BlackRock has launched a synthetically replicated S&P 500 ETF in a significant policy U-turn that sees the asset management titan lend credibility to an ETF replication structure it previously eschewed, often vocally.
Synthetic ETFs provide exposure to their reference index not by physically holding the underlying index securities but by entering into a swap agreement with a counterparty, usually an investment bank, to receive the performance of the index.
The popularity of the synthetic structure declined sharply following the global financial crisis due to concerns over counterparty and liquidity risks – a 2011 survey conducted by Morningstar found that 90% of respondents indicated they were “somewhat” or “very” concerned about synthetic ETFs.
Some of these concerns were arguably whipped up by ETF issuers whose product line-ups comprised solely or mostly physically replicated products (many of which, incidentally, were at the time lending out portfolio securities and keeping much of the proceeds for themselves) and by traditional fund managers who saw it as an opportunity to attempt to taint the ETF industry.
BlackRock was noted for its championing of physical ETF replication. In 2011 its then Head of iShares in Europe, Joseph Linhares, told the FT that, “ETFs started out as transparent, liquid, simple, vehicles but some have gone to opacity. We need to get back to full transparency across all the range of ETF products.” Larry Fink, the firm’s co-founder and CEO, regularly told investors and commentators that swap-based ETFs lacked transparency and risked damaging the industry.
As a result of all this, many issuers, such as Lyxor and Deutsche Bank, among others, converted swathes of synthetic ETFs to physical replication. This was despite the swap-based structure delivering many noteworthy advantages and ignoring the fact that these products were often over collateralized, in some cases with higher quality collateral than the constituents of the target index, and/or had multiple swap counterparties.
In recent years, however, the tide of criticism against synthetic ETFs has waned as investors have become reacquainted with the benefits of the structure’s inherent tax advantages in certain circumstances.
Most notably, non-US investors are required to pay a 15% withholding tax on income received from dividends. As synthetic ETFs do not actually own the underlying securities and owing to the way the swap arrangements are configured, investors choosing the synthetic structure are not liable for this tax, leading to immediate performance enhancement.
According to market analysis by Invesco, which offers a mix of physical and synthetic products, the firm’s synthetically replicated S&P 500, MSCI USA, and MSCI World UCITS ETFs have each outperformed the average of their largest physical competitors by 0.24%, 0.31%, and 0.12% respectively over the 12 months to the end of August 2020.
When looking over the past three years, these figures climb to 0.71%, 0.64%, and 0.18%, underscoring the long-term relative outperformance potential of some synthetic products.
Another advantage of synthetic ETFs is that they typically offer a lower tracking error compared to their physically replicated counterparts, although this benefit is most pronounced when the fund targets illiquid stocks such as emerging market equities.
The low tracking error offered by synthetic products was brought into focus during the Covid-19 market crisis with tracking errors for physical MSCI World ETFs doubling to 0.10% between 31 January and 30 April 2020. In contrast, synthetic ETFs generally maintained their lower volatility relative to the market throughout this period.
These advantages have contributed to synthetic ETFs gaining a greater market share in certain asset class segments in recent years. The $10.7bn Invesco S&P 500 UCITS ETF (SPXS LN), for example, has attracted over $2.4bn in net inflows over the past year compared to net outflows of $1.4bn for the $38.3bn iShares Core S&P 500 UCITS ETF (CSPX LN) over the same period.
In performing its volte-face, BlackRock will no doubt argue that the ETF industry and the wider financial infrastructure have become structurally more sound in the ensuing years and that levels of transparency and disclosure have improved while ETF investors have become more sophisticated. To be fair, much of this is probably true. Nonetheless, it demonstrates that commercial considerations – namely a company’s bottom line – will always influence an argument, as indeed it did back in 2011 and 2012.
The iShares S&P 500 Swap UCITS ETF has listed on the London Stock Exchange in pound sterling (I500 LN), on Xetra in euros (I500 GY), and on Euronext Amsterdam in US dollars (I500 NA).
JP Morgan and Citi will act as swap counterparties with more investment banks expected to enter the fold in the future.
The ETF’s collateral will consist solely of non-dividend paying S&P 500 equities, helping to allay any concerns that the structure might be unsuitable in the event of a default by a swap counterparty.
