ETFs To Bet (Hedge) Against The Euro

  • Shorting the euro is traditionally accomplished by borrowing a set number of euros and immediately exchanging them for a different currency with the goal of repurchasing it at a lower relative valuation.
  • The easiest way to short sell the euro is by using ETFs with built-in leverage, since the currency markets require significant leverage and expertise.

The two most common ETFs to short the euro are:

  • ProShares UltraShort Euro ETF (NYSE: EUO)
  • Market Vectors Double Short Euro ETN (NYSE: DDR)

Though EUFX becomes the first -1x Euro ETF, there are a handful of products that can be used to hedge against the struggling currency. As mentioned above, ProShares already offers an ETF (EUO)
(ProShares UltraShort Euro seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the U.S. Dollar price of the Euro.)

that delivers -2x daily exposure to the euro. PowerShares additionally offers a USD Index Bullish (EUFX – Short Euro) (This ETF seeks to track the inverse of the U.S. dollar price of the euro. )that seeks to replicate being long the U.S. dollar relative to a basket of developed market currencies, including the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc. Because the Euro represents a significant portion of the underlying basket, UUP often depends primarily on that currency.

One indirect way to hedge against a decline in the euro is the MSCI EAFE Currency Hedged Equity Fund (DBEF), which offers exposure to a basket of developed market stocks that includes a number of European economies. Unlike funds such as EFA or VEA, however, DBEF strips out the exchange rate exposure, meaning that a decline in the value of the euro won’t have an adverse impact on U.S. investors.

Here are four ETFs that are long the euro:

  • CurrencyShares Euro Trust (NYSE: FXE)
  • WisdomTree Dreyfus Euro (NYSE: EU)
  • Ultra Euro ProShares (NYSE: ULE)
  • Market Vectors Double Long Euro ETN (NYSE: URR)

There are a number of ETFs that allow investors to bet on an appreciation of the euro relative to the greenback, including FXE, ERO, and URR (2x)(As the Index is two-times leveraged, for every 1% strengthening of the euro relative to the U.S. dollar, the level of the Index will generally increase by 2%, while for every 1% weakening of the euro relative to the U.S. dollar, the Index will generally decrease by 2%. ).

The EURO STOXX 50 is a leading index of Europe’s blue chip companies owned by the Deutsche Borse, Dow Jones and SWX Group. Similar to the Dow Jones 30 index in the U.S., the EURO STOXX 50 includes 50 blue chip stocks across 12 eurozone countries. International investors can trade the index via exchange-traded funds (ETFs), futures contracts and stock options.

Components of the EURO STOXX 50 index are selected based on a number of criteria and weighted according to free-float market capitalization. Index members are also reviewed annually in September in order to ensure a transparent and up-to-date basket.

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Invest in EURO STOXX 50 with ETFs

Exchange-traded funds (ETFs) represent the easiest way to invest in the EURO STOXX 50. Unlike mutual funds, ETFs can be bought and sold like traditional stocks and usually have lower management fees. More advanced investors can also purchase call or put options on the ETF in order to speculate or hedge.

The two most popular EURO STOXX 50 ETFs are:

  • SPDR EURO STOXX 50 ETF (NYSE: FEZ)
  • iShares EURO STOXX 50 ETF (NYSE: EUE)

Alternatively, advanced investors can purchase EURO STOXX 50 index futures or options directly through the certain exchanges like the Eurex. Index futures (Symbol FESX) can be purchased for up to nine months, while index options (Symbol OESX) can be purchased up to 119 months.

EURO STOXX 50 Trading Strategies

The EURO STOXX 50 is a very popular index for speculative traders and geopolitical investors, since the market views it as a critical gauge of Europe’s overall health. As a result, many traders and investors buy and sell the stock as a way to speculate on Europe’s overall economic health.

Here are some common trading strategies for the EURO STOXX 50:

  • Very Bullish. Consider purchasing out-of-the-money call options on EURO STOXX 50 ETFs in order to apply maximum leverage towards any upside.
  • Bullish. Consider purchasing EURO STOXX 50 ETFs and perhaps protective puts on the ETFs in order to limit any potential downside.
  • Bearish. Consider short-selling EURO STOXX 50 ETFs or purchasing at-the-money puts that appreciate when the ETFs’ price declines.
  • Very Bearish. Consider purchasing out-of-the-money puts on EURO STOXX 50 ETFs in order to apply maximum leverage towards any downside.

When trading with stock options, investors should remember that they can lose their entire investment. Moreover, investors may be required to apply to short sell (e.g. margin trade), trade options or trade futures with their brokers due to their increased risk.

Alternatives to the EURO STOXX 50

International investors looking for exposure to more than just the 50 stocks on the EURO STOXX 50 index have several alternatives. Several indices and ETFs offer similar to expanded exposure to Europe, while international investors can also build their own portfolio of foreign stocks.

Some popular indices include:

  • S&P Euro & Euro 350 Indices
  • MSCI Europe Large Cap & EMU Indices

Some popular European ETFs trading these indices include:

  • Vanguard MSCI Europe ETF (NYSE: VGK)
  • iShares S&P Europe 350 Index (NYSE: IEV)
  • iShares MSCI EMU Index (NYSE: EZU)

Investors can also purchase many large individual European stocks on U.S. exchanges via American Depository Receipts (ADRs). These securities can be bought and sold like traditional stocks, but may have less liquidity than most U.S. blue chip stocks.

