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ETF Update: ETF Issuers Do Not Slow Down In December

Summary Every week, Seeking Alpha aggregates ETF updates in an effort to alert readers and contributors to changes in the market. There were 10 launches in the last 3 weeks. Have a view on something that’s coming up or a new fund? Submit an article. Welcome back to the SA ETF Update. My goal is to keep Seeking Alpha readers up to date on the ETF universe and to gain some visibility, both for the ETF community, and for me as its editor (so users know who to approach with issues, article ideas, to become a contributor, etc.) Every weekend, or every other weekend (depending on the reader response and submission volumes), we will highlight fund launches and closures for the week, as well as any news items that could impact ETF investors. December has been a busy month of the ETF industry, full of launches, company purchases and existing fund updates. On December 2nd, OppenheimerFunds (NYSE: OPY ) acquired 100% of the stock interests of VTL Associates, LLC, the owner of the RevenueShares brand of exchange traded funds. According to a press release from OppenheimerFunds, “VTL manages $1.7 billion for investors across eight ETFs and its separate accounts. Of the six ETFs that have sufficient track records to be rated by Morningstar, four are either four- or five-star rated.” The largest of these funds, the RevenueShares Large Cap ETF (NYSEARCA: RWL ), currently has $338.5 million in assets under management. It is unclear what direction OppenheimerFunds will take these ETFs in, but I hope to see further offerings from the company in 2016. Also shaking things up was First Trust, which on the 18th restructured two of its existing offerings. The First Trust ISE Global Copper Index Fund (NASDAQ: CU ) is now the First Trust Indxx Global Natural Resources Income ETF (FTRI), and the First Trust ISE Global Platinum Index Fund (NASDAQ: PLTM ) is the First Trust Indxx Global Agriculture ETF (FTAG). These are basically new ETFs when you consider the changes made. FTRI will cover the exploration and production side of the natural resources space, and FTAG offer investors coverage of all aspects of the farming industry. Clearly ETF issuers do not take the holidays off. With 2016 coming up, this is crunch time for filings and launches before end of year deadlines. Besides FTRI and FTAG there were 10 ETFs launched in the last three weeks. With tons to cover, let’s jump right in. Fund launches for the week of December 7th, 2015 Elkhorn launches its second ETF (12/10): After the success of the Elkhorn S&P 500 Capital Expenditures Portfolio (NASDAQ: CAPX ), Elkhorn has released its second exchange traded product. The Elkhorn FTSE RAFI U.S. Equity Income ETF (BATS: ELKU ) is designed to track the performance of domestic high yield stocks, focusing on sustainable income. Ben Fulton, Founder and CEO of Elkorn stated the following on the fund and its index in a press release : “Income remains an important area of need for investors and Research Affiliates brings a new and thoughtful approach to high yield equity investing.” iShares adds another emerging market fund to its lineup (12/10): The iShares FactorSelect MSCI Emerging ETF (BATS: EMGF ) seeks above-market returns over the long term from emerging market large- and mid-cap stocks. According to the ETF homepage, the fund features a “focus on drivers of emerging market equity performance: inexpensive stocks, financially healthy firms, trending stocks and relatively low market cap companies.” This is the 9th broad emerging market equity fund from iShares, all of which saw poor returns in 2015. Fund launches for the week of December 14th, 2015 Pacer rolls out 2 Europe focused ETFs (12/15): The Pacer Trendpilot European Index ETF (BATS: PTEU ) and the Pacer Autopilot Hedged European Index