ETF XRAY

ETF Pick of the Week: Sweden (EWD)

By Carl Delfeld of Chartwell ETF & Seeking ETF Alpha

iShares MSCI Sweden (EWD)

Rationale and Overview:

The main rationale for recommending Sweden (EWD), which is weighted only 1% in the MSCI World index, is its relative value despite being right at the top in terms of performance this year – up 33%. Trading at just over ten times earnings, it seems oversold compared with many other European developed markets trading in the mid and high teens as well as some emerging markets such as Mexico at 18 times, Taiwan at 25 times, and India at 21 times earnings.

This is besides the point that Sweden is a high quality, fiscally strong country with top flight multinationals in its ETF basket.

The top company in the Sweden ETF (EWD) is the telcom equipment maker Ericsson which accounts for 15% of the basket. Ericsson is a much stronger balance sheet than its peers. Just over 40% of all telephone calls worldwide go through an Ericsson system. Other top companies in the Sweden ETF include Sandvik, Volvo and Atlas Copco. About 50% of EWD’s exposure is to the financial and industrial sectors.

Sweden’s big banks, namely: Nordea, Handelsbanken, SEB, and Swedbank all have some non-performing loan problems especially with their Baltic borrowers but recent earnings reports indicate that the situation is under control. Consumer confidence is now off the lows hit in the first quarter of this year, increasing for the second consecutive month in June and Sweden's business confidence indicator also improved - for the third straight month in June. Retail sales are also climbing albeit from a low base. Another great aspect of Sweden is the he Swedish central bank (Riksbank),the oldest central bank in Europe and is a fierce inflation fighter.

Sweden’s reputation as a big spending, high tax state might also be due for a re-valuation. While government spending, even excluding investment outlays, were boosted from 22% of gross domestic product in 1970 to 30% in 1980, the number has come back down. Sweden’s finance minister Anders Borg is pushing Sweden in the opposite direction, encouraging the legislature to cut taxes, cap spending and privatize parts of health care according to recent Forbes interview.

"If you're working yourselves upwards in taxes and deficits, we're working ourselves downwards," says Borg. In 2009, Sweden's government is projected to have gross financial liabilities equal to 57% of GDP while the debt he debt of U.S. government entities, by contrast, is expected to be 100% GDP by next year, versus 63% in 2007, says the Organization for Economic Cooperation & Development.

Catalyst: The main catalyst is relative valuations and the momentum of Sweden’s market. The recent Swedish banking earnings reports were, on balance, positive and the expected global economic recovery should buoy Swedish companies in the industrial sector.

Tip: You can buy the Swedish Krona through the Swedish Krona currency ETF (FXS).

Risk Factor: The risk factor is medium and I suggest an 8-10% trailing stop loss.

Receive your own ETF Pick of the Week each week by joining Chartwell ETF today. The ETF Picks of the Week so far this year are up 19.6% and 24.9% with recommended 8% trailing stop loss in place.

The Chartwell ETF Focus List equally weighted is up 14.85% so far this year.

Seeking ETF Alpha

By Carl Delfeld of Chartwell ETF & Seeking ETF Alpha

While serving on a panel discussion with Ken Fisher during a recent Forbes investor cruise in the Adriatic, I found Ken’s overview of the different types of investors out their quite interesting.

As an asset manager, Ken is of course primarily interested in passive investors that are good prospects for money management services. As primarily a financial publisher, I am more interested in the more independent, self-directed type of investors though we are expanding our asset management services as well. 

After thinking it over, I thought it might be helpful to sketch out a few different investor categories and the Chartwell that match these needs.  

Believe me. Choosing amongst over 750 ETFs to build a smart global portfolio is a daunting task for anyone. Especially right now during these days of fast-changing markets. What unites all these investors is their search for more return than risk for their investment dollar. That is, the quest for ETF alpha.

First is the investor that just wants some ETF recommendations and not much else. Our ETF Pick of the Week product is the perfect fit with a clear and succinct weekly pick with brief rationale and overview, risk factor, catalyst and tip.

