Tag Archives: management

5 Japan ETFs Set To Rise Higher

A stronger-than-expected jobs report last Friday firmed expectations that the Fed may raise rates in December. However, the Fed has made it very clear that even after the first hike, the monetary policy is going to stay accommodative for quite some time. While a recovering economy and still accommodative monetary policy are good for US stocks, many investors are worried about rich valuations in the face of lackluster earnings. Investors should consider adding some Japanese stocks and ETFs to their portfolios, considering expectations of additional stimulus, rising corporate profitability and still-attractive valuations. Stimulus Expectations Rising In its last meeting, the Bank of Japan decided to keep its powder dry and maintained QE at the current level of ¥80 trillion ($660 billion) annually. However, taking into account the impact of the emerging markets’ slowdown, the bank downgraded its growth projections. Many still expect that the BOJ will have to announce an increase in asset purchases in the coming months. If the central bank decides to keep the stimulus unchanged, despite weak economic outlook, it will likely to be perceived as an acceptance by BOJ of its inability to ward off deflation. The BOJ governor reiterated its resolve to take further policy action if needed, and the case for additional easing continues to strengthen. Is Abenomics Working? The headline consumer prices index had risen after the launch of Abenomics in 2013, but has fallen back to zero, thanks mainly to the collapse in oil prices. Sales tax hike last year also forced consumers to cut spending and pushed inflation lower. The BOJ has now extended the deadline for achieving inflation target of 2% by six months. On the other hand, a new index of inflation, which excludes energy and food, has been rising; it was up 1.1% in August and 1.2% in September. The labor market has tightened, with the unemployment rate plunging to 3.4%. And the stock market is up about 120% since the launch of Abenomics (in local currency terms), thanks mainly to a surge in corporate profits, while the yen has declined almost 30%. Nominal GDP has actually turned upwards since 2013, after 20 years of sideways movement. Higher-than-expected industrial output (1.0% versus 0.5%) has also eased worries regarding a recession during the third quarter. Can the Yen Weaken Further? After falling to a 13-year low in June this year, the yen had rebounded nicely, thanks mainly to its safe haven status amid global turmoil. The currency has weakened over the past few weeks as expectations of the rate rise by the Fed have been rising. Rising Earnings; Increasing Shareholder Value Thanks mainly to the declining yen, Japanese companies’ earnings have improved a lot since the launch of Abenomics. The outlook for earnings growth for Japanese companies, particularly exporters, remains much better than in the US, with rising expectations for a rate hike by the Fed in December. Further, Japanese authorities have been encouraging companies to improve corporate governance and increase shareholder value via dividends and buybacks. Japanese Stocks Are Still Attractively Valued Despite recent rise, Japanese stocks trade at cyclically adjusted price/earnings ratio (CAPE) or Shiller P/E of 26.4 more than 20% below than the historical average of 34.4. Considering superior earnings growth potential of Japanese companies, these valuations look very attractive. Japan Post’s Strong IPO Japan Post, the parent and its banking and insurance units, IPO’d successfully last week on the Tokyo Stock Exchange. It was the largest IPO since Alibaba’s (NYSE: BABA ) public debut last year. The demand was very strong, the IPO oversubscribed and the shares opened 16.5% higher than the IPO price. The institution manages almost 25% of Japanese savings, and phased freedom from state ownership helps it to take more risks. So far, most of Japan Post’s assets have been invested in safe government bonds. Japanese authorities are trying to encourage investors to put more money into stocks rather than in savings products. The 144-year old Japan Post has a well established brand and is expected to attract retail investors. Biggest Risk for Japanese Stocks: China Slowdown Japan’s exports to China fell 3.5% last month, after declining 4.6% in August. With a slowdown in Chinese demand, Japanese exporters are cutting their production and profit forecasts. A decline in profits would further hurt investments and wages. A sharper slowdown in China could present the biggest challenge to Japanese equities; however, recent data suggests that China’s growth panic is probably overdone. Best ETFs to Consider In view of the reasons discussed above, we strongly believe that investors should consider investing in currency hedged Japan ETFs, which offer an excellent way to profit from the rise in Japanese stocks, while hedging the currency risk in case the yen moves lower. Additionally, adding some international flavor to the portfolio provides diversification benefits and boosts long-term risk-adjusted returns. The WisdomTree Japan Hedged Equity ETF (NYSEARCA: DXJ ) is the most popular ETF in this space, with $16.9 billion in AUM. The fund’s top holdings include well known Japanese companies Toyota (NYSE: TM ), Mitsubishi ( OTCPK:MMTOF ), Japan Tobacco ( OTCPK:JAPAF ) and Canon (NYSE: CAJ ). It charges an expense ratio of 0.48%. DXJ is up more than 12% year to date. Another great ETF worth a look is the Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSEARCA: DBJP ), which follows a similar strategy and is also slightly cheaper, with an expense ratio of 0.45%. Toyota, Mitsubishi and Softbank ( OTCPK:SFTBY ) are among its top holdings. DBJP is up almost 13% this year. The iShares Currency Hedged MSCI Japan ETF (NYSEARCA: HEWJ ) provides exposure to large- and mid-capitalization Japanese equities, both exporters and local companies. The fund’s expense ratio is 0.48%. The product is basically a currency hedged version of the ultra-popular Japan ETF EWJ. It is up more than 13% this year. The WisdomTree Japan Hedged SmallCap Equity ETF (NASDAQ: DXJS ) provides access to the small-cap segment of the Japanese stock market, while hedging the currency exposure. It charges 58 bps in expenses per annum. Smaller companies are more sensitive to domestic economic trends than their larger-cap counterparts, but at the same time, their stock prices are more volatile. This product has returned almost 18% this year. The WisdomTree Japan Hedged Financials ETF (NYSEARCA: DXJF ) provides currency hedged exposure to the financial segment of the Japanese stock market, including banks and insurers. It charges 48 bps in expenses. Financial firms have been benefitting from the rising stock market, and the ETF is up more than 18% this year. Original Post

