheaper than their A-share counterparts.

The repercussions of this balkanized share structure will be around for a long time. Chinese investors have jumped into A-share markets with both feet partly because they have precious little other options when it comes to parking their mounting savings. But is their a way for foreign long-term investors to take advantage of the current situation?

While the FTSE/Xinhua 25 ETF (FXI) fell almost 10% yesterday, it is still probably the best way to get at Chinese companies. FXI contains 25 of the largest and most liquid Chinese companies available to international investors and all the shares trade on the Hong Kong Stock Exchange. Eight of the largest ten companies in the index are H-shares and they collectively account for 46% of the index.

If the A-share market in China continues to be volatile and suffers a sharp pullback, I believe the H-share market will weather the storm fairly well because of the valuation gap and the likelihood that global investors will scoop up perceived bargains. If you still are hesitant you might want to hedge a bit by purchasing a put option (right to sell) FXI out as far as January, 2009. I call it China portfolio insurance.

The current market confusion in China is rich in irony. On the tenth anniversary of the turnover of Hong Kong to China rule, the open and free Hong Kong market is showcasing its traditional strengths and free market foundations.

Let the Chartwell ETF Advisor guide you through China's alphabet market mess.

How Will Stronger Yen Affect Japan ETFs?

By Carl Delfeld of the Chartwell ETF Advisor

As markets brace for interest rate decisions by both the Bank of England and the European Central Bank, Japan's central bank will also at some point have to increase benchmark rates. How will this affect Japan exchange-traded funds like iShares MSCI Japan (EWJ) and iShares S&P/TOPIX 150 (ITF)?

Bank of Japan Governor, Toshihiko Fukui, recently said that his bank is committed to gradually raising the county's "very low" borrowing costs to prevent investment bubbles. Fukui said "Keeping interest rates lower than the economy's strength is risky and they need to be raised in a timely manner." Fukui's comments are consistent with other policy members sentiment on the BOJ as the policy minutes from the Sep 18-19 BOJ meeting were released today. Some of the 9 board members stated that a "long period" of global monetary easing had led to "excessive financial behavior" that resulted in the US home loan crisis.

The Bank of Japan is concerned that keeping its benchmark rate at 0.50% risks seeding future asset bubbles as well as furthering the carry trade but are also concerned on how global financial market instability and the US economy will affect their outlook for Japan's growth and inflation. In other words, rates need to go up but policy maker s are fearful of slowing an already fragile economy.

Bumping the benchmark rate to 0.75% would be a wise move and would surely strengthen the yen while exporting oriented company shares would initially take a hit. The Japanese market overall would rise.

Japan still represents 40% of the MSCI index. What Japan allocation belongs in your portfolio? Join the Chartwell ETF Advisor to find out.

China Backtracks on Allowing Citizens to Invest in HK

By Carl Delfeld of the Chartwell ETF Advisor

In a blow to the iShares Hong Kong (EWH) and iShares China (FXI), China has reversed itself again and has pulled a proposal to allow mainland citizens to buy shares in Hong Kong. This decision will dampen the recent surge in the former colony’s equities that brought its market to record highs. It also highlights what is one of the biggest risks to investing in emerging markets: regulatory risk.

Wen Jiabao, the premier, has attached four conditions to final approval for the scheme, all of which are so open-ended that Beijing could take months, if not longer, to permit it to go ahead.

The Financial Times reports that the initial proposal to allow investors to invest in the Hong Kong stock market was announced in August by the State Administration of Foreign Exchange, a body under the central bank, and sparked strong interest in the HK's share prices which in many cases trade at considerable discounts for companies that have dual listings on mainland exchanges and HK as "H" shares.

Chinese investors are eager to open up options beyond chasing Chinese stocks to extreme levels and bank acounts which offer negative real interest rates. The Shanghai Composite index is up sixfold in two years.

Learn how Chartwell ETF reacts to this breaking news as it manages its seven model ETF portfolios.

New ProShares ETF Will Buffer Portfolio if Emerging Markets Cool

By Carl Delfeld of the Chartwell ETF Advisor

Yesterday, when the iShares MSCI Emerging Market (EEM) was down 4%, ProShares launched its new Short ETF (EUM) that moves 100% the inverse of EEM. Good timing.

The MSCI Emerging Markets Index has outperformed the S&P 500 by an astonishing 134.46% over the past three years. Many are divided over whether emerging markets can continue this sort of performance or whether there will be a sharp pullback.

It may be a good idea to have a slice of this new ETF to buffer your global ETF portfolio from what seems to be an inevitable pullback. However, the timing of and the allocation to such short ETFs is a tricky manner and it is best to seek professional advice. There are also techniques whereby you can pair this ETF with long positions in specific emerging market country ETFs like China (FXI) and South Korea (EWY) or Brazil (EWZ).

You also should be aware of the country distribution within the EEM exchange-traded fund. Currently, the distribution is China, 15.5%, South Korea, 14.9%, Brazil, 12.4%, Taiwan, 9.3% and Russia, 8.9%.

For ideas how to use these tools go to the Chartwell ETF Advisor.

Hong Kong & Singapore Lead Asian Outperformance

By Carl Delfeld of the Chartwell ETF Advisor

Investors with the Hong Kong (EWH) and Singapore (EWS) exchange-traded funds in their saddlebags are in good shape as both have outperformed benchmarks and surprised skeptics.

In morning update Barchart reports that Japan closed +0.79%, Hong Kong closed +0.45%, and Australia closed +1.10%. However, China closed -1.46%, and India's Sensex closed -0.57%. India today reported that its exports in September were very strong at a 5-month high of +19.2% yr/yr, thus providing support to keep industrial growth near the government's 10% growth target.

Hong Kong is just a bit behind the mainland in terms of a booming market. The stock market, which hit new highs on Thursday, has risen 11 per cent in the past month for a year-to-date gain of 58 per cent. The currency, pegged to the US dollar, is bumping against it ceiling which is forcing the de facto central bank to intervene five times on Wednesday alone.

Hong Kong has always been a bit volatile and tied to real estate in particular, but the latest rally does not seem excesswive at this point. The benchmark Hang Seng Index is trading at about 22 times next year’s earnings, comfortably below the excesses of the tech frenzy of 2000. The stock market itself is a far different beast from those days. Now, Chinese companies make up over half the market capitalisation

The iShares MSCI Singapore ETF (EWS) has also been at the sweetspot of Asian growth. It is up 40% year-to-date and is rapidly becoming a gateway for many investors interested in capturing China-led growth through Swiss. quality companies. The ETF basket has some of Singapore's largest blue-chip companies. Seventy percent is weighted within the 10 largest holdings, which are banking and financial.

Both of these ETFs have been core holdings of Chartwell ETF's Asian Opportunity portfolio, find out what other countries made the grade by joining the Chartwell ETF Advisor.