Top 3 South Korea ETFs (SSNLF, EWY)

South Korea

A South Korea exchange-traded fund (ETF) is comprised of the securities of companies based in South Korea and/or listed on South Korean exchanges. South Korea is one of the famous Four Asian Tigers, along with Hong Kong, Taiwan and Singapore, and it is home to some of the largest industrial and technological firms in the world.

Since the 1960s, very few countries boast as consistent and explosive an economic growth pattern as South Korea. It is the third-largest economy in Southeast Asia, trailing only top-five global economies in Japan and China.

ETFs operate like a hybrid between two other equities: stocks and mutual funds. A South Korea ETF can be just as diversified as a South Korea mutual fund, yet it trades intraday like shares of Korean companies such as Samsung (SSNLF).

Despite its growth and success, South Korea is not the target of many large ETFs. This leaves room for up-and-coming managers to seize on potentially untapped equity returns. On the flip side, it leaves many South Korea ETF plays as niche-only.

iShares MSCI South Korea Capped ETF
Very few funds dominate a single national equity market the way that the iShares MSCI South Korea Capped ETF (EWY) dominates South Korea. EWY is the only sizable ETF built of South Korean equity holdings and the only South Korea ETF with an average daily trading volume in excess of 300,000.

BlackRock launched EWY in 2000 and linked it to the Morgan Stanley Capital International Korea Index. This index is float-adjusted and, like most iShares, is weighted by market capitalization. This means that the largest South Korean companies are well-represented in EWY.

The top 10 holdings for EWY account for nearly half of total assets under management. The largest holding, Samsung Electronics, represents more than 20% of all AUM; investors should understand the potential risks of such a top-heavy ETF. Other large holdings include POSCO (PKX), Hyundai (HYMTF) and Kia (KIMTF).

With more than $4.3 billion in managed assets, this ETF is nearly 30 times larger than any of its direct competitors, most of which are much younger. This makes EWY the only stable ETF in play for the foreseeable future.

DB X-Trackers MSCI South Korea Hedged Equity Fund
Just as EWY is the clear leader among Korean ETFs, second place belongs to Deutsche Bank's X-trackers MSCI South Korea Hedged Equity ETF (DBKO). Excluding the much larger EWY, this fund has five times as much AUM and almost 10 times the trading volume of any other South Korea ETF.

Issued and managed by Deutsche Asset & Wealth Management, DBKO is the best play for currency-hedged ETF exposure in the South Korean market. It tracks the MSCI Korea 25/30 U.S. Dollar Hedged Index. DBKO is also relatively cheap, with an expense ratio of less than 60 basis points.

Currency hedging is a logical choice for any of the Asian Tigers because of their export focus. Exchange rate fluctuations can cripple the returns for investors who are left unprotected; this is DBKO's best competitive advantage over EWY. Nevertheless, this is still a very small ETF, and it can be illiquid.

Korea KOSPI 200 ETF
The KOSPI 200 ETF (HKOR) is a little-known, young and infrequently traded fund, but it could fit as a satellite holding as a Southeast Asian buy-and-hold equity. HKOR has low expenses – 38 bps – and tracks an index of 200 blue-chip firms.

HKOR was issued by the Toronto-based Horizons ETFs Group in 2014, and it represents Horizons' cheapest fund. This is considered a giant value play, but it should not be an actively traded ETF because of its low volume and short track record.

Like all South Korea ETFs, this fund is heavy in technology (Samsung especially). After tech stocks, the HKOR portfolio is surprisingly balanced. Basic materials, consumer cyclical stocks, financial services, defensive stocks and industrials each come in between 9 and 13% of total assets.
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What China Devaluing its Currency Means to Investors

All was well in China until stocks began to plunge, and they would have continued to plunge if it hadn’t been for government intervention, which included the temporary banning of short-selling with the potential for arrests, a hiatus for IPOs, throwing good money after bad to prop up equities, encouraging investors to buy equities despite excessive debts and slowing growth, and pressuring state-owned banks to lend to failing businesses.

While all of this was taking place, China also had high hopes for special drawing rights and becoming a reserve currency, but the IMF has stated that no change is likely prior to September 2016.

