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Monitoring Your Portfolio’s Dollar Sensitivity

By Tripp Zimmerman At WisdomTree, we continue to believe one of the most important themes impacting the global markets has been the strengthening U.S. dollar-and this is a trend we expect to continue for some time. As a result of the recent dollar strength, many U.S. multinationals with global revenue streams have reported currency headwinds as part of their earnings statements over the past year. This has hurt their performance compared to European and Japanese exporters, who have benefited from the weakening of the yen and the euro, respectively, against the U.S. dollar. This relative performance advantage is no surprise to us, because our research shows that these foreign markets actually performed better when their home currencies depreciated than when they appreciated. 1 Given this historical relationship and relative valuations, we continue to advocate for Japanese and eurozone exporters. But how should investors position their U.S. allocations? U.S. Corporations Continue to Warn about Dollar Strength “Sales by U.S. companies were $26.4 billion in the fiscal nine months of 2015, which represented an increase of 0.8% as compared to the prior year,” Johnson & Johnson (NYSE: JNJ ) reported. “Sales by international companies were $25.9 billion, a decline of 13.5%, including operational growth of 1.1%, offset by a negative currency impact of 14.6% as compared to the fiscal nine months sales of 2014.” 2 The Coca-Cola Company (NYSE: KO ) reported that over the most recent three months “fluctuations in foreign currency exchange rates decreased our consolidated net operating revenues by 8 percent. This unfavorable impact was primarily due to a stronger U.S. dollar compared to certain foreign currencies, including the South African rand, euro, U.K. pound sterling, Brazilian real, Mexican peso, Australian dollar and Japanese yen, which had an unfavorable impact on our Eurasia and Africa, Europe, Latin America, Asia Pacific and Bottling Investments operating segments.” 3 Determining Your Dollar Sensitivity WisdomTree believes currency sensitivity is an important factor that will continue to impact returns going forward, so to monitor the performance of this new factor, WisdomTree has created two new rules-based Indexes: The WisdomTree Strong Dollar U.S. Equity Index (WTUSSD) – This Index selects companies that generate more than 80% of their revenue from within the U.S. and then tilts its weight toward stocks whose returns have a higher correlation to the returns of the U.S. dollar. The WisdomTree Weak Dollar U.S. Equity Index (WTUSWD) – This Index selects companies that generate more than 40% of their revenue from outside the U.S. and then tilts its weight toward stocks whose returns have a lower correlation to the returns of the U.S. dollar. Since the inception of these Indexes, the U.S. dollar has strengthened 2.95% against a diversified basket of developed and emerging market currencies, leading to a performance advantage of 1.72% for WTUSSD compared to WTUSWD. 4 To try to understand what is behind this performance difference, we chart the median earnings and sales growth for the most recent quarter compared to the same reporting quarter one year ago, for both Indexes and the median for the entire universe. Year-over-Year Median Earnings and Sales Growth (click to enlarge) Strong Dollar Companies Displayed Higher Growth- The median earnings and sales growth for constituents of WTUSSD was more than 6% and 7% higher, respectively, compared to constituents of WTUSWD. We believe constituents of WTUSSD, or companies that generate more than 80% of their revenue domestically, tend to be less impacted by a strong-dollar environment-they aren’t focused on selling their goods and services abroad, and their import costs decrease with the rising purchasing power of the dollar. How Long Can This Persist? We have recently published a research paper, What a Rising U.S. Dollar Means for U.S. Equities White Paper , in which we illustrated the declining competitiveness of U.S. exports by graphing a ratio of exports of the U.S. economy over imports. As the U.S. dollar strengthened, the ratio of exports over imports weakened. Historically, we found that the impact can have a lag of around 36 months, so if history is any guide, we may not have seen the worst impact on exporters yet. At WisdomTree, our base case is still for a strengthening U.S. dollar, which may provide a continued headwind to U.S. multinationals with global revenue, but, depending on investors’ views, they can use the above Indexes to track the performance of either basket. Sources WisdomTree, Bloomberg. Johnson & Johnson quarterly earnings report, 10/30/15. Johnson & Johnson had a 1.21% weight in the WisdomTree Weak Dollar U.S. Equity Index as of 11/13/15. The Coca-Cola Company quarterly earnings report, 10/28/15. The Coca-Cola Company had a 0.71% weight in the WisdomTree Weak Dollar U.S. Equity Index as of 11/13/15. WisdomTree, Bloomberg, 5/29/15-11/13/15. U.S. dollar performance against a diversified basket of developed and emerging currencies is represented by the Bloomberg Dollar Total Return Index. Important Risks Related to this Article Investments in currency involve additional special risks, such as credit risk and interest rate fluctuations. Tripp Zimmerman, Research Analyst Tripp Zimmerman began at WisdomTree as a Research Analyst in February 2013. He is involved in creating and communicating WisdomTree’s thoughts on the markets, as well as analyzing existing strategies and developing new approaches. Prior to joining WisdomTree, Tripp worked for TD Ameritrade as a fixed income specialist. Tripp also worked for Wells Fargo Advisors, TIAA-CREF and Evergreen Investments in various investment related roles. Tripp graduated from The University of North Carolina at Chapel Hill with a dual degree in Economics and Philosophy. Tripp is a holder of the Chartered Financial Analyst designation.

