Tag Archives: economy

FXG Vs. RHS: To Weigh Or Not To Weigh

Both funds have excellent returns. Both funds are defensively structured. However, each favors a different bias within the Consumer Staple sector. Successful investors redirect funds according to economic conditions. During the lean times, the object is to get defensive. During the prosperous times, the investor can take more risks. One of the defensive sectors is Consumer Staples . According to Investopedia : Consumer staples are goods that people are unable or unwilling to cut out of their budgets regardless of their financial situation. Consumer staples stocks are considered non-cyclical, meaning that they are always in demand, no matter how well the economy is performing. Naturally, the investor may ‘pick and choose’ their favorite defensive holdings or may save a lot of time and effort by investing in an appropriate ETF. Two good examples are the First Trust Consumer Staples AlphaDEX ETF (NYSEARCA: FXG ) and the Guggenheim S&P 500 Equal Weight Consumer Staples ETF (NYSEARCA: RHS ). Fund 1-Month 3-Months Year-to-Date 1-Year 3-Year 5-Year Inception Inception Date Expense Ratio FXG -4.38% -1.16% 4.45% 12.26% 23.60% 21.60% 11.61% 5/8/2007 0.67% RHS -4.97% -1.34% 2.70% 10.50% 18.05% 18.09% 11.60% 11/1/2006 0.40% (Data from First Trust and Guggenheim) The above table indicates that in the short term, the First Trust fund slightly outperforms the Guggenheim fund and in the 1 to 5 year range First Trust fund outperforms Guggenheim fund by a respectable margin, however, returns since inception (only six months apart) are nearly identical. What makes this interesting is that the Guggenheim fund is an equally weighted fund; in particular, the Guggenheim fund tracks the S&P 500® Equal Weight Index which weights each of its component holdings at 0.2% of the index, rebalancing quarterly. On the other hand, the First Trust fund tracks the NYSE StrataQuant® Consumer Staples Index [STRQC] . The First Trust methodology is a little complex, but in essence, it is weighted by growth. It’s interesting to note the similarity between the two in a price history chart. (click to enlarge) Since one fund is performance weighted and the other equally weight it would make more sense to compare holdings; similarities and differences. First, where do they differ, if at all? The Guggenheim fund has 37 holdings; the First Trust has 39. Two of the First Trust holdings are “rights”, that is to say that the fund has the ‘right’ to “… purchase additional shares directly from the company in proportion to their existing holdings…—Investopedia “. Hence, aside from the ‘rights’ the funds have the same number of holdings. The following table lists the identical holdings but the weighting refers only to the First Trust fund, since in theory, the Guggenheim fund is equally weighted. Companies in Common FXG Weighting (RHS holdings are all equally weighted) Tyson Foods (NYSE: TSN ) 4.86% ConAgra Foods (NYSE: CAG ) 4.61% CVS Health (NYSE: CVS ) 4.59% Archer-Daniels-Midland (NYSE: ADM ) 4.35% Constellation Brands (NYSE: STZ ) 4.29% Walgreens Boots (NASDAQ: WBA ) 4.09% Reynolds American (NYSE: RAI ) 3.24% Hormel Foods (NYSE: HRL ) 3.17% Monster Beverage (NASDAQ: MNST ) 2.85% Whole Foods (NASDAQ: WFM ) 2.40% Sysco (NYSE: SYY ) 2.08% Campbell Soup (NYSE: CPB ) 2.05% Dr Pepper Snapple (NYSE: DPS ) 2.01% McCormick (NYSE: MKC ) 1.95% Brown-Forman (NYSE: BF.B ) 1.84% Procter & Gamble (NYSE: PG ) 1.70% Molson Coors (NYSE: TAP ) 0.99% Altria Group (NYSE: MO ) 0.94% J.M. Smucker (NYSE: SJM ) 0.90% General Mills (NYSE: GIS ) 0.85% Philip Morris (NYSE: PM ) 0.85% Average 2.60% (Data from First Trust and Guggenheim) Hence, the above table demonstrates that the well-known, well established, large cap consumer non-cyclicals as one would expect, are in both funds. However, there’s a divergence in those holdings not shared by the funds and it may be clearly observed in the following comparison tables. First Trust FXG Market Cap (Billions) Dividend Beta Weighting Guggenheim RHS Equally Weighted Market Cap (Billions) Dividend Beta Bunge (NYSE: BG ) $10.26 2.12% 0.93 2.32% Coca-Cola Enterprise (NYSE: CCE ) $11.3300 2.26% 1.04 Church & Dwight (NYSE: CHD ) $11.06 1.59% 0.33 0.86% Colgate-Palmolive (NYSE: CL ) $56.7710 2.41% 0.5 Edgewell (NYSE: EPC ) $5.31 2.34% 0.87 4.15% Clorox (NYSE: CLX ) $14.6110 