Tag Archives: exchange-traded funds

ETF News, People Profiles

ETMFs vs ETFs

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As the exchange-traded fund marketplace continues to evolve, the recent introduction of “exchange-traded managed funds”, aka ETMFs, has opened Pandora’s Box for those who have embraced “traditional” ETFs because of their transparency, real-time pricing (vs “end of day price setting”) and the relative ease of diagnosing liquidity by interrogating bid-offer markets in the respective underlying components.  The ETMF construct is intentionally-designed to mask the underlying components because (i) the underlyings are subject to change subject to the active manager’s strategy and (ii) mitigate the risk of market participants ‘gaming’ the cash ETMF via arbitraging the underlying components.

The excerpt below is courtesy of the 2nd of a series of interviews conducted by PA-based ValueShares and insight provided by Mike Castino, Senior Vice President.

Background:

Mike Castino, Senior Vice President

Mike Castino serves as business development officer for the Exchange Traded Funds division. Mr. Castino joined U.S. Bancorp Fund Services in 2013 with more than 20 years of business development, relationship management, marketing, managerial experience, and futures/equity trading experience. Prior to joining U.S. Bancorp Fund Services, Mr. Castino worked for Zacks Investment Management as managing director of the Index Services Division. He also held the position of vice president of Institutional Sales for Claymore ETFs (now Guggenheim Funds) and was senior floor trader at the Chicago Mercantile Exchange for a major Wall Street trading firm. He is also serves as chairman and trustee of ETF Series Solutions, our ETF trust. Mr. Castino received his Bachelor of Arts degree in business management from Illinois State University and is Series 7 and 66 licensed.

Interview:

The SEC recently approved Eaton Vance’s application to create exchange traded managed funds, or ETMFs. What is your opinion of ETMFs? Will the mutual fund companies now rush to launch ETMFs, and pay licensing fees to Eaton Vance, or will we see mostly just Eaton Vance products?

Mike: ETMFs are a welcome step forward in the in the evolution of non-transparent ETFs. Mutual fund families concerned about the non-daily disclosure of portfolio holdings can benefit from this structure as well as the added ability to mitigate capital gains. Given these benefits, Eaton Vance believes their clients may benefit from this structure, and mutual fund families sharing this sentiment may also be candidates for licensing this intellectual property.

While widely viewed by the larger investment community as a hybrid of existing structures, a mutual fund and an ETF, the SEC defines ETMFs as a separate and new structure. This becomes critical to definitively understanding which regulatory agencies or SROs, such as FINRA, may be establishing guidelines for this new structure, and what these guidelines may entail. At this time it is unknown whether it will it be similar to existing policies and procedures, or if regulatory changes will be occurring in the future.

Are ETMFs good for the investor? Specifically, can you help us understand ETMF liquidity? ETMFs will be “non-transparent” in the sense that they will only disclose their holdings monthly, or quarterly with a lag, as with mutual funds. Yet, if Authorized Participants (market makers) don’t know what an underlying ETMF basket looks like, how will they be able to maintain tight NAV spreads via the arbitrage process, as they do today with traditional ETFs? Any insights?

Mike: The ability to buy/sell shares of the ETF during the day at traditional bid/ask pricing does not exist in in the ETMF structure. ETMFs will be priced at the ETMF end of day NAV, plus or minus a determined spread.

To illustrate, let’s assume you purchased an ETF and an ETMF with the same underlying portfolio holdings at 10 a.m. on the same day. At the time of the purchase, the ETF was bought for $25 and the ETMF was bought for the NAV of $25 plus $.01. After the purchase, the market rallies before the end of the day. You paid $25 for the ETF which settles later that day at $25.50. The ETMF NAV will also have gained that day, but since your ETMF purchase price is based on end-of-day NAV, your actual purchase price is $25.51 ($25 starting NAV plus $.50 gained in the rally plus $.01). Effectively, you did not participate in the rally even if you purchased the ETMF at the same time as the ETF. Likewise, if you sell out an ETMF in the morning in anticipation of a sell off, you still get the end-of-day NAV plus or minus pricing.

This in no way indicates a flaw in the ETMF structure or that they are bad for investors. Many buy and hold investors will like the fact that they get end of day pricing and may not be subject to an intraday premium or discount relative to the current NAV. This holds true for many long-term mutual fund investors who will now potentially benefit from the tax mitigation features of ETMFs. It may be only tactical investors who are looking to buy at the start of the rally and capture that price movement, who would not find it beneficial to purchase an ETMF.

Liquidity and effectively pricing the shares may be a concern for some market makers. The specifics of what will be known about the portfolio when disclosed in the create/redeem process and what may have to be “reverse engineered” during the trading day if the ETMF is making changes to its portfolio during the trading day may widen spreads and affect the depth of book. Regardless, a portfolio of highly correlated, liquid securities may help market makers more confidently price the fund. While this is my opinion, investors should consult a market maker for their professional opinion.

What do you think are the most important considerations in selecting key service providers (e.g., custody, fund administration, fund accounting, statutory distribution) for an ETF?

Mike: Selection of an experienced service provider is an operational necessity. The greatest operational and cost efficiencies can often be achieved by using a service provider who offers full service options inclusive of administration, accounting, custody, index receipt agent and distributor services. This service offering should be built on state-of-the-art technology for create/redeem order entry among the seamlessly integrated internal systems that provide necessary access and reporting capabilities for the client and capital markets participants.

Beyond these services, the ability to provide an existing multiple series trust in which you can launch your ETF(s) using your own relief or “rented” relief is very helpful to new clients.

Many ETF providers have struggled with the question of distribution. It can be hard to identify who is buying ETFs on the secondary market, and this creates challenges for salesmen, who can’t attribute a secondary market trade to specific actions they took to make a sale. How do you think the industry will ultimately solve this problem?

Mike: Many wirehouses may be able to provide this information to you for a fee. There are data vendors out there who offer limited, but useful, data in this area of ETF ownership information as well.

Many ETF sponsors pay their ETF wholesale teams based first on a share of “pooled commissions” from AUM gathering. Additional incentives/commissions may be paid based on success stories wholesalers can provide their managers. For example, if they have a particular wirehouse advisor or RIA team that invests heavily in an ETF or ETFs, they may be inclined to contact the manager regarding that wholesaler and the valuable assistance they provide.

Due to the exchange listed nature of ETF shares, and the fact that they are not “transactional” like a mutual fund or unit investment trust, there may never be a final solution. But the current system of sharing a portion and building a case for additional incentives based on hard work should never go out of style. ETFs require servicing after the sale and the best wholesalers are product experts who can answer questions about the ETF methodology and other vital ETF subjects such as creation/redemption, liquidity, and best execution.

