Tag Archives: management

Small-Cap Value ETFs: Key To Win In Post Lift-Off Era?

The U.S. economy will probably experience a shift in era by this year end, if economic conditions remain unchanged. With the Fed now overtly referring to December as the timeline for raising interest rates after a decade and putting global growth issues aside unlike its prior meetings, investors may now have to rush to alter their portfolio and make it in line with the looming Fed rate hike. Though much of the impending shock has been priced in at the current level, gyrations are still expected in the stock market post lift-off. Though the Fed affirmed that the rate hike trail would be slower, investors know that this will be the beginning of the end of the rock-bottom rates era. Naturally, they will be hunting for the right equity investing strategy. Notably, years of cheap money fueled the U.S. growth stocks as evident from the 106% jump by iShares Russell 2000 Growth ETF (NYSEARCA: IWO ) in the last 10 years and its 75% surge in the last five years (as of November 18, 2015). But, value stocks underperformed, as indicated by iShares Russell 2000 Value ETF ‘s (NYSEARCA: IWN ) 45.3% gain in the last 10 years and about 44% rise in the last five years. Growth investing means buying those companies, which exhibit fast-growing earnings, indulge heavily in capital spending and are forecast to earn at an above-industry rate. This group of companies normally pays lesser dividend or no dividend and capital appreciation is the main motive. Quite understandably, this high-growth proposition requires more capital and lower interest rates to be executed. On the other hand, value strategy includes stocks with strong fundamentals – earnings, dividends, book value and cash flow – compared with their current market prices. These stocks trade below their intrinsic value and are undervalued by the market. This pool of companies normally pays sounder dividends too. Thus, it is historically seen that value stocks perform better than growth stocks in a rising rate environment, mainly due to the difference in their modes of operation. Then, as per analysts , the right time to tap value is when the market reaches its zenith and retreats on overvaluation. For fear of a horrendous sell-off, investors seek safety, which value stocks normally offer unlike growth stocks. Since the market is likely to be wobbly, value stocks can predominate. Moreover, in the absence of cheap money inflows, investors are likely to look for cheaper stocks with great potential rather than the pricey and glamorous growth stocks. All in all, there is a high chance that value stocks will rule the U.S. markets over the next few months. The global investment management firm Pimco also expects this trend to be established in the coming future. Analysts noted that: “During the periods when the Fed was raising interest rates, the value stocks had an average return of 1.2% a month, or 14.4% a year, versus the growth index’s 0.7% a month, or 8.3% a year.” Now with the U.S. economy taking root, job reports showing strength and inflation staying decent, small-cap value stocks should be the best bets ahead. Small-cap stocks are the best measure of domestic economic recovery as these are less exposed to foreign lands. Moreover, terror attacks in several parts of the globe and international growth issues can also be stripped out via U.S. small-cap valued ETFs. Below we highlight three such ETFs, which could be in focus in the coming days. S&P Small Cap 600 Value Index Fund (NYSEARCA: IJS ) The fund looks to provide exposure to U.S. small-cap value stocks by tracking the S&P SmallCap 600 Value Index. The $3.14-billion fund holds a total of 468 small-cap stocks. The fund appears diversified as no stock accounts for more than 0.92% of the basket. Among the different sectors, Financials, Industrials and IT occupy the top three positions with 24.36%, 19.75% and 16.59% of weight, respectively. The fund charges a premium of 25 basis points annually. This Zacks Rank #3 (Hold) ETF was up 1.25% in the last one month (as of November 18, 2015). WisdomTree SmallCap Earnings Fund (NYSEARCA: EES ) For a slightly different approach to the small-cap market, investors may want to consider EES, as it follows earnings-generating companies in the small-cap universe of the U.S. stock market. Furthermore, the fund looks to weight by earnings, giving bigger weights to firms that earn more, irrespective of market capitalization. This results in a portfolio of roughly 950 securities. No stock accounts for more than 1.1% of the fund. Financials (27.34%), Industrials (18.48%), Consumer Discretionary (15.68%) and IT (12.24%) are the top four sectors of the fund. This $382-million fund charges 38 bps in fees. The fund has a Zacks ETF Rank #3 (Hold) while it was almost flat in the last one month. Vanguard Small-Cap Value ETF (NYSEARCA: VBR ) This fund provides exposure to the value segment of the U.S. small-cap market by tracking the CRSP US Small Cap Value Index. It holds a large basket of 843 stocks, which is widely spread across individual securities as none of these has more than 0.6% of assets. In terms of sector exposure, Financials dominates the portfolio at 30%, followed by Industrials (20.5%) and Consumer Services (12.2%). The ETF is quite popular with AUM of more than $5.68 billion. It is one of the low-cost choices in the small-cap space, charging 9 bps in fees per year from investors. The fund added about 0.6% in the last one month. VBR has a Zacks ETF Rank #3. Original post .

