Last year I spoke to a leveraged ETF company executive about the serious compounding issues of such securities. As I have discussed, the compounding works against you — so both bear and bull 2X or 3X ETFs decline over time, a guaranteed permanent decay of sorts. Essentially, these ETFs are great for intraday trading, but terrible for long-term holders.
He looked at me like I was a Martian. How dare I bring such a thorny issue in our conversation?
The most important thing for him was to bring more and more money under management so he receives a bigger bonus. What happened to the unfortunate long-term holders of such securities was clearly irrelevant.
Later on, another executive of the same firm asked my opinion of the Market Vectors Brazil Small-Cap ETF (NYSE: BRF): He asked me, “But why would Brazilian small caps be so popular?”
They were looking for ideas for new leveraged launches. They were clueless on the benefits of the BRF; their world revolved around marketing the leverage of their ETFs, and they completely ignored the serious issues. In fact, I found out recently that although their number of leveraged ETFs increased, their assets under management dropped.
On the other hand, I have to say that Van Eck — which runs the Market Vectors ETF brand — is doing an outstanding job in the otherwise problematic ETF industry, which is looking to repackage anything in order to suck out those passive management fees. The BRF was a huge success as it covered a promising asset class that was previously not represented; they are doing the same with the recently-introduced Market Vectors Indian Small-Cap Index ETF (NYSE: SCIF).
We have had large-cap Indian ETFs for a while — the Powershares India Portfolio (NYSE: PIN) and the Wisdom Tree Indian Earnings Fund (NYSE: EPI) — which should both do great over time. The rally in PIN and EPI has slowed some after the huge recovery in 2009, which is normal after such a big move.
I absolutely expect them to be big winners in the next 10 years, where selloffs induced by the problematic markets of the West will be huge buying opportunities. Such prices that we saw in 2008 in Indian stocks may never come again.
Long-term shareholding does sometimes have its pains, but in the case of India it has much bigger and worthy gains. Look at the SCIF Sector Breakdown:
- Industrials: 26.8%
- Financials: 20.4%
- Materials: 13.7%
- Information Technology: 12.2%
- Consumer Discretionary: 11.8%
- Energy: 6.2%
- Consumer Staples: 3.8%
- Health Care: 3.1%
- Utilities: 2.0%
Not a single component of the SCIF ETF has a liquid ADR — just like in the case of BRF — so Market Vectors is doing investors a genuine service. India is the most domestic-demand oriented economy in Asia, which is why it was one of the few that did not have a recession in 2009; the other two were China and Indonesia.
Yes, portfolio investors pulled out assets in the 2008 panic, and yes, they even slowed FDI, but as we’ve seen since, that was a huge opportunity for investors focused on the long-term potential of Asia in those three countries.
Market Vector’s rationale for introducing the ETF is that India’s middle class is estimated to increase by 350% to 600 million — roughly double the U.S. population — in the next 15 years. Since the middle class has been the primary driver of the Indian domestic-demand driven economy, the number of consumers that those small cap Indian companies serve will nearly quadruple; I expect that this ETF may easily more than quadruple in that time frame.
Of the 120 holdings in the ETF, each generates 50% or more of their revenue in India, which makes SCIF more targeted. Some ETFs out there have great names, but when you look under the hood, the stocks have very little to do to with the ETFs marketing — this is not the case with SCIF.
Just like the BRF is the play on the real Brazil, SCIF is the play on real India. It will make a great long-term holding in my view.
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