ETF News

ETF Industry Growing At Rapid Rate; Assets Will Hit $5 Trillion By 2020

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MarketMuse update courtesy of ETF Trends’ Tom Lydon. 

The U.S. exchange traded products industry hit a major milestone last year, eclipsing $2 trillion in assets under management, but industry observers do not see that growth slowing. Rather, it is expected that ETFs will continue their exponential growth rate in the years ahead.

While it took nearly two decades for the ETF industry to reach $2 trillion in assets, it will not need nearly as long to get to $5 trillion, according to a new report by PwC. The PwC repots says the global ETF industry will reach $5 trillion in combined AUM by 2020.

“New types of indexing (also referred to as “smart beta”) represent a hotbed of product development activity with 46 percent of firms surveyed identifying this as the most important area of innovation. PwC expects this to continue for the near-term. Active ETFs (34 percent) and alternatives (29 percent) are also expected to be sources of significant ETF growth between now and 2020,” according to the “ETF 2020” report.

The rise of strategic beta ETFs has also played a significant role in boosting U.S. ETF assets. As of late August, assets under managements across smart beta ETFs totaled $350 billion, a 30% year-over-year increase. Much of that growth has been driven by institutional investors, including large money managers, endowments and pensions. The growth of these non-traditional ETFs has been exponential as smart beta ETFs accounted for just 19% of total industry assets at the end of 2013. [U.S. ETFs top $2 Trillion in AUM]

Some industry observers also see actively managed ETFs being a key driver of ETF industry growth in the coming years. For the week ending Jan. 16, U.S.-listed actively managed ETFs had a combined $17.24 billion in AUM with nearly half that total allocated to PIMCO and First Trust ETFs, according to AdvisorShares data.

While that is just a fraction of the overall U.S. ETF industry, increased demand for active ETFs and the potential for a more favorable regulatory environment could make actively managed ETFs a $500 billion asset class by 2020, according to a report by publishedSEI Investments last year. [Big Growth Seen for Active ETFs]

“In the U.S., institutional investors, including registered investment advisors, wealth management platforms, other asset managers, endowments and foundations are each expected to continue to expand their investments in ETFs between now and 2020,” said PwC.

Those comments jibe with data released last year by several major ETF issuers that show institutional investors are increasingly turning to ETFs.

Institutional investors continue to be key drivers of ETF asset growth, a theme that is expected to continue in 2015. In its 2014 U.S. Institutional ETF Usage Report, BlackRock (NYSE: BLK) notes the “results show that institutional use of ETFs is expected to rise across the board. This trend holds true for both existing institutional ETF investors and those who do not currently hold ETFs.” [Institutions Boost ETF Usage]

Fixed income and global ETFs are expected to be favorites of institutional investors this year. That prediction has proven accurate to this point in 2015 as three international ETFs and one bond fund rank among the top 10 asset-gathering ETFs on a year-to-date basis.

ETF News, Fixed Income

China’s Stock Connect Cooks Up ETF Plan: One from Column A, One From Column B

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MarketsMuse update courtesy of extract from BrokerDealer.com and Traders Magazine via Bloomberg LP

(Bloomberg) — China is considering allowing international investors to buy bonds and exchange-traded funds (ETFs) through the link between the Hong Kong and Shanghai bourses.

“We can offer more diversified products,” Huang Hongyuan, president of the Shanghai Stock Exchange, said through a translator at a presentation in Hong Kong on Jan. 20. “Perhaps we can move to ETFs or bonds; we can perfect further transaction arrangements.”

Since its launch last November, the link — dubbed Stock Connect — has only enabled investors to trade stocks listed on the major indexes in the two cities, with transactions capped at 23.5 billion yuan ($3.8 billion) a day. Including fixed income would give Hong Kong-based fund managers greater access to China’s 1.32 trillion yuan of exchange-traded bonds.

The proposal “is a progressive step for China to open up the capital markets,” Roy Teo, a Singapore-based strategist at ABN Amro NV, said in an interview in Hong Kong on Wednesday. “When the market opens up the difference between borrowing costs in Hong Kong and China would reduce.”

Government notes due June 2023 yield 3.49 percent in Hong Kong’s Dim Sum bond market, while similar-maturity securities in Shanghai pay 3.80 percent, according to data compiled by Bloomberg.

Valuation Gap

The valuation gap between dual-listed stocks in Shanghai and Hong Kong has widened since the Stock Connect opened on Nov. 17. The premium on mainland shares to those in Hong Kong was about 2 percent when the link began and ended last week at a three-year high of 33 percent, according to the Hang Seng China AH Premium Index.

China is loosening control of its currency and financial markets in an effort to attract foreign investment and increase global use of the yuan. The People’s Bank of China said Tuesday it will move forward with yuan capital-account convertibility and encourage greater cross-border use of the currency. The world’s second-largest economy needs its companies to diversify their sources of funding to mitigate borrowing risks.

To search for local broker-dealers across Asia, Brokerdealer.com provides a comprehensive database of regional brokers in China and surrounding countries.

For the entire story, please click here

ETF News, Tech Talk

Change is Coming: What to Expect With Bitcoin ETF

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MarketMuse update courtesy of Inside Bitcoins’ Kyle Torpey. 

Much of the bitcoin community is excited at the prospect of a bitcoin ETF due to the assumption that it could bring many new speculators into the market. After all, if everyone with access to assets traded on the NASDAQ can just as easily trade bitcoin in the same account as their other investments, it’s possible that more traditional investors may take a shot at the digital currency.

While there’s been plenty of attention on the possible Winklevoss bitcoin ETF, there hasn’t been much discussion on the effect the ETF could have on current bitcoin exchanges. Once traders have access to a regulated bitcoin ETF on the NASDAQ, why would they spend time trading on one of the frequently-hacked bitcoin exchanges?


Trading fees and unique trading options

I reached out to BTC China Senior Business Development Manager Greg Wolfson to get his reaction to the possibility of a bitcoin ETF becoming a reality in the near future. When asked what a traditional bitcoin exchange can offer that won’t be found with a bitcoin ETF, Wolfson was quick to point to zero-fee trading. The trend of offering free trading has become a popular way for new bitcoin exchanges to make a name for themselves, and this is something that simply cannot be offered by a bitcoin ETF.

When trading an ETF, you’re always going to have to pay brokerage fees and the expense ratio, which is used to pay the costs of operating the ETF. For example, GLD — on which the Winkless ETF is based — has a 0.40% expense ratio. You can bet that a bitcoin exchange will not charge you money simply for holding onto your bitcoins throughout the year — although leaving your bitcoins on an exchange for long periods of time is also not recommended.

