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Best And Worst Q4’15: Energy ETFs, Mutual Funds And Key Holdings

Summary The Energy sector ranks last in Q4’15. Based on an aggregation of ratings of 21 ETFs and 59 mutual funds. OIH is our top-rated Energy ETF and FSESX is our top-rated Energy mutual fund. The Energy sector ranks last out of the 10 sectors as detailed in our Q4’15 Sector Ratings for ETFs and Mutual Funds report. The Energy sector funds won last place in the prior quarter as well. It gets our Dangerous rating, which is based on aggregation of ratings of 21 ETFs and 59 mutual funds in the Energy sector. See a recap of our Q3’15 Sector Ratings here . Figures 1 and 2 show the five best and worst-rated ETFs and mutual funds in the sector. Not all Energy sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 25 to 150). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Energy sector should buy one of the Attractive-or-better rated ETFs or mutual funds from Figures 1 and 2. Figure 1: ETFs with the Best & Worst Ratings – Top 5 (click to enlarge) * Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings The PowerShares Dynamic Oil Services ETF (NYSEARCA: PXJ ) is excluded from Figure 1 because its total net assets are below $100 million and do not meet our liquidity minimums. Figure 2: Mutual Funds with the Best & Worst Ratings – Top 5 (click to enlarge) * Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings The Van Eck Market Vectors Oil Services ETF (NYSEARCA: OIH ) is the top-rated Energy ETF and the Fidelity Select Energy Service Portfolio (MUTF: FSESX ) is the top-rated Energy mutual fund. OIH earns an Attractive rating while FSESX earns a Neutral rating. The PowerShares DWA Energy Momentum Portfolio ETF (NYSEARCA: PXI ) is the worst-rated Energy ETF and the BP Capital TwinLine Energy Fund (MUTF: BPEAX ) is the worst-rated Energy mutual fund. Both earn a Very Dangerous rating. National Oilwell Varco (NYSE: NOV ) is one of our favorite stocks held by Energy ETFs and mutual funds. It earns our Attractive rating. Over the past four years, National Oilwell has grown after-tax profits ( NOPAT ) by 11% compounded annually. The company earns a return on invested capital ( ROIC ) of 8% and has generated over $1.1 billion in free cash flow on a trailing twelve-month basis. Across the energy industry, share prices have been collapsing over the past year, but National Oilwell’s business does not deserve the decline in its shares. At its current price of $38/share, NOV has a price to economic book value ( PEBV ) ratio of 0.6. This ratio implies that the market expects National Oilwell’s profits to permanently decline by 40% from current levels. If National Oilwell can grow NOPAT by just 1% compounded annually over the next five years , the stock is worth $80/share today – a 110% upside. It’s easy to see just how low the expectations baked into NOV have become. Tesoro Corporation (NYSE: TSO ) is one of our least favorite stocks held by Energy ETFs and mutual funds and earns our Very Dangerous rating. Since 2011, Tesoro’s NOPAT has declined by 1% compounded annually despite the oil industry witnessing high growth rates prior to 2014. Over the same timeframe, Tesoro’s ROIC has fallen to 6% from 12%. Despite the deterioration of the business, TSO has increased nearly 400% since 2011, which has left shares greatly overvalued. To justify its current price of $102/share, Tesoro must grow NOPAT by 10% compounded annually for the next 11 years. This scenario seems rather unlikely given that NOPAT has only declined lately. With such lofty expectations embedded in the stock price, it’s easy to see why Tesoro is one of our least favorite Energy stocks. Figures 3 and 4 show the rating landscape of all Energy ETFs and mutual funds. Figure 3: Separating the Best ETFs From the Worst ETFs (click to enlarge) Sources: New Constructs, LLC and company filings Figure 4: Separating the Best Mutual Funds From the Worst Mutual Funds (click to enlarge) Sources: New Constructs, LLC and company filings D isclosure: David Trainer and Thaxston McKee receive no compensation to write about any specific stock, sector or theme.