It comes to market with $100 million in assets under management and matches the 0.07% expense ratio offered by BlackRock’s physically backed S&P 500 ETF.
The post BlackRock makes policy U-turn with synthetic S&P 500 ETF launch first appeared on ETF Strategy.
Why You Shouldn’t Worry About Costco Stock
The warehouse club’s shares have been falling, but investors have nothing to worry about.
The warehouse club's shares have been falling, but investors have nothing to worry about.
The market crash has driven stocks into a bear market panicking many investors as strong companies with solid results see their shares tank. It's a market that seems to have no safe havens as the vague specter of inflation has cast a dark shadow over the entire market, but pandemic stocks, technology companies, and the entire retail sector.
Costco (COST) - Get Costco Wholesale Corporation Report has not been immune to the drop. Despite the warehouse club operating pretty much as it always has, steadily adding members while retaining existing members, the chain has seen its share price fall 22.83% in the past six months.
That's a big drop for a chain which has been a very steady stock, usually moving upward while also paying a dividend. Costco's share price drop, however, has nothing to actually do with the company's performance. Instead, the company has fallen victim to broad concerns about retail in general.
Target (TGT) - Get Target Corporation Report, for example, saw its shares lose over 25% in value after it reported first quarter results. The chain grew its same-store sales, which was impressive given that it had seen that metric rise by 22.9% in previous-year quarter. The retailer faltered when it came to profits as earnings were cut in half year-over-year due to rising costs and supply chain issue.
Never mind that Wall Street has taken Target's strength for weakness (making money and gaining customers under these conditions is impressive), Costco shareholders have even less to be worried about.
Why Is Costco So Strong?
Retail stocks, including Target and Costco, have suffered due to rising prices (inflation), supply chain issues, and fears over consumer spending drops. These are real concerns, but Costco has a lot of protection from those issues. The warehouse club operates on a membership model. Its profits come largely from selling memberships, not on the goods its sells its members.
Costco offers members the promise of low prices in exchange for a membership fee. The company offers a limited selection to keep prices down and it has enormous bargaining power with suppliers.
It's possible that inflation will drive prices higher on some key Costco items, but they company can simply pass those increase on without adding a markup. That makes the chain a value proposition for shoppers as these factors impact all retailers.
Costco has been able to hold its own on gross margin, according to CFO Richard Galanti speaking during the company's second-quarter earnings call.
"Moving down to the gross margin line. Our reported gross margin in the second quarter was lower year over year by 32 basis points but up 5 basis points, excluding gas inflation," he said.
Basically, aside from gas -- which is generally cheaper at Costco than anywhere else -- the company maintained its margin. It also grew its same-store sales by 11.1% excluding gas while its income rose as well.
"Net income for the quarter came in at $1.299 billion or $2.92 per diluted share. Last year's second quarter net income came in at $951 million or $2.14 per diluted share," Galanti shared.
Membership Is Costco's Key Metric
Unlike a traditional retailer, sales aren't the key metric for Target. Membership tells investors more about the health of the company than anything else. The warehouse club needs both retain members and add new ones.
It has done that, according to Galanti.
"In terms of renewal rates, they continue to increase. At second quarter end, our U.S. and Canada renewal rate stood at 92%, up 0.4 percentage point from the 12-week earlier at Q1 end. And worldwide rate, it came in at 89.6%, up 0.6% from where it stood 12 weeks earlier at Q1 end," the CFO shared.
Costco has seen its renewal rates go up as more members auto-renew. The warehouse club has also seen more of its members opt for the higher-priced Executive Membership, " who, on average, renew at a higher rate than non-Executive members," Galanti shared.
Membership has been growing (as it steadily has) as well, according to the CFO.
In terms of the number of members at second quarter end, member households and total cardholders, total households was 63.4 million, up 900,000 from the 62.5 million just 12 weeks earlier; and total cardholders at Q2 end, 114.8 million, up 1.7 million from the 113.1 million figure 12 weeks ago. At second quarter end, paid Executive Memberships stood at $27.1 million, an increase of $644,000 during the 12-week period since Q1 end. Executive Members, by the way, represent now 42.7% of our total membership base and 70.9% of our total sales.