Next is the independent self-directed investor that is looking for information on global markets, ETF ideas, strategies and information and a little help organizing their portfolios.

For this group, our flagship ChartwellETF.com weekly service established in January of 2003 is an excellent fit. It offers the Chartwell Global Market Letter, strategy articles, the ETF Pick of the Week and an ETF Focus List organized by core, international, global, currency and hedge categories. Our average annual return on ETF picks with an 8% trailing stop loss policy since January 2003 is 15.7%.

Some investors want to go a step further and are looking for help getting organized & putting in place a common-sense strategy using ETF model folios.

Seeking ETF Alpha offers these investors a simple one-two strategy.

First, put in place a well-diversified global core model portfolio of ETFs for the capital you wish to grow but also wish to protect and earn some income.

Second, around this core, build a global explore model portfolio for investing in areas of higher risk/higher reward like emerging markets or specific sectors. 

Both the Core and the Explore ETFfolios normally have on average 8-12 ETFs and you receive updates via email the first day of each month. The average number of changes each month is 3-5 over both portfolios.

ETFs are selected using a momentum led, valuation check model which balances momentum as shown by the moving averages and fund flow data with price to earnings, price to book, price to cash flow and other valuation indicators. For international markets, political and other factors come into play with the goal of building well-diversified folios. In terms of ETFfolio performance, while the S&P 500 has suffered a 21.9% decline during the past 12 months, the Global Core ETFfolio has given up only 1.1%. 

Since inception on April 1, 2005, the Global Explore ETFfolio is up 41.4% versus an 11.9% decline for the MSCI EAFE index. So far in 2009 (7/21/2009), the Global Explore ETFfolio is up 25.1% versus 7.1% for the MSCI EAFE. Finally, for investors that are independent but want an active focus on high-growth Asian and emerging markets, we offer the Asia & Emerging Markets Alpha trading service composed on an ETF folio and the Asia & Emerging Markets 20, a basket of 20 companies from around the world tapping Asian & emerging markets growth. For more information about these services, call me at 719.264.1503.

I would appreciate any feedback on how to improve existing products and services or what others investors are looking for in their quest for ETF alpha. 

 

 

 

 

 

 

Stir Fry Investing in China

By Carl Delfeld of Chartwell ETF & Seeking ETF Alpha

In general, liquidity and confidence drives markets. Many point to leverage, low interest rates and high government spending as the source of America’s market boom and recent uptick. It is clear to me that the surge in Chinese markets this year is speculation largely due to the huge jump in bank lending and the lack of many viable investment options to put this money to work.

The Chinese refer to putting this cash into markets as “stir frying”.

The MSCI Emerging Markets index, for example, trades at a price-to-earnings ratio of 16.1, which is 25 percent higher than its average P/E over the last five years. The Shanghai Composite in China recently hit a one-year high while the Hang Seng index in Hong Kong reached a level unseen since last October.

China’s hot market has overtaken Japan to become the world’s second biggest stock market by capitalization as investors pile into the fast-growing economy. China’s listed companies had a market capitalization of $3,210bn as of July 15 compared with Japan’s $3,200bn, according to Bloomberg data.

Investors have driven the Shanghai and Shenzhen markets up 75 percent and 95 percent respectively this year, thanks to the government’s $600bn stimulus plan, the effect of which was reflected in the hard to believe reported 8% percent second-quarter economic growth. The two Chinese stock markets are among the best performers globally this year though others in the region no doubt buoyed by Chinese growth such as Taiwan and Indonesia are not far behind.

The economic rebound has been driven by a powerful source of liquidity controlled by the ruling Communist party: a jump in lending by state-owned or controlled banks. Chinese banks, all but a handful of which are owned by the government, lent over a trillion dollars in the first half of this year, nearly double the total loans extended in the whole of 2008. As for June’s lending, at $220bn in new loans confirmed the trend as banks opened the spigots under the watchful eyes of the mandarins, just as they did in March (to $280bn).

