bull & bear funds

Four New 3x Direxion China and Latin America ETFs

Direxion, known for its 3x leveraged ETFs, launched four new funds today (12/03/09) targeting China and Latin America. The new ETFs seek 300% of the daily performance, or 300% of the inverse of the daily performance, of the BNY China Select ADR Index and S&P Latin America 40 Index.

The new Bull 3x funds will have a 0.94% expense ratio and the Bear 3x funds will have a 0.95% expense ratio. The capitalization-weighted BNY China Select ADR Index currently has 39 constituents. The new Direxion Latin America funds are based on the same index as the unleveraged iShares S&P Latin America 40 Index Fund (ILF).

The four new ETFs are:

* Direxion Daily China Bull 3x Shares (CZM)   (CZM overview)

* Direxion Daily China Bear 3x Shares (CZI)    (CZI overview)

* Direxion Daily Latin America 3x Bull Shares (LBJ)    (LBJ overview)

* Direxion Daily Latin America 3x Bear Shares (LHB)    (LHB overview)

Direxion reminds potential buyers of these new ETFs that they “are intended for use only by sophisticated investors who understand the risks associated with seeking daily leveraged investment results and plan to actively monitor and manage their positions in the funds.” The company provides additional educational material on the characteristics and risks of daily leverage in the education section of its website.

As with all Direxion 3x products, I expect these new ETFs to do a great job of meeting their daily objective. However, do not buy them if you do not understand the implications of daily leverage.

India reported surprisingly strong GDP growth for the third quarter, posting 7.9% growth in the July through September period. These numbers surprised both analysts and government officials: the growth was higher than even the most bullish analyst forecast, and the Reserve Bank of India said that it will likely revise upward future forecasts.

According to HSBC estimates, GDP grew at an astounding 13.9% rate from the previous quarter, with the gains largely coming from advances in the agricultural sector, high consumer demand, and government stimulus measures. These trends suggest that the Indian economy is humming along and that the government will soon begin to unwind stimulus measures and raise interest rates.Baha Despite these positive GDP numbers, there are still numerous risks involved with investing in India. Some believe that an asset bubble is rapidly building, and that the growth in many emerging markets is fueled by easy credit and a carry-trade induced flight from U.S. dollar based assets. Many also are worried that if government programs are removed too early, it could shock the markets and derail India’s growth.

Despite these risks, the GDP numbers come as welcome news to many investors around the world who are growing tired of hearing “less bad news” and finally get some good news out of a major world economy. If the government is able to remove the measures from the market and begin to raise rates without disrupting growth, it would go a long way towards assuring investors that India is not only a growth market, but a country with sound monetary fundamentals.

Should India continue to be able to grow despite a stronger rupee and higher interest rates, it would suggest that the country is developing a consumer-oriented middle class, a trend that could insulate the economy from major shocks and reduce its dependence on foreign economies. While many Indian stocks had a rough October, most have rebounded nicely in November and responded positively to the GDP news. For U.S. investors, there are several ways to gain exposure to India through exchange-traded products.

iPath MSCI India Index ETN (INP)

This fund is linked to the MSCI India Total Return Index, which seeks to measure the market performance of the National Stock Exchange of India. This index contains 59 firms with heavy concentrations in financials (25.7%), energy (17.6%), and information technology (15.4%). The fund is up almost 95% in 2009, but investors should note that it is structured as an exchange-traded note, meaning it carries some degree of credit risk. Moreover, the expense ratio of 0.89% is towards the high end of India ETF options.

iShares S&P India Nifty 50 (INDY)

This ETF started trading in mid-November, and as such has a limited trading history. INDY contains 50 stocks which are broadly diversified but with higher concentrations in the banking, software and energy sectors. The fund also focuses on mega-cap firms: the weighted average market cap is $24 billion. INDY also has an expense ratio of 0.89%.
WisdomTree India Earnings Index (EPI)

EPI focuses on equities that are traded on Indian markets and are generating positive earnings. The index currently contains 187 firms and is tilted towards the energy, banking, software, and materials sectors, providing more diversification across the economy than other ETF options. The focus on profitable companies has resulted in this fund outperforming the MSCI India index by over 4% in the past year

PowerShares India Fund (PIN)

PIN is similar in many ways to INDY: both have around 50 securities (this fund has 49) and both have big weightings in banking, software, and energy firms. This ETF does however, have a lower expense ratio (coming in at 0.78%). PIN has gained almost 75% so far in 2009. The fund has a turnover of 22% and is skewed towards large and giant cap firms (a weighted average market cap of about $26 billion).

