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On a personal note: I appreciate all the support we’ve gotten from the ETFdb community, whether it’s the kind emails from readers, financial support by subscribing to Pro, and all the helpful suggestions we get on how we can make ETFdb better. If you have any questions about ETFdb Pro, or ETF Database in general, please don’t hesitate to drop me an e-mail!

Cheers,

Michael Johnston
Senior Analyst & Co-Founder

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In recent weeks, U.S. investors have found themselves on the other side of that relationship, as concerns over tightening monetary policy in China and a potential debt crisis in Europe have sent global equity markets sharply lower. Continuing a trend that has emerged over the past two years, it has been the world’s developed economies that have struggled the most in the current environment. The current crisis in Europe has focused primarily on Greece, which faces mounting deficits amidst declines in tax revenues and huge spikes in government spending to ward off a double dip recession. The country’s budget deficit has swelled to 13% of GDP–well above the 3% limit imposed for euro-zone countries.

Much of the rest of Europe is on relatively solid financial footing, but the potential for defaults in Greece has rippled throughout the region and even reached overseas markets. The cost to insure debt issued by Spain and Portugal has skyrocketed in recent weeks, as risk averse investors race to find protection against other European countries with large deficits.

More Bargain Buys?

The recent pullback has created a number of buying opportunities for bargain-hunting investors. As Europe’s bond markets have been crushed by an increase in the likelihood of a regional debt crisis, many investors now see an attractive entry point. Greece’s deficit problem is a serious issue, but a default is far from certain. Even if the country were to default, the relative size of outstanding debt would make a bailout by EU neighbors a manageable undertaking.

Options for U.S. investors to invest in European debt markets are fairly limited, but there are a handful of global funds that offer exposure to this region. Following a surge in the dollar and rise in yields on European debt, many of these funds look relatively attractive.

For more actionable ETF investment ideas, sign up for our free ETF newsletter.

• SPDR Barclays Capital International Treasury Bond ETF (BWX): This ETF is designed to track the performance of government bonds issued in local currencies by investment-grade countries outside the U.S. with at least one year remaining until maturity. BWX has lost about 3% so far this year, and has an average coupon of 4.21%. BWX maintains a weightings of about 4.1% to Greece and 4.6% to Spain.

• SPDR DB International Government Inflation-Protected Bond ETF (WIP): As concerns about an imminent uptick in inflation have materialized, investors around the world have flocked to inflation-protected bonds. WIP invests in inflation-protected government bonds in both developed and emerging markets outside the U.S., and maintains an average coupon of 3.2% and a 30-day SEC yield of 1.5%. By comparison, the iShares Barclays TIPS Bond Fund (TIP) offers a weighted-average coupon of 2.2% and 30-day SEC yield of just 0.7%. WIP has lagged its U.S. counterpart by about 400 basis points this year.

• iShares S&P/Citigroup International Treasury Bond Fund (IGOV): Japan accounts for about a quarter of IGOV’s total assets, followed by Germany (9.6%), Italy (8.2%), and France (7.3%). Spain and Greece account for about 9% of total assets. IGOV features an average coupon of 3.6%. By comparison, the iShares Barclays 7-10 Year Treasury Bond Fund (IEF) has an average coupon of 3.8% and an SEC yield of 3.3%.

Disclosure: No positions at time of writing.

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“WisdomTree achieved our best fourth quarter in Company history,” said CEO Jonathan Steinberg in a press release. “We are encouraged to see the market responding to our innovations in the emerging markets – namely the industry’s first India, and emerging markets small cap ETFs, as well as the first “1940 Act” family of currency ETFs which collectively were responsible for the majority of the $911 million net inflows in the fourth quarter.”

Dwindling Cash

WisdomTree reported a GAAP net loss of $5.0 million in the fourth quarter and $21.2 million for the full year. But the company’s cash loss was far less. Excluding stock-based compensation, depreciation and amortization, and interest and investment income, the operating loss was only $1.5 million for the quarter and $11.3 million for the year. WisdomTree finished 2009 with $11.5 million of cash on hand, as cash actually increased in the fourth quarter due to the completion of a common equity offering. The net decrease in cash for the year was $1.8 million, including an offset of $5.0 million from the sale of common stock. Excluding this equity raise, the company’s change in cash for the year would have been $6.8 million, more than half the amount on hand at the end of the year.

Signs Of Improvements

WisdomTree’s fourth quarter results showed significant improvement in a number of areas, as revenue, total assets,  average ETF advisory fee both improved over year-ago levels.  WisdomTree has also beefed up its marketing and business development operations, which accounted for about 23% of total operating expenses in the fourth quarter. Business development and marketing accounted for just under 14% of expenses in the fourth quarter of 2008.

