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4 Sector ETFs On Sale

A string of woes have held back the U.S. market this year, with the S&P 500 adding just about 2.5% so far. Global growth issues, Fed lift-off worries and a surging greenback are coming in the way of the markets’ outperformance. While many may hope for a sharp revival in the market in 2016 following such a slow year, Goldman Sachs’ latest prediction points to the same story next year. Considering dividends, Goldman estimates stocks to return merely 3% next year. The renowned investment banker also raised overvaluation concerns over the U.S. market. This statement very well motivates investors to search for a value sector, if there is any left at all. A value play is especially required given the broad-based revenue weakness noticed in Q3, not only among multinationals but also within small-cap companies. After all, the low valuation might lead investors to some quality sector buys at best prices. No doubt, with all the major indices trading at around all-time highs, it is hard to find value plays at home. But for those investors ardently seeking undervalued sectors, there are still a few hidden treasures out there. While several indicators are used to find out any stock or sector’s valuation status, price-to-earnings ratio or P/E has been the most widespread. We have identified four sector picks having the lowest forward P/E ratio for next year’s earnings in the pack of 16 S&P sectors classified by Zacks and detail the related ETFs to play those sectors’ undervalued status. Auto – First Trust NASDAQ Global Auto ETF (NASDAQ: CARZ ) The U.S. automotive industry is on high gear. A strong labor market, persistently lower energy prices, increasing aging vehicles on road and a still-low interest rate environment made the first half of 2015 the best six months in a decade for auto sales. Though the Fed is poised to raise key interest rates in December, it will opt for a slower rate hike trajectory. So, auto loans are presently feared to get pricy. Despite strong fundamentals, the sector has a P/E ratio of 9.9 times for 2015 and 8.8 times for 2016, the lowest in the S&P universe, as per the Zacks Earnings Trend issued on November 18. Investors should note that the P/E of the auto industry trades at a 43.8% discount to the current year P/E of S&P and 45.7% discount to the next year P/E. The space is down 12.1% so far this year, implying that the auto stocks are yet to capitalize on the sector’s momentum. Investors should note that there is only one pure play CARZ in the space that provides global exposure to nearly 40 auto stocks by tracking the Nasdaq OMX Global Auto Index. CARZ has a Zacks ETF Rank #2 (Buy) and is up 1.4% so far this year (as of December 1, 2015). Transportation – iShares Dow Jones Transportation Average Fund (NYSEARCA: IYT ) This is yet another sector which failed to make the most of improving economic activities. The sector’s pricing is down 13.2% year to date. While a strong dollar will definitely play foul with the profits of big transporters, tailwinds including a stepped-up economy and cheap fuel are still in fine fettle. This raises optimism on the future of the transportation sector. This is especially true as total earnings of the sector were up 22.5% in Q3 while revenues declined 1.3%. This is much better than Q2 earnings growth of 9.4% and revenue decline of 1.9% for the same period. Revenues are forecast to grow from the first quarter of 2016. The current and the next year P/Es for the sector are 12.2 times each, reflecting a 30.7% and 24.7% discount to the S&P 500, respectively. One way to play this trend is with IYT, which tracks the Dow Jones Transportation Average Index that holds 20 stocks in its basket. The fund has a Zacks ETF Rank #3 (Hold) with a High risk outlook. The fund is off 10% so far this year (as of December 1, 2015). Finance – SPDR S&P Regional Banking ETF (NYSEARCA: KRE ) With the looming prospect of a lift-off, all eyes will be on financial stocks and ETFs. While the operating backdrop of financial stocks has improved a lot from the recession-cursed phase, a potential rising rate environment is another positive for the financial ETFs. The space has a current-year P/E of 13.6 times, reflecting a 22.7% discount to the S&P while its next year P/E stands at 12.8 times, a 21% discount to the S&P 500’s 2016 P/E. The space has lost 1.7% so far this year (as of November 27, 2015). While there are plenty of financial ETFs, investors can take a look at Zacks #2 ETF KRE. The bank fund is up 12.4% so far this year. Utilities – PowerShares S&P SmallCap Utilities ETF (NASDAQ: PSCU ) Utilities will be hurt by the Fed lift-off as this sector underperforms in a rising rate environment. But the space is expected to score positive earnings growth from the second quarter of 2016. The space has a current-year P/E of 15.7 times, reflecting a 10.8% discount to the S&P while its next year P/E stands at 15.3 times, a 5.6% discount to the S&P 500’s 2016 P/E. The space has lost 13.4% so far this year (as of November 27, 2015). However, investors should note that utility is a risky bet at this point of time. We thus highlight the small-cap utility ETF as small-cap stocks deal more with the reasonably expanding U.S. economy and also offer less exposure to the greenback. PSCU is up 4.1% so far this year (as of December 1, 2015). Original Post