Utility ETFs Slide On Weaker-Than-Expected Q3 Earnings

The utility sector disappointed in its third-quarter results over the last two weeks with earnings and revenue miss from some of the major players in the space, including Duke Energy Corporation (NYSE: DUK ), NextEra Energy (NYSE: NEE ) and Dominion Resources Inc. (NYSE: D ). However, a recovering U.S. economy, warmer-than-normal weather and ultra-low interest rates helped boost the top and bottom lines of most of these companies. The latest concern threatening the utility sector is the possibility of an interest rate hike in December by the Fed following stellar jobs report for October and the Fed Chair Janet Yellen’s affirmative stance on it. This high-yielding, capital intensive sector mostly resorts to external sources of financing to carry out its generation, distribution and transmission projects. Therefore, a rising interest rate environment certainly does not bode well for them. Below we have highlighted the third-quarter results of the aforementioned utility companies in detail. Duke Energy Duke Energy reported adjusted earnings of $1.47 per share for the quarter that fell short of the Zacks Consensus Estimate of $1.52 by 3.3%. However, quarterly earnings rose 5% year over year on the back of warmer weather compared to the previous year. Further, robust growth in its regulated utilities business as well as the North Carolina Eastern Municipal Power Agency acquisition led to the upside. Total revenue was $6,483 million, lagging the Zacks Consensus Estimate of $6,595 million by 1.7%. Nevertheless, revenues increased 1.4% on a year-over-year basis, driven mainly by rise in the company’s regulated electric unit’s revenues. The company tapered its high end of the earlier 2015 earnings guidance range to $4.55-$4.65 per share from $4.55-$4.75 per share. Shares of the company declined 5.5% (as of November 9, 2015) since its earnings release on November 5. NextEra Energy NextEra Energy’s quarterly adjusted earnings of $1.60 per share missed the Zacks Consensus Estimate of $1.64 by 2.4%. Despite this, earnings climbed 3.2% year over year on the back of higher revenues from Florida Power & Light Company. However, operating revenues of $4,954 million surpassed the Zacks Consensus Estimate by 2.7% and increased 6.5% from the year-ago level. NextEra reaffirmed its 2015 earnings guidance of $5.40-$5.70 per share and expects the figure to come in on the upper end of the range. Meanwhile, earnings per share are expected in a range of 5.85-$6.35 for 2016 and $6.60-$7.10 for 2018. Shares of the company went down nearly 5% since its earnings release on October 28. Dominion Resources Dominion Resources’ quarterly operating earnings of $1.03 per share lagged the Zacks Consensus Estimate of $1.06 by 2.8%. However, earnings increased 10.8% from 93 cents per share in the prior-year quarter due to normal weather and earnings from farmout transactions. The company’s operating revenues of $2,976 million also missed the Zacks Consensus Estimate of $3,181 million by 6.4% and declined about 2.4% year over year. Dominion expects to earn 85 cents to 95 cents per share for the fourth-quarter 2015 compared with 84 cents per share in the year-ago period. The company reaffirmed its 2015 earnings guidance of $3.50 to $3.85 per share. Shares of the company fell 5.2% since its earnings release on November 2. ETFs in Focus The sliding stock prices of these utility companies following the dull third-quarter results have adversely impacted the performance of ETFs with significant exposure to them. Below we have highlighted three of these ETFs, which have lost around 5% in the past two weeks. Investors are advised to exercise caution before investing in these ETFs as the looming rate hike is expected to worsen their performance in the coming days ahead. Utilities Select Sector SPDR (NYSEARCA: XLU ) XLU is one of the most popular in the space with nearly $6.3 billion in AUM and average daily volume of roughly 12.5 million shares. The main purpose of this fund is to provide investment results that correspond to the performance of the Utilities Select Sector Index. This fund holds 29 stocks with NextEra Energy, Duke Energy and Dominion Resources holding the top three spots with a combined exposure of nearly 25% in its assets. The fund charges only 15 bps in investor fees per year and currently carries a Zacks ETF Rank #3 (Hold) with a Medium risk outlook. Vanguard Utilities ETF (NYSEARCA: VPU ) This ETF tracks the MSCI US Investable Market Utilities 25/50 Index, measuring the performance of 81 U.S. utilities stocks as classified under the Global Industry Classification Standard. Duke Energy, NextEra Energy and Dominion Resources occupy the top three positions in the fund with a combined exposure of a little more than 20% in the fund’s assets. The fund has amassed $1.6 billion in its asset base and trades in a moderate volume of 144,000 shares per day. It is even cheaper than XLU with 12 bps in annual fees and carries a Zacks ETF Rank #3 with a Medium risk outlook. iShares Dow Jones US Utilities (NYSEARCA: IDU ) The fund follows the Dow Jones U.S. Utilities Sector Index, measuring the performance of 60 utility stocks in the U.S. equity market. Duke Energy, NextEra Energy and Dominion Resources are placed in the top three positions in the fund, together accounting for a share of nearly 21% of the total assets. The fund manages an asset base of around $560 million and exchanges about 182,000 shares per day. It is a bit expensive with 43 bps in annual fees and has a Zacks ETF Rank #3 with a Medium risk outlook. Original Post

