Tag Archives: ETF
Posted on 19. Mar, 2012 by Wilensky.
Guest Post By: Benjamin Shepherd
Thus far, 2012 has been a great year for the money center banks; shares of Goldman Sachs (NYSE: GS) and JPMorgan Chase (NYSE: JPM) have all gained more than 30 percent year to date. Solid balance sheets, growing profits and a strengthening domestic economy have underscored the fact that, thanks to aggressive intervention by government and banking authorities at the peak of the financial crisis, American banks are now the strongest in the world.
According to the Federal Deposit Insurance Corporation’s (FDIC) most recent quarterly assessment of the banking industry, the sector posted its tenth consecutive year-over-year gain in quarterly net income, hitting $26.3 billion during the fourth quarter. That’s a better than 23 percent increase over the same period in 2010, as two out of every three banks reported improved net income numbers. Full-year net income also hit a five-year high in 2011, reaching $119.5 billion for an almost 40 percent increase over 2010.
An improving domestic economy has been a huge factor in the positive developments in the banking industry, with declining noncurrent loan balances and falling loan-loss provisions driving much of the sector’s gains. The industry set aside only $19.5 billion in loan-loss reserves in the fourth quarter, a more than 40 percent decline from the same period in 2010, as more than half of banks cut reserves. As loan-loss reserves are reduced, they’re essentially added back into revenue.
Meanwhile, loan books are once again growing, with loan balances up by $130.1 billion in the final quarter of 2011, a gain of 1.8 percent from a year ago. Commercial and industrial loan balances were up 4.9 percent in the quarter, credit card balances rose by 3.2 percent and residential mortgage loans bumped up 1.4 percent, as credit started to flow again.
Unfortunately, the report wasn’t all roses. Full-year operating revenue declined in 2011 versus the prior year, marking only the second year of declines since the FDIC began keeping data in 1938. Net interest income fell by 1.7 percent, as banks struggled to cope with a low-interest rate environment. But the biggest drag on revenue was a 2.3 percent decline in noninterest income, largely due to a 4 percent drop in fees generated through mortgage servicing operations and a 5.9 percent fall in service charges on customer accounts.
While mortgage loan balances are growing, overall activity still remains well below the pre-crisis peak. That will detract from bank revenues for years to come. At the same time, banks are beginning to cope with the effects of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which, among other things, limits the fees banks can charge for things such as low account balances and bounced checks. Fee income has always been a major profit center for banks, so limits on charges create a significant earnings headwind.
But all of this news reinforces my bullish view on SPDR S&P Regional Banking ETF (NYSE: KRE).
The exchange-traded fund (ETF) holds a portfolio of 71 mostly smaller regional banks, with market capitalizations ranging from just $488.8 million to $31.3 billion and offers excellent stock diversification in a growing sector.
While the ETF’s portfolio holdings have a fairly wide range in terms of asset size, about half of them have total assets of less than $1 billion, which is the sleeve of banks in which we’re most interested.
The FDIC breaks its data out according to institution size, offering a decent snapshot of how small- and mid-sized banks perform relative to large money center institutions. The data show that while small banks are at a disadvantage to large banks in terms of their cost of funds–both interest and noninterest expense ratios are higher than at larger banks–they rate much higher in terms of efficiency and financial condition. For example, measures such as earning assets to total assets and tier 1 capital ratios tend to consistently run between 50 basis points and 300 points higher. They also tend to have higher net loans to asset ratios, which reflect the fact that their core business is making loans in their local markets. In other words, these are traditional banks.
While the big banks are clearly doing well for themselves, they’ve become so large and involved in so many business lines beyond simply taking deposits and making loans that they’re now in the crosshairs of the Dodd-Frank Act. Over the coming years, as more of the Dodd-Frank provisions come into force–assuming Congress doesn’t intervene in the meantime–big banks are going to find their profitability squeezed as they are forced to abandon investment banking activities such as proprietary trading and see more of their fee-collecting opportunities curtailed.
But because of specific exemptions built into the Dodd-Frank Act for institutions with less than $1 billion in assets, smaller banks won’t have to cope with the same amount of regulatory oversight. Beyond that, the majority of smaller banks don’t engage in the activities that are prohibited under Dodd-Frank anyway.
As a result, smaller banks will be able to continue building their businesses relatively unfettered by additional regulatory burdens, while, at the same time, they will face less competition from larger banks encroaching upon their areas of operation. In fact, national banks such as Bank of America (NYSE: BAC) and Wells Fargo (NYSE: WFC) are in the process of consolidating branches and pulling out of less profitable markets, offering smaller institutions the opportunity to pursue additional growth.
If you are DIY investor, check out Jim Fink’s article, How to Value Bank Stocks, for some excellent tips on selecting bank stocks.
Posted on 06. Feb, 2012 by Ron Rowland.