2.71% 0.41 Flowers Foods (NYSE: FLO ) $5.11 2.38% 0.62 2.19% Costco (NASDAQ: COST ) $63.1140 1.11% 0.5 GNC (NYSE: GNC ) $3.81 1.60% 1.21 0.84% Estee Lauder (NYSE: EL ) $29.1270 1.23% 1.19 Hain Celestial (NASDAQ: HAIN ) $5.96 0.00% 0.068 4.81% Keurig-Green Mountain (NASDAQ: GMCR ) $9.2660 1.91% 0.83 Herbalife (NYSE: HLF ) $5.37 0.00% 1.44 2.97% Hershey (NYSE: HSY ) $14.8820 2.49% 0.35 Ingredion (NYSE: INGR ) $6.29 1.91% 1.37 4.19% Kellogg (NYSE: K ) $24.1810 2.92% 0.55 Pinnacle Foods (NYSE: PF ) $5.33 2.23% 0.1 0.83% Kimberly Clark (NYSE: KMB ) $39.0720 3.28% 0.3 Pilgrim’s Pride (NASDAQ: PPC ) $5.60 0.00% 0.57 3.56% Coca Cola (NYSE: KO ) $170.3020 3.37% 0.52 Rite Aid (NYSE: RAD ) $8.72 0.00% 1.56 3.91% Mondelez (NASDAQ: MDLZ ) $69.3500 1.58% 0.81 Spectrum Brands (SFB) $5.83 1.35% 0.82 3.65% Mead Johnson Nutrition (NYSE: MJN ) $15.1660 2.21% 0.86 WhiteWave Foods (NYSE: WWAV ) $8.11 0.00% 1.72 4.48% PepsiCo Inc. (NYSE: PEP ) 136.7190 3.02% 0.43 Averages $6.67 1.19% 0.893 2.98% Averages $50.2310 2.35% 0.63 (Data From Reuters, Yahoo!Finance) The difference is outstanding. The First Trust growth weighted fund is taking more risk with companies having smaller market capitalizations, a higher beta, (although still less than 1), and much smaller dividends. On the other hand, the Guggenheim Equally Weighted fund contains a real home run hitting line-up. The average market capitalization of the non-overlapping companies of the Guggenheim fund is a whopping $50.2310 billion compared with the First Trust fund’s non-overlapping companies $6.67 billion; that’s over 7.5 times! Even when excluding Coca-Cola and PepsiCo whose combined market cap is $346.87 billion, the average market cap of the non-overlapping Guggenheim companies is $31.533 billion, almost 5 times the market cap of the non-overlapping First Trust funds. The average dividend yield of the non-overlapping Guggenheim companies is nearly twice that of the First Trust non-overlapping companies and lastly the average beta of the Guggenheim non-overlapping companies is 29.45% less than average non-overlapping companies’ beta; 0.893 vs 0.63. The First Trust fund is tracking an index containing slightly more volatile stocks with smaller market caps and lower yields. They are consumer staple companies to be sure, but towards the more volatile end of the consumer staple spectrum. The Guggenheim fund, on the other hand, tracks an index which equally weights the crème de la crème of consumer staple companies. Since inception, the Guggenheim fund has returned $11.41 in dividends but the First Trust fund has returned $2.77 per share. (Please note that for the sake of compactness, the above comparison price/dividend history chart begin from the end of 2010). Lastly, some ETF metrics of both funds are summarized in the table below. Fund Total Net Assets (Billions) Daily Volume Shares Outstanding Rebalance Frequency Price/Earnings Price/Book Beta Sharpe Ratio Dividend Yield (TTM) FXG $2.712996 364,741 61,550,000 Quarterly 17.21 3.34 0.95 1.71 1.58% RHS $0.336326 59,471 3,100,000 Quarterly 23.83 4.47 0.98 1.77 1.82% (Data From Reuters, Yahoo!Finance) It’s fair to say that both funds are excellent representations of the Consumer Staple sector. One slightly outperforms the other in terms of market price and the other having a relatively good regular dividend, particularly important for disciplined dividend reinvesting. The deciding factor depends on the individual investor’s outlook. The First Trust Fund has a slight bias towards the risky end of consumer staples having more volatile components, whereas the Guggenheim Fund evenly weights with the sector best and stable companies, hence very much towards defense. Hence an investor with an optimistic outlook would obviously desire capital appreciation whereas an investor with a less optimistic outlook would obviously desire a solid defense. However, either one seems suitable for the investor with a long term savings outlook. 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: CFDs, spreadbetting and FX can result in losses exceeding your initial deposit. They are not suitable for everyone, so please ensure you understand the risks. Seek independent financial advice if necessary. Nothing in this article should be considered a personal recommendation. It does not account for your personal circumstances or appetite for risk.