A Juicy 5% Yield From Emerging Markets But Be Aware Of The Risks

Summary The SPDR S&P Emerging Markets Dividend ETF has a yield of over 5% but dividend inconsistency and region exposure make it a risky proposition. The fund has sizeable positions in China and Brazil – two areas that have been hotbeds of political turmoil. The fund has underperformed the broad MSCI Emerging Markets index since its inception and an above average beta suggests a fund that comes with risks. Income-seeking investors often look to familiar sectors like financials and utilities to generate a higher yield from their equities. A place that investors may not consider for dividend income is emerging markets but, believe it or not, there are some significant yields in this space. The SPDR S&P Emerging Markets Dividend ETF (NYSEARCA: EDIV ) has been around for over four years and boasts a little over $300M in assets. Since its inception, the fund has trailed the iShares MSCI Emerging Markets ETF (NYSEARCA: EEM ) and one of its larger competitors, the WisdomTree Emerging Markets Equity Income ETF (NYSEARCA: DEM ) on a total return basis. EDIV Total Return Price data by YCharts The 5% yield is no doubt tantalizing but it’s important to recognize how that dividend is achieved and how much risk is involved in obtaining it. Not surprisingly, the fund has performed poorly as emerging markets have been hammered over the last year or more. The fund is down a total of 24% over the past one-year period and 35% since inception. The fund is fairly well diversified across the broad economy. The fund has 5% or higher allocations to eight different sectors with communications and technology stocks accounting for roughly 40% of total fund assets. More conservative areas like financials, industrials and basic materials count 30% of the portfolio bringing overall portfolio risk down although a 3 year beta of 1.16 suggests a more aggressive portfolio when compared to emerging markets overall. While ETF Database indicates this portfolio has one-third of its assets in “developed” markets, a look at the fund’s country and region allocation shows its exposure to primarily less developed and risky markets. China (10% of fund assets) for all of the volatility it has experienced over the past year is actually one of the fund’s better performing regions. Brazil (8%) has been the worst performer among the fund’s larger allocations due to the political unrest resulting from the Dilma Rousseff regime. Other regions like Taiwan (27%), South Africa (14%) and Turkey (9%) are all down double digits in the one-year period. Another risk comes from the quarterly dividend volatility. Income seekers looking for a predictable quarterly dividend should probably look elsewhere. Historically, most of the fund’s annual dividends come in the 2nd and 3rd quarter and trail off to minimal levels in the 1st and 4th quarters. Trailing 12-month dividend yields were down below 4% during the summer of 2014 and have risen to their current level of 5.16% thanks in part to the fund’s share price drop. The fund has paid $1.342 per share in dividends over the past four quarters compared to $1.645 per share in the four quarters prior to that. Conclusion This ETF has been able to consistently deliver annualized yields of over 4% but there’s a great deal of volatility involved to get there. Global economic weakness has hit emerging markets hard over the past year and the dividend is just one piece to consider here. The quarterly dividend payments are very inconsistent and the fund has larger exposures to areas with significant political and economic risks. This ETF has a place in a broader portfolio as a smaller high risk high return position but those looking for a predictable income producing investment should probably look elsewhere.