Top-Ranked ETFs To Tap India’s Growth Story

Finally, a slew of economic reforms including four rate cuts this year have started to pay off and stimulate growth in Asia’s third-largest economy. This is especially true as India picked up momentum with 7.4% growth in the second quarter (ending September). While this is far below the year-ago growth of 8.9%, it is up from 7% recorded in the first quarter and the market expectation of 7.3%, as per Reuters. Bright Spots A major boost to the economy came from solid progress in the manufacturing, mining and service sectors. Agriculture, industrial, automobiles and consumer durables are witnessing strong growth while investments are also showing signs of recovery. Additionally, current account deficit has narrowed and the currency has moved up significantly. Further, lower oil prices and rising consumer spending have added to economic strength. In particular, the current account deficit has narrowed sharply to around 1.3% of GDP in fiscal 2014-2015, below 1.7% in fiscal 2013-2014. Trade deficit in the first seven months of the current fiscal (April-October) contracted to $77.76 billion from $86.26 billion. Though inflation rose to 5% in October from 4.41% in September, it is expected to decline once the festival season ends. The central bank expects inflation to reach 6% by January 2016 and then moderate to 5% by March 2017. Given the positive developments, India has now become the world’s fastest-growing economy, outpacing China, and remains a bright spot given that most emerging economies are struggling to revamp growth. The Reserve Bank of India expects the country’s economy to grow 7.4% annually for fiscal 2015-2016 and the World Bank projects economic growth of 7.5% for the current fiscal year, followed by further acceleration to 7.8% in 2016-17 and 7.9% in 2017-18. The Organization for Economic Co-operation and Development (OECD) also sees robust growth prospects in India compared to the other emerging markets. It expects GDP growth to remain above 7% in the coming years fueled by more structural reforms. India ETFs to Buy Based on a speedy recovery and bright outlook, we recommend investors to buy India ETFs at least for the short term. For interested investors, we have found a number of top-ranked ETFs in the broad emerging Asia-Pacific space targeting India that have a Zacks ETF Rank of 2 or ‘Buy’ rating and are thus expected to outperform in the upcoming months. Among these, the following five funds could be good choices to play in the coming months and have potentially superior weighting methodologies which could allow them to continue leading the emerging Asia-Pacific space in the months ahead. iShares MSCI India ETF (BATS: INDA ) This ETF follows the MSCI India Total Return Index and charges 68 bps in fees per year from investors. Holding 72 stocks in its basket, the fund is highly concentrated on the top two firms – Infosys (NYSE: INFY ) and Housing Development Finance Corp. ( OTC:HSDGY ) – that together make up for 20.2% of total assets. Other firms hold no more than 6.63% share. Further, the product is slightly tilted toward the information technology sector at 21.7% while financials, consumer staples, health care, and consumer discretionary round off the top five. INDA is the largest and popular ETF in this space with AUM of over $3.5 billion and average trading volume of more than 2 million shares a day. The fund is down 7.9% in the year-to-date time frame. WisdomTree India Earnings Fund (NYSEARCA: EPI ) This product tracks the WisdomTree India Earnings Index, holding 238 profitable companies using an earnings-weighted methodology. Reliance Industries and Infosys occupy the top two positions with a combined 17.9% of assets while other firms hold less than 5.8% share. The fund is heavy on financials with one-fourth share, while energy and information technology also get double-digit allocation in the basket. The fund has amassed nearly $1.7 billion and trades in volume of more than 4.8 million shares a day. Expense ratio came in at 0.83%. The fund has lost about 9% over the trailing one year. iShares India 50 ETF (NASDAQ: INDY ) This ETF provides exposure to the largest 53 Indian stocks by tracking the CNX Nifty Index. It is pretty well spread out across components with none of the securities holding more than 7.73% of assets. With respect to sector holdings, financials takes the top spot at 26%, closely followed by information technology (16%), consumer discretionary (11%) and energy (10%). The product has managed assets worth $814.9 million and trades in good volume of nearly 320,000 million shares a day. It is the high cost choice in the space, charging 93 bps. The product shed 8.4% in the trailing one-year period. PowerShares India Portfolio (NYSEARCA: PIN ) This fund offers exposure to the basket of 50 stocks selected from the universe of the largest companies listed on two major Indian exchanges by tracking Indus India. The top two firms – Infosys and Reliance Industries – take double-digit exposure each while the other firms hold no more than 5.6% share. From a sector look, the fund is tilted toward energy and information technology, each accounting for over 20% share, followed by financials (12.1%) and health care (10.8%). The fund has amassed $431.7 million in its asset base and trades in solid volume of around 1.3 million shares a day on average. It charges a higher expense ratio of 85 bps and has lost 7.7% in the year-to-date timeframe. Market Vectors India Small-Cap Fund (NYSEARCA: SCIF ) This fund targets the small cap segment and tracks the Market Vectors India Small-Cap Index. In total, it holds 135 securities in its basket with none making up for more than 3.21% of assets. Here again, financials occupies the top position from a sector look at 28.3% while industrials, consumer discretionary, and information technology round off the next three spots. The fund has so far amassed $203.5 million in its asset base while charging 89 bps in annual fees. Volume is good, exchanging around 105,000 shares in hand a day. Bottom Line Given the current trends and favorable dynamics, India will likely get a solid boost. So a solid play on the country might be a good idea. This is especially true if investors take a closer look at the top-ranked ETFs in the space for excellent exposure and some outperformance in the coming months. Original Post

