Going by theie recent performance, Goldman Sachs’ planned ETF tracking the 50 most popular hedge fund stocks might be better shorted than purchased. Retail investors can exploit any period of outflows from the hedge fund industry:
Archive for the ‘ETFs’ Category
Here’s something that I dug up from my archives of unused stuff. This praise of CPF appeared in 2014 at https://www.drwealth.com/2014/10/20/3-steps-retire-singapore-like-bogle/?utm_medium=DISPLAY&utm_source=OUTBRAIN&utm_campaign=NOV2014&utm_content=ARTICLE7_RETIRE
“I have been blessed with a fabulous defined retirement plan”
Like all working Singaporeans, I contribute to CPF (Central Provident Fund), our mandatory national social security plan. CPF is made up of 3 separate accounts: Ordinary (OA), Special (SA) and Medisave (MA). Each month when I am working, I make the maximum possible contribution to CPF and eventually when I retire, CPF will pay me back a monthly annuity income. My OA had been used to pay for my housing mortgage, but SA remains untouched, and my MA pays for medical insurances.
Each year, I also contribute the maximum $12750 into my SRS (Supplementary Retirement Scheme) account. This voluntary contribution must be done with cash and provides a tax relief that reduces my tax bill. SRS is a form of forced savings as early withdrawal from the account attracts penalties.
Unlike the CPF that pays a risk free 2.5% to 5%, the SRS pay a very low interest, so I invest my SRS funds for higher yields. I sink my SRS money, using a RSP (regular savings plan), into the STI ETF (Straits Time Index exchange traded fund). What happens is that by the end of each year, I will contribute the maximum $12750 into my SRS account, and in the following year after my contribution, $1000 will be deducted every month automatically and bought into the low cost index fund, the STI ETF. In this way, the process is automated and I avoid timing the market too.
I treat my CPF as a form of bond, as it pays a decent risk free rate. The OA pays 2.5%, while the SA and MA pays 4%. There is an additional 1% paid to the first 60000 dollars. In the long run, with the magic of compounding interest, the amount in my retirement account can be significant. Contributing to my SRS gives me a tax saving and I do not actively manage my investment of the SRS money, as I feed them into the Singapore stock market automatically and regularly with a RSP. Together, my CPF and SRS plans will ensure that I will have 2 strong pillars for my retirement planning.
Re his faith in STI ETF, it’s clear that Dr Wealth does not subscribe to the Econoist and FT (Too poor isit?). There have been some articles quoting research that indicates that shares may not be the best long term. Example: investment http://www.economist.com/blogs/buttonwood/2016/01/investing
As of February 2013, the longest period of negative real returns from US equities was 16 years. But it was 19 years for global equities (and 37 for world ex-US), 22 for Britain, 51 for Japan, 55 for Germany and 66 for France. Such periods are much longer than most small investors would have the patience to wait.
Another way of looking at the same issue is whether equities beat bonds over the long term; whether the risk premium is really delivered.
The answer is not really.
Fronm NYT Dealbook
RISKY STRATEGY SINKS SMALL HEDGE FUND At the height of the 2008 financial crisis, investors would have had a gain of more than 600 percent, according to projections in investor documents for the new hedge fund, Spruce Alpha. But the fund, which started in April 2014, has failed to turn recent market turmoil to its advantage and has lost investors 48 percent of their money, Alexandra Stevenson and Matthew Goldstein report in DealBook.
The under-$100 million fund, which was managed by the $1.5 billion Spruce Investment Advisors, has moved its positions into cash, a person with knowledge of the fund said. The fund has told investors that they can redeem what remains of their money.
This sudden reversal of fortune at Spruce has highlighted the way hedge funds rely heavily on exchange-traded funds and derivatives to profit from short-term turmoil in the stock markets, and the way some use back-tested data to market to their investors.
Back-tested results in hedge fund marketing materials have long drawn scorn from some in the hedge fund world. They are typically recreated with the benefit of hindsight, making it easier for a fund to post hypothetical good results.
It is not clear exactly what caused the big losses in August. Spruce Alpha used a sophisticated strategy that involved derivatives to amplify returns from trading in E.T.F.s. The strategy seeks to make money off stock market volatility.