“On the other hand, the the ETF will be regulated by the SEC and therefore, open to many types of institutional investors that are otherwise prohibited from investing in bitcoin.”

Wolfson went on to explain certain trading options that are unique to bitcoin exchanges in his full response on the matter:

“An ETF may best fulfill the needs of individuals who want to simply hold bitcoin, but exchanges still offer a diversity of trading options that set them apart. Zero-fee trading, derivatives, cross-trading with altcoins, and direct access to BTC, to name a few. On the other hand, the the ETF will be regulated by the SEC and therefore, open to many types of institutional investors that are otherwise prohibited from investing in bitcoin.”

Access to actual bitcoins

Direct access to bitcoins was another feature of bitcoin exchanges mentioned by Greg Wolfson. While you’re purchasing actual bitcoins on a traditional bitcoin exchange, such as BTC China, you’re only purchasing shares of assets owned by someone else when you buy an ETF. You cannot trade your ETF shares for actual bitcoins. If you’re looking for ownership over physical bitcoins rather than exposure to the bitcoin price, then a traditional bitcoin exchange — or even an OTC trade — will be a better option.

What about insurance?

Although Wolfson did not mention insurance in his comments regarding the bitcoin ETF, it’s possible that this could be another opportunity for bitcoin exchanges. As mentioned in a previous article, there is no insurance to be found for shareholders of the Winklevoss Bitcoin Trust (COIN).

As we’ve seen in the past — and as recently as a few weeks ago with the Bitstamp hack — thefts are a rather common occurrence in the bitcoin world. An exchange that decides to offer insurance for all deposits — outside of user error — could offer peace of mind to the paranoid trader who doesn’t want to worry about a possible MtGox fiasco. The only bitcoin companies that seem to be bragging about their insurance coverage publicly are Coinbase, Xapo, and Circle; none of which are useful for even moderately high frequency trading.

For the original article from Inside Bitcoins, click here

ETF News, People Profiles

ETF.com Announces Finalists for ETF Industry Beauty Pageant Awards; 25 Categories; 100+ Nominees

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“And the nominees are…” MarketsMuse update profiles ETF industry portal ETF.com annual awards for ‘Best Of’ across 25 different categories, with more than 100 nominees. Winnners will be announced at an awards dinner that will take place March 19 at Pier 61 in New York City.

Below please find the extract from the ETF.com announcement.

“….In recognizing the forces that support the growth of the ETF industry, each year at its annual ETF.com Awards Dinner ETF.com recognizes the people, companies and products that are moving the industry forward. The dinner takes place March 19 at Pier 61 in New York City.

The award selection process follows three steps:

  1. An open nominating process
  2. A “Nominating Committee” composed of senior members of ETF.com’s editorial and analytics components narrows the nominees to a maximum of five in each category
  3. A “Selection Committee” of independent ETF experts votes on the winners.

The nominees are:

Category 1: Lifetime Achievement Award

Awarded annually to one living individual for outstanding long-term contributions to ETF investor outcomes, whether from a position of media, regulation, product provider or investor. Previous winners are not eligible.

Nominee No. 1: John Bogle
From an untiring emphasis on the “humble arithmetic” of indexing, to the customer-owned structure of his brainchild, Vanguard, there’s zero doubt that Jack Bogle is perhaps the biggest reason fund fees are falling and getting lower. Even his cranky critique of the perils of over-trading ETFs is, in its way, laudable: He truly wants what’s best for investors.

Nominee No.2: Lee Kranefuss
You won’t find an executive with more ETF-specific “street cred” than Lee Kranefuss. His almost-evangelical belief that the future of investing belonged to ETFs has been crucial to the rise of the industry. Under his direction, iShares grew to be the biggest ETF issuer in the world, and the unrivaled breadth of the company’s product line serves as the perfect metaphor of the power of ETFs.

Nominee No. 3: Burton Malkiel
Burton Malkiel put indexing on the map with his 1973 book, “A Random Walk Down Wall Street.” An enthusiastic proponent of index–based investments and ETFs, this Princeton academic remains engaged in many realms of the investment business, not least at chief investment officer of Wealthfront, the biggest player in the new “robo-advisor” field.

Nominee No. 4: Gus Sauter
During his 25-year career at Vanguard, Gus Sauter saw the firm shift from upstart to the biggest mutual fund company in the world. Sauter’s emphasis on indexing, on thoughtful diversification in asset allocation and on encouraging investors to stick to their plans puts Sauter and his nearly decade-long stint as CIO at the very center of Vanguard’s spectacular rise.

Category 2: ETF of the Year – 2014
Awarded to the ETF that has done the most to improve investor opportunities and outcomes in 2014, by opening new areas of the market, lowering costs, delivering new exposures or otherwise creating better options for investors. There is no requirement on when this fund launched.

Nominee No. 1: Global X GF China Bond (CHNB)

As the first ETF to provide access to China’s onshore bond interbank market, CHNB opened up the third-largest fixed-income market in the world. The fund pulled in nearly $50 million in investor flows in 2014, and offered investors the opportunity to access a relatively high-yielding asset with low credit risk.

Nominee No. 2: PIMCO 25+ Year Zero Coupon U.S. Treasury (ZROZ | C-57)
2014 was supposed to be a year of rising interest rates. Instead, rates plunged, and funds on the edge of the duration spectrum like ZROZ returned nearly 50 percent. As the longest-duration US-bond ETF, ZROZ was well positioned to ride 2014’s surprise rate drop. With a 0.15 percent annual expense ratio, ZROZ allows cheap, efficient access to the longest-term U.S. Treasuries.

Nominee No. 3: Vanguard Total International Bond (BNDX | B-57)
Vanguard broke new ground in the ETF world by offering the first global ex-U.S. broad-market bond fund. While other global-ex U.S. fixed-income funds cover parts of the bond universe—sovereigns or corporates—BNDX covers the entire non-USD investment-grade bond market. Vanguard’s choice to hedge BNDX’s currency exposure reduces the number of risk considerations for U.S.-based investors. At 20 basis points, the fund is very well priced, and quite efficiently run. The fund pulled in more than $2 billion in net inflows in 2014.

