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Beat Weak Q1 Earnings With Revenue-Weighted ETFs

The overall Q1 earnings picture looks bleak, with projected earnings growth deep in the negative territory for the fourth consecutive quarter. In fact, the magnitude of negative revisions over the last three months has been the highest among the recent quarters. Q1 earnings are expected to decline 11.1% versus the 6.4% drop in Q4, as per the Zacks Earnings Trend . However, the projected revenue decline of 2.3% for Q1 is much better than the Q4 revenue decline of 6.6%. Against this backdrop, revenue-weighted ETFs will likely take the lead over earnings-weighted strategies and could be the potential outperformer this earnings season. Why Revenue-Weighted ETFs? First, while a series of headwinds have been weighing on the profitability of companies, the depreciation in the dollar could offer some relief to the top line. As such, many companies could come up with an unexpected growth in revenues in their quarterly reports, giving a boost to the revenue-weighted ETFs. Notably, the ICE U.S. Dollar index, a measure of the dollar’s strength against a basket of currencies, fell to the lowest level in nearly eight months. Second, revenue-weighted funds have outperformed the earnings counterparts in both the short and long-term periods, proving the credibility of the superior weighting methodology. This is because revenues are a better indicator of a company’s financial health. The top line is harder to manipulate or alter on a quarter-by-quarter basis, as opposed to earnings, which can easily be fattened using accounting tricks, thereby leading to inaccuracy. The earnings-weighted ETFs do not reflect the true picture of the company and raise the risk in the portfolio. As a result, tilting toward the revenue metric is a more sensible choice. For investors seeking to do this, there is a small lineup of U.S.-focused ETFs that accomplish this task. Below, we have highlighted the funds that could be great choices for investors seeking to make money from the weak earnings season, while at the same time focus on one of the most important aspects of stock investing. RevenueShares Large Cap ETF (NYSEARCA: RWL ) This fund provides exposure to the top revenue-generating companies within the large-cap segment of the broad U.S. stock market. It consists of the same securities as the S&P 500 Index. Holding 500 stocks in its basket, the fund is concentrated on the top firm – Wal-Mart (NYSE: WMT ) – at 4.7% of total assets, while other firms hold no more than 2.4% share. However, the product has a diverse exposure to a number of sectors, with consumer staples, consumer discretionary and financial occupying the top three positions. The ETF has amassed $320.7 million in its asset base and charges 49 bps in annual fees. Volume is light, trading in about 33,000 shares a day. The fund is up 0.8% in the year-to-date time frame. RevenueShares Mid Cap ETF (NYSEARCA: RWK ) This ETF tracks the S&P MidCap 400 Index, providing exposure to the 400 top revenue generators. It is widely spread across components, with none holding more than 3.26% share in the basket. From a sector look, consumer discretionary, industrial and consumer staples take the top three spots with double-digit exposure each. The fund charges 54 bps in fees per year, while it trades in average daily volume of nearly 22,000 shares. It has accumulated $187.7 million in AUM and has added 3.7% so far in the year. RevenueShares Small Cap ETF (NYSEARCA: RWJ ) This fund targets the small-cap segment of the U.S. equity market. It follows the S&P SmallCap 600 Index and holds 600 stocks. RWJ provides a nice balance across a number of components, with each holding less than 2% share in the basket. However, it is slightly tilted toward industrials and the consumer discretionary sector at nearly 22% each, while consumer staples and financials round off the top four. The product has managed assets worth $276.6 million and sees a light volume of about 30,000 shares per day. It charges 54 bps in expense ratio and is up 2.1% year to date. RevenueShares Navellier Overall A-100 ETF (NYSEARCA: RWV ) This ETF is unpopular and illiquid in this space, with AUM of just $7 million and average daily volume of under 1,000 shares. It tracks the Navellier Overall A-100 Index and weighs securities by the top line. The product holds a basket of 100 stocks, which are concentrated on the top 10 holdings at 54.43% of assets. ADRs make up for 23.9% share, while consumer discretionary and consumer staples round off the top three in terms of sector allocation. Unlike the other three, RWV is pretty spread across various market caps, though large caps account for the largest share at 65% of the total. It charges 60 bps in fees per year from investors and gained 0.4% in the year-to-date time frame. Bottom Line Based on the historical performance, the strategy to weigh stocks by revenue seems one of the most effective factors for weighting the index holdings. Though revenue-weighted ETFs cost more, these have the potential to generate higher returns than their earnings counterpart. Original Post