Trading in E.T.F.s has become controversial with big-name investors blaming them for the violent swings in the market and Laurence D. Fink, the chief executive of BlackRock, which sells more traditional E.T.F.s, warning that E.T.F. strategies that rely on derivatives could blow up.
The tests at Spruce Alpha had apparently not simulated a situation like Aug. 24, when some E.T.F.s seized up in the first few minutes of trading.
Todd Rosenbluth, director of E.T.F. research for Standard & Poor’s Capital IQ, said leveraged E.T.F.s were an inherently risky strategy that is more akin to “gambling than investing.”
The rise in inter-bank rates (which impacts mortgage rates) here is part of the chain effect of fear of a Fed hike. The mkt believes that there is a 28% chance that the Fed rate will go up i.e, 70%8 believes it won’t be raised tom. So if it goes up and markets tank read this
Why financial markets are nervous about Fed’s decision tom (from NYT Dealbook).
INVESTORS HOPE FOR SMALL RIPPLES AHEAD OF FED RATE DECISION On Thursday, the Federal Reserve could increase interest rates for the first time in more than nine years. It may still hold after a violent downturn in global stock markets last month, but this moment has long been dreaded on Wall Street, and investors are hoping it won’t unleash too much turmoil, Peter Eavis writes in DealBook.
History shows that booms financed with cheap money often leave the financial system weaker, not stronger, and the fault lines become obvious when the Fed starts to tighten monetary policy.
In theory, a small increase in interest rates should not be enough to wreak havoc, but some analysts have a darker view of the weak links in the system. They say financial markets have funneled trillions of dollars intoinvestments that will prove unsustainable when interest rates go up.
And the signs of excess are everywhere. Technology companies have been able to raise huge sums even before they tap into the public markets. Debt markets have appeared overly eager to lend. Low interest rates mean investors more willing to buy stocks at historically high valuations and companies are able to borrow money cheaply to buy back their own shares and bolster earnings.
Doomsayers think these activities have continued for so long that companies are more vulnerable to a slight increase in interest rates.
However, even gloomier analysts have predicted a great reckoning for years and it has not yet happened, Mr. Eavis notes. The new restraints on Wall Street and the housing market have so far prevented a resurgence in the toxic real estate lending that occurred a decade ago.
Corporations’ borrowing costs are no cheaper when accounting for inflation. Since the end of 2008, the average, inflation-adjusted yield on corporate bonds of moderate credit risk has been 4.1 percent, compared with 3.94 percent for most of the postwar period.
The Fed’s policies also appear to have prompted a surge in lending that is more stable than the securities markets under higher interest rates. Buybacks are not certain to become less attractive, but if they do, it might prompt executives to invest spare capital in operations in an effort to increase productivity.
Yet fears about the markets themselves remain. High-frequency trading has ballooned over the last decade. Firms using automated trading account for about half of all trades in the market for Treasury Securities. Exchange-traded funds are a major force in the stock market.
E.T.F.s, whose shares are supposed to be closely tied to the value of their underlying assets, have created concerns recently. On Aug. 24, shares in some funds briefly fell to prices well below the value that they would have commanded had they stayed in line with the fund’s underlying holdings. An investor selling at that discount might take an unnecessary loss.
If heavy selling is widespread across many markets, the smooth functioning of these products and markets may be tested.
These charts from FT tell in charts what the NYT Dealbook describes in words below:
CHINA MOVES CLOSER TO INCLUSION IN MSCI INDEX Though MSCI decided on Tuesday that it would hold off on adding Chinese domestic shares to its emerging market index, China is moving closer to joining the global benchmark, Neil Gough writes in DealBook. In its decision, the index company cited concerns over China’s cumbersome investment quotas, restrictions on money flows, and questions over the legal status of foreign shareholders. But MSCI said that in the coming months it would work with China’s main securities regulator to address the company’s concerns and that it may make a special decision to include Chinese stocks, also known as A-shares, in its benchmarks before the next scheduled annual review, which takes place a year from now. “It is clear from MSCI’s announcement today that it is only a matter of time before A-shares are added to global indexes,” Louis Lu, a portfolio manager at CSOP Asset Management, which invests in mainland shares, said in an email.
