Tag Archives: ideas

Do TIPS ETFs Deserve A Look As Inflation Rises?

Inflation has been floppy for most developed economies, including the U.S., for quite some time now. Reaching 2% inflation – as targeted by most of the central banks – has become a tall order, with both the eurozone and Japan struggling to ward off deflation. The nagging oil price crisis over the last one and a half years seems to be the main culprit. While the ECB and Bank of Japan were compelled to pursue QE measures to fight deflationary threats. Back home, subdued inflation checked the Fed from being aggressive on the policy tightening issue. Even after the lift-off in December, market watchers were under the impression that the Fed will likely apply a single hike, at the most, this year, thanks to the global market upheaval and subdued inflation. In such a scenario, the U.S. inflation rate rose 1.4% for the fourth successive month in January – the best annual gain last seen in October 2014, and surpassing market expectations of a 1.3% gain. Core consumer price index (CPI) jumped to 2.2% in January. The reading was the highest since June 2012, and it came above the goal set by the Fed at 2%. Higher rents, healthcare and transportation costs boosted inflation in January. Excluding food and energy, consumer prices rose 0.3% in January – a four and-a half year high, and higher than the last month’s increase of 0.2%. Time for TIPS ETFs? TIPS offers robust real returns during inflationary periods, unlike its unprotected peers in the fixed-income world. These securities pay an interest on an inflated principal amount (principal rises with inflation), and when the securities mature, investors get either the inflation-adjusted principal or the original principal, whichever is greater. As a result, both principal amount and interest payments will keep on rising with increasing consumer prices. This mechanism makes TIPS ETFs investors’ darlings in times of rising inflation. Presently, the iShares TIPS Bond ETF (NYSEARCA: TIP ) is one of the biggest beneficiaries of this trend, having hauled in $256.5 million last week. The fund is up 1.5% this year (as of February 19, 2016). Is the Bet Worth It? Though the decline in oil prices has slowed, things are yet to stabilize in the oil patch. So, it is too early to take a call on the inflation picture. Of course, the recent trend is pointing toward solid inflation, and the upbeat January data has made the case stronger for faster Fed tightening. However, a lot of the future trend of inflation depends on the movement of energy prices. Still, investors with a long-term view can count on the potential uptick in inflation, as the U.S. economic backdrop remains more or less ,steady and issues in the energy space should be sorted sooner or later. With the economy and the job market mending, inflation will definitely increase in coming months. Below, we highlight a few outperforming TIPS ETFs which could be compelling investments if U.S. inflation continues to rise (see all TIPS ETFs here ). PIMCO 15+ Year U.S. TIPS Index ETF (NYSEARCA: LTPZ ) This fund targets long-term securities of the TIPS market by tracking the BofA Merrill Lynch 15+ Year US Inflation-Linked Treasury Index. In total, the product holds 7 bonds having effective maturity of 26.41 years and carrying a high interest rate risk, given the effective duration of 21.83 years. In terms of credit quality, the fund boasts top-rated bonds from Moody’s and the S&P, suggesting lower default risk. The ETF is less popular and less liquid, with AUM of $98.1 million. LTPZ has generated excellent returns of about 3% so far this year (as of February 19, 2016). SPDR Barclays Capital TIPS ETF (NYSEARCA: IPE ) This fund targets long-term securities of the TIPS market by tracking the Barclays Capital U.S. Government Inflation-Linked Bond Index. In total, the product holds 37 bonds having effective maturity of 9.08 years and carrying a moderate interest rate risk, given the effective duration of 4.90 years. In terms of credit quality, the fund boasts top-rated bonds. The ETF is moderately popular and less liquid, with AUM of $637.5 million. IPE has gained about 1.6% so far this year (as of February 19, 2016). PIMCO Broad U.S. TIPS ETF (NYSEARCA: TIPZ ) This $66.4 million fund looks to track the BofA Merrill Lynch US inflation-linked Treasury index. The fund holds 19 securities and has an effective maturity of 9.09 years, while its effective duration is 8.26 years. It charges 55 bps in fees, and is up 1.8% so far this year (as of February 19, 2016). Original Post

