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Tuesday
March 7, 2017
March 7, 2017
Trade War Threat Adds to BlackRock's China WoesBy Viren VaghelaConcern that U.S. President ’s policies may spark a trade war with China Donald Trumpis taking a toll on exchange-traded funds tied to the Asian nation.
The two biggest ETFs listed in Hong Kong that track the FTSE China A50 Index of mainland-listed shares — including 's 2823 fund — have had a BlackRock Inc.combined $1 billion of outflows over the past 12 months, according to data compiled by Bloomberg. The largest ETF listed in the U.S. that tracks Chinese equities, BlackRock's
, had $2.26 billion of outflows over the same period, the data show.FXI"There are a number of cautious views in international media about the China
economy like a potential trade war, currency devaluation and over leveraging in the banking system making international investors nervous, and they express that view by selling the ETFs," said , head of ETFs at Mirae Asset Global Investments, a David Quahunit of .Mirae Asset Financial Group
Curbs on domestic money exiting China and weakness in the yuan have also dragged on demand. That’s despite China stocks rising this year owing to buying by mainland investors, according to Quah. The FTSE China A50 Index is up 4.4 percent this year.
BlackRock closed its final synthetic China sector exchange-traded fund last week amid a change in strategy and waning investor demand.
The money manager’s iShares CSI A-Share Financials Index ETF was de-listed on Feb. 27, according to a Hong Kong Exchange filing. Other funds closed as part of the same overhaul include the iShares CSI A-Share Consumer Discretionary Index ETF, iShares CSI A-Share Consumer Staples Index ETF, iShares CSI A-Share Energy Index ETF, iShares CSI A-Share Infrastructure Index ETF and iShares CSI A-Share Materials Index ETF.
“The most liquid ETFs, including those exposed to onshore and offshore Chinese investments, continue to be barometers of investor sentiment," said , Anthony Arthurspokesman for BlackRock in Hong Kong. "We have evolved our product line in Hong Kong to reflect the market conditions today and in the future. That has included adding another physical A-Share ETF to our line up through the iShares CSI 300 A-Share Index ETF ( ), which is the lowest cost A-Share ETF in Hong Kong and now joins our 2846Core range and, the ongoing conversion to physical of our A50 fund."
Synthetic sector ETFs are expensive and it’s often cheaper to use a basket of stocksfrom an investment bank, according to Quah at Mirae Asset Global Investments.
“For financials you don’t need sector ETFs, as the China A50 is very heavily skewed to financials anyway," he said. "So the correlation is high — if it’s 90 percent you don’t need a sector ETF.”
A shortage of more than 20 liquid stocks in some China sectors makes it difficult to construct effective products, according to , head of ETF Melody Heand index solutions at CSOP Asset Management Ltd.
“When we develop ETFs here, it’s really chicken and egg,” she said. “If we don’t have the clientele, the liquidity and size can’t get up quickly and as liquidity and size aren’t there institutions don’t come in, so it’s a negative cycle.”
U.S.
ETFs 2 March 7, 2017
U.S.
ETN Traders Aim to Profit No Matter What Gas DoesBy Carolina WilsonAn exchange-traded note tracking the price of natural gas is down around 65 percent this year, but that isn’t affecting the seemingly insatiable demand for it. Shares outstanding in the VelocityShares 3x Long Natural Gas ETN ( ) have UGAZsoared around 442 percent to 38.1 million this year even as the note plummets in value, according to Bloomberg data. That’s because demand is coming not from natural gas bulls, but from short-sellers eager to profit from a phenomenon that causes the price of leveraged products to plummet almost like clockwork. Exchange-traded products like UGAZ that provide geared exposure to indexes have been a hit with some traders, while saddling unwitting investors with eye-watering losses. The products typically reset their leverage daily to give new buyers the performance they anticipate. That means the longer investors hold them, the less accurately the products will track their benchmarks. When markets are choppy, the price of the products is certain to plunge, a phenomenon known as volatility drag. "It’s just math, and math says the price is going to head toward zero," said Chris
, chief investment officer of , who is shorting Abraham CVA Investment Managementboth UGAZ and its twin, The VelocityShares 3x Inverse Natural Gas ETN ( ).DGAZ
UGAZ and DGAZ both track the S&P GSCI Natural Gas Index, which has fallen 63.9 percent over the past five years, according to Bloomberg data. The bullish ETN would be expected to perform even worse over that period, which it has, losing 99.6 percent of its value. But bearish DGAZisn’t performing much better. It’s down 91 percent, according to Bloomberg data.