“The decision – and the waiting period – reflects the changing face of China’s financial system,” Mr. Gough writes. Over the last two years, the country has embarked on a series of overhauls to the financial system, but foreigners remain wary because they continue to face challenges in gaining access to the Chinese markets. Mr. Lu said that the delay by MSCI is likely to motivate the Chinese government to “accelerate the opening of its capital markets and provide greater accessibility to international investors in the near term to increase the chance of inclusion as soon as possible.” If China can assuage MSCI’s concerns, analysts estimate that the country is likely to see several billion dollars of new investment pour in initially, with that figure rising to more than $200 billion over time.
BLACKROCK’S NEW BREED OF E.T.F. Exchange-traded fund have been a hit with passive investors for years. Now, BlackRock is introducing a new type of bond E.T.F. that aims to “blend the best of active investing (security selection) with index investing (cost and consistency),” Landon Thomas Jr. writes in DealBook. Of the financial inventions in the history of Wall Street, few have been as successful as E.T.F.s, which hardly existed 15 years ago and now, at $2 trillion, make up close to 15 percent of the mutual fund industry.
BlackRock’s iShares division has become a crucial profit driver for the fund company, accounting for close to a quarter of its $4.6 trillion assets under management. “The rush into E.T.F.s has come at a time when the performance records of mutual fund portfolio managers, especially on the equity side, have been poor,” Mr. Thomas writes. According to Morningstar, 74 percent of equity mutual funds trailed their benchmark index last year. For that reason, the bulk of E.T.F. flows have been into large fundsthat track stock indexes. Bond E.T.F.s have also grown in size in recent years, though the numbers have been smaller.
BlackRock’s new fund, called United States Fixed Income Balanced Risk, will invest in an equal split of corporate bonds, which will benefit if rates spike upward, and Treasury securities, which will protect the fund if rates fall. “Because these funds target a specific area of demand in the market but follow an index, they are seen by their champions as joining the best aspects of active and passive fund management,” Mr. Thomas writes. “Yet because the cult of the bond manager still holds sway, there have been few if any quasi-active bond funds that have thrived.”
Examining recent price trends, India has stabilized in dramatic fashion following its dismal performance in 2013. With superior demographics, a skilled work force, and pro-business leadership, India could prove to be an excellent growth engine over the coming decade. However, investors should also bemindful of the higher than normal price volatility and look to hold any new investment with a long-term viewpoint.
Circling the globe and focusing in on to the Pacific Rim, Indonesia has had a stellar year following a major decline of over 20% in 2013. The Market Vectors Indonesia (IDX) is currently up 26.5%, yet appears to still have a lot of room to run to reach its all-time highs. This ETF is weighted primarily towards large and mid-cap financials, consumer staples, and consumer discretionary stocks.
Indonesia stands to build on excellent GDP growth rates that exceed 5% on a year over year basis. Two thirds of their economy is driven by domestic consumption, which could continue to perform well given their stable democracy and large middle class. Indonesia also boasts one of the lowest debt to GDP percentages in greater Asian region, which should allow the government to continue its key investments in infrastructure.
Finally, stocks in the Philippines are beginning to show signs of life, with a year to date return of 23.4%. The iShares MSCI Philipines (EPHE) is dominated by 42 large cap stocks primarily centered around the financial, industrial, and telecom sectors.
Although the Thai protests last year pushed the region into a state of disarray, the Philippines has managed to overcome those fears and has held up relatively well. The Filipino economy is poised to continue its 2014 run on the back of robust economic growth, increased tourism, and a strong fiscal balance sheet.
In addition, the Filipino peso has been very strong relative to the U.S. dollar and other emerging market currencies. As a result, GDP growth has exceeded 6.5% over the last two years. These two factors bolster EPHE’s chances of trending higher in the near-term, even despite the country’s moderate levels of wage inequality and foreign investment restrictions.
Three-month flows into Singapore exchange-traded funds (ETFs) are on course to reach the most since Markit Ltd began tracking the data in 2009. Investors took money out of the stock and bond funds for five straight quarters through June, the Markit data show. The benchmark Straits Times Index has rebounded 13 per cent from this year’s low on Feb 5 and Singapore’s sovereign debt returned 3 per cent this year.
Singapore shares are the most attractive among Asia ex-Japan and emerging-market equities, beating Hungary, Chile and China, according to a Morgan Stanley study using measures from earnings to corporate governance and technical indicators. The investment bank predicts companies in the South-east Asian city-state will beat consensus earnings forecasts after the economy expanded at a quicker-than-expected pace in the second quarter.
