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Goldman Raises Yellow Flag On 2016: ETFs To Buy

While the investing world is busy celebrating expected gains coming their way in the three months from November through January – known as the most successful session of the stock market – Goldman Sachs’ latest prediction of a weak market next year, might be jarring to their ears. The sought-after investment broker expects weakness in the market next year with the S&P 500 predicted to close out 2016 at 2,100. The U.S. index presently trades at 2,088.87, meaning almost no change in gains in the coming 13 months. Considering dividends, Goldman estimates stocks to return merely 3% next year, which is a repetition of this year’s scenario. Notably, among the top ETFs, investors have seen the S&P 500-based SPY adding about 1.5%, Dow-based DIA being almost flat and Nasdaq-based QQQ advancing 10.6% so far this year (as of November 25, 2015). As per Goldman, higher interest rates post lift-off with their resultant strength in the greenback along with a soft profit outlook are behind this pessimism in the market. Plus, Goldman hints at the overvaluation of stocks at the current level. Added to this, Goldman indicated that P/E has a propensity to decline 10% in the six months after the first Fed lift-off, which is to take place in December, if macroeconomic conditions remain the same. While the tech sector has given a stellar performance lately, as per Goldman, ‘even tech sector profit margins have probably peaked at this point’. Finally, Goldman projects average EPS growth at around 10% in 2016 for the S&P 500 companies – perhaps with the help of stock buyback and not entirely through operating excellence. Still this expected increment indicates an improvement from this year. Goldman suggested investors to play the stocks of those companies which generate fewer revenues from outside of the U.S. border. This way investors can mitigate the negative currency fluctuations on a rising dollar. Goldman’s prescribed stocks are the likes of Amazon (NASDAQ: AMZN ), Chipotle Mexican Grill (NYSE: CMG ), and Wells Fargo (NYSE: WFC ). Though Goldman’s suggestions are for the worst case scenario, we also believe less exposure to the international market could be a way to win next year. We have profiled a few ETFs below to play Goldman’s stock pick in a basket manner as this is always a safer option than single stock selection. iShares U.S. Financial Services ETF (NYSEARCA: IYG ) Goldman’s favorite Wells Fargo takes the top spot of this $841-million financial ETF. After all, this is the right time to play the financial sector as this tends to outperformance in a rising rate environment. The fund charges 45 bps in fees and is up about 2.2% so far this year. It has a Zacks ETF Rank #2 (Buy). First Trust Dow Jones Internet Index (NYSEARCA: FDN ) Amazon gets the first place (11.7%) in this $4.78-billion Internet ETF. The fund charges 54 bps in fees per year. In total, the fund holds 41 stocks. The tech sector in any case is soaring now. From a sector look, Internet mobile applications account for 40% of the portfolio while Internet retail makes up for 22%. The ETF has a Zacks ETF Rank #2 and is up about 25%. The Restaurant ETF (NASDAQ: BITE ) U.S. restaurants are placed in the top 37% quartile of the Zacks Industry Rank system and are on the growth path as consumers are increasingly eating out. While the cost structure is low for these restaurateurs on falling agricultural commodity prices, many U.S. restaurants do not have much exposure to the foreign lands. This makes BITE a nice bet. No stock accounts for more than 3.09% weight in the 45-stock portfolio. Chipotle takes about 2.43% of the fund. BITE charges 75 bps in fees. Original Post

