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Buy-Ranked Large Cap Value ETFs In Focus

The start of 2016 was extremely rocky for the broader stock market, especially given the persistent slowdown in China and the collapse in oil prices. Subsequently, weak corporate earnings, a strong dollar, sluggishness in other emerging markets, uncertain timing of the next interest rate hike, and a spate of negative U.S. economic data added to the long list of woes. In particular, the global headwinds have started to hurt the U.S. economy as GDP for the fourth quarter grew at a slower pace of 0.7% after having advanced 2% in the third quarter and 3.9% in the second. With this, the rate of economic expansion in 2015 is same as that of 2.4% in 2014. While strong job growth, an improving housing market, and bumper auto sales continued to fuel growth in the economy throughout the year, falling oil prices and a strong dollar hurt consumer and business spending. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, grew 2.2%, down from 3% recorded in the third quarter while business spending contracted 2.5% after rising 9.9% in the third quarter. Moreover, the International Monetary Fund (IMF) recently warned that the global economy is on the verge of another financial meltdown and subsequently slashed the global growth forecast for the third time in less than a year. The agency now expects the global economy to grow 3.4% this year and 3.6% in the next, both down 0.2% from the previous estimates. Earlier this year, the World Bank also cut its growth forecast for the global economy to 2.9% for this year from its previous projection of 3.3%, citing that the slowdown in China, which is one of the big emerging market countries, and a worse-than-expected slowdown in Brazil and Russia have worsened the already bleak global economic outlook. Amid these headwinds and uncertainties, investors should focus on large cap stocks, which tend to be the most stable in an adverse economic scenario, while at the same time offering capital appreciation in a booming market. Further, honing in on value securities in this capitalization level ensures safety to investors. Value investing includes stocks with strong fundamentals – earnings, dividends, book value and cash flow – that trade below their intrinsic value and are undervalued by the market. Why Value Investing Is A Better Play Value stocks often overreact to both positive and negative news, resulting in share price movement that does not reflect the company’s true long-term fundamentals. This creates buying opportunities in such stocks at depressed prices and shows potential for capital appreciation when the stock finally reflects its true market price. As a result, value stocks have the potential to deliver higher returns and exhibit lower volatility compared to growth and blend counterparts. In fact, these stocks outperform the growth ones across all asset classes when considered on a long-term investment horizon, and are less susceptible to trending markets. Given this, investors may want to consider a nice large cap value play in the current volatile market environment. While looking at individual companies is certainly an option, a look at the top-ranked ETFs in this space could be a less risky way to tap into the same broad trends. Top-Ranked Large Cap Value ETF in Focus We have found a number of ETFs with a Zacks ETF Rank of 2 (Buy) in the large cap value space expected to outperform in the months to come (see all the Top-Ranked ETFs here ). While all these top-ranked ETFs are likely to outperform, the following five funds could be good choices to play the space. These products have potentially superior weighting methodologies, which could allow them to lead the large cap value space in the coming months. Vanguard Value ETF (NYSEARCA: VTV ) This fund seeks to track the CRSP US Large Cap Value Index, which measures the performance of the largest U.S. value stocks. With AUM of $17.6 billion and an expense ratio of 0.09%, VTV is one of the cheapest funds in this space. Volume is also solid exchanging around 1.7 million shares per day, on average. The product holds 328 stocks, which are well spread across each component, as none of these holds more than 4.3% share. Here again, financials takes the top spot with one-fourth share, while healthcare, industrials, consumer goods and technology round off to the next four spots with a double-digit allocation each. The ETF has shed 4.9% in the year to date time period. Vanguard Mega Cap Value ETF (NYSEARCA: MGV ) This ETF provides exposure to 160 stocks by tracking the CRSP US Mega Cap Value Index. It is pretty well spread out across components, as