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Small-Cap Value ETFs: Key To Win In Post Lift-Off Era?

The U.S. economy will probably experience a shift in era by this year end, if economic conditions remain unchanged. With the Fed now overtly referring to December as the timeline for raising interest rates after a decade and putting global growth issues aside unlike its prior meetings, investors may now have to rush to alter their portfolio and make it in line with the looming Fed rate hike. Though much of the impending shock has been priced in at the current level, gyrations are still expected in the stock market post lift-off. Though the Fed affirmed that the rate hike trail would be slower, investors know that this will be the beginning of the end of the rock-bottom rates era. Naturally, they will be hunting for the right equity investing strategy. Notably, years of cheap money fueled the U.S. growth stocks as evident from the 106% jump by iShares Russell 2000 Growth ETF (NYSEARCA: IWO ) in the last 10 years and its 75% surge in the last five years (as of November 18, 2015). But, value stocks underperformed, as indicated by iShares Russell 2000 Value ETF ‘s (NYSEARCA: IWN ) 45.3% gain in the last 10 years and about 44% rise in the last five years. Growth investing means buying those companies, which exhibit fast-growing earnings, indulge heavily in capital spending and are forecast to earn at an above-industry rate. This group of companies normally pays lesser dividend or no dividend and capital appreciation is the main motive. Quite understandably, this high-growth proposition requires more capital and lower interest rates to be executed. On the other hand, value strategy includes stocks with strong fundamentals – earnings, dividends, book value and cash flow – compared with their current market prices. These stocks trade below their intrinsic value and are undervalued by the market. This pool of companies normally pays sounder dividends too. Thus, it is historically seen that value stocks perform better than growth stocks in a rising rate environment, mainly due to the difference in their modes of operation. Then, as per analysts , the right time to tap value is when the market reaches its zenith and retreats on overvaluation. For fear of a horrendous sell-off, investors seek safety, which value stocks normally offer unlike growth stocks. Since the market is likely to be wobbly, value stocks can predominate. Moreover, in the absence of cheap money inflows, investors are likely to look for cheaper stocks with great potential rather than the pricey and glamorous growth stocks. All in all, there is a high chance that value stocks will rule the U.S. markets over the next few months. The global investment management firm Pimco also expects this trend to be established in the coming future. Analysts noted that: “During the periods when the Fed was raising interest rates, the value stocks had an average return of 1.2% a month, or 14.4% a year, versus the growth index’s 0.7% a month, or 8.3% a year.” Now with the U.S. economy taking root, job reports showing strength and inflation staying decent, small-cap value stocks should be the best bets ahead. Small-cap stocks are the best measure of domestic economic recovery as these are less exposed to foreign lands. Moreover, terror attacks in several parts of the globe and international growth issues can also be stripped out via U.S. small-cap valued ETFs. Below we highlight three such ETFs, which could be in focus in the coming days. S&P Small Cap 600 Value Index Fund (NYSEARCA: IJS ) The fund looks to provide exposure to U.S. small-cap value stocks by tracking the S&P SmallCap 600 Value Index. The $3.14-billion fund holds a total of 468 small-cap stocks. The fund appears diversified as no stock accounts for more than 0.92% of the basket. Among the different sectors, Financials, Industrials and IT occupy the top three positions with 24.36%, 19.75% and 16.59% of weight, respectively. The fund charges a premium of 25 basis points annually. This Zacks Rank #3 (Hold) ETF was up 1.25% in the last one month (as of November 18, 2015). WisdomTree SmallCap Earnings Fund (NYSEARCA: EES ) For a slightly different approach to the small-cap market, investors may want to consider EES, as it follows earnings-generating companies in the small-cap universe of the U.S. stock market. Furthermore, the fund looks to weight by earnings, giving bigger weights to firms that earn more, irrespective of market capitalization. This results in a portfolio of roughly 950 securities. No stock accounts for more than 1.1% of the fund. Financials (27.34%), Industrials (18.48%), Consumer Discretionary (15.68%) and IT (12.24%) are the top four sectors of the fund. This $382-million fund charges 38 bps in fees. The fund has a Zacks ETF Rank #3 (Hold) while it was almost flat in the last one month. Vanguard Small-Cap Value ETF (NYSEARCA: VBR ) This fund provides exposure to the value segment of the U.S. small-cap market by tracking the CRSP US Small Cap Value Index. It holds a large basket of 843 stocks, which is widely spread across individual securities as none of these has more than 0.6% of assets. In terms of sector exposure, Financials dominates the portfolio at 30%, followed by Industrials (20.5%) and Consumer Services (12.2%). The ETF is quite popular with AUM of more than $5.68 billion. It is one of the low-cost choices in the small-cap space, charging 9 bps in fees per year from investors. The fund added about 0.6% in the last one month. VBR has a Zacks ETF Rank #3. Original post .