WisdomTree’s revenue surged throughout last year, as assets under management grew from both strong equity market performance and continued cash inflows throughout the year. Of the $2.8 billion increase in assets during 2009, cash inflows accounted for $1.8 billion, while market appreciation drove another $1.0 billion increase. For the full year, currency ETF assets increased by a whopping 305%, followed by international ETFs (+96%), sector ETFs (+45%), and U.S. ETFs (+35%).

Declines in domestic and international equity markets in 2010 will present a challenging environment in the first quarter. But WisdomTree continues to haul in the cash. Although the latest data from the National Stock Exchange shows outflows of about $200 million in January, the red ink is primarily related to the unwinding of two WisdomTree “funds of funds,” DEW and DWM, which started in 2009 and ended in January 2010. Excluding this unwinding, WisdomTree actually saw $245 million of cash inflows, behind only Vanguard, Van Eck, and ETF Securities for the month.

WisdomTree shares declined more than 5% on Monday, and are down nearly 35% over the last three weeks.

See a full copy of the WisdomTree press release here (PDF). For more updates on the ever-changing state of the ETF industry, sign up for our free ETF newsletter.

Disclosure: No positions at time of writing.

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The ETFdb 60 Index, a benchmark measuring the performance of asset classes available through ETFs, declined 5.61 points, or 0.6%, to close at 986.34. The index has shed 4.6% so far in 2010, and is down 6.5% from its January high.

Leading the way lower on Monday was the Market Vectors Gold Miners ETF (GDX), which lost 3.8% as gold prices declined. After rallying in 2009 as the dollar came under pressure, gold mining stocks have been battered throughout 2010. GDX has now declined more than 10% on the year and has lost more than 25% since peaking in December. The Junior Gold Miners ETF (GDXJ), which invests in small and mid cap mining firms, slipped 3% on the day and has lost almost 14% so far in 2010.

One of the few winners Monday was the PowerShares DB Agriculture Fund (DBA), which added 1.4% as the dollar’s advance halted and most commodities delivered solid daily gains. DBA maintains exposure to a basket of 11 different agricultural commodities, including grains, livestock, and softs.

Disclosure: No positions at time of writing.

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Historically, ProShares has focused on inverse, 200% leveraged and 200% inverse leveraged ETFs, although the issuer expanded its offerings outside this area last year when in introduced the first 130/30 ETF. Several of the proposed funds, which are based on domestic and international equities and fixed income ETFs, would compete directly with existing products from Direxion.

Direxion’s 3x leveraged and inverse leverage Russell 2000 ETFs (TNA and TZA, respectively) had almost $600 million in aggregate assets at the end of January, while the company’s 3x and -3x emerging markets ETFs (EDC and EDZ, respectively) had more than $500 million in assets. ProShares also filed prospectuses for 300% funds based on the MSCI EAFE Index, a benchmark covered by Direxion’s DZK and DPK.

Despite facing a firestorm of criticism last year and the implementation of regulatory changes in December of 2009, leveraged ETFs have continued to surge in popularity. According to data from the National Stock Exchange, leveraged and inverse leveraged ETFs saw almost $10 billion in net cash inflows last year.

Disclosure: No positions at time of writing.

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Issue Overview

The People’s Republic has always been very sensitive about issues involving Taiwan, which the the communist country believes to be a “rebel province.” The Chinese hope to see the return of Taiwan to the Mainland’s control some day, much like Hong Kong, while opposing any notion of ‘”two Chinas.” As such, Beijing has applied pressure in several international forums to restrict or ban the involvement of Taiwan in any organization that would suggest status as an independent country. While hardly any countries recognize Taiwan as an independent nation, it has not stopped countries such as the United States from arming the small island with the latest military technology. In a recent deal, the U.S. has approved the sale of over $6.4 billion worth of high tech military technology to Taiwan, including 114 Patriot missiles and 60 Black Hawk helicopters. Not surprisingly, the Chinese were not pleased with this decision. “The United States will shoulder responsibility for the serious repercussions if it does not immediately reverse the mistaken decision to sell weapons to Taiwan,” said Chinese Vice Foreign Minister He Yafei.

Furthermore, Obama has stated that he intends to meet with the Dalai Lama, the spiritual leader of Tibet which has been occupied by the Chinese since the early 50’s. China considers the Dalai Lama a ‘separatist‘ and Beijing has voiced its displeasure over the upcoming meeting. “As far as Beijing is concerned, there is never a good time [to meet with the Dalai Lama],” said Drew Thompson, China Director at The Nixon Center. “But, I think, immediately on the heels of this notification to Congress of arms sales to Taiwan, it is probably going to be a bit too much for China to bear.”

