Tag Archives: etf

ETFs: Passing Marks For Liquidity, But What About Performance?

By Alliance Bernstein Proponents of credit exchange traded funds (ETFs) claim the last week of market turmoil was a test for these instruments-and that they passed. We think this takes grading on a curve to a new level. The cheerleaders say ETFs succeeded because they traded regularly after a high-yield mutual fund failed and barred investor withdrawals. Here’s what they’re not telling you: in exchange for this liquidity, investors ended up with instruments that have woefully underperformed active mutual funds-recently and over many years. For long-term investors who are saving to pay for college or retirement, that’s an awfully steep price to pay for something they don’t really need. The numbers speak for themselves: Over the first 11 months of this year, the two largest ETFs – HYG and JNK – have sharply underperformed the average active manager, not to mention their own benchmarks. They’ve also trailed the average active manager so far in the fourth quarter ( Display ) and since the start of December, one of the year’s most volatile months so far. ETFs’ longer-term performance falls short, too. In fact, not only have active managers outpaced ETFs over the long run, they’ve done it with lower volatility, as measured by risk-adjusted returns. The Sharpe ratio, which measures return per unit of risk, was 0.45 for JNK and 0.51 for HYG between February 2008, shortly after they began trading, and November of this year. For the top 20% of active high-yield managers, it was 0.71. How Much Liquidity Is Enough? Is the ability to get in or out of an ETF at any point in the day worth the underperformance? For asset managers and traders who need to trade frequently to hedge positions, maybe. After all, they’re not investing in these instruments as long-term income generators. But a large share of the people who own high-yield ETFs aren’t traders. They’re regular folks saving for college, or to buy a new home, or for retirement. In other words, they’re investors, not traders. Most probably aren’t doing any intraday trading at all. If they’re buying ETFs for the liquidity, they’re paying-dearly-for something they don’t need. In our view, an actively managed mutual fund is likely to offer higher potential returns over the long run – and give investors a better chance of meeting their goals. In fact, the data suggest that investors who want long-term exposure to high yield would do better to pick an active manager out of a hat than invest in an ETF. With Mutual Funds, Diversification Is Key All well and good, some investors are no doubt thinking. But what happens when mutual funds fail? That’s a fair question. Liquidity is important for everyone, as the failure of Third Avenue Management’s Focused Credit Fund illustrates. But it’s important to remember that this mutual fund was not a typical high-yield fund. It focused almost exclusively on risky distressed debt issued by highly leveraged companies. These types of assets are relatively illiquid, and that became a problem when large number of investors wanted to sell their shares. In other words, investors were promised “daily liquidity”-the ability to buy or sell shares in the mutual fund at the end of each trading day-but the assets the mutual fund owned could not be bought or sold on a daily basis. These types of strategies are bound to fail eventually. Most high-yield managers follow more diversified strategies that focus on a wide array of higher-quality assets. Of course, investors should still make sure their investment managers have a dynamic, multi-sector approach and are managing their liquidity risk effectively . Those who do a good job will be in position to meet redemptions during downturns and seize opportunities as they arise . That’s something Third Avenue couldn’t do. High-yield ETFs can’t do it, either . The recent turbulence in the high-yield market probably isn’t over. But we don’t think that should concern long-term investors too much. In our view, the best approach at this point is probably to ride out the storm. The intraday liquidity ETFs offer comes at a high price-and if you’re a long-term investor in high yield, you shouldn’t be paying it. The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Disclosure: None

