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This New Hedged Global ETF Meets The Demand Of Time

It is in years like 2015 that the spotlight falls on the hedged global investing strategy. The world economy is presently mulling over two starkly different policy tools. While the biggest economy, the U.S., is planning for a tightening, other developed nations are turning their loose policies to ultra-loose. Agreed, the recent soft jobs data put off the rate hike speculations to a large extent this year, but this hardly dampened the greenback. The U.S. currency is still stronger despite bets over the imminent Fed lift-off subsiding. The U.S. dollar is 13.5% stronger than the euro in the last one-year time frame, trading 12.3% higher than the yen and 24.4% above the Australian dollar (as of October 6, 2015). This makes the case for hedged global ETF investing stronger. Moreover, the wave of easy money policies across the globe, be it in Europe or Asia, has brightened the appeal for dividend investing lately. Several nations are resorting to further easing as growth, investments and consumer demand have failed to exhibit sustained recovery so far in the year. Though the Fed is aiming policy normalization later this year or early next year, the modest U.S. growth momentum indicates a slower rate hike trajectory in the future. All these will likely keep bond yields at check globally. As a result, investors looking for steady current income might shift their focus to high dividend global stocks. It is this economic backdrop that can make the new ETF – the SPDR S&P International Dividend Currency Hedged ETF (NYSEARCA: HDWX ) – a star performer. HDWX in Detail The fund is nothing but the currency-hedged version of an already popular fund, the SPDR S&P International Dividend ETF (NYSEARCA: DWX ), and follows the S&P International Dividend Opportunities USD hedged Index. In total, the underlying fund DWX holds 119 high-yielding securities with none holding more than 3.36% of assets. Fortescue Metals ( OTCQX:FSUMF ), National Grid plc (NYSE: NGG ) and Berkeley Group ( OTCPK:BKGFY ) are the top three holdings. All stocks need to deliver positive 3-year earnings growth and profitability, as calculated by positive earnings per share before extraordinary items over the last 12-month period. Financials and Utilities take the top two spots with each accounting for about one-fourth share, followed by Telecom (15.9%) and Energy (14.7%). Australian firms dominate the returns at 23.2% while the United Kingdom and Canada make up for 17.4% and 10% share, respectively. From a market cap look, mid caps and large caps combine to make up for 88%, leaving little room for the small caps. The fund has amassed about $4 million of assets within less than one month of its launch. It charges 48 bps in annual fees. It has an annual dividend yield of 6.67% (as of October 6, 2015) and added about 5% the same day. Can It Continue to See Success? Focus on dividends and hedging technique in the global equities ETF space is no longer a fresh idea as individually there are plenty of similar options. Products like the PowerShares International Dividend Achievers Portfolio ETF (NYSEARCA: PID ) and the First Trust Dow Jones Global Select Dividend Index ETF (NYSEARCA: FGD ) have already accumulated considerable investor wealth in the dividend ETFs space and could pose as threats to the tenderfoot. However, taking both factors – dividend payments and currency-hedging – into consideration, the list gets shortened. Still, HDWX might have to compete with similarly-themed products like the WisdomTree Global ex-U.S. Hedged Dividend ETF (NYSEARCA: DXUS ), the Deutsche X-trackers MSCI All World ex US Hedged Equity ETF (NYSEARCA: DBAW ) and the Deutsche X-trackers MSCI EMU Hedged Equity ETF (NYSEARCA: DBEZ ). The trio charges in the range of 40-45 bps in fees. However, like HDWX, none of these are heavily weighted on Australia. Since commodities bounced back after a muted U.S. jobs report, heavy presence of the commodity-rich Australia in the portfolio showered ample gains on HDWX. Once this boom fizzles out, HDWX may not be able to sustain the momentum. Still, investors can ride on this new ETF as long as the trend is your friend. Original Post

