Tag Archives: ideas

Japan ETFs To Buy On Negative Interest Rates

Finally, Bank of Japan (BoJ) has also followed the ECB’s suit by pushing interest rates on excess reserves into negative territory. While the investing world was expecting further monetary easing from the BoJ as the region’s growth picture is still dull and the inflationary environment is slackening substantially, hardly did any one hope for the launch of a negative interest rate. However, dissimilar to the single negative rate applied by the ECB, the Japanese central bank resorted to tiered measures exercised by the Swiss National Bank. Under this method, “the outstanding balance of each financial institution’s current account at the BoJ will be divided into three tiers , to each of which a positive interest rate, a zero interest rate, or a negative interest rate will be applied, respectively.” At its January-end meeting, BoJ set its benchmark interest rate at negative 0.1%, higher than ECB’s deposit rate of negative 0.3%. However, the BoJ hinted at further cuts in interest rates if the economy fails to improve desirably. Prior to this, in December 2015, Japan’s central bank announced a number of cautious changes without expanding the volume of its annual asset purchasing program it has been following for about the last three years. The bank opted for raising the Japanese government bonds’ (JGBs) average maturity from 7-10 years to 7-12 years. The bank also revealed its plan of purchasing all JGBs to be issued in 2016 and announced that it will allocate 300 billion yen of assets annually in purchasing ETFs that seek to follow the JPX-Nikkei Index 400. Reason Behind This Dovishness Investors should note that massive monetary easing to move closer to the target inflation rate of 2%, a flexible fiscal policy and structural reforms made Japan a rising star in 2013. However, the economy started to lose ground since 2014, slipping into recession in Q2 and Q3. Though the BoJ reacted to this slowdown by enhancing its asset-buying program to 80 trillion yen a year from the previous rate of 60-70 trillion yen in late October 2014, the response was not favorable. Experiencing a spurt in the first quarter of 2015, the Japanese economy shrank in Q2 and barely escaped a technical recession in Q3 (having expanded 0.3% q/q in Q3 compared with an initial reading of a 0.2% contraction). Meanwhile, consumer prices in Japan increased 0.2% y/y in December 2015, down from 0.3% growth in the previous month. The recent inflation trend shows that the level is far behind the BoJ’s goal of 2%. The central bank, on January 28, stretched out its timeline to attain the inflation goal to the first half of 2017, the third deferment in less than a year . Market Impact While this flush of liquidity gave the equities a solid boost, the Japanese yen fell against the U.S. dollar. This is true given the Fed’s policy tightening stance and the resultant ascent of the U.S. dollar. The CurrencyShares Japanese Yen Trust ETF (NYSEARCA: FXY ) lost 2.2% in the last five trading sessions (as of January 29, 2016). This proved vital for investors seeking a Japanese flavor in their portfolio, yet looking to hedge against a falling currency. The move also lowered Japanese government bond yields boosting the Japanese government bond ETFs. The DB 3x Japanese Govt Bond Futures ETN (NYSEARCA: JGBT ) – a triple leverage JGB ETF – added 2.4% on January 29 and hit a 52-week high. Below we highlight a number of top-ranked (Zacks ETF Rank #2 (Buy) currency-hedged Japan ETFs which are likely to soar in 2016 given the supportive BoJ. WisdomTree Japan Hedged SmallCap Equity ETF (NASDAQ: DXJS ) DXJS offers exposure to the Japanese small cap stocks while at the same time provides a hedge against any fall in the Japanese yen. Since small-cap stocks better reflect the economy’s inherent strength. This ETF appears to be a strong bet in the current perspective. This is truer given the global growth worries which weighed on Japan’s export sector. The ETF charges 58 bps in fees and gained 6.6% in the last five trading sessions (as of January 29, 2016). iShares Currency Hedged MSCI Japan ETF (NYSEARCA: HEWJ ) This is another currency hedged option to play the Japanese equity and is a hedged version of the popular fund (NYSEARCA: EWJ ). The expense ratio comes in at 0.48%. The fund gained 5.9% in the last five trading sessions (as of January 29, 2016). WisdomTree Japan Hedged Dividend Growth ETF (NYSEARCA: JHDG ) The ETF follows the WisdomTree Japan Hedged Dividend Growth Index and measures the performance of dividend-paying common stocks with growth characteristics selected from the WisdomTree DEFA Index while at the same time neutralizing exposure to fluctuations between the yen and the U.S. dollar. JHDG charges 43 bps in fees and was up 6.3% in the last five trading sessions. WisdomTree Japan Hedged Equity ETF (NYSEARCA: DXJ ) DXJ also looks to offer investors a way to gain exposure to the Japanese shares devoid of currency risks. This ultra-popular Japan ETF charges 48 bps in fees. The fund advanced 4.6% in the last five trading sessions. Original Post