Although a trade war still seems unlikely at this point, the possibility is growing as relations are put under more pressure. Should America and China find themselves in a protracted trade dispute in which tariffs rise on a multitude of products, several ETFs could see a big move.

iShares MSCI Australia Index Fund (EWA)

Australia and China have had their disputes as well over the past decade, but the countries are growing increasingly dependent on each other. While China relies on Australia to provide the country with a steady stream of minerals and resources, Australia is growing increasingly dependent on China for its growing demand for consumer goods. Should Chinese trade dip with the United States, China may look down under to Australia in order to help pick up some of the slack. This would help to improve relations between the two countries and ultimately benefit Australian equities.

Market Vectors Vietnam ETF (VNM)

If firms believe that prolonged tariffs will be imposed upon companies in China, they may try to move operations to low-cost Vietnam or chose to open up shop in Hanoi instead of Beijing. Vietnam offers multinationals cheap labor costs, a large market, and distance from the fraying relations between the two superpowers. This could allow Vietnam to sell products to both countries, allowing its manufacturing base to get a boost from any significant tariffs. This increased investment will also boost financials firms which stand to benefit from capital inflows as well as higher employment levels. The financials and industrials sectors make up more than 60% of VNM.

Global X China Consumer ETF (CHIQ)

In order to prevent a worsening unemployment situation that would be caused by American tariffs (some Chinese sources are estimating that over 100,000 Chinese would lose their jobs) China may have to significantly increase domestic consumption to pick up slack for decreased American purchases. If the government is able to spur consumption, it could have a huge impact on CHIQ which has about 21% allocated to consumer services and 28% to retail, two segments that are likely to see a boost in demand from increased spending.

Industrials Select Sector SPDR (XLI)

While tariffs are sure to hurt foreign manufacturing, they will likely help struggling American manufacturing firms that will be protected from low-cost competition in China. Firms such as General Electric and United Technology Group, which make up 18.3% of XLI, stand to benefit if double-digit tariffs like the 35% duty that was put on Chinese tires are applied to other products as well. These duties would go a long way to making American manufacturing competitive, at least domestically, which would help to boost the outlook of the entire industrials sector.

SPDR S&P Retail ETF (XRT)

A loser in this, at least in the short term, is likely to be the American consumer who depends on many products from China for consumer discretionary goods. According to some anti-Wal-Mart sources, as much as 70% of Wal-Mart goods are made in China, suggesting that high tariffs could hurt short-term profit margins at major retailers. With consumers already stretched thin, it is unlikely that many would tolerate a 30% price increase on a variety of discretionary goods, which would limit purchases to non-Chinese made goods and necessities.

For more ETF ideas, make sure to sign up for our free ETF newsletter.

Disclosure: Eric is long EWA

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The first six days of 2010 filled investors with false hope, as impressive gains in equity markets fueled hope of a return to pre-recession levels for major benchmarks and personal portfolios in 2010. Unfortunately, a reality check came swiftly and harshly, as a sudden turnaround sent markets plummeting for the remainder of the month. But there’s a silver lining in January’s freefall: the pullback in many markets seems to have been a bit overdone, presenting some attractive entrance points as the calendar turns to February.

One of 2009’s best performers became one of January’s biggest dogs, as Brazilian equity markets took it on the chin to start the year. Brazil’s signature moment of 2009 came in October when Rio de Janeiro became the first South American city to be selected as host of the Olympics, but the country’s equity markets shined throughout the year. The Market Vectors Brazil Small-Cap ETF (BRF) more than doubled between its inception in May and the end of the year, while the iShares MSCI Brazil Index Fund (EWZ) added 120% in 2009.

There were a few bumps along the way, but nothing like the turbulence Brazilian markets hit in January. BRF lost 14.1%, while EWZ slumped 13.3%. Over the last year, U.S. investors have become accustomed to the phenomenon of market rallies despite the presence of good news of any significance. But Brazil’s January nosedive came despite an abundance of positive developments that seemed more likely to send the market in the opposite direction.

Brazil’s unemployment rate dropped to a record low of 6.8% in December, representing a decline of 0.6% from November and a return to December 2008 levels. By comparison, official U.S. unemployment stood at 10.0% in December, a whopping 3.6% higher than the same period a year earlier. More recently, Brazil’s IBGE statistics institute announced that output rose by an impressive 18.9% in December from the same period a year earlier.

