Tag Archives: nasdaq

Is YieldCo Bubble In Trouble? ETF In Focus

When the idea of an “YieldCo” was first introduced in 2012 as an adapted version of a REIT, it looked very impressive and was expected to be a boon for the renewable energy sector (mainly solar and wind). The first YieldCo was Brookfield Renewable Energy Partners LP (NYSE: BEP ), formed by Brookfield Asset Management (NYSE: BAM ). The motive behind launching YieldCos was to help energy companies raise cheaper capital for their renewable energy projects while benefiting investors through higher distributions and yield. These projects are sold by energy companies through “drop down” transactions to publicly traded YieldCos, which develop them and generate stable cash flow by selling electricity under power purchase agreements (“PPAs”) with utilities. YieldCos distribute most of their income or cash flow (about 80%) as dividends to its shareholders, making them an attractive buy. However, the survival of this interesting vehicle of investment has come into question lately owing to a number of adverse developments. Notably, the Indxx Global YieldCo Index plunged 26.6% (as of October 12, 2015) from its mid-April high while many YieldCo stocks are trading in the red. As a result, energy companies like SunEdison, Inc. (NYSE: SUNE ) and NRG Energy, Inc. (NYSE: NRG ) have decided to either hold off selling their projects to YieldCos or pursue a limited strategy with them. Slumping crude oil prices is the primary factor for the underperformance of the renewable energy sector and consequently the YieldCos. Low oil prices reduce the demand for renewable energy. Secondly, China is the leader in the global renewable energy industry. Due to its economic slowdown, the sector outlook looks grim at this moment. Thirdly, the prospect of a near-term interest rate hike by the Fed is having a double whammy effect on YieldCos. Higher interest rates make high-yielding stocks such as YieldCos less attractive. Further, they raise the cost of financing the expansion projects for YieldCos. Lastly, YieldCos need to issue new shares (generally at higher prices than their IPOs) from time to time to raise capital for new investments as most of their cash flow gets wiped out by paying dividends. However, they are facing difficulties on this front due to depressed renewable energy stocks and an oversupply of YieldCos in the market, making investors reluctant to pay higher prices. Keeping in mind the challenging environment, we turn our attention to the recently launched ETF focused on this niche market. Global X YieldCo ETF (NASDAQ: YLCO ) Launched in May this year by Global X, the fund intends to diversify the risk of owning YieldCo stocks by tracking the Indxx Global YieldCo index. The ETF holds 20 securities with Brookfield Renewable Energy Partners, TerraForm Power Inc. (NASDAQ: TERP ) – formerly a SunEdison YieldCo – and NextEra Energy Partners, LP (NYSE: NEP ) – a NextEra Energy, Inc. (NYSE: NEE ) YieldCo – taking up the first, second and third spots with 11.75%, 8.79% and 7.62% share, respectively. The fund is highly concentrated in its top 10 holdings, which account for 68.22% of total assets. It has a global footprint with the U.S. occupying the top spot at 41%, followed by Canada (29%), U.K. (18%) and Spain (12%). YLCO has gathered a meager $3.3 million in assets and trades in a paltry volume of 4,200 shares. It charges 65 bps in annual fees from investors and has a dividend yield of 1.22%. The product was down significantly by 27.4% since its inception (as of October 15, 2015). Although the idea of investing in YieldCos looks tempting at first given its high income nature, lots of public funds pouring into the renewable energy sector and environmentalists pushing for greener energy, investors should exercise caution before hopping onto this ETF, which is thinly traded and focused on the niche market that is not yet developed and presently facing turbulence. Original Post

Inside New Diversified Return U.S. Equity ETF By J.P. Morgan

The global economy is presently caught in a vicious cycle of volatility with the sole star U.S. (in the developed market pack) also finding itself trapped. Instead of leaning on policy tightening, the domestic economy is now backtracking on the issue. This was especially true given the slowing momentum in the labor market and muted inflation. In this backdrop, volatility has taken center stage. Still, several other economic indicators at home are sturdy enough for investors to bet on U.S. stocks. Plus, a dovish Fed eased tensions over the sudden cease or shrinkage in cheap money inflows. All in all, risky assets regained some lost ground but volatility prevailed. Probably keeping this in mind, issuers look to deploy quality factors as much as possible. After all, be it developed economies, emerging nations or commodities and currencies, shocks were felt everywhere. Thanks to this, J.P. Morgan’s new factor-based ETF targeted on the U.S. market – J.P. Morgan Diversified Return U.S. Equity (NYSEARCA: JPUS ) – deserves a detailing. JPUS in Focus The fund looks to track the performance of the Russell 1000 Diversified Factor Index and has exposure to domestic multi-cap stocks. The fund seeks to score high on basic factors like quality and momentum to mitigate risks and tack on capital appreciation. The 561-stock portfolio is equally weighted resulting in minimal company-specific concentration risk. No stock accounts for more than 0.65% of the basket at present. Xcel Energy Inc. (NYSE: XEL ), TECO Energy Inc. (NYSE: TE ) and Henry Schein Inc. (NASDAQ: HSIC ) are the top three holdings. Consumer discretionary (17%), health care (16%), utilities (13%), consumer staples (13%) and technology (12%) get double-digit exposure in the fund. Large caps rule the basket with about 60% focus followed by 35% of assets invested in the mid caps and 5% in the small caps. The fund charges 29 bps in fees. How Will it Fit in a Portfolio? Several academic researches indicated that the risk-adjusted returns from quality stocks outperform the broader market over long term. Thus, this ETF could be an intriguing pick for investors looking to invest in stocks that have high quality and are rich in momentum factors. This way the fund appears to stay afloat in a booming as well as in a volatile market. ETF Competition The craze for smart-beta or high-quality products is high of late especially given the heightened volatility in the market. Issuers are increasingly coming up with multi-factor ETFs, though the space is yet to be jam-packed. However, J.P. Morgan has been quite proactive with this technique and bet on the trend last year with the launch of a global equity ETF (NYSEARCA: JPGE ) which focuses on factors like value, size, momentum and low volatility. State Street is also ramping up its multi-factor lineup. Apart from these, a few products including PowerShares S&P 500 High Quality Portfolio (NYSEARCA: SPHQ ), MSCI USA Quality Factor ETF (NYSEARCA: QUAL ), MSCI USA Value Factor ETF (NYSEARCA: VLUE ) or Arrow QVM Equity Factor ETF (NYSEARCA: QVM ) could put pressure on this new J.P. Morgan ETF. There is also iShares MSCI USA Momentum Factor ETF (NYSEARCA: MTUM ) which is a notable momentum play. Despite these threats, we do not expect J.P. Morgan’s Russell 1000 Diversified Factor ETF to face much problem in garnering assets given a unique index, the strong brand name of the issuer and multi-factor techniques. Within just a few days of its launch, JPUS has accumulated over $10.5 million of assets which gives an idea about its forthcoming success. Original Post