Nominee No. 4: Vanguard Total Stock Market (VTI | A-100)
Among the 38 ETFs offering total U.S. stock market exposure, VTI stands out for best representation and exceptionally low costs. With nearly 3,700 constituents, VTI captures virtually the entire investable U.S. equity market. Better still, VTI actually costs less than its published expense ratio of 5 basis points, with an average actual tracking difference versus its index of just 2 bps. VTI covers the entire U.S. stock market, basically for free; it’s hard to argue with that.
Nominee No. 5: WisdomTree Europe Hedged Equity (HEDJ | B-48)
The only nonvanilla ETF to make the top 10 flows list in 2014, HEDJ has captured the attention (and dollars) of tactical investors looking to make a currency-hedged bet on eurozone equities. With the euro on the rocks, its ability to protect against falling currency meant it outperformed non-hedged European equity ETFs by 10-12 percent for the year. HEDJ attracted $4.9 billion of inflows in 2014.

Category 3: Best New ETF – 2014
Awarded to the most important ETF launched in 2014. Note: Importance is measured by the overall contribution to positive investor outcomes. The award may recognize ETFs that open new areas of the market, lower costs, drive risk-adjusted performance or provide innovative exposures not previously available to most investors. Only ETFs with inception dates after Jan. 1, 2014, are eligible.

Nominee No. 1: EMQQ Emerging Markets Internet & Ecommerce (EMQQ | B-48)

As amazing as emerging market funds like VWO, EEM or IEMG are, they do have some conspicuous holes, which EMQQ aims to fill. Investors who want to own all of the emerging markets cannot overlook EMQQ, which will give them access to Internet and e-commerce companies that are typically excluded from traditional indexes because they are listed on the New York Stock Exchange.

Nominee No. 2: First Trust Dorsey Wright Focus 5 ETF (FV | C-23)

FV is a perfect example of how flexible ETFs are. This fund qualifies as a catchy riff on the “smart beta” trend, putting into one convenient, dynamic and tradable fund-of-funds wrapper Tom Dorsey’s popular system of technical analysis. It was the fastest-growing new ETF launched in 2014, pulling in $1.2 billion in inflows.

Nominee No. 3: iShares Core Total USD Bond Market ETF (IUSB | D)

Broad-market bond funds that track the Barclays Aggregate overlook certain corners of the U.S. bond market: High-yield bonds are excluded from the Agg, for instance, as are many internationally issued bonds denominated in U.S. dollars. IUSB offers a broader take on the bond market, bringing extra yield to core bond exposure. It’s also cheap, charging just 0.15 percent a year in expenses.

Nominee No. 4: Market Vectors ChinaAMC China Bond ETF (CBON)

CBON offered U.S. investors access to Chinese debt issued in mainland China for the very first time. With the Chinese market rallying and bond opportunities looking thin elsewhere, this novel exposure is a welcome addition to the mix.

Nominee No. 5: PowerShares DB Optimum Yield Diversified Commodity Strategy (PDBC) This fund isn’t the first of its kind in the commodity space, but it is the cheapest, and that counts for a lot in a pocet of the ETF industry that remains relatively pricey. The fund allows investors to steer clear of cumbersome “K-1” tax forms reserved for futures while still enjoying futures-like exposure.

For the entire announcement from ETF.com, please click here.

ETF News

An ETF For The Mile-High Club

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MarketMuse update courtesy of Zacks.com from Nasdaq.

The U.S. aviation industry has been on cloud nine since the oil price succumbed to gravity.  Moreover, a pickup in the domestic economy, rising cargo demand, a boost to tourism and the subsiding Ebola scare put the industry in the top-performing category.  The sentiment around the sector was so bullish that Airlines rocketed to the highest level since 2001 in late December, per Bloomberg. 

Investors should note that the ETF industry was largely unable to reap the return out of this booming industry as Guggenheim closed the last airline ETF Guggenheim Arca Airline ETF (FAA) in 2013. Prior to that, Direxion Airline Shares ETF (FLYX) had also faced the same fate in 2011. However, to fill the void, a new airline ETF has been filed lately. The fund looks to trade under the name of U.S. Global Jets ETF (JETS) . 

The Proposed Fund in Detail 

The passively managed product intends to track the U.S. global Jets Index that considers worldwide airline companies, per the prospectus. The index attaches weight to the companies on the basis of the square root of their average daily volume seen in the trailing three months. The index looks to consider 25 to 40 airline stocks across the market. The product will charge 60 bps in fees. 

How Does it Fit in a Portfolio? 

The global aviation industry holds a steady outlook for 2015. The outlook is especially positive for the U.S. economy, with GDP growth gaining momentum. Consolidation benefits, growing travel demand and enhanced ancillary revenues also provide an impetus for growth. Other regions including the Middle East, Latin America & Africa and Asia-Pacific also hold promise. 

Several Gulf-based airlines continue to build up their positions within the global airline industry. Fleet development should improve over the coming years. Apart from the high demand from the oil rich Gulf nations, a major part of the fleet demand will be driven by China and India, and continuous expansion of low budget carriers around the world. 

If this was not enough, an unexpected plunge in oil prices turned out to be the real catalyst in propelling the industry. Airline profit outlook depends on fuel prices, the major variable component in the industry. The oil price drop of about 50% seen in 2014 is yet to turn around in 2015. In such a bullish backdrop, the upcoming airline ETF has every reason to be successful, if it gets approval. 

ETF Competition 

The road ahead for the proposed ETF is nothing but clear skies. The industry has long been waiting for such a product after the shutdown of the Guggenheim fund. While there are no direct competitors to the product, investors should note that two transportation ETFs, namely iShares Transportation Average ETF ( IYT ) and SPDR S&P Transportation ETF ( XTN ) have weight in the airlines industry. While IYT puts about 45% of its weight in the airlines, air freight & logistics sectors, XTN places about one-fourth of the fund in them. 

We expect the newly filed product to cash in on the underlying sector’s allure and find a solid following among investors. Nonetheless, the two transportation ETFs could eat into the proposed fund’s asset base because of the formers’ diversified approach to the transportation sector. Still, investors solely eyeing the global aviation industry would be satisfied by the proposed JETS ETF. 

 

ETF News

ETF Investors Have Regret Following the Swiss National Bank’s Announcement

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MarketMuse update courtesy of Tom Lydon from ETF Trends. This update acts as a follow up from one of yesterday’s posts.

Thursday’s biggest financial market headlines came courtesy of the Swiss National Bank (SNB), which opted to drop the franc’s peg to the euro, a move that sent the Swiss currency soaring and Swiss stocks to one of their worst one-day performances on record.

The CurrencyShares Swiss Franc Trust (NYSEArca: FXF) easily Thursday’s top performing non-leveraged ETF with a gain of over 17% on volume that was nearly 34 times trailing three-month daily average. SNB’s decision to do away with the franc’s euro peg was a surprise, particularly because it conflicted with recent rhetoric from the central bank, which indicated SNB was looking to defend the EUR/CHF peg.

