Tag Archives: consumer

CARZ ETF Zooms Ahead On 10-Year High Auto Sales

In August, the automakers witnessed the highest rate of increase in light vehicle sales in the U.S. in 10 years. Sales on a seasonally adjusted annualized rate (“SAAR”) surged to 17.81 million units in August 2015 from 17.3 million units in August 2014. This was the highest pace since July 2005. Moreover, the SAAR finished above the 17 million mark for the fourth straight month in August. However, U.S. light vehicle sales nudged down 0.7% year over year to 1.51 million units in August 2015. Low oil price, a recovering economy, improving labor market condition, and easy availability of credit with lower interest rates and longer repayment periods were the main reasons behind the surge in sales on a SAAR basis. However, the inclusion of the Labor Day weekend in September this year, compared to August last year, resulted in a year-over-year decline in August sales figures. While Ford Motor Co. (NYSE: F ) registered the highest year-on-year improvement in August among the major automakers, General Motors Company (NYSE: GM ) recorded the best sales figure for the month in absolute terms. Auto Sales in Detail Ford reported a 5% increase in U.S. sales from the year-ago period to 234,237 vehicles, witnessing its best August sales in nine years. Meanwhile, FCA US LLC – controlled by Fiat Chrysler Automobiles N.V. (NYSE: FCAU ) – recorded a 2% year-on-year gain in sales to 201,672 vehicles, registering its highest August sales since 2002. This was also the 65th consecutive month in which the company reported a year-over-year gain in sales. However, General Motors recorded 270,480 vehicle sales in August, marking a 0.7% year-over-year decline. Though retail sales improved 5.9% to 224,978 units, the company witnessed a 24% plunge in fleet sales in August. Separately, sales performances from the major Japanese automakers were disappointing last month. Toyota Motor Corporation’s (NYSE: TM ) sales went down 8.8% year over year to 224,381 units. Sales also declined 5.3% on a daily selling rate (“DSR”) basis from the year-ago period. Moreover, Honda Motor Co., Ltd. (NYSE: HMC ) recorded a 6.9% year-over-year decline in sales on a volume basis to 155,491 vehicles in the month. Also, Nissan Motor Co. Ltd. ( OTCPK:NSANY ) reported a 0.8% year-over-year decrease in sales to 133,351 vehicles in August. Catalysts Behind the Surge The overall improvement in the U.S. economy has helped the auto sector to register solid gains in the past few months. The “second estimate” released by the U.S. Department of Commerce last month showed that the GDP in the second quarter advanced at a pace of 3.7%, significantly higher than the first quarter’s rise of only 0.6%. Though the economy created only 173,000 jobs in August, down from July’s tally of 245,000, the unemployment rate declined to 5.1% from July’s rate of 5.3%. Meanwhile, the market is witnessing a freefall in crude prices since the middle of last year. In fact, the price of West Texas Intermediate (WTI) fell nearly 60% as compared to mid-2014, when oil was trading above $100 each barrel. This oil plunge is also playing a major role in boosting auto sales. Moreover, automakers are aiming to increase market share by offering large incentives and discounts to customers. Additionally, banks are providing more car loans with lower interest rates and longer repayment periods. Further, the high average age of cars on U.S. roads has led to increased replacement demand both for cars and for parts. CARZ in Focus The auto ETF – First Trust NASDAQ Global Auto ETF (NASDAQ: CARZ ) – gained nearly 2% following the release of the auto sales report on Sept. 1 through Sept. 3, before losing 2.2% last Friday. It has a decent exposure to the above-mentioned stocks, excluding FCA US LLC, and is thus poised to gain from improving auto trends in the coming days. The ETF tracks the Nasdaq OMX Global Auto Index, giving investors exposure to automobile manufacturers across the globe. The product holds 37 stocks in the basket with Ford, Honda, Toyota, Daimler and General Motors comprising the top five holdings with a combined allocation of more than 40% of fund assets. In terms of country exposure, Japan takes the top spot at 36.6% while the U.S. takes the second spot having around 24.8% allocation, followed by Germany with 19.1% exposure. The ETF is unpopular with $32.4 million in its asset base and sees light trading volume. The product seems to be slightly expensive with 70 bps in annual fees and has a dividend yield of more than 1.7%. The fund has a Zacks ETF Rank #2 (Buy) with a High risk outlook. Bottom Line The improving auto industry has been one of the drivers of the recent economic growth in the U.S. Auto sales will continue to be a tailwind for the economy in the coming days. It is also speculated that the auto sector is poised for further gains given the favorable macroeconomic fundamentals. Original Post 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.

