Three Differences Between DAX And FTSE 100 Indices

Posted by David Hunkar on 30 September 2015, 2:11 am

Germany’s DAX Index differs widely from the UK’s FTSE-100 Index. In this post, lets take a quick look at some of the differences between these two benchmark indices.

The FTSE-100 is dominated by banks, insurers, oil and natural gas and mining firms. The DAX-30 on the other hand is concentrated by firms in the chemicals, automobiles and parts and industrial goods and services sectors. Chemicals form almost quarter of the market.

DAX Breakdown by Sector:

FTSE 100 Breakdown by Sector:

Note: Data shown are as of June this year.

The DAX is unusual in that it is a total-return index meaning the return values calculated included reinvested dividends. The FTSE is a price return index.

Five DAX firms earn over 90% of their revenues from outside of Germany while nearly three-fourths of the FTSE firms’ sales come from overseas markets.

Source: What’s in the German stock market?, Barclays

The components of the DAX and FTSE 100 can be found here and here respectively.

Related:

Top Countries For Foreign Direct Investment Inflows And OutFlows

Posted by David Hunkar on 29 September 2015, 2:21 am

Foreign Direct Investment (FDI) involves capital flows across boundaries. Unlike movement of humans, capital movement is unrestricted between countries. FDI flows are different foreign portfolio investments which are simply investing capital in equity and other markets. FDI capital flows usually relates to investments such as building a factory to make autos for example. Unlike FDI capital, portfolio investments are extremely risky for the receiving country as they can be pulled out overnight by investors.

Foreign investors usually prefer some countries over others at a given time. China has been a favored destination for FDI for many years now due to the abundance of cheap labor readily available for exploitation by multi-national corporations.

The Top 20 countries of FDI Inflows in 2013 and 2014 are shown below:

China was the top recipient of foreign capital in 2014. The US ranked the third in hosting FDI. This may come as surprise to some investors since usually people think of capital leaving the US for investment in other countries. But in reality the US is also a major destination for FDI as other countries try to invest and grow their businesses in the US market. In addition, compared to other countries returns can be much higher in the US due to relatively loose regulations, excellent and cheap labor pool, favorable tax system, infrastructure, etc. Only five of the top 10 FDI host countries were emerging countries.

The Top 20 countries of FDI Outflows in 2013 and 2014 are shown below:

The US was the top country in FDI outflows. China was the second top country for FDI outflows. This shows that China is not only the top host country for FDI inflows but also is also a big investor in other countries. China has huge investments in Latin American and Africa and continues to expand trader partnership with resource-rich countries.

Source: World Investment Report 2015, UNCTAD

Which Is Better For Investment – ETFs Or Stocks

Posted by David Hunkar on 28 September 2015, 3:21 am

Exchange-Traded Funds(ETFs) have soared in popularity in recent years. Today the ETF industry is huge and competes strongly against mutual funds.One can find ETFs of all shapes and sizes and ETFs are available to practically cover any asset class, region, sector, etc. In fact, the alphabetical soup of ETF available on the market can be intimidating for some investors. Despite the tremendous growth of this asset class there are plenty of pitfalls of owning them especially when compared to stocks. In this post let us discuss some of the advantages and disadvntages of ETFs over stocks.

Due to the wide avaialbility and depth of the ETF market, some financial advisors even suggest holding an all-ETF portfolio. This is not a wise strategy for a variety of reasons including some of the onesdiscussed below.

1. ETFs have many advantages including Transparency, Flexibility, Greater scrutiny and Versatility according to State Street Global Advisers’ Jo McCaffrey. However because they arederivate products they are also much more volatile than stocks or other under-lying assets. Due the recent volatile days, some ETFs including the iShares Core U.S. Value ETF(IUSV) plunged more than then value of the underlying stocks. This problem does exist for the most part with investing directly in stocks.

From an August Journal article:

Monday’s mayhem exposed significant flaws in the new architecture of Wall Street, where stock-linked funds—as much as shares themselves—now trade en masse on U.S. markets.

