Last week (blog dated 1/05/2010) I talked about the advantages and disadvantages of Exchange Trade Funds (ETFs) vs. Mutual Funds and two BRIC (Brazil, Russia, India and China) index ETFs. Today I will review two BRIC index ETFs and decide which one I am going to buy (or both) and what is the buying / selling strategy:
- S&P BRIC 40 SPDRS (BIK): up 66.9% year-to-date
- Claymore/BNY BRIC (EEB): up 66.1% year-to-date
The following are the primary reasons to invest in BRIC index ETFs:
- Much higher GDP growth than the western development countries of Japan, EU and US. In 2008 China was 9.6%, India 7.4%, Russia 5.6% and Brazil 5.1% compared to US 1.1%, EU .8% and Japan .7%. Their growth rate should be higher than most developing and developed nations over the next 10 years.
- Hedging against a declining US dollar.
- China and India have much higher savings and investment rates than the US which will help to fuel their GDP growth.
- It is always good to have emerging / international markets in your portfolio. I would suggest including at least 15% international and 5% emerging investments.
Let’s look at the two BRIC index ETFs: BIK and EEB (data as of 1/12/2009). BIK uses the S&P BRIC Index which has 43% invested in China and 28% in Brazil (and the rest in India and Russia). The fund has the following weighting: 48% energy and industrial materials and 32% financial services. The expense ratio is .50% and the bid / ask spread is 2.7% (this is like a front end fee). The Net Asset Value (NAV) price is higher than the stock price. The yield is 2.62, much higher than a 3 year Certificate of Deposit (CD).
EEB uses the Bank of New York BRIC Select APR Index which invests 54% in Brazil and 31% in China. The fund has almost the same weighting as BIK. The expense ratio is .60% and the bid / ask spread is 2.1% which is lower than BIK (EEB has 100% higher net assets than BIK). The NAV price is higher than the stock price. The yield is 2.42% which is lower than BIK.
After reviewing the two BRIC index ETFs, I have decided to buy the BIK and EEB BRIC index ETFs in equal amounts (less than 1% of my total portfolio).The correlation of growth over the last year is very close. One has a higher expense ratio (expense ratio + bid / ask spread ratio), but has a higher yield. In a surprise announcement on Tuesday (January 12, 2010) the Chinese authorities stated they are raising the proportion of deposits that banks must hold in reserve; this has caused a 3% pullback in the ETFs. I have decided to put in an order for one half of investment today and wait for a further pullback to place the other half (dollar cost average the investment). I am also putting together a selling strategy using trailing stop orders.
Regarding Ford: I talked about possible trading strategies (blog dated 12/29/2009) with the Ford (F) stock that I bought October 2008 at $2.09 and have sold the amount that equaled cost of buying and an annual return of 10% for 3 years (I am playing with ‘free’ money). Today (01/11/2010) F price is $12.11 and after a 475% gain I have decided to sell a subset of my shares with a trailing stop of 3%. My selling price was $11.74. I will wait for a pullback to increase my number of shares with the gross revenue from the recent sale.
In the next blog I am going to talk about strategies for shorting middle and long US treasuries. Please comment on the BRIC index ETF strategy, selling some of Ford and waiting for a pullback to buy more, and strategies for shorting US treasuries.
Paul
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I pulled the data on both of these to my surprise the chart on both of these follow in lock step. I would have expected a bit of a crossing of the lines. They both move in tandem both up or down. I away like splitting my funds in the same sector but in difference hemispheres. Doing this should protect you against an event happing in one of these country's. I also like that both of these ETF have a low turnover ratio less than 20% per year.
ReplyDeleteOver the past few years I've been trading in and out of the same stock like ford. Last year it was mostly AAV which was a trust and has been converted to a company. The year before it was AMR. Both of these stocks would swing 30% or move from highs to lows base on the cost of OIL. Other stock that seem to swing within a range are McDonald and Coke both trade between a range while they cycle is much slower 6-9 months they both pay a divide. I've traded both of these. Right now there are near there highs so there just on my watch list. The stocks I trade in this way I'm able to judge how they will perform base on the worlds GDP growth and the cost of commodity AAV and AMR trade base on OIL
AAV up when OIL up
AMR down when OIL up
Coke moves with sugar, Mcd moves with corn,wheat these also have a dollar play right now they are trading near their highs base on the weak dollar. In my head I have a buy point on both of these or a point when I start watching more intently
I for one keep a trailing stop lost on most of my stocks just a few days ago I was stop out of my Microsoft.