The two above situations led to the Chinese government devaluing its currency by almost 2% against the U.S. Dollar. This might not sound like a big move, but the biggest daily move prior to Aug. 11, 2015 was 0.16%. Since 2005, the Renminbi has appreciated 25% against the U.S. Dollar, which gave the Chinese government room to move. But will it matter? (For related reading, see: How Does China Manage Its Money Supply?)

Red Dominoes
China is the second-largest economy in the world, and many people felt that it would surpass the United States as the largest economy in the world at some point this century. If you were to look at long-term trends, excessive leverage, and overbuilding to show GDP growth, you could have concluded that this wouldn’t take place. (For more, see: Is Now the Time for Chinese Stocks?)

The United States is in a shaky economic situation right now, but the United States also has a way of finding its way back to prosperity. When you combine American ingenuity with its vast natural resources, the United States is still the favorite to be the largest economy in the world throughout the 21st Century. However, there will be some very difficult times ahead due to deflationary forces.

While China might not reach deflationary levels, it’s not an impossible scenario. Currently, estimates are for China to grow at 7% in 2015, but this seems highly unlikely. The only way China grows at 7% is if the Chinese government finds a way to skew the number. The only reason China grew at 7% in the first half is because of financial services performing exceptionally well as equities soared higher. Equities are no longer soaring. (For more, see: Should Investors Be Bearish on China?)

Look at July as a small sampling for the Chinese economy. Exports declines 8.3% and auto sales slid 7%. One of the reasons the Chinese government devalued its currency was to make its goods for affordable for international buyers. (For related reading, see: How to Invest in China's Auto Industry.)

Also in July, state-run banks loaned a total of $240 billion. The last time state-run banks loaned that amount was 2008. What does that tell you? Also consider that all those Chinese companies that own debt in U.S. Dollars are going to get slammed. (For more, see: China Owns U.S. Debt, But How Much?)

How to Play It
It’s possible that this crafty move by the Chinese government leads to a temporary bounce in Chinese equities, which will then lead to the false belief that the Chinese economy is capable of a sustainable v-shaped recovery in a global economy where central banks are desperately fighting against deflation.

Over the long haul, there is little doubt that Chinese equities will head south once again. And again, the Chinese government will probably move in to prop up the market. This can lead to a fitful trading experience. Eventually, the Chinese government will run out of ammunition and natural forces will take over, bringing Chinese equities much lower than where they currently stand. (For more, see: Why China's Currency Tangos With the USD.)

Ironically, the Chinese are known for patience, but despite the high likelihood of the Chinese economy bouncing back in the future thanks to demographic trends (Tier 2 and Tier 3 cities being modernized + massive consumer population), the Chinese government wants to extend the current economic bubble as long as possible. From an investment perspective, a much better option exists. (For more, see: Top 3 ETFs for Investing in China.)

Trading currencies might not lead to the same kind of upside potential you would see with shorting Chinese stocks, but it will lead to a lot fewer headaches. That may sound strange considering currencies are seen as high risk and unpredictable, but almost everything in the world is working in favor of the U.S. Dollar right now. (For more, see: China’s Economic Indicators, Impact on Markets.)

Prior to this event, we had the ECB and BOJ printing money as if there was no tomorrow, which coincided with the anticipated event of deleveraging in the United States – this would lead to a strengthening Dollar. Now we have the Chinese government devaluing its currency, which strengthens the U.S. Dollar even more.

This is not a recommendation. If you want to invest in the U.S. Dollar, then please do your own research prior to doing so. My opinion is that the U.S. Dollar will move higher in the near future. I also believe that Chinese equities can only be propped up the government for a limited amount of time. The problem here is that the timing is difficult, which makes for a high-risk trade.

The Bottom Line
The Chinese government is doing everything in its power to buy time. Prior to the first wave of the crash in the Shanghai Composite Index, the Chinese government fooled everyone into believing it held a full house, but investors are beginning to see that it was nothing but a stone-cold bluff.
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Top 3 Euro (EUR) ETFs (FXE, ERO)

Top 3 Euro (EUR) ETFs (FXE, ERO) money banknote currency

Currency exchange-traded funds (ETFs) are an alternative investment that offer investors a way to obtain exposure to the foreign exchange market with an investment asset that trades in the same manner as common stock, on regular U.S. exchanges. Currency ETFs are fund investments designed to profit from the value or performance of a currency, such as the U.S. dollar or the euro.

