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A Juicy 5% Yield From Emerging Markets But Be Aware Of The Risks

Summary The SPDR S&P Emerging Markets Dividend ETF has a yield of over 5% but dividend inconsistency and region exposure make it a risky proposition. The fund has sizeable positions in China and Brazil – two areas that have been hotbeds of political turmoil. The fund has underperformed the broad MSCI Emerging Markets index since its inception and an above average beta suggests a fund that comes with risks. Income-seeking investors often look to familiar sectors like financials and utilities to generate a higher yield from their equities. A place that investors may not consider for dividend income is emerging markets but, believe it or not, there are some significant yields in this space. The SPDR S&P Emerging Markets Dividend ETF (NYSEARCA: EDIV ) has been around for over four years and boasts a little over $300M in assets. Since its inception, the fund has trailed the iShares MSCI Emerging Markets ETF (NYSEARCA: EEM ) and one of its larger competitors, the WisdomTree Emerging Markets Equity Income ETF (NYSEARCA: DEM ) on a total return basis. EDIV Total Return Price data by YCharts The 5% yield is no doubt tantalizing but it’s important to recognize how that dividend is achieved and how much risk is involved in obtaining it. Not surprisingly, the fund has performed poorly as emerging markets have been hammered over the last year or more. The fund is down a total of 24% over the past one-year period and 35% since inception. The fund is fairly well diversified across the broad economy. The fund has 5% or higher allocations to eight different sectors with communications and technology stocks accounting for roughly 40% of total fund assets. More conservative areas like financials, industrials and basic materials count 30% of the portfolio bringing overall portfolio risk down although a 3 year beta of 1.16 suggests a more aggressive portfolio when compared to emerging markets overall. While ETF Database indicates this portfolio has one-third of its assets in “developed” markets, a look at the fund’s country and region allocation shows its exposure to primarily less developed and risky markets. China (10% of fund assets) for all of the volatility it has experienced over the past year is actually one of the fund’s better performing regions. Brazil (8%) has been the worst performer among the fund’s larger allocations due to the political unrest resulting from the Dilma Rousseff regime. Other regions like Taiwan (27%), South Africa (14%) and Turkey (9%) are all down double digits in the one-year period. Another risk comes from the quarterly dividend volatility. Income seekers looking for a predictable quarterly dividend should probably look elsewhere. Historically, most of the fund’s annual dividends come in the 2nd and 3rd quarter and trail off to minimal levels in the 1st and 4th quarters. Trailing 12-month dividend yields were down below 4% during the summer of 2014 and have risen to their current level of 5.16% thanks in part to the fund’s share price drop. The fund has paid $1.342 per share in dividends over the past four quarters compared to $1.645 per share in the four quarters prior to that. Conclusion This ETF has been able to consistently deliver annualized yields of over 4% but there’s a great deal of volatility involved to get there. Global economic weakness has hit emerging markets hard over the past year and the dividend is just one piece to consider here. The quarterly dividend payments are very inconsistent and the fund has larger exposures to areas with significant political and economic risks. This ETF has a place in a broader portfolio as a smaller high risk high return position but those looking for a predictable income producing investment should probably look elsewhere.

