Tag Archives: seeking

5 ETFs Leading The Broad Market Rally

After the worst third-quarter performance in four years, the U.S. stock market showed an impressive comeback to start the new quarter, trumping global growth worries. This is especially true as the S&P 500 index and Dow Jones climbed 7.1% and 6.7%, respectively, in the first few days of the final quarter of 2015. The rally has been broad-based with most of the sectors moving up on subsiding volatility and none of the issues from Q3 currently overwhelming the market. In particular, the rising oil price has fueled optimism into the battered energy sector and a rebound is noticeable in the beaten-down healthcare stocks. Further, China, the major culprit of the market turmoil, is showing signs of stabilization and commodities are surging too. Moreover, the dismal job report for September and the latest Fed minutes suggest that cheap money flows will be in place for longer than expected. This seems good for the stocks as the near-zero rates have allowed the U.S. stock market to complete a spectacular six-year bull-run. If these weren’t enough, the final three months have been the strongest and extremely profitable for investors, if history is any guide. Since 1995, the S&P 500 posted an average gain of 5% , representing the best quarterly return. This is especially true as seasonality drives the stock market higher during this time period given the crucial holiday shopping season and an expected Santa Claus Rally. Though there have been winners in every corner of the space, several ETFs have easily crushed the broad market fund (NYSEARCA: SPY ) by wide margins. Below, we have highlighted five ETFs have been star performers since the start of the fourth quarter and look to offer a broad exposure across a number of sectors. PowerShares S&P 500 High Beta Portfolio (NYSEARCA: SPHB ) This fund tracks the performance of 100 stocks from the S&P 500 Index with the highest realized volatility over the past 12 months. It follows the S&P 500 High Beta Index and has amassed $78.4 million in its asset base. The ETF trades in good volume of more than 132,000 shares a day and charges 0.25% in expense ratio. The product is widely spread out across each security as none of these holds more than 1.75% of total assets. Mid-caps account for 51% of the portfolio, while large caps comprise the remaining. Small caps get just 2%. From a sector look, energy takes the top spot with one-fourth share, closely followed by information technology (18.6%), industrials (16.8%) and consumer discretionary (12.9%). SPHB had a strong run this quarter, gaining near double digits. PowerShares Russell 2000 Equal Weight Portfolio ( EQWS ) This fund provides equal-weight exposure to the small-cap segment of the broad U.S. stock market. It tracks the Russell 2000 Equal Weight Index, holding 1,928 stocks in the basket with each holding less than 0.3% of assets. The product is also widely spread across a number of sectors with industrials, information technology, energy, consumer discretionary and consumer staples taking double-digit allocation each. The ETF is often overlooked by investors as depicted by AUM of $13.5 million and average daily volume of under 1,000 shares. It charges 27 bps in fees per year from investors. The fund gained about 9.7% since the start of the fourth quarter and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a High risk outlook. Guggenheim S&P SmallCap 600 Pure Value ETF (NYSEARCA: RZV ) This fund provides pure exposure to the small-cap value segment of the U.S. equity market by tracking the S&P SmallCap 600 Pure Value Index. It holds 157 stocks in its basket that are widely spread across components with none holding more than 2.0% of total assets. From a sector look, about one-fourth of the portfolio is tilted toward the top sector – industrials – while information technology, consumer discretionary, financials and energy round off the top five. The product has been able to manage $154.7 million in its asset base while trading in a paltry volume of about 14,000 shares a day on average. It charges 35 bps in fees per year from investors and added about 9.5% in the first few trading sessions of the fourth quarter. RZV currently has a Zacks ETF Rank of 3 with a High risk outlook. Direxion Value Line Mid- and Large-Cap High Dividend ETF (NYSEARCA: VLML ) This fund uses a unique strategy to provide investors exposure to the mid and large-cap stocks that are expected to pay above-average dividends. This is easily done by tracking the Value Line Mid- and Large-Cap High Dividend Yield Index, which selects stocks based on the criteria of the four-part Value Line, namely, Timeliness, Performance, Safety Ranks and the Financial Strength Rating. This approach results in a basket of 51 securities, with Archer-Daniels-Midland (NYSE: ADM ), Air Products & Chemicals (NYSE: APD ) and Avery Dennison (NYSE: AVY ) as the top three holdings. The fund is well spread across various sectors with double-digit exposure to industrials, materials, consumer discretionary, technology, financials and energy. It was introduced to the space in March and has accumulated about $4.8 million in AUM. Volume is paltry at about 300 shares a day while expense ratio came in a bit higher at 0.38%, suggesting an extra hidden cost for this fund. VLML is up 9.3% so far this quarter. First Trust Mid Cap Value AlphaDEX Fund (NYSEARCA: FNK ) This product offers exposure to the mid cap value sector of the U.S. equity market and employs the AlphaDEX stock selection methodology to select stocks from the S&P MidCap 400 Value Index. Holding 183 stocks in its basket, the fund provides a nice balance across each sector and securities, preventing heavy concentration. Industrials make up for the top sector at roughly 17.2% share while none of the securities hold more than 1.20% share in the basket. The ETF is relatively unpopular and illiquid in the mid cap space with AUM of $70.4 million and average daily volume of 13,000 shares. It charges a higher 73 bps in annual fees and has gained 8.8% in the same time frame. It has a Zacks ETF Rank of 3 with a Medium risk outlook. Bottom Line Investors should definitely look at these ETFs as these could continue their strong performances heading into the fourth quarter and lead the broad market rally. Original post .

