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CARZ ETF Zooms Ahead On 10-Year High Auto Sales

In August, the automakers witnessed the highest rate of increase in light vehicle sales in the U.S. in 10 years. Sales on a seasonally adjusted annualized rate (“SAAR”) surged to 17.81 million units in August 2015 from 17.3 million units in August 2014. This was the highest pace since July 2005. Moreover, the SAAR finished above the 17 million mark for the fourth straight month in August. However, U.S. light vehicle sales nudged down 0.7% year over year to 1.51 million units in August 2015. Low oil price, a recovering economy, improving labor market condition, and easy availability of credit with lower interest rates and longer repayment periods were the main reasons behind the surge in sales on a SAAR basis. However, the inclusion of the Labor Day weekend in September this year, compared to August last year, resulted in a year-over-year decline in August sales figures. While Ford Motor Co. (NYSE: F ) registered the highest year-on-year improvement in August among the major automakers, General Motors Company (NYSE: GM ) recorded the best sales figure for the month in absolute terms. Auto Sales in Detail Ford reported a 5% increase in U.S. sales from the year-ago period to 234,237 vehicles, witnessing its best August sales in nine years. Meanwhile, FCA US LLC – controlled by Fiat Chrysler Automobiles N.V. (NYSE: FCAU ) – recorded a 2% year-on-year gain in sales to 201,672 vehicles, registering its highest August sales since 2002. This was also the 65th consecutive month in which the company reported a year-over-year gain in sales. However, General Motors recorded 270,480 vehicle sales in August, marking a 0.7% year-over-year decline. Though retail sales improved 5.9% to 224,978 units, the company witnessed a 24% plunge in fleet sales in August. Separately, sales performances from the major Japanese automakers were disappointing last month. Toyota Motor Corporation’s (NYSE: TM ) sales went down 8.8% year over year to 224,381 units. Sales also declined 5.3% on a daily selling rate (“DSR”) basis from the year-ago period. Moreover, Honda Motor Co., Ltd. (NYSE: HMC ) recorded a 6.9% year-over-year decline in sales on a volume basis to 155,491 vehicles in the month. Also, Nissan Motor Co. Ltd. ( OTCPK:NSANY ) reported a 0.8% year-over-year decrease in sales to 133,351 vehicles in August. Catalysts Behind the Surge The overall improvement in the U.S. economy has helped the auto sector to register solid gains in the past few months. The “second estimate” released by the U.S. Department of Commerce last month showed that the GDP in the second quarter advanced at a pace of 3.7%, significantly higher than the first quarter’s rise of only 0.6%. Though the economy created only 173,000 jobs in August, down from July’s tally of 245,000, the unemployment rate declined to 5.1% from July’s rate of 5.3%. Meanwhile, the market is witnessing a freefall in crude prices since the middle of last year. In fact, the price of West Texas Intermediate (WTI) fell nearly 60% as compared to mid-2014, when oil was trading above $100 each barrel. This oil plunge is also playing a major role in boosting auto sales. Moreover, automakers are aiming to increase market share by offering large incentives and discounts to customers. Additionally, banks are providing more car loans with lower interest rates and longer repayment periods. Further, the high average age of cars on U.S. roads has led to increased replacement demand both for cars and for parts. CARZ in Focus The auto ETF – First Trust NASDAQ Global Auto ETF (NASDAQ: CARZ ) – gained nearly 2% following the release of the auto sales report on Sept. 1 through Sept. 3, before losing 2.2% last Friday. It has a decent exposure to the above-mentioned stocks, excluding FCA US LLC, and is thus poised to gain from improving auto trends in the coming days. The ETF tracks the Nasdaq OMX Global Auto Index, giving investors exposure to automobile manufacturers across the globe. The product holds 37 stocks in the basket with Ford, Honda, Toyota, Daimler and General Motors comprising the top five holdings with a combined allocation of more than 40% of fund assets. In terms of country exposure, Japan takes the top spot at 36.6% while the U.S. takes the second spot having around 24.8% allocation, followed by Germany with 19.1% exposure. The ETF is unpopular with $32.4 million in its asset base and sees light trading volume. The product seems to be slightly expensive with 70 bps in annual fees and has a dividend yield of more than 1.7%. The fund has a Zacks ETF Rank #2 (Buy) with a High risk outlook. Bottom Line The improving auto industry has been one of the drivers of the recent economic growth in the U.S. Auto sales will continue to be a tailwind for the economy in the coming days. It is also speculated that the auto sector is poised for further gains given the favorable macroeconomic fundamentals. Original Post Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Digging Beneath The Surface Of 2 Concentrated Value ETFs