WisdomTree Dreyfus Indian Rupee (ICN)

This fund seeks to match the money market rates available to foreign investors in India and reflect the changes in value of the rupee against the dollar. It has a relatively low expense ratio of 0.45% and is up slightly over 9.0% in 2009. The fund typically invests in currency swaps and forwards and money market securities with an average maturity of less than 90 days in order to reflect the Indian rupee money market.

Global X Management Company expanded their ETF offerings today with the launch of

The new ETFs will have an expense ratio of 0.65%. The underlying indexes use a capped weighting methodology whereby the percentage weighting of each constituent is capped at 4.75%. The weightings will be adjusted twice a year. Excess weight is allocated proportionally to the constituents whose percentage weight is not capped.

This methodology should help provide a true sector representation without the extreme company overweighting found in many popular ETFs like the Select Sector SPDRs. Only stocks which are tradable for foreign investors are eligible for inclusion. Index members must either be domiciled in China or have their main business operations in that country.

Global X China Consumer ETF (CHIQ) will track the S-BOX China Consumer Total Return Index developed by Structured Solutions Ag specifically for this ETF. The index fact sheet (pdf) shows 40 constituents with the largest nine capped at 4.75% each. Top holdings include New Oriental Education, Ling Ni Co, Denway Motors, China Yurun Foods Group, Parkson Retail Group, Sinopharm Group, Want Want China Holdings, Dongfeng Motor Group, and Tingyi Holdings. Top industry representation according to the CHIQ fact sheet (pdf) includes retailing 28.6%, food 21.9%, services 20.5%, autos 12.0%, and health care 7.9%.

Global X China Industrial ETF (CHII) will track the S-BOX China Industrial Total Return Index. The CHII index fact sheet (pdf) shows 31 constituents with the largest 10 capped at 4.75% each. Top holdings include Anhui Conch Cement, Shanghai Industrial Holdings, China COSCO Holdings, China Communications Construction, China Shipping Development, Metallurgical Corporation of China, China Railway Group, China Railway Construction, BYD Co, and China National Building Material. Top industry representation according to the CHII fact sheet (pdf) are engineering and construction 26.7%, industrial equipment 25.9%, transportation 21.9%, building materials 20.0%, and industrial services 5.5%.

Global X plans to launch four more China sector ETFs in the next few weeks. These are included in the prospectus dated 11/24/09 and will cover the energy, financial, technology and materials sectors. They will also be based on S-BOX indexes representing the respective sectors.

In the second quarter of 2009, state owned Banco do Brasil  reported an asset increase of 43.9 percent compared to the same period in 2008, becoming the number one bank in Latin America and the seventh largest on the continent.

Banco do Brasil had slipped in the rankings in November 2008, said Portafolio, when Banco Itaú announced its merger with Unibanco, giving rise to the largest financial institution in the southern hemisphere.

The latest figures show the privately owned Itaú-Unibanco, Banco do Brazil’s main competitor, according to AméricaEconomía, has now fallen to second place. The data was featured in a six-month report issued by consulting firm Economática, which compiled results released by the continent’s trading banks.

“Private banks must learn that it is better to profit from issuing more credit than restricting their offer. It would be better for them to react now or their market quota will further diminish,” commented Brazilian Finance Minister Guido Mantega in Estadao, and urged private banks to lower their interest rates.

In contrast to the majority of private banks, who cut back on loans due to the world economic crisis, Brazil’s state bank provided more credit, mainly to consumers. Another reason for the Banco do Brasil’s rapid ascent back to first place was its increased presence in Brazil’s richest province, Sao Paulo, after acquiring Nosso Caixa’s regional assets.

