Tag Archives: seeking

Does This New Consumer Discretionary ETF Look Promising?

Consumer discretionary is one of the sectors that have delivered commendable performance so far this year. The credit goes to the recovering U.S. economy, cheap gas prices, subdued inflation and prolonged ultra-low interest rates. The recent Fed minutes revealing its reluctance to raise interest rates in the near term should bode well for the sector, at least for the rest of the year. Notably, the most popular consumer discretionary ETF, Consumer Discret Sel Sect SPDR ETF (NYSEARCA: XLY ), returned 7.7% in the year-to-date time frame, while S&P 500 Index lost 2.1% in the same period. Manulife Financial Corp’s (NYSE: MFC ) insurance and investment manager John Hancock has forayed into the ETF world with six multi-factor smart beta offerings. One of them is JHancock Multifactor Cnsmr Discret ETF , trading under the symbol JHMC . The launch of this consumer-discretionary-focused ETF looks to be timely. Smart beta ETFs aim to obtain a return that’s higher than the return of the benchmark index, which is the fund’s alpha. Apart from higher returns, the fund seeks to reduce costs and enhance diversification. They follow a passive management strategy with a tweak in the component weightings unlike traditional, market-cap-weighted index funds. JHMC in Details Like other ETFs of John Hancock, JHMC is also based on the index that is developed by Dimensional Fund Advisors, which will also act as the sub-advisor to the fund. Dimensional is one of the first managers to work on multi-factor and rules-based investing. The index comprises securities in the consumer discretionary sector within the U.S. universe whose market capitalizations are larger than that of the 1001st largest U.S. company. The ETF comprises 154 holdings with Comcast Corporation (NASDAQ: CMCSA ) occupying the top position with 3.52% share, followed by Amazon.com, Inc. (NASDAQ: AMZN ) with 3.45% share and Home Depot, Inc. (NYSE: HD ) with 3.22% share. The top 10 holdings constitute around 23.96% of the fund. As far as sector allocation is concerned, media takes the top spot with 22.38% allocation, followed by specialty retail, and hotels, restaurants and leisure with 22.32% and 14.66% shares, respectively. The fund is moderately expensive as it charges 50 bps in fees from investors per year. How Does it Fit in a Portfolio? The upbeat September auto sales data triggered optimism in the consumer discretionary sector. U.S. light-vehicle sales increased 15.7% year over year to 1.44 million units in September. Sales on a seasonally adjusted annualized rate (“SAAR”) basis surged to 18.17 million units in the month from 16.53 million units in September 2014. It was the highest SAAR since July 2005. Further, retail sales spending indicates positive consumer sentiment for the sector. Consumer spending accounts for roughly 70% of the economic activity in the U.S. In August, personal spending edged up 0.4% from the prior month, as per the U.S. consumer department. For September, consumer spending is expected to rise as well given higher auto sales and, with the holiday season around the corner, it would likely remain bullish this year. The National Retail Federation predicted that U.S. holiday sales for the last two months of the year will grow 3.7%, higher than the 10-year average of 2.5%. Finally, rising consumer confidence bodes well for the sector. According to the business research group, Conference Board, the consumer confidence index increased to 103 in September after rising to 101.3 in August. The monthly reading was the highest since this January. The bullish trend in consumer spending is not only a positive for the consumer discretionary sector but also for investors interested in this new ETF. ETF Competition Being a smart-beta ETF, JHMC definitely deserves attention. However, there are a number of popular consumer discretionary ETFs that are already on the investors’ tracking list. Among them, the most popular are above mentioned XLY and First Trust Cnsmr Discret AlphaDEX ETF (NYSEARCA: FXD ). XLY tracks the S&P Consumer Discretionary Select Sector Index focusing on companies defined by the S&P 500 Composite Stock Index. The fund’s top ten holdings comprise nearly the same stocks as that of JHMC. It has an impressive asset base of $10.7 billion. On the other hand, FXD follows the StrataQuant Consumer Discretionary Index selecting stocks from the Russell 1000 Index that may generate positive alpha relative to traditional passive style indices. It manages an asset base of $2.4 billion. Both XLY and FXD stand nearly at the same level in terms of yield, with XLY offering 1.4% and FXD offering 0.86%. However, on the cost front, XLY looks very attractive with only 15 bps in fees compared with a much higher annual fee of 70 bps for FXD. Original Post