Forex traders and ETF investors alike were caught off-guard.

“Data from the Commodity Futures Trading Commission released on Friday showed net short positions of 24,171 contracts on the Swiss franc, the largest since June 2013. Adding in 662 short option contracts gives a combined position of 24,833 contracts or $3.5 billion at the current rate of around 0.90 franc to the dollar,” according to Reuters.

Regarding ETFs, the iShares MSCI Switzerland Capped ETF (NYSEArca: EWL), the largest U.S.-listed Switzerland ETF, lost almost $27 million in assets since the start of 2015 heading into Thursday while FXF was light by almost $5 million. The First Trust Switzerland AlphaDEX Fund (NYSEArca: FSZ), a smart beta spin on Switzerland ETFs, had not lost or taken in any money since the start of the new year.

Those numbers are not staggering, but fourth-quarter outflows from Switzerland ETF paint a better picture of investors missing out on Thursday’s Swissie surge. In the last three months of 2014, investors pulled nearly $198 million from EWL and $113.5 million from FSZ.

With gold prices languishing and the dollar surging, investors also did not stick around to wait for a franc rally and pulled almost $10 million from FXF. Of course it is with the benefit of hindsight and few if any traders could see a 17% one-day move coming for a currency ETF, but investors that left equity-based Switzerland ETFs missed out on EWL surging nearly 4% and FSZ climbing 3.7% Thursday.

Some former gold ETF investors also missed. The SPDR Gold Shares (NYSEArca:GLD) lost $3.2 billion in assets last year and has bled another $115 million to start 2015, but a sustained rally by the franc could ameliorate that situation.

On Thursday, GLD, the world’s largest gold ETF, climbed 2.5% on more than double the average daily volume to reclaim its 200-day moving average for the first time since September.

For the original article from ETF Trends, click here.

ETF News

Issuers Get Pickier Over Which ETFs to Launch

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MarketMuse update courtesy of ETF Trends’ Tom Lydon.  

In 2014, just over 200 new exchange traded products launched in the U.S., more than double the nearly 90 that closed, but even with launches continuing to easily outpace closures, some major ETF issuers are getting choosy about the new number of rookie products they bring to market.

For example, BlackRock (NYSE: BLK), the parent company of iShares, the world’s largest ETF sponsor, launched 29 new ETFs in 2014, a number that matches the ETFs shuttered by the firm, reports Victor Reklaitis for MarketWatch.

The bulk of iShares’ closures came by way of an August announcement declaring 18 closures. Ten of those 18 ETFs, all of which ceased trading in mid-October, were target date funds. In early 2014, iShares announced the closure of 10 ex-U.S. sector ETFs.

Some of the more successful ETFs launched by iShares last year include the $146.1 million iShares Core Dividend Growth ETF (NYSEArca: DGRO), the $206.2 millioniShares Core MSCI Europe ETF (NYSEArca: IEUR) and the $140.3 million iShares MSCI ACWI Low Carbon Target ETF (NYSEArca: CRBN).

Increased selectivity by issuers when it comes bring new ETFs could become a more prominent theme as the battle for investors’ assets intensifies. Simply put, many new ETFs struggle out of the gates and go months if not years with nary a glance from advisors and investors. As of late December, 92 of the ETFs launched last year had over $10 million in assets under management and none of 2014’s crop of new ETFs came within spitting distance of the over $1 billion accumulated by the First Trust Dorsey Wright Focus 5 ETF (NasdaqGM: FV). FV debuted last March and by November had over $1 billion in assets

There are more than 7,500 U.S. open-end mutual funds, MarketWatch reports, citing Morningstar data, implying there is room for the U.S. ETF industry to grow from the current area of about 1,700 products.

One thing is clear: Different issuers are taking different approaches to new ETFs. For example, Vanguard, the third-largest U.S. ETF issuer, did not bring a new ETF to market in 2014 but still managed to add $75.3 billion in new ETF assets, a total surpassed only by iShares. Earlier this month, Pennsylvania-based Vanguard said it expects to launch its first municipal bond ETF early in the second quarter.

First Trust, one of the fastest-growing U.S. ETF sponsors, launched 15 new products last year, including FV.

For the original article from ETF Trends, click here.

 

ETF News

New Equity ETF Hopes to Combat Volatility

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MarketMuse update courtesy of Nasdaq’s Len Zacks.

2015 has started out week for the US equity market but Direxion has a plan to change that.

After delivering handsome returns last year, the U.S. equity markets have started the year on a weak note.  Slumping crude oil prices, strong dollar and global growth concerns with Europe fighting deflation, Japan still struggling in a recession and China losing steam, are weighing upon the market sentiment, leading to increased market volatility.

As a result, low volatility funds are gaining immense popularity as they provide improved risk adjusted returns in a choppy market. Given the trend, Direxion has recently filed for a product focusing on this niche segment

Below, we have highlighted some of the details of the newly filed product.

Direxion Value Line Conservative Equity ETF

As per the SEC filing, the fund seeks to track the Value Line Conservative Equity Index. The index consists of roughly 170 U.S. stocks that have been selected using Value Line’s proprietary Safety Ranking. The ranking methodology measures the total risk of a stock and its capability to withstand an overall equity market downturn relative to the other stocks in the Value Line universe which consists of roughly 4,000 stocks.

The total risk or volatility of each stock is measured through its Price Stability Score and Financial Strength rating. The Price Stability score for a stock is based on a ranking of the standard deviation of weekly percentage changes in the price of the stock over the past five years.

For the Financial Strength rating, a number of balance sheet and income statement factors like the company’s long-term debt to total capital ratio, short-term debt and amount of cash on hand are reviewed to assign a ranking.

Sector-wise, consumer staples and health care form a large part of the index.

How Does it Fit in a Portfolio?

The product could be an interesting choice for investors seeking to avoid market volatility but remain invested in stocks.  Low volatility products have proven beneficial for investors given their superior risk adjusted returns.

These funds have gained immense popularity in the past few months given increased market volatility on the back of global growth concerns, slumping crude prices and worries related to the timing of interest rate hike in the U.S.

For the complete article on Nasdaq’s site, click here.

 

ETF News

Egypt to Allow ETF Trading for the First Time

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MarketMuse update courtesy of Reuters.

Egypt prepares for the first ETF to be traded on their stock exchange for the first time ever on Wednesday, January 14. They hope that this will help gain more foreign investors and boost cash flow. 

Egypt’s stock exchange will allow trading in Exchange Traded Funds (ETFs) for the first time on Wednesday, as part of efforts to encourage foreign investment and boost liquidity.