During A Period Of Negative Returns, The Dividend And Low Volatility Factors Again Led The Pack In The Third Quarter

Summary Dividend and low volatility factors were the clear winners in the third quarter of 2015, while small-cap, high beta and value factors lagged. Exposure to in-favor consumer discretionary and sectors aided momentum and growth factors throughout much of 2015. Although factors have been shown to outperform the broad market over long periods, they can either underperform or outperform over the short term due to market and economic conditions. High beta, small-cap momentum factors struggle amid corporate earnings concerns By Nick Kalivas In my previous blog, I discussed sector performance thus far in 2015. Here, I’d like to examine the performance of US equities via different investment styles, or “factors,” as they’re known in the world of smart beta investing. Third quarter marked by heightened volatility Factor returns in the third quarter were materially influenced by a correction in equities, which began in earnest after the July 20 market highs. This selloff was sparked in part by the deflation of the Chinese stock market bubble, which generated concerns over global economic growth and prompted many companies to lower their earnings guidance. Corporate profit estimates had already been under pressure through much of 2015 due to the lagged impact of a strong dollar, a drop in commodity prices and inventory overhang. Once earnings estimates were revised, credit spreads widened and market volatility escalated – affecting factor performance. Despite largely negative returns, there was tremendous factor dispersion in the third quarter, with a spread of nearly 15% between the best performing factors – dividend and low volatility, and the worst-performing factor – high beta. Although research has shown that many factors have historically outperformed the broad market across market cycles, the third quarter demonstrated that factors are not immune from short-term volatility. Factor returns – Q3 and YTD 2015 Source: Bloomberg L.P., Sept. 30, 2015. Past performance is no guarantee of future results. An investment cannot be made directly into an index. Factor performance: The good Among the best performing factors in the third quarter of 2015: Dividend growth. Dividend growth, as measured by the NASDAQ Dividend Achievers 50 Index, outperformed the S&P 500 Index by 3.53%. Low volatility. The large-cap S&P 500 Low Volatility Index outpaced the S&P 500 Index by 5.26%, while the S&P MidCap 400 Low Volatility Index outperformed the S&P MidCap 400 Index by 6.62%. A combination of dividend growth and low volatility. This multi-factor strategy, as defined by the S&P 500 Low Volatility High Dividend Index, generated a positive return of 0.36%, besting the S&P 500 Index by 6.80%. Quality. As defined by the S&P 500 High Quality Rankings Index, quality outperformed the broader large-cap market by 2.79%. Also note that large-cap growth stocks outpaced the S&P 500 Index by 2.28%, while large-to-mid-cap momentum stocks lagged the S&P 500 Index by just 0.16%. Both factors benefited from their exposure to the consumer discretionary and health care sectors, which displayed relatively strong earnings growth. Factor performance: The bad Large-cap value strategies, as defined by the Dynamic Large Cap Value Indellidex Index and NASDAQ Buyback Achievers Index, underperformed the S&P 500 Index by 90 to 301 basis points (0.90% to 3.01%) during the third quarter respectively. Within the value universe, buyback – a factor focusing on companies that have shown a propensity to buy back outstanding shares – was the worst performer during the quarter, while fundamental (FTSE RAFI US 1000) fared better. As a whole, value stocks were pressured by low interest rates and the cyclical slowdown in economic growth. Although value stocks often trade below their intrinsic values, they can be influenced by economic cycles and interest rates. Many value names in the financial sector fell victim to cyclical weakness during the third quarter, as evidenced by the deceleration in the Institute for Supply Management’s manufacturing index, which declined from 53.2 in June to 50.2 in September. 