Fed-Free Week Still Full Of Obstacles For ETFs

Summary A 2015 rate hike is off the table. In the near term, USDU might be the preferred option of the pair simply because it is short several emerging markets currencies, which have the potential to continue falling. As is often the case with weekly ETF previews, some familiar ETFs frequently re-emerge, and that is the case this week. By Todd Shriber, ETF Professor After a week spent worshiping at the altar of the Federal Reserve, financial markets will be spared the specter of a Fed meeting in the week ahead. However, that does not mean a 2015 rate hike is off the table. San Francisco Fed President John Williams told reporters last week that a rate hike this year could be appropriate. Richmond Federal Reserve President Jeffrey Lacker on Saturday said he dissented at a Fed policy meeting because he thought the economy was now strong enough to warrant higher interest rates, Reuters reported . Federal Reserve Bank of St. Louis President James Bullard said he argued against the continuation of the Fed’s zero interest rate policy. The ETF Situation The PowerShares DB USD Bull ETF (NYSEARCA: UUP ) and the actively managed WisdomTree Bloomberg U.S. Dollar Bullish ETF (NYSEARCA: USDU ) are the two primary exchange traded funds tracking greenback fluctuations, so suffice to say these ETFs would like 2015 rate hike momentum to reemerge and do so soon. In the near term, USDU might be the preferred option of the pair simply because it is short several emerging markets currencies, which have the potential to continue falling. UUP tracks the dollar against major developed market currencies, some of which could and should rally the longer the Fed puts off higher interest rates. There is some evidence to suggest some market participants were not reassured by the Fed’s no-hike call last week. For example, the Consumer Staples Select Sector SPDR ETF (NYSEARCA: XLP ) and the Utilities Select Sector SPDR ETF (NYSEARCA: XLU ) , each among the most rate-sensitive sector ETFs, lost a combined $382.3 million in assets last week. XLP posted a modest gain, while XLU climbed 1.6 percent – which could mean the latter is worth monitoring in the week ahead. Watch List As is often the case with weekly ETF previews, some familiar ETFs frequently re-emerge, and that is the case this week. It should be noted the Global X FTSE Greece 20 ETF (NYSEARCA: GREK ) merits a place on traders’ watch lists in the week ahead. In what feels like a monthly occurrence, Greece holds national elections again this weekend. Even with potential for increased volatility due to the election and news of a major index provider lowering Greece’s market classification , the Global X FTSE Greece 20 ETF climbed 3.8 percent last week and is up 6.3 percent over the past month. It could be a sign of a renewed risk appetite, though only time will tell, but the PowerShares QQQ Trust ETF (NASDAQ: QQQ ) , the NASDAQ-100 tracking ETF, hauled in over $1.2 billion in new assets last week despite suffering a modest drop. Remember what investors are doing by being long QQQ. They are making an ETF proxy bet on the likes of Apple, Microsoft and Amazon, as those stocks combine for over a quarter of QQQ’s weight. Disclaimer: Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation. 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. I have no business relationship with any company whose stock is mentioned in this article.

Where Will China Financial ETFs Go From Here?