ETF (BATS: PAEU ) both track strategies that focus on the FTSE Eurobloc Index. PTEU is similar to previous Pacer funds, as it uses complex technical indicators to hedge its position when the market outlook is poor, and go all in when the outlook is strong. PAEU however is the first of Pacer’s Autopilot funds. Still alternating between a hedged or unhedged market position, PAEU instead hopes to take advantage of the fluctuation in exchange rates. Guggenheim launches a smart beta DJIA ETF (12/16): According to the funds homepage, the Guggenheim Dow Jones Industrial Average Dividend ETF (NYSEARCA: DJD ) “seeks investment results that correspond generally to the performance, before the fund’s fees and expenses, of the Dow Jones Industrial Average® Yield Weighted index.” Unlike other large indexes, the Dow is a price-weighted index, meaning the priciest of the 30 stocks in the index make up the largest positions. This dividend focus is a better fit for income seeking investors still looking to hold the DJIA in their portfolios. State Street Global Advisors (NYSE: STT ) launches a natural resources ETF (12/16): The SPDR S&P North American Natural Resources ETF (NYSEARCA: NANR ) tracks an index of “U.S. traded securities that are classified under the GICS energy and materials sector excluding the chemicals industry; and steel sub-industry” according to the fund homepage. The iShares North American Natural Resources ETF (NYSEARCA: IGE ), a very similar fund which has been trading since 2001, currently has a YTD of -25%. Hopefully the industry improves in 2016. Fund launches for the week of December 21st, 2015 JPMorgan (NYSE: JPM ) adds to its growing ETF lineup (12/21): – The JPMorgan Diversified Return Europe Equity ETF (NYSEARCA: JPEU ) is the 6th ETF from JPMorgan and its third launch of 2015. According to a press release from the issuer, “JPEU is designed to serve as the foundation of a developed Europe equity portfolio, combining portfolio construction with stock selection in an effort to produce higher returns with lower volatility than traditional market cap-weighted indices.” WisdomTree (NASDAQ: WETF ) launches 2 U.S. Equity funds (12/23): The WisdomTree Dynamic Long/Short U.S. Equity Fund (NYSEMKT: DYLS ) is primarily a long ETF strategy that adds short exposure when needed to act as a market risk hedge. According to the fund’s homepage, the WisdomTree Dynamic Bearish U.S. Equity Fund (NYSEMKT: DYB ) “is able to be net short or market neutral when the market environment is considered poor or mixed, and can have a small net long position when the environment is deemed more attractive.” Alpha Architect adds an international alternative to QMOM (12/23): The MomentumShares U.S. Quantitative Momentum ETF (BATS: QMOM ), launched earlier this month, now has an international twin. The MomentumShares International Quantitative Momentum ETF (NYSEMKT: IMOM ) is focused on high quality momentum companies based in developed international markets. Dr. Wesley Gray commented in a press release : “We seek to deliver a high-conviction momentum approach backed by extensive academic and market research and a substantive knowledge of the manner in which irrational investor behavior creates mispricing. With IMOM, we can now give our investors access to this strategy with an international lens.” There were no fund closures for the weeks of December 7th, 14th and 21st, 2015 Have any other questions on ETFs or ETNs? Please comment below and I will try to clear things up. As an author and editor I have found that constructive feedback is the best way to grow. What you would like to see discussed in the future? How can I improve this series to meet reader needs? Please share your thoughts on this first edition of the ETF Update series in the comments section below. Have a view on something that’s coming up or a new fund? Submit an article.

