Tech, Economic Outlooks Firm Wall Street Pre-Bell; Asia Mixed, Europe Up

Asian stock markets were uneven on Tuesday, with most trading floors closing in the green, but China-exposed exchanges falling back on possible international-commerce tensions.

Hong Kong and Shanghai finished down, while Tokyo green and most other regional markets closed higher.

In Japan, the Nikkei 225 opened higher and rose to the close, finishing up 2% as traders embraced tech issues after overnight gains of peer issues in New York. Shipping line shares fell back.

The benchmark Nikkei 225 rose 776.25 to 40,083.30, as gaining issues outnumbered losers 141 to 80.

Leading the upside was chip-making equipment manufacturer Tokyo Electron, up 11.2%, while video-game maker Nexon declined 2.9%.

In Hong Kong, the Hang Seng Index opened lower and slipped in trading, finishing off 1.2% on reports of possibly additional China-US trade hurdles pending in Washington.

The broad gauge Hang Seng fell 240.71 to 19,447.58, as losing issues outnumbered gainers 48 to 31. The Hang Seng TECH Index lost 0.9% on the day, while the Mainland Properties Index was steady.

Leading the upside was Semiconductor Manufacturing International, gaining 5.1%, while internet-colossus Tencent declined 7.3%.

China-based Tencent and battery-maker CATL were among "Chinese military companies operating in the US" published recently in the US Federal Register, a definition that could restrict US commerce with the companies in the future. Tencent and CATL said their inclusion was a mistake and misunderstanding, reported the South China Morning Post.

On the mainland, the Shanghai Composite rose 0.7% to 3,229.64.

On the other regional exchanges, the S. Korean KOSPI rose 0.1%; the Taiwan TWSE inclined 0.4%; the Australian ASX 200 inclined 0.3%; the Singapore Straits Times Index rose 0.3%, and the Thai Set inclined 1.3%. In late trading in Mumbai, the Sensex was up 0.2%.

The euro area's construction sector extended its slump through the end of 2024 as new orders fell for the 33rd consecutive month amid prolonged demand weakness, survey data from Hamburg Commercial Bank and S&P Global showed Tuesday.

The HCOB Eurozone Construction PMI Total Activity Index inched up to 42.9 in December 2024 from 42.7 in the prior month but stayed firmly in contraction territory. The overall decline was led by steep drops in Germany and France, while Italy recorded its first increase in activity since March 2024.

Among the three monitored segments, housing saw the sharpest decline, followed by softer contractions in commercial and civil engineering. "Housing activity is in deep crisis, shrinking disproportionately compared to commercial and civil engineering activities. To revive the residential property sector, significant interest rate cuts by the ECB would likely be necessary soon," said Hamburg Commercial Bank economist Tariq Kamal Chaudhry.

Weak demand continued to weigh on business activity, prompting construction firms across the eurozone to further scale back their workforce. Purchasing activity also continued to decline, marking the fastest pace of contraction in six months.

Looking ahead, eurozone builders remained pessimistic about the sector's prospects for 2025. Firms in Germany and France expressed particularly negative outlooks, while Italian companies were more optimistic, though their expectations softened from the prior month.

"Eurozone looks ahead with pessimism. The year 2025 is unlikely to significantly reduce the downward pressure in the sector. Although both order intakes and future activity have increased compared to the previous month in December (with future activity rising significantly), the sub-indices remain firmly in contraction territory," Chaudhry added.

Indian shares ended higher, rebounding from last session's heavy losses. Investors remain cautious amid concerns about a potential new virus outbreak in China, Angel One analyst Sameet Chavan said in a note. Financial and consumer stocks led gains. IndusInd Bank advanced 1.4% and ICICI Bank was 1.3% higher. Nestle India rose 1.1% and Hindustan Unilever added 0.6%. Tata Motors was the best performer on the benchmark index in this session, rising 2.25%. The benchmark Sensex rose 0.3% to 78199.11. (sherry.qin@wsj.com)

The STOXX 50 was up 0.2% and the STOXX 600 edged 0.1% higher on Tuesday, recovering from losses at the open, as traders digest preliminary inflation figures for the Eurozone.

Annual inflation rose to 2.4% last month, in line with expectations, mostly due to a rebound in energy costs.

The data had minimal impact on market expectations for the European Central Bank, with investors still pricing in four 25bps rate cuts for 2025.

Meanwhile, traders continued to assess the potential impact of Trump's tariff policies after the President-elect denied allegations that his administration was preparing softer measures.

Financial services were among the top performing sectors while healthcare and banking stocks experienced the largest declines.

On the corporate front, LVMH (0.8%) and SAP (1%) were in the green while Novo Nordisk lost about 2%.

Also, shares of Next soared more than 4% after the British retailer raised its profit forecast.

By Jon Sindreu

History teaches that financial complexity always creeps upward. Lately that trend has reached investor-friendly exchange-traded funds.

