Tag Archives: financials

Sector Investing: Why It Matters

This was originally published on December 29, 2015 Within the S&P 500, there are 10 sectors that comprise the key benchmark, and it remains my preferred way of dissecting the market for clients, and giving clients an orderly structure or framework to think about the giant morass that is the capital markets. The primary tool for analyzing sectors for clients remains the excellent sector earnings work done by Thomson Reuters and FactSet, as well as Howard Silverblatt of Standard & Poor’s, and Estimize (although Estimize has a narrower focus than the other firms) which is shared every week on this blog for readers. (Sam Stovall of Standard & Poor’s wrote a book on sector investing that was published in 1996. I just found the book on Amazon and bought it for some holiday reading this weekend.) Why worry about sectors? Well, give this a little thought: The bull market in the S&P 500 that ran from August 1982 to March of 2000 was dominated by two sectors: Technology and Financials. A lot of the old market pundits and the so-called gurus from the 1990s used to say that “The Financials are the market generals” and there was real truth to this. The Financials were the S&P 500’s primary market leader in the 1980s and 1990s. The S&P 500’s decade-long bear market from 2000 through 2009, the decade with the lowest average return for the S&P 500 since the 1930s, was a result of brutal bear markets in two sectors (guess which sectors): yes, Financials and Technology. Technology came first, with the Nasdaq correcting 80% from March 2000 through October 2002, and then the mother-of-all sector corrections with Financial stocks correcting (looking at the Financial Select Sector SPDR ETF (NYSEARCA: XLF )) from $38 to the $6 area from mid-2007, though late 2008, early 2009. Technology as a percentage of the S&P 500’s total market cap hit a peak of 33% in the first quarter of 2000 (really unbelievable when you think about it) and Financials hit their peak in mid-2007. I thought that Financials had gotten close to 30% as a percentage of the S&P 500’s market cap, but from looking at historical data, maybe Financials’ peak total of the S&P 500 was closer to 25% rather than 30%. The reason the Energy bear market hasn’t really impacted the S&P 500 like the Technology and the Financials’ collapse is that when crude oil started to fall from $110 to today’s $35-$37 per barrel, Energy as a percentage of the market cap of the S&P 500 was just 10%. It is now roughly 6.5% today. As the above implies, “Size (in terms of market cap) Matters”. Three bear markets: Technology, Financial and Energy – all sector-driven. Here is our latest spreadsheet where we updated sector weightings ( FC – marketcapvsearningswt ). As readers can see from this spreadsheet, Technology and Financials remain the two largest sectors within the S&P 500 at 37% of the S&P 500, and since they had their absolutely crushing bear markets in the last decade, what are the odds (in your opinion) that Technology repeats 2000-2002 or Financials’ 2007-2009? 20% corrections can happen at any time for a variety of reasons, but would a reader think that Financials and Technology could correct 30% or 40%? Here are the sector weightings for the S&P 500 as of late December 2015 (courtesy of Bespoke, rounded to the nearest 1%): Technology: 21% Financials: 16% Health Care: 15% Consumer Discretionary: 13% Industrials: 10% Consumer Staples: 10% Energy: 6%-7% Utilities, Materials, Telecom: 3% each The top 5 sectors of the S&P 500 are 75% of the market cap of the S&P 500. The top sectors which we’ve discussed at length are 37%. Consumer Discretionary’s 10% return year to date is heavily influenced by Amazon (NASDAQ: AMZN ) since the stock is a member of the Consumer Discretionary sector. Bespoke has noted that without Amazon’s 140% return year to date, Consumer Discretionary would be up just 2%-3% in 2015. Conclusions about 2016: Given the above, and the Technology and Financials’ weights, I just don’t think there is a sustained bear market in our future. Technology and Financials remain the largest sector overweights for clients coming into 2016. I’m leery of Health Care in a Presidential election year. I do like Industrials in 2016 IF the dollar can remain right where it is, or weaken a little. The biggest change to client accounts in the last 4 months has been adding the Energy Select Sector SPDR ETF (NYSEARCA: XLE ), and the iShares U.S. Energy ETF (NYSEARCA: IYE ) to client accounts with the market correction in August-September. We haven’t had any Energy exposure for years. There is more owned now than at any time in the last 5 years. Also bought in September, early October were the Vanguard FTSE Emerging Markets ETF (NYSEARCA: VWO ), and the iShares MSCI Emerging Markets ETF (NYSEARCA: EEM ), or the Emerging Markets ETFs. The underperformance of emerging markets relative to the S&P 500 the last 7-8 years has been remarkable. We have never owned Emerging Markets for clients before these positions. Finally, I took a shot at some Brazil (NYSEARCA: EWZ ), the last month. Brazil is the confluence of Energy risk, commodity risk, socialism, and inept incompetence, in one ETF. There is an approximate weighting of 5% in Energy, Emerging markets and Brazil in client accounts, depending on a number of other factors.