This liquidity is fueling the Shanghai Stock Exchange, where daily volumes are currently three times the five-year average.

For a weekly global market letter, strategy articles like this, ETF Pick of the Week, and an ETF Focus List, go to Chartwell ETF. For a Core Global ETFfolio and an Explore Global ETFfolio, go to Seeking ETF Alpha. For Chartwell Premium services such as consulting, asset management and the Asia & Emerging Markets Alpha, call Carl Delfeld at 719.264.1503.

Some state-owned companies have set up separate divisions just to speculate and trade stocks. We have seen this cycle before. Keep in mind that the Shanghai composite was as low as 1,717 last November — a 70 percent drop from its peak in late 2007.

In the first half of the year, it is estimated that banks operating in China made about $1 trillion in new loans — an astounding figure considering that all of the 2008 bank loans totaled about $620 billion.

What about earnings? The 741 companies in the MSCI Emerging Markets index that reported results since the end of the first quarter posted an average earnings drop of 92 percent, trailing analysts’ estimates by 14 percent, according to Bloomberg data. That compares with a 46 percent profit slide for Europe and a 31 percent fall for the S&P 500, Bloomberg data show.

What about valuations?  Are investors paying too much for growth? The MSCI emerging markets index trades at 15.6 times reported earnings, compared with just over 14 for the S&P 500, according to weekly data compiled by Bloomberg. When developing nations last commanded a premium, the 22-country benchmark sank 54 percent in the next year.

But there are some that feel that this premium is now justified with banks in Asia generally healthy compared to developed countries and the growth potential of emerging markets going forward. Using a peg ratio whereby a market’s price earnings ratio is divided by its growth rate, many emerging markets still look attractive. 

Another opportunity may be investing in China’s H shares that trade in Hong Kong. Some estimate that they trade at about a 40% discount to the A shares for the same companies trading in Shanghai and Shenzhen. iShares FTSE/Xinhua China 25 Index (FXI) is a basket of 25 of these companies.

It’s hard to fight this kind of momentum but investors need to stay on top of these markets and manage the risk. Be wary of getting carried away with China’s and emerging market bull markets. The MSCI emerging-market index had 13 bull-market rallies of at least 20 percent and 12 bear-market declines of the same magnitude according to data compiled by Birinyi Associates. That compares with five bull markets and four bear markets for the S&P 500 during the same period.

Enjoy the sizzle but watch out for the burn. The sting may be in the tail. I am keeping my hand on the leverage inverse ETF to FXI (FXP).

 

Japan Leads Equity Fund Flows

By Carl Delfeld of Chartwell ETF

Japan, Chartwell ETF's Pick of the Week last week, led recent equity fund flow rankings.

Brad Durham of EPFR.com reports that although oil prices remained under pressure, this year’s US federal deficit pushed over the $1 trillion mark and Tokyo’s benchmark Nikkei-225 index spent much of the week in retreat, flows into US Bond ETFs & Funds, Global Bond ETFs & Funds, Japan Equity ETFs & Funds and several sector fund groups stood out during an otherwise lackluster week – especially for equity funds -- as investors hunkered down for the second quarter earnings season.

 In this uncertain investment climate, fixed income funds continued to shine with Global and Emerging Markets Bond Funds both extending their inflow streaks to 14 straight weeks and Balanced Funds taking in fresh money for a 15th consecutive week. Flows into Global Bond Funds hit their highest level, in percentage terms, since the final week of 2002 and US Bond Funds absorbed over $1 billion for the 17th time in the past 19 weeks. Inflation concerns continued to show up in the flows data as the strongest inflows among the US bonds were recorded by Short Term Bond Funds, Inflation Protected Bond Funds, and Short Term Government Bond Funds. US Municipal Bond Funds again led the US bond fund pack for inflows in total USD terms.

