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By Spencer Bogart | August 20, 2014
Related ETFs: TAO


Chart courtesy of

Marc Faber recently sat down with’s Alpha Think Tank to discuss his views on everything from U.S. Treasurys to Chinese real estate. One of several views that Faber expressed was his bullishness on the Chinese property market.

However, instead of investing directly in mainland real estate developers, Faber prefers to express this view through the highly correlated Hong Kong market, where he notes that property stocks “all sell at discounts around 40-45 percent to net asset value.”

The best ETF to implement Faber’s view is the Guggenheim China Real Estate ETF (TAO | D-29), which tracks a market-cap-weighted index of Chinese and Hong Kong real estate companies and REITs. More than 80 percent of the fund is allocated to Hong Kong, with the majority of the remainder invested in Chinese companies. TAO is up roughly 10 percent so far this year.

By Spencer Bogart | August 19, 2014
Related ETFs: XHB | ITB

Homebuilder ETFs Rallying

Chart courtesy of

Homebuilder ETFs are up 2-3 percent today on the heels of a rosy housing starts report. According to data from the Commerce Department, housing starts increased nearly 16 percent in July—better than surveys projected.

The report could indicate the housing market is regaining the momentum it had in 2013, which saw the SPDR S&P Homebuilders ETF (XHB | A-24) return more than 24 percent. This year has been a different story: Just last week, the iShares US Home Construction ETF (ITB | A-59) appeared on my list of slumping sector ETFs.

The fortune of these homebuilder ETFs may be turning around though, as XHB and ITB have returned 7 percent and 8 percent, respectively, since Aug. 7.

By Spencer Bogart | August 19, 2014
Related ETFs: EIS | ISRA

Israel ETFs vs VWO

Chart courtesy of

The ongoing conflict in Israel and Gaza is finally taking its toll on the Israeli economy. According to Bloomberg, Israel’s GDP grew at 1.7 percent in the second quarter—far less than the 2.7 percent economists were expecting.

Worse yet, exports declined nearly 18 percent over the quarter. That’s particularly troubling for a country where exports account for more than 34 percent of economic activity.

Still, some are expecting the central bank to intervene to cut interest rates and weaken the shekel—a move that makes Israeli exports cheaper and more competitive on the global market. If that happens and the shekel weakens, it could prompt a turnaround for the sagging Israeli economy.

Those considering investing broadly in Israeli equities might consider one of two ETFs:

The iShares MSCI Israel Capped ETF (EIS | C-47) offers “pure” exposure to Israeli equities, as 100 percent of its portfolio securities are traded in Tel Aviv. Like the Israeli market, EIS is highly concentrated in its largest holdings, with more than 70 percent allocated to its top 10. It comes with heavy allocations to financials and health care—Teva Pharmaceuticals alone comprises more than 25 percent of the portfolio.

The Market Vectors Israel ETF (ISRA | C-32) offers a portfolio with a more relaxed definition of “Israeli” companies. In all, nearly a third of the portfolio is allocated to companies that don’t meet the technical definition of “Israeli” but have been deemed so by an advisory committee. Compared with EIS, ISRA is less concentrated in its top holdings and holds more than twice as many securities.

By Boris Valentinov | August 18, 2014
Related ETFs: PCY | ITLY | BUNT


Chart courtesy of

It hasn’t been a happy year for the global economy so far. Geopolitical tensions and economic weakness have dashed hopes for a long-awaited global recovery.

Most countries in Europe are on the verge of or are already in recession. Violence in the Mideast keeps the price of oil elevated, feeding inflation and slowing growth in emerging markets. Japan continues to muddle through its problems.

The only relatively bright spot remains the U.S. But even here the news is mixed: Mortgage applications just fell to a 14-year low—reflecting the faltering confidence of American consumers. Amid all these worries, investors have been seeking safety in sovereign debt and pushing interest rates down all over the world.