none of the firms holds more than 5% of assets. From a sector look, about one-fourth of the portfolio is dominated by financials, while healthcare, information technology, industrials and energy round off the top five with double-digit allocation each. MGV has AUM of $1 billion and average daily volume of 62,000 shares. It charges 9 bps in annual fees from investors and has lost 4.6% so far this year. Schwab U.S. Large-Cap Value ETF (NYSEARCA: SCHV ) This fund tracks the Dow Jones U.S. Large Cap Total Stock Market Index, holding 342 stocks in its basket. None of the securities accounts for more than 4.6% of total assets. Additionally, the product is well spread out across sectors, with financials, consumer staples, information technology, and healthcare accounting for double-digit exposure each. SCHV has amassed assets worth $1.7 billion and trades with volume of around 268,000 shares a day, on average. It charges a low expense ratio of 0.07% and is down 4.1% so far this year. PowerShares Dynamic Large Cap Value Portfolio ETF (NYSEARCA: PWV ) This fund tracks the Dynamic Large Cap Value Intellidex Index, which seeks to provide capital appreciation while maintaining value exposure. The index applies a 10-factor style isolation process and then evaluates stocks on price momentum, earnings momentum, quality and management action. This approach results in a basket of 50 securities, each holding less than 4% of total assets. About one-fourth of the portfolio is allotted to financials, followed by 15.3% to information technology, 12.5% to consumer staples and 10.5% to energy. The fund has amassed $912.4 million in its asset base, while it sees solid volume of 143,000 shares a day, on average. It charges 57 bps in fees per year and has lost 3.7% this year (see all the Large Cap Value ETFs here ). iShares Morningstar Large-Cap Value ETF (NYSEARCA: JKF ) With AUM of $280.5 million, this product tracks the Morningstar Large Value Index. Holding 84 securities, the fund is moderately concentrated on the top firms, with none holding more than 6.51% of assets. From a sector look, financials, energy, consumer staples, and industrials are the top sectors with double-digit exposure each. The ETF charges 25 bps in annual fees and trades in light volume of nearly 16,000 shares a day. It has shed 3.8% in the year to date time frame. Bottom Line Value stocks generally outperform during periods of muted market performance, which we are seeing currently. Investors are taking flight to safety given global slowdown concerns and geopolitical tensions. Therefore, the above-mentioned products have lost less that the broad U.S. market fund (NYSEARCA: SPY ) and the growth fund (NASDAQ: QQQ ). As such, investors shouldn’t forget the value space and should take a closer look at a few of the attractive value ETFs in this segment for excellent exposure and some outperformance in the months ahead. Original Post

Best And Worst Q1’16: Financials ETFs, Mutual Funds And Key Holdings

The Financials sector ranks seventh out of the ten sectors as detailed in our Q1’16 Sector Ratings for ETFs and Mutual Funds report. Last quarter , the Financials sector ranked sixth. It gets our Dangerous rating, which is based on an aggregation of ratings of 41 ETFs and 244 mutual funds in the Financials sector. See a recap of our Q4’15 Sector Ratings here . Figures 1 and 2 show the five best and worst-rated ETFs and mutual funds in the sector. Not all Financials sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 22 to 572). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Financials sector should buy one of the Attractive-or-better rated ETFs or mutual funds from Figures 1 and 2. Figure 1: ETFs with the Best & Worst Ratings – Top 5 Click to enlarge * Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings Four ETFs are excluded from Figure 1 because their total net assets are below $100 million and do not meet our liquidity minimums. See our ETF screener for more details. Figure 2: Mutual Funds with the Best & Worst Ratings – Top 5 Click to enlarge * Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings The iShares US Insurance ETF (NYSEARCA: IAK ) is the top-rated Financials ETF and the Davis Financial Fund (MUTF: DVFYX ) is the top-rated Financials mutual fund. Both earn a Very Attractive rating. The PowerShares KBW Premium Yield Equity REIT Portfolio ETF (NYSEARCA: KBWY ) is the worst-rated Financials ETF and the Rydex Series Real Estate Fund (MUTF: RYREX ) is the worst-rated Financials mutual fund. Both earn a Very Dangerous rating. 