ETFs are typically funds that track equity indexes, though they can also track commodities and other assets, with component stocks usually represented in proportion to the size of their market capitalization.

ETFs are traded like a stock and can allow investors to diversify their risks and reduce transaction costs.

The introduction of ETFs in Egypt comes amid a flurry of takeovers and share issues on Egypt’s stock exchange, signalling resurgent interest from international investors in a market looking to restore confidence after the turmoil unleashed by a 2011 uprising which ousted leader Hosni Mubarak.

The main stock index rose about 30 percent in 2014 and trading volumes have rebounded above levels seen in 2010.

“We are working on offering new investment vehicles to investors and in the long run, these funds will help to create liquidity in the market,” Mohamed Omran, chairman of the Egyptian Exchange, told Reuters.

“The funds will help investors reduce risk by investing in the market as a whole.”

The introduction of ETFs will also allow for the emergence of market-makers in Egypt for the first time, potentially boosting liquidity.

Egypt’s Beltone Financial Holding, which specialises in brokerage, investment banking and private equity, won Egypt’s first licence to operate an ETF on the Egyptian Exchange in April.

Its ETF is being launched with an initial value of 10 million Egyptian pounds ($1.4 million), according to Alia Jumaa, head of investment for the new fund.

For the original article from Reuters, click here

ETF News

Philippines Has Rising Star in the ETFs Market

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MarketMuse update courtesy of ETF Trends’ Todd Shriber.

After finishing lower for a second consecutive year in 2014, diversified emerging markets exchange traded funds are off to decent though not spectacular starts in 2015.

Off to a more impressive start than broader peers, such as the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) and the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO), is the iShares MSCI Philippines ETF (NYSEArca: EPHE). EPHE, the lone Philippines ETF, entered Friday with a 2015 gain of 2.6%, or nearly quadruple that of VWO.

In 2014, EPHE gained more than 22% while EEM and VWO each finished the year in the red. EPHE now resides less than 10% below its all-time high set in January 2013 and more gains could be on the way after stocks in Manila rose to a record during Friday’s Asian session.

Like India, the Philippines is getting a significant economic boost from lower oil prices because the Philippines is dependent on oil imports to help power one of Southeast Asia’s fastest-growing economies. Over the past six months, the U.S. Oil Fund (NYSEArca: USO) has plunged 51%, but the WisdomTree India Earnings Fund (NYSEArca: EPI) and EPHE have traded modestly higher over that period.

Investors are paying up to be involved with Philippine equities.

“Shares in the Philippine Stock Exchange Index are valued at 18.4 times 12-month estimated earnings, the highest since Nov. 26. The gauge has the highest multiple among Asia’s benchmark equity indexes,” reports Michael Patterson for Bloomberg.

The MSCI Emerging Markets Index trades at about 11 times earnings, but that did not prevent EPHE from hauling in $44.3 million in new assets last year. That is nearly 12% of the ETF’s current assets under management, indicating U.S. investors remain underweight Philippine equities. That may not be the case for long.

“The Taiwanese, Philippine and South Korean stock markets also warrant over-emphases on account of their stable political regimes, reliable policymaking climates and healthy economic prognoses,” said S&P Capital IQ.

For 2015, Morgan Stanley “said the Philippines was the best-positioned market due to its ample liquidity, strong forecast gross domestic product growth and low levels of credit penetration,” reports The Star.

A stronger U.S. dollar is helping Philippine stocks beyond lower oil prices. Foreign remittances are now worth more when converted into pesos, helping boost the local economy. EPHE allocates nearly 12% of its weight to consumer sectors.

In fact, the Philippines has already issued dollar-denominated bonds this year, becoming the first emerging market to do so. The Philippines can afford to do that because its external funding costs are low relative to other developing economies and the country has an investment-grade rating from all three major ratings agencies.

For the original article by Todd Shriber from ETF Trends, click here.

ETF News

Euro Exposure? Eurozone Bond ETFs In Advance of ECB’s QE

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MarketsMuse.com update courtesy of extract from Jan 6 ETF.com article by Dennis Hudacheck, with a look at Eurobond ETFs $HEDJ,$DBEU, $HEZU, $EZU, $DBEZ, $VGK, $FEZ, $DFE

All eyes are on the European Central Bank’s Jan. 22, 2015 meeting, as it’s no secret that ECB President Mario Draghi has been hinting at a large-scale quantitative easing program for some time.

There’s no guarantee the ECB will actually implement any such program in January, but the consensus seems to be that there will be some type of big announcement on that front sometime in the first quarter of 2015.

At the same time, the U.S. Federal Reserve is expected to begin raising rates in mid-2015. This opposing force between the world’s two largest central banks has strategists calling for a currency-hedged strategy to capitalize on a rising-equity/falling-euro scenario in Europe.

An Equity ETF Designed For A Weakening Euro For currency-hedged options, the $5.6 billion WisdomTree Europe Hedged Equity Fund (HEDJ | B-47) is by far the leading ETF in the space.

Despite its “Europe” name, HEDJ focuses exclusively on eurozone securities. That means that for better or worse, it excludes the U.K., Switzerland and Sweden, which account for roughly 50 percent of Europe’s equity market capitalization, combined.

More importantly, it carries a significant exporter bias, attempting to capitalize on a weakening-euro scenario. The dividend-weighted ETF does this by screening out any company that gets more than 50 percent of its revenues from within Europe.

This makes HEDJ geared toward investors with a strong bearish view on the euro. Naturally, the fund favors consumer sectors over financials compared with vanilla, cap-weighted European indexes (MSCI Europe IMI Index).

This now-blockbuster fund tracks its index well and trades more than $80 million a day at 3 basis point spreads, keeping overall trading costs very low.

‘Neutral’ Currency-Hedged Products Contrary to popular thinking, investors interested in currency-hedged Europe ETFs don’t necessarily have to be bearish on the euro. They might have a neutral view, and simply prefer a purer equity exposure by taking any currency fluctuations out of the equation.The Deutsche X-trackers MSCI Europe Hedged Equity ETF (DBEU | B-66) is also a leading ETF in the space, and takes a broader approach, including all of developed Europe, beyond the eurozone.

It tracks a cap-weighted index and neutralizes exposure to the euro, the British pound, the Swiss franc and a few other European currencies against the dollar. DBEU has more than $710 million in assets and trades with robust liquidity that’s sufficient for small and large investors alike.

For a neutral currency take on the eurozone, rising in popularity is the iShares Currency Hedged MSCI EMU ETF (HEZU), which literally holds the $7.5 billion iShares MSCI EMU ETF (EZU | A-63) with a forward contract overlay to neutralize euro exposure.

