Tag Archives: seeking-alpha

5 ETFs Up At Least 10% This Year

Volatility has been calling shots in the investing world this year as hard landing fears in China, return of deflationary worries in the Euro zone despite easy policy measures, vulnerable emerging markets, slumping commodities and the nagging hearsay about the timeline of Fed lift-off dampened the risk-on trade sentiments on several occasions. Though the most part of the year saw decent trading, the global market went ballistic in Q3 on the Chinese market crash. Sudden currency devaluation, multi-year low manufacturing data and some failed but desperate policy measures to rein in the slide led the Chinese stocks to hit the dirt in Q3 and see the worst quarter since 2008. Needless to say, such a massacre in the world’s second-largest economy did not spare other risky asset classes. The most key global indices also endured the worst quarter in four years and the leading U.S. indices tasted correction in August. Also, emerging market fund flows are now likely to turn negative this year for the first time since 1988 (read: ETFs to Watch as Emerging Market Asset Outflow Doubles ). Agreed, a dovish September Fed meeting and a soft job report for that month finally pushed back the speculative timeline for the U.S. policy tightening to early next year. This also brought the risk-on sentiment back on the table. Yet it definitely does not ensure seamless trading till the end of the year. These may give enough reasons for investors to panic and look for equity survivors this year. For them, we highlight five ETFs that have gained over 15% so far this year. China – Market Vectors ChinaAMC SME-ChiNext ETF (NYSEARCA: CNXT ) After a lot of tantrums, the China stocks and ETFs finally seem back on track. Compelling valuation after a bloodbath, some decent factory data in September, continued momentum in China’s service sector, persistent rollout of accommodative government measures (though at a petite dose) and an accommodative Fed led this China A-Shares ETF to build up gains in the year-to-date frame. The Zacks Rank #3 (Hold) fund is up over 25% so far this year (as of October 5, 2015) and also added close to 20% in the last one month. However, the point to be noted here is that China investing stands at a critical juncture this year and the economy is far from being steady. So, A-Shares investing needs a strong stomach for risks (read: Correction Seems Over: Time for China ETFs? ). Long/Short – QuantShares U.S. Market Neutral Momentum Fund (NYSEARCA: MOM ) Since volatility has been at its height so far this year, this long/short ETF had to emerge as the winner. The underlying index of the fund is equal weighted, dollar neutral and sector neutral. The index takes the highest momentum stocks into account as long positions and the lowest momentum stocks as short positions. MOM is up 20.8% this year and gained 3.3% in the last one-month period. With volatility refusing to backtrack even in Q4 on global growth issues, MOM is likely to prevail ahead (read: 3 Hit and Flop Zones of Q3 and Their ETFs ). Japan – WisdomTree Japan Hedged Health Care ETF (NYSEARCA: DXJH ) Since the Japanese economy shrank 0.3% in the second quarter of 2015, marking the first contraction since the third quarter of 2014, and the third quarter output is also seemingly flat; hopes for further policy easing are doing rounds. The Japanese economy is already undergoing a gigantic stimulus measure. Thus, hopes for further easing amid a slowing economy gave the justified boost to this currency-hedged ETF. DXJH is up about 21% so far this year (as of October 5, 2015). However, the product was flat in the last one-month period. The fund has a Zacks ETF Rank #1 (Strong Buy). Denmark – i Shares MSCI Denmark Capped Investable Market Index ETF (BATS: EDEN ) The Danish economy expanded 0.2% in Q2 and carried on the longest stretch of incessant growth in 25 years. Moreover, the economy wiped out fears of a lull in Q2. All these stirred optimism around the nation. This Zacks ETF Rank #3 fund has added over 17% in the year-to-date frame and gained about 2% in the last one month. Internet – First Trust Dow Jones Internet ETF (NYSEARCA: FDN ) This branch of the U.S. technology sector has been a smart survivor in the recent global market sell-off. The usage of Internet has been gaining popularity. While its surge has saturated in the developed economies, scope for growth is huge in the emerging markets. Investors should also note that tech stocks normally perform better in the final quarter of the year. Thanks to this burgeoning trend, this Internet ETF has advanced 13.7% this year and added 4.7% in the last one month. The fund has a Zacks ETF Rank #2 (Buy). Link to the original post on Zacks.com