Global Manufacturing Picks Up: ETFs To Watch

The month of March will be remembered for the revival in the manufacturing sector in the world’s two largest economies – the U.S. and China. While a stronger dollar and huge capex cuts by energy companies to fight back the plunge in oil prices hurt the U.S. manufacturing sector, soft demand in the wake of global growth worries can be held responsible for the overall global slowdown. However, things took a turn in March as signs of stabilization showed up. Let’s delve deeper into the data. Finally Chinese Manufacturing in Positive If we talk of manufacturing slowdown, China comes first to mind. But after posting sluggish factory output data since July 2015, the economy posted growth in March. China’s official manufacturing purchasing managers’ index (PMI) came in at 50.2 for March , which beat Reuters’ forecast of 49.3 and February’s reading of 49.0. Any reading at or above 50 suggests expansion in activity. While this official data considers larger companies, another index, namely Caixin Manufacturing PMI, considers smaller or medium-sized companies. Investors should note that the Caixin Manufacturing PMI for March also rose to 49.7 from 48.0 in February, “marking the first increase from the previous month in a year.” Improving Trend in the U.S. A five-month long losing streak also bucked the trend in the U.S. in March. The ISM manufacturing data expanded to 51.8 in March from 49.5 in February buoyed by new orders and increased output. The data came above the Wall Street Journal’s expectation of 50.5. Out of the 18 manufacturing industries, 12 reported expansion in March. What Cooks Up in the Euro Area? Coming to the Eurozone, the Markit Eurozone Manufacturing PMI came in at 51.6 in March 2016, surpassing a preliminary reading of 51.4 and 51.2 recorded in February. The reading also bettered the forecast of 51.4 . All is not well across the globe. But noticeable improvement in the big three gives us reasons to look at the below-mentioned international industrial ETFs. Global – iShares Global Industrials ETF (NYSEARCA: EXI ) The fund looks to track the S&P Global 1200 Industrials Sector Index. The $16.2 million ETF is heavy on the U.S. which takes about 53% of the basket. General Electric (NYSE: GE ) (8.62%), 3M Co. (NYSE: MMM ) (2.93%) and Siemens AG ( OTCPK:SIEGY ) (2.56%) are the top three stocks of the fund. The fund charges 48 bps in fees. It added 0.5% in the last one month (as of April 5, 2016). China – Global X China Industrial ETF (NYSEARCA: CHII ) The Global X China Industrial ETF seeks to provide investment results of the Solactive China Industrials Index. The $3.6 million fund charges 65 bps in fees. This fund is heavy on building and construction (34.4%) and machinery and equipment (31.6%) industries. The fund has exposure to about 40 stocks. CHII added 2.9% in the last one month (as of April 5, 2016). U.S. – Industrial Select Sector SPDR ETF (NYSEARCA: XLI ) This product tracks the Industrial Select Sector Index. General Electric occupies the top spot with an 11.7% allocation, while 3M, Honeywell (NYSE: HON ) and Boeing (NYSE: BA ) have a combined exposure of over 10% in the fund. XLI has garnered $6.65 billion in assets and trades in heavy volume of 13.8 million shares per day. It has a low expense ratio of 0.14%. The fund has the highest exposure to aerospace and defense (25.3%), followed by industrial conglomerates (21.6%). The product gained 2.4% in the last one month (as of April 5, 2016). Original Post

Pain Or Gain Ahead For Bank ETFs?