2 Factor performance: The ugly The worst performing factors were high beta – comprising stocks sensitive to market movements – small-cap momentum and mid-and-small-cap fundamental. The S&P 500 High Beta Index dropped 14.72% during the third quarter, while the two small-cap indexes were off by more than 10%. Concerns over an inventory correction among technology providers, continued stress in the energy sector and a dimmed profit outlook for industrials sector weighed on high beta names. Generally speaking, small-cap stocks were hurt by increased volatility, a flight to quality and rising credit spreads, although small-cap low-volatility shares fared much better. The performance of small-cap shares can be inversely related to market stress. One of the theories explaining long-term small-cap outperformance rests in investors being compensated for the added risk of owning smaller companies. In periods of risk aversion, however, buyers step away – depressing small-cap stock prices and offering buyers the potential to realize outsized future returns in exchange for taking on more risk. A second theory supporting small-cap returns is rooted in the idea that small companies grow faster than large companies and the general economy. A diminished earnings growth outlook called into questioned the vibrancy of small-cap earnings. Looking ahead Although the fourth quarter is still young, high beta stocks have shown signs of rebounding, buoyed by a recovery in cyclical and commodity shares. Contrarian investors expecting revived aggregate demand might wish to consider small cap, high beta, and value strategies, which have been out of favor for most of 2015. Conversely, those who anticipate ongoing market turbulence may want to evaluate their allocations to low volatility and quality stocks. Of course, please speak with your financial adviser before making any investment decisions. Invesco PowerShares offers a broad lineup of exchange-traded funds that track factor-based indexes. Two that were just launched this month are the PowerShares S&P 500 Value Portfolio (NYSEARCA: SPVU ) and PowerShares S&P 500 Momentum Portfolio (NYSEARCA: SPMO ). For more on factor investing, visit our Factor Investing page. 1 Bloomberg, L.P., Sept. 30, 2015 2 Institute for Supply Management, Oct. 1, 2015 See here for important disclosure information.

Singer Meghan Trainor Knows, It’s All About That Central Bank Stimulus

Just how powerful is the combination of quantitative easing (QE), zero percent rate policy and even negative percent rate policy? Omnipotent. With the recent revelation from the ECB, and the predictable reaction of market participants, is it time to amplify your risk taking? Quite possibly. On the other hand, there are at least two reasons to exercise some restraint. Nearly one-third of S&P 500 corporations have reported earnings and revenue from the third quarter. With 147 companies chiming in, profits are down -0.6% and sales are down -2.7% from a year earlier. One might have thought that several quarters of contraction in earnings and revenue (a.k.a. an “earnings recession” and a “revenue recession”) might have weakened stocks. After all, if robust sales and hearty profits are the primary drivers behind price appreciation for companies in the Dow and the S&P 500, shouldn’t diminishing sales and dwindling profits lead to price drops for the Dow and S&P 500? Welcome to the mixed-up world of centralized bank planning. For example, at a news conference today (10/22/2015), the president of the European Central Bank (ECB) underscored the downside risks to the euro-zone economy. Mario Draghi emphasized everything from the impact of China’s slowdown to the rapid-fire fall in commodity demand. His prescription? More central bank stimulus up-and-above the ECB’s existing bond-buying program and negative interest rate policy. On the news, developed world benchmarks (e.g., Dow, S&P 500, Stoxx Europe 600) surged by more than 1% across the board. Did it matter that Caterpillar (NYSE: CAT ) discussed its expectation for 2016 revenue to collapse by 5% across all of its segments (i.e., transportation, construction, resources)? Nope. Did investors fret 3M’s (NYSE: MMM ) intention to reduce its global workforce by 1500 positions on dismal earnings? Hardly. Investors have come to expect huge rewards for taking risk when central planners engage in extraordinary levels of borrowing cost manipulation. Perhaps ironically, weakness in multinational earnings and revenue simply confirms weakness in the global economy. Indeed, the weaker the results, the greater the likelihood that the ECB will step up its stimulus measures and the