How To Find The Best Style ETFs: Q4’15

Summary The large number of ETFs hurts investors more than it helps as too many options become paralyzing. Performance of an ETFs holdings are equal to the performance of an ETF. Our coverage of ETFs leverages the diligence we do on each stock by rating ETFs based on the aggregated ratings of their holdings. Finding the best ETFs is an increasingly difficult task in a world with so many to choose from. How can you pick with so many choices available? Don’t Trust ETF Labels There are at least 60 different All Cap Blend ETFs and at least 281 ETFs across all investment styles. Do investors need 23+ choices on average per style? How different can the ETFs be? Those 60 All Cap Blend ETFs are very different. With anywhere from 29 to 3792 holdings, many of these All Cap Blend ETFs have drastically different portfolios, creating drastically different investment implications. The same is true for the ETFs in any other style, as each offers a very different mix of good and bad stocks. Large Cap Value ranks first for stock selection. Small Cap Blend ranks last. Details on the Best & Worst ETFs in each style are here . A Recipe for Paralysis By Analysis We firmly believe ETFs for a given style should not all be that different. We think the large number of All Cap Blend (or any other) style ETFs hurts investors more than it helps because too many options can be paralyzing. It is simply not possible for the majority of investors to properly assess the quality of so many ETFs. Analyzing ETFs, done with the proper diligence, is far more difficult than analyzing stocks because it means analyzing all the stocks within each ETF. As stated above, that can be as many as 3792 stocks, and sometimes even more, for one ETF. Any investor worth his salt recognizes that analyzing the holdings of an ETF is critical to finding the best ETF. Figure 1 shows our top rated ETF for each style. Note there are no All Cap Growth or All Cap Value ETFs under coverage. Figure 1: The Best ETF in Each Style (click to enlarge) Sources: New Constructs, LLC and company filings How to Avoid “The Danger Within” Why do you need to know the holdings of ETFs before you buy? You need to be sure you do not buy an ETF that might blow up. Buying an ETF without analyzing its holdings is like buying a stock without analyzing its business and finances. No matter how cheap, if it holds bad stocks, the ETF’s performance will be bad. Don’t just take my word for it, see what Barron’s says on this matter. PERFORMANCE OF ETF’S HOLDINGS = PERFORMANCE OF ETF If Only Investors Could Find Funds Rated by Their Holdings The ValueShares US Quantitative Value ETF (BATS: QVAL ) is the top-rated All Cap Blend ETF and the overall best ETF of the 281 style ETFs that we cover. The worst ETF in Figure 1 is the State Street SPDR S&P Small Cap Growth ETF (NYSEARCA: SLYG ), which gets a Neutral rating. One would think ETF providers could do better for this style. Disclosure: David Trainer and Blaine Skaggs receive no compensation to write about any specific stock, style, or theme