Some popular European ADRs include large companies like:

  • Nokia Corporation (NYSE: NOK)
  • Banco Santender SA (NYSE: STD)
  • ArcelorMittal (NYSE: MT)

Key Points to Remember about EURO STOXX 50

  • The EURO STOXX 50 index is comprised of 50 large companies located in 12 eurozone countries and is similar to the Dow Jones 30 in the United States.
  • The EURO STOXX 50 index is often used as a barometer of Europe’s economy, which means there are many trading strategies available.
  • There are many viable alternatives to the EURO STOXX 50 index, ranging from ETFs to ADRs, that investors can consider.

There are a slew of country and region specific funds and some areas have more than others, so that’s what makes this list so important. Research which funds for which areas are the best for your investment strategy

Africa ETFs

  • AFK – Market Vectors Africa ETF
  • EZA – iShares MSCI South Africa Index ETF
  • GAF – SPDR S&P Emerging Middle East & Africa ETF

 

Argentina ETFs

  • ARGT – Global X FTSE Argentina 20 ETF

 

Andean ETFs

  • AND – Global X FTSE Andean 40 ETF

 

Asia ETFs

  • AAXJ – iShares MSCI All Country Asia ex Japan Index ETF
  • ADRA – BLDRS Asia 50 ADR Index ETF
  • ALD – WisdomTree Asia Local Debt Fund
  • AIA – iShares S&P Asia 50 Index ETF
  • ASEA – Global X FTSE ASEAN 40 ETF
  • AXJS – iShares MSCI All Country Asia ex Japan Small Cap Index Fund
  • AYT – Barclays GEMS Asia-8 ETN
  • DND – WisdomTree Pacific ex-Japan Total Dividend ETF
  • DNH – WisdomTree Pacific ex-Japan Equity Income ETF
  • EPP – iShares MSCI Pacific ex-Japan ETF
  • FPA – First Trust Asia Pacific Ex-Japan AlphaDex Fund
  • GMF – SPDR S&P Emerging Asia Pacific ETF
  • GSAX – ALPS/GS Momentum Builder Asia ex-Japan Equities and U.S. Treasuries Index ETF
  • IFAS – iShares FTSE EPRA/NAREIT Developed Asia Index ETF
  • JPX – UltraShort MSCI Pacific ex-Jpn ProShares ETF
  • PAF – PowerShares FTSE RAFI Asia Pacific ex-Japan ETF
  • PGD – Barclays Asian & Gulf Currency Reval ETN
  • TOK – iShares MSCI Kokusai Index ETF
  • UXJ – Ultra MSCI Pacific Ex-Japan
  • VPL – Vanguard Pacific Stock ETF

 

Australia ETFs

  • AUSE – WisdomTree Australia Dividend Fund
  • AUD – Australia Bond Index Fund
  • EWA – iShares MSCI Australia Index ETF
  • FAUS – First Trust Australia AlphaDex Fund
  • FXA – CurrencyShares Australian Dollar Trust ETF
  • KROO – IQ Australia Small-Cap ETF
  • GDAY – ProShares Ultra Australian Dollar ETF
  • CROC – ProShares UltraShort Australian Dollar ETF

 

Austria ETFs

  • EWO – iShares MSCI Austria Investable Mkt Index ETF

 

Belgium ETFs

  • EWK – iShares MSCI Belgium Investable Market Index ETF

 

Brazil ETFs

  • BRAQ – Global X Brazil Consumer ETF
  • BRAZ – Global X Brazil Mid Cap ETF
  • BRF – Market Vectors Brazil Small-Cap ETF
  • BRZU – Direxion Daily Brazil Bull 3X Shares ETF
  • BRZS – Direxion Daily Brazil Bear 3X Shares
  • BZQ – UltraShort MSCI Brazil ProShares ETF
  • DBBR – DBX Brazil Currency-Hedged Equity Fund
  • EWZ – iShares MSCI Brazil Index ETF
  • EWZS – iShares MSCI Brazil Small-Cap Index Fund
  • FBZ – First Trust Brazil AlphaDex Fund
  • UBR – Ultra MSCI Brazil ETF

 

BRIC ETFs

  • BIK – SPDR S&P BRIC 40 ETF
  • BKF – iShares MSCI BRIC Index ETF
  • EEB – Claymore/BNY Mellon BRIC ETF
  • EWBK – Rydex Russell BRIC Equal Weight ETF

 

Cananda ETFs

  • CAD – Pimco Canada Bond Index Fund
  • CNDA – IQ Canada Small-Cap ETF
  • CNPF – Global X Canada Preferred ETF
  • DBCN – DBX MSCI Canada Currency-Hedged Fund
  • ENY – Claymore/SWM Canadian Energy Income ETF
  • EWC – iShares MSCI Canada Index ETF
  • FCAN – First Trust Canada AlphaDex Fund
  • FXC – CurrencyShares Canadian Dollar Trust ETF
  • TSXV – Global X S&P-TSX Venture Canada 30 ETF

