Tag Archives: seeking-alpha

Top ETF Stories To Watch For In November

The third quarter of 2015 was shockingly downbeat for the broader U.S. market and the global indices with the China-led tumult culminating into a bloodbath in August and September. Needless to say, investors will keenly watch the market movement in the fourth quarter. With the first month of Q4 finally bringing back the strong stretch for the U.S. market, investors must now be hoping for more and seeking to carve out some solid gains. Traditionally, the three months from November through January mark the most successful run of the stock market. A consensus carried out from 1950 to 2014 shows that November ended up offering positive returns in 43 years and negative returns in 22 years, per moneychimp.com . In fact, all the three major indices are now positive from the year-to-date look with the S&P 500 rising 2.5%, Dow Jones Industrials Average gaining over 0.5% and Nasdaq composite climbing 8.6%. With vacations, holiday season buying and seasonal optimism taking charge, investors might reap more returns to close out 2015. However, before riding on the cyclicality, one should not cast out the presently-hot areas of the global investing arena, which will play the kingmakers in November. This is why we highlight the top financial stories and the related ETFs which should be strongly watched this month. Fed Rate Lift-off Talks and Rising U.S. Bond Yields Turning on rounds of hearsay about the lift-off, the Fed brought the December rate hike possibility back on to the table in October end. Yes, the central bank is supportive now, citing a slowing job market, moderating U.S. economic growth and subdued inflation. But it was finally the easing of the upheaval in the global market that led it to mull over policy tightening this year, if possible. Post Fed meeting at October end, investors rapidly shifted their bets with futures contracts entailing a 52% December hike possibility (at the current level) compared with 34% preceding the statement. In anticipation of a faster lift-off, the 10-year Treasury bond yields jumped 18 bps to 2.23% in six days (as of November 3, 2015). The rising yields give cues of the fact that though Q3 U.S. economic growth tallied 1.5 % in Q3, falling short of the 1.6% expectation, investors are hardly paying heed to the soft GDP data, rather wagering on a sooner-than-expected lift-off. As a result, sectors benefitting from higher rates showed strength in recent trading. Financial ETFs like SPDR S&P Regional Banking ETF (NYSEARCA: KRE ) and U.S. dollar ETF PowerShares DB US Dollar Bullish Fund (NYSEARCA: UUP ) performed nicely and could be in watch this month. High Yield Bond ETFs Back into Business After having a troublesome time in the first half of the year, the scope of outperformance for the high-yield bond ETFs is now opening up. Investors seeking to beat the yields provided by the benchmark U.S. treasury bonds might flock to this segment. Corporate bonds are also showing an uptrend on rising issuance. In October, as much as $ 100 billion worth of U.S. corporate bonds were sold. This dynamics in the high-risk fixed-income market should put bonds like BulletShares 2016 High Yield Corporate Bond ETF (NYSEARCA: BSJG ), High Yield Long/Short ETF (NASDAQ: HYLS ) and High Yield Interest Rate Hedged ETF (BATS: HYHG ) in focus. Biotech Bounce The biotech space saw choppy trading in the past few weeks on drug pricing concerns. While the sell-off made the space affordable, a few more days of easy money from the Fed should be supportive of this high-beta sector. Needless to say, the operating fundamentals of the biotech space are stronger than many other sectors. As a result, ETFs like Dynamic Biotech & Genome ETF (NYSEARCA: PBE ), SPDR S&P Biotech ETF (NYSEARCA: XBI ) and ALPS Medical Breakthroughs ETF (NYSEARCA: SBIO ) would be in focus throughout this month. Inside the Chinese Wall Now who can forget China? Surprises and shocks from the world’s second largest economy are rampant these days. In October, China reduced the key interest rates by 25 bps which marked the sixth slash since last November. Apart from these, China enacted a volley of accommodative measures to boost domestic consumption. Of which, scrapping of its long-standing ‘one-child’ policy was eye-catching. Since, the so-far-rolled-out measures to jumpstart the ailing economy went down the drain, investors can very well expect some other stimulus measures this month. Chinese ETFs including Market Vectors ChinaAMC SME-ChiNext ETF (NYSEARCA: CNXT ) and iShares MSCI China Small-Cap ETF (NYSEARCA: ECNS ) are worth a watch. European Delight Though Q3 was patchy for the continent, Q4 has so far been joyous for the European region. No, economic data hasn’t been great; but it is ECB’s promise to beef up the ongoing QE measure (if need be) that has started showering gains on the European stocks and ETFs. As a result, all currency-hedged European ETFs including Europe Hedged SmallCap Equity Fund (NYSEARCA: EUSC ), Europe Hedged Equity Fund (NYSEARCA: HEDJ ) and Currency Hedged MSCI Germany ETF (NYSEARCA: HEWG ) are set for a northbound journey since last month and are likely to top investors’ list in November too. Original Post