XLP Has Numbers For Volatility And Correlation, But It Could Be Better

Summary The portfolio used by XLP isn’t optimized for the best possible performance. I love that the portfolio isn’t afraid to hold producers of addictive substances, but where is the BUD? The expense ratio is fairly solid at .15% and the yield isn’t too bad for an ETF used as a small allocation to overweight the sector. I’d like to see XLP increase the number of holdings within the ETF to reduce the concentrated risk of individual holdings. The low beta reflects a combination of mediocre correlation and low volatility which makes the fund a reasonable fit for a small allocation. Investors should be seeking to improve their risk-adjusted returns. I’m a big fan of using ETFs to achieve the risk-adjusted returns relative to the portfolios that a normal investor can generate for themselves after trading costs. I’m working on building a new portfolio, and I’m going to be analyzing several of the ETFs that I am considering for my personal portfolio. One of the funds that I’m considering is the Consumer Staples Select Sector SPDR ETF (NYSEARCA: XLP ). I’ll be performing a substantial portion of my analysis along the lines of modern portfolio theory, so my goal is to find ways to minimize costs while achieving diversification to reduce my risk level. Expense Ratio The expense ratio on XLP is .15%. I’d like to see a little lower on domestic equity but for a sector-specific ETF, this is still within reason. Yield The ETF is yielding 2.58%. That isn’t enough for a large position in a dividend growth investor’s portfolio, but it is not low enough to really damage the dividend performance of an investor’s portfolio if it is simply being used to create a slight overweight on the sector due to the lower volatility of this sector. Allocations by Industry The following chart breaks down the allocations by each sector: The heaviest exposures are to food and retailing of staples with beverages also coming in as a “very heavy weight”. All around, it should be clear that the goal of this portfolio is to focus on companies that sell products that will maintain strong demand even if the economy is not performing very well. Accordingly, these companies as a group are less volatile than the broader market. Top Holdings The following chart breaks down the top 10 holdings in the fund: After seeing the beverage sector coming at over 18% of the portfolio, I was expecting PepsiCo (NYSE: PEP ) to have a slightly higher weighting. There are a few other things that surprised me as well though. For instance, CVS Health Corporation (NYSE: CVS ) has a higher weighting than Wal-Mart (NYSE: WMT ). I would have expected Wal-Mart to get a slightly higher allocation. I also would have expected Target (NYSE: TGT ) to get at least a small exposure in the portfolio, but when I downloaded the entire list of holdings it was not present. For tobacco being just over 15% of the portfolio, how about some alcohol exposure? I would have expected Anheuser-Busch (NYSE: BUD ) to merit a place somewhere in the list since the goal is to have companies that can continue to make sales even if the market turns down. Perhaps I’m being cynical to think I’d like to own a large company that sells low-cost alcohol as part of a strategy for hedging against a weak economy which can often include high levels of unemployment. It may be cynical, but it is also prudent financial planning. Despite my rationale for including BUD, it is not listed in the portfolio either. The portfolio has a total of only 38 holdings which is also lower than I would expect for an ETF whose primary purpose is to lower the volatility of the portfolio. Building the Portfolio This hypothetical portfolio has a moderately aggressive allocation for the middle-aged investor. Only 30% of the total portfolio value is placed in bonds and a third of that bond allocation is given to high-yield bonds. This portfolio is probably taking on more risk than would be appropriate for many retiring investors since the volatility on equity can be so high. However, the diversification within the portfolio is fairly solid. Long-term treasuries work nicely with major market indexes, and I’ve designed this hypothetical portfolio without putting in the allocation I normally would for REITs on the assumption that the hypothetical portfolio is not going to be tax exempt. Hopefully, investors will be keeping at least a material portion of their investment