 

Chile ETFs

 

China ETFs

  • CHIB – Global X China Technology ETF
  • CHIE – Global X China Energy ETF
  • CHII – Global X China Industrials ETF
  • CHIM – Global X China Materials ETF
  • CHIQ – Global X China Consumer ETF
  • CHIX – Global X China Financials ETF
  • CHXX – China Infrastructure Index ETF
  • CN – db X-trackers Harvest MSCI All China Equity Fund
  • CNY – Market Vectors Renminbi/USD ETN
  • CYB – WisdomTree Dreyfus Chinese Yuan ETF
  • CZI – Dixerion Daily China Bear 3x Shares ETF
  • CZM – Dixerion Daily China Bull 3x Shares ETF
  • DSUM – PowerShares Chinese Yuan Dim Sum Bond Portfolio
  • ECNS – iShares MSCI China Small-Cap Index Fund
  • EWGC – Rydex Russell Greater China Large Cap Equal Weight ETF
  • FCA – First Trust China AlphaDex Fund
  • FCHI – iShares FTSE China (HK Listed) Index ETF
  • FXI – iShares FTSE/Xinhua China 25 Index ETF
  • FXP – UltraShort FTSE/Xinhua China25 Proshares ETF
  • GXC – SPDR S&P China ETF
  • HAO – Claymore/AlphaShares China Small Cap ETF
  • KBA – KraneShares Bosera MSCI China A Share ETF
  • KFYP – KraneShares CSI China Five Year Plan ETF
  • KWEB – KraneShares CSI China Internet ETF
  • MCHI – iShares MSCI China Index Fund
  • PEK – Market Vectors China ETF
  • PGJ – PowerShares Golden Dragon Halter USX China
  • RMB – Guggenheim Yuan Bond ETF
  • TAO – Claymore/AlphaShares China Real Estate ETF
  • TCHI – RBS China TrendPilot ETN
  • XPP – Ultra FTSE/Xinhua China 25 ProShares ETF
  • YAO – Claymore/AlphaShares China All-Cap ETF
  • YXI – Proshares Short FTSE / Xinhua China 25 ETF

 

Colombia ETFs

  • GXG – Global X/InterBolsa FTSE Colombia 20 ETF
  • COLX – Market Vectors Colombia ETF

 

Denmark ETFs

  • EDEN – iShares MSCI Denmark Capped Investable Market Index ETF

 

Egypt ETFs

  • EGPT – Market Vectors Egypt Index ETF

 

Europe ETFs

  • ADRU – BLDRS Europe 100 ADR Index ETF
  • DFE – WisdomTree Europe SmallCap Dividend ETF
  • DRR – Market Vectors Double Short Euro ETN
  • EPV – UltraShort MSCI Europe ProShares ETF
  • ERO – iPath EUR/USD Exchange Rate ETN
  • ESR – iShares MSCI Emerging Markets Eastern Europe Index ETF
  • EU – WisdomTree Dreyfus Euro ETF
  • EUFN – iShares MSCI Europe Financials Sector Index Fund
  • EUO – UltraShort Euro ProShares ETF
  • FEP – First Trust Europe AlphaDex Fund
  • FEZ – SPDR DJ EURO STOXX 50 ETF
  • FXE – CurrencyShares Euro Trust ETF
  • GUR – SPDR S&P Emerging Europe ETF
  • IEV – iShares S&P Europe 350 Index ETF
  • IFEU – iShares FTSE EPRA/NAREIT Developed Europe Index ETF
  • ULE – Ultra Euro ProShares ETF
  • UPV – Ultra MSCI Europe ETF
  • VGK – Vanguard European ETF

 

Far East ETFs

  • FEFN – iShares MSCI Far East Financials Sector Index Fund

 

Finland ETFs

  • EFNL – iShares MSCI Finland Capped Investable Market Index ETF

 

France ETFs

  • EWQ – iShares MSCI France Index ETF

 

Germany ETFs

  • BUND – Pimco Germany Bond Index Fund
  • BUNT – PowerShares DB 3x German Bund Futures ETN
  • BUNL – PowerShares DB German Bund Futures ETN
  • EWG – iShares MSCI Germany Index ETF
  • FGM – First Trust Germany AlphaDex Fund
  • GERJ – Germany Small-Cap ETF
  • GGOV – ProShares German Sovereign/Sub-Sovereign ETF

 

Greece ETFs

  • GREK – Global X FTSE Greece 20 ETF

 

Hong Kong ETFs

  • EWH – iShares MSCI Hong Kong Index ETF
  • EWHS – iShares MSCI Hong Kong Small Cap Index ETF
  • FHK – First Trust Hong Kong AlphaDex Fund

 

India ETFs

  • EPI – WisdomTree India Earnings ETF
  • FNI – First Trust ISE Chindia ETF
  • ICN – WisdomTree Dreyfus Indian Rupee ETF
  • INCO – Emerging Global India Infrastructure ETF
  • INDL – Direxion Daily India Bull 3x Shares ETF
  • INDY – iShares S&P India Nifty Fifty Index ETF
  • INP – iPath MSCI India Index ETN
  • INR – Market Vectors Rupee/USD ETN
  • INXX – EGShares India Infrastructure ETF
  • PIN – PowerShares India ETF
  • SCIF – Market Vectors India Small-Cap Index ETF
  • SCIN – Emerging Global Shares Indxx India Small Cap ETF
  • INDA – MSCI India Index Fund
  • SMIN – iShares MSCI India Small Cap Index Fund