According to EFE, Banco do Brasil is now the seventh largest bank in the Americas after the top three U.S. institutions Bank of America, JP Morgan Chase and Citigroup. Other Brazilian banks in the top 20 include Itaú-Unibanco (ITUB), Bradesco (BBD) and Banco Santander Brasil (BSBR).

Banco do Brasil’s next steps included opening consumer branches in the United States followed by further expansion in Latin America and Asia, announced the bank’s president, Aldemir Bandine, to O Globo. Bandine also stated that the bank’s policy “is to implement development strategies and forward the government’s policy of lowering interest rates to dampen the effects of the world economic crisis.”

The Reserve Bank of India  has in effect called the end of the financial crisis in India, and is the third central bank to do so, after Australia and Israel.

Amidst the noise of cricket score updates and stock market swings you may not have heard this at all, even if you live in India. Or you may have heard some wonkish technical jargon, such as ‘RBI Policy Signals End of Easy Money Era’ and moved on to more interesting news.

You may even have reacted with some anger if you have money invested in the Indian stock market, because the Sensex tumbled as the RBI signaled tighter policy and the RBI disappointed the market. Poor market, you might be left thinking, and poor banks, who have been sent reeling.

What nonsense. None of these reports have picked up the true significance of the move, which is that the Financial Crisis has officially ended for India, or the bullishness of this prudent move for India’s long term health, and that of its markets.

Let us leave the hype aside for a moment and concentrate on specifics. The Australian Central Bank on 6 October 2009 became the first G7 monetary authority to raise its interest rates, which was a positive sign for both Australia and the world. It raised its rates to 3.25%, with the possibility of a further 50 bps raise next week. Back in August, Israel raised rates from 0.5% to 0.75%, and there are signs Norway and South Korea are set to do the same.

The RBI has not raised interest rates. Since it has kept rates higher than any other developed economy (the key lending rate or repo rate currently stands at 4.75%) it doesn’t need to make a drastic change there. The consensus is that it definitely will by April next year, with a 50% chance of a move this year, according to an economist survey.

Instead what the RBI is doing is tightening some of the extraordinary measures it had put in place in response to the credit crunch. A special facility to provide liquidity (ie money)  to financial firms  is being withdrawn, as private funds move back and inflows of FDI and FII into the market. It has raised commerical real estate rates, worried that a new bubble is building up.

Significantly the RBI also tightening some of the capital requirements it has for Indian banks. It is raising the ’statutory liquidity ratio’, the amount of money that a bank needs to keep in cash, gold or government bonds, to 25%, up from 24%.

Lets compare this situation to that of western banks, particularly those in the US. Yes liquidity or reserve levels are being increased, but accordingto the Basel II accord capital requirements, bank holding companies should hold tier I and tier II capital reserves of 10%. Now ask yourself the question; how much safer is a bank with 25% of assets liquid versus a bank with 10% capital? The answer: more than twice as safe. And that is before even discussing the fact that most US banks still have only single digit liquid reserves.

It also intends to standardize provisioning for Non-Performing Assets (NPA) to 70%. What does this mean? Lets say that a bank has loaned money to a private company or fund, and that entity has stopped paying interest on the loan. The loan would now be classified as an NPA,and the bank would need to take 70% of the value of the loan out of its profits and hold that in a provisioning pool. If repayments on the loan resume, it would get out of the NPA bucket and back into the business-as-usual bucket,and the provisioning fund can be released back into the banks working funds. If the NPA finally does default, then the 70% provision will be used to offset any losses, although one would assume that more than 30 cents on the dollar can be earned on average in all but the very worst markets. In other words, thebank should eventually be able to increase its liquidity and should never be brought to its kness by NPAs.

Now look at NPAs and their US equivalent, toxic assets. How has the US responded to the question of these ‘damaged goods’? In part by relaxing reporting regulations (mark-to-market), so that their values need not be recognised now. I don’t know about you, but I would much rather a bank that keeps a 70% provision to the value of a loan or asset in trouble versus one that doesn’t have to report its value.

Indian banks are in much ruder health than western ones – and they are getting healthier. Period.

So let the market and the banks complain, these moves will strengthen the Indian economy and the health of its banks for years to come, and the RBI should be congratulated for unpopular but wise policy moves.

