Every ETF has its day.
For each of three major news events now unfolding––Alibaba Group Holding Ltd.'s initial public offering, steps toward quantitative easing in Europe and possible Federal Reserve rate tightening––there's an exchange-traded fund that finds itself in the sweet spot. Here's a look at what these ETFs offer investors.
China's biggest e-commerce company just had the world’s largest IPO. Unfortunately for ETF investors, Alibaba falls into a no-man’s-land: It's a Chinese company domiciled in the Cayman Islands and listed on a stock exchange in the U.S. Since many ETFs track established, mainstream indexes that use country of incorporation and the exchange where a stock is listed as basic filters, Alibaba won’t fit into the portfolio guidelines of most popular China or U.S. ETFs.
Enter the KraneShares CSI China Internet Fund (KWEB), an ETF with new school rules that will allow it add Alibaba in its portfolio quickly––after the stock's eleventh trading day, to be precise. It will most likely be added at a healthy 7 to 8 percent weighting.
KWEB is full of rising-star China tech companies such as Tencent Holdings Ltd. and Baidu Inc. Tech is a big potential growth area for China, where only half of all citizens are online, compared to around 90 percent for the U.S. These companies have made KWEB the best-performing China ETF for the year to date and the past year. It's gained 29 percent over the past 12 months, triple the gain of the ever-popular iShares China Large-Cap ETF (FXI).
One note of caution: The price-to-earnings ratio of KWEB's portfolio is an average of 34, which means investors are paying $34 for each dollar in earnings. That's about double the p-e ratio on the average large-cap U.S. stock ETF.
KWEB has $105 million in assets and charges investors 0.68 percent a year.
Easing Up in Europe
The European Central Bank recently announced interest rate cuts and a program to buy asset-backed securities and covered bonds. If that sounds familiar, that's because it's reminiscent of the Federal Reserve's actions in the U.S. and also of "Abenomics," the strategy Prime Minister Shinzo Abe has taken to revive Japan's economy. It's yet another central bank printing money to weaken its currency and stimulate exports and its economy.
That puts the WisdomTree Europe Hedged Equity Fund (HEDJ) in the catbird seat. It tracks the top exporting companies in euro zone countries and hedges against moves in the relative value of the euro against the U.S. dollar. That combination gives investors pure exposure to the performance of local stocks, with a bit less volatility from currency fluctuations. So far this year, the fund is up 5 percent, while the non-hedged European ETFs are flat.
HEDJ follows in the footsteps of another WisdomTree ETF, the Japan Hedged Equity Fund (DXJ). That ETF soaked up $10 billion in new cash from investors as Abenomics unfolded in Japan. About $1.8 billion has flowed into HEDJ so far this year, the most of any European ETF. That quadrupled its size to $2.5 billion.
HEDJ charges 0.58 percent of assets a year.
The Fed Tightening
With the economy showing signs of improvement, there's mass speculation that the Federal Reserve will increase short-term interest rates. This has already caused investors to sell short-term bonds and buy longer-term ones. That caused the Treasury yield curve––the difference in yield between shorter-term and longer-term bonds––to flatten. And that plays right into the strategy of the iPath US Treasury Flattener exchange-traded note (FLAT).