China Passes Japan in Share Value, Closes In on GDP

By Carl Delfeld of Chartwell ETF

China has overtaken Japan to become the world’s second biggest stock market by capitalisation as investors pile into the fast-growing economy. China’s listed companies had a market capitalisation of $3,210bn as of July 15 compared with Japan’s $3,200bn, according to Bloomberg data. It is the first time China has overtaken Japan since January 2008 but keep in mind that much of this is not free float but rather restricted.  

Beijing’s (FXI) foreign reserve holdings have come back through the $2,000 billion mark, as hot money jumps back into China to take advantage of faster economic growth and rapidly rising asset prices and liquidity levels.

China has ratcheted up a major plan to internationalize the renminbi and the process is likely to be faster than many expect, according to HSBC. If they pull it off, this could lead to nearly $2,000bn in annual trade flows, or as much as 50 percent of China’s total, being settled in renminbi each year by 2012, compared with less than 10 percent today.

The move follows continuous and loud calls by China for the world to adopt a world reserve currency based on a basket of currencies to replace the US dollar.

China is beginning an audacious plan to raise the role of the renminbi in international trade and finance and to reduce reliance on the US dollar,” said Qu Hongbin, China chief economist at HSBC.

“This will likely be a multi-year and gradual process. Yet, we believe the pace is likely to be faster than many expect.” “More than half of China’s total trade flows, primarily bilateral trade with emerging market countries, are likely to be settled in renminbi in the next three to five years,” said Mr. Qu.

HSBC estimates that Chinese gross domestic product could hit $4,700bn this year. This would mean that it could overtake Japan as the world’s second-largest economy in 2010, while it was likely to overtake Germany as the world’s second-largest trading country by the end of the year.

State Street Global Advisors June ETF Update

By Carl Delfeld of Chartwell ETF

State Street Global Advisors came out with their June ETF update and, as of July 1st, there were 740 ETFs in the US with assets totaling approximately $593 billion managed by 25 ETF managers. ETF industry assets rose $5.7 billion for the month, or 1.0% and 12 new ETFs were launched in June.

Eight of the twelve categories gained assets. The Fixed Income category gained the most in absolute terms, rising $3.8 billion. The International category was the biggest loser, falling $1.5 billion, or 1.1%.

Overall, assets were down 0.1%. The Micro Cap category rose $41MM, or 13.3%. Allcap Value led declines falling $18.2MM, or 5.3%.

Consumer Staples led overall gains in percentage terms rising $667.9 billion, or 20.4%. Although falling 11.0% in June, assets in Materials are up 56.2% YTD.

The top three managers in the US ETF marketplace were: Barclays Global Investors (BGI), State Street Global Advisors (State Street), and Vanguard. Collectively, they accounted for approximately 83.5% of the US-listed ETF market. Average Daily Volume fell from an average of $74.8 billion to $64.4 billion.

The top three US ETFs in terms of dollar volume traded for the month were the SPDR® S&P 500® [SPY], PowerShares QQQ [QQQQ], and iShares Russell 2000 [IWM].

The top three US ETFs in terms of assets were: the SPDR® S&P 500® [SPY], SPDR® Gold Shares [GLD], and iShares MSCI EAFE® [EFA].

In terms of performance,  Small Cap, Large Cap, and Total Market indices rose; only Mid Cap fell for the month. Six of ten sectors had positive returns. Utilities and Information Technology were by far the best performers. Information Technology has gained nearly 25% YTD.

 

 

 

Japan (EWJ) Continues Weakness

By Carl Delfeld of Chartwell ETF

Japan has notched up five sequential quarters of decline. This is due to more than slipping demand from overseas. Orders from manufacturers, which tend to focus on exports, rose in May from the previous month. By contrast, orders from sectors such as construction and telecommunications which are a good proxy for domestic demand, fell 7 percent. This suggests continued significant excess capacity, the culprit of Japan’s economic dilemma. The world’s second-biggest economy has an output gap, on the government’s reckoning, in excess of 8 percent.