 

Indonesia ETFs

  • EIDO – iShares MSCI Indonesia Investable Market Index ETF
  • IDX – Market Vectors Indonesia ETF
  • IDXJ – Market Vectors Indonesia Small-Cap ETF

 

Ireland ETFs

 

Israel ETFs

  • EIS – iShares MSCI Israel Cap Invest Market Index ETF

 

Italy ETFs

  • EWI – iShares MSCI Italy Index ETF
  • ITLT – PowerShares DB 3x Italian Treasury Bond Futures ETN
  • ITLY – PowerShares DB Italian Treasury Bond Futures ETN

 

Japan ETFs

  • DBJP – DBX MSCI Japan Currency-Hedged Equity Fund
  • DFJ – WisdomTree Japan SmallCap Dividend
  • DXJ – WisdomTree Japan Total Dividend ETF
  • EWJ – iShares MSCI Japan Index ETF
  • EWV – UltraShort MSCI Japan ProShares ETF
  • EZJ – Ultra MSCI Japan ProShares ETF
  • FJP – First Trust Japan AlphaDex Fund
  • FXY – CurrencyShares Japanese Yen Trust ETF
  • JGBS – PowerShares DB Inverse Japanese Government Bond Futures ETN
  • JGBD – PowerShares DB 3x Inverse Japanese Government Bond Futures ETN
  • JGBT – PowerShares DB 3x Japanese Govt Bond Futures ETN
  • JGBL – PowerShares DB Japanese Govt Bond Futures ETN
  • JPP – SPDR Russell/Nomura PRIME Japan ETF
  • JSC – SPDR Russell/Nomura Small Cap Japan ETF
  • JYN – iPath JPY/USD Exchange Rate ETN
  • SCJ – iShares MSCI Japan Small Cap Index ETF
  • YCL – Ultra Yen ProShares ETF
  • YCS – UltraShort Yen ProShares ETF

 

Latin America ETFs

  • BONO – Market Vectors LatAm Aggregate Bond ETF
  • FLN – First Trust Latin America AlphaDex Fund
  • GML – SPDR S&P Emerging Latin America ETF
  • ILF – iShares S&P Latin America 40 Index ETF
  • LATM – Latin America Small-Cap ETF
  • LBJ – Direxion Daily Latin America 3x Bull Shares ETF

 

Malaysia ETFs

 

Mexico ETFs

 

Middle East ETFs

 

Netherlands ETFs

  • EWN – iShares MSCI Netherlands Invstable Market Index ETF

 

New Zealand ETFs

 

Norway ETFs

  • GXF – Global X FTSE Nordic 30 ETF
  • NORW – Global X FTSE Norway 30 ETF

 

Peru ETFs

  • EPU – iShares MSCI All Peru Capped Index ETF

 

Philippines ETFs

 

Poland ETFs

  • EPOL – iShares MSCI Poland Investable Market Index Fund
  • PLND – Market Vectors Poland ETF

 

Russia ETFs

 

Singapore ETFs

  • EWS – iShares MSCI Singapore Index ETF
  • EWSS – iShares MSCI Singapore Small Cap Index ETF

 

South Korea ETFs

  • EWY – iShares MSCI South Korea Index ETF
  • FKO – First Trust South Korea AlphaDex Fund
  • HKOR – Horizons Korea KOSPI 200 ETF
  • KORU – Direxion Daily South Korea Bull 3x Shares ETF
  • KORZ – Direxion Daily South Korea Bear 3X Shares ETF
  • SKOR – IQ South Korea Small-Cap ETF- CLOSED

 

Spain ETFs

  • EWP – iShares MSCI Spain Index ETF

 

Sweden ETFs

  • EWD – iShares MSCI Sweden Index ETF
  • FXS – CurrencyShares Swedish Krona Trust ETF

 

Switzerland ETFs

  • EWL – iShares MSCI Switzerland Index ETF
  • FSZ – First Trust Switzerland AlphaDex Fund
  • FXF – CurrencyShares Swiss Franc Trust ETF
  • SGOL – ETFS Physical Swiss Gold Shares ETF

 

Taiwan ETFs

 

Thailand ETFs

  • THAI – IQ Thailand Small-Cap ETF
  • THD – iShares MSCI Thailand Invest Market Index ETF

 

Turkey ETFs

 

United Kingdom ETFs

 

Vietnam ETFs

  • VNM – Market Vectors Vietnam ETF

Price-Weighted Index vs Market Capitalization

DEFINITION of ‘Price-Weighted Index’

A stock index in which each stock influences the index in proportion to its price per share. The value of the index is generated by adding the prices of each of the stocks in the index and dividing them by the total number of stocks. Stocks with a higher price will be given more weight and, therefore, will have a greater influence over the performance of the index.
INVESTOPEDIA EXPLAINS ‘Price-Weighted Index’

For example, assume that an index contains only two stocks, one priced at $1 and one priced at $10. The $10 stock is weighted nine times higher than the $1 stock. Overall, this means that this index is composed of 90% of the $10 stocks and 10% of $1 stock.