Here are three interesting funds with which to play the weakening global economy theme:

PowerShares Emerging Markets Sovereign Debt ETF (PCY | C-33)

China has been slowing down for a while now, and the 85 percent tumble in credit growth in July is the latest sign of trouble in the largest emerging economy. Many other developing markets are struggling too. This ETF invests in sovereign emerging market debt denominated in U.S. dollars—taking currency risk out of the picture for U.S. investors. It has returned more than 10 percent since the beginning of the year.

PowerShares DB Italian Treasury Bond Futures ETN (ITLY | C)

Italy is officially in recession now, and despite a crushing level of government debt, the interest rates on the country’s bonds continue to fall. This ETN tracks an index of intermediate-term Italian government debt—it has returned almost 15 percent since the beginning of the year. Currency risk is part of the package here: A weakening euro would undermine returns.

PowerShares DB 3X German Bund Futures ETN (BUNT)

Germany’s 10-year yield fell below 1 percent this week, as Europe’s biggest economy contracted 0.2 percent in the second quarter. This ETN is a 3 times leveraged play on bunds and is definitely not for the faint of heart. It has returned more than 30 percent since the beginning of the year as German yields seem to follow in Japan’s footsteps and become wafer thin. With deflation rearing its ugly head in Europe, and the ECB standing ready to apply more quantitative easing, the trend may not have run its course yet.

By Boris Valentinov | August 18, 2014
Related ETFs: EWG | DXGE


Chart courtesy of

A contraction in Germany’s GDP of 0.2 percent in the second quarter pushed prices of German bunds to an all-time high last Thursday, as investors traded risk for safety. For the first time in history, the yield on the country’s 10-year debt dipped below 1 percent—a level not seen even during the darkest days of the euro debt crisis.

While noteworthy, the German GDP news is no real surprise though. Tensions with Russia over Ukraine and weak global demand were bound to be a serious head wind to Europe’s biggest economy. Indeed, the German stock market has been reflecting this for a while now.

While all German equity ETFs have turned in losses for the last few months, the choice of investment vehicle to play the market there has made a difference. A plain-vanilla ETF like the iShares MSCI Germany ETF (EWG | A-97), for example, has lost about 7 percent in the last three months, whereas the WisdomTree Germany Hedged Equity ETF (DXGE | C-63) has only lost half that.

The main driver of this difference is in the currency hedge: The euro has depreciated about 2.5 percent against the dollar since May, putting an extra dent in EWG’s returns. However, another important factor contributing to DXGE’s outperformance is the fund’s focus on export companies. The weaker euro has been good for them.

With more easing expected from the ECB to help prop up the continent’s struggling economies, the European currency may keep sliding. Should this trend continue, ETFs like DXGE would be a far better place to be going forward than their unhedged broad-index counterparts.

By Spencer Bogart | August 15, 2014
Related ETFs: SPY | XLY | XLP | XHB | XRT


Chart Courtesy of

Consumer ETFs are struggling alongside U.S. consumers, as unemployment remains high and wage growth stays low.

Less money in the hands of consumers means lower bottom-line earnings for consumer discretionary companies from Macy’s to Disney, and we’re seeing that effect trickle down to ETFs tracking these markets.

While the SPDR S&P 500 ETF (SPY | A-98) has returned 6 percent year-to-date, the Consumer Discretionary Select SPDR ETF (XLY | A-90) has struggled to stay in the black, as it has barely eked out positive gains this year.

Meanwhile, specific industries within the consumer discretionary sector are faring even worse: The SPDR S&P Retail (XRT | A-47) has fallen more than 2 percent so far this year. The homebuilders industry has been among the hardest hit, as the SPDR S&P Homebuilders ETF (XHB | A-24) has slid more than 8 percent in 2014.

Of course, this all makes sense, because when consumers are making less money, they spend less on clothes and houses. The same isn’t true for health care and food supplies—goods that consumers purchase regardless of the economic cycle. That reality is evident in the resilient consumer staples sector, where the Consumer Staples Select SPDR ETF (XLP | A-90) has returned more than 4 percent this year.