Notes On The SEC’s Proposal On Mutual Fund Liquidity

I’m still working through the SEC’s proposal on Mutual Fund Liquidity, which I mentioned at the end of this article : Q: Are you going to write anything regarding the SEC’s proposal on open end mutual funds and ETFs regarding liquidity ? A: …my main question to myself is whether I have enough time to do it justice. There’s their white paper on liquidity and mutual funds . The proposed rule is a monster at 415 pages , and I may have better things to do. If I do anything with it, you’ll see it here first. These are just notes on the proposal so far. Here goes: 1) It’s a solution in search of a problem. After the financial crisis, regulators got one message strongly – focus on liquidity. Good point with respect to banks and other depositary financials, useless with respect to everything else. Insurers and asset managers pose no systemic risk, unless like AIG they have a derivatives counterparty. Even money market funds weren’t that big of a problem – halt withdrawals for a short amount of time, and hand out losses to withdrawing unitholders. The problem the SEC is trying to deal with seems to be that in a crisis, mutual fund holders who do not sell lose value from those who are selling because the Net Asset Value at the end of the day does not go low enough. In the short run, mutual fund managers tend to sell liquid assets when redemptions are spiking; the prices of illiquid assets don’t move as much as they should, and so the NAV is artificially high post-redemptions, until the prices of illiquid assets adjust. The proposal allows for “swing pricing.” From the SEC release : The Commission will consider proposed amendments to Investment Company Act rule 22c-1 that would permit, but not require, open-end funds (except money market funds or ETFs) to use “swing pricing.” Swing pricing is the process of reflecting in a fund’s NAV the costs associated with shareholders’ trading activity in order to pass those costs on to the purchasing and redeeming shareholders. It is designed to protect existing shareholders from dilution associated with shareholder purchases and redemptions and would be another tool to help funds manage liquidity risks. Pooled investment vehicles in certain foreign jurisdictions currently use forms of swing pricing. A fund that chooses to use swing pricing would reflect in its NAV a specified amount, the swing factor, once the level of net purchases into or net redemptions from the fund exceeds a specified percentage of the fund’s NAV known as the swing threshold. The proposed amendments include factors that funds would be required to consider to determine the swing threshold and swing factor, and to annually review the swing threshold. The fund’s board, including the independent directors, would be required to approve the fund’s swing pricing policies and procedures. But there are simpler ways to do this. In the wake of the mutual fund timing scandal, mutual funds were allowed to estimate the NAV to reflect the underlying value of assets that don’t adjust rapidly. This just needs to be followed more aggressively in a crisis, and peg the NAV lower than they otherwise would, for the sake of those that hold on. Perhaps better still would be provisions where exit loads are paid back to the funds, not the fund companies. Those are frequently used for funds where the underlying assets are less liquid. Those would more than compensate for any losses. 2) This disproportionately affects fixed income funds. One size does not fit all here. Fixed income funds already use matrix pricing extensively – the NAV is always an estimate because not only do the grand majority of fixed income instruments not trade each day, most of them do not have anyone publicly posting a bid or ask. In order to get a decent yield, you have to accept some amount of lesser liquidity. Do you want to force bond managers to start buying instruments that are nominally more liquid, but carry more risk of loss? Dividend-paying common stocks are more liquid than bonds, but it is far easier to lose money in stocks than in bonds. Liquidity risk in bonds is important, but it is not the only risk that managers face. it should not be made a high priority relative to credit or interest rate risks. 3) One could argue that every order affects market pricing – nothing is truly liquid. The calculations behind the analyses will be fraught with unprovable assumptions, and merely replace a known risk with an unknown risk. 4) Liquidity is not as constant as you might imagine. Raising your bid to buy, or lowering your ask to sell are normal activities. Particularly with illiquid stocks and bonds, volume only picks up when someone arrives wanting to buy or sell, and then the rest of the holders and potential holders react to what he wants to do. It is very easy to underestimate the amount of potential liquidity in a given asset. As with any asset, it comes at a cost. I spent a lot of time trading illiquid bonds. If I liked the creditworthiness, during times of market stress, I would buy bonds that others wanted to get rid of. What surprised me was how easy it was to source the bonds and sell the bonds if you weren’t in a hurry. Just be diffident, say you want to pick up or pose one or two million of par value in the right context, say it to the right broker who knows the bond, and you can begin the negotiation. I actually found it to be a lot of fun, and it made good money for my insurance client. 5) It affects good things about mutual funds. Really, this regulation should have to go through a benefit-cost analysis to show that it does more good than harm. Illiquid assets, properly chosen, can add significant value. As Jason Zweig of the Wall Street Journal said : The bad news is that the new regulations might well make most fund managers even more chicken-hearted than they already are – and a rare few into bigger risk-takers than ever. You want to kill off active managers, or make them even more index-like? This proposal will help do that. 6) Do you want funds to limit their size to comply with the rules, while the fund firm rolls out “clone” fund 2, 3, 4, 5, etc? You will never fully get rid of pricing issues with mutual funds, but the problems are largely self-correcting, and they are not systemic. It would be better if the SEC just withdrew these proposed rules. My guess is that the costs outweigh the benefits, and by a wide margin. Disclosure: None