Goal-Oriented Investing

By Seth J. Masters How should investors assess the asset-allocation decisions they or their advisors make? In our view, the key benchmark is the investor’s own goals. The display below assesses the success of three plausible asset allocations for meeting the risk and return goals of three different hypothetical investors. Investor A wanted annualized returns greater than 5%, with no peak-to-trough drawdown deeper than 20%. Investor B targeted annualized returns greater than 7%, with no drawdown deeper than 30%. Investor C cared only about achieving a return greater than 7%, with no drawdown constraint at all. The display shows the share of all rolling 10-year periods from January 1976 to June 2015 in which each investor would have achieved his goals through each of three different mixes of global stocks and municipal bonds. The conservative (30% stock/70% bond) allocation would have most often achieved Investor A’s conservative goals, with his lower return objective and tighter drawdown limit. The moderate and growth-oriented portfolios, by contrast, would have repeatedly exceeded his drawdown constraint. The moderate (60/40) portfolio would have most often met Investor B’s goals. And the growth-oriented (80/20) portfolio would have had the greatest success rate in meeting Investor C’s goals. When risk isn’t an issue, stocks are the asset of choice. This display underscores the importance of matching a portfolio’s asset allocation to the investor’s return and risk objectives. Investors who don’t select an asset allocation that fits their objectives are likely to be disappointed. Of course, this illustration covers only simple return and drawdown goals. In most real-world situations, investors also need to take into account their expected cash flows, their tax situation, prevailing market conditions, and a host of other factors. And real-world investors can choose between more than two asset classes. But no matter how complex the objectives an investor seeks, or how diverse his or her asset allocation, we think one simple standard should apply: The asset allocation has to be designed around the investor’s objectives. If not, the investor is unlikely to be satisfied with the plan and unlikely to stick with it. The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Seth Masters, Chief Investment Officer – Bernstein

Valuation Dashboard: Utilities – November 2015

Summary 3 key factors are reported across industries in Utilities. They give a valuation status of industries relative to their history. They give a reference for picking stocks in each industry. This article is part of a series giving a valuation dashboard by sector of companies in the S&P 500 index (NYSEARCA: SPY ). I follow up a certain number of fundamental factors for every sector, and compare them to historical averages. This article is going down at industry level in the GICS classification, and includes also mid and small cap companies. It covers Utilities. The choice of the fundamental ratios has been justified here and here . You can find in this article numbers that may be useful in a top-down approach. There is no analysis of individual stocks. A link to a list of individual stocks to consider is provided at the end. Methodology Three industry factors calculated by portfolio123 are extracted from the database: Price/Earnings (P/E), Price to sales (P/S), Return on Equity (ROE). They are compared with their own historical averages “Avg”. The difference is measured in percentage for valuation ratios and in absolute for ROE, and named “D-xxx” if xxx is the factor’s name (for example D-P/E for price/earnings). The industry factors are proprietary data from the platform. The calculation aims at eliminating extreme values and size biases, which is necessary when going out of a large cap universe. These factors are not representative of capital-weighted indices. They are useful as reference values for picking stocks in an industry, not for ETF investors. The price-to-cash-flow ratio used in my dashboards for other sectors has been eliminated here, because discontinuities and outliers make it often irrelevant in Utilities. Industry valuation table on 11/4/2015 The next table reports the 3 industry factors. For each factor, the next “Avg” column gives its average between January 1999 and October 2015, taken as an arbitrary reference of fair valuation. The next “D-xxx” column is the difference as explained above. So there are 3 columns for each ratio. P/E Avg D- P/E P/S Avg D- P/S ROE Avg D-ROE Electric Utilities 18.13 15.94 -13.74% 1.77 1.22 -45.08% 8.94 10.43 -1.49 Gas Utilities 21.8 17.24 -26.45% 1.46 0.97 -50.52% 10.34 11.49 -1.15 Multi-Utilities 19 16.59 -14.53% 1.67 0.95 -75.79% 10.22 9.48 0.74 Water Utilities 22.89 23.68 3.34% 4.7 3.94 -19.29% 3.5 7.96 -4.46 Ind.Power Prod. & Energy Traders* 34.92 34.9 -0.06% 3.33 4.16 19.95% -4.22 -5.15 0.93 * Averages since 2005 Valuation The following charts give an idea of the current status of industries relative to their historical average. In all cases, the higher the better. Price/Earnings: Price/Sales: Quality (ROE) Relative Momentum The next chart compares the price action of the SPDR Select Sector ETF (NYSEARCA: XLU ) with SPY (chart from freestockcharts.com). (click to enlarge) Conclusion Utilities have played their traditional defensive role during the correction in August, but XLU has slightly underperformed the broad market last 6 months. Looking at the valuation and quality charts above, only one industry looks attractive: Independent Power Producers and Energy Traders. Its industry P/E factor points to a fair pricing, and the 2 other factors are better than their historical averages. At the opposite, Electric and Gas Utilities look the less attractive, the 3 factors being worse than averages. However, there may be quality stocks at a reasonable price in any industry. To check them out, you can compare individual fundamental factors to the industry factors provided in the table. As an example, a list of stocks in Utilities beating their industry factors is provided on this page . If you want to stay informed of my updates, click the “Follow” tab at the top of this article. You can choose the “real-time” option if you want to be instantly notified.