"The volatility drag will make both go down, even if during that time period natural gas goes up ordown," said Eric
, an ETF Balchunasanalyst for Bloomberg
. That makes Intelligencethe products attractive to short-sellers, he said. The number of UGAZ shares sold short soared
to 11.6 million on Feb. 15 from 726,992 in February 2016, according to Bloomberg data. DGAZ shares sold short climbed to 55.1 million from 5.19 million over the same period. Meeting the demand from short-sellers is one reason why share numbers are climbing even as the price of both notes drops, said , a strategist Sebastian Mercadofor ETFs at . Last year, the cost to borrow shares of the ETNs was Deutsche Bank AGaround 3 percent, while this year it’s climbed to around 6 percent, he said. As borrowing costs increase, "more people are going to be interested in lending securities out." Similar phenomena have arisen around other ETFs. For example, the iShares MSCI Mexico Capped ETF lost 13.2 percent in November, the month Donald Trump won the U.S. presidential election while the number of shares outstanding soared by 53 percent to 35.4 million, according to Bloomberg data.
A popular "double short" last year involved selling short shares of both and UWTI, leveraged oil products, as the price of crude bounced around.DWTI
Of course the strategy is not without its risks. If volatility recedes and the prices of the products move in a straight line, volatility decay becomes less of an issue. "You’ll get burned if natural gas keeps trending in one direction for a while," said Abraham.The trade is also effective only if traders commit to holding these highly-volatile products for an extended period of time, said Mercado. "Yes, the decay works in the very long-term, but the ride to get there could involve some trends or spikes that might make you lose all your capital," he said.
Korea
ETFs 3 March 7, 2017
Korea
Q&A
ETFs 4 March 7, 2017
Q&A
'Investors Don't Need More New, New ETFs': Lee Kranefuss of 55 Capital
Kranefuss led the iShares business at Barclays Global Investors before it was sold to BlackRock.
ETFs are powerful building blocks, but "you need to have some theory of how you put them together."
Interviewed by Carolina Wilson on Feb. 22. Comments have been edited and condensed for clarity.
Lee Kranefuss, Co-founder and Co-chairman, 55 Capital
Q: Take us back to the start of ETFs at iShares. What were you trying to do?A: What we saw was there was a real opportunity for what institutional investors had adopted — the use of beta strategies or indexes to accomplish many things — for individuals to take advantage of that, as well. If you think about how index funds work, 75 percent of the ETF assets for the retail adviser market were Vanguard products, which only had about 10 index funds and extreme limits on liquidity. iShares opened up to the adviser market the opportunity to have a full suite of index funds to work with that were adviser-friendly.
We thought that 100 ETFs would probably pretty much cover the waterfront. You'd be able to invest in every country, in different parts of the U.S. market, different parts of the European market, bonds and the like. And we thought it would end there.
Q: But of course it didn't.A: What we found was that there was this really rapid acceptance and interest in the idea of ETFs. Which is great. But, along the way, it started to become a "how thin can you slice the onion" approach rather than what do people really need that's the next incremental product. Obviously, you can slice the bond market many ways, for example. But, the industry fell in love with the idea of "what's the new new?"
Q: Do you think there are too many ETFs?A: The number of ETFs in the U.S. is quickly approaching the number of stocks on the New York Stock Exchange. If you do look at what's come out, you see huge growth in the traditional benchmarks, but you see everyone try to grab onto "here's something that's a little bit different," whether it's fundamental active or some of the thematic funds. They're trying to differentiate themselves by saying: it's just
like active, but it's not active. Which is neither fish nor fowl in many cases. It's not that these ideas aren't good ideas. Like factor-based investing — it's an interesting idea.
Q: But do you think some of the smart beta and factor ETFs have taken it too far?A: It's hard to put value as a factor into the portfolio by buying up a lot of things that have value and being in a value ETF. Because you end up with a portfolio that has a tremendous amount of growth you'll never neutralize by bringing in a 50-basis points value ETF. We often liken it to someone trying to improve their diet who eats McDonalds everyday and starts having a Diet Coke with a Big Mac. You need to think about: well, what's a good diet?