Currency ETFs can be structured in different ways. The most common form is an ETF that tracks the exchange rate of a selected currency pair, such as EUR/USD, which is quoted as the U.S. dollar price exchange rate for one euro. Alternatively, some currency ETFs focus on the overall value of a given currency, reflecting its performance against a selected basket of other currencies.

Investors can utilize currency ETFs to obtain exposure to investments in the forex market, to gain further diversification in their investment portfolio or to hedge other investments in their portfolio. The euro is the second most frequently traded currency, behind the U.S. dollar.

The CurrencyShares Euro Trust ETF
The CurrencyShares Euro Trust ETF (NYSEArca: FXE) is designed to provide investors with exposure to potential profits from an appreciation in value of the euro in direct relation to the value of the U.S. dollar. Shares in the trust represent units of fractional interest in ownership of the trust, which is invested in the EUR/USD exchange rate. Trust shares increase or decrease in value in correlation to increases or decreases in the exchange rate between the euro and the U.S. dollar.

This fund from RydexSGI, rated as medium risk, shows five-year returns of -18.5% as of June 2015, resulting from a sustained uptrend in the relative value of the U.S. dollar. The expense ratio for the fund is relatively low, at 0.4%. There is no dividend yield offered by investment in the fund, since it does not have stock holdings. This is one of the most widely traded euro-focused ETFs, with total assets of approximately $300 million and an average daily trading volume of almost 1 million shares.

The iPath EUR/USD Exchange Rate ETN
This exchange-traded note (ETN), issued by Barclays Bank, is similar to other single-currency iPath ETNs. The iPath EUR/USD Exchange Rate ETN (NYSEArca: ERO) is appropriate for investors wishing to invest in the euro – particularly for investors who prefer trading ETNs, which are debt securities, as opposed to traditional ETFs. The ETN reflects the performance of a benchmark index that measures the relative values of the euro and the U.S. dollar. The index also includes the value of returns using U.S. Treasury bills for cash collateral. Share values of ERO increase or decrease in correlation to the relative value of the euro.

ERO is rated as a relatively moderate ETN. The total assets of the trust are approximately $3 million, so ERO trades with less liquidity than FXE. The expense ratio for ERO is 0.4%.

The ProShares Ultra Short Euro ETF
This leveraged ETF is ideally suited for investors who anticipate a decline in the value of the euro relative to the U.S. dollar (as it sells short the EUR/USD currency pair) and who wish to use leveraged investments. The ProShares Ultra Short Euro ETF (NYSEArca: EUO) aims for daily investment results that reflect 200% of the inverse of the daily change in the EUR/USD exchange rate, excluding expenses. The fund prospers as the EUR/USD exchange rate falls. The fund shows a five-year return of 26%.

Because of the leveraged nature of the investment, it is rated as relatively high-risk. The fund carries an expense ratio of 0.95%. It is the largest EUR/USD ETF, with assets in excess of $600 million.
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Top 3 Japanese Yen (JPY) ETFs (FXY, YCL)

Top 3 Japanese Yen (JPY) ETFs (FXY, YCL) banknote money currency نقود مال اموال ين يابانى

The currency exchange market is yet another area that has been opened to a wider span of investors through the emergence of exchange-traded funds (ETFs) as an increasingly popular investment instrument. Currency ETFs that trade like regular U.S. stocks have simplified access to investments in foreign exchange.

Currency ETFs reflect the changes in exchange rates between a pair of currencies, or the overall performance of a single currency against a selected basket of other currencies. Currency funds may hold cash in a currency, or use futures, options, forex or swap contracts to track exchange rates and relative values. Investors utilize currency ETFs to add further diversification to an investment portfolio, or just as a simple means of accessing potential profits in the forex market.

The Japanese yen is the fourth most widely traded currency globally, behind the U.S. dollar, the euro, and the British pound, and it is the most widely traded currency in Asia. It is often used as a reserve currency in international transactions. With forex traders, the yen is sometimes used to provide diversification, as it frequently trades inversely to the other major currencies in relation to the U.S. dollar.

CurrencyShares Japanese Yen Trust ETF
The CurrencyShares Japanese Yen Trust ETF (NYSEArca: FXY) was first launched in 2007 by RydexSGI, and it is rated as relatively high-risk. The trust seeks for its shares to mirror the price and performance of the Japanese yen relative to the U.S. dollar. They are intended to provide investment results corresponding to those possible from holding currency in the form of yen.