Contributor Post By: Ron Rowland
The ETF marketplace changed last month. You didn’t notice? Don’t worry, you’re not alone. Today I’ll tell you all about it.
You already know that “exchange traded funds” trade on an exchange. That’s what distinguishes them from old-fashioned mutual funds. But what exchange trades them, and where is it?
For some new iShares, the answer isn’t New York or Chicago. Their trading hub is Lenexa, Kansas. Let me explain …
Exchange Floors No Longer Needed
For most people, the term “stock exchange” brings to mind images of noisy rooms filled with men in colorful jackets, waving their arms and making cryptic hand motions.
At one time, this is exactly how trading got done — and the apparent chaos was actually very efficient. But now, even the nimblest floor traders can’t compete with the speed and accuracy of modern computers.
An “exchange” isn’t a physical place anymore. It’s a mechanism by which buyers and sellers find each other. Nowadays, it happens in milliseconds.
Not surprisingly, then, there’s no longer a need for traders and exchanges to stay in lower Manhattan. The New York Stock Exchange and Nasdaq don’t get it — yet. They will. Their customers are going BATS.
Kansas: The New ETF Capital
From its headquarters in a Kansas City suburb, BATS Global Markets is now the nation’s third-largest securities exchange. The company launched its first trading system in 2006. Then in 2008, it was acknowledged by the SEC as a “national securities exchange” on par with the NYSE and Nasdaq. BATS is an acronym for “Better Alternative Trading System.”
The founders of recognized that stock exchanges are really in the technology business. Trade processing isn’t rocket science, and it doesn’t take financial genius. The keys to success are accuracy, reliability, and low costs.
Locating in Kansas is a great way to keep your expenses down. Everything from office space to taxes is much lower than New York. Over time (and millions of transactions) the difference adds up.
BATS — maybe because it has some distance from the traditional exchange culture — is innovating in other ways, too. The company is planning a “Competitive Liquidity Provider” program that will give market makers a financial incentive to increase liquidity and keep bid/ask spreads tighter.
It’s working: Last year BATS had an 11 percent share of U.S. stock market activity. The firm’s European unit, when combined with another exchange BATS is in the process of acquiring, had a 25 percent market share.
Now BATS is going for the jugular. The upstart wants to lure primary listings away from the big exchanges, starting with ETFs. iShares was the first sponsor to make the leap — but I bet more will follow.
Why You Should Care!
For small investors, this may seem like “inside baseball.” You may not know or care how it all works. You just want to buy and sell at a fair price. You trust your broker to handle the details.
That’s exactly why you should be glad BATS is on the scene. The competition they’re creating, both for listing fees and trading volume, is what keeps your costs down.
So whether you knew it at the time or not, the January 24 launch of iShares MSCI Norway Capped Investable Market Index Fund (ENOR) on BATS was a big deal! ENOR was the first of seven new single-country ETFs from iShares in January. BATS is the primary exchange for all of them. Two more are coming soon.
I don’t know if iShares intends to keep listing new ETFs on BATS. Nevertheless, the vote of confidence from the world’s largest ETF sponsor means something.
Unfortunately, some stock quote services are not yet set up to recognize BATS as the primary (or only) exchange for securities. I expect this to be fixed soon. But in the meantime, you may have a little trouble getting quotes on the BATS-listed ETFs.
Will BATS take over the world? No — there will always be room for competition. But the fact that this firm exists at all is still remarkable.
ETFs were a revolution in themselves. They’ve transformed the entire money management industry. Now the revolution is entering a new stage — and you’re set to be one of the winners.
Disclosure covering writer, editor, and publisher: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned. This article originally appeared in Money and Markets, a free daily investment newsletter from Weiss Research. To view archives or subscribe, visit http://www.moneyandmarkets.com/.
Posted on 24. Jan, 2012 by Wilensky.
Since mid 2008 natural gas has been completely decimated by the market with the past eight months have been particularly bearish, cutting natural gas stocks in half. Take a look at UNG for instance, down close to 60% from it’s June high of 12.32 a share. So with natural gas bouncing off it’s all time low is it time to take a bullish stance on the commodity? Recent options activity has spiked dramatically, with a call to put ratio of more than six to one. With options activity a good forward looking indicator of investor sentiment, this is generally a very bullish outlook. However, according to Option Monster, the majority of the volume is contained in a single spread by one investor. While all time lows are attractive, tread carefully when chasing another individual’s trade..
“optionMONSTER’s systems show that a trader bought 20,000 March 7 calls for $0.11 and sold the same number of the March 8 calls for $0.03. So the trade cost $0.08, or a total of $160,000. If the UNG is above $8 at expiration, the spread will be worth $1.84 million, but that payout comes with a very small probability. The delta of the March 8 calls suggests that there is only a 7 percent probability that the UNG will be above that price at the expiration. ”
Posted on 13. Jan, 2012 by Ron Rowland.
