ETF XRAY

Significant Security Risks Loom Over Global Markets

By Carl Delfeld of Chartwell ETF

As if markets did not have enough to worry about given the global financial meltdown and the deepening consumer recession, there are significant political risks on the horizon that merit close attention. Assessing political risk is not a minor matter. As a new president assumes the mantle of foreign policy leadership, he might get the following quick rundown of trouble spots from his national security advisor. Are any of these coming up in your discussions with your investment adviser?

 The re-grouping of al Queda

 The deterioration in Afghanistan

 Iran just a step away from gaining a nuclear capability

 The rise of Russian nationalism

North Korea’s growing isolation and nuclear

China’s rise and, paradoxically, the possibility of domestic instability due to growing unemployment and slower economic growth

Potential for increasing Taiwan-China tension

Escalating drug wars and corruption on the Mexican-American border

Financial markets and institutions growing vulnerability to cyber threats

Investors may wish learn learn how to hedge some of these risks at ChartwellETF.

 

 

 

  

Margaret Thatcher on the Stimulus Bill

By Carl Delfeld of the Great America Foundation

How would former Prime Minister Margaret Thatcher come down on the stimulus package winding its way through Congress?

Her view is probably close to the sentiments expressed on page 131 of her autobiography entitled Margaret Thatcher: The Downing Street Years.

"As governments tried to stimulate employment by pumping money into the economy they caused inflation. The inflation led to higher costs. The higher costs meant loss of ability to compete. The few jobs that we had gained were soon lost; and so were a lot more with them. And then, from a higher level of employment and inflation, the process was started all over again, and each time around both inflation and unemployment rose."

As usual, a dose of direct, logical, common sense from the "Iron Lady".

Canada and ETF (EWC) Looking Good

By Carl Delfeld of Chartwell ETF

The Canada ETF (EWC) has been a recent Chartwell ETF Pick of the Week. 

As an affluent, high-tech industrial society in the trillion-dollar class, Canada resembles the US in its market-oriented economic system, pattern of production, and affluent living standards.

Canada is largely a resource-based economy but its service side provides good balance. It offers investors fiscal strength, low political risk, and a resilient economy.

Industrial Materials (15.6%) and Energy (26.3%) sectors account for 42% of EWC, with such main players in industry such as Canadian Natural Resources (CNQ), Encana Corp. (ECA) and Suncor Energy Inc. (SU). But the financial sector is the largest group in EWC, at 35%. 

Canada and EWC are also a limited play on gold mining companies with two of North America’s largest, Barrick Gold (ABX) and Goldcorp Inc (GG). Canada and EWC thus offer a low-risk way to add energy and commodity diversification to your global portfolio.

EWC offers a nice yield just under 3% and also provides a nice hedge on the U.S. Dollar. Though recently strong, the greenback may reverse course as global markets concern over the Fed printing press and inflationary pressures returns.

Canada, on the other hand, is in a strong fiscal position and actually has a current budget surplus.

The Financial Times seems to agree with our sentiments as it highlights that Canada's overnight interest rate was cut to 1 per cent last week and a C$30bn fiscal package due to be introduced to the budget tomorrow. Canada’s banks are in pretty good shape too. The ratio of deposits to total liabilities for the sector, for example, is a high 70%. By contrast, that number is below 50% in the US. Furthermore, the six biggest Canadian banks have only suffered $8bn of writedowns and have an average tier one ratio of 

10%. 

Catalyst: The Canadian market and EWC will likely do very well if and when energy and commodity prices rebound from their sharp selloff.

Valuation: EWC is trading at a five-year low and lost about 10% of its value just this week. I can’t tell you where the bottom is but believe the risk/reward relationship is favorable for investors. The Canadian market is trading at about a 10% discount to the S&P 500 on a price to earnings basis.

Risk Factor: Moderate – Low given the depressed state of energy & commodity prices.

Risk Management: Suggest an 8% trailing stop loss.

Tip: You may wish to scale into a position in EWC rather than jump in with both feet.

 

Taiwan Faces Credit Downgrade

By Carl Delfeld of Chartwell ETF

Today Fitch lowered its outlook on Taiwan’s credit rating, saying government debt is likely to be pushed to record levels by aggressive stimulus packages. This will likely have a negative impact on the Taiwan (EWT) ETF that tracks its market.

The downgrade of Taiwan’s double A local-currency rating from stable to negative was the first such cut Fitch has made since it began assigning ratings to the country in late 2001. Some European country ratings are also under pressure as debt obligations mount.

Like other export-oriented Asian economies, Taiwan has been hard hit by the sudden slump in consumer demand in the US and Europe. The island saw economic growth fall into negative territory in last year’s third quarter and growth projections for 2009 are uncertain at best.

Robin Kwong of the Financial Times reports from Taipei that President Ma-ing-jeou said his government would turn to spurring the domestic economy to drive growth. He announced a number of stimulus packages, including $2.5 billion worth of spending vouchers and earmarking $18bn in funds for loan guarantees for businesses. The economic ministry is also considering a bail-out for ailing memory-chip makers.