Barclays Global Investors announced on Friday the launch of  a new ETF tracking an index composed of the 50 largest and most liquid Indian securities listed on the National Stock Exchange of India.

The iShares S&P India Nifty Fifty Index Fund INDY will compete with several existing India exchange-traded funds, including products from iPath, WisdomTree, and PowerShares.

“We’re pleased to provide investors with an iShares ETF that tracks one of the most investable and well-known India indexes,” said Noel Archard, head of U.S. iShares Product Research and Development. “Demand for Indian equities continues to be strong as India has a differing set of companies and industries.”

The S&P CNX Nifty Index has a median market capitalization of almost $9 billion and big allocations to energy giant Reliance Industries and IT consulting firm Infosys (INFY). These two companies will make up for about 20% of INDY’s holdings at inception.

INDY will be well-diversified across major sectors of the Indian economies, allocating no more than 20% of holdings to a single industry. The new ETF will charge an expense ratio of 0.89%, making it competitive with existing India ETFs. The fact sheet may be accessed here : iShares INDY

Emerging market ETFs have seen huge cash inflows this year as appetite for risk has returned and investors spooked by lingering troubled for the American economy have looked to diversify their portfolios beyond the U.S. Through October of this year 30% of iShares total net asset flows, or $9.8 billion, has gone into emerging market and single emerging countries.

Options Aplenty

In addition to the new iShares fund, there are several diversified BRIC and emerging markets ETFs that include significant allocations to India. There are also three funds that focus exclusively on Indian equities:

iPath MSCI India Index ETN (INP) : This exchange-traded note is linked to the MSCI India Index, a benchmark that seeks to represent approximately 85% of the free-float-adjusted market capitalization of equity securities by industry group within India. Similar to the new iShares fund, the index underlying INP makes significant allocations to Reliance and Infosys. It is important to note that INP is an ETN, meaning that investors are exposed to some degree of credit risk.

WisdomTree India Earnings Fund (EPI) : This ETF is based on the WisdomTree India Earnings Index, a benchmark that measures the performance of profitable companies listed in India. Companies in the index are weighted on their earnings in the prior fiscal year, thereby avoiding exposure to companies with big losses (and potentially introducing a tilt towards value stocks). EPI is up nearly 90% year-to-date.

PowerShares India Portfolio (PIN): This ETF tracks the Indus India Index, a benchmark with 50 constituents spread across the technology, health services, financial services, heavy industry, and consumer products sectors. About 21% of this fund’s holdings are in Reliance and Infosys. PIN charges an expense ratio of 78 basis points, making it the cheapest way to gain exposure to India equities.

New figures from the Chinese Ministry of Commerce show that the country has extended it’s FDI growth streak to three months, with 5.7% year on year growth recorded for the month of October to $7.1Bn.

Shanghai, Shenzen & Hong Kong all rallied comprehensively on the news today, with Shanghai recording a 2.75% rise, Shenzen 3.3% & Hong Kong gaining 2.3%, as investor confidence is buoyed by these positive numbers.

In parallel, a seperate report by the Industry Ministry has forecast that China is set to grow it’s industrial output by 16% over November & December, with full year growth potentially reaching 10.5%, well ahead of growth targets set by Beijing in March of 8%.

Minister Li Yizhong reiterated China’s success, with the economy beginning to recover in March & now recording six months of consequential growth, as a testament to the early & vigourous stimulus plan put in place by central government. October’s figures show that the economy has rebounded to pre-financial crisis levels of June 2008, indicating that China is enjoying a V shaped economic recovery.

However, this was surprisingly, caveated with commentary that indicate that Beijing is not entirely convinced that completely plain sailing is ahead. Although Chinese companies are becoming more profitable with increasing export orders, there has still been stagnant inward investment within Chinese industry & Li warned that some companies may be faced with operational bottlenecks in early 2010.

Li said China must continue in its efforts to restructure the domestic economy by focussing on innovation & technology investment. Particular emphasis being given to energy conservation, cutting down greenhouse gas emissions & integrating technology into backward industrial sectors.

