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

Summary The Consumer Discretionary sector ranks fourth in Q4’15. Based on an aggregation of ratings of 17 ETFs and 20 mutual funds. RTH is our top-rated Consumer Discretionary ETF and FSRPX is our top-rated Consumer Discretionary mutual fund. The Consumer Discretionary sector ranks fourth out of the 10 sectors as detailed in our Q4’15 Sector Ratings for ETFs and Mutual Funds report. It gets our Neutral rating, which is based on aggregation of ratings of 17 ETFs and 20 mutual funds in the Consumer Discretionary 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 Consumer Discretionary sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 25 to 391). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Consumer Discretionary sector should buy the one Attractive rated ETF in Figure 1. 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 Retail Portfolio ETF (NYSEARCA: PMR ) and the U.S. Global Jets ETF (NYSEARCA: JETS ) are excluded from Figure 1 because their 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 Rydex Retailing Fund ( RYRIX , RYRAX ) and the Rydex Leisure Fund ( RYLIX , RYLAX ) are excluded from Figure 2 because their total net assets are below $100 million and do not meet our liquidity minimums. The Market Vectors Retail ETF (NYSEARCA: RTH ) is the top-rated Consumer Discretionary ETF and the Fidelity Select Retailing Portfolio (MUTF: FSRPX ) is the top-rated Consumer Discretionary mutual fund. RTH earns our Attractive rating and FSRPX earns our Neutral rating. The SPDR Homebuilders ETF (NYSEARCA: XHB ) is the worst-rated Consumer Discretionary ETF and the Rydex Series Leisure Fund (MUTF: RYLSX ) is the worst-rated Consumer Discretionary mutual fund. XHB earns our Neutral rating and RYLSX earns our Dangerous rating. 450 stocks of the 3000+ we cover are classified as Consumer Discretionary stocks. Twenty-First Century Fox, Inc. (NASDAQ: FOXA ) is one of our favorite stocks held by Consumer Discretionary ETFs and mutual funds and earns our Very Attractive rating. Over the past five years, Twenty-First Century Fox has grown its after-tax operating profit ( NOPAT ) by 5% compounded annually. Twenty-First Century Fox’s return on invested capital ( ROIC ) has risen to 10% from 8% over this same timeframe. Though content creators will always be in demand in the television/movie industry, fears about the future of television viewership have left FOXA undervalued. At its current price of $29/share, FOXA has a price to economic book value ( PEBV ) ratio of 0.9. This ratio implies that Twenty-First Century Fox’s NOPAT will permanently decline by 10%. However, if Twenty-First Century Fox can grow NOPAT by just 5% compounded annually for the next 5 years , the stock today is worth $41/share, a 41% upside. KB Home (NYSE: KBH ) is one of our least favorite stocks held by Consumer Discretionary ETFs and mutual funds and was recently featured as a Danger Zone stock . It earns our Very Dangerous rating. KB Home’s problems are twofold; declining market share/profits and overpriced shares. Despite the housing market improving since 2011, KB Home’s economic earnings have only gotten worse over this time. However, because GAAP net income does not account for off-balance sheet liabilities and equity capital, KB Home has been able to report growing GAAP EPS. The disconnect between GAAP EPS and economic earnings has left KBH overvalued. To justify its current price of $14/share KB Home’s must grow NOPAT by 18% compounded annually for 13 years . This expectation is rather optimistic given KB Home’s inability to participate in the housing recovery over the past few years, which, as we detail in our Danger Zone report, will not likely continue for much longer. Figures 3 and 4 show the rating landscape of all Consumer Discretionary 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 Disclosure: David Trainer and Blaine Skaggs receive no compensation to write about any specific stock, sector or theme.