602 stocks of the 3000+ we cover are classified as Financials stocks. The Progressive Corp (NYSE: PGR ) is one of our favorite stocks held by IAK and earns a Very Attractive rating. PGR also lands on January’s Most Attractive Stocks list. Since 2009, Progressive has grown after-tax profit ( NOPAT ) by 5% compounded annually. Over this same time frame, Progressive’s return on invested capital ( ROIC ) never fell below 17% and is currently a top quintile 19%. The strength in Progressive’s business helps explain why the stock was up over 17% in 2015, but even after this price increase shares remain undervalued. At its current price of $31/share, Progressive has a price to economic book value ( PEBV ) ratio of 1.0. This ratio means that the market expects Progressive’s NOPAT to never meaningfully grow from its current levels. If Progressive can grow NOPAT by just 5% compounded annually (similar to past five years) for the next five years , the stock is worth $39/share today – a 26% upside. Prologis (NYSE: PLD ) is one of our least favorite stocks held by RYREX and earns a Dangerous rating. On the surface, Prologis would appear to be a healthy business that has grown GAAP net income by 181% compounded annually since 2010. However, this net income growth fails to account for the expansion of the balance sheet to fund the GAAP growth. In fact, Prologis’ debt has increased from $3.6 billion to $10.4 billion since 2010 and in total, Prologis’ invested capital has grown from $7 billion to $25 billion over the past five years. Increasing invested capital does not come free of charge and after removing the cost for Prologis’ invested capital we find that Prologis has only earned positive economic earnings in one of the past 17 years (2005). Despite its long-term track record of value destruction, PLD is priced for significant profit growth going forward. To justify its current price of $41/share, PLD must grow NOPAT by 10% compounded annually for the next 12 years . This expectation seems highly optimistic given PLD’s history of value destruction. Figures 3 and 4 show the rating landscape of all Financials ETFs and mutual funds. Figure 3: Separating the Best ETFs From the Worst ETFs Click to enlarge Sources: New Constructs, LLC and company filings Figure 4: Separating the Best Mutual Funds From the Worst Mutual Funds Click to enlarge Sources: New Constructs, LLC and company filings D isclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, sector or theme.

If Investors Get More Stimulus, Will They Take More Risk?

The U.S. economy continues to show signs of frailty. U.S. gross domestic product (NYSE: GDP ) expanded at a feeble pace of just 0.7% in the 4th quarter. In the same vein, the Atlanta Fed’s GDP forecast for the first quarter of 2016 is just 1.2%. There’s more. The manufacturing segment of the economy has contracted for four consecutive months. Meanwhile, year-over-year growth for total business sales as well as retail have steadily eroded. Also, year-over-year activity for corporate spending on tangible assets like equipment, buildings and machinery (i.e. capital goods) has decelerated, ultimately turning negative. Throughout the course of the current bull market cycle, investors have relied on the Federal Reserve to stimulate the economy as well as risk asset appetite. The central bank of the United States bought mortgage-backed securities and U.S. treasury debt in the beginning of 2009 (a.k.a. “QE1″). When the economy softened in 2010, the Fed rode to the rescue in 2010 with “QE2.” When the euro-zone crisis threatened the world economy in 2011, monetary policy leaders acquired longer-term Treasury securities with the proceeds of shorter-term debt to push borrowing costs even lower. The media dubbed the new stimulus effort, “Operation Twist.” And economic deceleration in 2012 led to the most remarkable stimulus of them all, “QE3.” What is strange about the picture above? In December of 2015, the Federal Reserve raised its overnight lending rate by 0.25%, even though the U.S. economy had been showing signs of strain. The stimulus removal may not have seemed like a big deal at the time. However, the Fed’s expressed desire to move in the direction of less stimulus has significantly impacted currency exchange rates, corporate bonds, foreign bonds, and investor tolerance for risk. Consider a few straightforward realities in the ETF world. Since the last bond purchase of QE3 in mid-December of 2014, the CurrencyShares Euro Trust ETF (NYSEARCA: FXE ) has depreciated 11% and the P owerShares DB USD Bull ETF (NYSEARCA: UUP ) has appreciated 8.5%. Similarly, FXE is near a 5-year low, while UUP is near a 5-year high. CEOs of U.S. corporations regularly cite the super-sized strength of the U.S. greenback as a severe headwind to profit growth. The