Summary We have seen a big shift in investor appetite away from traditional value companies and into high flying growth names over the last several years. The August correction may afford an opportunity to purchase value ETFs at attractive prices when compared to broad equity benchmarks. Two relatively new ETFs came across my watch list as potential candidates for investors seeking an outside the box approach to value selection screens. We have seen a big shift in investor appetite away from traditional value companies and into high flying growth names over the last several years. That trend has continued in 2015, yet the recent volatility may have investors reconsidering the fundamental qualities of the stocks in their portfolio. Growth stocks tend to fall harder during corrective phases as investors flock to the safety of defensive or value-oriented sectors. Furthermore, the August correction may afford an opportunity to purchase value ETFs at attractive prices when compared to broad equity benchmarks. Two relatively new ETFs came across my watch list as potential candidates for investors seeking an outside the box approach to value selection screens. Both funds are built using a more concentrated portfolio focused on stocks with solid balance sheets and sound business qualities. ValueShares U.S. Quantitative Value ETF (BATS: QVAL ) QVAL is an actively managed ETF that debuted in late 2014 and has amassed over $50 million in assets spread amongst 40-50 individual holdings. This fund is managed by Wesley R. Gray, Ph.D. who has written extensively on the attributes of quantitative values and behavioral finance. QVAL uses three separate screening criteria to hone in on a focused number of stocks that it believes offer solid value alongside quality long-term business fundamentals. The goal is to invest in the cheapest, high quality stocks in order to try and outperform a more passive index. QVAL benchmarks its performance versus the iShares S&P 500 Value ETF (NYSEARCA: IVE ) and so far this year it has been able to maintain a similar total return. Prior to the recent correction, this actively managed ETF was actually significantly outperforming the passively managed yardstick. It’s worth pointing out that IVE is a market cap weighted index of 359 holdings, while QVAL takes a more equal weighted approach to its portfolio construction methodology. In addition, QVAL charges an expense ratio of 0.79%, compared to 0.18% for its passive counterpart. The significantly higher fees of the actively managed portfolio are to be expected for a unique strategy using proprietary screening and construction methodologies. Nevertheless, QVAL needs to prove that its approach adds value (pardon the pun) to investors that choose to step outside the passive index realm. In my opinion, this fund should warrant consideration for those seeking an alpha generating strategy for the value sleeve of their equity portfolio. Deep Value ETF (NYSEARCA: DVP ) DVP is another value-oriented strategy that debuted in 2014. This fund is based on the TWM Deep Value Index, which is constructed of 20 dividend paying stocks within the S&P 500 Index with solid balance sheets, earnings and strong free cash flow. According to the fund company website, the companies within the index are weighted based on a “rules-based assessment of their valuations so that stocks that are most attractively valued receive a higher weight.” In addition, the index is reconstituted annually. The extremely concentrated nature of the DVP portfolio makes for an interesting study in what is essentially a smart-beta index. The smaller number of holdings will likely create a greater divergence from the benchmark than a more traditional approach. This ETF will be more susceptible to individual business risks and opportunities of the underlying stocks than its peers as well. I would expect that the DVP portfolio will experience pronounced periods of underperformance and outperformance depending on the prevailing market environment . DVP has managed to accumulate over $200 million in total assets and charges a similar expense ratio as QVAL at 0.80%. This ETF is certainly worth a look for investors that like the comfort of a passive index with a stock picker’s mentality. The Bottom Line There are pros and cons to selecting ETFs that fall outside the traditional realm of low-cost and well-diversified benchmarks. However, both of these funds offer a unique approach to value investing that should not be overlooked. They can potentially add value as tactical positions that compliment your core ETF portfolio. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: David Fabian, FMD Capital Management, and/or clients may hold positions in the ETFs and mutual funds mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell, or hold securities.

