The Week Ahead In ETFs

December 04, 2009

A look ahead at market news and trading ideas in the ETF space.


Financials In Focus

As Bank of America announced the largest capital raise in a decade ($19.3 billion) Friday and Citigroup revealed earlier this week that
Abu Dhabi
will be converting its holdings into common stock at a hefty premium, financial sector ETFs will likely take the brunt of next week’s trading action in the exchange-traded product space.

In particular, the Financial Select Sector SPDR Fund (NYSEArca: XLF) and Vanguard Financials ETF (NYSEArca: VFH) will be in focus, since those funds are more weighted than most in the two banks (above 11 percent of assets under management for each fund). For investors who don’t want so much volatility, the iShares Dow Jones U.S. Financial Sector Index Fund (NYSEArca: IYF) presents a more diversified bet—but not by much.

The Yen Weakness

Among currency ETFs, yen-focused funds such as the CurrencyShares Japanese Yen Trust (NYSEArca: FXY), WisdomTree Dreyfus Japanese Yen (NYSEArca: JYF) and inverse fund ProShares UltraShort Yen (NYSEArca: YCS) will likely be in play next week, after comments by Japan’s prime minister that indicate the government may intervene in the currency markets there.

Wednesday, Japanese leader Yukio Hatoyama said that the yen’s strength vs. global currencies “can’t be left as it is,” sparking a three-day, 5 percent rally in YCS.

The contagion effect of a weaker yen could also help Japanese equity prices, which are on something of a rebound, according to Avery Shenfeld, chief research analyst at Toronto-based CIBC.

“While both stimulative fiscal and monetary policies need to be extended to prevent a Japanese relapse, the government will also be tempted to intervene to weaken the yen. That would not only support exports but also help inflate
via higher import prices,” Shenfeld wrote in a recent research note.

Either way, any volatility in the yen is likely to impact iShares MSCI Japan Index ETF (NYSEArca: EWJ) significantly, since seven of its top 10 holdings are exporters, and it is the most highly concentrated of the generally well-diversified Japanese ETFs.

Merger News

With Kraft expected to make a second offer Friday for British candy company Cadbury, the recently launched IQ ARB Merger Arbitrage ETF (NYSEArca: MNA) will have a chance to pick up additional trading volumes.

In addition to holding firms that are potential buyout targets, MNA also has a 2 percent position in the Japanese yen. Since its debut two weeks ago, provider Index IQ has been relatively successful attracting investors to MNA, which trades with an average daily volume of around $25 million.

You can read a recent in-depth report on MNA by’s Cinthia Murphy here.

Inverse And Leverage

Such luck is not on the cards for leveraged and inverse ETFs, however. FINRA’s increased margin limits on leveraged and inverse funds, which took effect Tuesday, may weigh on trading volumes of for these funds. (Details of FINRA’s decision can be found here.)

Still, as Matt Hougan revealed in his funds flow analysis for November, controversy surrounding these funds hasn’t deterred investor interest: ProShares and Direxion are No. 3 and No. 5 in terms of total net inflows YTD, respectively.

Earnings Impacts

In terms of earnings, when Costco reports Friday, Retail HOLDRs ETF (NYSEArca: RTH) is likely to feel a pinch if November sales are anything to go by. The membership warehouse retailer, which comprises 5 percent of RTH’s holdings, announced this week that despite a 6 percent rise year-on-year, its November sales were weaker than Wall Street expected.

Investors in the PowerShares Dynamic Mid Cap Value Fund (NYSEArca: PWP) will want to keep an eye out for quarterly earnings of H&R Block Tuesday, which are forecast to stay the same as for the equivalent period last year, showing a loss of 40 cents per share. H&R Block forms a 3.4 percent position in PWP.

Vanishing VIX

Recently, major indexes have been trading more or less sideways, putting pressure on notes linked to the CBOE Volatility Index such as the iPath S&P 500 VIX Short-Term Futures ETN (NYSEArca: VXX) and the iPath S&P 500 VIX Mid-Term Futures ETN (NYSEArca: VXZ).

John Stimpson, a managing director at Prisma Capital Partners in
New York
, told traders on an investment bank conference call Friday morning that the scenario is unlikely to change in the near term.

Since Nov. 10, we've been in a 2.5 percent range on the SPX. This may explain the collapse in the VIX. [It’s] never a good sign to mark a high for the year, then close on the lows of the day,” he said. Stimpson added that the “top 10 most crowded trade” right now was to go “long gold, short the dollar, long the SPX.”


Daniel Harrison welcomes your questions or comments at [email protected].


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