The Paradox Of Risk: Central Planning Is Linear, Reality Is Non-Linear

You thought it was safe to drive 90 miles an hour on a rain-slicked narrow road while you were tipsy because the airbag would save you, but it still hurts when you crash. I first discussed the Paradox of Risk in August 2008, just before the stock market melted down : The Unintended (Risky) Consequences of “Backstopping” Risk (August 12, 2008). This is the Paradox of Risk: the more risk is apparently lowered, the higher the risk we are willing to accept. I recently covered a related topic, The Dangerous Illusion That Risk Can Be Offloaded Onto Others (October 2, 2015). The paradox is that believing risk has been eliminated leads us to take on insane levels of risk – levels that we would never have accepted before, levels that essentially guarantee our financial destruction. I recently had the opportunity to discuss these topics with Max Keiser: Keiser Report: Global Paradox of Risk (25:40 – I join Max and Stacy in the 2nd half) 1. The Fed Put, the belief that the Federal Reserve will never let stocks decline by more than a few percentage points before it steps in and saves the market from any further decline. 2. The belief that hedges dependent on counterparties paying off when the market craters have effectively transferred risk to others. 3. The belief in Modern Portfolio Management, i.e. that risk can be hedged or reduced to near-zero by diversifying one’s portfolio, investing in assets with low correlation, etc. All of this is nice, but fatally flawed. Max and I discuss the reality that markets are not linear, they are fractal. Central planning is linear, but reality is non-linear. The net result is the Fed can do whatever it wants, whenever it wants, and markets will still crash from time to time. That markets crash is predictable, but not when they crash. I’ve prepared a chart that depicts the downside of the Paradox of Risk: everyone who believes in the Fed Put, hedges or Modern Portfolio Management will view any decline in stocks as temporary. As a result, they won’t sell as markets plummet. When markets finally hit bottom, believers will assure themselves that the Fed is going to push stocks higher any day now, because they have always done so in the past. When central planning efforts to push stocks back up falter, the believers that risk has been banished grow frustrated; come on, Fed, do whatever it takes! Alas, the Fed has done whatever it takes but it has failed to produce the desired effect. Now the market starts another slide to fresh lows, and the believers finally start recognizing that risk has not been disappeared: counterparties start failing, hedges don’t get paid off, and a sense that events are spiraling beyond the control of central planning is spreading. Sorry, believers that risk has been banished: it’s too late, you’re wiped out. You thought it was safe to drive 90 miles an hour on a rain-slicked narrow road while you were tipsy because the airbag would save you, but it still hurts when you crash: Keiser Report: Global Paradox of Risk (video).

Time For Dow ETFs?

Dow Jones Industrial Average has been the worst performing index among the popular trio – S&P 500, Dow and Nasdaq – thanks mainly to a freefall in oil prices and rising rate worries in the U.S. Added to this, fears of a hard landing in China and its ripples throughout the world sent this key index into the correction territory in August. So far this year (as of October 9, 2015), SPDR Dow Jones Industrial Average ETF (NYSEARCA: DIA ) is down about 4%. However, things seemed to have been set right for the Dow Jones lately on the oil price jump and the diminishing prospect of a rate hike this year. Oil prices regained some of the lost ground as the U.S. count of oil and gas drilling rigs slipped to a five-year low. Also, the Energy Information Administration (EIA) expects a remarkable drop in U.S. crude production through the middle of next year before a turnaround in late 2016. Oil output is estimated to fall from 9.2 million barrels per day (bpd) in 2015 to 8.9 million bpd in 2016. Needless to say, the rise in oil prices supported energy stocks greatly in recent sessions. On the other hand, a weak September job data pushed the speculative timeline of the Fed rate lift-off to early next year. After all, the year-to-date monthly pace of job gains now averages 198K and the pace for the last three months is much lower at 167K. This compares with the monthly average of 260K for 2014, hinting at the lost momentum in U.S. economic growth. And the stocks surged in hopes of incessant cheap money flows. Moreover, a soft job report curbed the dollar strength which in turn provided a long-awaited boost to the commodities and material stocks. Though all the major benchmarks are correlated and got the boost they needed in October from the Fed and energy-centric optimism, Dow remained relatively more beaten-down and thus is more prone to a sturdy reversal. If this was not enough, a dovish Fed pushed the interest rates down to a lower territory. This in turn brightened the appeal for more yielding securities. Notably, among the top ETFs, Jones Industrial Average-based DIA yields 2.33% annually (as of October 9, 2015) against the S&P 500-based SPY ‘s 2.02% and Nasdaq-100 based QQQ ‘s 1.08%. Below, we highlight a few Dow Jones-based ETF options which could be intriguing options to play: DIA seeks to match the performance of the Dow Jones Industrial Average Index. The index is price weighted and measures the performance of 30 large cap stocks traded in the U.S. markets. Industrials, Financials, IT, Consumer Discretionary and Health Care all hold double-digit exposure in the fund. However, it is subject to company-specific concentration risks as it invests more than half of its portfolio in the top 10 holdings. This $11.6 billion-fund trades in large volumes of over 5 million shares daily and charges 17 bps in fees. It advanced 4.8% in the last 10 trading sessions (as of October 9, 2015). The fund has a Zacks ETF Rank #3 with a Medium risk outlook. iShares Dow Jones U.S. ETF (NYSEARCA: IYY ) This $941.1 million ETF also tracks the Dow Jones U.S. total market index. This fund has a proportionate exposure in almost all sectors with maximum emphasis on IT (19.77%), Financials (17.47%), Health Care (13.91%), Consumer Discretionary (13.55%), and Industrials (10.66%). Unlike DIA, this 1,280-stock fund invests less than 15% share in the top 10 holdings. IYY charges 20 basis points as fees and added 4.2% in the last 10 trading sessions. ALPS Sector Dividend Dogs ETF (NYSEARCA: SDOG ) This fund applies the ‘Dogs of the Dow Theory’ on a sector-by-sector basis using the S&P 500. This could be easily done by selecting the five highest yielding securities in each of the 10 GICS sectors and equally weighing them. These higher yielding stocks will appreciate in order to bring their yields in line with the market, leading to outsized gains. This approach results in a portfolio of 51 stocks with each security accounting for less than 2.33% of total assets. The fund focuses on yield in the large cap market while giving investors roughly equal exposure to all sectors. SDOG has accumulated $1.1 billion in AUM and trades in good volume of more than 180,000 shares. It charges 40 bps in annual fees and has an annual dividend yield of 3.63%. The ETF was up over 5.9% in the last 10 days. Original Post