By Spencer Bogart | August 14, 2014
Related ETFs: ITA | PSCE | ITB | PSCI | FCG


Chart courtesy of

These five sector ETFs have the lowest return over the previous three months:

  1. The iShares US Home Construction ETF (ITB | A-59) holds a plain-vanilla portfolio of companies involved in producing homes or selling materials to homebuilders—ITB is down more than 4.7 percent in 2014.
  2. The PowerShares S&P SmallCap Energy ETF (PSCE | B-24) tracks a market-cap-weighted index of energy companies—PSCE has fallen 5.3 percent this year.
  3. The PowerShares S&P SmallCap Industrials ETF (PSCI | B-34) tracks an index of lesser-known small-cap industrial names such as Moog and Hillenbrand. PSCI has slid 5.4 percent so far in 2014.
  4. The iShares US Aerospace & Defense ETF (ITA | A-81) tracks an index of airline and defense suppliers such as Boeing and Lockheed Martin. 2014 has been rough for the industry and ITA is down more than 6 percent.
  5. The First Trust ISE-Revere Natural Gas ETF (FCG | A-99) tracks an equal-weighted index of companies that derive a substantial portion of their revenue from the exploration and production of natural gas. After previously being bid up, FCG has been slammed hard and is down 8.6 percent this year.
By Spencer Bogart | August 13, 2014
Related ETFs: EWZ


Chart courtesy of

Update: In a tragic turn of events, Eduardo Campos, the presidential candidate ranking third in opinion polls has died in a plane crash.

Political change can improve or even completely alter a country’s economic prospects. This year, the world watched intently as transformative Indian politician Narendra Modi surged in election polls and ultimately secured his role as prime minister.

Amid the furor, investors bet big on India as Modi promised to reduce bureaucracy, embrace the private sector and reduce public debts. In less than a year since August 2013 lows, broad Indian equity indices surged nearly 60 percent.

Riding on the coat tails of India’s hot performance, some investors bet on similar results in fellow BRIC country Brazil—especially as current President Dilma Rousseff’s approval ratings slid. In a recent article, Bloomberg highlighted that Brazil’s equity markets rose in an inverse relationship to Rousseff’s declining popularity.

Now it appears that enthusiasm for change may have been overblown, as Rousseff’s popularity has recovered and equity markets have stalled. After rising 20 percent since March lows, the iShares MSCI Brazil Capped ETF (EWZ | C-98) has stalled.

Ultimately, Brazil’s market is large and consequential to the global economy, so if polls narrow and a positive political turnaround looks likely, we’ll see it in the country’s equity indices.

By Spencer Bogart | August 12, 2014
Related ETFs: HEDJ | EWG | HEWG


Chart courtesy of

The Ukraine crisis continues to rattle global markets as the German ZEW survey revealed a sudden and sharp decline in optimism for the German outlook.

America’s largest Germany ETF, the iShares MSCI Germany ETF (EWG | A-97), fell nearly 1 percent in early trading as concerns mounted over the economic effects of a continued Russian standoff in Ukraine.

According to Reuters, the report also dragged the euro toward a nine-month low. The good news, however, is that a weaker euro plays to the favor of export powerhouse Germany, as its goods become less expensive on global markets.

Some investors have been calling for a weaker euro for months as economists and politicians alike have complained of the negative effect of euro strength on the continent’s competitiveness. Some have gone as far as to suggest that the ECB would intervene to directly weaken the euro. Many believe that such a move would be highly bullish for eurozone equities.

Investors who want to invest in this theme might consider the iShares Currency Hedged MSCI Germany ETF (HEWG | F-46), which takes a long position in Germany equities but hedged exposure to the euro.

Alternatively, a broader approach would be the WisdomTree Europe Hedged Equity ETF (HEDJ | B-49), which takes long positions in eurozone companies that pay dividends and derive the majority of their revenues from exports outside the eurozone. In short, HEDJ is a big bet on a falling euro boosting exports within the eurozone.

By Spencer Bogart | August 11, 2014
Related ETFs: DBA | COW | WEAT


Chart courtesy of

Commodity investing incurs unique geopolitical risk because of the globalized nature of commodities—a reality that has played out negatively over the past week. Commodities markets are usually localized in the short term; for example, agriculture goods are usually sourced regionally, but prices are ultimately interconnected globally.