Exploring The Highest-Yielding, Dividend-Raising Utility

In a screen for the highest-yielding, dividend-raising utility I came across a Houston-based company with a 5%+ dividend yield. This company has provided solid investment results over the past decade. This article looks at what you might expect moving forward based on the company’s commentary. For dividend-oriented investors, David Fish’s list of Dividend Champions, Contenders and Challenges is the place to get your bearings. It’s nice because it provides you with a great subset of the types of securities you might be looking for: companies that have not only paid but also increased their dividend payments for at least 5, 10 and 25 years. Still, there are hundreds of names from which you can explore. As such, it can be helpful to whittle down the list to discover pockets of the investing world one by one. As an example, you might organize the list by utilities and then by “current” dividend yield. Naturally screens come with a bevy of limitations, but for exploration sake they work quite well. If you completed this exercise, you would notice that CenterPoint Energy (NYSE: CNP ) happened to be the highest-yielding, dividend-raising utility. Let’s explore. Tracing its roots back to 1866 , CenterPoint Energy began as the Houston Gas Light Company. Today the company has more than 7,400 employees serving more than 5 million customers. The business operates in four basic areas: natural gas distribution, electric transmission, natural gas sales and heating and cooling services. The largest segment is the Texas utility serving the Houston area, hence the utility category. However, the company also has a 55.4% limited partner interest in Enable Midstream Partners (NYSE: ENBL ), a natural gas and crude oil infrastructure pipeline. Incidentally, this also explains why CenterPoint has an above average yield – even when compared to other utilities. The payout ratio is well above average, and the share price has declined materially during the last year. Let’s take a look at the company’s history moving from 2005 through 2014: CNP Revenue Growth -0.6% Start Profit Margin 2.3% End Profit Margin 6.6% Earnings Growth 11.7% Yearly Share Count 3.7% EPS Growth 8.7% Start P/E 19 End P/E 17 Share Price Growth 6.9% % Of Divs Collected 54% Start Payout % 60% End Payout % 67% Dividend Growth 10.1% Total Return 10.0% The above table demonstrates an interesting story. On the top line the company actually had lower revenues in 2014 as compared to 2005. Yet this alone did not prevent the company from generating solid returns. The quality of those sales improved dramatically, resulting in total earnings growth of nearly 12% per year. Ordinarily this number is boosted by a reduction in share count. In the case of utilities, the opposite usually occurs. CenterPoint Energy has been no exception: increasing its common shares outstanding from about 310 million in 2005 to almost 430 million last year. As such, the earnings-per-share growth trailed total company profitability – leading to almost 9% average annual increases. Investors were willing to pay a lower valuation at the end of the period, resulting in 6.9% yearly capital appreciation. Moreover, investors saw a 3% starting dividend yield grow by 10% annually, resulting in total returns of about 10% per annum. In other words, despite the lack of revenue growth and P/E compression, shareholders still would have enjoyed a solid return. This was a direct result of strong underlying earnings growth and a solid and increasing dividend payment. Moving forward, looking at the investment with a similar lens can be helpful. Since the end of 2014, both the share price and expected earnings have declined materially as a result of the broader energy environment. For this fiscal year the company has provided full-year earnings guidance of $1.00 to $1.10 per diluted share – well below the $1.40 earned last year. Still, the company has indicated that it expects to keep the dividend at its current rate, resulting in a 90%+ payout ratio for the time being (this simultaneously equates to 60% to 70% utility operations payout ratio). Moreover, CenterPoint has indicated that it expects to grow its dividend in-line with EPS growth (forecasted at 4% to 6% annually) through 2018. This isn’t speculation on my part or a collection of analyst’s estimates. Instead, its what the company is telling you to expect. Granted they could certainly turn out to be incorrect, but it should be somewhat reassuring given their greater stakes, more to lose, higher company knowledge, etc. Here’s what the next three years of dividend payments could look like with 5% annual growth: 2016 = $1.04 2017 = $1.09 2018 = $1.15 In total an investor might expect to collect $3.28 in aggregate dividend payments, or roughly 18% of the recent share price. Without any capital appreciation whatsoever, this would equate to 5.6% annualized returns. With a future earnings multiple of say 17, this would equate to a total yearly gain of about 8.9% over the three-year period. This is how I’d begin to think about an investment in CenterPoint Energy. You might perform a similar screen and come across the company. Yet this alone does not mean that it’s a worthwhile opportunity. Just because a company has an above average yield doesn’t mean that it’s a great investment. There are other factors at play. However, it does mean that the “investing bar” is relatively lower. A higher starting dividend yield, especially when coupled with reasonable growth, means that a good portion of your return will be generated via cash received. In this case you could see 5% or 6% annual returns without any capital appreciation. From there, if capital appreciation does come along, your investment returns start to approach the double digits. Finally, it’s important to be prudent in these assumptions as the slower growing nature of the business creates an out-sized emphasis on the valuation paid. You could see years of slow or moderate growth outweighed by compression in the earnings multiple. As such, a cautious approach is likely most sensible: expecting to receive a solid and above average dividend yield without the simultaneous anticipation of wide price swings to the upside.