Exchange-traded fund (ETF) new issues continue to flood on to the market, with most weeks bringing a gaggle of new ideas. A few have caught my eye. Take CoCo (contingent convertible) bonds, for instance. These are a new-fangled funding device for big banks looking to raise Tier 1 capital (this is the capital regulators look at when judging banks' financial stability). In the event of a deep downturn and escalating bank losses, CoCo bonds would convert into shares. They are, in effect, hybrid securities, with some of the risks of equity but the upside in terms of income of fixed-income bonds.
The generous yield on offer has tempted some income investors to buy individual CoCos, which is risky you really need to know your bank and its credit risk to do this. If you are tempted, it's best to invest in a diversified pool of CoCos now on offer from ETF issuer Wisdom Tree. Its new CoCo bond ETF (LSE: CCBO) invests in a range of big European bank issues (although many are dollar denominated, which introduces currency risk). UK banks top the list, with Barclays and HSBC each comprising 7.5% of investments, followed by French banks. The headline distribution yield is a mighty 6.8%, but be aware that this could vanish in a recession if lots of CoCos end up being turned into equity.
Prepare for volatility
I've no idea whether we are as late in the stockmarket cycle as some maintain (my hunch is that we are), but I feel fairly confident in predicting that whatever happens next might involve some uptick in volatility. Markets are starting to price in more risk, and there are lots of interesting moves happening in the market, not least in oil prices.
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French bank SocGen has recently issued a swathe of daily index trackers I counted 59 new ones with five times leverage. This means you get five times the daily price change of the underlying index. The FTSE 100 tracker, for instance SG FTSE X5 Daily Long (LSE: SG86) was up 33% over the 28 days to 21 May, whereas the FTSE 100 was up 5.57%. The range includes underlying indices such as natural gas (and oil) through to currency pairs (the price of one currency set against another).
These products are high-risk trading tools designed for short-term investors, with positions varying from a few days to a few weeks. Keep in mind that, as well as gains, any losses would be five times greater. These are absolutely not buy-and-hold products, not least because the higher costs of running them will eventually catch up with you. (Disclosure: I appear on a monthly video, which discusses markets, that is sponsored by SocGen.)
A safe-harbour fund
Last but by no means least, if you are a bit more defensive in outlook as I am it might be worth watching out for a new ETF soon to be launched in the UK by BlackRock iShare, which will invest in aerospace and defence. This is already the focus of a US ETF which mirrors the upcoming UK fund. Boeing tops the list of main holdings, along with aircraft manufacturer United Technologies, and defence specialists such as Lockheed Martin, Raytheon and Northrop Grumman. As these holdings are US equities, valuations are a bit pricy at 29 times earnings, but if the world is set for more geopolitical risk, this sector might be a safe harbour.
The ETF should be accompanied by UK versions of two other popular US funds an index tracker investing in smaller US banks, and another investing in US oil and gas equipment stocks. I've owned both of these US ETFs, but sold out recently after making big profits. Both have probably seen their best gains, but they are nevertheless very useful for more focused investors looking to access particular themes such as booming regional banks and the US shale revival.
Short positions record year for ethical ETFs
The future of the BlackRock Emerging Europe trust "lies in some doubt" after the board kept a promise to allow shareholders to sell, or tender, all their shares back to the company, says Danielle Levy on Citywire's Investment Trust Insider. The offer gives investors a chance to sell their stakes in the fund at close to their net asset value (NAV, the value of the underlying portfolio) after costs. In practice, it is not clear how many will choose the option, as the shares currently trade at a narrow discount of just 2% below NAV. The announcement came nearly five years after the board pledged to offer an exit opportunity in June 2018; since then the discount has narrowed from 15%. Uncertainty is prompted by the fact that more than a third of the shares are held by large value investors which bought in on wide discounts and may view the offer as an opportunity to bank profits. To proceed, the 100% tender offer requires the support of 75% of votes cast at an AGM on 20 June.
More exchange-traded funds (ETFs) with environmental or social goals entered the market in May 2018 than in any previous month, says Kate Beioley in the Financial Times, while 2018 has already been a record year for such listings. Ten ETFs categorised as environmentally or socially responsible have been listed in London so far this year, compared with just six in the whole of 2017. This takes the number of ethical ETFs to 31, with £3.97bn of assets under management, though ethical funds still make up just 1.3% of funds overall.
Activist watch
The head of the Children's Investment Fund has demanded that Rupert Murdoch "immediately engage" with Comcast, the world's largest broadcaster, as it considers making a rival offer for 21st Century Fox's prized entertainment business, says James Dean in The Times. In a letter to the media tycoon, Christopher Hohn disclosed his fund's 7.4% stake in 21st Century Fox, saying it was "imperative" that the company's board "runs a fair auction [and sells] to the highest bidder". The $73bn company has accepted a $52.4bn bid from Disney for a package of entertainment assets, including the 20th Century Fox film studio. However, Comcast is in the "advanced stages" of preparing a "superior" offer, it said earlier this month.
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David Stevenson has been writing the Financial Times Adventurous Investor column for nearly 15 years and is also a regular columnist for Citywire.
He writes his own widely read Adventurous Investor SubStack newsletter at davidstevenson.substack.com
David has also had a successful career as a media entrepreneur setting up the big European fintech news and event outfit www.altfi.com as well as www.etfstream.com in the asset management space.
Before that, he was a founding partner in the Rocket Science Group, a successful corporate comms business.
David has also written a number of books on investing, funds, ETFs, and stock picking and is currently a non-executive director on a number of stockmarket-listed funds including Gresham House Energy Storage and the Aurora Investment Trust.
In what remains of his spare time he is a presiding justice on the Southampton magistrates bench.
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