portfolio in tax-advantaged accounts. The portfolio assumes frequent rebalancing which would be a problem for short-term trading outside of tax-advantaged accounts unless the investor was going to rebalance by adding to their positions on a regular basis and allocating the majority of the capital towards whichever portions of the portfolio had been underperforming recently. (click to enlarge) A quick rundown of the portfolio The two bond funds in the portfolio are PIMCO 0-5 Year High Yield Corporate Bond Index ETF (NYSEARCA: HYS ) for high yield shorter-term debt and iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ) for longer-term treasury debt. TLT should be useful for the highly negative correlation it provides relative to the equity positions. HYS on the other hand is attempting to produce more current income with less duration risk by taking on some credit risk. XLP is used to make the portfolio overweight on consumer staples with a goal of providing more stability to the equity portion of the portfolio. iShares U.S. Utilities ETF (NYSEARCA: IDU ) is used to create a significant utility allocation for the portfolio to give it a higher dividend yield and help it produce more income. I find the utility sector often has some desirable risk characteristics that make it worth at least considering for an overweight representation in a portfolio. iShares MSCI EAFE Small-Cap ETF (NYSEARCA: SCZ ) is used to provide some international diversification to the portfolio by giving it holdings in the foreign small-cap space. The core of the portfolio comes from simple exposure to the S&P 500 via SPDR S&P 500 Trust ETF (NYSEARCA: SPY ), though I would suggest that investors creating a new portfolio and not tied into an ETF for that large domestic position should consider the alternative by Vanguard – Vanguard S&P 500 ETF (NYSEARCA: VOO ) – which offers similar holdings and a lower expense ratio. I have yet to see any good argument for not using or another very similar fund as the core of a portfolio. In this piece I’m using SPY, because some investors with a very long history of selling SPY may not want to trigger the capital gains tax on selling the position and thus choose to continue holding SPY rather than the alternatives with lower expense ratios. Risk Contribution The risk contribution category demonstrates the amount of the portfolio’s volatility that can be attributed to that position. Despite TLT being fairly volatile and tying SPY for the second-highest volatility in the portfolio, it actually produces a negative risk contribution because it has a negative correlation with most of the portfolio. It is important to recognize that the “risk” on an investment needs to be considered in the context of the entire portfolio. To make it easier to analyze how risky each holding would be in the context of the portfolio, I have most of these holdings weighted at a simple 10%. Because of TLT’s heavy negative correlation, it receives a weighting of 20% and as the core of the portfolio SPY was weighted as 50%. Correlation The chart below shows the correlation of each ETF with each other ETF in the portfolio and with the S&P 500. Blue boxes indicate positive correlations and tan box indicate negative correlations. Generally speaking lower levels of correlation are highly desirable and high levels of correlation substantially reduce the benefits from diversification. Conclusion The nice thing about XLP is that has a correlation of only .84 with the S&P 500 and .47 with high yield bonds. For an aggressive portfolio, a small allocation to XLP can provide a nice reduction in risk. The beta on the fund is only .65 which reflects the combination of moderate correlation to the market and lower total volatility as demonstrated by 12% annualized volatility when SPY had 15.5% annualized volatility. When it comes to the expense ratio and the statistical factors, I think XLP is doing a fairly good job. However, I can’t get past thinking that a portfolio that adds some exposure to other addictive substances like alcohol would be creating a more resilient base for the portfolio. At the same time, I’d like to see a slightly larger volume of holdings (perhaps around 70 rather than 38) to reduce the idiosyncratic risk from holding larger positions in individual companies. XLP is a decent ETF and it performs well in a portfolio. However, I think it could be optimized a little better. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.