Selectivity: The New Way Forward For Investors

We believe these changes position investor portfolios to capture what we view as the best opportunities in global equity markets that we expect to play out over the next several years. More specifically, some of the broader changes we’ve made are from a thematic perspective: Equity and multi-asset class portfolios underwent a fairly significant reorientation away from companies levered to the commodity complex (i.e., the Energy and Materials sectors) to those more levered to services/consumption (i.e., the Information Technology and Healthcare sectors). Portfolios also continue to have significant exposure to the Consumer Discretionary sector as we seek to capitalize on service/consumption trends. Additionally, we notably decreased exposure to the Industrials sector and meaningfully increased exposure to Consumer Staples in our Non-U.S. Equity portfolios. Equity positioning is driven by our bottom-up, fundamental research, complemented by our top-down macroeconomic viewpoints. Primary driving factors behind the portfolio repositioning include: The waning commodity supercycle, combined with China’s structural transition from an investment-driven model of growth to one driven more by consumption. And more broadly: Emerging markets’ burgeoning middle class, along with ongoing advancement in emerging market consumers’ wealth. China’s economic transformation does indeed present the risk that Chinese GDP deviates from investor expectations. The transition to a slower – albeit more stable and sustainable – pace of growth, however, is necessary and well underway, as evidenced by GDP and Purchasing Managers’ Index (PMI) data. Data showing contribution to real GDP is released annually in China. The most recent release shows that in 2014, consumption contributed more to GDP growth than investment. More recently, PMI data shows that activity in the services sector continues to expand (i.e., a reading above 50), whereas manufacturing activity has been contracting. This suggests that the rebalancing story continues to play out. (click to enlarge) More broadly, emerging market consumers currently spend only a fraction of what their developed world counterparts spend, due in large part to income disparities. As the emerging markets’ middle class grows, consumer spending on goods and services should become larger contributors to GDP. According to McKinsey & Company, emerging markets’ consumption is expected to equal $30 trillion by 2025, a 150% increase from 2010. (click to enlarge) In our view, all of these dynamics present long-run opportunities for investors seeking growth. We believe that the changes in our portfolio positioning will enable investors to benefit from the trends that we think will move global equity markets over the next several years. Nevertheless, flexibility is paramount to any investment strategy in order to adapt to an ever-changing economic backdrop. To be sure, a selective approach is critical, as opportunities are far from uniform across all countries and sectors. Learn more about the importance of selectivity in today’s environment, in our latest video series from our investment team experts. 1 Source: Winning the $30 trillion decathlon