Momentum Portfolio Update

In 2011, Scott’s Investments began tracking a momentum portfolio which ranks a basket of ETFs based on price momentum and volatility. In 2014, I also introduced a pure momentum system, which ranks the same basket of ETFs based solely on 6-month price momentum. The first portfolio was previously called the “ETFReplay.com Portfolio”, but going forward, it will be called the “Conservative Momentum Portfolio” (or “6/3/3 strategy”) to reflect some changes in the portfolio and tracking methodology for both portfolios detailed below. In previous years, the Conservative Momentum Portfolio began with a static basket of 14 ETFs. The basket of 14 ETFs will be reduced to 10 ETFs. This change is being made in order to further simplify the portfolio. The 10 ETFs are listed below: RWX SPDR Dow Jones International Real Estate ETF PCY PowerShares Emerging Markets Sovereign Debt Portfolio ETF EFA iShares MSCI EAFE ETF EEM iShares MSCI Emerging Markets ETF VNQ Vanguard REIT Index ETF TIP iShares TIPS Bond ETF VTI Vanguard Total Stock Market ETF GLD SPDR Gold Trust ETF TLT iShares 20+ Year Treasury Bond ETF SHY iShares 1-3 Year Treasury Bond ETF The ETFs will still be ranked by 6-month total returns (weighted 40%), 3-month total returns (weighted 30%), and 3-month price volatility (weighted 30%). The top 3 will be purchased at the beginning of each month, and if a holding drops out of the top 3 at the next month’s rebalance, it will be replaced. Previously, the portfolio purchased the top 4 ETFs and only sold when a holding dropped out of the top 5. In addition, ETFs previously had to be ranked above the cash-like ETF ((NYSEARCA: SHY )) in order to be included in the portfolio. This requirement will be removed, so the top 3 ETFs will be held regardless of proximity to SHY. Pure Momentum System The pure momentum system previously ranked ETFs based solely on 6-month price momentum. For 2015, the strategy will rank ETFs based on 5-month price momentum. There is no cash filter in the pure momentum system, volatility ranking, or requirement to limit turnover. Previously, the strategy bought the top 4 ETFs each month – going forward, the top 3 ETFs will be purchased. The portfolio and rankings are posted on the same spreadsheet as the 6/3/3 strategy. The portfolio names are dropping “ETFreplay.com” because the strategy can be tracked on multiple website. ETFReplay.com is still an excellent choice for tracking and backtesting the strategies detailed. However, a formidable free option for backtesting these strategies has emerged at Portfolio Visualizer . The current top 3 ETFs are listed below for each strategy: Conservative Momentum TIP iShares Barclays TIPS Bond Fund SHY iShares Barclays 1-3 Year Treasry Bond Fund TLT iShares Barclays 20 Year Treasury Bond Fund Pure Momentum PCY PowerShares Emerging Markets Bond TLT iShares Barclays 20 Year Treasury Bond Fund VNQ Vanguard MSCI U.S. REIT The current portfolios are below: Conservative Momentum Position Shares Avg. Purchase Price Purchase Date TIP 38 111.2 2/1/2016 TLT 32 126.67 2/1/2016 SHY 49 84.36 12/31/2015 Pure Momentum Position Shares Purchase Price Purchase Date PCY 117 27.65 8/31/2015 TLT 25 126.67 2/1/2016 VNQ 40 79.89 10/30/2015 Current signals can be viewed on Scott’s Investments here . Disclosure: None.

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

The Consumer Staples sector ranks first out of the ten sectors as detailed in our Q1’16 Sector Ratings for ETFs and Mutual Funds report. Last quarter , the Consumer Staples sector ranked first as well. It gets our Attractive rating, which is based on an aggregation of ratings of 9 ETFs and 15 mutual funds in the Consumer Staples sector. See a recap of our Q4’15 Sector Ratings here . Figure 1 ranks from best to worst all nine Consumer Staples ETFs and Figure 2 shows the five best and worst-rated Consumer Staples mutual funds. Not all Consumer Staples sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 17 to 116). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Consumer Staples sector should buy one of the Attractive-or-better rated ETFs or mutual funds from Figures 1 and 2. It is rare that one of the worst ETFs in this sector hold enough quality stocks to earn an Attractive-or-better rating. 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 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 Fidelity Select Automotive Portfolio (MUTF: FSAVX ) is excluded from Figure 2 because its total net assets (TNA) are below $100 million and do not meet our liquidity minimums. The Vanguard Consumer Staples Index Fund ETF (NYSEARCA: VDC ) is the top-rated Consumer Staples ETF and the Vanguard Consumer Staples Index Fund (MUTF: VCSAX ) is the top-rated Consumer Staples mutual fund. VDC earns a Very Attractive rating and VCSAX earns an Attractive rating. The PowerShares DWA Consumer Staples Momentum Portfolio (NYSEARCA: PSL ) is the worst-rated Consumer Staples ETF and the ICON Consumer Staples Fund (MUTF: ICRAX ) is the worst-rated Consumer Staples mutual fund. PSL earns a Neutral rating and ICRAX earns a Very Dangerous rating. 121 stocks of the 3000+ we cover are classified as Consumer Staples stocks. Wal-Mart Stores (NYSE: WMT ) continues to be one of our favorite stocks held by VDC and earns an Attractive rating. Since 1998, Wal-Mart has been uniquely consistent in growing after-tax profit ( NOPAT ) by 9% compounded annually and earning a double-digit return on invested capital ( ROIC ), which is currently 11%. Additionally, Wal-Mart has generated over $57 billion, cumulatively, in free cash flow over the past five years. Overblown concerns about Wal-Mart’s business model pushed the stock down over 25% last year, which has made shares greatly undervalued. At its current price of $64/share, WMT has a price to economic book value ( PEBV ) ratio of 0.8. This ratio means that the market expects Wal-Mart’s NOPAT to permanently decline by 20%. However, if Wal-Mart can grow NOPAT by just 2% compounded annually over the next decade , the stock is worth $98/share today – a 53% upside. The J.M. Smucker Company (NYSE: SJM ) is one of our least favorite stocks held by ICRAX and earns a Dangerous rating. Over the past five years, J.M Smucker’s NOPAT has declined by 2% compounded annually while its ROIC has fallen from 8% to 5%. Despite the deterioration of the business, SJM is up over 20% in the past two years, which has left shares significantly overvalued. To justify its current price of $122/share, SJM must grow NOPAT by 13% compounded annually for the next 12 years . This expectation seems awfully optimistic given SJM’s inability to grow NOPAT at all in the past five years. Figures 3 and 4 show the rating landscape of all Consumer Staples 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.