“The Singapore market is somewhat undervalued for a pretty strong growth environment with positive earnings revisions,” said Jonathan Garner, Hong Kong-based head of Asia and emerging-market strategy at Morgan Stanley. “We also like the fact that the market scores very highly in terms of our political risk and corporate governance model.” BT on Tuesday)
Of course Mah Bow Tan http://www.tremeritus.com/2014/05/01/netizens-agog-at-mah-bow-tans-fortune/and other millionaire ministers (present and retired) are not among these ‘lesser mortals”..
EFTs are created in the US to enable individual retail investors the ability to access hedge funds, long-short strategies and other areas of the market previously off limits. Here are some of the best picks.
The $700 million IQ Hedge Multi-Strategy Tracker ETF (NYSE:QAI) could be an interesting starting point. As one of the oldest alts ETFs, the fund is basically a hedge fund in one ticker. QAI hopes to replicate risk-adjusted returns of hedge funds using various hedge fund investment styles. It does this by using other liquid ETFs. Current top holdings include the Vanguard Total Bond Market (NYSE:BND) and PowerShares Senior Loan (Nasdaq:BKLN). So far, QAI has managed to provide consistent returns since its inception. Another broad hedge fund style ETF choice could be the ProShares Hedge Replication ETF (NYSE:HDG).
The biggest category of alts fall under the managed futures banner. These strategies take advantage of price trends across different futures contracts including commodities, currencies and stock index derivatives. The WisdomTree Managed Futures Strategy (Nasdaq:WDTI) tracks the Diversified Trends Indicator- which is the benchmark managed futures index. So far, performance for WDTI has been pretty poor as commodities have fallen by the wayside and stocks have rallied. However, that highlights WDTI’s non-correlated status.
Finally, market neutral or absolute return strategies could be winners as volatility returns to the market. The new First Trust High Yield Long/Short ETF (Nasdaq:HYLS) goes long on junk bonds while shorting treasury bonds to profit from the spread and reduce interest rate risk, while the Credit Suisse Merger Arbitrage ETN (Nasdaq:CSMA) uses M&A to profit. CSMA seeks to gain from the spread between when an acquisition is announced and the final purchase price is made. Both funds won’t “hit it out of the park,” but will deliver consistent returns for portfolios.
(*Terms and conditions apply)
Only problem is that most of it is via capital appreciation i.e. must sell to get the income.
While our CPF ordinary account is getting a miserly 2.5% that is getting beat by inflation.
Although we can invest amounts above $20,000 in the CPF ordinary account into approved stocks and unit trust, this rule puts a damper on everyone’s CPF accounts, especially those who are starting to work, or those whose pay is low and those who are not investment inclined.
More important is the fact that just the average dividends given by the STI ETF alone will have beat the 2.5% given by the CPF.
The reply by our government that the interest rate is low because our currency is strong is pure hogwash. If you are using the CPF funds to invest all over the world and boasting that you are getting investment returns that is on par or beat that of Warren Buffett’s Berkshire Hathaway, that explanation is laughable.
So why not just put all the CPF funds into STI ETFs, get dividends higher than 2.5%, have a more than even chance of getting capital returns with dividend as high as the 8.4% achieve over the last 10 years?
This is one example of the nanny state trying to be too clever.
[T]he buyer of the exchange traded note takes on its investment risk along with a big barrel full of counterparty risk, too. And perhaps some market or liquidity risk as well, as we’ve seen in recent days.
In short, an exchange traded note can be seen as a total return swap, sold to retail investors, that lacks all of the regulatory innovations that have developed over the past few years.
Tan Kin Lian, Fisca and yrs sincerely are strong advocates of investing via low-cost ETFs. Hey we not that smart: Warren Buffett advises retail investors to buy low-cost index funds. ETFs are a form of index funds.
But it’s not a no-brainer, risk-free investment strategy. You still can lose money. This US-centric illustration shows why: It’s When You Start And When You Finish.
There are no easy answers when building an egg-nest for yr retirement. Buying life insurance packaged with an investing element is not an easy answer. It is expensive and often is not the answer to building an egg nest. The returns that the agent shows you are not guaranteed. They juz example leh.
Taz why Fisca and TKL advocate by term insurance and invest the rest in ETFs.