Polish fruit farmers usually sell their goods to regional buyers at established prices but, for example, when Russia bans Polish fruit imports, farmers must look elsewhere. This amounts to excess supply flowing through global commodity markets, which drives down prices.

We saw this in action the week of Aug. 7, when Russia banned agricultural imports from the U.S., EU and other Western countries. With a large buyer is taken off the market, prices reacted immediately.

The PowerShares DBA Agriculture ETF (DBA | B-7) fell more than 2 percent, while the more specialized iPath Dow Jones-UBS Livestock Total Return ETN (COW | B-85) and the Teucrium Wheat ETF (WEAT) fell more than 3 percent on the heels of Russia's announcement. The drops highlight the point that saber-rattling between Western nations and Russia has real financial and economic ramifications.

By Dave Nadig | August 11, 2014
Related ETFs: EIRL | EWI | EWP | GREK | PGAL


It wasn't so long ago that pundits were talking about Portugal, Ireland, Italy, Greece and Spain as a kind of European BRIC block: a homogeneous set of beleaguered states that could be leveraged for recovery plays.

My how times have changed. The best-performing PIIG this year is Spain, up 3.38 percent year-to-date. The worst? Greece, down more than 14 percent in slightly more than seven months. So what's driving this difference?

  • The iShares MSCI Spain ETF (EWP | B-94) has been benefiting from that country's pre-growth reforms, and Spain is being seen by many in our Alpha Think Tank as the best country in Europe right now.
  • The iShares MSCI Italy ETF (EWI | C-91) is suffering, as Italy has dropped back into recession. Fund flows suggest the market is very nervous about EWI, with both big creations and big redemptions within the last week.
  • The iShares MSCI Ireland ETF (EIRL | D-65), while down for the year, should benefit from a slow-and-steady recovery in Ireland, which recently upgraded its GDP forecasts and is showing improvements in the labor and, critically, the export market.
  • The Global X FTSE Portugal 20 ETF (PGAL | D-73) has been slammed by the banking crisis there, which has culminated in the government takeover and the plan to split Banco Espirito Santo into good and bad banks. I literally don't follow a pundit who thinks there's a magical buy-level in Portugal right now.
  • Which brings us to beleaguered Global X FTSE Greece 20 (GREK | C-54), the ignoble winner of "worst PIIG" in 2014. Still trapped in recession, Greece is now feeling the brunt of Russian sanctions—Russia is Greece's largest trading partner. Greece is very much on the bubble managing its recovery, and it's difficult to assess the true risks of a re-collapse—or a surprise recovery.

The bottom line here? The only things these five countries have in common is geography and a sputtering recovery.

By Spencer Bogart | August 08, 2014
Related ETFs: HDGE | SDS | TBT


Chart Courtesy of

It's no secret that the stock market has been on a tear over the past five years, but mounting concerns over geopolitical stability, rising interest rates and sky-high equity valuations have some investors wondering how long the party will continue.

Should markets turn south, consider these ETFs that aim to profit from falling prices:

The ProShares UltraShort S&P 500 ETF (SDS) provides 2x inverse exposure to the S&P 500. The fund's leverage resets daily, so it may be unsuitable for long-term exposure in choppy markets, but should do very well in steady down-trending markets. Alternatively, investors can get 1x inverse or 3x inverse exposure to the S&P 500.

Investors looking to profit from falling bond prices might instead prefer the ProShares UltraShort 20+ Year Treasury ETF (TBT), which provides 2x inverse exposure to U.S. Treasurys with more than 20 years remaining to maturity. This a high-octane way to short duration in U.S. Treasurys, but keep in mind that leverage resets daily.

An interesting new ETF that resets its inverse exposure monthly instead of daily is the Barclays Inverse U.S. Treasury Composite ETF (TAPR), which takes equally weighted short positions in U.S. Treasurys across the yield curve. TAPR's monthly reset feature deemphasizes the importance of timing and steadily down-trending bond markets and allows investors to take a longer-term stance on falling bond prices.

