Chartwell Global ETF Report

While global markets have been turbulent, three sectors and the exchange-traded funds (ETFs) that track them have done fairly well as investors looked for safety and energy prices climbed.
Global Energy Sector ETFs such as (IXG) had a strong week as the price of crude oil moved back over $60 a barrel and Global Utilities Funds like iShares S&P Global Utilities Sector (JXI) and WisdomTree International Utilities Sector (DBU) represent the classic defensive sector, extended their winning streak to seven straight weeks.

But Global Real Estate funds and ETFs such as the SPDR DJ Wilshire International Real Estate (RWX) saw their seven week, $6 billion run of inflows come to an end as investors factored in their fears of slower than predicted economic growth into demand projections for commercial space.

There are also several domesatic utility options such as S&P Select Utilities SPDR (XLU), iShares Dow Jones U.S. Utilities Sector Index (IDU) and the Vanguard Utilities (VPU) 1.9%.
Although many ETFs have bounced back this week, it is useful to track the ETF and fund investment flows to see what sectors help up best under stress.

Emerging Portfolio Fund Research (EPFR) comments that investors hit the reset button during the first week of March, pulling a record-setting $17.2 billion out of EPFR-tracked funds and ETFs during the week as flows and performance for most fund groups dropped close to the break-even point for the year. Emerging markets equity funds and ETFs accounted for $8.9 billion of the outflows while equity funds geared to developed markets saw $8.3 billion pulled out by investors.

The only fund groups to escape the carnage were Global and US Energy, Consumer Goods and Utilities Sector Funds, US Small Cap equity funds and Balanced Funds that invest in both equities and fixed income. Although it may have seemed like the end of the world, the outflows were actually very small in realtion to assets. Outflows of $1.77 billion from US Equity Funds and ETFs amounted to only 0.12% of assets under management as some investors sought safety, pursued pockets of value in the small cap universe and extended the winning streak of Balanced Funds, which invest in both equity and fixed income, to nine straight weeks.

Don't forget that exchange-traded funds (ETFs) offer investors the opportunity to invest in corporate or government bonds. Bond ETFs are portfolios of bonds that track the performance of a bond or index, such as 20-year Treasuries. They are bought and sold like stocks. Investors reap interest via monthly dividends, and any capital gains are paid out through an annual dividend. Bond ETFs don't mature, but they reflect the particular bond index's maturity and can be shorted, traded on margin and hedged with options.

Mutual funds have a big lead but the popularity of exchange-traded funds (ETFs) is making them sweat as more than one out of every three fresh dollar inflow from investors goes to upstart ETFs. ETF inflows went up from only $7 billion in 2000 -- a scant 2% of fund inflow -- to $60 billion in 2006, or 40% of fund inflow, according Strategic Insight data.

Global markets were flat and directionless as if exhausted by the last week’s volatility. Europe was up across the board and Asian markets were generally up slightly with Japan off just a bit. Gold and oil rose a bit and weaker than expected jobs data was received warmly as evidence that inflation would remain muted. Real estate was one of the hardest hit sectors. I would stay far away from this area and we added a short position to our most aggressive portfolio which is up 9% in the last week alone.

Oil Services HOLDRs (OIH) and the iShares Dow Jones US Oil Equipment (IEZ) were up 2.34% and the PowerShares Dynamic Oil & Gas Services (PXJ) was up 2.32% for the day. The biggest loser for the day was the DJ Wilshire REIT ETF(RJR) which was down 1.5% and the iShares MSCI Mexico Index (EWW), down 1.52%.

Some exchange-traded funds (ETFs) give investors both more flexibility and a cost advantage over traditional investment tools. For example, leveraged ETFs let investors make extra large bets up or down on major indexes in one stock buy. For instance, if the S&P 500 goes up 1% on a certain day, Ultra S&P500 ProShares (AMEX:SSO - News) will climb by 2%. Others concentrate bets even further like UltraShort S&P500 ProShares (AMEX:SDS - News) which doubles the short position. Compared to using a margin account, these leveraged ETFs are both cheaper and less cumbersome – and no margin calls.

The Sweden ETFs (EWD) top holding is the telcom equipment maker Ericsson which accounts for 21% of the basket. This is a good thing since Ericsson is a great company and attractve stock. With telco out of favor, Ericsson is up only 5% over the last 12 months but it has a 25% return on equity and a much stronger balance sheet than its peers. Just over 40% of all telephone calls worldwide go through an Ericsson system. Sounds crystal clear to me. Other top companies in the Sweden ETF include Svenska, Sandvik, Volvo and Atlas Copco. Join me as I lead a small group of smart investors to visit Stockholm and Copenhagen in June 2007.

Wall Street snapped back Tuesday as investors were encouraged by a recovery on global markets and moved to recoup some of the big losses suffered during last weeks sharp pullback. Solid gains in overseas markets and exchange-traded funds or ETFs set the stage for the comeback, despite some shaky U.S. economic data that posed a fresh threat to the dollar and raised the specter of inflation once again.

The Japanese yen, which in the past week climbed about 4% amid concerns that carry trades were being rapidly unwound, fell against the U.S. dollar and other major currencies helping the Nikkei 225 index to its first positive finish in six sessions with an increase of 1.2%. While the Dow Jones industrials was up more than 150 points and European stock markets also rose with the FTSE 100 up 1.3%, it was Asian and Latin America markets and ETFs that led the global rally.

iShares MSCI Malaysia ETF (EWM) was the leading ETF today up 6.56%, the iShares MSCI Brazil ETF (EWZ) was up 6.39%, the iShares MSCI Australia ETF (EWA) was up 6.22%, the iShares MSCI Singapore ETF (EWS) was up 5.44%, the iShares FTSE/Xinhua China 25 ETF (FXI) was up 5.89%, the iShares S&P Latin America 40 ETF (ILF) was up 4.93% and the iShares MSCI South Korea ETF (EWY) was up 4.51%. In Asia, only the Philippines and Taiwan iShares MSCI Taiwan ETF had down markets for the day.

Amazingly, no equity ETFs were down for the day but some bond ETFs suffered marginal declines. It will be interesting to see if this momentum carries into tomorrow.

The bloodletting continued around the world on Monday as the Dow, S&P 500 and Nasdaq all lost ground with the least damage amongst the larger cap exchange-traded funds or ETFs like (DIA) and (XLG) while the Russell 2000 ETF (IWM) was down 1.98%. European markets were down across the board with volatility up 9%.

Asia was the worst hit with Hong Kong down 4% for the day and the stronger yen impacting big exporters like Toyota which was off 3.24%. The blue chip Nikkei 225 was down 3.3%. The U.S. dollar weakened against the yen by about 1% but held its own against all other major currencies.

The Malaysian ETF (EWM) was down 6.64%, Australia (EWA) lost 5.81%, the Powershares China (PGJ) lost 4.3% and the South Korean KOSPI index (EWY) was down 2.7%.

The big winners were of course the inverse ETFs that move opposite markets with the ProShares Ultra Dow Jones U.S. Real Estate ETF (SPS) up 7.39% for the day. SPS moves 200% the opposite of the underlying index. U.S. real estate tracking ETFs were hit very hard again today.

At some point, prices will settle at levels sure to bring out the bargain hunters. According to the Financial Times, the cheapest stock market indexes on a price to earnings basis are Thailand trading at 9.5 times earnings, Brazil at 11.9 times, South Korea at 10.9 times, Germany at 13 times, Brazil at 11.8 times and the Netherlands at 11.8 times earnings.