Tag Archives: seeking

The Smart Beta Rally That Many Investors Missed In 2015

By Luciano Siracusano, III One of the big trends in the exchange-traded fund (ETF) industry has been this year’s flow of new money into developed world equity ETFs, both unhedged and currency hedged. WisdomTree estimates that nearly $100 billion of this year’s $171 billion in ETF industry inflows cascaded into these funds through the end of October. But the vast majority of assets in international equity ETFs-and the vast majority of net inflows this year-has been concentrated primarily in developed world large-cap strategies. While equity returns for the MSCI Europe and MSCI Japan indexes have, thus far in 2015, exceeded those generated by the S&P 500 Index, the bigger bull market has actually occurred in the smaller-company segment of the developed world. If we look at year-to-date returns through October 30, we can see by how much small-cap indexes have outperformed compared to broad market indexes comprising primarily large-cap companies in Europe, Japan and the developed world. (click to enlarge) For definitions of indexes in the chart, visit our glossary . What’s interesting is that the excess return produced by the small caps compared to their large-cap brethren is not just a 2015 phenomenon. Excess returns have held up over the last year, three years, five years and the better part of the last decade going back to the inception of the WisdomTree Indexes back in May of 2006. When One Compares Returns across Asset Classes, Additional Light Bulbs Light Up The double-digit gains European and Japanese small caps have generated thus far in 2015 have not only surpassed the broad European and Japanese benchmarks (MSCI Europe and MSCI Japan), they have outperformed the major asset classes investors typically tap to construct a globally diversified portfolio: large caps and small caps in the U.S. 1 ; MSCI EAFE Index and MSCI Emerging Markets Index; REITs 2 , U.S. Treasuries, investment-grade and high-yield corporate bonds 3 ; commodities 4 and gold 5 . Moreover, year-to-date in 2015, small caps measured by the WisdomTree Japan SmallCap Dividend Index and the WisdomTree Europe SmallCap Dividend Index outperformed each of the major indexes designed to measure how each smart beta factor is performing: MSCI Momentum, MSCI Quality, MSCI Value, MSCI Low Volatility or MSCI Size. What accounts for the divergence in returns? Part of it can be explained by sector concentrations, country and currency exposure. Another reason: Small-cap stocks are less tied to the global economy and often more sensitive to inflections in local economies. This can be partly explained by the historic tendency of small-company stocks to outperform large caps. This is one of the reasons that back in 2006 WisdomTree became the first ETF manager to launch international small-cap ETFs. At that time, WisdomTree knew that international small caps not only added potential for higher returns compared to large caps but they could also provide diversification benefits to a globally diversified portfolio. Since its inception in 2006, for example, the WisdomTree Japan SmallCap Dividend Index had a correlation of .49 to the S&P 500. Adding components with lower correlations to one’s U.S. equity exposure has the potential to lower the overall volatility of a globally diversified portfolio. Conclusion Because most passive indexes and active international managers tend to concentrate primarily on large-cap stocks, international investors may miss the potential of small-cap companies unless they make a conscious effort to include them in their portfolios. We believe international small-cap exposure can help investors complete their international allocations. Returns this year in Europe, Japan and the developed world add additional real-time evidence to support our thesis. Unless otherwise stated, data sources are Bloomberg and WisdomTree. Sources S&P 500 and Russell 2000 Index. MSCI US REIT Gross Total Return and S&P Global ex-U.S. REIT USD Index. Barclays US Agg Corporate Yield-To-Worst and Barclays U.S. High Yield 2% Issr Cap Yield To Worst. Commodity Research Bureau BLS/US Spot all Commodities Index. Gold Spot Price Index. Important Risks Related to this Article Performance, especially for very short periods, should not be the sole factor in making your investment decision. Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. Investments focusing on certain sectors and/or smaller companies increase their vulnerability to any single economic or regulatory development. Investments in commodities may be affected by overall market movements, changes in interest rates, and other factors, such as weather, disease, embargoes and international economic and political developments. Diversification does not eliminate the risk of experiencing investment losses. Luciano Siracusano, III, Executive Vice President-Head of Sales and Chief Investment Strategist Luciano Siracusano, III has served as our Executive Vice President-Head of Sales and Chief Investment Strategist since March 2011. Prior to serving in those positions, Mr. Siracusano served as our Director of Research from 2001 until October 2008, and as a research analyst and editor of our various media publications from 1999 until 2001. Mr. Siracusano, together with Mr. Steinberg, was responsible for the creation and development of our fundamentally weighted index methodology.