Impressive Auto Earnings Put This Car ETF In Focus

The automobile sector has been riding on a host of favorable elements this year such as plunging oil prices, a recovering U.S. economy, rising consumer confidence and spending, increasing aging vehicles on the road, high incentives and discounts and easy availability of credit. While these factors led to better-than-expected earnings during the third quarter, it is only the stronger dollar that stood in the way of the sector to realize its full potential, leading to revenue weaknesses across the board. As per Earnings Trend report, earnings of all the automobile companies that have reported so far are up 30.7% year over year for the third quarter of the year, with 60% of the companies beating the Zacks Consensus Estimate. Meanwhile, revenues of all the companies are down nearly 1% for the quarter, with only 20% of them surpassing the Zacks Consensus Estimate (read: ETF & Stocks Riding on Auto Sector Boom ). Below we have highlighted in detail the third quarter results of some of the major auto companies that have reported recently. Auto Earnings in Detail The largest U.S. automaker, General Motors Co.’s (NYSE: GM ) adjusted earnings of $1.50 per share for the quarter beat the Zacks Consensus Estimate of $1.17 by a wide margin. Earnings increased 55% from 97 cents per share recorded in the third quarter of 2014. The robust year-over-year improvement was driven by solid performance in China and the U.S. However, revenues in the quarter declined 1.3% year over year to $38.8 billion, marginally missing the Zacks Consensus Estimate of $39.1 billion. The year-over-year decline was due to the adverse impact of foreign currency translation. The second-largest carmaker by sales, Ford Motor Co. (NYSE: F ) posted adjusted earnings per share of 45 cents in the third quarter, way above the 24 cents earned in the prior-year quarter (all excluding special items). Earnings per share were in line with the Zacks Consensus Estimate. Pre-tax income (excluding special items) surged 128% to $2.7 billion, marking a third-quarter record. Revenues increased 9.1% to $38.1 billion due to full-scale production of the F-150 and surpassed the Zacks Consensus Estimate of $35.4 billion. The automaker reaffirmed its pre-tax profit guidance (excluding special items) in the range of $8.5-$9.5 billion for 2015, significantly higher than $6.3 billion recorded in 2014. Automotive revenues, operating margin and operating-related cash flow are also expected to be higher than 2014. Japanese automaker, Honda Motor Co., Ltd. (NYSE: HMC ) reported earnings per share of ¥70.88 (59 cents) in the second quarter of fiscal 2016 (ended September 30, 2015) compared with ¥66.32 (61 cents) in the year-ago quarter. Earnings per share missed the Zacks Consensus Estimate of 63 cents. Consolidated net sales and other operating revenues escalated 15.6% year over year to ¥3.62 trillion ($30.19 billion). However, revenues fell short of the Zacks Consensus Estimate of $30.22 billion. The year-over-year increase can be attributed to higher revenues from all the businesses. For fiscal 2016, Honda expects revenues to increase 9.5% to ¥14.6 trillion ($123.7 billion) while operating income is likely to rise 2.1% to ¥685 billion ($5.81 billion). Another Japanese automaker, Toyota Motor Corporation (NYSE: TM ) posted earnings of ¥192.51 per share ($3.16 per ADR) in fiscal 2016 second quarter, compared with ¥170.54 per share ($3.28 per ADR) in the prior fiscal quarter. Earnings per ADR surpassed the Zacks Consensus Estimate of $3.09. The company’s consolidated revenues grew 8.4% year over year to ¥7.1 trillion ($58.2 billion) and outpaced the Zacks Consensus Estimate of $57.81 billion. However, Toyota lowered its consolidated revenue guidance to ¥27.5 trillion ($233.1 billion) from ¥27.8 trillion ($237.6 billion) for fiscal 2016. Nevertheless, the revenue guidance reflects a 1% improvement over fiscal 2015. The automaker’s net earnings are expected to be around ¥2.25 trillion ($19.1 billion) or ¥713.76 per share ($12.10 per ADR), reflecting an expected 3.5% improvement over fiscal 2015. Due to better-than-expected earnings, most of the auto stocks have been posting gains following their results. In fact, the exclusive auto ETF, the NASDAQ Global Auto Index Fund (NASDAQ: CARZ ) – which has a sizable exposure to the above mentioned stocks – returned more than 3% (as of November 6, 2015) since General Motors released its quarterly results on October 21. Let us take a look at this ETF in detail, which is expected to post gains in the coming days as well. CARZ in Focus This ETF tracks the NASDAQ OMX Global Auto Index, having exposure to automobile manufacturers across the globe. The product holds 37 stocks in the basket with General Motors, Ford, Toyota and Honda placed among the top five holdings with a combined allocation of nearly one-third of fund assets. In terms of country exposure, Japan takes the top spot at 36.3% while the U.S. takes the second spot having a 23.9% allocation, followed by Germany and South Korea with 16.4% and 8.8% allocations, respectively. The ETF is neglected with $40.8 million in AUM and sees light trading volume of around 9,000 shares. The product is a bit expensive with 70 bps in annual fees and currently has a Zacks ETF Rank #2 (Buy) with a High risk outlook. Link to the original post on Zacks.com