Investors that prefer an actively managed approach to shorting the stock market might consider the AdvisorShares Ranger Equity Bear ETF (HDGE), which uses fundamental analysis to identify and short companies with aggressive accounting policies and low earnings quality.

By Dave Nadig | August 08, 2014
Related ETFs: HYG | JNK


There’s a lot of noise today about “what’s happening in junk bonds,” much of it around recent outflows. So how bad are things? It turns out, not very bad at all. Let’s put junk in perspective in this little window of chaos we’re in right now.

The S&P 500 has fallen 3.8 percent since the recent July 23 high. In contrast, the SPDR Barclays High Yield Bond ETF (JNK | B-66) is down 1.37 percent and the iShares iBoxx $ High Yield Corporate Bond ETF (HYG | B-69) is down just .95%.

For the trailing year, JNK is still beating the pants off the broad market, returning almost 8 percent versus 4.2 percent for the broader bond market.

Option adjusted spreads on high-yield bonds (at around 4 percent) are nowhere near their all-time highs, nor are they near their lows, suggesting you’re neither being compensated particularly well or particularly poorly for the increased risk of high-yield corporate lending.

Don’t forget—these are bond funds. They make monthly distributions, and both major junk ETFs went ex-dividend on Aug. 1, and pay out significant chunks as income month after month. If you’re looking at price charts, you’re doing it wrong.

By Dave Nadig | August 07, 2014
Related ETFs: ERUS | MCHI | INDA



With all eyes on Russia, the conflict in Ukraine, and the potential sanctions impacts, it’s easy to forget we once thought of Russia as part and parcel of a collective—with partners Brazil, India and China. Does that distinction make sense anymore? Up until this year, correlations between these markets were still quite high, but as the chart shows, there’s a lot going on in single-country-land right now that’s exploded this relationship.

  • The iShares MSCI Russia ETF (ERUS | B-95) has been beaten down almost entirely from the situation in Ukraine, the worst of it hitting in March when the U.S. government actually advised investors they might want to reconsider Russian stocks, a nearly unprecedented warning.
  • On the other end of the spectrum, the iShares MSCI India ETF (INDA | C-93) has been one of the top performers for the last 12 months, riding a wave of positivity after Narendra Modi’s pro-business Bharatiya Janata Party won the election handily in May. International investors were especially drawn toward perceived value here, but P/Es for India have now reached developed-markets levels. Can the rally continue for another 35 percent run? Seems dubious to me.
  • The iShares MSCI Brazil ETF (EWZ | C-98) caught a little bit of a liftoff of a generally sanguine World Cup, but more importantly, it’s seen as one of the only countries that may actually benefit from Russian counter-sanctions. With a ban on importing food from the U.S., Brazilian companies are already looking to lock in lucrative replacement contracts.
  • Finally, the iShares MSCI China ETF (MCHI | B-44) has muddled along, as investors really don’t know how to play China right now. Clearly not the insane growth powerhouse of the recent past, we now have to evaluate China mostly like a developed market looking to banking policy, broad economic growth and export/import statistics. I’m still a believer in China long term; the question is, how long?

The takeaway? I think the age of thinking of the BRICs as a unit are long past, and with the easy access of single-country ETFs, why would any investor be sucked in by a clever acronym?


By Dave Nadig | August 06, 2014
Related ETFs: EWI


Italy’s economy shrank .2 percent in the second quarter, the second-consecutive quarter of contraction, officially putting the country into recession.

Investors should remember, however, that Italy has been one of the best plays in Europe for the last year, and was up more than 40 percent for the nine months ending in May. It’s still—even after a crushing few days in the market—up more than 21 percent in the past 12 months, crushing broader Europe.

So what’s going on?

  • Italy’s economy is heavily dependent on exports, specifically to Germany. Those orders to Germany are way, way down, and that kind of lag can cause real problems with industrial infrastructure.
  • A surprisingly strong euro has also created problems for business large and small, with the euro peaking against the dollar just in May. The strengthening dollar since hasn’t been enough to boost order flow outside of Europe.
  • A raft of bad earnings announcements, in companies from telecom to autos, weigh heavily on the Italian stock market.

