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ETF MARKET INTEL

ETF Market Intel is your source for timely, actionable trading and investment ideas.

By Spencer Bogart | August 29, 2014
Related ETFs: PALL

PALL_YTD

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The price of palladium is up more than 25 percent this year and rapidly approaching 15-year highs set in 2001. Earlier this year, miner strikes in South Africa—the world's second-largest palladium supplier—drove the price higher. Now, concerns about the world's largest palladium producer, Russia, are pushing prices even higher.

Palladium has been one of the most effective ways to hedge geopolitical risk from Russia and Ukraine. The other way investors might hedge this risk is by shorting broad baskets of Russia equities, but given their low valuations and dividend yield (about 4 percent), this approach is both risky and expensive.

As its name suggests, the ETFS Physical Platinum ETF (PALL | A-100) tracks the spot price of palladium by physically owning palladium bullion in London and Zurich. The fund is highly liquid and efficient, making it an appropriate vehicle for establishing a long position in palladium.

By Spencer Bogart | August 28, 2014
Related ETFs: CHIE

CHIE_1YR

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The Financial Times is reporting that China has issued a crude oil import license to a private company as it takes it first big step toward opening the energy sector that has previously been controlled by state-owned firms.

That's big news for ETF investors, as some issuers have put the cart before the horse and already launched sector-specific ETFs. The offerings include the Global X China Energy ETF (CHIE | D-35), which tracks a cap-weighted index of investable Chinese energy companies.

So far, that's been slim-pickings for CHIE, as the free-float on state-owned energy companies is only a small fraction of the market capitalization of the companies themselves. Fortunately, more market liberalization could boost the prospects for ETFs like CHIE, which has yet to attract any serious interest from investors and, as a result, is dangerously illiquid.

CHIE isn't alone though; there's a suite of sector-specific China focused ETFs that can be found on this ETF Screener by selecting "China" in the geography filter and "sector" in the category filter.

By Spencer Bogart | August 28, 2014
Related ETFs: RSX | ERUS

ERUS_RSX_1YR

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Once again, things are escalating in Eastern Ukraine, but this time markets seem to think the situation is particularly troublesome, as Russian stocks and the ruble are sinking rapidly.

As Reuters reports, evidence of Russia's presence in Eastern Ukraine seems to be mounting, and that has markets frazzled. The United Nations and the United States in particular have been vocal about drawing a line in the sand and keeping Russia out of Ukraine and the latest incursions may have crossed that line.

At the time of writing, the Market Vectors Russia ETF (RSX | C-63) and the iShares MSCI Russia Capped ETF (ERUS | B-95) were down nearly 3 percent on the day.

RSX and ERUS both track plain-vanilla, market-cap-weighted indices of Russian stocks. ERUS requires that its portfolio companies are listed or domiciled in Russia, whereas RSX also includes foreign companies that earn the majority of their revenue in Russia. RSX's wider scope produces a larger basket of 46 stocks, which is more than twice as many names as ERUS' more concentrated 20-company portfolio.

By Spencer Bogart | August 27, 2014
Related ETFs: NGE

NGE_TR

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Nigeria is going backward. Instead of increasing investment in Nigeria, foreign companies are headed for the exits.

Often touted as one of Africa's brightest prospects, Nigeria has attracted much interest and investment from foreign companies over recent years, but things are turning sour. As the Financial Times reports, a consortium of foreign oil companies is close to finalizing the sale of onshore oil resources in Nigeria. That's the opposite of where things should be headed for a country with a relatively young population and vast potential.

The companies cited "theft and sabotage" as the impetus for the rushed exit. That's particularly troubling considering that, more than anything, frontier countries like Nigeria need to show stability and rule of law to attract the foreign investment that spurs development.

The Global X MSCI Nigeria ETF (NGE) tracks a market-cap-weighted index of 25 companies that are headquartered or listed in Nigeria and carry out the majority of their operations there. NGE is down more than 6 percent over the past month and a half but, should stability and order return to the country, NGE could be a useful investment vehicle for capturing growth.

By Spencer Bogart | August 27, 2014
Related ETFs: IAU | SIVR

SIVR_IAU_TR

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Precious metals love QE. Gold and silver rallied hard during the first two rounds of Bernanke's quantitative easing. Now, the whisper on the street is that Draghi is readying the ECB for its own quantitative easing. Given recent history, more easy money should help propel precious metals higher.

Gold and silver gained 35 percent and 66 percent, respectively, through the first round of Federal Reserve quantitative easing, then another 11 percent and 39 percent, respectively, through the second round.

Fortunately, investing in precious metals has never been easier. For a 0.25 expense ratio percent per year, investors in the iShares Gold Trust (IAU | A-100) own a claim to gold bars protected in bank vaults. Or, for 0.30 percent per year, investors can stake a claim on silver with the ETFS Physical Silver ETF (SIVR | A-100).

By Spencer Bogart | August 26, 2014
Related ETFs: EGPT | SCIF

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The three emerging markets that investors will be kicking themselves for not investing in this year are India, Egypt and Indonesia. The common thread between them? Elections.

India's markets boomed in the lead-up to and in the aftermath of the country's elections that swept transformative leader Narendra Modi into power. The MSCI India Total Return Index has gained more than 25 percent this year, but some subsets of the India market have fared even better: The Market Vectors India Small-Cap ETF (SCIF | D-49) has returned nearly 50 percent so far this year.

In May, Egyptians voted overwhelmingly in favor of presidential candidate Abdel Fattah El-Sisi, who received more than 96 percent of votes cast. Markets cheered the relative stability after years of uncertainty and the Market Vectors Egypt ETF (EGPT | F-43) surged more than 30 percent since the start of the year.