Reducing Portfolio Risk With Help From Momentum Model

Reduce portfolio risk by activating momentum model. Reduce portfolio risk based on security volatility. Reduce portfolio risk through the use of stop-loss orders. Controlling portfolio risk is every bit as important as seeking portfolio return, particularly when markets are high and volatile. The following analysis takes readers through a process of controlling portfolio risk with help from a tranche momentum spreadsheet. Main Menu: We begin with the following Main Menu where the basic assumptions are laid out by the portfolio manager. In the following example we are using twelve (12) ETFs plus SHY as the cutoff security. Hence the name, Baker’s Dozen. Many of the ETFs carry low correlations with each other, an important factor to consider when identifying securities to populate a momentum oriented portfolio. In the follow screen-shot we set the number of offset portfolios to 8 and the period between offsets to two (2). What this means is that the securities are ranked multiple times (8) on different dates (separated by 2 days) based on two different look-back periods plus volatility. Using these three metrics, the ETFs are ranked each review period. My preference is to review a portfolio every 33 days so the review is rotated throughout the month. Not only are the ETFs ranked based on current data, but they are ranked two, four, six, eight, and etc. days ago so we know what the rankings looked like up to sixteen (8 x 2) days ago. The look-back periods are 60 and 100 trading days. A 20% weight is assigned to the volatility as we are looking for securities with low volatility. Only two securities are selected for each offset portfolio. This becomes more apparent in the second screen-shot so move down to that slide. (click to enlarge) Tranche Recommendations: Here we have what is called the Tranche Momentum model worksheet. This is the first of three risk reducing mechanisms. The tranche model is designed to reduce the “luck-of-trading-day” as this is a problem inherent in all back-tests as well as real portfolio management. Instead of splitting the portfolio into 50% VNQ and 50% MTUM , as the current offset recommends, we note that offset 3 recommended divisions between VNQ and TLT . Offset portfolio #5 recommended 50% allocation to SHY and 50% to VNQ. Using eight (8) portfolio offsets ends up dividing the portfolio into four securities where the percentages are based on the number of times the ETF shows up in one of the eight rankings. The worksheet permits as many as 12 portfolio offsets, but I tend to favor using eight. The following worksheet ranks the ETFs using both absolute and relative momentum principles. Readers will note that the current portfolio holds 200 shares in VTI, but the tranche momentum model recommends none as VTI is under-performing SHY, our “circuit breaker ETF.” Momentum becomes one of our risk reducing mechanisms as under-performing securities are screened out of the active portfolio. (click to enlarge) Risk Reduction Recommendations: The following worksheet combines recommendations from the above tranche data and adds a volatility factor to come up with a list of recommended ETFs. In the following slide the Maximum Trade Position Risk percentage is set to 2.0% so the total portfolio is not exposed to more than a 6% draw-down until the next review period. The still leaves individual ETFs at unacceptable risk levels which we control in the final screen-shot. Before moving to the final slide, look at the individual recommendations. Shares held in VTI and PCY are sold out of the portfolio as VTI is under-performing SHY and PCY has not shown up as a recommended ETF in any of the last 8 offset portfolios. The recommendations are to hold the following four ETFs. 75 shares of SHY – round up from 74. 300 shares of VNQ – rounded to the nearest 100 shares. 100 shares of TLT – rounded to the nearest 100 shares. 350 shares of MTUM – rounded to nearest 50 shares. (click to enlarge) Manual Risk Reduction Recommendations: For the final risk reduction activity the recommendations from the above worksheet are followed which still leaves a few ETF exposed to excess risk. The final step is to place stop-loss or Trailing Stop Loss Orders (TSLOs) on VNQ and MTUM. VTI is either sold at market or a 6% TSLO is used. While the current portfolio holds $8,000 in cash, the recommendation is to increase it to $32,500. Note that the current portfolio carries a risk of 4.8%, but if the suggested adjustments are made, the risk drops to 3.4%. (click to enlarge) With the aid of the tranche momentum spreadsheet we limit portfolio risk through absolute and relative momentum principles as these keep us out of deep bear markets. Further portfolio risk is controlled by placing stop-loss orders as a way of clamping down on excess draw-downs. Granted, these procedures work when we have an orderly market. Guarding against “flash crashes” is an entirely separate problem.