In this case, a change in the value of the $1 stock will not affect the index’s value by a large amount, because it makes up such a small percentage of the index.

A popular price-weighted stock market index is the Dow Jones Industrial Average. It includes a price-weighted average of 30 actively traded blue chip stocks.

 

DEFINITION of ‘Market Capitalization’

The total dollar market value of all of a company’s outstanding shares. Market capitalization is calculated by multiplying a company’s shares outstanding by the current market price of one share. The investment community uses this figure to determine a company’s size, as opposed to sales or total asset figures.

Frequently referred to as “market cap.”

INVESTOPEDIA EXPLAINS ‘Market Capitalization’

If a company has 35 million shares outstanding, each with a market value of $100, the company’s market capitalization is $3.5 billion (35,000,000 x $100 per share).

Company size is a basic determinant of asset allocation and risk-return parameters for stocks and stock mutual funds. The term should not be confused with a company’s “capitalization,” which is a financial statement term that refers to the sum of a company’s shareholders’ equity plus long-term debt.

The stocks of large, medium and small companies are referred to as large-cap, mid-cap, and small-cap, respectively. Investment professionals differ on their exact definitions, but the current approximate categories of market capitalization are:

Contango is a situation where the futures price (or forward price) of a commodity is higher than the expected spot price.[1][2] In a contango situation, hedgers (commodity producers and commodity users) or arbitrageurs/speculators (non-commercial investors),[3] are “willing to pay more for a commodity at some point in the future than the actual expected price of the commodity. This may be due to people’s desire to pay a premium to have the commodity in the future rather than paying the costs of storage and carry costs of buying the commodity today.”

The opposite market condition to contango is known as normal backwardation. “A market is “in backwardation” when the futures price is below the expected future spot price for a particular commodity. This is favorable for investors who have long positions since they want the futures price to rise.”[2]

The Commission of the European Communities (CEC & 2008 6) described backwardation and contango in relation to futures prices: “The futures price may be either higher or lower than the spot price. When the spot price is higher than the futures price, the market is said to be in backwardation. It is often called “normal backwardation” as the futures buyer is rewarded for risk he takes off the producer. If the spot price is lower than the futures price, the market is in contango.”[3]

The futures or forward curve would typically be upward sloping (i.e. “normal”), since contracts for further dates would typically trade at even higher prices. (The curves in question plot market prices for various contracts at different maturities—cf. term structure of interest rates) “In broad terms, backwardation reflects the majority market view that spot prices will move down, and contango that they will move up. Both situations allow speculators (non-commercial traders)[4] to earn a profit.”[3]

A contango is normal for a non-perishable commodity that has a cost of carry. Such costs include warehousing fees and interest forgone on money tied up (or the time-value-of money, etc.), less income from leasing out the commodity if possible (e.g. gold).[5] For perishable commodities, price differences between near and far delivery are not a contango. Different delivery dates are in effect entirely different commodities in this case, since fresh eggs today will not still be fresh in 6 months’ time, 90-day treasury bills will have matured, etc.

 

CT-Contango2

 

 

The graph depicts how the price of a single forward contract will behave through time in relation to the expected future price at any point time. A contract in contango will decrease in value until it equals the spot price of the underlying at maturity. Note that this graph does not show the forward curve (which plots against maturities on the horizontal).

 

Contango is a potential trap for unwary investors. Exchange-traded funds (ETFs) provide an opportunity for small investors to participate in commodity futures markets, which is tempting in periods of low interest rates. Between 2005 and 2010 the number of futures-based commodity ETFs rose from two to ninety-five, and the total assets rose from 3.9 to nearly 98 billion USD in the same period.[6] Because the normal course of a futures contract in a market in contango is to decline in price, a fund composed of such contracts buys the contracts at the high price (going forward) and closes them out later at the usually lower spot price. The money raised from the low priced, closed out contracts will not buy the same number of new contracts going forward. Funds can and have lost money even in fairly stable markets. There are strategies to mitigate this problem, including allowing the ETF to create a stock of precious metals for the purpose of allowing investors to speculate on fluctuations in its value. But storage costs will be quite variable, and copper ingots require considerably more storage space, and thus carrying cost, than gold, and command lower prices in world markets: it is unclear how well a model that works for gold will work with other commodities.[6] Industrial scale buyers of major commodities, particularly when compared to small retail investors, retain an advantage in futures markets. The raw material cost of the commodity is only one of many factors that influence their final costs and prices. Contango pricing strategies that catch small investors by surprise are intuitively obvious to the managers of a large firm, who must decide whether to take delivery of a product today, at today’s spot price, and store it themselves, or pay more for a forward contract, and let someone else do the storage for them.[7]

The contango should not exceed the cost of carry, because producers and consumers can compare the futures contract price against the spot price plus storage, and choose the better one. Arbitrageurs can sell one and buy the other for a theoretically risk-free profit (see rational pricing—futures). The EU describes the two groups of players in the commodity futures market, hedgers (commodity producers and commodity users) or arbitrageurs/speculators (non-commercial investors).[3]

If there is a near-term shortage, the price comparison breaks down and contango may be reduced or perhaps even reverse altogether into a state called backwardation. In that state, near prices become higher than far (i.e., future) prices because consumers prefer to have the product sooner rather than later (see convenience yield), and because there are few holders who can make an arbitrage profit by selling the spot and buying back the future. A market that is steeply backwardated—i.e., one where there is a very steep premium for material available for immediate delivery—often indicates a perception of a current shortage in the underlying commodity. By the same token, a market that is deeply in contango may indicate a perception of a current supply surplus in the commodity.