Guest post: Ron Rowland
One of the best ways to make money in ETFs is to not lose money. I know it sounds obvious, but I can assure you that many people don’t get this key point. So if I can help you do that, then I count it as a success. And today I’ll talk about an ETF category I think you should avoid in 2012: Japan.
What’s Wrong with Japan?
I’ve been to Japan many times. I love the country and the people. Yet I have to tell you that now is not the time to invest in Japanese stock ETFs. Yes, I know the Nikkei Dow looks oversold, but it’s looked that way for years. As I’ve explained before, calling a bottom is tough. And I don’t think Japan is there yet. Here are six reasons why:
#1 — Strong Yen
The yen was very strong in 2011 … which is bad news because it makes Japan’s exports relatively more expensive. And exports are a BIG part of the national economy for Japan.
The authorities are well aware of this, of course, but there isn’t much they can do about it. The Bank of Japan intervened multiple times last year. In every case, the impact of their actions was gone within a few days.
#2 — European Recession
A huge chunk of Japanese exports go to Europe. As you’ve surely noticed, the euro zone is having a few problems. A severe recession — or at best a few years of low growth — seem likely for 2012 and beyond.
If Europeans have no money to spend, their demand for imports (from Japan and elsewhere) is going to plummet. This is another bad sign for Japan.
#3 — Hungry Competitors
Japan reached economic success by beating the developed countries in cheap, efficient manufacturing. Now they have competitors: Taiwan, South Korea, Brazil, India … and of course China.
The challenge for Japan is that all these other countries can do the very same things that put Japan on the map. And in some cases, they can do it better. Nations like Brazil have other advantages, too, like better access to natural resources and geographical proximity to key markets.
#4 — Aging Population
Japan is, on average, one of the oldest nations on the planet. Furthermore, the relatively small number of young adults has a very low birth rate.
The resulting imbalance is making it harder and harder for Japanese industry to keep growing. Older workers hang on to their jobs for dear life while younger people have no way to gain skills. We’re seeing a similar pattern here in the U.S., but in Japan it’s a much bigger problem.
#5 — Massive Government Debt
Japan’s national debt is projected to surpass 1 quadrillion yen in 2012. A big cause is the population imbalance noted above. All those older people require heavy spending on health care and pensions.
To stay afloat, Japan will almost certainly need to raise taxes on both individuals and businesses. And higher taxes won’t make it any easier to create economic growth.
#6 — Political Instability
Japan’s parliamentary government used to work pretty well. Now it’s turning almost as dysfunctional as Italy and Greece.
Consider this: Japan has had six different prime ministers since 2006. The current occupant, Yoshihiko Noda, took office in September 2011 and is already under fire.
The real problem isn’t the government; it’s the voters and their unrealistic expectations. Changing leadership is just a symptom.
Posted on 11. Jan, 2012 by Wilensky.
Anti-Tilson ETF Basket Leads The Way Early In 2012
So why are investors willing to pay the industry standard 2 and 20 to underperform when they can show hedge fund like returns with zero management fees? That, is a good question…
The most popular talking-head on financial TV (after Bill Miller and Byron Wien), Whitney Tilson, has not had a winning year so far. In fact the simple pair trade Anti-Tilson (Long GMCR-Short Netflix which we closed when it returned 50% in just over a month), that was so popular last year, has been expanded to include his biggest shorts (as we promised yesterday). While we do not know weightings (obviously), on an equal-weighted basis from today’s price, Tilson’s 10 largest shorts have managed an impressive 7.37% gain on the year, handily outperforming his 15 largest longs which have managed a sub-market performance gain year-to-date of 1.45%. So being long Whitney’s shorts and short the-ever-smiling manager’s longs (on an equal weighted basis) would have made you around 6% year-to-date – considerably better than the +2.5% move in the S&P itself.
Posted on 18. May, 2011 by Ron Rowland.
First Trust Advisors last week (5/10/11) introduced the First Trust NASDAQ Global Auto Index Fund (CARZ). CARZ becomes the second fund to focus on the global automotive industry and the first in an ETF format. The underlying index is a modified market capitalization weighted index of companies classified as automobile manufacturers. The index caps the five largest stocks at 8% and all others at 4% during each quarterly rebalancing.
CARZ presently has 32 holdings, and the annual index reconstitution is scheduled for next month. The ten largest stocks are Daimler AG (DDAIF) 7.9%, Ford Motor Company (F) 7.8%, General Motors Company (GM) 7.2%, Toyota Motor Corporation (TM) 7.1%, Honda Motor Co., Ltd. (HMC) 7.0%, Hyundai Motor Co. 5.2%, Kia Motors Corporation 5.0%, Volkswagen AG (VLKAY) 4.3%, Bayerische Motoren Werke AG (BAMXY) 4.2%, and Nissan Motor Co., Ltd. (NSANY) 3.9%.