Korean ETF Offers Investors Chance For Growth

EWY is weighted heavily towards the information technology and consumer discretionary sectors. Korea is a technology-based economy composing of companies who are industry leaders in their respective fields and have strong earnings. EWY provides targeted access to Korean stocks and is a good measure of the economic strength of Korea; rating agencies are optimistic in growth prospects of Korean economy. By Harry Lee Korea is currently offering investors a solid mid-term growth opportunity at a good value through the iShares MSCI South Korea Capped ETF (NYSEARCA: EWY ). EWY is down 16% overall from its high at 62.93 in April, due to a strong U.S. Dollar, the devaluation of the Chinese yuan, and the crash in equity prices in China this past summer. Fundamentally, however, the Korean economy itself not remarkably declined in a way that justifies the 16% decline in EWY’s price since July of 2014. This has created a solid entry point for investors looking for strong growth potential over the mid term. EWY’s Sector Weights and Sector-Specific Performance EWY is heavily weighted towards the information technology and consumer discretionary sectors. Hence, when evaluating EWY, we must examine the individual performances of those individual sectors and their long-term growth prospects, rather than solely scrutinizing at the performance of the national economy as a whole. Samsung Electronics ( OTC:SSNLF ) is the largest component, at 21.99%; Hyundai Motors ( OTC:HYMPY ), Naver Corp. ( OTC:NHNCF ), and others trail between 2~3%. In its most recent earnings report, Samsung posted quarterly revenue of $45 billion, up 8.9% year-over-year. Profits were $6.45 billion, up an astonishing 82%. Despite mounting pressure from competitors such as Apple and Huawei on both the high and low-ends, respectively, Samsung’s profits expect to be relatively protected due to its semiconductor business. Samsung’s semiconductor business supplies Apple (NASDAQ: AAPL ) with the A9 chip processor used in Apple’s flagship iPhone 6 and iPhone 6S models. Hyundai Motors is also expected to have good growth prospects. Despite posting record low profits in Q3 of 2015, they recently announced that they would launch a new global luxury car brand called Genesis, targeting large fat profit margins from the higher end of the market. Building off of its current luxury models, the Genesis line will launch with two luxury sedans aiming to combat both the European luxury brands of BMW ( OTCPK:BAMXY ), Mercedes-Benz, and Audi ( OTCPK:AUDVF ), but also Nissan’s ( OTCPK:NSANY ) Infiniti and Toyota’s (NYSE: TM ) Lexus. Investors reacted positively to the news, with Hyundai shares closing 1.85 percent higher at a one-month peak. Considering all these factors, the prospects for growth in the mid-term are quite optimistic. Performance of the South Korean Economy as a Whole Investing in an ETF that closely tracks the performance of the Korean economy is a solid investment because South Korea has a number of economic advantages, including a highly advanced economy (nominal GDP is ranked at 13th highest); a low debt-to-GDP ratio and an accommodative central bank. Recently, the Bank of Korea maintained interest rates at 1.5 percent, but drastically cut the benchmark borrowing costs in half over the past three years in an attempt to defend domestic exporters against the Chinese exporters in a climate of a devalued Chinese yuan. Moreover, Standard & Poor’s upgraded Korea’s credit rating to AA- this past September, the highest rating in nearly two decades. It expressed optimism in the growth prospects of the peninsula, claiming that it was likely to maintain economic growth higher than the bulk of the developed economies in the next three to five years. S&P also expressed optimism at the overall decline in external debt owed by Korean banks and reduced short-term borrowing in total external debt. Conclusion Korea’s world-leading electronics industry, along with optimism in the auto industry appears encouraging for the information technology and consumer discretionary sectors within Korea, both of which are significant components in EWY. A vigorous but an accommodating central bank that is willing to devalue its currency to defend domestic producers and exporters should prove encouraging for the mid-long term growth prospects of the economy as a whole. Despite these positive facets, an investment in EWY is not entirely risk free. Samsung Electronics’ flagship mobile division could underperform, leading to the firm missing analysts’ expectations and driving both the equities of the firm and EWY down; Hyundai’s new luxury brand may not become a cornerstone of automotive luxury as Lexus and Infiniti have become. In conclusion, though, there are many factors that point to an optimistic long-term future for Korea, though it is not without risk. The current pricing appears to be a good point of entry, as a series of recent global circumstances have depressed EWY below its true value. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.