The going has been tough for bank ETFs for quite some time now mainly due to the twin attacks of a delay in further Fed rate hikes after a liftoff in December and the energy sector lull. Moreover, UBS Group AG’s (NYSE: UBS ) moderate earnings for the fourth quarter of 2015 triggered a sell-off in banking stocks because the bank pointed to several macroeconomic headwinds and geopolitical issues that will bother its operations in the near term. Not only banking stocks, broad-based risk-on sentiments took a backseat in the first quarter of 2016. Now, with the earnings season impending and the broader markets rebounding, albeit slowly, let’s catch a glimpse of the looming headwinds and tailwinds to the banking sector. Headwinds Tightening Yields: The benchmark U.S. 10-year Treasury note yield slipped to 1.76% on April 6, 2016 (down 48 since the start of the year) while the yield on the short-term Treasury note (one year of maturity) fell to 0.55% on the same day (down just 6 bps since the beginning of 2016). The narrowing gap between the short and long-term yields has been a cause of concern for the backing sector (read: Bank ETFs Hurt by the Dovish Fed ). In fact, in early March, the spread between the two-year and 10-year Treasury yields tapered the most since 2009. Narrowing spread between long- and short-term rates hurts net interest margin, which a key metric for the banking sector. Energy Sector Exposure: U.S. banks have significant exposure to the long-ailing energy sector where chances of credit default are higher. In February, the S&P cut its outlook on several regional banks with the highest energy sector exposure citing a likely increase in non-performing assets. Among the biggies, Wells Fargo (NYSE: WFC ) reported around $42 billion oil and gas credit in February. The situation is the same for JPMorgan (NYSE: JPM ), the energy loan of which accounts for 57% of the investment-grade paper. JPMorgan has ‘ set aside $600 million’ for loan losses emanating from the energy, metals and mining sectors. Panama Papers Scandal: The leaked documents from Panama Law firm Mossack Fonseca & Co. revealing global business leaders and officials moving money to international tax havens may take a toll on bank stocks. Banks may now face more stringent scrutiny and litigation issues to arrest means of evading taxes. Tailwinds Increased Activity: Having described the stress situation, we would like to note that fears of a 2008-like recession or financial market crash are perhaps exaggerated. The lower interest rates should boost capital market activities and benefit banks in other ways. After all, bank stocks have gained their lost ground in the U.S. in a rock-bottom interest rate environment (see all Financials ETFs here). Compelling Valuation: The finance sector has a current-year P/E of 12.6 times, reflecting a 27.6% discount to the S&P while its next-year P/E stands at 11.5 times, reflecting a 25.3% discount to the S&P 500. Such an intriguing valuation might also help the sector to score gains as and when favorable industry dynamics hit the space. ETF Impact All in all, bank stocks are on the fence with pain and gain on either side, though downside risks look higher at the current level. So, investors seeking a financial sector exposure can have a look at the following ETFs: The PowerShares KBW Bank Portfolio ETF (NYSEARCA: KBWB ) , with considerable exposure to Wells Fargo, JPMorgan and US Bancorp (NYSE: USB ). The fund has a Zacks ETF Rank #3 (Hold) with a High risk outlook. SPDR S&P Bank ETF (NYSEARCA: KBE ) also has similar holdings; but it holds stocks in an equal-weighted manner. No stock accounts for more than 2.19% of the fund and diversifies stock-specific risks pretty well. KBE has a Zacks ETF Rank #3 with a High risk outlook. SPDR S&P Regional Banking ETF (NYSEARCA: KRE ) takes into account companies that do business as regional banks or thrifts. KRE also has a Zacks ETF Rank #3. iShares MSCI Europe Financials Sector Index ETF (NASDAQ: EUFN ) measures the combined equity market performance of the financial sector of developed market countries in Europe. The fund has a Zacks ETF Rank #3. Link to the original post on Zacks.com