Q: What has surprised you most about how the industry has developed?A: Another thing that's happening a lot in the industry right now that's been surprising to me — and I understand why they're doing it — has been this incredible attraction from traditional fund players, active players, to get into ETFs. But to do it in a way that is leveraging what they already do, so trying to come up with active ETFs. I'm not quite sure what value that really brings. An active strategy by default is not a building block in the normal sense.
Q: What do you think investors need?: A lot of people mischaracterize the A
alpha-beta shift. It's not that people are going from all alpha to all beta, in the sense of what Vanguard originally proposed — which is buy one fund and just sit there on that. What people are really doing is that they're moving from trying to get performance from securities selection — which really doesn't work — to using beta products, but then needing some way of actively using those beta products.
When you move to beta and you have all of these building blocks, you need to have some theory of how you put them together. The theory is out there, but very few people do it. People don't need more new, new things. What they need is the wherewithal to use the pieces to implement the things that very often the new things are claiming they do, but often don't provide.
Q: Have we peaked in terms of the number of ETFs and providers?
: I think you're going to see a whole lot Aless focus going forward on new ETF companies and new ETFs. Think of what iTunes did for music. If you have a great idea, you can put it up on iTunes and record it in your garage and a lot of people try to do that with an ETF. The challenge is that it doesn't make it any easier to write a hit song. It doesn't mean people won't keep trying.
At a Glance
Age: 55Previously. executive chairman of Source ETFs (2014-2016); Global chief Career:
executive officer of iShares (1998-2010). MBA in finance from Wharton; bachelor of science degree from Cornell Education:
University.Divorced with three children: Phoebe (age 23), Eli (19) and Eva (16).Family:
Teacher, chef or forest ranger.If you could have any other career:
Gold
ETFs 5 March 7, 2017
Gold
State Street's New Gold ETF Is Up, But for Some That's Not EnoughBy Carolina WilsonState Street’s dollar-hedged gold ETF has done exactly what it was meant to do since being rolled out five weeks ago — protect bullion holders from a rising greenback. That doesn’t mean investors are flocking to it.
A net $27.3 million has flowed into the SPDR Long Dollar Gold Trust ( ) GLDWsince it was rolled out on Jan. 30, according to Bloomberg data. That’s a respectable amount for a fund that has returned 3.7 percent since inception, but expectations are high when you’re State Street. It turns out that innovating in gold ETFs is harder than it looks, even when you’re the firm behind the biggest commodity fund in the world, the $33.1 billion SPDR Gold Shares ETF ( ).GLD
Investors added $1.66 billion to GLD in February after four consecutive months of outflows, as they sought havens from rising political uncertainty in the U.S. and Europe. While gold has climbed 6.8 percent this year, there’s a "persistent negative correlation" between the precious metal and the U.S. dollar, according to , director of Maxwell Goldinvestment strategy for ETF Securities
. The dollar's steep rally under LLCPresident should make Donald TrumpState Street’s new fund a no-brainer — but some investors balk at the idea of adding a currency hedge to gold.
“Lack of liquidity in GLDW and its derivative exposure would cause my partner and I to pause before taking on a sizable trade there,” said Chad
, portfolio manager at Morganlander, who holds GLD. Stifel, Nicolaus & Co.
“We want ETFs that are completely transparent without any derivatives exposure in there.”
According to the prospectus for GLDW, the fund achieves its currency hedge via a delivery agreement with Merrill Lynch
. Each day, the ETF either Internationalreceives gold into the fund or delivers it to Merrill Lynch depending on the performance of a basket of currencies including the euro, the yen and British pound sterling. Whether that’s the equivalent of holding a portfolio of currency swaps is probably up for debate.
“This isn’t GLD plus derivatives,” said
George Milling-Stanley, head of gold strategy at State Street Global
“The only asset in GLDW is Advisers. physically-allocated gold bullion, exactly as that’s the only asset in GLD.”
For firms like WisdomTree , currency-hedged Investments Inc.
ETFs have been a hit. Its ETF, HEDJwhich tracks European stocks, grew its assets by nearly 2,000 percent as the euro weakened against the dollar in 2014 and 2015, according to Bloomberg data.
The track record for such ETFs tracking gold has been more mixed. Two AdvisorShares ETFs that use futures and forwards to essentially buy gold using euros and yen have acquired in total around $35 million in assets since they were started in 2014, according to the data.
One reason may be that gold investors seem more hung up than others about what’s in their funds. Prospectuses for GLD and the iShares Gold Trust ( ) IAUdescribe the physical location where bars are held, while one fund, The VanEck Merk Gold Trust ( ), gives holders OUNZthe option to take actual physical delivery of the stuff.
