ETF Prime Archive

Asia and its Vast Array of ETFs

As the dollar continues to show signs of weakness and the U.S. is digging itself out of a recession, many have turned to Asia making the emerging continent a headline amongst many.

Asia has drawn attention due to its large growth rates and its ability to emerge out of the global recession with a V-shaped recovery.  Take Hong Kong for example, whose economy grew at a seasonally adjusted 3.3% in the second quarter of the year and China who is expected to grow at a rate of 8% for the year.  These nations have been able to pull themselves up by their boot straps, mainly due to fiscal stimulus plans which accounted for nearly 4% of GDP and were higher than any other region of the world. 

Government stimulus packages have been successful in Asian nations due to low consumer debt, and a high propensity to save.  This way of life has led these nations to further develop and enable incomes to rise, which will likely cause the domestic demand for goods and services to increase as well.  In fact, demand from domestic consumption is expected to add nearly 7% to the growth rate of the smaller emerging nations of Asia.  

To add to the region’s attractiveness, most nations have kept unemployment rates relatively tame, many big technology companies in the region are increasing capital expenditure projections, and the International Monetary Fund has openly stated that it expects the region as a whole to continue to grow. 

Lastly, Asian nations are diligently working together to construct an agreement that will free up trade.  Over time, this will help the region by lowering economic barriers, further enabling nations to develop more efficient economies of scale.  Additionally, the agreement could potentially increase the inflow of foreign direct investment which could further lead to technological advancements and even more economic growth.

For most, when they speak of Asia they think of Japan, China and India, but it is just as easy to gain access to the region’s other markets, which will probably show even more prosperity, through the following ETFs:

• iShares MSCI Hong Kong Index (EWH), which carries an expense ratio of 0.52% and gives exposure to Hong Kong which has benefited from China’s growth and stimulus package.
• iShares MSCI South Korea Index (EWY), which has an expense ratio of 0.63% and gives great exposure to South Korea which is heavily reliant on China and is highly correlated with developed nations.
• iShares MSCI Singapore Index (EWS), which has an expense ratio of 0.52% and relies on manufacturing, which is expected to see signs of recovery.
• iShares MSCI Taiwan (EWT), which has an expense ratio of 0.63% and is being bolstered by exports to China, low interest rates and stable consumer prices.

The Ins and Outs of Hard Assets

Hard assets have traditionally been a great way to diversify a portfolio and protect against inflation and overall market turmoil.  When considering hard assets, many think of precious metals such as gold and silver, however, there is a wide array of choices that can be easily accessed in a cost-efficient manner through exchange traded funds.  As an alternative to the more pure exposure provided through ownership of physical commodities or through futures contracts, ETFs also provide alternative, indirect access via the stocks of companies participating in the production, processing and distribution of commodities.  Exposure can also be accessed via exchange traded notes (ETNs) – debt instruments that commit to deliver the total return of a commodity index.

Examples of equity-based ETFs covering companies that participate in the production and handling of commodities are SPDR S&P Metals & Mining (XME) or the Market Vectors RVE Hard Assets Producers (HAP).  XME provides exposure to large companies like US Steel and Alcoa and has an expense ratio of 0.35%.  HAP, on the other hand, is a bit more diverse providing exposure to water and renewable energy in addition to metals and mining.  It carries an expense ratio of 0.65%.

The ETN alternative can be tapped through the following Barclay’s iPath family of commodity ETNs:

• iPath Dow Jones UBS Industrial Metals Subindex Total Return (JJM)
• iPath Dow Jones AIG Tin Total Return Sub-Index ETN (JJT)
• iPath Dow Jones AIG Platimun ETN Total Return Sub-Index (PG)
• iPath Dow Jones AIG Lead ETN Total Return Sub-Index (LD)
• iPath Dow Jones AIG Aluminum Total Return Sub-Index (JJU). 

Note that as unsecured debt instruments, ETNs carry some level of issuer credit risk.

How To Play Real Estate with ETFs

The real estate sector has been the bearer of good news lately, which has enabled it to gain some of the ground that it lost over the past two years. 

In the month of August, residential construction rose by 4.7% to an annualized rate of $249.5 billion.  Although still down nearly 25% on a year-over-year basis, the trend is a positive one.  To add to the construction numbers, there have been talks between lawmakers and the White House to extend the expiration of the $8,000 first time home buyer tax credit and possibly even expand the credit to current homeowners. 

In regards to supply and demand forces in the sector, the inventory of existing homes has slowly been trending down and there is now close to 8.5 months of supply on the market.  As for new homes, in absolute terms, inventories are at a 27-year low. 

In addition, mortgage rates continue to drop to highly favorable levels.  Most recently, a 30-year fixed mortgage was below 5%.  This makes home ownership a bit more affordable and attractive to first time homebuyers who have been waiting for the perfect time to buy. 

Although there are plenty of indicators that real estate is trending upwards, it is important to keep in mind other economic indicators which are unfavorable to the sector.  First, there is unemployment.  The unemployment rate hasn’t stabilized yet and continues to grow.  Secondly, consumer confidence in the overall health of the economy is still extremely shaky, steering consumers away from making big purchases.  Lastly, foreclosure rates are elevated which will put further strain on the sector.