Regulatory Decision Confirms Attractive Value At Capstone Infrastructure

Competition Markets Authority released its summary decision, with management confident that dividends can be sustained under new rates. Management discussed additional levers to find value at Bristol Water, including new financing options, additional efficiencies and increased leverage. Overall, following the decision, valuation has been derisked and significant upside maintained. Nearly two months ago, we published a report on Capstone Infrastructure Corporation ( OTCPK:MCQPF ), a Canadian small-cap infrastructure company. The company has a variety of critical infrastructure assets, from solar, wind, hydro and biomass power generation, to natural gas co-generation, district heating and a water utility. The firm’s assets are geographically diverse, with the power assets located in Canada, the district heating business in Sweden and the water utility located in the U.K. The company has a market capitalization of just over C$300 million (US$230 million) and is traded primarily on the Toronto Stock Exchange under the symbol “CSE.” Today, we would like to share some analysis of a recent regulatory decision that we believe adds considerable certainty to the future sustainability of Capstone Infrastructure and confirms the company as an attractive value play. At the time of publication of our initial report, one of the material risk factors to Capstone’s valuation was the pending U.K. Competition Markets Authority (CMA) decision in the appeal of a previous Ofwat regulatory decision for its Bristol Water business. This pending decision was a major factor in the decline in Capstone’s share price and has been a drag on the stock’s value for the past several months. We are happy to now see this decision released, and investors can largely put this concern behind them. The regulator’s press release and a summary decision regarding Bristol Water was released on October 6 , clarifying several factors for the business, including increased operating expenses, increased capital expenditures on a reduced scope, a higher return on equity and higher customer billing rates. While the company felt that the billing revenue side of the decision was disappointing, overall the decision will, in the view of management , enable Bristol Water to maintain its dividend level going forward. We agree that their approach to managing the lower rates does seem reasonable and that dividends at or very near the previous levels should be able to be maintained. The trading response to this decision has been fairly muted, perhaps because the outcome is not substantially different from the preliminary findings of CMA released earlier this year. But today we stand faced with more certainty about the short-term sustainability of the dividend, which at nearly 10 percent is underpinning a great deal of the company’s value today. In our valuation case presented in our original piece, we indicated that the impact of the Bristol Water decision would be plus or minus C$7 million on adjusted funds from operations. It seems that via management’s responses on the conference call, overall distributions from Bristol Water should be maintained at their previous levels, in line with our “mid-case.” With this uncertainty removed from the picture, we can tighten the 2017 share price target range from C$2.92-7.53 to C$3.82-6.56, maintaining our mid-case target of $4.90 per share. (thousands) Low Case Mid Case High Case Comments Start: 2014 AFFO $56,412 $56,412 $56,412 Impact of Cardinal ($36,000) ($36,000) ($30,000) Low case is with project financing, high case is without. Impact of Bristol $0 $0 $0 2015 Commissioned Wind $5,000 $6,000 $7,000 Skyway 8, Saint-Philemon, Goulais 2015 AFFO $25,412 $26,412 $33,412 2016 Commissioned Wind $2,500 $3,500 $4,000 2016 AFFO $27,912 $29,912 $37,412 2017 Commissioned Wind $0 $3,500 $4,000 Corporate Savings $2,000 $5,000 $10,000 Management projects $10 million in corporate SG&A, project cost, interest and tax savings 2017 AFFO $29,912 $38,412 $51,412 2017 Projected Share Count 96,408 96,408 96,408 Based on 93,573 outstanding at Dec 31, 2014, increased by 1% annually for DRIP 2017 AFFO per Share $0.31 $0.40 $0.53 Payout Ratio 80% 80% 80% Projected 2017 Dividend/share $0.25 0.32 $0.43 Projected Dividend Yield 6.5% 6.5% 6.5% Conservative dividend level based on peer group 2017 target share price (CAD$) $3.82 $4.90 $6.56 There are still risks present in this valuation of course, including Bristol’s inability to implement cash flow enhancements to the level that management currently anticipates, or potential schedule issues or underperformance on their new energy assets. Even if these risks materialize, however, we believe the downside is not much lower than where the stock is trading today. At a significant discount to book value, this is a true value play with considerable upside for investors. We believe there is considerable short-term upside here heading into the third-quarter results in early November, and of course stand behind our call for considerable upside into 2017. To summarize, this decision derisked the situation at Capstone Infrastructure, while in the subsequent trading days, the company has maintained a substantial discount to what we perceive as a fair value. With a dividend that we’re comfortable with calling sustainable at near 10 percent and future cash flow growth supported by a higher degree of regulatory certainty, Capstone Infrastructure is currently positioned as a fantastic value play for investors with a greater than 50 percent upside to our target price and a sustainable 10 percent dividend. 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.