The Chinese economy has been grappling with liquidity crunch for more than two years now. But the problem recently reached an alarming level. While high bad loan in a waning economy made it hard for the borrowers to repay loans, the surprise devaluation of yuan in mid August worsened the crisis. This led to net foreign exchange outflows worth 723.8 billion of yuan in August that crumpled the Chinese banking system. Chinese banks are on their way to see the worst year in 13 years, per Wall Street Journal. Most of banking bellwethers reported lackluster first-half performances this year. Some analysts including those of Moody’s expect Chinese banks’ profits to weaken further in the second half of this year hurt by piled up non-performing loans and fall in net interest margins. A plunge in fee income from stock-related services will also hit banking services hard as Chinese investments fell out of investors’ favor lately. Is There Any Hope? While the operating backdrop looks outright grim for the Chinese banks, a few recent developments could favor the bunch. First, despite the record monthly decrease in forex reserves, China had the biggest hoard of foreign reserves of $ 3.56 trillion at the end of last month. Added to this, the percentage of bad debt in total loans, though high from the last quarter, remained low by global averages. Moreover, after the summer slowdown and a scorching sell-off in August, Chinese banks are now trading at bargain. The price/book value of Industrial and Commercial Bank of China’s Hong Kong-listed stock is 0.8 times, reflecting a 72.4% discount from the level seen in 2009, per Wall Street Journal. Several other big banks are also showing the same downtrend. Of course this valuation pointer reflects bearish sentiments on these banking stocks. But on a positive note, it also indicates dirt cheap valuation for the Chinese banks. If this was not enough, the Chinese central bank appears to be going all out to infuse liquidity into the economy and cut rates and reserve requirement ratios (RRR), as it has done several times this year, to boost lending. China also relaxed the methods for computing the reserve requirement ratios of banks. Per the 17-year old rule, banks were required to tally their RRR on a daily basis. “Under the changes, banks can report a daily RRR that is up to 100 basis points lower than the rate set by the PBOC, but their daily average RRR in the assessed period cannot fall under the required level,” per Reuters . Per a report by Barrons.com , Nomura Securities approximates that this easing can free up to 1.3 trillion yuan, or 1% of total banking deposit. All these stimuli should result in higher lending which in turn should boost profits. Also, in August, total social financing rose 13% to 1.08 trillion and corporate-bond issuances more than doubled to 287.5 billion indicating that present activities may not be as bleak as it looks. In a nutshell, relentless efforts by policymakers to boost loan growth and compelling valuation should stage the backdrop for China ETFs with heavy allocation to the financial sector, at least for the near term. Since no one knows what’s exactly cooking up behind the Great Wall and how long does it will take the country to return to top gear, caution needs to be practiced while playing these products. Investors should note that the core China financial ETF, the Global X China Financial ETF (NYSEARCA: CHIX ) was one of the best performers in the China equities ETFs space in the last one-week, four-week and one-year periods (as of September 15, 2015). So, we highlight two finance-heavy China ETFs which have bottomed out and could turn around in the coming days. After all, China shares have been trending higher in recent sessions after a bloodbath and financial ETFs could very well cash in on this rising trend: ETF Plays Global X China Financial ETF This ETF provides concentrated exposure to the financial segment of Chinese equity market by tracking the Solactive China Financials Index. In total, the fund holds over 40 securities in its basket with the top three firms – China Construction Bank ( OTCPK:CICHF ), and Industrial & Commercial Bank of China ( OTCPK:IDCBY ) and Bank Of China ( OTCPK:BACHY ) – dominating the fund’s returns at more than 9% share each. It is a large cap centric fund accounting for 85% of assets. The fund has amassed $54.1 million in its asset base while trades in moderate volume of 150,000 shares per day on average. It charges 65 bps in annual fees and expenses. The fund is presently trading at a P/E (ttm) of 7 times, suggesting an appealing valuation. The fund was up about 9% in the last one week (as of September 15, 2015) and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook. iShares China Large-Cap ETF (NYSEARCA: FXI ) This is easily the most popular China ETF in the market, as over $5.7 billion is invested in the fund and average daily volume is over 30 million shares a day. The 51-stock product puts half of its weight in the financial sector. This means that any news out of the financial sector can have a huge impact on the overall return of this famous ETF. China Construction Bank Corp, Industrial & Commercial Bank of China and Bank of China Ltd. are among the top-five holdings. FXI charges 74 bps in fees and has P/E (ttm) of 9 times. The ETF added about 7.2% in the last five trading sessions and has a Zacks ETF Rank #3. Link to the original post on Zacks.com