So, while Costco's share price has suffered due to broader concerns and general market panic, the chain's business has not suffered. In a terrifying environment for investors, you could argue that Costco's one of the safer bets as long as you're willing to be patient.
In the short-term, stock prices may not reflect actual business results. Over time, however, the warehouse club will go back to posting steady share gains while also paying a dividend (and perhaps offering a bonus special dividend).stocks pandemic consumer spending canada
Hot Biotech Penny Stocks to Watch as Stocks Enter Bear Market
Are these biotech penny stocks on your watchlist right now?
The post Hot Biotech Penny Stocks to Watch as Stocks Enter Bear Market appeared first on…
3 Hot Biotech Penny Stocks to Add to Your Watchlist With the Market Down
Recently, biotech penny stocks have seen heightened bullish sentiment. Today, the emphasis on biotech stocks comes as the Monkeypox virus is seeing a resurgence in certain areas around the world. Today, the WHO confirmed 80 cases of the virus in 11 countries. And since then, investors have begun looking for biotech stocks that may be able to benefit.
In addition to this, we are also seeing heightened volatility with penny stocks and blue chips. This means that it is more important than ever to stay on your toes. Understanding what your trading strategy is and how you can best execute it is crucial in these market conditions.
If you are thinking about getting into penny stocks, then make sure to do your research first. There is a lot going on in the stock market, so researching and understanding all you can about penny stocks is essential to your success. With this in mind, let’s take a look at three biotech penny stocks to add to your watchlist right now.
3 Biotech Penny Stocks to Add to Your Market Crash Watchlist
Immix Biopharma Inc. (NASDAQ: IMMX)
One of the bigger gainers of the day is IMMX stock. At EOD, shares of IMMX stock shot up by over 30%, with a 5% gain in after hours trading. And, in the past five day period, shares of IMMX have climbed by more than 50%.
While we do see many gains with penny stocks without news, today, Immix made an exciting announcement in premarket trading. The company stated that its IMX-110 drug demonstrated improved survival over the current approved drug, Trabectedin. It states that IMX-110 is part of what is expected to be a $6.5 billion market by 2030.
“We are excited to see continued evidence of IMX-110 anti-tumor activity versus approved therapies. We believe this is a preview of anti-tumor activity to be demonstrated in our 2 clinical trials to be kicked-off in 2022: IMX-110 monotherapy, and IMX-110 in combination with anti-PD-1 tislelizumab.”The CEO of Immix Bio, Ilya Rachman
Right now, there is quite a lot of bullish sentiment with biotech penny stocks. And, as a clinical stage biopharmaceutical company, Immix is at the center of this. While it is highly volatile IMMX stock could be worth adding to your list of penny stocks to watch.
TherapeuticsMD Inc. (NASDAQ: TXMD)
Another gainer of the day on May 20th is TXMD stock, which shot up by over 35%. In the past month, shares of TXMD stock have fallen by around 74%, which makes this gain much more substantial.
Today, the company announced that it received FDA approval for its Supplemental New Drug Application for Annovera. With this approval, the company will be able to produce 7,000 additional rings for the supply chain, which will be made available to customers by the second and third quarter of this year.
“Today’s approval is an important milestone as it will allow us to more efficiently scale, manufacture, and consistently supply ANNOVERA to meet the increasing demand by women who want procedure-free, long-lasting reversible birth control.”The CEO of TherapeuticsMD, Hugh O’Dowd
Back in 2018, Annovera was approved by the FDA as a long-lasting, reversible, procedure-free birth control product. And since then, the company has worked hard to commercialize it as much as possible. With that in mind, do you think TXMD is a worthwhile add to your penny stocks watchlist or not?
Chimeric Inc. (NASDAQ: CMRX)
With an over 6.8% gain at EOD on May 20th, CMRX stock is another penny stock that investors are watching right now. In the past five days, we’ve seen a very steady gain with CMRX stock, pushing up by more than 20%, which is no small feat. And, this comes after a six month drop of over 60%.
The main reason for today’s gain with CMRX stock comes as fears surrounding an increase in Monkey Pox cases, are driving up biotech stocks. This includes Chimeric, which recently announced a deal with Emergent, to offer exclusive rights for its smallpox oral antiviral product known as Tembexa.