Market Strategies For 2015 And 2016

Market Strategies For 2015 And 2016 | Seeking Alpha Seeking Alpha ‘ + ”; $(‘header’).insert({ before: element }); _bindEvents(); Effect.BlindDown(‘ipad_beta_promo_container’, { duration: 0.5 }); } } function _bindEvents() { var closeBtn = document.querySelector(‘#ipad_beta_promo_container #close_promo_ipad’); if (closeBtn) { closeBtn.addEventListener(‘click’, function () { createCookie(‘hide_ipad_promo’, 1, 1); Effect.BlindUp(‘ipad_beta_promo_container’, {duration: 0.5}); Effect.BlindUp(‘keep_fixed’, {duration: 0.5}); Effect.BlindUp(‘close_promo_ipad’, {duration: 0.5}); }); } } add_ipad_promo_if_needed(); })(); 1. Market outlook for rest of the year; expectations for 2016; what were the main surprises in 2015? Expect a dive on 16th December, when the Fed announces its rate hike. The Bank of New York Mellon (NYSE: BK ) reckons that during Fed tightening cycles since 1946, every time the Fed has raised rates, the market has gained three per cent over the following 12 months after this “lift-off”. ( Financial Times , 10th December, 2015, p. 21). Then expect a year-end rally on account of portfolio managers wanting to improve their annual performance. Surprises: The market crash of September AND the way that the Chinese government tried to halt it with its interventionist policies. 2. Investment strategy; where to find opportunities; how to separate winners from losers How to separate winners from losers: use our Economic Clock®! Winners where there is an excess supply of money, or outlook of an excess supply of money. Losers: where there is an excess demand for money, or outlook of an excess demand for money. INVESTMENT STRATEGY The winners are Europe, Japan, the US and China: the first two have an excess supply of money; the US has a tiny excess supply of money and an improved earnings outlook (courtesy of an excess demand for goods). China will have an excess supply of money once the Central Bank loosens. This is not happening currently: indeed, when the Central Bank supports the RMB exchange rate, it buys RMB and sells dollars. But it then removes these RMB from circulation, so they are not part of money supply any more. SECTOR WINNERS are clearly soft commodities on account of a bad weather outlook. SECTOR LOSERS remain the industrial commodities: over-investment based on China euphoria are at the root of these losses. 3. Japan outlook; Abenomics and BOJ policy A winner – for all the wrong reasons. Her Economic Time® will continue being that of an excess supply of money and an excess supply of goods. Abenomics is dead in the water: that’s because the third arrow got bent by politicians unwilling to reform. Thus, like everywhere else, the Central Bank is left to pick up the pieces. 4. China markets; weak data signalling stimulus soon? Policy response is likely in the first quarter of next year . Indeed, the weaker RMB will help importers raise margins; but I remain doubtful whether the weak RMB can lift increasingly sophisticated exports. 5. Commodity rout; how long will it go? Oil prices See the Investment Strategy of question two above. Industrial commodities will continue suffering on account of a global excess supply of goods. Oil prices: Have nothing to do with our beloved demand/supply approach. Instead, they are all driven by politics of Saudi Arabia not wanting to accommodate Iran’s desire to produce 1 million barrels of oil/day. My guess is that everyone will scramble for market share, meaning that that excess supply of oil gets exacerbated. The good news is that this represents a massive tax cut for the consumer. 6. A Fed rate hike seems more likely this month. What’s your take? I guess “yes”; but this really depends on what the FOMC decides to focus on. If it is the US economy, then a rate hike is probable. But if it switches the floorboards again and decides to focus on China and on what the World Bank as well as the IMF are pronouncing, then all bets are off. I’ll believe that future rate hikes will take place gingerly, a bit like walking on egg shells.