In 2005 and 2006 a perception of impending supply shortage allowed traders to take advantages of the contango in the crude oil market. Traders simultaneously bought oil and sold futures forward. This led to large numbers of tankers loaded with oil sitting idle in ports acting as floating warehouses.[8] (see: Oil-storage trade) It was estimated that perhaps a $10–20 per barrel premium was added to spot price of oil as a result of this.

If such is the case, the premium may have ended when global oil storage capacity became exhausted; the contango would have deepened as the lack of storage supply to soak up excess oil supply would have put further pressure on spot prices. However, as crude and gasoline prices continued to rise between 2007 and 2008 this practice became so contentious that in June 2008 the Commodity Futures Trading Commission, the Federal Reserve, and the U.S. Securities and Exchange Commission (SEC) decided to create task forces to investigate whether this took place.[9]

A crude oil contango occurred again in January 2009, with arbitrageurs storing millions of barrels in tankers to profit from the contango (see oil-storage trade). But by the summer, that price curve had flattened considerably. The contango exhibited in Crude Oil in 2009 explains the discrepancy between the headline spot price increase (bottoming at $35 and topping $80 in the year) and the various tradeable instruments for Crude Oil (such as rolled contracts or longer-dated futures contracts) showing a much lower price increase.[10] The USO ETF also failed to replicate Crude Oil’s spot price performance.

We can see the linkage between the price of crude oil and the high yield debt prices as represented by the price of Barclays High Yield Bond ETF (JNK-blue line) and the price of the West Texas Intermediate crude ($WTIC-red line). The price of oil is shown on the left axis and the price of JNK is shown on the right axis.

 

Energy companies now constitute approximately 15% of the high yield bond market, up from 8% in 2008.

Everything was fine when oil was north of $100 a barrel. But many of these independent drillers that can profitably extract oil when it is trading at $100 a barrel are now potentially less or not profitable as oil has fallen to its current levels and positive cash flow lessens or evaporates. The costs for the various shale oil drillers are all over the map but most independent drillers hit a break-even around $80-$85 per barrel.

12-11-MC-2

 

It is amazing how much of an impact a small increase in interest rates can have on your hard earned principal. These interest rate increases, as we saw from our first example, aren’t always over a long period of time. In our example, the interest rate on the 10-year U.S. Treasury note fell and then moved up 0.35% in just one morning. While this was an outlier event, it does show that rates can move rapidly if market views on interest rates change suddenly.

In order to illustrate this relationship between interest rate increases and the impact on the principal value of your investment, we present five interest rate increase scenarios below. The “initial” point is where your investment is made into the iShare Barclays 20+ Year Treasury Bond ETF, in this case the current interest rate on the 20-year U.S. Treasury is 2.70%. We then show how over a three month time frame the prevailing interest rate rises in 30 basis point increments, ranging from a 0.30% to a 1.50% interest rate increase.

122MC2

 

OTHER TYPES OF BONDS

A zero-coupon bond (also discount bond or deep discount bond) is a bond bought at a price lower than its face value, with the face value repaid at the time of maturity.[1] Note that this definition assumes a positive time value of money. It does not make periodic interest payments, or have so-called “coupons”, hence the term zero-coupon bond. When the bond reaches maturity, its investor receives its par (or face) value. Examples of zero-coupon bonds include U.S. Treasury bills, U.S. savings bonds, long-term zero-coupon bonds,[1] and any type of coupon bond that has been stripped of its coupons.

In contrast, an investor who has a regular bond receives income from coupon payments, which are usually made semi-annually. The investor also receives the principal or face value of the investment when the bond matures.

Some zero coupon bonds are inflation indexed, so the amount of money that will be paid to the bond holder is calculated to have a set amount of purchasing power rather than a set amount of money, but the majority of zero coupon bonds pay a set amount of money known as the face value of the bond.

Zero coupon bonds may be long or short term investments. Long-term zero coupon maturity dates typically start at ten to fifteen years. The bonds can be held until maturity or sold on secondary bond markets. Short-term zero coupon bonds generally have maturities of less than one year and are called bills. The U.S. Treasury bill market is the most active and liquid debt market in the world.

 

OTHER INFO

2) Treasury Bond Rates: As shared above, there is an important historical relationship between Treasury bonds and the valuation of the stock market. Right now that is very favorable for stocks as bond rates have come down significantly over the past year. And signs point to rates staying low for quite some time.

However, you can easily appreciate that if rates started to rise significantly, then it would have a negative effect on stock prices. I believe stocks will do fine if rates just float up to around 3%. Above that and it will start to call into question their relative value versus bonds, which would spark a correction even if other economic indicators are positive.

