BRIC ETFs, Ford and Shorting US Treasuries

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