Whether an investor is optimistic or pessimistic about the prospects of real estate, ETFs provide a means to play the sector.  From a long perspective, one can take a look at the iShares Dow Jones US Real Estate (IYR) ETF, which gives exposure not only to residential real estate, but commercial as well.  Another option is the SPDR S&P Homebuilders (XHB)ETF, which provides exposure to home furnishing companies like Bed, Bath & Beyond or Williams Sonoma.

To short the sector, the UltraShort Real Estate ProShares (SRS) ETF is a good option with an expense ratio of 0.95% and a yield of 0.18%.

New Commodity Equity ETF

Jefferies, the publisher of the popular Reuters-Jefferies CRB Index, recently launched the Jefferies | TR/J CRB Global Commodity Equity Index Fund (CRBQ) which invests in the stocks of companies primarily involved in the production and distribution of commodities and related products and services.

This new ETF will seek to track the performance of the Thomson Reuters/Jefferies In-The-Ground CRB Global Commodity Equity Index, which is essentially intended to be an equity version of the benchmark CRB Index.  The fund’s 147 holdings are comprised of agriculture (38%), industrial metals (14%), precious metals (9%), and energy (39%) and its top three holdings are Monsanto, Exxon, and Potash.

This is an interesting new entrant into the commodity ETF space given the current regulatory microscope futures-based commodity ETFs are under.  By investing in the equities of companies involved in the production and distribution of commodities – and not using futures contracts – operation of the fund will not be affected by potential regulations concerning position limits that futures-based commodity ETFs are currently dealing with.

In addition, the ETF avoids the complexities involved with futures-based commodity ETFs such as contango and backwardation.  These conditions reflect higher or lower forward month prices relative to spot prices.  This can either decrease or increase returns of the ETF since the fund might have to purchase forward futures contracts at a premium or discount to the spot price.  In addition, investors won’t have to file a schedule K-1 with their annual tax returns, a small nuisance that investors must deal with on futures-based commodity ETFs which are structured as limited partnerships.

Finally, another potential benefit – one that is often overlooked when investing in futures-based commodity ETFs – is the ability to capture dividends.  Since the fund is investing in companies, and not contracts, investors can reap the rewards of any dividends paid by those companies.

While this equity ETF does not encounter some of the issues involved with futures-based commodity ETFs , it’s important to note that the equities of commodity producers and distributors can behave differently than the commodities themselves.  If the stock market is dropping precipitously, it’s highly likely that the stocks of commodity producers will drop as well, even if the actual commodities are performing differently.  For example, during the most recent market collapse, DBA, which invests in agriculture-related futures contracts and swaps was down approximately 49% (from its high to low), while it’s equities-based counterpart, MOO, was down a whopping 70%.  In other words, investors looking for agriculture exposure via equities suffered an additional 21% loss than had they made the more pure play.

Also, because this ETF holds global equities and thus, has holdings denominated in currencies other than the dollar, currency fluctuations can be either supportive or detrimental to the overall performance of the fund – a dynamic that doesn’t concern fully dollar-denominated futures-based commodity ETFs.

Why Green ETFs May Be Worth A Look

As the world begins to recover from a global recession, political attention is starting to shift to other areas.  One such area is clean energy, making green exchange traded funds an interesting place to look.

One reason that green ETFs may be attractive in the near future is the portion of the U.S. energy policy which calls for a reduction of 30%-40% in emmissions over the next few years.  In fact, the American Clean Energy and Security Act aims to cut emissions from 2005 levels by 17% in 2020 and 83% by 2050.

A second reason that green ETFs might be attractive is that clean energy is becoming cheaper, more efficient and more competitively viable.  Take the solar industry, for example, where innovation and technology is enabling the development of a new thin-film panel technology that will soon replace the limited capacity produced from polysilicon panels, pushing efficiency of solar panels up near the 20% mark.

Not surprisingly, green ETFs and alternative energy ETFs have been highly correlated to energy prices over the past couple of years.  As the price of oil goes up, alternative fuels and clean energy become more compettive as substitutes.  The collapse of energy prices during the last half of 2008, likewise, saw corresponding declines in alternative energy and clean energy equities.

This doesn’t mean that green ETFs don’t come with disadvantages.  Green ETFs generally lack diversity, lack the liquidity of larger ETFs and can be subject to big price swings.  Additionally, as emerging nations continue to grow and prosper, they will continue to demand emergy, most likely coal and crude oil, to fuel their factories and businesses which could further put a damper on green ETFs.

From an investor’s perspective, one can grab exposure to clean energy through the following ETFs:  the Claymore Global Solar Energy ETF (TAN), which will give exposure to the solar subsector of the industry, the Market Vectors Global Alternative Energy  (GEX) which gives one global exposure to green energy, First Trust’s Global Wind Energy (FAN) or the PowerShares WilderHill Progressive Energy (PUW) which gives a broader, more diverse exposure to green energy.