So what’s an investor to do? If you’re still sitting in a fund like the iShares MSCI Italy Capped ETF (EWI | C-91), the worst may already be priced in this morning.

If you’ve already pulled the trigger? Congrats on your prescience.

If you’re watching the decline from the sidelines? Italy’s fundamentals don’t seem particularly attractive for the next year, and most of the Europe-watchers in our Alpha Think Tank have given the nod to Spain over Italy for a continued European recovery.

By Spencer Bogart | July 29, 2014
Related ETFs: EMB | HYG

HYG price and volume

Chart courtesy of

It's no secret that bond inventories have been declining precipitously at the nation's largest broker-dealers: The SEC released a cautionary report on the trend near the start of the year. What few realize though is that while trading bonds has become more challenging and costly, trading bond ETFs has never been easier—or cheaper.

In short, banks and major broker-dealers are reducing their bond inventories in an attempt to raise capital, avoid regulatory restrictions, and reduce risk. That presents a challenge for you or me when we want to trade bonds, as there are fewer parties willing to make competitive markets.

The challenge isn't limited to smaller investors either: Bloomberg recently reported that with limited corporate bond availability, Bill Gross's Total Return Fund is increasing its use of credit default swaps to express views.

Fortunately, investors can find respite in bond ETFs. For example, while liquidity might be drying up for high-yield bonds in the over-the-counter market, the iShares iBoxx $ High Yield Corporate Bond ETF (HYG | B-69) is abundantly liquid: HYG trades more than $250 million most days at pennywide spreads. Good luck finding that kind of liquidity over-the-counter.

And if you want to trade corporate bonds from emerging markets? No problem. The iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB | B-50) trades more than $70 million most days at spreads of just 0.02 percent.

I'm cherry-picking what are traditionally the most illiquid segments of the fixed-income market but the examples are across the board. The reason is that the exchange-traded nature of ETFs adds layers of liquidity to the over-the-counter bond market. In heavily traded ETFs, such as HYG and EMB, those additional layers of liquidity may be more liquid than the underlying market itself.

You can use this ETF Finder and toggle the asset-class filter to "Fixed Income" to find a liquid ETF to suit almost any of your fixed-income needs.

By Spencer Bogart | July 28, 2014
Related ETFs: ARGT

Argentina- The Currency Effect

Chart courtesy of

Investors who bet the Argentine stock market would rise this year were right—unfortunately, that's only half the picture. When U.S. investors make overseas investments, they also need to consider currency risk.

After all, to buy Argentine equities, investors need to convert their USD to Argentine pesos—and then back again when they sell their equity investment. If the local currency falls during the course of that investment, it provides a damper on equity returns.

Case in point: Argentine equities and the Argentine peso. The Merval 25 is a price-weighted index of 25 large Argentine companies listed on the Buenos Aires Stock Exchange. Although price-weighting is an arcane, nonsensical indexing method, the Merval 25 can still be considered a proxy for Argentine equities. The index is up an astonishing 48 percent on the year.

U.S.-based investors in the Argentine equity market would have made out like bandits, if it weren't for the fact that the Argentine peso has fallen more than 20 percent over the same period, seriously detracting from returns.

In fact, despite the outsized equity rally, the Global X FTSE Argentina 20 ETF (ARGT | C-23) has returned a more modest 14 percent in 2014. ARGT tracks an index of U.S.-listed American depositary receipts (ADR) that are linked to equities traded on the Buenos Aires Stock Exchange.

Although ADR investments are made in USD, investors don't circumvent currency risk by using these securities—currency devaluation does in fact trickle down to the ADR. While there are currency-hedged ETFs for many markets, there isn't yet one specifically for Argentine equities.

By Spencer Bogart | July 28, 2014

5 Hottest ETFs of the Week

The week's (7/21-7/25) list of the hottest ETFs is completely dominated by China after economic data showed better-than-expected results in HSBC's Manufacturing PMI data.

Investors welcomed the fourth-consecutive gain in the index after weakness in the first three months of year startled markets and sparked concerns of a hard-landing slowdown. While each of this week's five hottest ETFs target China, they each take a different approach to the market.