Last week, Chinese ETFs traded on the NYSE, FXI & HAO along with close end fund CAF had a pretty torrid time. With a view to this week, we can already see the positive figures in China helping Asian stocks in general, with the S&P Asia 50 Index climbing 1.4% & the MSCI Asia Apex 50 recording a 1.8% increase. There are signs that this may follow through into Europe, with Frankfurt already showing a 1% jump & London following suit on the FTSE 100.

Looking at my own personal favourite Chinese equities that trade as ADRs :

Chinese telco stocks have warmed back up after a non-descript performance last week; China Mobile (CHL), China Unicom (CHU) & China Telecom (CHA) have all advanced in line with the general market.

Materials are also back in the frame (thankfully) ; Aluminum Corp (ACH) enjoying 2.6% gain in Shanghia, with the Hong Kong stock recording a 2.9% jump on the day. ACH had a pretty lacklustre time of it last week, declining 0.65% over the 5 day trading session, so personally am happy to see it regain that & more in a single days bullish trading.

Amongst perennial favourite internet stocks; Shanda Interactive (SNDA) is having a bright start in Frankfurt, adding a little more than 1% in eraly trading, whilst internet portal provider Sohu (SOHU) looks as though it may be shaking off it’s month long malaise by now turning positive 0.5% in Frankfurt.

Some others that I’ll be certain to have a look at pre-US market are Tri-Tech (TRIT), Changyou (CYOU) &  Yingli Green Energy (YGE) which is off to the races in Frankfurt, gaining 3.3%

Potentially the most telling subject in the above commentary from Chinese officials is their ongoing requirement to stabilise both energy production & also emissions. For me this means I’ll be putting some focus into Chinese solar & renewables this week.

Happy trading

Over the last two years, a slew of financial and economic crises have caused many U.S. investors to re-examine traditional asset allocation strategies that put the vast majority of their assets into U.S.-listed securities.

As these investors have looked to move beyond their borders, Brazil has been one of the most popular destinations, identified as an emerging market candidate likely to continue along the path to developed status.

For investors looking to gain exposure to Brazil, two of the most efficient options have been the iShares MSCI Brazil Index Fund (EWZ) and the Market Vectors Brazil Small-Cap ETF (BRF). While these products both offer exposure to Brazilian equities, they are more different than alike, focusing on completely different parts of the economy. This leads to a very different risk and return profile, as evidenced by year-to-date share price performances.

Over the last year, EWZ and BRF have both trended sharply upwards, spurred by strong demand for natural resources and increasing demand for consumer products within Brazil. But these ETFs have his a rough patch in the last weeks as concerns about the sustainability of the global recovery have spooked some investors away from emerging market investments. Between mid-May (when BRF was launched) and last week, EWZ had gained about 54% and BRF was up more than 85%. But both funds have plummeted in recent sessions, dropping 10% or more in the last 3 days.

These sharp declines are due primarily to regulatory and external factors rather than weakness in the Brazilian economy. Last week, the government implemented a 2% tax on foreign investment in an effort to prevent the currency from appreciating too quickly against the U.S. dollar.

Comparing Brazil ETFs

As the names of these funds (and the above table) suggest, there is very little overlap in the holdings of these funds. EWZ focuses primarily on mega cap and large cap companies (energy giant Petrobras accounts for more than 20% of total holdings), while BRF invests exclusively in small-cap firms.

While this leads to a difference in the size of underlying holdings, it also produces a sharp contrast in sector exposure. As shown below, BRF is tilted more heavily towards the consumer discretionary and industrials sectors, while maintaining no exposure to energy companies.

Many investors clearly remain bullish on Brazil, as these ETFs have started to rebound after the irrational selloffs that occurred earlier in the week.

Some great news for investors who can only buy domestic based products: After the successful launch of Van Eck Global Brazil Small Cap earlier this year, a similar product is now slated for India.

I am very excited about this, as one of my pet peeves has been the lack of mid-sized or even smaller type ADRs listed in US markets for either Brazil or India. You can throw a dart and hit a Chinese small or mid-cap, but have to dive under piles of hay looking for Brazilian / Indian needles.