And, given that Monkey Pox is a smallpox derivative virus, we see the major correlation between the two. With this new virus situation, there is a large demand increase for this vaccine. And while the fears that are comparing this virus to Covid-19 are somewhat unwarranted, there is a lot to consider. With this in mind, does CMRX deserve a spot on your buy list or not?
Which Penny Stocks Are You Watching Right Now?
Finding the best penny stocks to buy is all about understanding where to look. While it can be difficult given the heightened volatility in the stock market right now, there are some ways to make it easier. The best course of action will always be to have a well-thought-out trading strategy on hand.
This can help you to maximize your chance of profitability and increase your odds of not seeing losses. In addition, considering exactly what is going on in the stock market remains paramount to your success as an investor. So, as we continue to traverse this extremely volatile period, which penny stocks are on your watchlist right now?
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Why I’m Not Worried About the Stock Market Crash
In the long run, the stock market always goes up (but it’s way more complicated than that).
In the long run, the stock market always goes up (but it's way more complicated than that).
We're not living in 1929. It's important to remember that as we watch the stock market crash and our personal net worth take a big hit.
While that has certainly happened, it's important to note that the stock market isn't the economy. We're not on the cusp of the next Great Depression. Instead, we have a market that's spooked by rising inflation (i.e. stuff costing more) that's also struggling with supply chain issues caused by an unparalleled global pandemic.
Yes, many things cost more including basic needs like food and shelter, as well as near-basic needs likes cars and gas. But, while inflation has been real, that's not the full story of the U.S. economy.
We're also living at a time where the unemployment rate (3.6%) remains near historic low (where it most likely would be if jobs weren't so plentiful allowing some people to sit out of the labor market for a period). The labor picture has for a very rare time in American history titled in favor of workers.
This has led to jobs in the retail and service space which once paid minimum wage while offering minimal benefits to offer $15 an hour or more along with perks like free college tuition. That's not to say that these jobs even pay a living wage (it depends a lot upon where you live) but the situation for workers in these spaces has notably improved.
The economy has its struggles, but it's not a clear picture. High house prices for one person means a home that has gained a lot of value for someone else. And other issues -- like the high cost of gas and the shortage of new as well as used cars -- are tied to relatively short-term problems.
But What About My Investments?
Stock markets crash. That's sometimes an indication of greater economic problems, but the U.S. stock market has never failed to recover its losses -- often in a fairly quick period. That's cold comfort as you see red in your portfolio, but if retirement (or whatever you plan to spend your invested money on) isn't now or in the next year or two, a "crash" is something expected that can be used to your advantage.
The first thing you should do is evaluate why you own the shares that you own. Has something changed about any of those companies because of the pandemic? Not has the share price gone down, but has anything changed about the company's long-term trajectory?
Short-term investors, or perhaps people who panic easily, have used Netflix's (NFLX) - Get Netflix, Inc. Report slight subscriber drop as a sign that the company has peaked. Do you believe that or do you see the streaming leader both returning to growth and better controlling its content costs?
Netflix had explosive growth during the pandemic. Would you have rather it added those customers at a pace that spread things out for Wall Street? Do you see people leaving the service for a rival or to start reading more?
The reality is that many high-quality companies have suffered major declines for reasons that have nothing to do with their business performance. Yes, the pandemic did create some false winner that won't be long-term successes, but that's a small number of companies (and many long-term investors avoided those companies because of that possibility.
Now Is the Time to Buy
The stock market has become a giant Marshalls filled with name brands at huge discounts. It may seem counterintuitive to buy while stocks are crashing, but isn't that the best time to buy? If your BMW dealer has too much inventory and offers a sale, that doesn't change the long-term value of owning a BMW.
And while buying can be a huge opportunity, the reality is that a market crash is not the time to sell (unless you truly believe you have a holding that's not a good long-term investment). Yes, a lot of high-fliers have fallen to earth, but that was true in 2008 as well and history has shown that holding and buying great companies when prices are low is how you get rich.
Daniel Kline is Managing Editor of TheStreet.comdepression unemployment pandemic stocks spread unemployment stock markets
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