Sumething to think about if you are investing in equities for the long term, esp if you are doing it via ETFs or other low-cost index funds.
The only reason we invest in stocks is to earn more than we would get from cash or bonds. The amount you are supposed to earn by taking the additional risk of owning stocks is called the risk premium. If you don’t get paid more for taking the risk, you should put your money in bonds.
Over the last 207 years you got paid 2.5 percentage points more each year (on average) to invest in stocks than you did in bonds.
But you know what they say about statistics, right? In the real world, we have to deal with the fact that, like all averages, this one has some serious problems. Sometimes the risk premium is higher than 2.5 percent, and sometimes it goes away or is hugely negative (say, in a bear market).
Until recently, most of us thought of bear markets as those three- to five-year periods where you grit you teeth and hang on. But recent experience is more painful than that. Read the rest of this entry »
A leveraged ETF seeks to deliver a daily return that is a multiple of the return of the underlying index while an inverse ETF provides the opposite performance to the benchmark.
As these instruments reset every day, an investor who maintains a position for more a single day may find his exposure to potential losses if the market turns against him is larger than anticipated due to the effects of compounding.
Regulators have expressed their concerns about the suitability of leveraged and inverse for retail investors, particularly in volatile markets.
ProShares, which offers 19 leveraged and inverse ETFs benchmarked to a variety of regions and countries ,has a “Facts and Fallacies about Leveraged Funds”page on its website.
If you are investing in an ETF because you want to invest in a low-cost index fund (Warren Buffett thinks that most investors shld do so; and so does Tan Kin Lian and his Fisca), make sure you are not investing in leveraged and inverse ETFs.Invest only only in ETFs that are cash-based i.e. that do not use derivatives to track the indices.
The Straits Times Index (STI) is traditionally taken as the barometer of the S’pore stock market and the two ETFs that track it are the most liquid of the ETFs.
But should the STI and the two ETFs be as popular as they should be?
The reason is the presence of the Jardine Matheson, Jardine Strategic and Hongkong Land in the STI, which do not reflect the S’pore economy although apologists point to the operations of Cycle & Carriage Cold Storage, Guardian and Giant embedded within JM. While not peanuts, they are tiny in the Jardines scheme of things. And, to boot, they are illiquid and tightly held via cross holdings.
In theory, this means that the STI can be manipulated by judicious buying or selling of these counters. I stress “in theory” because there is no evidence that the STI has been manipulated by the trading of these three counters.
Sometime back, BT wrote,”The STI’s guardians last week defended Jardine’s inclusion using reasoning that went something like this: ‘we have a set of criteria for index inclusion that Jardine meets, so they’re included’.”
BT went on to to say, “Conveniently omitted is what those criteria are; more interesting is the question of why it is that Jardine Matheson, Jardine Strategic and Hongkong Land, which are in the STI, are not in the more widely-followed MSCI Singapore Free Index*?”. Add to that the FT S’pore Index.
*Widely followed by the pros but not the retail punters. The ETF based on this is illiquid, as it is expensive in dollar terms.
Princeton University economist Burton Malkiel, the author of “A Random Walk Down Wall Street”, a book that introduced many to the idea of investing via indexed-linked funds, sees value in Chinese shares, he tells the FT.
The FTSE-Xinhua index of the 25 largest Chinese stocks quoted in Hong Kong (”H” shares) is different [from the Shanghai “A” shares which he thinks overvalued], he says. This year, while the Shanghai has gained 53.8 per cent, the FTSE Xinhua is up 6.8 per cent – less than the S&P 500.
A “matched pair” study – comparing oil company CNOOC with ExxonMobil, its equivalent in the S&P, and so on – shows that FTSE-Xinhua price/earnings multiples are higher than in the S&P. But their rate of earnings growth is also higher. Crucially, their “PEG ratio” (the earnings multiple divided by the growth rate) is actually lower. So, Malkiel says, Chinese “H” shares are “moderately priced” compared to the S&P.
That is why he is buying China. But Malkiel is not selling his principles. He recommends investing in “H” shares via exchange-traded funds tied to the index – and not backing anyone who says they can beat the market. (Note there is an ETF traded here that tracks the FTSE-Xinhua index of the 25 largest Chinese stocks quoted in Hong Kong (”H” shares): DBXT FTChina25.)