For the entire analysis from ETF.com, please click here

ETF News

Vanguard Files For The Company’s First Muni Bond ETF

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MarketMuse update courtesy of ETF Trends’ Tom Lydon’s 6 January story.

Vanguard, the third-largest U.S. issuer of exchange traded funds, has filed plans with the Securities and Exchange Commission to introduce the firm’s municipal bond ETF.

The Vanguard Tax-Exempt Bond Index Fund will be the firm’s first tax-exempt index fund and ETF. Pennsylvania-based Vanguard already has a substantial municipal bond footprint with about $140 billion in tax-exempt bond and money market funds, according to a statement issued by the firm.

Vanguard offers 12 actively managed municipal bond funds (five national, seven state-specific) and six tax-exempt money market funds (one national, five state-specific), according to the statement.

The Vanguard Tax-Exempt Bond Index Fund is expected to debut in the second quarter with three share classes – Investor Shares, Admiral Shares and ETF. The new ETF will have an annual expense ratio of 0.12%, well below the average annual fee of 0.49% on municipal bond ETFs, said Vanguard, citing Lipper data.

The statement did not include a ticker for the new ETF.

“For investors in high tax brackets, a high-quality, broadly diversified municipal bond fund or ETF can provide tax advantages as well as diversification from the risks of the equity market,” said Vanguard CEO Bill McNabb in the statement. “Vanguard is pleased to bring a low-cost index option to the municipal category as a complement to our lineup of low-cost actively managed tax-exempt bond funds.”

That jibes with Vanguard’s reputation for being one of the low-cost leaders in the ETF space. In December, Vanguard lowered fees on 12 of its equity-based ETFs, including 10 sector funds, moving the issuer into a tie with Fidelity for the least expensive sector ETFs.

Vanguard currently sponsors 13 fixed income ETFs, including the behemoth VanguardTotal Bond Market ETF (NYSEArca: BND). Home to nearly $24 billion in assets under management, BND was one of 2014’s top asset-gathering ETFs. Other Vanguard bond ETFs include the Vanguard Extended Duration Treasury ETF (NYSEArca: EDV) and the Vanguard Total International Bond ETF (NYSEArca: BNDX), two last year’s top performing bond funds.

Last year, investors poured a record $215.5 billion into Vanguard funds, including $75.3 billion into Vanguard ETFs. Including BND, four Vanguard ETFs were among the top 10 asset-gathering ETFs in 2014.

For the original story in ETF Trends, click here.

 

ETF News

Finally! Now You Know How to Play the Oil ETFs

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MarketMuse update courtesy of ValueWalk.

It’s the first (real) week back from holiday break, but the story is the same as it was before Christmas, and before Thanksgiving for that matter…. Crude Oil continues to fall like a lead oil filled balloon, falling below the $50 mark on Monday for the first time since 2009. It’s even gotten to the point of family and friends asking where we think Crude Oil will bottom at parties and dinners, getting our contrarian antennas perked up.

The million, or actually Trillion, dollar question is where will Crude finally find a bottom and bounce back? Fortune let us know recently that the $55 drop in Brent Oil prices represents about a Trillion dollars in annual savings.

Now, while some are no doubt betting on continued downside with the recent belles of the ball – the inverse oil ETFs and ETNs ($DTO) ($SCO) ($DWTI), the last of which is up a smooth 527% since July {past performance is not necessarily indicative of future results}. Others are no doubt positioning for the inevitable rebound in energy prices, thinking it is just a matter of when, not if. Crude Oil is back around $70 to $100 a barrel. And what a trade that would be. Consider a move back to just $75 a barrel, the very low end of where Crude spent the last 5 years, would be a 50% return from the current $50 level. It seems like that could happen nearly overnight without anyone really thinking much about it.

So how do you play a bounce in Oil?

Well, the most popular play, by size and volume ($1.2 Billion in Assets, $387 million changing hands daily), is no doubt the Oil ETF (USO). But is that really the best way to ‘play’ a bounce?

Consider that USO Is designed to track the “daily” movement of oil. What’s the matter with that? One would hope that the ETF closely matches the daily move of Oil, right? Well, yes and no. Yes if you are going to buy the ETF for one day, or even a couple of days; no if your investment thesis is oil prices will climb higher over an extended period of time. Because, and here’s where it gets tricky – USO’s long term price appreciation won’t match the sum of its daily price appreciations. How is that possible?

You see, the ETF works by buying futures contracts on Oil, and there are 12 different contracts in Crude Oil futures each year, you guessed it – one for every month. And while the so called ‘front month contract’ is trading near the number you see on the news every night ($50 yesterday), the further out contracts, such as 10 to 12 months from now, may already reflect the idea that Oil prices will be higher.

Indeed, the price for the December 2015 contract is $57, versus $50 for the front month. So there’s $7, or a 14% gain, already “built in” to the futures price. What’s that mean for the ETF investor? Well, if you are correct that Oil will rebound, and it does so, to the tune of rising 14%, or $7 per barrel, over the next 11 months; the ETF likely won’t appreciate 14% as well. It likely won’t move at all, because it will have to sell out of its expiring futures positions and buy new futures positions each month. This means it will essentially have to “pay” that $7 in what’s called “roll costs”.

This is why $USO has drastically underperformed the “spot price” of Oil over the past five years, with $USO having lost -39% while the spot price of Oil went UP 48%. It is like an option or insurance premium – a declining asset with all else held equal. Just look at what happened during the last big rally for energy prices between January 2009 and May 2011. That’s a 110% difference between what you thought was going to happen and what the ETF rewarded you with.

For the full article from ValueWalk, click here.

 

ETF News

ETF Industry’s 1st Deal for 2015: Nasdaq Acquires ETF firm Dorsey Wright

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MarketsMuse update courtesy of ETF.com’s Ollie Ludwig—

Nasdaq, the stock exchange company that’s also pushing deep into the world of indexing, significantly added to its index-provider profile by agreeing to acquire the technical analysis and ETF firm Dorsey Wright & Associates for $225 million in debt and cash on hand.

The transaction, which is expected to close in the first quarter of 2015, will make Nasdaq one of the biggest providers of “smart beta” indexes, Nasdaq and Dorsey Wright said today in a press release. The combined entity will bring together the 17 ETFs Dorsey Wright has its name on as well as Nasdaq’s 69 smart-beta ETFs focused mainly on dividend and income strategies.

Nasdaq Global Indexes will become one of the largest providers of smart-beta indexes, with nearly $45 billion in assets benchmarked to such benchmarks. A total of more than $105 billion is benchmarked to all Nasdaq indexes, the companies said.