FXY is the second most widely traded yen ETF. Its with total assets are over $100 million, and its average daily trading volume is over 100,000 shares. The fund's expense ratio is 0.4%. This fund is well-suited to investors who seek exposure to the Japanese yen, specifically in relation to the U.S. dollar.

ProShares Ultra Yen ETF
The ProShares Ultra Yen ETF (NYSEArca: YCL) is the first of two ProShares offerings of leveraged ETFs that track the performance of the Japanese yen. By holding yen/U.S. dollar forward contracts, the fund’s goal is to provide investment results equal to twice the daily performance of the JPY/USD cross rate.

The fund's expense ratio is 0.95%. Its total assets are approximately $5 million, and its average daily trading volume is only about 2,000 shares.

YCL is appropriate for investors who desire leveraged exposure to the performance of the Japanese yen relative to the U.S. dollar, and who anticipate a relative rise in the value of the yen. ProShares offers a similar leveraged ETF that adopts a bearish stance toward the yen.

ProShares UltraShort Yen ETF
The largest yen ETF, as of 2015, with over $400 million in total assets, is the ProShares UltraShort Yen ETF (NYSEArca: YCS). This is another leveraged ETF that ProShares offers to reflect changes in the JPY/USD exchange rate. This fund has a bearish approach to the yen, seeking to provide daily investment results that are 200% of the inverse of the performance of the JPY/USD pair. While YCL shares increase in value when the relative value of the yen rises, YCS shares increase in value when the yen declines relative to the U.S. dollar.

YCS is the only yen-focused ETF that is currently showing a positive five-year return. The fund shares have increased in value 71% between 2010 and 2015, due to a protracted bear market for the yen.

The fund's expense ratio is 0.95%. For investors with a bearish outlook on the JPY/USD pair, and who are seeking leveraged investment results, the ProShares UltraShort Yen ETF is the best option currently available.
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No Solace in Small Caps

In the U.S., second-quarter earnings season has generally been better than expected. However, it has failed to inspire investors. While low rates and sluggish wage growth have allowed profit margins to remain at record levels, large U.S. companies continue to struggle with the competitive headwind caused by a stronger dollar, which has hurt revenues and estimates of third quarter earnings.

In an effort to mitigate the impact of a stronger dollar, many investors have been favoring small-cap stocks, which depend less on international sales than larger companies. But the strategy hasn’t provided much benefit so far this year. The large-cap S&P 500’s modest 1% gain is slightly ahead of the small-cap Russell 2000’s performance year-to-date, according to Bloomberg data.

What exactly is holding back small caps? As I write in my new weekly commentary, “The Curious Case of Dollar Strength,” while small caps do have less exposure to international sales, they have proved more vulnerable to rising real interest rates (the interest rate after inflation) and investor anticipation of monetary tightening.

Recent U.S. economic data—including the ISM non-manufacturing survey and the July non-farm payroll report—have provided more evidence that the economy in the second half of the year should show an improvement over what we saw in the first half. As such, there’s a growing perception that the economy is strong enough for the Federal Reserve (Fed) to begin removing the ultra-accommodating conditions that have defined U.S. monetary policy since 2008, and many market watchers expect the Fed to start raising interest rates this fall.

Those expectations are leading to what’s known as a flattening of the yield curve, whereby shorter-term bond yields rise faster than yields on longer-term bonds, as the former sell off. And this, in turn, helps to explain small cap’s lackluster performance. During earnings season, investors worried about the impact of a flattening yield curve on small cap banks, which make up roughly 25 percent of the Russell 2000, according to Bloomberg data. In addition, consistent with history small cap earnings multiples are proving more vulnerable to a tightening in monetary conditions. According to the Bloomberg data, in July, the trailing price-to-earnings ratio for the Russell 2000 contracted by roughly 2 percent, while S&P 500 gains were supported by multiple expansion of roughly 2 percent.

As for what this means for investors looking forward, I continue to remain neutral in terms of any size bias in U.S. equities. Though small caps have lower exposure to the dollar’s impact on international sales, this benefit is being trumped by small cap’s potential vulnerability to the changing interest rate environment.

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