Best And Worst Q4’15: Small Cap Blend ETFs, Mutual Funds And Key Holdings

Summary The Small Cap Blend style ranks last in Q4’15. Based on an aggregation of ratings of 28 ETFs and 642 mutual funds. VB is our top-rated Small Cap Blend style ETF and PCOEX is our top-rated Small Cap Blend style mutual fund. The Small Cap Blend style ranks twelfth out of the twelve fund styles as detailed in our Q4’15 Style Ratings for ETFs and Mutual Funds report. Last quarter , the Small Cap Blend style ranked last as well. It gets our Dangerous rating, which is based on an aggregation of ratings of 28 ETFs and 642 mutual funds in the Small Cap Blend style. See a recap of our Q3’15 Style Ratings here. Figures 1 and 2 show the five best and worst-rated ETFs and mutual funds in the style. Not all Small Cap Blend style ETFs and mutual funds are created the same. The number of holdings varies widely (from 23 to 2053). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Small Cap Blend style should buy one of the Attractive-or-better rated mutual funds from Figures 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 5 ETFs are excluded from Figure 1 because their 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 Boston Trust & Walden Funds Mid Cap Fund (MUTF: WAMFX ) and the Boston Trust & Walden Funds SMID Cap Innovations Fund (MUTF: WASMX ) are excluded from Figure 2 because their total net assets are below $100 million and do not meet our liquidity minimums. The Vanguard Small-Cap ETF (NYSEARCA: VB ) is the top-rated Small Cap Blend ETF and the Putnam Capital Opportunities Fund (MUTF: PCOEX ) is the top-rated Small Cap Blend mutual fund. VB earns a Neutral rating and PCOEX earns a Very Attractive rating. The State Street SPDR Russell 2000 Low Volatility ETF (NYSEARCA: SMLV ) is the worst-rated Small Cap Blend ETF and the ProFunds Small Cap Fund (MUTF: SLPSX ) is the worst-rated Small Cap Blend mutual fund. SMLV earns a Dangerous rating and SLPSX earns a Very Dangerous Rating. The Goodyear Tire & Rubber Company (NASDAQ: GT ) is one of our favorite stocks held by VB and earns our Very Attractive rating. Since 2010, the company has grown after-tax profits (NOPAT) by 18% compounded annually and doubled its NOPAT margin. Goodyear has also improved its return on invested capital ( ROIC ) from 5% to 9% over the same timeframe. Despite the impressive profit growth, GT remains undervalued. At its current price of $35/share, GT has a price to economic book value ( PEBV ) ratio of 1.0. This ratio means that the market expects Goodyear to never meaningfully grow NOPAT over the remaining life of the corporation. If Goodyear can grow NOPAT by 7% compounded annually for the next five years , which is well below the historic growth rate, the company is worth $49/share today – a 40% upside. Ruby Tuesday (NYSE: RT ) is one of our least favorite stocks held by Small Cap Blend ETFs and mutual funds and earns our Dangerous rating. Since 2010, Ruby Tuesday’s NOPAT has declined by 11% compounded annually while its NOPAT margins have fallen from 9% in 2010 to 3% on a trailing-twelve-month basis. Ruby Tuesday’s ROIC has followed this downward trend and is currently a bottom quintile 3%, down from 6% in 2011. To justify the current price of $5/share, Ruby Tuesday must grow NOPAT by 5% compounded annually for the next 12 years . This expectation is awfully optimistic for a business that has failed to grow profits at all over the past five years. Figures 3 and 4 show the rating landscape of all Small Cap Blend 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 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, style, or theme.

ETF Update: 5 New Funds To Be Thankful For

Summary Every week, Seeking Alpha aggregates ETF updates in an effort to alert readers and contributors to changes in the market. There were 5 ETF launches over the last 2 weeks, a slowdown from the 17 launches in the first half of November. Have a view on something that’s coming up or a new fund? Submit an article. Welcome back to the SA ETF Update. My goal is to keep Seeking Alpha readers up to date on the ETF universe and to gain some visibility, both for the ETF community, and for me as its editor (so users know who to approach with issues, article ideas, to become a contributor, etc.). Every weekend, or every other weekend (depending on the reader response and submission volumes), we will highlight fund launches and closures for the week, as well as any news items that could impact ETF investors. I hope all my American readers had a delicious Thanksgiving and a great holiday weekend. Mine is always a great event with +20 family members converging upon Chicago (I’m still celebrating the fantastic Bears/Packers upset from Thursday). However, every Thanksgiving since the beginning of my career has inevitable involved the following vague question: “So, what do you think of the market?” My solution last year was to sign questioners up for Seeking Alpha’s Wall Street Breakfast , and I must say the conversations about the economy were much more rewarding this time around. Now if only we could skip “so, who are you voting for in 2016?” Always my cue to get seconds of sweet potatoes. Fund launches for the week of November 16th, 2015 Fund launches for the week of November 23rd, 2015 Deutsche Bank (NYSE: DB ) launches a pair of multifactor smart-beta ETFs (11/24): The Deutsche X-trackers FTSE Developed ex US Enhanced Beta ETF (NYSE: DEEF ) and the Deutsche X-trackers Russell 1000 Enhanced Beta ETF (NYSE: DEUS ) track benchmarks derived from their indexes, but with a smart beta twist. According to the press release , “both FTSE Russell Comprehensive Factor indexes weight each stock within their respective underlying benchmark based on five academically-proven characteristics that influence the risk and performance of stocks: Value, Quality, Momentum, Volatility and Size.” FlexShares rolls out a fund of funds ETF (11/24): Northern Trust’s (NASDAQ: NTRS ) FlexShares Real Assets Allocation Index Fund (NASDAQ: ASET ) seeks to achieve optimal exposure to the three underlying ETFs while limiting volatility by investing in three FlexShares ETFs. This are the FlexShares Morningstar Global Upstream Natural Resources Index ETF (NYSEARCA: GUNR ), the FlexShares STOXX Global Broad Infrastructure Index ETF (NYSEARCA: NFRA ) and the FlexShares Global Quality Real Estate Index ETF (NYSEARCA: GQRE ). According to its homepage, the fund will “provide investors with a core real assets allocation that helps address their inflation-hedging, diversification, and income needs.” There were no fund closures for the weeks of November 16th and 23rd, 2015 Have any other questions on ETFs or ETNs? Please comment below and I will try to clear things up. As an author and editor I have found that constructive feedback is the best way to grow. What you would like to see discussed in the future? How can I improve this series to meet reader needs? Please share your thoughts on this first edition of the ETF Update series in the comments section below. Have a view on something that’s coming up or a new fund? Submit an article.