Selectivity: The New Way Forward For Investors

We believe these changes position investor portfolios to capture what we view as the best opportunities in global equity markets that we expect to play out over the next several years. More specifically, some of the broader changes we’ve made are from a thematic perspective: Equity and multi-asset class portfolios underwent a fairly significant reorientation away from companies levered to the commodity complex (i.e., the Energy and Materials sectors) to those more levered to services/consumption (i.e., the Information Technology and Healthcare sectors). Portfolios also continue to have significant exposure to the Consumer Discretionary sector as we seek to capitalize on service/consumption trends. Additionally, we notably decreased exposure to the Industrials sector and meaningfully increased exposure to Consumer Staples in our Non-U.S. Equity portfolios. Equity positioning is driven by our bottom-up, fundamental research, complemented by our top-down macroeconomic viewpoints. Primary driving factors behind the portfolio repositioning include: The waning commodity supercycle, combined with China’s structural transition from an investment-driven model of growth to one driven more by consumption. And more broadly: Emerging markets’ burgeoning middle class, along with ongoing advancement in emerging market consumers’ wealth. China’s economic transformation does indeed present the risk that Chinese GDP deviates from investor expectations. The transition to a slower – albeit more stable and sustainable – pace of growth, however, is necessary and well underway, as evidenced by GDP and Purchasing Managers’ Index (PMI) data. Data showing contribution to real GDP is released annually in China. The most recent release shows that in 2014, consumption contributed more to GDP growth than investment. More recently, PMI data shows that activity in the services sector continues to expand (i.e., a reading above 50), whereas manufacturing activity has been contracting. This suggests that the rebalancing story continues to play out. (click to enlarge) More broadly, emerging market consumers currently spend only a fraction of what their developed world counterparts spend, due in large part to income disparities. As the emerging markets’ middle class grows, consumer spending on goods and services should become larger contributors to GDP. According to McKinsey & Company, emerging markets’ consumption is expected to equal $30 trillion by 2025, a 150% increase from 2010. (click to enlarge) In our view, all of these dynamics present long-run opportunities for investors seeking growth. We believe that the changes in our portfolio positioning will enable investors to benefit from the trends that we think will move global equity markets over the next several years. Nevertheless, flexibility is paramount to any investment strategy in order to adapt to an ever-changing economic backdrop. To be sure, a selective approach is critical, as opportunities are far from uniform across all countries and sectors. Learn more about the importance of selectivity in today’s environment, in our latest video series from our investment team experts. 1 Source: Winning the $30 trillion decathlon