The announcement of the transaction comes at a time when the world of smart-beta ETFs is all the rage. Inflows last year into such strategies were estimated to be twice that of flows into ETFs in general, based on the most liberal definitions of what constitutes smart-beta ETFs.

“Smart beta represents one of the fastest growing sectors within the ETF market,” Tom Dorsey, president of Dorsey Wright, said in the press release. “This deal will allow us to grow significantly, while continuing to create products and strategies that meet the needs of our clients.”

For the entire story from ETF.com, please click here 

ETF News

The US’s Deep Freeze Gives Temporary Boost to Natural Gas ETFs

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MarktMuse update courtesy of extract from ETF Trends’ Tom Lydon.

After natural gas futures dipped below $3 for the first time in two years, the commodity and related exchange traded funds are warming up on cold weather next week, but any gains may be brief as temperatures could remain above normal for the rest of the month.

The United States Natural Gas Fund (NYSEArca: UNG) was up 1.4% Friday whileiPath Dow Jones-UBS Natural Gas Total Return Sub-Index ETN (NYSEArca: GAZ)was 1.0% higher. Over the past year, UNG declined 28.6% while GAZ fell 20.2%.

NYMEX natural gas futures surged in early trading Friday but settled just shy of $3 per million British thermal units.

Natural gas futures were heating up from a 27-month low on speculation that a cold snap could stoke demand for  heating fuel next week. According to Commodity Weather Group, “a sizable chunk of arctic air” will cover the Midwest, South and East next week, reports Naureen S. Malik for Bloomberg.

However, while temperatures will drop next week, the weather will likely warm up and continue to weigh on natural gas prices after next week.

While the cold outbreak “is occurring on the anniversary of last year’s polar vortex big event, we do not expect it to reach those levels,” Matt Rogers, president of Commodity Weather, said in a note. “The other big story is the warmer pattern shift for the 11-15 day,” raising temperatures up to seasonal norms across most of the lower 48 states from January 12 to 16.

Additionally, supply remains robust due to new hydraulic fracturing techniques in shale oil beds, further weighing on natural gas prices through the season.

“We don’t look for this rally to carry above the $3 mark in today’s session despite some possible cold updates to the temperature views,” energy-advisory firm Ritterbusch & Associates said, the Wall Street Journal reports. “Production has been running at a near-record clip.”

For Lydon’s full article on ETF Trends, click here.

ETF News

Fed Does Walk Back On Leveraged ETFs; Now Endorsed in US Govt Study

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MarketsMuse editor note: For those not familiar with leveraged ETFs, before reading this special column, you’ll want to get up to speed with Investopedia’s defintion, otherwise, ETF industry experts and observers have new ammunition in which to debate the pros and cons of leveraged ETF products. If you find that your debate with peers becomes too spirited, you might change the channel and duel about the merits of shale oil fracking..

Leveraged and inverse ETFs, which some industry experts have labeled “Weapons of Financial Destruction” aka “WFDs” have come under heavy criticism as potentially exacerbating volatility in financial markets, are not the danger that critics have made them out to be, concludes a preliminary study from U.S. Federal Reserve researchers.

“..Leveraged and inverse exchange-traded funds (ETFs) have been heavily criticized for exacerbating volatility in financial markets because it is thought that they mechanically rebalance their portfolios in the same direction as contemporaneous returns. We argue that these criticisms are likely exaggerated because they ignore the effects of capital flows on ETF rebalancing demand. Empirically, we find that capital flows substantially reduce the need for ETFs to rebalance when returns are large in magnitude and, therefore, mitigate the potential for these products to amplify volatility. We also show theoretically that flows can completely eliminate ETF rebalancing in the limit.”  US Federal Reserve study, November 2014
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ETF News

European ETFs Look Promising for 2015

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MarketMuse update courtesy of extract from ETF Trends’ Tom Lydon.

European equities and related exchange traded funds could outperform in 2015, capitalizing on lower energy prices, an improved export outlook and potentially more European Central Bank easing.

For instance, the iShares MSCI EMU ETF (NYSEArca: EZU) and the SPDR EURO STOXX 50 (NYSEArca: FEZ) both focus on Eurozone countries.

Alternatively, investors seeking to capture Eurzone market exposure can also consider a hedged-equity ETF that will help diminish the negative effects of a depreciating euro currency. For example, the Deutsche X-Trackers MSCI Europe Hedged Equity ETF (NYSEArca: DBEU), iShares Currency Hedged MSCI EMU ETF (NYSEArca: HEZU)and WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ) hedge against the euro currency and would outperform a non-hedged Europe equity ETF if the euro currency continues to depreciate.

DBEU, though, takes a slightly broader approach to the European markets, including about a 40% combined tilt toward the United Kingdom and Switzerland. HEZU and HEDJ only cover Eurozone member states.

Wall Street analysts believe that European equities could be one of the best places to invest in 2015, reports Sara Sjolin for MarketWatch.

“Europe was a market ‘darling’ this time last year, then became a pariah,” economists at Morgan Stanley said in a research note. “[Now] we like European equities, (especially cyclicals) and European ABS.”

Mislav Matejka, chief European equity strategist at J.P. Morgan, even predicts that Eurozone stocks could outperform U.S. equities next year.

Specifically, the investment banks are pointing to three factors that will support the region: the ECB, a cheap euro currency and low oil prices.

ECB President Mario Draghi has hinted that the central bank could introduce further stimulus in early 2015 and even enact a bond purchasing program.

“The mantra is ‘Don’t fight the ECB’ — the central bank is set to inject €1,000 billion and to add sovereign bonds to its buying program,” analysts at Société Générale said in a research note.

While the euro currency has depreciated 10% against the U.S. dollar so far, analysts believe there is more room to fall after the ECB enacts further easing. Consequently, the weak euro will help bolster the Eurozone’s large exporting industry, making goods cheaper for foreign buyers. Morgan Stanley predicts the cheap currency could add at least 2% to earnings per share for European companies next year.

Lastly, lower energy prices will have an immediate effect on consumers, allowing Europeans to spread around their cash for discretionary purchases and spur growth. Additionally, the cheap oil will lower input costs for companies’ profit margins and lift earnings.

Furthermore, analysts believe that if the ECB begins a quantitative easing plan, the financial sector will be a key beneficiary. Most major Eurozone banks are already in good shape and should capitalize on improved credit supply and loan demand. For targeted Europe financial exposure, investors can take a look at the iShares MSCI Europe Financials ETF (NYSEArca: EUFN). However, the ETF does not hedge against currency risks.