New ETF’s

HKK: Small Cap Muscle for Hong Kong

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If you ever get a chance to go to Hong Kong, do not pass it up.  I received my first opportunity in 1982 and immediately fell in love with the place.  The business energy level is so high there that it is infectious.  Perhaps that is one of the reasons that just two days ago, the Swiss-based International Institute for Management Development (IMD) ranked Hong Kong the World’s Most Competitive Economy.

The large companies of Hong Kong help make it a global powerhouse.  However, its smaller companies, the unsung superheros of Hong Kong, might better exemplify its true competitiveness.  With Wednesday’s (5/18/11) launch of IQ Hong Kong Small Cap ETF (HKK), U.S. investors can for the first time get easy access to this desirable segment of the world economy.

The underlying Index IQ Hong Kong Small Cap Index is a capitalization-weighted index that aims to capture the bottom 15% of the publicly available total market capitalization of companies located in Hong Kong.  The 15-year old iShares MSCI Hong Kong (EWH) targets the largest 85%, which theoretically allows for zero overlap between them.  Although the two ETFs may compete for the dollars investors decide to allocate to Hong Kong, they are actually complementary products.

HKK’s sector breakdown has Consumer Discretionary at 23.6%, Financials 18.9%, Materials 15.7%, Technology 10.9%, Consumer Staples 8.8%, Industrials 6.7%, Transportation 5.6%, Communications 2.7%, Energy 2.6%, Utilities 2.3%, and Health Care 2.2%.  This is vastly different from EWH, which has a 61.9% allocation to Financials (EWH overview page).

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New BONO ETF Has Undocumented Foreign Currency Exposure

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Van Eck last Thursday (5/12/11) launched the Market Vectors LatAm Aggregate Bond ETF (BONO), claiming it is the first U.S.-listed ETF offering exclusive exposure to Latin America’s debt markets.  The new ETF will try to replicate the BofA Merrill Lynch Broad Latin America Bond Index using a 4% sampling technique.

The underlying index is composed of external and local currency Latin American sovereign debt, and the external debt of non-sovereign Latin American issuers denominated in USD or Euros.  The index consists of debt that is 64.3% sovereign issued, 33.8% corporate, and 1.9% quasi-governmental.

When buying a foreign debt fund, investors want to know the issuers, quality, yield, and currency exposure of the overall fund.  Van Eck fails on half of these items by providing no indication regarding the yield or currency exposure (summary page).

The marketing literature fails to supply the currency exposure of either the fund or the index.  However, the downloadable spreadsheet of holdings supplies the currency on a bond by bond basis.  With some effort, I modified the spreadsheet to determine that 40.8% of the fund is currently denominated in four foreign currencies.  However, shareholders should not be forced to perform these types of calculations.  Data of this nature should be calculated and supplied by Van Eck.  Currency exposure isn’t even identified as one of the risks on the fact sheet(pdf).

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Analysis of New High Beta and Low Volatility ETFs from PowerShares

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Invesco PowerShares brought out two new and unique ETFs last Thursday (5/5/11).  PowerShares S&P 500 High Beta Portfolio (SPHB) and PowerShares S&P 500 Low Volatility Portfolio (SPLV) are innovative products that employ quantitative beta-weighting and volatility-weighting as part of the underlying index construction.  As with any new investment strategy, you need to understand how these new ETFs will function before putting them in your portfolio.

– PowerShares S&P 500 High Beta Portfolio (SPHB) (SPHB overview) tracks the new S&P 500 High Beta Index, which consists of the 100 stocks from the S&P 500 with the highest sensitivity to market movements, or beta, over the past 12 months.  The 100 stocks are weighted proportional to their 12-month beta coefficient at each quarterly rebalancing.

– PowerShares S&P 500 Low Volatility Portfolio (SPLV) (SPLV overview) tracks the new S&P 500 Low Volatility Index, which consists of the 100 stocks from the S&P 500 with the lowest realized daily volatility over the past 12 months.  The 100 stocks are weighted inversely proportional to their 12-month realized volatility at each quarterly rebalancing.

Beta & Volatility

Beta is one of the most misunderstood investment terms, and it is often incorrectly assumed to be a word that is interchangeable with volatility.  However, that is not the

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