SPDR ETFs Gain Market Share

By Carl Delfeld of Chartwell ETF and ETFfolio

During 2008, State Street Global Advisor’s SPDR ETFs gained market share while rival iShares lost 5.8% market share in terms of assets under management. State Street Global Advisors’ US ETF market share was 30.0% as of month end, an increase of 4.0% since the beginning of the year.

Despite steep losses in the equity and credit markets in late 2008, State Street saw $70BN in combined net flows into the SPDR^® ETF family for 2008, raising assets by $2BN to $160.1BN. At the end of 2008, 747 ETFs with assets of $534 billion were being managed by 22 ETF managers.

ETF industry assets increased $56.6BN for the month — up 11.9%. Thirteen new ETFs were launched in December and one was liquidated. In December 2008, nine of the twelve categories gained assets with large-cap and international ETF assets gaining the most, $25.7BN and $14.6BN, respectively. For all of 2008, international ETF assets were down 37% while inverse/leveraged ETF assets were up 126% and fixed income ETF assets up 62%.

 

Market Turmoil Strengthens the ETF Revolution

By Carl Delfeld of Chartwell ETF & ETFfolio

The volatility of global equity markets has accelerated investor’s movement towards ETFs at the expense of mutual funds. This is an evolutionary, incremental process but is seems pretty clear that the tide is turning. The advantages of ETFs such as transparency, flexibility, ease of diversification, opportunities to hedge and tax efficiency are all moving in the right direction. Just as volatility was escalating in September and October 2008, ETF trading volume was reaching a record high of 40% of total market-trading volume. For much of 2008, the average share was just under 30%. 

At the same time, consolidation in the ETF industry is accelerating. There is considerable overlap of coverage and it seems that the explosion of ETFs during the last three years may be helping the leaders more than the challengers. iShares Lee Kranefuss in an interview with Chief Executive magazine notes that iShares has gone from $2 billion of assets in 2000 to $350 billion in assets spread amongst its 330 ETFs on the market. That’s about a 50% market share in both ETFs and assets. 

We see two opportunities to grow with the ETF revolution. First, financial and investment advisors as well as some self-directed investors oftentimes need some independent advice in building global ETF portfolios for their clients. Next month, we are releasing “ETF Passport: An Advisor’s Guide to International ETFs” which will contain some international strategies, an ETF library and profiles of thirty country markets. Chartwell produced the publication which will be distributed with the support of ETF sponsors. 

Second, we believe the next step in the ETF revolution is packaging ETFs into folios so that investors and advisors can more easily build a custom global ETF portfolio. ETFfolio.com offers both groups a range of ETFfolios from a global core ETFfolio to an emerging markets ETFfolio that can be used as portfolio building blocks. 

This is a challenging time for everyone in the investment business but ETFs are powering ahead.

Austria (EWO) ETF Pick of the Week

By Carl Delfeld of Chartwell ETF

iShares MSCI Austria (EWO)

Overview and Rationale:
The eight million people of Austria are at the heart of the continent and the country’s resurgence brings back memories of its historical role as an imperial dealmaker. 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, countries that tend to throw their weight around the councils of Europe.

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

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 almost zero in the early 1990s to nearly 10% 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 have boosted economic growth as well as the ETF (EWO) that tracks it.

That is, until last fall when EWO began a sharp decline as the economies of Eastern Europe slowed exposing fiscal weakness and fragile currencies.

Catalyst:
The chief catalyst that I believe will propel EWO is its relative valuation and the likelihood that markets and economies of Eastern Europe are at a point of maximum pessimism.

Valuation:
We are likely close to a point of extreme pessimism for EWO with minimal downside risk and potential for prospects improve. The Austrian market is trading at just 5.5 times projected 2009 earnings compared with 11.2 times for Germany and 12.8 times for Switzerland. It is down about 20% over the last three months but showing some near-term strength.

Risk Factor & Risk Management:
Moderate to high due to heavy emerging market debt of Austrian banks. Pleas keep in mind that the top three companies in EWO (Erste Bank, OMV and Telekom Austria) account for 39% of its assets. Suggest an 8% trailing stop loss.

Chartwell ETF Rules

By Carl Delfeld of Chartwell ETF

To begin the new investment year, it may be helpful to review Chartwell's ten investment rules. 

Here they are.

 1)  Think Global                            

The days of just allocating 10% of your portfolio to an international mutual fund without thinking are over. The world is filling in fast and you need a global perspective in seeking growth and value opportunities. In particular, emerging markets with 85% of the world’s population, 25% of world GDP and generating more than 50% of world economic growth, still only represent 11% of the world’s total market value. This is a great opportunity since many of these countries have higher foreign exchange reserves, lower foreign debt, lower inflation, higher credit ratings, and have enjoyed average annual economic growth of 7.7% during the last four years. The current sharp pullback in growth and valuations is an opportunity as emerging market countries, particularly in Asia show a glimmer of growth hard to find elsewhere. Look for value throughout the world.