The outlook from Brazil’s financial sector is also bright. Banco Bradesco, one of the country’s largest financial institutions, expects to expand its credit portfolio by up to 25% in 2010, including growth of 20% in its consumer portfolio and 29% in the corporate portfolio. Last week Itau Unibanco raised its growth forecast for 2010 GDP to 6% from just over 5%. Despite early signs of inflation, interest rates are expected to remain low through at least the first quarter.

The pullback doesn’t seem to be attributable to a realization that perhaps markets had run too far, too fast over the last year either. According to Business Week, Brazil’s Bovespa Index was recently trading at about 13 times this year’s earnings, well below the 15 times multiple for Mexico’s Bolsa Index and 17.5 times for Chile’s Ipsa.

So if the domestic outlook is so bright, what drove the January swoon in Brazilian stock markets? Weakness in another BRIC market was largely to blame, as worries about tightening monetary policy in China dampened the outlook for the world’s third largest economy. Highlighting China’s increased importance to the global economy, lower expectations for Chinese raw materials demand impacted markets around the world, particularly those that generate significant revenues from sale of metals and oil to the resource-hungry nation. China surpassed the U.S. as Brazil’s largest trading partner in 2009, giving a boost to the South American economy while also increasing its foreign dependence.

Brazil find itself in a much better position than China, as a weekly central bank survey reveals that local economists expect inflation to be approximately 4.8% in 2010, just slightly above the government’s target of 4.5%.

BRF vs. EWZ

Investors looking to make a play on Brazilian equities have two primary options: the large-cap EWZ and the small-cap BRF. Although EWZ’s $11-plus billion assets indicate more widespread use among investors, BRF is a better play for several reasons. EWZ is dominated by mega cap companies, which tend to be more dependent on the global industrial cycle, oil prices, and demand from China. By comparison, small cap equities depend on real growth in Brazil’s domestic economy and continued increases in both the size and wealth of the middle class (see a comparison of historical performances of small cap international ETFs in this feature). Moreover, large cap companies are more likely to count the Brazilian government among major shareholders, increasing the likelihood of these businesses being operated contrary to investors’ best interests.

More than 20% of EWZ is invested in Petrobras, one of the world’s largest oil companies which is 55.7% owned by the Brazilian government. BRF’s holdings in commodity-intensive industries are minimal, offering instead exposure to the consumer discretionary sector. This allocation should act to insulate the fund somewhat from slipping Chinese demand, making January’s drop all the more puzzling.

BRF has rebounded nicely in the first few sessions of February, but remains well below year-end levels and still has plenty of room on the upside.

More Actionable Investment Ideas

Each month, our team of ETF experts publishes actionable investment ideas in ETF Edge, our all-ETF newsletter. To see the rest of this month’s recommendations, including an international fixed income ETF and a China sector fund, sign up for a free trial of ETFdb Pro. In addition to the monthly newsletter, Pro subscribers get access to our line of all-ETF model portfolios, more than 60 in-depth ETF Category reports, and a monthly mailbag session with out team of ETF experts.

Disclosure: No positions at time of writing.

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Given this increased emphasis on index construction and analysis, ETF Database is proud to introduce our Index Database, a collection of all benchmarks underlying U.S.-listed ETFs in an investor-friendly format. The Index Database is organized into nine large categories dedicated to the various asset classes available through ETFs, including leveraged, inverse, and multi-asset class funds. Each index page (see the equities indexes page as an example) contains a complete list of indexes assigned to that asset class, organized by ETFdb Categories.

Each index name in the Index Database is linked to a separate page (see the S&P 500 Index page as an example) that includes a description of the benchmark, a table listing all U.S.-listed ETFs that track the benchmark, and a list of other ETFs in the relevant ETFdb Category. Finally, each index page includes a list of other indexes to which similar ETFs are linked.

For individual investors and financial advisors looking to make the switch from mutual funds to ETFs, the index database should be tremendously useful in mapping existing holdings to more cost-efficient ETFs.

Changes To Ticker Pages

We’ve also made a couple changes to our 900+ ticker pages that we think make them immensely more useful. First, at the top of each ticker page, we’ve added the underlying index and a description for each U.S.-listed ETF (see the page for SPY as an example) is the index tracked by the ETF (in the case of SPY, the S&P 500), along with a brief description of the benchmark. Second, on each ticker page we’ve added a link to the issuer home page for each ETF in the database, allowing users to jump directly from ETFdb.com to the site maintained by the ETF issuer that includes detailed information on the fund’s assets and risk profile.