directional shift in monetary policy did not simply jolt world currencies. Since the last asset purchase of QE3 in mid-December of 2014, riskier stock assets have lost value. The SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) has charted a volatile path toward 6% losses. And that’s the smallest example of wealth destruction. The iShares Core S&P MidCap ETF (NYSEARCA: IJH ) is off roughly 9%, a small-cap proxy like the iShares Russell 2000 ETF (NYSEARCA: IWM ) is down 14%, the iShares MSCI ACWI Index ETF (NASDAQ: ACWI ) dropped approximately 14%, and the Vanguard FTSE Emerging Markets ETF (NYSEARCA: VWO ) cratered a starling 23%. Bear in mind, the limited desire for risk-taking does not stop at the doorstep of the equity markets. Since the last bond purchase of QE3 in mid-December of 2014, long-term treasuries via the iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ) is up 5%. Even more impressive? The intermediate area of the yield curve via the iShares 7-10 Year Treasury Bond ETF (NYSEARCA: IEF ) has tacked on 5% as well; the exchange-traded tracker currently sits at a new 52-week high. Stock bulls have modified their thesis since the breakdown of market internals in the summer of 2015 . Then, there had been great faith in corporate profitability. Today, the earnings picture is decidedly poor, but many are pointing to improving valuations that might support slightly higher price levels. Then, there had been tremendous confidence in the resilience of consumers, particularly in light of energy-related savings. Today, bulls tacitly acknowledge that consumer spending is slowing and that savings has been rising, leading cheerleaders like CNBC’s Jim Cramer to beg the Fed to reconsider its direction on rate guidance. In a nut shell, bullish investors now hope that the Fed reverses course and discusses stimulus once again. Weaken the dollar. Secure ultra-low borrowing costs. Businesses and consumers can ignore total debt levels if the cost to service those debts abates. And investors? They’ll project lower rates for even longer out into the future, allowing them the luxury to pay premium valuations for stock assets. That’s the hope, anyway. Cracks in the Fed facade appeared as recently as February 1, when Vice-Chairman Stanley Fischer hinted that fewer rate hikes may be in the cards. It seems probable that the Fed is/was/has always been prone to backtracking. On the flip side, if the Fed does have a change of heart, will it occur early enough to help the economy and/or inspire investor confidence? Bullish stock investor certainly hope so. Their revised thesis on bear market avoidance depends on it. That said, central bank policy alone may not be able to keep an economy from succumbing to recessionary forces; it may not stop stocks from falling precipitously. The Federal Reserve did not act early enough or powerfully enough to save stocks from collapsing 50%-plus in the 2000-2002 dot-com disaster, nor was the institution prepared to prevent the 50% shellacking in the 2007-2009 banking crisis. In truth, monetary policy gamesmanship bolsters asset prices when market internals are improving. Yet the Fed is not omnipotent; its leadership does not have arrows in its collective quill to avert every and any recession. And that means, if the global economy crumbles, it may do more harm than simply act as a drag on the domestic recovery. Right now, market internals show little evidence of improvement. For instance, over the course of the last 12 months, the New York Stock Exchange Advance/Decline (A/D) Volume Line portrays a very grim picture of risk appetite. Net advancing volume continues to deteriorate as the volume of declining stocks has, more often than not, superseded the volume of advancing issues. Since the last asset purchase of QE3 in mid-December of 2014, corporate credit tells a similar story about risk preferences. The rising price ratio between investment grade corporate credit via the iShares Intermediate Credit Bond ETF (NYSEARCA: CIU ) relative to the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA: HYG ) is near a 52-week high. Our tactical shift toward lower risk since mid-2015 remains the same. Moderate growth and income investors at Pacific Park Financial, Inc. have approximately 50% in low volatility, high quality U.S. large caps. We have 25% in investment grade bonds, primarily Treasury bonds and munis. The remaining 25% in cash/cash equivalents exists to lessen the volatility while awaiting better buying opportunities in the near future. For Gary’s latest podcast, click here . Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. 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