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Small-Cap Stocks Are Ready To Rumble

Summary The backdrop for small-capitalization stocks looks compelling right now. A strong seasonal pattern for the small-cap sector is at hand. Small-caps tend to do most of their business in the US and should benefit from the improving US economy. The first half of December is historically weak performance-wise; mid-December is the time to accumulate. During times of stronger economic growth and rising interest rates, small-capitalization stocks have outperformed their large-cap counterparts. Add to the mix an approaching strong seasonal pattern, and you have the recipe for small-cap outperformance. The small-cap sector of the market will likely post a year-end rally and outperform large-caps over the next six months, if history is any guide. Small-caps have actually trounced large-caps by about 7% this year until they peaked on June 23rd of this year. Since then, large-caps have “turned the tables”, with the S&P 500 ahead by approximately 4% year-to-date. However, it’s time to overweight small-caps in your portfolio as history clearly favors stocks of small companies at this juncture in time. Much has been written over the years confirming the seasonal tendency for small-caps to outperform from January to June. Let’s take a look at a chart, which illustrates the seasonal pattern: (click to enlarge) Source: Jeffrey A. Hirsch, Stock Trader’s Almanac When the line on the chart is descending, large-caps are outperforming small-caps; when the line on the chart is rising, small-caps are moving up faster than large-caps. Based on this strong historical seasonal pattern, it may be prudent to trim your exposure to large-cap stocks and overweight small-caps for the next six months or so. Smaller companies tend to do most of their business within the U.S. and should benefit particularly from the modestly improving U.S. economy. With all the tax-loss harvesting going on this month, mid-December would be an appropriate time to begin buying the sector. There are a few ways to potentially capture the small-cap seasonal phenomenon. The Vanguard Small-Cap ETF (NYSEARCA: VB ) is a solid choice with the lowest expense ratio in the space, at just 0.09%. The SPDR S&P 600 Small Cap ETF (NYSEARCA: SLY ) is limited to just 600 or so small company stocks. The selection universe for this fund includes all U.S. common equities listed on the NYSE, NASDAQ Global Select Market, NASDAQ Select Market and NASDAQ Capital Market with market capitalizations between $250 million and $1.2 billion. The iShares Core S&P SmallCap 600 ETF (NYSEARCA: IJR ) is an ETF which offers inexpensive, superior performance. Its expense ratio is just 0.12%. If you’re looking for a more widely diversified fund spread across sectors and the growth-value spectrum, the iShares Russell 2000 ETF (NYSEARCA: IWM ) fits the bill. It’s the largest ETF in the small-cap sector and carries an expense ratio of 0.20%. Lastly, the PowerShares DWA SmallCap Momentum ETF (NYSEARCA: DWAS ) is an interesting choice. Dorsey Wright & Associates, an internationally recognized firm for its work in tactical asset allocation and technical analysis, selects securities pursuant to its proprietary selection methodology, which is designed to identify securities that demonstrate powerful relative strength characteristics. DWA has an excellent track record and a wide following. Its expense ratio is the highest of the group, coming in at 0.60%. Year-to-date, IJR, DWAS and SLY have performed similarly and all three are outperforming VB by approximately +1.97% and IWM by +2.33%. (click to enlarge) Here is a longer-term chart going back to June of 2012: (click to enlarge) IJR and DWAS, again, have performed similarly and have outperformed VB by +5.86%, SLY by +8.27% and IWM by +8.78%, respectively. IJR has edged out most of the other ETFs over various time periods and combined with its very low expense ratio, makes it a very attractive choice in the small-cap space. Conclusion The outlook for small-cap stocks looks favorable right now. One of the most important factors powering the performance of small-cap stocks is economic growth. Studies involving past rates of return have shown that during times of improving economic conditions and rising interest rates, small-cap stocks tend to outperform large-caps. One possible reason for the strong performance of small-caps relative to large-caps in rising rate environments is that rates tend to go up in response to better economic conditions, which tend to provide a positive backdrop for small-cap companies. We would use the weakness we’re seeing in early December to accumulate small-caps via low-cost ETFs through year-end.