Forget REITs, Invest In Utility ETFs Instead?

The global investing world across asset classes was caught off guard recently by the Chinese market rout. The world’s second largest economy has completely derailed the market in August after China devalued its currency, the yuan, by 2%, to presumably maintain export competitiveness and revealed a six and a half-year low manufacturing data for the month. The tumult in global equities, currencies and commodities suddenly perked up the safe haven appeal of the market. While this risk-off trade sentiment among investors went against most asset classes, a downtrodden defensive sector – utility – cashed in on (slightly) this debacle. Investors should note that the U.S. economy is primed for a rate hike sometime later in 2015 after nine long years. Several U.S. economic data released lately were upbeat, supporting the case for an imminent rate hike. Quite expectedly, this phenomenon should weigh on rate sensitive sectors like utilities and REITs. These sectors need a high level of debt for operations and approach the capital markets for raising funds. As a result, a rising rate environment is a downright negative for these areas. While the utility sector suffered from the looming rate hike worries in the last few months, REITs seem less ruffled by this threat. Broader utility ETF Utilities Select Sector SPDR (NYSEARCA: XLU ) is down over 13% in the year-to-date frame while the Vanguard REIT ETF (NYSEARCA: VNQ ) has lost about 11%. This was probably because a healthy economy and busy activities helped the REIT space weather the rate hike worries to a large extent. However, investors should note that the retreat in VNQ was steeper in the last one-month time frame compared to XLU. In the said period, XLU was down about 6% while VNQ shed 7.9% (as of September 4, 2015). Let’s take a look at what’s giving utilities a slight edge over REITs? Safe Haven & Cheaper Valuation Win, Rate Sensitivity Loses The downward drift in utilities decelerated in recent times as these can be attractive in a choppy market like this. This sector is less volatile in nature and relatively immune to the market peaks and troughs. If this was not enough, the space is less exposed to a stronger dollar due to the lack of foreign coverage. Rather lower commodity prices amid the strengthening greenback will help lower the input costs of the utility companies. Investors should also note that long-term interest rates have been on a downhill ride post the China currency episode. Yield on the 10-year Treasury note fell to 2.13% (as of September 4, 2015) from 2.24% on August 10. If this was not enough, U.S. job numbers in August grew at the most sluggish pace in 5 months and fell short of analysts’ expectations. As per several market participants, the China issues and the latest setback on the job front have silenced the growing buzz about the likely Fed rate hike as early as this month to some extent. This played yet a big role in bringing down the Treasury yields. Since utilities usually have strong yields, investors can embrace this segment amid falling Treasury bond yields. Notably, the yield of XLU was 3.71% as of September 4, 2015. Though REITs too offer bumper yields as evident by the 4.14% offered by VNQ, REITs score lesser than utilities on safety. To add to this, after being crushed for the last few months, utility ETFs now offer a compelling valuation, which acts as another driver for its northbound ride. XLU is presently trading at a P/E (ttm) of 16 times while VNQ trades at 37 times of P/E (ttm). This clearly explains why it might be better to look away from REITs, and tilt toward utility ETFs. Even research house MKM Partners is of the same opinion. As a result, utility stocks and the related ETFs might ricochet in the coming days to reflect the flight to safety. Bottom Line We no doubt believe that the utility sector will have several deterrents over the longer term among which the Environment Protection Agency’s Clean Power Plan seems to be a big one. The norm looks to lower carbon emission from power plants and utilities have long been dependent on coal. But as of now, the sector looks solid. Investors, who normally eye cheaper plays, can thus try out a few utility ETFs to reduce the beta in the portfolio, especially until this China-induced anxiety is over and the Fed shapes up a well-defined solution over policy tightening. These funds include XLU, the First Trust Utilities AlphaDEX Fund (NYSEARCA: FXU ) , the Guggenheim S&P Equal Weight Utilities ETF (NYSEARCA: RYU ) and the Vanguard World Fund – Vanguard Utilities ETF (NYSEARCA: VPU ) . Original Post