John Deere Q1 Results Drag Down Agribusiness ETFs

Before the opening bell on Friday, the world’s largest agricultural equipment maker, Deere & Co. (NYSE: DE ), reported disappointing fiscal first-quarter 2016 results. Though the company surpassed our earnings estimates, it missed on revenues and provided a bleak outlook for full fiscal 2016, reflecting another year of declining sales and continued pullback in the global agricultural sector. Deere Q1 Results in Focus Earnings per share came in at 80 cents, comfortably beating the Zacks Consensus Estimate of 71 cents, but deteriorating 28.6% from the year-ago period. Revenues declined 15% year over year to $4.77 billion and lagged our estimate of $4.79 billion. The global agricultural slowdown and weakness in construction equipment markets were the major culprits for the lackluster revenue performance and this trend is likely to continue this year. Additionally, a strong dollar continues to weigh on the company’s profitability (read: Top and Flop Currency ETFs YTD ). As a result, the manufacturer expects 2016 to be another challenging year with overall equipment sales expected to drop 8% for the second quarter and 10% for fiscal 2016. Segment wise, the company expects global construction and forestry equipment sales to decline about 11% in fiscal 2016, including negative currency translation of 2%, and global sales of agriculture and turf equipment to drop 10%, including negative currency translation of 4%. The company also expects net income of about $1.3 billion for fiscal 2016. Market Impact Based on bleak outlook, shares of DE dropped as much as 4.7% on the day while trading volume was also heavy with around 9 million shares exchanged in hand compared with the 3-month average of around 3.6 million shares. Rough trading is expected to continue in the ETF world as well over the next few days, especially among those that have the largest allocation to this big agricultural equipment maker (see: all Materials ETFs here ). However, investors should closely monitor the movement of these funds and the stock, and could tap the beaten down prices with a low risk in the basket form. This is especially true as Deere has a solid Zacks Rank #2 (Buy) with additional flavors of a Value and Momentum Style Score of ‘B’ each. iShares MSCI Global Agriculture Producers ETF (NYSEARCA: VEGI ) This fund follows the MSCI ACWI Select Agriculture Producers Investable Market Index and offers investors global exposure to 128 firms that are primarily engaged in the business of agriculture. Here, Deere occupies the third position with a 7.9% allocation. From a sector look, agricultural chemicals takes the largest share at 47%, closely followed by farming/fishing (20%) and industrial engineering (18%). American firms dominate the fund’s holding with 45.4% of total assets, followed by a double-digit exposure to Switzerland. The ETF is less popular and illiquid with $24.7 million in its asset base and around 10,000 shares in average daily volume. The ETF charges 39 bps in fees per year from investors and has shed 2.2% post Deere results. Market Vectors Agribusiness ETF (NYSEARCA: MOO ) This fund is by far the most popular and liquid choice in the space with AUM of about $758.4 million and average daily volume of nearly 215,000 shares. It tracks the Market Vectors Global Agribusiness Index and charges 57 bps in annual fees. In total, the fund holds 53 securities in its basket with DE occupying the third spot at 6.8% of total assets (read: Market Crashing! ETFs & Stocks That Deserve Love ). The product provides nice diversity across business segments with agricultural chemicals accounting for 37% share while industrial engineering (17%), farming/fishing (14%) and packaged food products (13%) round off the next three spots. In terms of country allocation, half of the portfolio goes to the U.S. firms while Canada, Switzerland and Japan get a decent exposure of around 8% each. The fund lost 1.5% on the day of the earnings release. Original Post

Earnings Review: Drought, Currency Impact On International Business Dents Duke’s Q4 Results

The largest electric utility company in North America, Duke Energy (NYSE: DUK ) reported its fourth quarter and full-year earnings for the fiscal-year 2015 on Thursday, February 18th. The company reported adjusted earnings per share of 87 cents, 7% below consensus estimates of 94 cents . Management attributed the earnings miss on the impact of mild weather conditions and the negative impact of currency translation, as revenue earned from international operations in South America was worth less when translated back into the U.S. dollar. For the full year, revenue stood at $23.46 billion , down 2% from 2014’s $23.93 billion. Operating income rose by 2.1% year over year as operating expenses fell by close to 3% on lower fuel expenses. The decline in operating costs was offset by higher operation and maintenance expenses, as well as higher depreciation and amortization expenses. Segment wise, increased pricing as well higher wholesale net margins led to a 9% increase to $601 million in the reported adjusted income of the Regulated Utilities division. Lower margins for National Methanol and the unfavorable impact of currency translations meant that the adjusted income of the International Business dropped by 5.6% to $68 million for the full year. The company’s commercial power business reported an adjusted income of $41 million for the full year, up 28% from last year’s $32 million, on the back of higher margins in wind and solar generated power. The commercial power business which now includes unregulated renewable assets and commercial electric and gas transmission investments but not the Midwest Commercial Generation business, which the company sold to Dynergy last year. We have a $68 price estimate for Duke Energy , which is about 9% below the current market price. Key Drivers For 2016 Due to a tougher regulatory environment, Duke has had to forego short-term profitability and focus on optimizing its asset base. The company has focused on increasing investments in natural gas and renewables, while getting lowering its exposure to unregulated markets. In 2016, the company expects most of its growth in the regulated utilities business to come from opportunities that will be unlocked by the $5 billion investments in growth that it has made. Management expects retail load to grow by around 0.5% year over year, and that should result in some bottom-line growth for the company. Most of its growth in 2016 is expected to result from the integration of the North Carolina Eastern Municipal Agency’s (NCEMPA) assets that it purchased for $1.25 billion and closed in July of last year. Additionally, the company has been focusing on reducing operational and maintenance costs. On the commercial power front, Duke expects to benefit from a $1.5 billion investment in Renewables and from its stake in the joint venture in the Atlantic Coast pipeline with Piedmont and Dominion. However, there has been a lag in getting regulatory approval for operations in certain jurisdictions. This, coupled with the loss of earnings from the Midwest power generation business, will offset some of the gains from new investments. On the international front, management said that reservoir levels in Brazil increased throughout 2015, which will enable the company to purchase power at a lower cost in 2016, resulting in higher margins. However, lower exchange rates between currencies in South America and the U.S. dollar, and low Brent crude oil prices, will mean lower revenue for the company’s National Methanol business. Additionally, Duke is considering exiting from its international business, but no timeline has been specified on this front, making the performance of the international business in 2016 less important. Most of Duke’s growth will come from its core business, which the company expects to grow between 4% and 6% in 2016. Disclosure: No positions.