Similar to how investors hope Modi will be able to cut through the red-tape, slowing business development in India, so too did investors cheer the election of Indonesian president Joko Widodo. Much like Modi, Widodo was successful in spurring regional economic growth. Investors in both countries hope these leaders will be able to replicate their regional success countrywide.

The iShares MSCI Indonesia ETF (EIDO | B-99) has returned more than 30 percent so far this year.

By Spencer Bogart | August 25, 2014
Related ETFs: EWQ | EWG | EWU

EWU_EWG_EWQ_1yr

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The U.K represents roughly 15 percent of the European Union by GDP, but ETF assets show a disproportionate interest in the country: 29 percent of ETF assets invested in European Union countries are invested in the U.K. The majority of those assets are invested in the iShares MSCI United Kingdom ETF (EWU | B-93).

Those figures stand in stark contrast to France—which ETF investors have readily avoided: While France generates 16 percent of the European Union's GDP, ETF assets invested there are less than 2 percent of the total for EU countries. The only U.S.-listed ETF investing comprehensively in the French economy is the iShares MSCI France ETF (EWQ | A-97).

It's not a stretch to say that there's a real connection to economic policies. According to Reuters, French President Hollande today asked his prime minister to form a new government as "France has lagged other euro zone economies in emerging from a recent slowdown."

Interestingly, ETF assets invested in most of the other EU countries were within a couple percent of their contribution to EU GDP—indicating investors are neither overallocating nor underallocating to those economies.

Germany, however, was another standout, as it registered disproportionate interest from ETF assets. Germany commands 21 percent of the EU economy has but 32 percent of ETF assets invested in EU countries. The iShares MSCI Germany ETF (EWG | A-97) has more than $4.5B in assets under management.

By Spencer Bogart | August 22, 2014
Related ETFs: IBB | FCG

FCG_IBB_30Day_TR

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Where there is volatility there is opportunity. Nowhere is the double-edged sword of volatility better highlighted than in the returns of the two most volatile sector ETFs over the past 30 days.

The First Trust ISE-Revere Natural Gas ETF (FCG | A-99) and the iShares Nasdaq Biotechnology ETF (IBB | A-30) were the two most volatile ETFs over the past 30 days, with an annualized standard deviation of 21 percent of their respective share prices.

IBB flew to a 3 percent gain over the past 30 trading days as it rode the wave of surging biotech prices amid Ebola-fears and a risk-on mode that pumped up the sector over the past two weeks. IBB holds a basket of 122 biotechnology and pharmaceutical companies that are listed on Nasdaq.

Meanwhile, FCG slide nearly 7 percent over the past 30 trading days after being down as much as 10 percent in the period. FCG and the natural gas companies that it holds are struggling with falling natural gas prices as inventories rise and demand slumps.

By Spencer Bogart | August 21, 2014
Related ETFs: RWG | PSR | EMLP

PSR_RWG_EMLP_1yr_TR

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These three ETFs had the highest trailing one-year total return among actively managed ETFs:

  1. The PowerShares Active US Real Estate ETF (PSR | C-89) returned 24 percent over the past year. PSR holds a portfolio of mostly commercial REITs but also includes exposure to specialized REITs (hospitals, railways, etc.) and residential REITs.
  2. The Columbia Select Large Cap Growth ETF (RWG | C-46) returned 25 percent over the past year and holds a portfolio of large and midcap "growth" equities. With a portfolio P/E of 41 and a P/B of 7, RWG selects the "growthiest" of the growth securities.
  3. The First Trust North American Energy Infrastructure ETF (EMLP) is the hottest actively managed ETF over the past year, having returned 26 percent for investors. The fund invests in American and Canadian MLPs and corporations that are involved in energy infrastructure.

It's worth noting that while these actively managed strategies performed very well over the past year, they also happened to be invested in markets that themselves were rising quickly. In fact, none of them generated statistically significant risk-adjusted outperformance—meaning that while they may have beaten our benchmark, they did so with extra risk.

By Spencer Bogart | August 21, 2014
Related ETFs: THHY | HYHG | IGHG | HYZD | AGZD | AGND | HYND | LQDH | HYGH

HYHG_1yr_TR

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When it comes to bonds, investors bear two types of risk: credit risk and interest-rate risk. Investors profit from holding credit risk when default rates are stable or falling and credit conditions are improving. Similarly, it's profitable to bear interest-rate risk when interest rates are declining. But what about when we're facing the prospect of a rising-rate environment?

That's where duration-hedged ETFs come into play. These ETFs take long positions in corporate bonds (credit risk and interest-rate risk) and overlay a short position of U.S. Treasurys (interest-rate risk only). Investors are left with near-pure credit exposure. The result is that investors can maintain their fixed-income exposure without worrying about rising rates.

In considering these duration-hedged ETFs, investors have two questions to answer.

First, how much credit risk do you want to bear? These ETFs come in high-yield and investment-grade varieties.

Second, how far do you want to hedge duration? There are ETFs that hedge duration to zero (neutralizing interest-rate risk) as well as ETFs with negative duration (inverting interest-rate risk).

Use the links below to further investigate each of the duration-hedged ETFs available (ranked by AUM):

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

TAO_YTD_TR

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Marc Faber recently sat down with ETF.com'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

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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

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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

Global_Interest_Rates

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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

German_ETFs_hedged_vs_unhedged

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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

Consumer_ETFs_YTD_Total_Return

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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

5_Slumping_Sector_ETFs

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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

EWZ_Total_Return

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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

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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

Agriculture_ETFs_React_to_Russia

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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.

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