PPL Corporation – Ready To Go Strong Starting 2016

Summary Stock is compelling investment prospect for income-hunting investors. Strategic investments in utility infrastructure development and extension-related projects are in-line with long-term growth generating strategy. Strategy of sharing cash flow base strength with shareholders through dividend payments will continue to positively affect stock price. PPL Corporation (NYSE: PPL )’s strong business fundamentals and its important infrastructural growth-related investments cast an impressive outlook for the stock. I believe the company’s regular efforts to augment the growth capabilities of its regulated business’ infrastructure with regular infrastructural improvement and enhancement-related investments will bode well for its future EPS growth. These healthy growth prospects of PPL will ultimately better its future cash flow productivity level and this will in turn help the company maintain its practice of paying increasingly healthy dividends in the years ahead. Moreover, PPL’s current valuations are more attractive than its peers and the industry average. Nevertheless, un-foreseen adverse weather conditions, volatility in fuel prices and strict regulatory restrictions are key threats that will keep on hovering over the company’s future financial performance. Over the last few years, the U.S. utility industry has faced challenges such as a decline in energy demand by industries amid the recession. Furthermore, the regulatory uncertainties and restrictions imposed by the Environmental Protection Agency (EPA) caused industry disruptions. However, the EIA has projected that energy demand in the U.S. will increase by 2.1% in residential space in the second of 2015 and will grow by 0.7% in industrial space in 2015, which indicates that the overall utility industry’s outlook is attractive. To combat the industrial headwinds and to meet the expected rise in energy demand, the U.S. utility industry players have accelerated their growth investments in order to get a broader regulated infrastructure. Like all of the other utility industry players, PPL is also making hefty infrastructural investments; around $10 billion is projected to be spent by the company on infrastructure improvement by the end of 2017, which will help it apply for regular rate base hikes and will ultimately drive its future earnings and revenues. I continue to believe that this utility company’s attractive growth investments will help it enjoy EPS growth in future, which will support its cash flows and dividend growth. PPL, however, is confident of achieving a 6% compounded annual earnings growth rate through 2017. And for its U.K. operations, the company now expects EPS growth of 1% to 2%, in contrast to its previous expectation of flat earnings growth. I think that these strong earnings growth potentials will augur well for the stock valuation. To recover the capital investments made previously, the company has applied for a 5.1% rate case hike. Although the case is still waiting for regulatory approval, if approved, it will add around $124 million per year towards PPL’s revenues. The company has plans to use the proceeds of its rate cases in technological upgradation and improvement-related projects. In this regard, recently, PPL asked for the Pennsylvania Public Utility Commission’s approval to make an investment of $450 million in the technology upgradation process of meters in order to resolve their problems associated with old meters. This investment will not only improve the company’s image as a quality regulated utility but will also benefit its EPS growth, because the cost of investment will be recovered through a special rate rider; as per the management’s estimates, this investment will increase rate base by $330 million . Moreover, two of PPL’s subsidiaries, namely Louisiana Gas And Electric Company and Kentucky Utilities Company, have recently signed a $220 million agreement with Paringa Resources Limited for the purchase of coal from Buck Creek No.1 mine, with the completion of certain construction-related work, coal purchase under this agreement will begin in 2018. The coal purchase agreement will extend PPL’s energy generation resources, thereby improving its load capacity and will help it apply for rate case, which in turn will help it in reporting incremental EPS growth. Furthermore, the company has maintained an impressive record of sharing its cash flows with shareholders through healthy dividend payments. Owing to consistent dividend growth, currently, PPL offers an attractive yield of 4.44% . Moreover, the commitment to keep its dividends growing has been affirmed by the company’s chairman in the 3Q2015 earnings conference call; he said : “Regarding the dividend, we expect minimal dividend growth again for 2016 as we strive to get the payout ratio down into the mid-60% range, at which time we will target a 4% to 6% dividend growth rate, more in line with our earnings growth expectations. We currently expect to be in the targeted payout range by the end of 2016. So our current expectation is that we will grow the dividend more meaningfully starting in 2017, but our current expectation for 2017 is at the low end of the 4 to 6% relative to the dividend.” Due to the abovementioned strong strategic growth prospects, I think the chairman’s dividend growth expectation is realistic and achievable. Moreover, PPL’s strong balance sheet position, as reflected in the chart below, makes me believe in the company’s ability to continue sharing a decent portion of its future cash flows with shareholders in the years ahead. Source: 4-traders.com Final Words PPL is a compelling investment prospect for income-hunting investors. The company’s strategic investments in utility infrastructure development and extension-related projects and its strong balance sheet position are in-line with its long-term growth generating strategy. Moreover, PPL’s strategy of sharing its cash flow base strength with shareholders through dividend payments will continue to positively affect its stock price. Also, earnings for PPL are expected to grow at a growth rate of 4.86% , better than Southern Company (NYSE: SO )’s earnings growth expectations of 3.88% . Also, PPL has attractive stock valuations in comparison to SO and the industry average, as displayed below. Source: Yahoo Finance & NYU.edu