Best And Worst Q4’15: Financials ETFs, Mutual Funds And Key Holdings

Summary The Financials sector ranks sixth in Q4’15. Based on an aggregation of ratings of 43 ETFs and 220 mutual funds. IYF is our top-rated Financials sector ETF and DVFYX is our top-rated Financials sector mutual fund. The Financials sector ranks sixth out of the 10 sectors as detailed in our Q4’15 Sector Ratings for ETFs and Mutual Funds report. Last quarter , the Financial Sector ranked 9th. It gets our Neutral rating, which is based on aggregation of ratings of 43 ETFs and 220 mutual funds in the Financials sector. See a recap of our Q3’15 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 24 to 563). 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 The PowerShares KBW Property & Casualty Insurance Portfolio ETF (NYSEARCA: KBWP ) is excluded from Figure 1 because its total net assets are below $100 million and do not meet our liquidity minimums. 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 Schwab Financial Services Fund (MUTF: SWFFX ) is excluded from Figure 2 because its total net assets (TNA) are below $100 million and do not meet our liquidity minimums. The iShares U.S. Financials ETF (NYSEARCA: IYF ) is the top-rated Financials ETF and the Davis Financial Fund (MUTF: DVFYX ) is the top-rated Financials mutual fund. IYF earns a Very Attractive rating and DVFYX earns an Attractive rating. The PowerShares KBW Premium Yield Equity REIT Portfolio ETF (NYSEARCA: KBWY ) is the worst-rated Financials ETF and the Rydex Real Estate Fund (MUTF: RYREX ) is the worst-rated Financials mutual fund. Both earn a Very Dangerous rating. Discover Financial Services (NYSE: DFS ) is one of our favorite stocks held by Financials ETFs and mutual funds and earns our Very Attractive rating. Since 2011, Discover has grown after-tax profit ( NOPAT ) by an impressive 34% compounded annually. Over the same time frame, the company has increased its return on invested capital ( ROIC ) to a top quintile 18% up from 10%. Despite improving profitability, DFS is down 16% year-to-date and now presents value investors a great buying opportunity. At its current price of $57/share, Discover has a price to economic book value ( PEBV ) ratio of 0.9. This ratio implies that the market expects Discover’s profits to permanently decline by 10%. If Discover can grow NOPAT by just 4% compounded annually over the next five years , the stock is worth $74/share today – a 30% upside. PHH Corporation (NYSE: PHH ) is one of our least favorite stocks held by Financials ETFs and mutual funds and is on October’s Most Dangerous Stocks list . PHH earns our Very Dangerous rating. PHH has been wildly inconsistent at generating positive GAAP net income, but one thing that has been consistent is PHH’s inability to generate economic earnings . Additionally, PHH earns a bottom quintile ROIC of -18% which is well below the 12% earned in 2013. It appears investors realized the trouble at PHH as shares crashed over 30% after poor Q2’15 earnings. However, what investors may not realize is how overvalued PHH remains. To justify its current price of $14/share, PHH must immediately achieve pre-tax margins of 2% (average of last five years, excluding the -44% in 2014) and grow revenues by 12% compounded annually for the next 12 years . 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 Thaxston McKee receive no compensation to write about any specific stock, sector or theme.

