Monday, August 27, 2012

Global ETFs v Equities

Questions to ask before you Proceed ETFs or Equities

  • Style, and expectations of the capital markets - are we trending? are we in a range? Is the market psychologically driven or valuations driven?
  • What is your portfolio strategy in reference to your liquidity needs in the future?

Case for Global ETFs

  • Some markets are hard to enter through equites - korean equities, chinese equities; emerging market exposures are gained through ETFs
  • Macro themes like gold (liquidity) and soft commodities (drought in US) allow to easier capture through etfs (GLD, SLX, QAG)
  • Another interesting macro theme is the US dollar (UUP) and oil (USO) the negative correlations of the two allow for interesting intermarket trading
  • ETFs allow global bond exposures to be maintained more easily - no more large 100k blocks to have bonds in your accounts
  • ETFs now have filters to allow for easier asset allocation process, global indices are easier to filter - stw for asx200, spdr for us sp500
  • Europe and its potential rally have allowed to compelling ETF value, without the individual tail risk of one stock (FEZ - eurostox, EWG - germany, DFE - small cap dividend fund)
  • Psychologically easier to rebalance ETFs than equities
  • Bond ETFs; TUZ (treasury index fund 1-3 year), Global Real Estate (VNQI), US real estate (VNQ)

Case for Global Equities

  • There are now so much free data and equity tools available sites that allow for effective filtering of global stocks; heatmaps using finviz, 4-traders, stocktwits, vuru, google finance
  • Australia stocks have lagged this year 2012 - not as much liquidity compared to US, Euro, China; we are secondary market - i.e china demand.
  • Australian equities suffering from historically high AUD/USD
  • Cheap to trade US equities - $1 per trade on interactive brokers
  • Valuation process of fundamentals can be more discretionary
  • Global tech trends can only be captured by access to global markets, AAPL, GOOG, CSCO, AMZN
  • Brands that are not global will tend to be harder to identify in local markets - Coke, Nike, Starbux, MacD

Points to remember

  • Need to manage fx risk; use cfds, use natural hedge, use fx options.
  • Need to create a diversified plan based on both area and risk factor, country, beta, volatility, sector
  • Liquidity as a risk factor should be monitored constantly.
  • Always check fees and spreads for ETFs
  • Contango can eat into etf costs i.e UNG