Do Price Targets Matter In Volatile Markets? (And, Why Alpha Theory Should Be A Starting Point Even In Turbulent Times)

This blog was co-authored with Alpha Theory’s Customer Relations Manager, Dana Lambert. “Stock prices will continue to fluctuate – sometimes sharply – and the economy will have its ups and downs. Over time, however, we believe it is highly probable that the sort of businesses we own will continue to increase in value at a satisfactory rate.” – Warren Buffett, famed investor “While many have portrayed the current environment as a highly risky time to invest, these individuals are likely confusing risk with volatility. We believe risk should be determined based on the probability that an investor will incur a permanent loss of capital. As market values have declined substantially, this risk has actually diminished rather than increased. “- Bill Ackman, Pershing Square 3Q08 Investor Letter The recent market environment has proven challenging for many funds, including Alpha Theory clients. The market has been volatile, but the real challenge is directionality. As of September 28, the S&P was down 11% over the prior 49 trading days, with 30 of the 49 days being down. Alpha Theory clients generally benefit from pure volatility (large ups and downs without a direction) because they are buying on dips and selling on rises (mean-reversion). The problem with a uniformly down directional market is that clients are continually getting indications to add to their longs and trim their shorts – the proverbial “catching the falling knife”. Although Alpha Theory cannot overcome persistent negative correlation between scenario estimates and outcomes – in other words inaccurate research – it does offer three options to help clients deal with these circumstances. OPTION #1 – RAISE PREFERRED RETURN. When the price of an asset falls, its probability-weighted return (PWR) rises. When the PWR rises, the normal action is to increase your position size. But when all asset prices fall, all PWRs rise and thus the longs become more attractive and the shorts less so. This suggested increase in long exposure may not be tenable and there may be a general skepticism regarding the price targets. In this situation, a manager can raise the preferred return for longs and thus raise the ‘hurdle rate’ required to be a full position in his or her fund (i.e., before you required only a 40% PWR to be a full position, but in this market environment you require 60%). This will immediately lower long exposure and only suggest adding to the best ideas. In the extreme example of February 2009, clients raised their hurdle rates to 70% or 80% and were able to see quickly numerous compelling ideas and how to shift capital appropriately. OPTION #2 – RELATIVE INDEX ADJUSTMENT. As the market falls, the “market multiple” decreases – which has ripple effects through the price targets in Alpha Theory. For those who cannot re-underwrite all of their targets for the new market paradigm, the application offers an easy-to-use feature called ‘Relative Index Adjustment’. This basically adds back the move of the market to an asset’s expected return, and the following would be an illustrative example. If the market is down 11%, then most assets’ prices will also be down and their suggested position sizes will increase. Now let’s turn on the Relative Index Adjustment. If every asset is down 11%, commensurate with the market move, then Alpha Theory will adjust the prices so that there is no change (-11% Stock Move minus -11% Market Move = 0% change) and thus no suggested change in position size. The beauty of this system is that you can turn it on and off and the Market Move is calculated since the last price target update. So if an analyst updates a price target, the Market Move gets set back to zero because the analyst would take into account the new “market multiple.” OPTION #3 – RE-UNDERWRITE CONSERVATIVE PRICE TARGETS. Fundamental investors recognize that there is no absolute intrinsic value for each asset because their assumptions are subjective. There is, however, a range of assumptions that span from aggressive to conservative. Down markets imply that pushing your assumptions to the conservative end of the spectrum may be appropriate. After doing this, you can see which assets are still suggested buys and which are not. The confidence imbued by using the most conservative assumptions allows you to be aggressive with add and trim decisions. A few views to help isolate where to start the re-underwriting process are: Performance view : shows those assets that have suffered the most on an absolute and relative basis Group by Risk/Reward within 10% : groups the assets that are within 10% of Reward and 10% of Risk targets (click to enlarge) While consideration of the aforementioned steps certainly is appropriate, as you develop conviction about downward directionality for the market, it is also worth noting that volatile markets can often be followed by periods of relative calm and distinct upwardly-biased directionality – and of course this has been the pattern for the past several years now. So where in one week an analyst or PM sees a 1-year target as likely to be unachievable, the next week suddenly the expected return gap narrows considerably. In short, just when you may be losing faith in your targets, they can quickly fall back into an attainable range. Directional markets that move quickly are challenging for many reasons. It is easy to throw up your hands and rationalize that “price targets don’t matter” or “our research is wrong”. It is hard to restrain those emotions and redouble your efforts to find the value that has been exposed in the quick, volatile relocation of asset prices. To do so requires a rigorous, disciplined process that begins with retesting assumptions (i.e., raising return hurdles, adjusting for the market move, and setting more conservative targets). If, after re-underwriting price targets and portfolio inputs, Alpha Theory is still recommending upsizings, then you can feel confident in your actions … even in a volatile, directional market.