El Paso Electric: The Best Of Both Worlds

El Paso Electric Company has grown its renewable energy portfolio to a well-crafted portfolio aligned with EPA expectations. A high dividend yield with the potential for even higher yields later on give investors a fat dividend check to look forward to. Investors should consider El Paso Electric Company for a two-pronged investment in capital appreciation and capital preservation. After the recent poor performances in the overall stock market, investors are pining for higher returns. But before they run away from the stock market and look for higher returns, they should consider investing in small cap companies in the stock market. As a whole, small cap companies have generated higher returns than mid cap companies or large cap companies, and they have also outmatched various passive indices in return on investment generation as well. This is simply due to the fact that small cap companies have more room for growth than mid or large cap companies, and therefore this extra growth can generate higher returns for investors. Of course, this growth comes with its risks as well. Small cap companies are more likely to go belly up, which is why investors need some method of mitigating the risk involved with investing in small cap companies. One way investors can reduce the risk of investing in small cap companies is through the investing in small cap companies in stable industries. These industries can include industries such as utilities or industrials, given the inelastic demand and high diversification of these industries. The stability of these industries combine with the growth of small cap companies to yield a unique blend of risk and reward. Both capital preservation and capital appreciation are given by this mix, not to mention the steady quarterly paycheck that comes from dividend payouts. One such firms that offers this unique blend is the El Paso Electric Company (NYSE: EE ), a small cap utilities firm engaged in the generation, transmission, and distribution of electricity to a variety of customers in Texas and New Mexico. The Company owns several generation facilities, and it primarily distributes electricity to retail customers. The Company’s ownership interests in these generation facilities provide the Company with a unique blend of investments in various submarkets within the utilities industry, such as nuclear power, natural gas, and other areas of energy. Thus, the Company is well-diversified, providing investors with additional stability. Investors certainly should be pleased with how the Company has done over the years. Capital invested at the onset of calendar year 2011 would have generated a return on investment of about 70% over the course of five years. Although the overall rate of growth is a little slow, the Company’s stock has done nothing but grow steadily over this time period, essentially exchanging rapid, volatile growth for stable growth. Recently, the Company’s shares have begun to trade somewhat sideways as a result of macro instability in the emerging markets, which has affected not just the Company but the overall stock market as well; thus, this stagnation is not Company-specific. From a technical perspective, the 50-day moving average has danced around the 200-day moving average, but both indicators have moved in the positive direction for the past five years in a general manner. Most recently, the 50-day moving average has risen above the 200-day moving average, which could indicate near-term upside as the spread between these two indicators continues to rise. (click to enlarge) Source: Stockcharts.com But it’s not just the technicals that are painting a pretty picture. The Company’s fundamentals are fairly outstanding as well. With a dividend yield of about 3.2%, investors are having the opportunity of substantial capital appreciation (because the Company is a small cap company) as well as the opportunity for a stable, fat dividend check. In fact, the Company plans on growing this dividend yield to about 4 – 6% in the long-term, so investors could see their dividend checks swell even more. Besides this enormous dividend yield (given the Company’s size) and the opportunity for further dividend yield expansion, the Company also has fundamentals that indicate future long-term growth for the Company. In particular, the Company’s energy portfolio will consist of nuclear power, natural gas, and other renewable energy sources. As a result, the Company’s energy portfolio aligns with the interests of the EPA Clean Power Plan (CPP), which could benefit the Company in the long-term if it decides to either keep or grow this particular part of its energy portfolio. Furthermore, while top-line growth and margins have been relatively stagnant, what’s important to keep in mind is the Company’s retained earnings balance, which has steadily risen over the past several fiscal years. The rising retained earnings balance will help buffer dividend payouts, and it will help management reach its goal of a 4 – 6% dividend yield. Overall, we have a small cap utilities company with an extremely high dividend yield and an energy portfolio in-line with what the EPA wants. Investors should consider El Paso Electric Company for a two-pronged investment in capital appreciation and capital preservation.

Is It All Downhill For SLV?

Summary The silver market cooled down in recent weeks. The rise in U.S. treasury yields and stronger U.S. dollar dragged down the price of SLV. The low price of silver didn’t raise the physical demand for silver. The silver market cooled down as the market is slowly adjusting to a possible rate hike by the FOMC in December. The price of the iShares Silver Trust ETF (NYSEARCA: SLV ) dropped by more than 8% since the beginning of the month. The lower price has yet to ramp up the physical demand for silver. The upcoming minutes of the FOMC meeting could revise market expectations with respect to the Fed’s rate decision, which could impact SLV. Even though the recent NFP report was better than expected and led the market to revise up the odds of a hike – the implied probabilities for a December hike grew to 70%; it’s still not a done deal that the Fed will raise rates in December. These odds could come down if the next NFP report in early December disappoints and the growth rate in wages declines again to around 2.2%. And these chances still suggest the market isn’t fully convinced of a rate hike this year. As long as there is uncertainty, the price of SLV is likely to benefit from it. This week, the minutes of the FOMC will be published. Last time, the FOMC issued a hawkish statement, in which it mentioned December as a possible timing to raise interest rates. In recent weeks, the U.S. dollar resumed its upward trend, and medium-term and long-term U.S. treasury yields bounced back. And if the upcoming minutes of the FOMC meeting were to present a hawkish stance, after all occasionally the minutes are revised up to their release, this could further boost the U.S. dollar and treasury yields – trends that are likely to bring down SLV. Another report worth noticing is the U.S. CPI, which will be published on Tuesday. The U.S. core CPI reached 1.9% – close to the Fed’s lower bound inflation target. But the weakness in the energy market could also trickle into the core CPI, resulting in a possible decline in the coming months. If the core CPI were to fall back down to 1.8% or lower, this could reduce the odds of a rate hike and slightly reduce the downward pressure on SLV. But let’s not only dwell on the demand for silver for investment purposes. Has the low price of silver drove up the physical demand for silver? On this front, in the U.S., the leading country in importing silver, the market has also cooled down in the past several months, as indicated in the following chart: Source: Bloomberg and U.S. Mint During the past month and a half, sales of American Eagle Silver reached a monthly average of 3.9 million ounces – nearly 16% lower than in Q3 2015, but 2.3% higher year on year. The amount of silver sold doesn’t seem to be strongly correlated with the monthly changes in the price of silver – the linear correlation is only -0.17. So, even if the price of SLV is expected to come further down, it’s not likely to push the demand for silver in the U.S. much higher. The decline in the price of SLV was inevitable as the Fed moves closer towards raising rates. The recovery of the U.S. dollar and rise in long-term yields have also helped push back down the price of SLV and erased its gains from October. This week’s release of the minutes of the last FOMC meeting could raise the chances of a December rate hike, which could also result in another blow for SLV. In any case, the bearish sentiment for SLV isn’t likely to dissipate anytime soon. For more, please see: Is SLV about to change course?