PPL Corporation – Ready To Go Strong Starting 2016

Summary Stock is compelling investment prospect for income-hunting investors. Strategic investments in utility infrastructure development and extension-related projects are in-line with long-term growth generating strategy. Strategy of sharing cash flow base strength with shareholders through dividend payments will continue to positively affect stock price. PPL Corporation (NYSE: PPL )’s strong business fundamentals and its important infrastructural growth-related investments cast an impressive outlook for the stock. I believe the company’s regular efforts to augment the growth capabilities of its regulated business’ infrastructure with regular infrastructural improvement and enhancement-related investments will bode well for its future EPS growth. These healthy growth prospects of PPL will ultimately better its future cash flow productivity level and this will in turn help the company maintain its practice of paying increasingly healthy dividends in the years ahead. Moreover, PPL’s current valuations are more attractive than its peers and the industry average. Nevertheless, un-foreseen adverse weather conditions, volatility in fuel prices and strict regulatory restrictions are key threats that will keep on hovering over the company’s future financial performance. Over the last few years, the U.S. utility industry has faced challenges such as a decline in energy demand by industries amid the recession. Furthermore, the regulatory uncertainties and restrictions imposed by the Environmental Protection Agency (EPA) caused industry disruptions. However, the EIA has projected that energy demand in the U.S. will increase by 2.1% in residential space in the second of 2015 and will grow by 0.7% in industrial space in 2015, which indicates that the overall utility industry’s outlook is attractive. To combat the industrial headwinds and to meet the expected rise in energy demand, the U.S. utility industry players have accelerated their growth investments in order to get a broader regulated infrastructure. Like all of the other utility industry players, PPL is also making hefty infrastructural investments; around $10 billion is projected to be spent by the company on infrastructure improvement by the end of 2017, which will help it apply for regular rate base hikes and will ultimately drive its future earnings and revenues. I continue to believe that this utility company’s attractive growth investments will help it enjoy EPS growth in future, which will support its cash flows and dividend growth. PPL, however, is confident of achieving a 6% compounded annual earnings growth rate through 2017. And for its U.K. operations, the company now expects EPS growth of 1% to 2%, in contrast to its previous expectation of flat earnings growth. I think that these strong earnings growth potentials will augur well for the stock valuation. To recover the capital investments made previously, the company has applied for a 5.1% rate case hike. Although the case is still waiting for regulatory approval, if approved, it will add around $124 million per year towards PPL’s revenues. The company has plans to use the proceeds of its rate cases in technological upgradation and improvement-related projects. In this regard, recently, PPL asked for the Pennsylvania Public Utility Commission’s approval to make an investment of $450 million in the technology upgradation process of meters in order to resolve their problems associated with old meters. This investment will not only improve the company’s image as a quality regulated utility but will also benefit its EPS growth, because the cost of investment will be recovered through a special rate rider; as per the management’s estimates, this investment will increase rate base by $330 million . Moreover, two of PPL’s subsidiaries, namely Louisiana Gas And Electric Company and Kentucky Utilities Company, have recently signed a $220 million agreement with Paringa Resources Limited for the purchase of coal from Buck Creek No.1 mine, with the completion of certain construction-related work, coal purchase under this agreement will begin in 2018. The coal purchase agreement will extend PPL’s energy generation resources, thereby improving its load capacity and will help it apply for rate case, which in turn will help it in reporting incremental EPS growth. Furthermore, the company has maintained an impressive record of sharing its cash flows with shareholders through healthy dividend payments. Owing to consistent dividend growth, currently, PPL offers an attractive yield of 4.44% . Moreover, the commitment to keep its dividends growing has been affirmed by the company’s chairman in the 3Q2015 earnings conference call; he said : “Regarding the dividend, we expect minimal dividend growth again for 2016 as we strive to get the payout ratio down into the mid-60% range, at which time we will target a 4% to 6% dividend growth rate, more in line with our earnings growth expectations. We currently expect to be in the targeted payout range by the end of 2016. So our current expectation is that we will grow the dividend more meaningfully starting in 2017, but our current expectation for 2017 is at the low end of the 4 to 6% relative to the dividend.” Due to the abovementioned strong strategic growth prospects, I think the chairman’s dividend growth expectation is realistic and achievable. Moreover, PPL’s strong balance sheet position, as reflected in the chart below, makes me believe in the company’s ability to continue sharing a decent portion of its future cash flows with shareholders in the years ahead. Source: 4-traders.com Final Words PPL is a compelling investment prospect for income-hunting investors. The company’s strategic investments in utility infrastructure development and extension-related projects and its strong balance sheet position are in-line with its long-term growth generating strategy. Moreover, PPL’s strategy of sharing its cash flow base strength with shareholders through dividend payments will continue to positively affect its stock price. Also, earnings for PPL are expected to grow at a growth rate of 4.86% , better than Southern Company (NYSE: SO )’s earnings growth expectations of 3.88% . Also, PPL has attractive stock valuations in comparison to SO and the industry average, as displayed below. Source: Yahoo Finance & NYU.edu