The Index Database and changes to the ticker pages are the first of several improvements to the site we’ll be rolling out in coming months. While we’ve got some exciting things planned for ETFdb.com, we’re always interested to hear suggestions from our users on tools, data, and resources that would be useful to you. If you have any suggestions for improvements, please don’t hesitate to shoot me an email or give me a call.

Regards,

Michael Johnston
Co-Founder
michael.johnston@etfdb.com
312-640-9093

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The energy sector sector has been one of the hardest hit in recent weeks, as disappointing earnings reports and concerns over job growth have spooked investors. Unexpected increases in oil inventories and a surprisingly strong dollar have also weighed on the sector in the early part of the year. But after dropping as much as 20% from 2010 highs, some energy ETFs seem to now be offering good value as bargain buys.

Energy ETF Options

With the possible exception of technology, no sector of the economy is widely-available through ETFs as the energy industry. In addition to funds focusing on various segments of the clean energy universe, there are several ETFs offering granular exposure to sub-sectors of the oil and gas industry. From a geographical perspective, there are several options as well, including both U.S. and international ETFs and those that maintain a more global focus. For more head-to-head looks at ETF options, sign up for our free ETF newsletter.

SPDR Select Sector ETF (XLE)

The largest and most popular energy ETF, this sector SPDR consists primarily of large-cap U.S. oil and gas companies. Major holdings in XLE include Exxon Mobil, Chevron, and Schlumberger (these three in aggregate account for more than 35% of holdings). According to the issuer Web site, XLE is trading at a forward price-to-earnings ratio of just 13.5, its lowest level in months and a discount from the forward multiple for the more broad-based S&P 500. XLE has lost 4.9% so far in 2010.

iShares S&P Global Energy Index Fund (IXC)

This ETF is similar to XLE in that it invests in oil equipment and services companies, exploration and production firms, and refineries. But IXC has a more global focus, tracking the S& Global Sector Index. In addition to U.S. holdings, which account for nearly half of IXC, this fund gives significant weightings to UK and Canadian firms (such as BP and Royal Dutch Shell). IXC has lost more than 8% so far this year, reflecting the difficult economic environment in Europe.

Global X China Energy ETF (CHIE)

Concerns over an overheating economy and rising inflation have sparked concerns that China’s government will be forced to tighten its policies in coming weeks, a move that could ripple through global economies. CHIE is down more than 13% on the year, as both energy equities and China ETFs have sunk lower in recent weeks. Chinese oil companies have been aggressive in their efforts to expand overseas operations, as highlighted by recent reports of Cnooc’s pursuit of massive Ugandan fields (Cnooc is CHIE’s largest holding at almost 10% of fund assets).

Dow Jones Emerging Markets Energy Titans Index Fund (EEO)

For investors looking to make a more diversified play on the energy sector in emerging markets, EEO may be an attractive option. In addition to investments in China’s oil companies, EEO invests heavily in Russian natural gas companies.

Relative to their U.S. counterparts, emerging markets energy stocks may be attractive for two reasons. First, these companies have been far more active in acquiring potentially lucrative oil fields throughout the developing world. Second, as strange as it seems, the potential for adverse government intervention may be far lower in emerging markets, especially considering the outrage that has historically been directed at the industry during boom times for Big Oil. EEO has declined about 9% so far in 2010.

ProShares Short Oil & Gas (DDG)

For investors with a bearish outlook on the energy industry, the ProShares Short Oil & Gas offers a way to establish short exposure to the sector. DDG is designed to deliver daily results equal to the inverse of the Dow Jones U.S. Oil & Gas Index. DDG has gained about 5% so far in 2010, although the fund is down about 17% over the last year.

Disclosure: No positions at time of writing.

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The ETFdb 60 Index, a benchmark measuring the performance of asset classes available through ETFs, inched up 0.18 points to close at 991.95. Volume for index components was nearly 1.8 billion shares, the most active trading day of the year.

The Market Vectors Gold Miners ETF (GDX) gained 5.4% on the day, but failed to claw back all the losses from the previous session’s bloodbath. Gold prices closed slightly up, accounting for some of GDX’s big gain, but the majority of the rise was seemingly attributable to bargain hunters looking for funds that had been battered in the recent pullback.

Losing ground on Friday was the iShares MSCI EAFE Small Cap Index Fund (SCZ), which lost 1.7% as concerns over a potential crisis in the euro zone continued to weigh on international markets. Costs of insuring Greek, Portuguese, and Spanish debt have skyrocketed in recent days as investors lose faith in the ability of debt-laden governments to rectify deteriorating public finances.

Disclosure: No positions at time of writing.

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