Allianz Makes The Case For Alternative Investments

By DailyAlts Staff With interest rates at rock-bottom lows, the three-decade bull market in bonds is clearly in its last days. Meanwhile, stock markets from Asia to the Americas are undergoing various bouts of volatility, and valuations remain stretched, indicating recent bearishness may be far from over. These factors, along with the diverging policies of world central banks, are causing investors in traditional assets to rethink their allocation strategies. Allianz Global Investors makes “The Case for Alternatives” in the latest edition of the firm’s Analysis & Trends white paper series. Financial Repression Financial repression occurs when real interest rates are negative. In this way, savers can’t grow their wealth merely “risk-free,” and thus they’re forced to choose between losing ground to inflation or investing in riskier assets. Typically, financial repression has been the result of inflation outpacing the nominal interest rates on government bonds. But due to unprecedented monetary experiments, most European nations now have negative nominal yields on their sovereign debt. This isn’t something traditional “60/40” investors ever bargained for. (click to enlarge) Obviously, bond investors need to look elsewhere for income when they’re faced with negative nominal yields. According to Allianz, this has resulted in the growing popularity of “low-risk, low-return” alternative strategies to replace the role that bonds once played in investors’ portfolios. Monetary Consequences The negative yields on European bonds are a direct consequence of the European Central Bank’s policy of “quantitative easing” – i.e., buying bonds with newly minted money. When the central bank expands the money supply to buy bonds, it bids down interest rates. This not only props up the bond market, it also lowers the risk-free rate of return, thereby encouraging investors into riskier assets – like stocks. This is why Allianz says “ongoing expansionary monetary policy globally” should “support risky assets longer-term” – but in the meantime, “investors should be prepared for increasing volatility.” The Alternatives Universe Allianz GI points out that “alternatives” are not an asset class of their own, but a “universe” of investments that includes all of the following (and more): Commodities Currencies Real assets (timberland, fine wine, art) Intangible assets (patents, royalty streams) Private equity Alternative strategies The graphic below plots a variety of alternatives on two axes: The up/down axis considers liquidity from the perspective of the investor and the investment vehicle, while the left/right axis considers liquidity in terms of the underlying assets. For example, ’40 Act long/short equity funds are liquid from the perspective of the investor, and also in terms of their underlying assets. But while publicly traded REITs are just as liquid from the investor’s perspective (or nearly so), their underlying assets are far less liquid. Choosing the Right Alternatives Alternatives should be attractive to investors who realize the traditional “60/40” stock/bond diversification is unlikely to provide its traditional benefits going forward. Bonds are set to lose ground as interest rates rise, and stocks, which had been pumped up by monetary accommodation, are likely to come under increasing pressure, too. Whereas the income from bonds used to provide a cushion for “60/40” portfolios, even during bear markets, the ultra-low yields on U.S. and especially European bonds won’t have that effect in the immediate future. The question, then, is which alts should investors consider? According to Allianz, investors have two choices: Allocate broadly to alternatives via a custom advisory service; or Add single alternative strategies in order to achieve a specific investment objective. Allianz breaks down the alternative strategies pursued by hedge funds into four broad classes: Event driven, relative value, macro, and long/short equity. Given each strategy is designed to provide returns with limited correlation to the broad markets, and the broad markets have been bullish for years, the coming volatility and presumed end of long-time bull markets in stocks and bonds should result in a positive environment for many alternative strategies. For more information, download a pdf copy of the white paper .