5 China ETFs Up At Least 20% In Q4

Though the Chinese economy and securities have seen the height of volatility so far this year, the final quarter of 2015 seems quite steady, rather upbeat. This is quite a different picture from Q3 backed by compelling valuation after a bloodbath in August following currency devaluation and several cool economic data. China started to recoup losses from October with its A-Shares ETFs once again seeing runaway success in November. Apart from cheaper valuation, plenty of policy easing to jumpstart its ailing economy and hopes for further easing (as the economy is still reeling under pressure) helped Chinese equities ETFs to rule the top-performers’ list in the quarter-to-date frame (as of December 3, 2015). In October, China reduced the key interest rates by 25 bps, which marked the sixth slash since last November. Not only monetary policy easing, Beijing went on to enact a demographic reform and put an end to the country’s decades-long infamous one-child policy. Investors should note that China has long been working on stepping up domestic consumption, shedding focus on exports and intending to move to a ‘slower and more balanced growth’ economy. If this was not enough, the Chinese currency, the yuan, received a privileged reserve currency status from the IMF recently and joined the league of the major currencies, namely U.S. dollar, pound, euro and yen. China’s currency will have a weight of 10.92%, higher than the yen (8.33%) and the pound (8.09%), in IMF’s reserve currency basket from October 2016. As per the IMF, the step was the outcome of reformative measures presently being undertaken in China, which gives the “freely usable” tag to the yuan. It’s not that China investing is devoid of glitches. In fact, news about the Chinese securities regulators being stricter in their investigation into brokerages led the country’s stocks to suffer the deepest plunge on November 27 since the August uproar. Still, relentless constructive measures by regulators have saved China equities every time. One of China’s latest measures to calm the jittery market will be to launch a “circuit breaker ” on a benchmark stock index of the country next year. Per the new norm, a 5% one-day gain or loss in the CSI300 index (before 2:30 p.m.) would close trading in the country’s all equity indices for 30 minutes. Shifts of over 7% would result in closed trade for the rest of the day. In such a backdrop, investors might want to know about the top-performing China ETFs so far in Q4. For them, we highlight five Chinese equities ETFs that are still up at least 20%. KraneShares CSI China Internet ETF (NASDAQ: KWEB ) – Up 30.2% This product provides concentrated exposure to the Chinese Internet market by tracking the CSI China Overseas Internet Index. In total, the fund holds about 60 securities in its basket. The ETF has amassed $154.4 million in AUM and charges 71 bps in annual fees from investors. P owerShares Golden Dragon China Portfolio ETF (NYSEARCA: PGJ ) – Up 27.7% The $185 million ETF holds about 77 securities. The expense ratio of the fund is 0.70%. The fund is heavy on IT (46.4%) and Consumer Discretionary (38.2%). As far as individual holdings are concerned, Ctrip.com (NASDAQ: CTRP ) takes the top position with a 10.27% weight followed by NetEase (NASDAQ: NTES ) (9.8%) and Baidu (NASDAQ: BIDU ) (9.0%). Guggenheim China Technology ETF (NYSEARCA: CQQQ ) – Up 27.3% This fund targets the overall technology sector in China and follows the AlphaShares China Technology Index, holding 76 stocks in its basket. Alibaba dominates the fund’s return with a 21.5% share while other firms hold no more than 9.4% of assets. In terms of industrial exposure, about 65% of the portfolio is allotted to Internet mobile applications while electronic components and semiconductors round off to the next two spots. The product manages an asset base of $58.4 million. The expense ratio comes in at 0.71%. KraneShares CSI New China ETF (NYSEARCA: KFYP ) – Up 24.1% This fund tracks the CSI China Overseas Five-Year Plan Index, holding about 140 securities in its basket. About one-third of the portfolio is skewed towards Consumer Discretionary, closely followed by Information Technology. The fund is unpopular as depicted by its AUM of $3.2 million. The expense ratio comes in at 0.71%. Deutsche X-trackers Harvest CSI 500 China A-Shares Small Cap ETF (NYSEARCA: ASHS ) – Up 22.4% This product is a combination of China A-shares and smaller capitalization. This ETF attempts to replicate the performance of the CSI 500 index, which tracks 500 small cap companies on the Shanghai and Shenzhen stock exchanges. This $35.8 million fund charges 80bps in fees. Industrials (24.3%) and Consumer Discretionary (15.9%) are the top two sectors. Link to the original post on Zacks.com

How To Find The Best Sector 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 44 different Financials ETFs and at least 196 ETFs across all sectors. Do investors need 19+ choices on average per sector? How different can the ETFs be? Those Financials ETFs are very different. With anywhere from 24 to 561 holdings, many of these Financials ETFs have drastically different portfolios, creating drastically different investment implications. The same is true for the ETFs in any other sector, as each offers a very different mix of good and bad stocks. Consumer Staples ranks first for stock selection. Energy ranks last. Details on the Best & Worst ETFs in each sector are here . A Recipe for Paralysis By Analysis We firmly believe ETFs for a given sector should not all be that different. We think the large number of Financials (or any other) sector 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 561 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 sector. Figure 1: The Best ETF in Each Sector (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 PowerShares KBW Property & Casualty Insurance Portfolio ETF (NYSEARCA: KBWP ) is the top-rated Financials ETF and the overall best ETF of the 196 sector ETFs that we cover. The worst ETF in Figure 1 is the Fidelity Covington MSCI Utilities Index (NYSEARCA: FUTY ), which gets a Dangerous rating. One would think ETF providers could do better for this sector. Disclosure: David Trainer and Blaine Skaggs receive no compensation to write about any specific stock, sector, or theme.