"I don’t really understand the currency hedge that well," said , Vern Sumnichtchief executive officer of ETF investment strategist . "It’s too much iSectorsuncertainty that I just don’t want to have to deal with."
State Street remains confident that its
fund will eventually find buyers. As liquidity increases, there will be GLD holders “who may trade in and out between the two products,” said Milling-Stanley. “There will also be buyers who believe they’re smart and nimble enough to play the foreign exchange element, so they will sell GLD and buy GLDW on days where they think the dollar is going up,” he said.
Still, there are obstacles beyond derivatives to widespread adoption of GLDW. One is gold miners ETFs, which hold shares in companies that mine precious metals and are among the most traded funds in the U.S.
Sumnicht of iSectors holds , the GDXJVanEck Vectors Junior Gold Miners fund that was until recently outperforming GLD. "Whatever gold does, gold miners do better," Sumnicht said. "It’s like an exponential play on GLD."
The other risk, which slowed asset growth in some of WisdomTree’s funds, is that currencies quit cooperating with the fund’s objectives.
“The expectation for a large appreciation of the dollar is a little hard to see at this point,” said Gold of ETF Securities, the firm behind the unhedged $1 billion ETFS Physical Swiss Gold Shares fund. The “consensus seems to be that the dollar has run too far too quick,” he said.
Japan
ETFs 6 March 7, 2017
Japan
BOJ Support Fuels Japan REIT Fund Demand Despite Slowdown SignsBy Viren VaghelaJapanese investors are betting on the nation’s real estate to earn extra yield, speculating that central bank support will prevent the market from slumping too much.
Investors poured nearly $300 million into Japan real estate exchange-traded funds this year, 14 times more than in financial ETFs, which had the next biggest inflows, according to data compiled by Bloomberg. Assets of the country’s real estate investment trust mutual funds doubled in three years to 4 trillion yen ($35 billion) as of December,
data show.SMBC Nikko Securities Inc.Buyers are attracted by REITs that
yield 3.3 percent at a time when Japan’s benchmark 10-year debt offers around 0.07 percent, even as the Tokyo Stock Exchange’s REIT index has underperformed the Topix equity gauge in the past year. The Bank of Japan’s holdings of J-REITs have ballooned to 367 billion yen at the end of February from 270 billion in 2015, when the central bank doubled the cap on the maximum stake in each real estate trust issue to 10 percent, according to BOJ data.
“After the U.S. presidential election, the stock market was strong and net inflows into REITs were small,” said Hiroshi
a senior analyst at SMBC Nikko Torii, Securities in Tokyo. “But since December, net inflows have recovered as J-REITs’ dividend yield is very attractive.”
The purchases are happening even as weak signs emerge from Japan’s property market. The percentage of Tokyo apartments sold before completion, which has been on a downward trend for two years, fell to 62 percent in January, according to Real Estate Economic Research Institute data.
real-estate analyst Deutsche Bank AG forecasts that apartment Yoji Otani
prices in Japan’s capital will drop more than 20 percent in the next two years because of a surge in inventory.
The TSE REIT index has dropped 3.8 percent in the past 12 months to 1,800.34 on Tuesday, while the Topix share gauge has gained 14 percent during the same period. In another possible brake on the market, the Tokyo Stock Exchange said in
December that new REITs would need to submit documents on the reasoning behind their pricing when they apply for an initial public offering.
The property market’s savior? Investors are counting on BOJ Governor
and his Haruhiko Kurodaunprecedented drive to banish deflation in Japan by purchasing bonds, ETFs and REITs.
“The BOJ buying J-REITs decreases the risk premium and acts as a pull factor for investors to buy REIT ETFs,” said
, head of the ETF center at Koei Imai.Nikko Asset Management
With Japan’s central bank purchasing REITs and the 10-year government bond yield likely to remain around zero percent, SMBC Nikko sees a big potential for the TSE REIT index to rise. It’s targeting a year-end level of 2,000 for the gauge, on lower costs of servicing debt and higher rents.
“Both retail investors and regional banks actively buy J-REITs to get higher income gain as the downside risk is limited,” said Torii at SMBC Nikko.
— With assistance from Katsuyo Kuwako.
ETFs 7 March 7, 2017
ETFs on the Bloomberg Terminal
ETFs 8 March 7, 2017
ETFs on the Bloomberg Terminal
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