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ETF Deathwatch For February 2016: Here Come The Currency-Hedged ETFs

Last year, hedging was a popular strategy employed by new ETFs coming to market. I referred to it as a “land rush,” with sponsors throwing caution to the wind in their quest to achieve first-mover status. In my year-end summary , I identified 74 new ETFs following this theme. Of these, 57 have currency hedges, 12 use various equity hedges (mostly long/short portfolios), and five use interest-rate hedging to help mitigate the impact of rising interest rates on bond holdings. With no real investor demand for many of these funds, I predicted many would end up here on ETF Deathwatch. This month, more than half of the 25 products added to ETF Deathwatch are hedged ETFs. Two of the additions are interest-rate hedged, one is an equity-hedged fund, and ten use currency hedging. Additionally, two others are based on currency themes (strong U.S. dollar and weak U.S. dollar), although they do not use any direct currency hedging. At the end of 2015, there were 87 currency-hedged ETFs with a median asset level of just $5.25 million, well below the level required for profitability. If this supply glut wasn’t enough, funds using currency hedging 2.0 are now coming on stream. These second-generation currency-hedged ETFs automatically adjust their currency exposure based on market conditions. This is a feature I believe many investors will appreciate, and it will further reduce demand for funds using the old first-generation static approach to hedging. Thirteen products came off of ETF Deathwatch this month. Nine were the result of improved health, and four are no longer with us. The net increase of 12 puts the total count at 398, consisting of 295 ETFs and 103 ETNs. The average asset level of products on ETF Deathwatch dropped from $6.9 million to $6.3 million, and the quantity of products with less than $2 million jumped from 83 to 91. The average age decreased from 48.8 to 47.8 months, and the number of products more than five years old decreased from 137 to 134.Here is the Complete List of 398 ETFs and ETNs on ETF Deathwatch for February 2016 compiled using the objective ETF Deathwatch Criteria . The 25 ETFs and ETNs added to ETF Deathwatch for February: ALPS Enhanced Put Write Strategy (NYSEARCA: PUTX ) ALPS Sector Leaders (NYSEARCA: SLDR ) ALPS Sector Low Volatility (NYSEARCA: SLOW ) Deutsche X-trackers MSCI ACAP x-Japan Hedged (NYSEARCA: DBAP ) ELEMENTS S&P Commodity Trends Indicator ETN (NYSEARCA: LSC ) ETRACS ISE Exclusively Homebuilders ETN (NYSEARCA: HOMX ) GaveKal Knowledge Leaders Developed World (NYSEARCA: KLDW ) GaveKal Knowledge Leaders Emerging Markets (NYSEARCA: KLEM ) Global X SuperDividend Alternatives (NASDAQ: ALTY ) iShares Currency Hedged MSCI ACWI (NYSEARCA: HACW ) iShares Currency Hedged MSCI ACWI ex U.S. (NYSEARCA: HAWX ) iShares Currency Hedged MSCI Australia (NYSEARCA: HAUD ) iShares Currency Hedged MSCI Canada (NYSEARCA: HEWC ) iShares Currency Hedged MSCI EAFE Small-Cap (NYSEARCA: HSCZ ) iShares Currency Hedged MSCI Mexico (NYSEARCA: HEWW ) iShares Currency Hedged MSCI United Kingdom (NYSEARCA: HEWU ) iShares Interest Rate Hedged 10+ Year Credit Bond (NYSEARCA: CLYH ) iShares Interest Rate Hedged Emerging Market Bond (NYSEARCA: EMBH ) Market Vectors Morningstar International Moat (NYSEARCA: MOTI ) PureFunds ISE Big Data ( BDAT ) SPDR BofA Merrill Lynch Emerging Markets Corp Bond (NYSEARCA: EMCD ) WisdomTree Global ex-U.S. Hedged Dividend (NYSEARCA: DXUS ) WisdomTree International Hedged Equity (HDWM) WisdomTree Strong Dollar U.S. Equity (NYSEARCA: USSD ) WisdomTree Weak Dollar U.S. Equity (NYSEARCA: USWD ) The 9 ETPs removed from ETF Deathwatch due to improved health: Deutsche X-trackers Muni Infrastructure Revenue Bond (NYSEARCA: RVNU ) First Trust International Multi-Asset Diversified Income (NASDAQ: YDIV ) First Trust Low Duration Mortgage Opportunities (NASDAQ: LMBS ) FlexShares Credit-Scored US Corporate Bond (NASDAQ: SKOR ) iShares MSCI International Developed Value Factor (NYSEARCA: IVLU ) Oppenheimer ADR Revenue (NYSEARCA: RTR ) Sit Rising Rate ETF (NYSEARCA: RISE ) SPDR S&P 1500 Momentum Tilt (NYSEARCA: MMTM ) WisdomTree Europe Quality Dividend Growth (NYSEARCA: EUDG ) The 4 ETPs removed from ETF Deathwatch due to delisting: CS X-Links Commodity Benchmark ETN (NYSEARCA: CSCB ) Columbia Large Cap Growth (NYSEARCA: RPX ) Columbia Select Large Cap Growth (NYSEARCA: RWG ) Columbia Select Large Cap Value (NYSEARCA: GVT ) ETF Deathwatch Archives Disclosure: Author has no positions in any of the securities mentioned and no positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) is received from, or on behalf of, any of the companies or ETF sponsors mentioned. Original Post