U.S. High-Yield Bonds See Worst Q3 Performance In 4 Years

Reportedly, U.S. high-yield bonds suffered their worst performance in four years in the third quarter. The Credit Suisse High Yield Bond Fund ETF slumped 12% from July 1-Sept. 30. The index is down 17.1% year to date. An article by Forbes points to a deluge of bearish commentaries about high yield, seconded by Wall Street strategists. Remember, positive indications of the U.S. Fed hiking rates dominated for most part of the third quarter; while finally the central bank decided against a rate hike in September. The worst performance in four years echoed the broader markets’ trend. The Dow, S&P 500 and Nasdaq declined 7.6%, 7% and 7.4%, respectively, giving their worst third-quarter performance since Sept. 2011. Just 17% of the mutual funds managed to finish in the green. This was a slump from 41% in the second quarter, which was again a sharp fall from 87% of the funds that ended in the positive territory in the first quarter. Coming to the high-yield mutual fund performance in the third quarter, these saw a dour sentiment prevailing. But for a handful of funds, the majority of high-yield mutual funds finished in the red. Gains were minute, as only one fund could post an above 3% return while all other gainers settled below 2%. The best gainer in the third quarter was The Fairholme Focused Income Fund (MUTF: FOCIX ), which added 3.8%. Catalyst High Income C (MUTF: HIICX ) was the biggest loser as it nosedived 20.5%. For most part of the third quarter, high-yield bond funds suffered outflows. In fact, in the last week of the third quarter, i.e. in the week ending Sept. 30, high-yield bond funds saw net outflows of $2.2 billion. As of Oct. 7, the year-to-date outflow for high yield bond funds was $5.2 billion. Of the 667 funds we studied, just 25 managed to finish in the green. However, these 25 funds had paltry gains with just one fund posting an above 3% return. For the other 24 funds, gains ranged from 0.01% to 1.6%. The average gain for these 26 funds was 0.5%. While one fund had a breakeven return, 640 funds ended in the red. The average loss for these 640 funds was 4.2%. Fed Rate Hike Dilemma The record low rate scenario makes dividend-paying funds attractive. Mutual funds paying high dividends assure a consistent stream of income opportunities; and thus are lucrative investment options in a low rate environment. However, there were indications that the Fed will hike rates in September and end a record-long low rate environment. In July, the FOMC’s two-day policy meeting gave no clear indication on the timing of the first rate hike. Nonetheless, the door for a September rate hike was kept open. However, in a testimony before Congress, Fed chair Janet Yellen said she expects the U.S. economy to strengthen and the central bank to hike interest rates “at some point this year.” In August, minutes of the FOMC meeting held on July 28 and 29 revealed that the majority of policymakers “judged that the conditions for policy firming were not yet achieved,” but noted that conditions were approaching that point. Federal Reserve Vice Chairman Stanley Fischer commented that a September rate hike was “pretty strong” before China devalued its currency. Finally in September, the FOMC cited a weak global growth scenario and low inflation rate as the main reasons for their decision to not hike rates in September. The Fed continues to wait for “further improvement in the labor market” and inflation to “rise to 2% in the medium term.” Separately, though the Fed raised its outlook for economic growth for this year, it trimmed projections for 2016 and 2017. However, Yellen later indicated that the lift-off option is very much on the table for later this year. She was also optimistic about the U.S. economy. Top 9 High-Yield Funds Fund Name Q3 Total Return Q3 % Rank vs. Obj YTD Total Return % Yield Expense Ratio Minimum Initial Investment ($) Load Great-West Bond Index (MUTF: MXBIX ) 1.6 1 1.36 1.77 0.5 0 N Guggenheim Total Return Bond A (MUTF: GIBAX ) 0.47 1 1.41 4.07 0.87 2500 Y American Century Core Plus A (MUTF: ACCQX ) 0.37 1 0.31 2.68 0.9 2500 Y Rydex Inverse High Yield Strategy A (MUTF: RYILX ) 0.2 2 -2.82 0 1.52 2500 Y Fidelity Strategic Advrs Core Inc (MUTF: FPCIX ) 0.18 2 0.35 2.96 0.07 0 N Aquila Three Peaks High Income Y (MUTF: ATPYX ) 0.15 2 2.54 3.56 0.94 0 N RidgeWorth Limited Duration I 0.04 3 0.12 0.16 0.34 0 N Sterling Capital Corporate Fund A (MUTF: SCCMX ) 0.04 3 0.6 2.6 0.85 1000 Y Guggenheim Limited Duration A (MUTF: GILDX ) 0.01 3 1.89 3.54 0.85 2500 Y Note: The list excludes the same funds with different classes, and institutional funds have been excluded. Funds having minimum initial investment above $5000 have been excluded. Q3 % Rank vs. Objective* equals the percentage the fund falls among its peers. Here, 1 being the best and 99 being the worst. As said, high-yield mutual funds could manage flimsy gains. In fact, beyond the tenth-placed Guggenheim Limited Duration A, which gained 0.01%, the other funds had negative returns. However, GILDX sports a decent yield of 3.5%. The other funds with a decent yield and in the best performers’ list are Guggenheim Total Return Bond A, American Century Core Plus A, Fidelity Strategic Advrs Core Inc. and Aquila Three Peaks High Income Y with yields of 4.07%, 2.68%, 2.96% and 3.56%, respectively. Here, GIBAX and FPCIX carry a Zacks Mutual Fund Rank #3 (Hold). The top performer Great-West Bond Index also carries a Hold rating. Separately, ATPYX sports a Zacks Mutual Fund Rank #1 (Strong Buy) while ACCQX holds a Zacks Mutual Fund Rank #2 (Buy). Original Post