Light order books are a reflection of weak capital expenditure plans, as recently highlighted in Japan’s quarterly Tankan survey of business sentiment Government spending cannot fill the gap given Japan’s huge debt burden equal to 185% of GDP. Public sector orders dropped 11 percent month on month in May, although this followed a 22 percent increase in April.

Japanese equity markets and (EWJ) had fallen by midweek six consecutive days. Japanese loan growth is also decelerating, in part as companies and households grow more reluctant to borrow and spend. Corporate bankruptcies, meanwhile, continue to soar: more than 1,400 companies went bust last month, up 7 percent from a year ago.

 

Chartwell ETF Pick of the Week

By Carl Delfeld of Chartwell ETF

WisdomTree Dreyfus Emerging Market Currency (CEW)

Rationale and Overview:

This brand new emerging market currency ETF offers investors the opportunity to gain access to emerging market currencies such as Brazil, Chile, China, the Czech Republic, Hungary, India, Israel, Malaysia, Mexico, Poland, Russia, Singapore, South Africa, South Korea, Taiwan, Turkey, and Thailand.

Diversification into these emerging market currencies has the potential of helping your global portfolio in a number of areas, principally, higher yields, stronger economic growth leading to chances for appreciation, and exposure to non-correlated assets that will likely move opposite or contrary to equities and other asset classes. 

Emerging market equities react to factors independent of those factors that drive currency returns, often contributing to significantly higher volatility. Over the last 10 years, an equally weighted basket of emerging currencies had an annualized volatility of 6.9%, while an equally weighted basket of emerging market stocks from the same countries had a volatility of 25.2%.

Emerging economies often offer higher yields to compensate investors for these risks. The chart below uses global one-month deposit rates to present a range of yield opportunities available to U.S. investors in certain emerging and developed markets. The bar labeled “Emerging Basket” shows an average of the emerging market currencies shown. As of March 31, 2009, the average rate on the Emerging Basket was 3.6 percentage points higher than deposit rates on the euro and 4.2 percentage points higher than similar short-term rates in the U.S.

Catalyst: Emerging market equities have had a good run and the time is right to lighten up a bit by including some currency exposure. Investors are also looking for higher income and plays on a weaker US dollar.

Tip: Keep CEW as one your currency plays along with the Canadian (FXC) and Australian (FXA) dollar.

Risk Factor:
The risk factor is medium and I suggest an 8-10% trailing stop loss.

To receive Chartwell ETF's Pick of the Week every week plus updates on global markets and an ETF Focus List, please go to Chartwell ETF today.

Indonesia (IF) a Strong Performer

By Carl Delfeld of Chartwell ETF

Indonesia (IF) has been one of this year’s top performers. Indonesian President Susilo Bambang Yudhoyono outlined yesterday his domestic agenda for the next five years, predicting that if re-elected later this year Indonesia would record 7 per cent annual economic growth by 2014.

Analysts are paying close attention to Mr Yudhoyono’s forecasts because he is widely expected to defeat his two rivals in presidential elections to take place in July. Current polls suggest Mr Yudhoyono, whose Democrat Party won the most votes in April’s parliamentary election, will win comfortably in one round but experts believe his lead will narrow once the formal campaign begins next week.

Indonesia last experienced 7 percent economic growth in 1996, during the era of the dictator Suharto and before the 1997/98 Asian financial crisis. Growth last year was 6.1 per cent and 4.4 per cent in the first quarter of this year. Analyst forecasts for 2009 range from around 2 per cent to 4.5 per cent. The Asian Development Bank approved on Wednesday a $1bn standby loan to Indonesia, as the country puts together a $5.5bn  package to bolster its ability to navigate the global financial crisis.

The loan came as Bank Indonesia, the central bank, cut its benchmark rate by 25 basis points to a four-year low of 7 per cent to stimulate growth after inflation reached a 17-month low of 6.04 per cent, year-on-year, in May.

Receive more information on Indonesia and Asian and emerging markets by going to Chartwell ETF.