Last year, U.S.-based ETFs broke a record, surpassing $1 trillion in total inflows. They are cheap, liquid and, crucially, far more tax-efficient than traditional mutual funds. If you want to hold stocks and bonds, the flagship trackers from industry giants BlackRock, Vanguard and State Street Global Advisors already do the trick for very low fees. It is tough, and not especially rewarding, to compete with those industry behemoths head-on.

So Wall Street has found a new gold rush: packaging even the most sophisticated products in ETF form. About 30% of ETFs launched in the U.S. in 2024 referred to some complex strategy in their names, an analysis of Morningstar Direct data suggests — double the average of the previous nine years. What it says on the label is becoming increasingly creative, and what happens inside of those funds is increasingly obscure.

That complexity sometimes delivers a poor return compared with the plain vanilla variety. After a dismal December, the Simplify Enhanced Income ETF — trading under the ticker HIGH — ended 2024 with a total return of 1.5%, despite its prospectus saying that "it seeks to provide significant supplemental income to T-bills." The SPDR Bloomberg 1-3 Month T-Bill ETF, or BIL, returned 5.2%.

In addition to buying short-term paper, HIGH buys and sells "call" and "put" options to generate extra income, which amount to insurance policies against rises and falls in the price of some underlying asset. But this can create big losses whenever market volatility jumps, as happened in August and October. HIGH has the flexibility to venture into terrain such as the S&P 500, Nasdaq-100 and Russell 2000 indexes, and even gold ETFs.

Beating T-bills when interest rates are at 4.5% is no easy task, and HIGH has been making some risky bets. Its options contracts on the S&P 500 maturing this Friday, for example, will only yield a gain from here if the index rises more than 0.6% or falls more than 7.9% from Monday's close by expiration. The fund even traded options on MicroStrategy, the speculative bitcoin-buying machine, which fell 25% in December.

The similar NEOS Enhanced Income 1-3 Month T-Bill ETF, ticker symbol CSHI, managed to deliver a 5.7% return in 2024 by sticking to less-risky put options. The point, though, is that any product exposed to big drawdowns isn't a good alternative to cash, which is the typical use case for short-term bond ETFs.

Take the JPMorgan Equity Premium Income ETF, or JEPI, and its Nasdaq-focused sibling, JEPQ: They received $5 billion and $11 billion in net inflows in 2024, respectively, putting them on par with the top U.S. equity ETFs. While their options-based strategies reduce volatility from owning stocks, they also cap the upside, are easy to front-run, are tax inefficient and don't shield against big selloffs. Arguably, they are products that almost nobody needs.

Even those offering investors the ingredients to shoot the lights out often wind up shooting them in the foot. The ProShares UltraPro QQQ, a $27 billion behemoth that promises to triple the daily return of the Nasdaq-100, has barely generated any return over the past three years as the technology-heavy index soared.

The issue with it and dozens of similar funds is that leveraged ETFs are usually reset daily. Each loss therefore reduces the base for future gains more than for the index, which measures returns cumulatively.

Since 2022, financial firms have been launching leveraged ETFs that target single companies, making this problem more egregious. Once again, MicroStrategy pops up: The Defiance Daily Target 2X Long MSTR ETF and the T-Rex 2X Long MSTR Daily Target ETF aim to amplify the returns of the stock but have barely done so, often missing even their daily targets.

The next frontier is building ETFs that replicate other assets without some of their undesirable characteristics.

The Alpha Architect 1-3 Month Box ETF, or BOXX, for example, tries to match or surpass T-bill returns with options so as not to trigger taxable distributions. Still, it was forced to do one last year under counsel from its legal advisers.

There is also demand to access so-called alternative assets in a cheaper, easier way. The University of Connecticut's endowment recently replaced most of its hedge-fund holdings with "buffered ETFs," which also offer some protection in down markets. Products such as the IQ Hedge Multi-Strategy Tracker ETF explicitly try to copy the performance of hedge funds without owning any.

In December, both BondBloxx and Virtus Investment Partners launched the first ETFs providing exposure to private debt, although in the form of relatively mainstream collateralized loan obligations. State Street Global Advisors has filed an application with U.S. regulators to launch an ETF that would invest a portion of its money in this illiquid form of credit directly. Its approval is uncertain because putting a liquid wrapper around less-liquid assets comes with obvious dangers.

Of course past innovation in ETFs has led to predictions of trouble that have time and again proved unfounded. In 2020, when corporate-debt markets froze, ETFs became a way to keep markets liquid during trying times.

Yet, by their very nature, financial markets will eventually push one too many complex features into ETFs. Perhaps it will happen to this recent crop of products, leaving holders with a mix of losses in cash-like funds, stranded private assets and ill-conceived tax strategies that prompt angry calls from the Internal Revenue Service. The tipping point could still be years away.

Regardless, investors need to be increasingly cautious about what they buy and who they buy it from. These are the times that will test ETF builders.

Write to Jon Sindreu at jon.sindreu@wsj.com

EU50 increased to a 4-week high of 4997.00 Index Points.

Over the past 4 weeks, Euro Area Stock Market Index (EU50) gained 0.22%, and in the last 12 months, it increased 11.39%.