Taking Stock Of International ETFs After The Sell Off

Summary Exchange-traded funds (ETFs) that track international markets started the year with tremendous promise that ultimately lost ground to a host of fundamental concerns. The hazards in China and Brazil have been well documented and weighed as a primary concern for growth in emerging market countries. The combination of these issues alongside the volatility in U.S. stocks has led to wide-spread selling in broad-based indexes over the last five months. Exchange-traded funds (ETFs) that track international markets started the year with tremendous promise that ultimately lost ground to a host of fundamental concerns. Despite the best efforts of the European Central Bank to stimulate economic growth through quantitative easing programs, both developed and emerging markets overseas have seen momentum vanish in 2015. The hazards in China and Brazil have been well documented and weighed as a primary concern for growth in emerging market countries. In Europe, the fiscally conservative German stock market was rocked by the Volkswagen scandal alongside other financial worries. The combination of these issues alongside the volatility in U.S. stocks has led to wide-spread selling in broad-based indexes over the last five months. The iShares MSCI EAFE ETF (NYSEARCA: EFA ) is the largest international exchange-traded fund with over $56 billion in total assets. EFA tracks 900 stocks in both developed and emerging foreign markets. In its market cap weighted form, the top country allocations are Japan, United Kingdom, and France. Since hitting a high in May, EFA has fallen more over 18% to the September low – just barely avoiding a drop into bear market territory . This route was initially started by weakness in emerging markets, but has seen Europe join in to drive prices lower in recent months. Like nearly all risk assets, the October rally has led to some relief of the selling pressure in EFA and barely pushed the index back into the black for the year. Another key item of note in international markets is the price action of the U.S. dollar, which sent so much money spinning into currency-hedged ETFs at the beginning of the year. The P owerShares DB USD Bull ETF (NYSEARCA: UUP ) has been decidedly flat over the last five months. Recent price action may even suggest a mild downside bias, which could lead to a test of support at $24.50 in the near future. ETFs such as the WisdomTree Europe Hedged Equity ETF (NYSEARCA: HEDJ ) benefited from the rise of the dollar as the built-in currency arbitrage worked as a tailwind in the first half of the year. Now there is less of a convincing case that the U.S. dollar will continue its rally and lend weight behind the currency hedged theme. A falling dollar would ultimately make a traditional international fund such as the Vanguard FTSE Europe ETF (NYSEARCA: VGK ) a more attractive near-term opportunity. Of course, this is predicated on the expectation that the October rally in global stocks has further room to run through the end of the year. I would sum up the state of international markets in the following bullet points: From a pure price perspective, broad-based international ETFs were leaders on the upside and consequently leaders on the downside relative to U.S. markets this year. That makes them a more aggressive play for those that are positioned for a rebound. While it appears that there are sound fundamental and technical reasons to avoid international stocks, they still offer compelling upside opportunity in the context of a well-diversified portfolio. Your allocation to this sector will likely be governed by your overarching risk tolerance. For core international exposure , I believe that it’s important to stick with broad-based indexes rather than trying to hand pick specific countries or sub-regions. The risk of hits and misses in concentrated areas make for a less compelling investment proposition. International investors should also keep one eye on the currency trends as well. Even if your fortunes aren’t tied to a currency-hedged ETF, there are still important correlations that can be gleaned from observing forex markets. Remember that a higher dollar (lower euro) favors currency-hedged positions, while a lower dollar favors traditional un-hedged exposure. The Bottom Line Growth-oriented investors can still benefit from a strong comeback in international stocks given the backdrop of global stabilization. However, it is imperative to have a counterintuitive mindset that allows you to identify opportunity on the way down and curb your enthusiasm in the late stages of a rally. Be mindful of the inherent volatility in international ETFs versus the major U.S. indexes as well.