Inside 5 iShares ETFs Targeting The Globe

iShares is easily the biggest ETF sponsor globally, but other issuers are also holding their heads high now. Most sponsors are tapping lucrative areas as the market for plain vanilla ETFs looks to be maturing, compelling issuers to come up with novel themes. Most ETF launches are now based on the smart-beta theme. iShares has also started to regain its seemingly fading charm. The issuer has initiated quite a few ETFs with innovative ideas recently. As part of this effort, the mega issuer most recently launched five ETFs. Notably, in its all five launches, iShares provides exposure to stocks with high scores on attributes like value, quality, momentum, and low size. Let’s take a look inside the funds. iShares FactorSelect MSCI Global ETF (NYSEMKT: ACWF ) The newly launched passively managed ETF looks to track the performance of the MSCI ACWI Diversified Multi-Factor index. The fund currently holds 319 stocks from the 12 developed and emerging markets. The U.S. holds the highest weight with over 42% exposure followed by 12.8% occupied by Japan and 6.14% by China. All the other seven countries have less than 5.78% allocation each in the fund. Sector wise, Financials dominates the fund with 22% allocation, while Health Care (16.63%) and Industrials (16.43%) occupy the next two spots. The fund is low on utilities and energy, each carrying about 3% of the basket. The fund has very low company-specific concentration risk with no single stock occupying more than 2.35% of the total. The fund charges 50 basis points as fees. Competition: The newly launched product is likely to face competition from quite a number of funds prevalent in the global equities space. Still, a few specific ETFs can emerge as strong contenders. The SPDR MSCI World Quality Mix ETF (NYSEARCA: QWLD ), the AdvisorShares Accuvest Global Opportunities ETF (NYSEARCA: ACCU ) and the FlexShares International Quality Dividend Index ETF (NYSEARCA: IQDF ) are some of the examples. iShares FactorSelect MSCI International ETF (NYSEMKT: INTF ) The fund seeks to track the MSCI World ex-USA Diversified Multi-Factor Index to provide core international equity exposure. The fund holds a portfolio of 198 large and mid cap stocks from the developed markets outside North America. INTF focuses on an equal-weighted strategy with no stock forming more than 2.81% of the total fund assets. Japan is the top country holding of the fund with about 24% exposure followed by 18.5% in the U.K. and 10.31% in Switzerland. However, no other economy makes up over 6.82% of the basket. Sector wise, once again, Financials dominates the fund with 28.5% allocation, while Industrials (17.14%) and Consumer Discretionary (13.65%) occupy the next two spots. The fund is light on Telecom (3.9%) and Energy (2.0%) and charges 45 bps in fees. Competition: Like the global ETFs, this space is also heaving with products, with the Morningstar Developed Markets ex-US Markets Factor Tilt Index ETF (NYSEARCA: TLTD ), the JPMorgan Diversified Return International Equity ETF (NYSEARCA: JPIN ) and the First Trust Developed Markets Ex-US AlphaDEX ETF (NYSEARCA: FDT ) posing as tough competitors. iShares FactorSelect MSCI International Small-Cap ETF (NYSEMKT: ISCF ) This fund is also targeted at the international space with focus on the smaller spectrum of capitalization. Tracking the MSCI World ex-USA SmallCap Diversified Multi-Factor index, the fund holds a well-diversified portfolio of 659 stocks, with no stock taking more than 1.09% of the basket. Once again, Japan and the U.K. take top two positions in the fund with 29.4% and 23.7%, respectively. Sector wise, the fund is heavy on Consumer Discretionary (22.3%), Financials (19.2%) and Industrials (17.6%). The fund charges 60 bps in fees. Competition: The foreign mid and small cap equities ETF space is relatively less jam-packed compared to the other two segments discussed above. Among the set, while the Vanguard FTSE All-World ex-US Small-Cap Index ETF (NYSEARCA: VSS ) is one of the leaders based on AUM, the PowerShares FTSE RAFI Developed Markets ex-U.S. Small-Mid Portfolio ETF (NYSEARCA: PDN ) and the iShares Enhanced International Small-Cap ETF (NYSEARCA: IEIS ) can give ISCF a run for its money courtesy of their smart-beta and relatively active approach. U.S. ETFs Apart from global ETFs, the issuer also rolled out two U.S. ETFs, one with large-cap and the other with small-cap focus. The funds are the iShares FactorSelect MSCI USA ETF (NYSEMKT: LRGF ) and the iShares FactorSelect MSCI USA Small-Cap ETF (NYSEMKT: SMLF ). LRGF charges 35 bps in fees, while SMLF charges 50 bps. The large cap fund holds 133 stocks. No stock accounts for more than 2.87% of the basket. Health Care (21.39%) and Financials (20.87%) are the top two sectors of the fund. However, the small-cap fund is pretty spread out across 508 components with none accounting for more than 1.40% share. The fund is heavy on Financials (23.17%) and IT (21.71%). Notably, both spaces are crowded with products. Products like the First Trust Large Cap Core AlphaDEX ETF (NYSEARCA: FEX ) on the large-cap surface and the First Trust Small Cap Core AlphaDEX ETF (NYSEARCA: FYX ) on the small-cap space might emerge as competitors. Original Post