Cross listing of one company on multiple exchanges should not be confused with dual listed companies, where two distinct companies – with separate stocks listed on different exchanges – function as one company.

Cross listing of shares is when a firm lists its equity shares on one or more foreign stock exchange in addition to its domestic exchange. Examples include: American Depositary Receipt (ADR), European Depositary Receipt (EDR), International Depository Receipt (IDR) and Global Registered Shares (GRS).

Generally such a company’s primary listing is on a stock exchange in its country of incorporation, and its secondary listing(s) is on an exchange in another country. Cross-listing is especially common for companies that started out in a small market but grew into a larger market. For example, numerous large non-U.S. companies are listed on the New York Stock Exchange or NASDAQ as well as on their respective national exchanges such as Enbridge, BlackBerry Ltd, Statoil, Ericsson, Nokia, Toyota and Sony.

 

ind that a cross-listing on a U.S. stock market by a non-U.S. firm is associated with a significantly positive stock price reaction in the home market

show that companies with a cross-listing in the United States have a higher valuation than non-cross-listed corporations, especially for firms with high growth opportunities domiciled in countries with relatively weak investor protection

2014-12-20_23-55-10

 

 

Dual-listed companies should not be confused with cross-listed companies, where the stock of one company is listed on more than one stock exchange.

A dual-listed company or DLC is a corporate structure in which two corporations function as a single operating business through a legal equalization agreement, but retain separate legal identities and stock exchange listings. Virtually all DLCs are cross-border, and have tax advantages for the corporations and their stockholders.

In a conventional merger or acquisition, the merging companies become a single legal entity, with one business buying the outstanding shares of the other. However, when a DLC is created, the two companies continue to exist, and to have separate bodies of shareholders, but they agree to share all the risks and rewards of the ownership of all their operating businesses in a fixed proportion, laid out in a contract called an “equalization agreement.” The equalization agreements are set up to ensure equal treatment of both companies’ shareholders in voting and cash flow rights. The contracts cover issues that determine the distribution of these legal and economic rights between the twin parents, including issues related to dividends, liquidation, and corporate governance. Usually, the two companies will share a single board of directors and have an integrated management structure. A DLC is somewhat like a joint venture, but the two parties share everything they own, not just a single project; in that sense, a DLC is similar to a general partnership between publicly held corporations.

 

Some major dual-listed companies are listed in Category:Dual-listed companies; they include:[1]

Other companies were formerly dual-listed:

Some major dual-listed companies are listed in Category:Dual-listed companies; they include:[1]

Mispricing in DLCs

The shares of the DLC parents represent claims on exactly the same underlying cash flows. In integrated and efficient financial markets, stock prices of the DLC parents should therefore move in lockstep. In practice, however, large differences from theoretical price parity can arise. For example, in the early 1980s Royal Dutch NV was trading at a discount of approximately 30% relative to Shell Transport and Trading PLC. In the academic finance literature, Rosenthal and Young (1990)[2] and Froot and Dabora (1999)[3] show that significant mispricing in three DLCs (Royal Dutch Shell, Unilever, and Smithkline Beecham) has existed over a long period of time. Both studies conclude that fundamental factors (such as currency risk, governance structures, legal contracts, liquidity, and taxation) are not sufficient to explain the magnitude of the price deviations. Froot and Dabora (1999)[3] show that the relative prices of the twin stocks are correlated with the stock indices of the markets on which each of the twins has its main listing. For example, if the FTSE 100 rises relative to the AEX index (the Dutch stock market index) the stock price of Reed International PLC generally tends to rise relative to the stock price of Elsevier NV. De Jong, Rosenthal, and van Dijk (2008)[4] report similar effects for nine other DLCs. A potential explanation is that local market sentiment affects the relative prices of the shares of the DLC parent companies.

Because of the absence of “fundamental reasons” for the mispricing, DLCs have become known as a textbook example of arbitrage opportunities, see for example Brealey, Myers, and Allen (2006, chapter 13).[5]

SUMMARY
pick the company listing in the stronger economy 

pick the company listing in the country you will get a better tax advantage

 

One interesting finding by Froot and Dabora (1999) is that although the level of the premium or discount between twins may be hard to explain, it is possible to explain some of the changes in the price difference. In examining the cases of Royal Dutch Petroleum/Shell, Unilever NV/PLC, and SmithKline Beecham, Froot and Dabora find that prices of individual twins showed ‘excess comovement’ with the local stock market index in the country where most of the twins’ trading occurs. For example, the price of Royal Dutch was affected relatively more by developments in the US stock market (where it traded most actively, in the form of an ADR) while the price of Shell was influenced relatively more by movements in the UK stock market (where it traded most actively). Hence changes in the premium or discount between twins were partly explained by relative movements in the relevant national stock market indices. This finding has been widely interpreted as evidence that asset prices are 2014-12-20_23-32-42partly determined by the sentiment in the markets where trading occurs.

 

IBLN is a variation on a theme started by the Global X Guru Index ETF GURU, +0.92%  , which opened in 2012 and now has about a half-billion dollars in assets. The Guru fund tracks an equal-weighted index that attempts to mimic concentrated equity positions taken by large hedge funds, as reported in SEC filings; that’s the same basic concept as iBillionaire, but with 75 experts instead of 20 billionaires.