3 Emerging Market ETFs With Q4 Gains

Wrong were those investors who thought emerging markets would perform miserably in the fourth quarter due to the looming Fed tightening. The gradual waning of cheap dollar inflows post lift-off, the resultant rise in the greenback, sluggish emerging currencies, high inflation issues, political disorder and the commodity market rout were deemed to dull the appeal of emerging markets. The theory wasn’t completely baseless. The broader emerging market ETF iShares MSCI Emerging Markets (NYSEARCA: EEM ) has lost 17% so far this year and over 3.3% so far this quarter (as of December 18, 2015). But not all emerging market equities and the related ETFs have been vulnerable. At least, Q4 performance of a few emerging market ETFs has been noteworthy. Investors should note that the S&P 500-based SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) has added over 1.8% so far this quarter (as of December 18, 2015) and the world ETF iShares MSCI ACWI (All Country World Index) Index (ACWI ) is up 0.3%. A couple of emerging market ETFs have managed to climb and two funds even impressed with their double-digit returns in the quarter-to-date period (as of December 18, 2015). Interestingly, these top performers are spread across various sectors or countries and could be better plays in the current market. This suggests that there have been winners in every corner of the space, even amid a sluggish overall trend. Below, we highlight three top-performing emerging market ETFs in the quarter-to-date frame. Emerging Markets Internet & E-Commerce ETF (NYSEARCA: EMQQ ) – Up 23.3% The Internet and e-commerce industry is developing fast with the increased use of social networking sites and online trading as well as the growing adoption of smartphones and other mobile Internet devices. So, this product has more to do with technological expansion in the emerging markets rather than reflecting the slowing potential of those economies. In fact, EMQQ can succeed on the back of a fast-expanding middle-class population of emerging nations. This $12-million ETF considers companies from Asia, Latin America, Africa and Eastern Europe. Country-wise, China takes the highest allocation in the fund. Alibaba (NYSE: BABA ), Baidu (NASDAQ: BIDU ) and Baozun (NASDAQ: BZUN ) are the top three holdings of the fund. EMQQ charges 86 bps in fees and is up 23.5% so far in the fourth quarter (as of December 18, 2015). First Trust ISE Chindia ETF ( FNI ) This fund follows the ISE Chindia Index, which measures the performance of the liquid firms domiciled either in China or in India. Notably, even after the upheaval in August, Chinese stocks are among the top and stellar performing securities in the emerging market pack. As far as India is concerned, it is one of the most stable emerging markets at the current level in terms of economic growth and corporate profitability. It has accumulated nearly $230 million in its asset base. The product puts nearly 50% of its assets in the top 10 holdings, with JD.com (NASDAQ: JD ), Tata Motors (NYSE: TTM ) and NetEase (NASDAQ: NTES ) being the top three firms. From a sector look, more than 35% of the assets are allocated to information technology while about one-third goes to consumer discretionary. FNI charges 60 bps in fees per year from investors and has returned 12.63% so far in the quarter. The product looks to track 50 emerging market-based depositary receipts. The fund invests about 45% of assets in China while Taiwan, Brazil and India get the next three positions with 14%, 12.5% and 10.4% weight, respectively. The fund charges 30 bps in fees. Sector-wise, the fund is heavy on information technology (38.68%) while telecom (16.75%), financials (14.7%) and energy (10.2%) get double-digit exposures. Alibaba (11.5%) and Taiwan Semiconductor (NYSE: TSM ) (10.6%) are the top two stocks of the fund. ADRE is up 5.6% in the quarter-to-date frame and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook. Original