Historical Rates Impact Common Stocks

Summary We think there is a recency bias surrounding interest rates. Historical rates are in the band between 3% and 6%. We believe rates will rise when there is a demand for credit, which can be a good thing for common stock owners. Time and coincidence often cloud our own perception. Consider interest rates. Baby Boomers and Generation Xers became adults (25 or older) between 1965 and 2005. During that period, these adults witnessed an aberration in the history of interest rates. They saw moments of monumental highs (20%) and levels consistently above historical norms. The chart below shows that long- and short-term interest rates in the United States have spent most of the last 400 years in a range between 3% and 6%. We contend that this deviation clouds the judgment and expectations of many of today’s investors. There are numerous implications for long-duration common stock owners arising from the examination of historical interest rates. Intrinsic Value Computations The father of value investing, Ben Graham, concluded through his years of research that 10-year corporate bonds averaged 4.4%. Therefore, in his revised intrinsic value equation, he used 4.4% as the numerator for adjusting intrinsic value based on interest rate fluctuations. This long-term interest rate chart supports the validity of his choice, and is right in the middle of the 3-6% historical range. One could argue that long-duration equity investors have been using discount rates in their intrinsic value calculations much higher than historical interest rates justify. This is likely due to the unusually high rates of the period between 1965 and 2005, a recency bias. Commitment of Capital to Bond Investments In 1980, the prime interest rate at the major banks was 20%. Long-term Treasuries peaked at 15% in early 1981. Inflation topped out in 1981 at 11%. Thirty-year fixed mortgages were issued as high as 17%. What people didn’t realize at the time was that they were living through a five-standard deviation event, according to history. Even if inflation had stayed at 11%, those interest rates offered investors very high inflation-adjusted returns. As the famous bond investor Bill Gross has argued, this laid the groundwork for more than 30 years of declining interest rates and a normalization back into the band between 3% and 6%. This has rewarded bond investors and got them addicted to an asset-allocation commitment based on lookback returns which are statistically unlikely. Interest rates are currently below the historical 3-6% range, and will likely rebound over the next 10 years into the historically normal band. We believe common stock buyers should include that likelihood in their stock selection methodology, whether in their intrinsic value calculations or in the effect that higher rates in the U.S. have on the U.S. dollar and overall economic growth in the country. We contend that the surprise in the U.S. will be how much stronger economic growth will be than what is expected. How else can rates go up, unless someone demands the capital via borrowing? Need for Solid Returns for Investors Owners of wealth in the form of liquid assets have an economic need in both low and high interest rate time periods. They need to earn a return above inflation to defend the purchasing power of their liquid asset pool. Ownership of long-duration common stocks has proven to be superior to that of other liquid assets over long time periods, except for the 10-year stretch from 1999 to 2008. As 10-year Treasuries fell to 1.6% in 2008 and stocks were liquidated in the financial crisis, two five-standard deviation events conspired to elevate bond investments in popularity and thrust bond portfolio managers into god-like status. We think a good rule of thumb is to avoid portfolio success stories created by five-standard deviation events. These only happen 2.5% of the time. Rather than being preoccupied with the consensus of investors, we believe building our portfolio around high-probability events is much more valuable to the long-term investor. Industries Benefited By Higher Rates in the 3-6% Range We have argued ad nauseam that common stock investors have two possibilities in front of them as it pertains to interest rates. If interest rates were to rise back into the 3-6% historically normal band, there must be forces which demand the money and industries which benefit from the forces that cause the rise in rates. If rates stay below the historical band, intrinsic value calculations using discount rates above the historical average will undervalue common stocks. Certain industries would welcome higher interest rates. Insurers must earn interest on collected premiums, banks would like to charge more for loans, and homebuilders would like to have so many customers for new homes that the resulting demand for money drives up interest rates. Consumer discretionary companies would love to see a level of prosperity which would drive retail sales and liberal advertising budgets. Drug and biotech companies would like everyone to be able to afford the fantastic new medicines they will introduce in the next 10 years. In summary, above-average returns don’t come along without taking risk. Investors have become very comfortable with today’s historically low interest rates, and fear continued poor economic growth rates. Equity portfolio managers use discount rates higher than today’s actual rates because of the abnormally high rates of the last 40 years. Lastly, the contrary long-duration common stock investor should be attracted to industries which benefit from the gravitation back into the historically normal returns from the bond market. The information contained in this missive represents SCM’s opinions, and should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results. Bill Smead, CIO and CEO, wrote this article. It should not be assumed that investing in any securities mentioned above will or will not be profitable. A list of all recommendations made by Smead Capital Management within the past 12-month period is available upon request.