 

In 2013, the Guru fund was the top issue in its category, according to Morningstar Inc.

This year, it ranks dead last.

It hasn’t lost money — and it is still outperforming the S&P sharply since inception — but it’s pretty much in line with the average large-cap fund since it opened, despite one year of superior results.

 

But wait – how does it access such sensitive information? Well, as it transpires, everyone has access to the information already through SEC filings that are required for any investment made in excess of $100 million. What iBillionaire does is makes the data more easily accessible, while serving up historical trends – peaks and troughs – of how big investments fared.

 

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Dave Nadig

ETF.com Analyst Blogs

iBillionaire ETF Buyers: Beware Of Bear

Related ETFs: MOAT | GURU | IBLN
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It’s easy to be a cynic—in fact, I’ve been accused of either being a professional cheerleader or a professional cynic for most of my career (an odd dichotomy I still can’t figure out). And when someone launches a fund called the “Billionaire ETF,” it’s almost like someone showed up with a prewritten script for a late-night TV monologue.

But the thing is, the Direxion iBillionaire ETF (IBLN) is actually part of two waves of investing at the same time.

The first wave is the “smart” wave. We’ve seen a rash of “smart beta” launches, most based on models that algorithmically try to rebuild traditional pools of asset—like large-cap stock—using market-beating rules. But there’s another version of these smart products—the ones that are trying to tap other investors’ acumen.

The most notable example is the Global X Guru ETF (GURU | B-58). Guru builds a portfolio based on the filings of large hedge funds, as reported in 13F filings. It’s another snickerworth idea, but naysayers are really the ones who should be snickered at here: The fund has pulled in nearly $500 million in just two years, while crushing the S&P 500 by more than 22 percent.

But that’s not the only successful example: Van Eck launched the Market Vectors Wide Moat ETF (MOAT | A-48) in 2012 as well, based on the picks of the Morningstar equity analyst team, and it’s also beaten the S&P since its 2012 inception, by 4.56 percent.

IBLN takes things one step more active than either GURU or MOAT—it trolls through 13F filings for the personal holdings of the world’s wealthiest investors. The theory is, I suppose, that the 19 rich white guys they’re following all got at least the “rich” part from being smarter than the rest of Wall Street.

All three funds are really just vehicles for tapping a different kind of active management—one based on a “wise men” model rather than a hot-shot stock-picker model perhaps, and one that sticks the picks into an index before rolling them into a fund; but mostly, that’s splitting hairs.

The second wave all of these ETFs are part of, however, is the one I actually find more interesting: equal weighting. All three of the ETFs mentioned here take their best ideas from their different methodologies and equal-weight them, rebalancing occasionally.

Equal weighting is the simplest-to-implement version of the “anything but market cap” approach to smarter investing, and despite the implied higher trading costs, it’s actually been a consistent winner during this bull market.

Consider the returns just of the Guggenheim S&P 500 Equal Weight (RSP | A-79) versus the SPDR S&P 500 (SPY | A-98):

RSP_SPY

That’s a nearly 20 percent gain over the naive S&P 500 in five years.

Now, there are lots of academic reasons why equal weighting has outperformed—it’s not magic. It’s overweight smaller-cap stocks, which have juiced its beta by about 8 percent. That increased beta means it goes up more when the market is up and down more when the market is down. We’ve been mostly in an up market. It’s not a free lunch—it’s a tool to tweak your exposure.

So let’s consider how these other equal-weighted, “wise men” focused funds have done (substituting in indexes where the actual fund history isn’t long enough).
manyfunds

Charts courtesy of Bloomberg

You’re starting to see the appeal of “anything but market cap” in a bull market. Every one of these strategies beat the pants off the S&P 500 over the five-year window, with iBillionaire on top. I don’t find that particularly surprising—the index was only introduced in November last year, and let’s be honest, nobody has ever introduced a “smart” index that looks bad on the backtest.

But I’m left with more than one concern:

The first is simply that I remain, as always, enormously skeptical of active management. IBLN certainly looks good on paper right now, but it hasn’t actually been tested in a live bear market.

And the thing you’d expect these “wise men” to do if they were really geniuses managing your money would be to get out of a falling market faster than everyone else—precisely what IBLN cannot possibly do, since it’s dealing with data lagged from these gentleman by 45 days through the 13F filing process.

The second is that I’m not convinced folks will understand that a significant portion of the “magic” here comes from simply equal weighting a large-cap portfolio. That magic serves mostly just to boost the beta of the underlying selection of stocks.

That works great in upmarkets, and can really hurt in downmarkets. In the terrible year leading up to the March bottom in 2009, for instance, equal-weighted S&P underperformed the S&P by an extra 5 percent—rough justice in a period where the S&P was down 45.5 percent already.

My prediction, however, is that despite all the snickering, we’ll continue to see strong flows into IBLN, GURU and their inevitable copycats. No matter how many regressions I run, or how many statistics I can trot out, nobody wants to be average, and the belief that the rich guys must be smart is so fundamentally American that it’s an easy sell.

At least when the market’s up.