6 ETFs To Watch In September

After a worldwide brutal stretch in August, the investing cohort must be keenly following the market movement in September. In any case, September is a seasonally cursed month having underperformed historically especially when it comes to stocks. According to the Stock Trader’s Almanac , September ended in red 55% of the time while S&P Dow Jones Indices indicated an average fall of 1.03% return over the last 87 years in September. Prelude to September There is no end to hurdles in the global market, with China being the main culprit. The world’s second-largest economy completely derailed the market in August by devaluing its currency yen by 2%, to presumably maintain export competitiveness and by revealing six-and-a-half-year low manufacturing data for August. Even repeated attempts and intervention by the Chinese policy makers in its economy and stock markets did not help and the bloodbath in global risky assets continued. The U.S. and Asian stocks had experienced a three -year low monthly performance in August. Europe saw the most horrible month since the 2011 debt debacle. Commodities crumbled to multi-year lows on demand issues and hit hard all commodity-rich nations. All three key U.S. indices met with correction in the month, though these managed to score gains in the end. In short, August got on investors’ nerves. Weak Start to September Some might have hoped for relief and rebound in this dull scenario, defying the seasonal weakness of September. But much to their shock, September unfolded on a grave note, with U.S. stocks in red on global growth issues. The contagion rooted in China’s factory sector slowdown, the end to stock purchases by Chinese government-backed funds and lack of certainty in the upcoming Fed policy ravaged the global market all over again. Most importantly, oil prices that recently impressed investors with the largest three-day oil price gain in 25 years , resumed their decline on China-led growth fears. Among the top U.S. ETFs, investors saw SPY lose about 3%; DIA shed about 2.9% while QQQ moved lower by about 3.1% on the first day of September. This makes it more important to pinpoint the ETFs that could hop or drop in September as volatility in various markets could make for some interesting near-term outlook. Vanguard Extended Duration Treasury ETF (NYSEARCA: EDV ) As September is the most speculated month in recent times for the rate lift-off, all eyes will be on the Fed meeting scheduled mid-month. A yes or no from the Fed would drag down or drive higher this long-term U.S. Treasury bond ETF. Not only this ETF, several other bond ETFs would be impacted by the Fed move. Market Vectors ChinaAMC SME-ChiNext ETF (NYSEARCA: CNXT ) China, the epicenter of the latest global chaos, should be a high-alert territory throughout September. If no further rotting news emanates from the nation, the stocks and funds might snap back on bargain hunt as they say no news is good news. But if anything wrong happens on the economic front, the ETF could be due for a wilder ride, though the chance of the latter appears less. Vanguard Total Stock Market ETF (NYSEARCA: VTI ) This all-cap U.S. equity ETF could be in watch in September. The fund was off over 2.9% to start the month and could be used as a representative of the total stock market performance in the ill-fated month. Any new China-driven sell-off or stronger Fed rate hike bet could thwart the fund and vice versa. S&P Small-Cap Consumer Staples Portfolio (NASDAQ: PSCC ) Since the consumer staples sector is known to act in investors’ defense in a rough market, this fund might come to one’s rescue in the troubled month. A small-cap exposure will help the fund mitigate the currency-translation woes, and at the same time enable it to capture the improving U.S. consumer sentiment. PSCC was down 4.4% in the last one month and up over 1.7% in the last five days (as of September 1). This was one of the best performances in the consumer staples’ segment. In fact, the consumer staples sector outdid another safe sector utility in recent times. SPDR S&P Metals & Mining ETF (NYSEARCA: XME ) The metal and mining industry has been a dreadful area as commodities were smashed on China-related worries (one of the major consumers of metals in the world) and the strength in the greenback. However, the product gained about 9% in the last five trading sessions (as of September 1, 2015) as price of some precious metals like gold brightened on their safe-haven status and the greenback lost some its strength on Fed ambiguity. So, let’s see whether further pain or gain is in store for this stressed but cheap space. United States Oil Fund (NYSEARCA: USO ) Who can forget oil? It hit September on a bearish note and will keep investors busy in assessing how it will finish the month especially given the flow of news (both good and bad) from the space. USO was down 6.8% on the first day of September and shed just 1.9% in the last one month (as of September 1, 2015). Original Post