Bubble or collapse in China?
He would not be surprised if China took a near-term hit. But long term, he believes it is the place to be … He is concerned about asset bubbles forming in real estate, banking, and in the stock market. “This is bound to occur wherever economies grow fast, and China’s expansion over the past decade has been unprecedented in the history of industrialisation.”
But will the economy collapse if any of these asset bubbles burst? “Absolutely not,” says Mr Malkiel. “They will correct, and restart because of the strength of the underlying story and the country’s extraordinary balance sheet.”
He does not think the country can continue to rely on export-led growth for both geopolitical and economic reasons.
“China potentially has the largest consumer market in the world, but its consumption is less than 40 per cent of GDP, a ratio that has not changed over the past decade. In the US, the ratio is about 70 per cent.”
But key reasons for low consumption remain extant: people need to save because there are virtually no government safety nets; and the one-child policy makes it difficult for children to adequately care for their parents.
The divide between the Haves and the Have Nots is what most worries Mr Malkiel. “There are seismic gaps in China between rich and poor, especially seen in the affluent east versus the impoverished central and western regions.”
This has already led to some unrest. Potential instability is a great danger. “But that’s why the government is developing infrastructure, education and a nascent social safety net,” he says.
He contends that a purchasing power-adjusted gross domestic product weighting, which adjusts for the renminbi’s significant undervaluation by this measure, suggests equity exposure of between 6 and 12 per cent.
So how does he (and his clients) invest in China?
As chief investment officer of China-focused AlphaShares, he is certainly helping investors find their way into the mainland. He has crafted a series of indices, some of which are trading as ETFs, that provide specific sector exposure (infrastructure, consumer, technology and real estate) and market exposure (all cap and small cap).
But his firm has also developed a set of private actively managed funds. These include a China-linked fund, which invests in non-Chinese companies that are directly benefiting from China’s growth, and an enhanced index fund – a broad-market fund with an enhanced weighting of small and value stocks. A buy-write fund aims to exploit Chinese market equity volatility by going long the highly liquid FTSE Xinhua 25 Index and writing options against it to pick up premium income. AlphaShares may take these funds public.
Mr Malkiel squares this active management with his long-term embrace of passive investing by citing the inherent inefficiencies in the way the Chinese market functions and is tracked. He believes unprecedented growth, trifurcated shares [mainland, Hong Kong and foreign classes], and volatility present special opportunities that cannot be captured through traditional indices.
Finally, it should be no surprise, he is a bull on emerging markets, and equities in general.
For a 40-something US investor with a family, he is recommending a portfolio with 80 per cent equity exposure. And he thinks half of that should be foreign stocks. He believes long-term investors will be best served with half of this international exposure being in emerging markets such as Brazil, India, and China.
He remains a believer that passive exchange traded funds are the most efficient means of gaining market exposure around the globe. His recommended 50 per cent US exposure is close to the MSCI All-Country World Index weighting of 44 per cent. However, he deviates significantly in his exposure to so-called EAFE countries, the developed world ex-US and Canada. He recommends 25 per cent EAFE exposure versus the global weighting of almost 41 per cent, in the belief that Europe and Japan will not experience significant growth in the coming years.
He departs from market-cap benchmarking even more materially in recommending 25 per cent equity exposure to emerging markets, twice the All-World Index’s weighting.
Mr Malkiel justifies this by citing a perceived fundamental shift in growth away from developed to emerging markets. “My portfolio strategy remains passive, I’m not picking stocks,” he says. “I’m adjusting for economic realities. And we see the need for such investment modification in China where a low free float [on which most indices are based] undercounts China by at least a factor of four.”
Investors can now gain exposure to shares listed on the Indonesia stock exchange and on the Shanghai and Shenzhen exchanges.
Two Mondays ago, db x-trackers listed an ETF tracking the MSCI Indonesia index on SGX. The ETF is Ucits III compliant. This means it is a product that can be sold to EU retail investors because it meets European regulatory requirements on risk management and operational procedures.
It has also launched an ETF on CSI 300, an index of leading Chinese stocks. This is also Ucits III compliant.
db x-trackers says its management fee is only 0.5%.
db x-trackers must be concerned abt the liquidity of these new ETFs because it took out an ad in ST telling people abt these products last friday.