greater the probability that the U.S. Federal Reserve will leave 0% lending rates intact. Bad news is good news yet again. Just how powerful is the combination of quantitative easing (QE), zero percent rate policy and even negative percent rate policy? Omnipotent. Take a look at the performance of the Vanguard Total Stock Market ETF (NYSEARCA: VTI ) as it relates to the creation of electronic dollar credits for the purpose of buying debt, or QE. Specifically, in mid-December of 2012, the U.S. Federal Reserve upped its QE3 program to $85 billion per month in the acquisition of U.S. treasuries and mortgage-backed securities. The program began winding down in 2014 during the “Great Taper,” though the final day of the last asset purchase actually occurred in mid-December of 2014. The 2-year performance for VTI? Approximately 52%. Now take a look what happened from the removal of the stimulus “punch bowl” through October 21st of this year. The gains have been so paltry, an all-cash position provided a better risk-adjusted return. With the recent revelation from the ECB, and the predictable reaction of market participants, is it time to amplify your risk taking? Quite possibly. On the other hand, there are at least two reasons to exercise some restraint. First, extreme stock valuations challenge the notion that you should always follow the central banks (e.g., Federal Reserve, European Central Bank, Bank of Japan, Bank of England, etc.). Warren Buffett’s favorite measure of stock valuation, total-market-cap-to-GDP, sits at 117.7%. That is the second highest in history and it is higher than the 2007 peak of 110.7%. Market-cap-to-GDP fell to 62.2% at the 2009 March bottom. In addition to clear concerns regarding fundamental valuation, the most widely regarded technical indicator still points to a long-term downtrend. The S&P 500 has yet to reclaim its 200-day moving average since falling below the level in mid-August. (Note: That might change by the time this article hits the Internet!) Prior to the start of the mid-August correction, our tactical asset allocation moved moderate clients from a 65%-70% equity stake (e.g., domestic, foreign, large, small, etc.) to a 50%-55% equity stake (mostly large-cap domestic). Similarly, we shifted the 30%-35% income allocation (e.g., short, long, investment grade, higher yielding, etc.) to something akin to 20%-25% income (mostly investment grade). The aim? Reduce exposure to riskier assets and raise cash equivalents to roughly 25% for a future move back into risk assets. Granted, valuations represent a significant concern over the longer-term . This bull market in stocks is unlikely to carry on indefinitely regardless of central bank rate manipulation and monetary stimulus. That said, trendlines and other market internals give us the best indication of near-term risk preferences. It follows that a break above 200-day trendline resistance coupled by continued improvement in credit spreads and advance-decline lines would be a reason to put some capital back to work. Where might I add some risk? At present, our equity holdings include funds like the iShares MSCI USA Minimum Volatility ETF (NYSEARCA: USMV ), the Vanguard Mid-Cap Value ETF (NYSEARCA: VOE ) and the Vanguard High Dividend Yield ETF (NYSEARCA: VYM ). Certain sector funds that have already reestablished respective uptrends – The Technology Select Sector SPDR ETF (NYSEARCA: XLK ), the Consumer Staples Select Sector SPDR ETF (NYSEARCA: XLP ) and the Vanguard REIT Index ETF (NYSEARCA: VNQ ) – are funds on my radar screen. By the same token, investors may wish to hedge against a longer-term bearish turn of events. The ECB’s comments this morning did not just create demand for “risk-on” assets; that is, “risk-off” assets are holding their own. German bunds catapulted higher on Draghi’s comments. The U.S. dollar via the PowerShares DB USD Bullish ETF (NYSEARCA: UUP ) skyrocketed. And risk-off treasuries at the long-end of the curve also gained ground. In fact, a second-half-of-the-year comparison between the FTSE Multi-Asset Stock Hedge Index (a.k.a. “MASH”) and the S&P 500 shows the value of multi-asset stock hedging. Components of “MASH” include zero-coupons, TIPS, munis, long-dated treasury bonds, gold, German bunds, Japanese government bonds, the yen, the dollar and the Swiss franc. Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. 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