Nine countries are represented in the fund with Japan at 32.7%, Germany 20.2%, U.S. 17.7%, South Korea 9.9%, France 7.0%, China 5.2%, Italy 5.0%, Taiwan 1.4%, and Malaysia 1.0%.
Posted on 12. May, 2011 by Ron Rowland.
Invesco PowerShares brought out two new and unique ETFs last Thursday (5/5/11). PowerShares S&P 500 High Beta Portfolio (SPHB) and PowerShares S&P 500 Low Volatility Portfolio (SPLV) are innovative products that employ quantitative beta-weighting and volatility-weighting as part of the underlying index construction. As with any new investment strategy, you need to understand how these new ETFs will function before putting them in your portfolio.
- PowerShares S&P 500 High Beta Portfolio (SPHB) (SPHB overview) tracks the new S&P 500 High Beta Index, which consists of the 100 stocks from the S&P 500 with the highest sensitivity to market movements, or beta, over the past 12 months. The 100 stocks are weighted proportional to their 12-month beta coefficient at each quarterly rebalancing.
- PowerShares S&P 500 Low Volatility Portfolio (SPLV) (SPLV overview) tracks the new S&P 500 Low Volatility Index, which consists of the 100 stocks from the S&P 500 with the lowest realized daily volatility over the past 12 months. The 100 stocks are weighted inversely proportional to their 12-month realized volatility at each quarterly rebalancing.
Beta & Volatility
Beta is one of the most misunderstood investment terms, and it is often incorrectly assumed to be a word that is interchangeable with volatility. However, that is not the (more…)
Posted on 11. May, 2011 by Ron Rowland.
Global X introduced a new ETF targeting the global food industry on May 3, and said it will donate all profits to help fight world hunger. The Global X Food ETF (EATX) tracks the Solactive Global Food Index, consisting of the 50 largest global firms with significant business operations in the food industry.
The index targets companies that derive the majority of their revenue from the production, development, or distribution of food or food ingredients. Stock weightings are determined by free float capitalization, but to ensure diversification, positions are capped at 4.75% at each 6-month rebalancing.
There are seven stocks limited by the 4.75% cap as of the last rebalancing: Brasil Foods S.A. (BRFS), Danone (DANOY), General Mills Inc. (GIS), HJ Heinz Co. (HNZ), Kellogg Co. (K), Kraft Foods Inc. (KFT), and Nestle (NSRGY).
Seventeen countries are represented in the fund with the U.S. at 48.3%, China 8.4%, Switzerland 8.1%, Japan 6.7%, U.K. 5.4%, Canada 5.2%, France 4.9%, and 10 others totaling 13.0%.
Although there are many ETFs focusing on food, agriculture, and related commodities, there are none that isolates the global food industry in the manner that EATX does. Its closest competitor is likely to be PowerShares Dynamic Food & Beverage (PBJ), although there are significant differences between the two. PBJ includes companies focusing on beverages and retail food sales, while limiting its holdings to just U.S. companies.
Global X Management Company, LLC, the fund adviser, will donate any profit it derives from EATX to Action Against Hunger | ACF International, a global humanitarian organization that works to save the lives of malnourished children while providing communities with sustainable access to safe water and long-term solutions to hunger.
Disclosure covering writer, editor, and publisher: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.
By Ron Rowland
Posted on 10. May, 2011 by Ron Rowland.
The fund’s 61 holdings are weighted by float-adjusted market capitalization. While no stock is supposed to exceed a 10% allocation at the quarterly rebalancing, presently no holdings need to be capped. The largest position is Sunoco Inc (SUN) at 6.2%, followed by Oceaneering International Inc (OII) 5.3%, Core Laboratories (CLB) 5.2%, Tesoro Corp (TSO) 4.5%, Petrominerales Ltd (PMGLF) 4.3%, and Alliance Oil Company Ltd (ALLZF) 3.9%.
The IOIL portfolio currently spans 14 countries, including both developed and emerging markets. I was somewhat surprised to see Thailand with the third largest allocation but Russia and Mexico not represented at all. My guess is that this reflects the large size of oil-related companies in those places. The rest of the list was no surprise with the U.S. at 45.1%, Canada 11.7%, Thailand 7.5%, Colombia 4.3%, Japan 4.0%, Sweden 3.9%, U.K. 3.9%, Finland 3.0%, and six others combining for 13.5%.
Posted on 21. Feb, 2011 by Harvey Sax.
If you will search on our posts, you will see we suggested buying the USO (that’s the most popular ETF tracking crude oil), several of the largest gold miners, and lastly we have repeatedly warned of a toppy market. Now you might say we have been lucky, that the Mideast democracy contagion has worked in our favor (more…)