Starting from the bottom, the Market Vectors ChinaAMC A-Share ETF (PEK | F-48) and the db X-trackers Harvest CSI 300 China A-Shares ETF (ASHR | D-52) each target the mainland A-share market by tracking the CSI 300—an index of the 300 largest and most liquid companies traded on the Shanghai or Shenzhen exchanges. Respectively, PEK and ASHR returned 5.4 and 5.6 percent for the week.

The RBS China Trendpilot ETN (TCHI) is a crafty exchange-traded product that toggles between exposure to a China index and three-month Treasury bills depending on whether the index is closing above its 100-day simple moving average. The idea is to provide exposure to Chinese equities on upswings while switching to U.S. Treasurys as momentum subsides. Currently exposed to Chinese equities, TCHI returned 5.9 percent on the week.

Targeting the Chinese Internet sector, the KraneShares CSI China Internet ETF (KWEB | B-20) owns U.S.-listed shares of Chinese Internet companies. A seemingly awkward way to get exposure, KWEB's approach actually makes some sense, as many Chinese Internet companies are listed in the U.S. or Hong Kong. KWEB returned 6.6 percent on the week.

The week's top-performer was the Global X China Financials ETF (CHIX | C-92), which holds a concentrated basket of 40 Chinese financials companies. The fund comes with heavy exposure to China's largest state-owned banks—a play that returned 6.6 percent for the week, as growth strengthened and debt fears resided.

By Spencer Bogart | July 25, 2014
Related ETFs: XHB | ITB

Single Family Home Sales Results

Chart courtesy of

Weak home sales data dragged down the iShares U.S. Home Construction ETF (ITB | A-60) more than 3.4 percent Thursday. June single-family home sales came in at 406K, vastly lower than expectations for 475K. The weak data, coupled with a poor earnings report from a major homebuilder, took its toll on homebuilder ETFs.

Notably, however, the SPDR S&P Homebuilders ETF (XHB | A-27) fell only 1.6 percent—modest in comparison to ITB's tumble. Moreover, it isn't unusual for these two ETFs to have disparate returns despite the fact that both target homebuilders. So, why are two homebuilder ETFs behaving so differently?

The difference comes down to methodology. ITB tracks what we call a "plain vanilla" index—it selects and weights its constituents according to their market capitalization. That means the homebuilder companies with the greatest market value earn the largest allocations in ITB's portfolio.

XHB also selects its constituents by market capitalization but forgoes market cap weighting in favor of an equal-weighting approach. This methodology reduces the influence of the most valuable homebuilders and increases the influence of smaller, often lesser-known homebuilder companies.

In this case, XHB's smaller tilt proved beneficial. ITB's largest holding, DR Horton, reported earnings that missed drastically and sent its shares plummeting—dragging ITB down with it. XHB's smaller allocation to this huge homebuilder insulated the ETF from the fall.

Moral of the story: Methodology matters.

By Spencer Bogart | July 24, 2014
Related ETFs: KCE | KBE | IYG | KIE

Financial Industries 1-Year Total Return

Chart courtesy of

The order of the year for big banks seems to be a round-robin of punitive fines from regulators. The fines—usually measured in billions—are dragging down the bottom line of many of the nation's largest banks, and risk-averse investors may prefer to avoid this regulatory risk altogether.

We can see the bank pain in their performance figures as well: Over the past year, bank ETFs have underperformed the other major financial sectors and the broad financials markets in general.

For example, the largest bank ETF, the SPDR S&P Bank ETF (KBE | A-55), only returned 4.9 percent over the past year, while the largest financial services ETF, the iShares US Financial Services ETF (IYG | A-84) , returned 11.5 percent.

But it's not just financial services, banks are underperforming other industries within the financial sector as well: The SPDR S&P Insurance ETF (KIE | A-73) returned 13 percent over the past year, and the SPDR S&P Capital Markets ETF (KCE | B-73) returned 14.3 percent.

It's tough to say what other banks or fines regulators might be considering, so risk-averse investors may prefer to avoid banking ETFs altogether. Then again, those brave enough to see a bottom in bank woes might find them timely.

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