QQQ Is Far More Than A Technology-Driven Juggernaut

Summary The truth is that many technology companies have historically picked the NASDAQ exchange as their home base. However, when you dig beneath the surface, this unique group of stocks actually offers far more than just a one-dimensional focus. Over the years, QQQ has evolved to include a broader depth of sector dispersion as market dynamics, M&A activity, and other growing trends have taken hold. The PowerShares QQQ Trust ETF (NASDAQ: QQQ ) is based on the NASDAQ-100 Index, which measures the 100 largest non-financial stocks currently trading on the NASDAQ exchange. Whether by design or practical experience, this index and its affiliated ETF have always been associated with the technology sector. The truth is that many technology companies have historically picked the NASDAQ exchange as their home base. Because QQQ culls its underlying holdings from this pool, there is a natural tendency to be overweight the cream of the crop in the technology field. However, when you dig beneath the surface, this unique group of stocks actually offers far more than just a one-dimensional focus. Over the years, QQQ has evolved to include a broader depth of sector dispersion as market dynamics, M&A activity, and other growing trends have taken hold. Understanding its nuances can unveil attractive characteristics for investors looking to capitalize on a diversified array of top growth stocks . Today’s QQQ The current sector makeup of QQQ is 55% technology, 20% consumer discretionary, 14% healthcare, 7% consumer staples, and a small fraction in industrials. Top holdings in this ETF include: Apple, Inc. (NASDAQ: AAPL ), Microsoft Corp. (NASDAQ: MSFT ), and Amazon.com, Inc. (NASDAQ: AMZN ). Together, these three stocks make up over 25% of the total portfolio, with AAPL garnering 12.65% of the overall weight. Fun fact: According to Wikipedia , AAPL is one of only four original components of the NASDAQ-100 Index since its debut in 1985. The other three are Costco Wholesale Corp. (NASDAQ: COST ), Intel Corp. (NASDAQ: INTC ), and PACCAR, Inc. (NASDAQ: PCAR ). Many of the top stocks in QQQ can be found in specialized sector funds such as the Technology Select Sector SPDR ETF (NYSEARCA: XLK ). However, the real value in this index is its diversification into other realms such as biotechnology, social media, e-commerce, and other consumer-driven themes. Healthcare in particular has been a strong momentum area of the market over the last several years and continues to be a performance differentiator for QQQ. In addition, the underlying holdings in this ETF are not solely U.S.-based stocks. Many publicly-traded international companies such as Baidu, Inc. (NASDAQ: BIDU ) and JD.com, Inc. (NASDAQ: JD ) are represented in the index as well. This broader diversification has prompted QQQ to become one of the top baskets that market experts monitor on a daily basis. To date, this juggernaut has accumulated $39 billion in total assets and charges an expense ratio of 0.20%. While the QQQ expense ratio is slightly higher than an equivalent S&P 500 Index fund, the embedded cost is still in a reasonable realm for a market-cap weighted ETF. How To Use This ETF An ETF like QQQ has many uses within the context of a diversified portfolio . It straddles the line between a low-cost core index fund and a more nuanced tactical position, which makes it a versatile fund for a variety of investor profiles. More aggressive investors with a long-term mindset may be apt to view this ETF as a core holding from which they can own top companies across a variety of growth-oriented themes. This should come with the implicit understanding that QQQ will likely experience periods of heightened volatility versus ETFs that have greater emphasis on defensive areas of the market. On the flip side, this fund can also be used by active investors to tactically overweight a smaller portion of their portfolio towards high momentum stocks. This may include taking advantage of a short-term trading opportunity or simply finding value in the sectors that make up this unique index. Whatever your reason may be for owning this ETF, it should be noted that the underlying holdings are evaluated on an annual basis to stay in line with the index methodology. Stocks that have shrunk in market cap size may be eliminated and others will ultimately take their place. In addition, automatic rebalancing will impact the distribution of assets among the individual stocks in the portfolio. My advice is to thoroughly research these factors and create a sound game plan before implementing this ETF in your own account.