Value Seen In Muni Bond Closed-End Funds

Guest Paul Mazzilli, Independent Fund Consultant and Senior Advisor for S-Network Global Indexes, shares his thoughts on the current attractiveness of municipal bond closed-end funds: Their ability to use leverage very effectively. Wide discounts: share price dislocation versus net asset values. The potential impact of the Puerto Rico debt crisis. TOM BUTCHER: I’m here with Paul Mazzilli, Senior Advisor to S-Network Global Indexes. ETF providers often seek to partner with innovative third-party index developers like S-Network. Using his extensive knowledge of the closed-end fund market, Paul was instrumental in the development of the S-Network Municipal Bond Closed-End Fund Index. Paul, why may municipal bond closed-end funds be attractive for investors right now? PAUL MAZZILLI: There are three attractive aspects of municipal closed-end funds, all of which are working together right now. The first, as a closed-end fund, they have a set investment, they’re run by professional managers, and since they don’t have assets coming in and out like an open-end mutual fund, they can buy less-liquid, higher-yielding securities like private placements, non-rated bonds, and they’re not forced to sell bonds when people are seeking out liquidity. The next is a unique aspect of municipal closed-end funds. They have the ability to leverage. When a closed-end fund leverages, it will borrow against its own assets and buy more bonds. Here is a simple example: For a $100 million closed-end fund, the most it’s allowed to borrow is one-third leverage. It can borrow $50 million and buy another $50 million of bonds. The $100 million in assets becomes $150 million invested. If the underlying bonds are yielding 4%, the leveraged fund would yield 6%, approximately, before any incremental costs. You get almost a 50% increase given this ability to leverage one third. The final thing is that after closed-end funds are issued, they trade as stocks in the marketplace. Based on demand and supply, they can trade rich to their value [at a premium], or they can trade cheap to their value [at a discount]. Right now, they’re selling historically cheap at about a 10% average discount. The 25-year average discount is approximately 2%. So when you’re selling at a 10% discount, if you’re buying a dollar of assets for $0.90, if you had an asset yielding 10%, you’re actually getting an 11.1% yield on the money you’re putting up. This fact that they’re trading at a discount is happening right now because investors are fearful of the Fed raising rates. They are fearful of the equity markets, they’ve been raising cash since they’ve traded stocks, they’re selling them, they’re not looking at the underlying value, and it’s created a real buying opportunity. The discount has one other final advantage: If bonds were to sell off, but you’re buying at a 10% discount and it goes to a 5% discount, you actually could have a capital gain, even though the underlying bonds sell off. BUTCHER: Is the prospect of debt restructuring in Puerto Rico going to have any impact on municipal bond closed-end funds? MAZZILLI: Very good question. I think there are two different aspects. First, what does Puerto Rico do to the general municipal bond market? It is a significant issuer. It could have some impact in terms of how bonds trade. I personally believe a lot of that is already reflected in the market. Second is, what does it do to our index of municipal closed-end funds [S-Network Municipal Bond Closed-End Fund Index, CEFMX]? Our index currently has a very low exposure of about 0.43% to Puerto Rico. And that comes from two reasons. One: municipal closed-end funds tend to buy higher-quality funds, which would exclude Puerto Rico right now, or in the past. Two, we buy only national municipal closed-end funds, or our index represents only national municipal closed-end funds. And the national funds buy very little Puerto Rico exposure because they have a lot of other ways to diversify. BUTCHER: Paul, thank you very much for joining me today. MAZZILLI: Thank you. Index returns are not Fund returns and do not reflect any management fees or brokerage expenses. Investors cannot invest directly in the Index. Returns for actual Fund investors may differ from what is shown because of differences in timing, the amount invested and fees and expenses. Index returns assume that dividends have been reinvested. S-Network Municipal Bond Closed-End Fund Index is a rules based index intended to serve as a benchmark for closed-end funds listed in the US that are principally engaged in asset management processes designed to produce federally tax-exempt annual yield.