Best And Worst Q1’16: Industrials ETFs, Mutual Funds And Key Holdings

The Industrials sector ranks second out of the ten sectors as detailed in our Q1’16 Sector Ratings for ETFs and Mutual Funds report. Last quarter , the Industrials sector ranked third. It gets our Neutral rating, which is based on aggregation of ratings of 20 ETFs and 23 mutual funds in the Industrials sector. See a recap of our Q4’15 Sector Ratings here . Figures 1 and 2 show the five best and worst-rated ETFs and mutual funds in the sector. Not all Industrials sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 20 to 348). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Industrials 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 U.S. Global Jets ETF (NYSEARCA: JETS ), the Guggenheim S&P 500 Equal Weight Industrials ETF (NYSEARCA: RGI ), and the Huntington EcoLogical Strategy ETF (NYSEARCA: HECO ) 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 Fidelity Select Environment and Alternative Energy Portfolio (MUTF: FSLEX ) is excluded from Figure 2 because its total net assets are below $100 million and do not meet our liquidity minimums. The iShares Transportation Average ETF (NYSEARCA: IYT ) is the top-rated Industrials ETF and the Fidelity Select Transportation Portfolio (MUTF: FSRFX ) is the top-rated Industrials mutual fund. Both earn a Very Attractive rating. The PowerShares Dynamic Building & Construction Portfolio ETF (NYSEARCA: PKB ) is the worst-rated Industrials ETF and the ICON Industrials Fund (MUTF: ICIAX ) is the worst-rated Industrials mutual fund. PKB earns a Neutral rating and ICIAX earns a Dangerous rating. 409 stocks of the 3000+ we cover are classified as Industrials stocks. Landstar System (NASDAQ: LSTR ) is one of our favorite stocks held by IYT and earns an Attractive rating. Over the past decade, Landstar has grown after-tax profit ( NOPAT ) by 7% compounded annually. LSTR improved its already high 18% return on invested capital ( ROIC ) in 2004 to a top-quintile 22% ROIC on a trailing twelve months basis. Despite the consistent strength in its business, LSTR is undervalued. At its current price of $59/share, LSTR has a price to economic book value ( PEBV ) ratio of 1.1. This ratio means that the market expects Landstar to grow NOPAT by only 10% over its remaining corporate life. If Landstar can continue to grow NOPAT by just 7% compounded annually over the next decade , the stock is worth $72/share today – a 22% upside. Celadon Group (NYSE: CGI ) is one of our least favorite stocks held by Industrials ETFs and mutual funds. Celadon was placed in the Danger Zone in November 2015 and is a competitor to Landstar. Since 2009, Celadon’s reported earnings have been extremely misleading. Despite net income growing from $2 million in 2009 to $37 million in 2015, Celadon’s economic earnings have declined from -$16 million to -$25 million over the same timeframe. The disconnect comes from Celadon’s failed acquisitions, which have helped grow EPS while destroying shareholder value, something known as the high-low fallacy. Even though CGI is down 50% since our initial Danger Zone report, it still remains overvalued. To justify its current price of $9/share, Celadon must grow NOPAT by 8% compounded annually for the next 11 years . While this may not seem like a high rate of profit growth, keep in mind that over the past decade, CGI has only grown NOPAT by 3% compounded annually. Figures 3 and 4 show the rating landscape of all Industrials 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 Kyle Guske II receive no compensation to write about any specific stock, sector or theme. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

The Bright Side Of Volatility

Stock markets around the world have had a bumpy ride so far in 2016. The CBOE Volatility Index (often called the “VIX”), a measure of expected stock market volatility, has doubled since early November , and US stocks have fallen more than 10% since the start of the year. These kinds of changes can be gut-wrenching and can make it difficult to maintain a long-term perspective. But for some investors who are able to do so, there’s a bright side to volatility. If you’re periodically investing money, such as putting a portion of each paycheck into a 401(k) account, volatility isn’t necessarily bad. When markets fall you’re able to acquire more shares, giving you “more bang for your buck.” This concept is similar to ” dollar-cost averaging ,” where the average price you pay for an investment will be less than the average of the prices at each of the times you’re investing (because you’re acquiring more shares when the price is low and fewer shares when the price is high). Compared to if markets just blandly moved in a straight line, the ups and downs allow your periodic investments on average to go farther. Of course, there are a few caveats to this volatility fairy tale. First, it assumes that the market will end up in the same place regardless of how much volatility there is. This assumption is clearly sometimes false; stock markets would almost certainly be higher right now if the beginning of this year had been a paragon of financial tranquility. But over the long term it’s approximately true. Stock prices 20 years from now are unlikely to be massively affected by how much stock market volatility there was in 2016. Second, the potential benefits of volatility only apply if you have a long time horizon for your investments. If instead you need the money in the near future and markets plunge, the fact that you can then get more bang for your buck won’t do much good. Perhaps the most important caveat, however, is that you need to be able to stick to your strategy of periodically putting more money into the market. When the kind of turbulence that’s characterized stock markets this year arrives, it can be tough to invest money knowing that one wild day of market moodiness might eliminate a chunk of it. But those who are able to continue making periodic investments can benefit in the long run.