It Is A Good Time To Invest In The YieldCo ETF

Summary The renewable energy market is growing and yieldcos are gaining traction. The Global X YieldCo ETF remains insulated from the Chinese stock market weakness. Better performance than peers. The Global X YieldCo Index ETF (NASDAQ: YLCO ) is an ETF investing in YieldCos. This ETF provides a good chance of increasing investor returns, since it invests in the high yielding yieldcos as their underlying asset. In addition to investing in yieldcos which are considered a less risky way of earning stable dividends, this ETF also provides the benefit of diversification. The renewable energy market is set to grow at a rapid pace and will account for the lion’s share of electricity capacity going forward. YLCO has been battered recently due to a sharp fall in the overall energy sector. This has led to a jump in their yields as prices have declined. After drawing strong investor interest, the situation has reversed with investors shunning these securities. SunEdison (NYSE: SUNE ) which runs 2 yieldcos has said that it will not drop further projects into its yieldcos, given the sharp price erosion. Other companies such as Trina Solar (NYSE: TSL ) have also halted their plans of listing a yieldco. However, my view is that this is a temporary hiccup due to a combination of high exuberance for yieldcos and an overall selloff in energy prices. YLCO is currently trading down 27% since its listing in May 2015. Given the current slump in yieldco prices, I think it should be a good time to build some position in this safe bet. Why you should invest in this YieldCo ETF Underlying assets are yieldcos, which are growing – YieldCos are considered a safe bet given their low risk profile and ability to generate stable and predictable cash flows. They are also less volatile than renewable energy stocks. Even when the entire energy market is going through a severe downturn, I believe yieldcos are a good bet as they should continue paying their dividends since their cash flows are relatively immune from recessions. The growth story is also strong as the renewable energy industry is set to continue over the long term. No exposure to the Chinese market – The Chinese market turmoil has strongly affected the global commodity industry, with many commodity producers trading at multi year lows. There is a fear that the Chinese economy may face a hard landing leading to global slowdown. The global YieldCo ETF does not have any exposure in the Chinese market. The ETF has its maximum exposure in the U.S. market followed by the U.K. These two economies are performing well relative to other regions, such as Japan and Europe. A better shield to downside risks than individual holdings – YLCO has lost 27% since inception. Given below is the YTD performance of some of its top holdings, suggesting the ETF’s performance was better than most of its constituents. % of Holding YieldCos YTD performance 12.45 Brookfield Renewable Energy Partners (NYSE: BEP ) -10% 8.32 Terraform Power (NASDAQ: TERP ) -38% 7.68 NRG Yield Inc (NYSE: NYLD ) -45% 7.36 Nextera Energy Partners (NYSE: NEP ) -27% 6.53 Abengoa Yield (NASDAQ: ABY ) -27% Data as on 13th October’15 closing The renewable Energy Market is booming – There is an increased awareness about the renewable energy usage and its benefits in reducing the effects of global warming. Countries like India have large power deficits and rely on coal for their energy needs. Now these countries are at the forefront of an energy revolution, shifting largely towards solar, wind and other renewable forms of energy for their power needs. The U.S. has also made its stand clear by passing its recent ‘Climate Action Plan’. All of this speaks of a booming renewable energy demand. It is estimated that renewable energy could account for almost 80% of the world’s energy supply within four decades. The market for yieldcos is growing – YieldCos have proven to be a success amongst the shareholders, primarily due to their stable dividend growth and relatively lower risk profile. With the growing renewable energy market, more yieldcos are coming into existence. After the success of SunEdison’s ( SUNE ) Terraform Power, the company has also listed another yieldco specializing in developing economies – Terraform Global (NASDAQ: GLBL ). There was also a joint yieldco by SunPower (NASDAQ: SPWR ) and First Solar (NASDAQ: FSLR ) called 8point3 Energy Partners (NASDAQ: CAFD ). Likewise, Canadian Solar (NASDAQ: CSIQ ) is also thinking of forming a yieldco before year end. Stock performance & Valuation YLCO gave better returns than some of its top holdings, as shown in the table above. The YTD performance was also better than solar ETFs like the Guggenheim Solar ETF (NYSEARCA: TAN ) and the Market Vectors Solar Energy ETF (NYSEARCA: KWT ). The stock is currently trading at ~$11 which is 26% low than its all-time high price. The ETF was listed in May 2015 with an expense ratio of 0.65%. (click to enlarge) Source: Google Finance What could go wrong The energy stocks have taken quite a beating in recent days and yieldcos have not been immune to this fall. The slowdown of the Chinese economy has not only hurt the Chinese energy demand growth, but also the growth in other countries due to secondary indirect effect as their exports to the Chinese economy has declined. As we can see from the graph above, the stock price decline has happened in line and is following the trend in the broader energy market. If conditions get worse, the ETF could also lose more value. The project business is a highly capital intensive business, where developers resort to large amount of debt. Any problems in the sponsor company to honor their debt might lead to a slowdown in the yieldco business. Some of the yieldcos are now adopting a more prudent growth strategy to take into account the market turmoil. Some of the solar companies have also put their plans to do yieldco in cold storage. This might help YLCO as the competition for renewable energy assets will reduce, thereby making existing yieldcos more attractive. Conclusion The current weakness in the energy sector has caused major downturn in the energy sector. I believe this will cause the weaker players to close shop and only good quality stocks would survive. The major advantage of YLCO is that it does not have any exposure in the Chinese market, which is experiencing a major slowdown. Though it will not be totally isolated from the Chinese slowdown effects, it will still not be very drastic. Also the investment case for renewable energy market continues to be strong and YLCO insulates its investors from the volatility of directly investing in this sector. I think this is a good time to build a position in this yieldco ETF. Share this article with a colleague