No symbol yet, but per IndexUniverse.com:

* Van Eck has registered with the SEC a new exchange-traded fund that provides investors with exposure to India’s smaller companies. The Market Vectors India Small-Cap ETF will replicate the performance of the Market Vectors India Small-Cap Index.
* The prospectus did not list fees for the fund, although it did point out some of the risks. The new fund will invest in the more volatile side of India’s already volatile equities market, holding small-cap names with limited liquidity. Still, India has been a hot market for investors over the past year, and the new small-cap fund is likely to appeal to some.
* Van Eck has been targeting small-cap international as a new area for growth. Its Market Vectors Brazil Small-Cap ETF (BRF) has nearly $520 million in assets.
* There are three India-focused exchange-traded products on the market. The PowerShares India (PIN) ETF and the iPath MSCI India Index ETN (INP) both focus on large-cap companies. They have tallied returns year-to-date of 71.6% and 90.6%, respectively, according to Morningstar. The WisdomTree India Earnings Fund (EPI) dedicates nearly 20% of its portfolio to mid-caps, with the remainder being primarily large- and giant-cap offerings. The fund has posted year-to-date returns of some 88.2%.

We were huge proponents of the Brazilian Small Cap fund (our only mistake was not buying it in June) because the only comparable index product was a large cap offering that was extremely exposed to 2 companies – Petrobras (PBR) and Vale (VALE). Excellent companies, but if I want them I can go buy them. The small cap ETF is a lot more consumer oriented and offers countless stocks we can not buy here.

In the Indian space there are now three major ETFs (ETNs) which were an improvement over the two closed end funds I traded for years. In fact, we used the archaic ‘The India Fund’ here in our portfolio in 2007 and early ‘08. Reading that post in March ‘08, I had the same complaints then I have now.

For those of us “India bugs” out there, we’ve had very limited choices to invest in India. Due to a lack of individual companies listed on US exchanges I’ve been using The India Fund (IFN), which is a closed end fund

The three newer ETFs are generally very heavy on large caps and we see the same name over and over: Reliance Industries, Infosys (INFY), etc. In fact all three of the newer ETFs / ETNs have those two companies at a (roughly) combined 20% of the instrument; that’s like buying GE and IBM  as 1/5th of your exposure to the US.

There are even fewer Indian companies on US exchanges than Brazilian. We’ve simply been using the two major banks (HDFC (HDB) and IBN) as our exposure, with an occasional foray into base metals stock Sterlite Industries . Aside from the “IT / outsource companies,” I don’t think there are more than 10 other Indian stocks available.

This is a very good move, and we’ll see if the small caps (over time) diverge from the larger caps. Generally more growth (and risk) should come on the lower end of the size scale. Last I checked on how the two Brazilian ETFs were doing, the newer small cap had been trouncing the large cap.

On a side note, India has been acting a little tired lately. As with Brazil, I’d really like to see some correction after a huge run in 2009. Maybe we can only ask for pullbacks to the 50-day moving averages in this era of central bank largess.

With the weakness in Brazil the past week, we are going to take this opportunity to begin a long-term stake in

We highlighted this name in the summer under $29 [Jun 2, 2009: Market Vectors Brazil Small Cap (BRF) - a New ETF for Exposure to Brazil] It was a new ETF, so we were not ready to jump in, but it has had a great run, and has enough volume on a daily basis to show others are interested in it as well. Obviously if the dollar corrects in the weeks to come, foreign exchanges will take a hit blah blah blah.

But this just might be our favorite market on the planet right now, and with the stopping out of most of our only-Brazilian position Wednesday, it’s a good place to begin a stake. We’ll start modestly with a 1% stake, and if there is weakness in the coming months look to add – eventually I’d like to make this a large weighting in the fund.

I’d like to be a buyer in scale somewhere in the lower $30s if afforded the opportunity in the months to come. I am not using any sort of technical analysis or “trading” it, we’re wanting to build a core position here for the very long run.

For now, we’ll get started in BRF (NYSE: BRF) with a buy at the open…

Mark is a self taught private investor who operates the website Fund My Mutual Fund; a daily mix of market, economic & stock specific commentary.The origin of the website is to leverage the power of the internet in developing a transparent track record to attract investors for his potential “long/short” mutual fund.