Many traders reported difficulty buying and selling exchange-traded funds, a popular investment in which baskets of stocks and other assets are packaged to facilitate easy trading. Dozens of ETFs traded at sharp discounts to their net asset value—or their components’ worth—leading to outsize losses for investors who entered sell orders at the depth of the panic.

The article noted a few examples of ETF price volatility that day. Here is one example:

For example, the $2.5 billion Vanguard Consumer Staples Index ETF and the $5.8 billion Vanguard Health Care Index ETF both plunged 32% within the opening minutes of trading. The Vanguard Consumer Staples ETF was halted six times over the course of 37 minutes early in the day, according to trading records. The health-care ETF was halted eight times Monday.

The declines in these and other ETFs were notable in that they exceeded the declines in the prices of their underlying holdings. In the case of the Vanguard Consumer Staples ETF, the value of the underlying holdings in the fund fell only 9%, according to FactSet.

Source: Stock-Market Tumult Exposes Flaws in Modern Markets, Aug 25, 2015, WSJ

2.Investing in ETFs involves fees paid to the provider.Even though this fee may be extremely small for some funds, they are still fees that eat away part of returns. Investing in stocks does not involve any recurring fees other than the one time trade commission for buying.

3. Some of the ETFs may not be well diversified and may have heavy concentration in certain sector or stocks. For instance, some country-specific ETFs have concentrated allocations to financials. Buying this ETF exposes an investor to high risk should financials tank. When selecting and buying stocks this problem can be avoided. With ETFs one cannot eliminate this risk since the fund’s positions are determined and selected by the fund managers.

4.If an ETF is not profitable for a provider to operate, the fund will be closed and the liquidated cash returned to fund investors. This is not an issue with equities since an individual investor can hold the equiity as long as he wants.

5.With stocks, when a company increases dividend the shareholder receives the higher dividend. This may not occurt with ETFs meaning even if the stocks held in the fund increase their dividends the fund itself may not increase the dividends paid out to fund holders. Other events that occur with holding equities such as company spinoffs, merger and takeovers, etc. are much more favorable for direct equity holders than ETF investors.

In summary, ETFs are suitable for some situations but not in all. Ideas such as building a portfolio using only ETFs should be avoided at all cost. Though ETFs can be traded all day unlike a mutual fund, investors do not invest in ETFs to trade. Traders are in the business of trading stocks, ETFs and all other products thats out there because it is their job. For most retial investors, holding a portfolio of widely diversified stocks and using ETFs to fill gaps will suffice.

Disclosure: No Positions

The Harder A Stock Falls The Tougher It Is To Recover Losses

Posted by David Hunkar on 27 September 2015, 1:29 pm

One of the important strategies to follow for success in equity investing is the willingness to cut losses and moving on. To become successful with investing in stocks is to accept that not all stocks one holds in a portfolio will be winners. In fact, there will some that will perform average over the years and a few that will completely crash and end up worthless. However in a portfolio of say 50 stocks, if 3 become worthless it is no big deal as long as the portfolio is well diversified and the portfolio’s assets are not most allocated to those stocks.

When a stock falls hard it is even harder to recover the losses. For example, if a stock trading at $10 falls by 50% to reach $5, an investor needs the stock to jump by 100% (going from $5 to $10) to break even. of course, it very rare for a stock to shoot up by 100% or double in price easily.

The following simple chart explains this mathematical concept:

Click to enlarge

$Simple-Painful-Math-of-Investment-Losses-Chart$

Source: How to Win More by Losing Less in Today’s Markets, Blackrock Blog

Here is an example. Brazilian oil giant Petrobras (PBR) reached a peak of $72.34 in early June 2008. Since then the stock has plunged consistently year after year to reach $4.08 on Friday. That is a decline of about 94% according to Yahoo Finance. In early 2001, the stock traded at around $4. So from $4 it went all the way over $72 and then came back to $4. For an investor who bought it at the peak, the stock has to increase by nearly 1800% to break even.