       2)  Get Organized 

Most portfolios I review are a hodgepodge and rarely reflect a well thought out strategy. Investors would be better served by separating their portfolios by goals and risk. Why not a core & explore strategy with a core portfolio for the capital you primarily want to protect and a few growth portfolios with capital appreciation as the overriding objective. This keeps India, Treasury bonds, gold, foreign currencies, China and biotech all in their proper places.    

3)  Use ETFs as Core Investment Tool 

Although ETFs are popular because of their low cost, transparency and tax efficiency, they can also help you get organized and go global.  ETFs are an effective tool for a smart core/satellite strategy and can be easily paired with intensive active asset management. ETFs offer investors risk management techniques such as using trailing stop losses and there is no better way to diversify your portfolio into areas such as precious metals like silver and gold, foreign currencies like the Swiss franc or euro, countries like Singapore or Brazil, timber, and technologies like clean energy.

       4)  Look Under the Hood

 Before investing in an ETF, make sure you take the time to look to see what companies are in its basket and how they are weighted. Traditional market cap weighted ETFs in particular can have a high concentration in its top names. Samsung Electronics (South Korea - EWY) and Ericsson (Sweden- EWD) account for 23% of their respective country ETFs, Google is not even in HLDRS Internet ETF, the iShares S&P Latin America 40 (ILF) has 88% in Brazil and Mexico, and the difference in the companies in the iShares S&P Global Financials (IXG) and WisdomTrees International Financial Sector (DRF) ETF is striking.

      5)  A Rifle is More Deadly than a Shotgun

 Keep in mind that broad-based ETFs are a very different animal than narrow ETFs that focus on a particular sector or sub-sector. Vanguard’s FTSE All World ex-US (VEU) ETF has 2,200 stocks from 48 countries where as the iShares FTSE/Xinhua China 25 (FXI) is a basket of 25 Chinese companies listed on the Hong Kong market with 40% of your exposure in just four companies. On the other hand, after disappointing earnings, Ericsson recently lost 25% of its value in one day while the Swedish ETF was off only 5%. Cap allocations to your portfolios accordingly.

     6)  To Beat Benchmarks, Look Forward

The traditional market cap weighted indexes such as the MSCI World index that most institutional money managers use as their benchmarks look backward. For example, in the MSCI world index, America accounts for 48%, Japan 11%, Australia 2.3%, Germany 3.1%, Singapore 0.37% and Brazil is 0.7% and Canada is 0.1%. Japan is still 40% of the Asian MSCI index. To beat these benchmarks, use common sense and weight countries based on prospects going forward rather than the value of their market due to past performance.

     7)  Politics Matter

Take off your green eyeshades, get your head out of the numbers and start paying attention to politics. Great bull markets start with significant political reforms and end in their reversals. Just look at the Reagan revolution of the early 1980s, the Irish renaissance, the fiscal reforms in Brazil, India and China opening up to foreign investment, Sweden’s turn to the center. What are the prospects and likely impact regarding upcoming elections in India?  You need to know.       

     8)  Valuation Led, Momentum Check

It is difficult to fight the momentum of surging markets but over the long haul, valuation is king.. Chartwell ETF watches 30, 50 and 200-day moving averages closely in making its ETF selections but also checks them against relative valuations. When you see an emerging market like India or Indonesia trading at 25 times earnings, it is time to apply the breaks and take some money off the table. Look beyond p/e ratios and at price to book and price to cash flow.  A 8% trailing stop loss strategy is also wise and takes emotion out of the equation. Only a fool holds out for top dollar.  

     9)  Follow the Big Boys

 Chartwell ETF also looks carefully at where the big global money managers are placing their bets. EPFR Global tracks both traditional and alternative funds domiciled globally with $10 trillion in total assets and delivers a complete picture of institutional and individual investor flows and fund manager allocations driving global markets. Being a bit ahead of these massive investment flows is the goal. You don’t want to be left behind holding the bag as behemoths like Templeton sharply reduce weightings to countries like Mexico or Malaysia. 

It is also good idea to hedge markets that may be ahead of themselves with limited allocations to ETFs that move opposite markets. On days when your global portfolio is a sea of red, it is nice to see ETFs like the ProShares Short Emerging Markets (EUM) in the black. I refer to these inverse ETFs as portfolio shock absorbers. having a slug of them during 2008 made a big difference in staying in the black.

     10)  Date Before You Marry

It is surprising how many investors change advisors or money managers without getting to know how they think. Take your time and have a few dates before tying the knot. Spend some time getting to know how they approach building a global portfolio and make sure your expectations and goals are clear. This is one reason Chartwell offers its Portfolio Architect consulting services and why Chartwell ETF offers a trial period to new members.