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Better-Than-Expected Q3 Earnings Lift Industrial ETFs

Despite global growth slowdown, most of the major industrial players managed to beat earnings estimates in the past one week. This along with better-than-expected U.S. jobless claims and dovish comments from the European Central Bank President Mario Draghi has led the Dow Jones Industrial Average to record its best point and percentage gain in yesterday’s (October 22, 2015) trading session since September 8. However, revenue weakness was widespread among the industrial players. The blame goes largely to the stronger dollar as most of these companies have significant international exposure resulting in an unfavorable currency impact. Industrial Earnings in Focus General Electric Company (NYSE: GE ) Diversified industrial conglomerate General Electric posted stellar third quarter performance as it was able to surpass expectations for both earnings and revenues. The company’s operating earnings rose year over year to $3.3 billion or 32 cents a share in the quarter owing to stringent cost-cutting and simplification initiatives. Operating earnings exceeded the Zacks Consensus Estimate by 6 cents (read: Industrial ETFs in Focus on GE Restructuring Plans ). Revenues fell slightly to $31,680 million from $32,107 million in the year-earlier quarter due to lower Industrial segment and GE Capital revenues. However, total revenue topped the Zacks Consensus Estimate of $28,666 million. Organic revenue growth for the Industrial segment was 4% for the quarter. Shares of GE rose 2.6% since its earnings release on October 16 (as of October 22, 2015) (read: 3 Industrial ETFs to Play on GE Q3 Earnings Beat ). 3M Company (NYSE: MMM ) Another major conglomerate, 3M Company reported earnings of $2.05 per share for third-quarter 2015, beating the Zacks Consensus Estimate of $2.01 and increasing 3.5% year over year. The decline in shares outstanding for the latest quarter boosted earnings per share Net sales during the quarter were $7,712 million, down 5.2% year over year and short of the Zacks Consensus Estimate of $7,895 million. The year-over-year decrease in sales was largely due to a significant negative foreign currency translation impact. However, the company achieved organic local-currency sales growth of 1.2%. 3M shares went up 4.1% in yesterday’s trading session post earnings release. Honeywell International Inc. (NYSE: HON ) Honeywell International’s adjusted earnings per share escalated 9.8% to $1.57 in the reported quarter, beating the Zacks Consensus Estimate of $1.55. The uptick in earnings was driven by improved cost management and margins. Revenues in third-quarter 2015 decreased 5% year over year to $9,611 million, missing the Zacks Consensus Estimate of $9,884 million. The decrease in revenues was due to the unfavorable foreign currency impact and divestiture of Friction Material. However, Honeywell delivered 1% core organic sales growth. Shares of the company rose 3.8% since its earnings release on October 16. Caterpillar Inc. (NYSE: CAT ) Mining and equipment behemoth Caterpillar posted disappointing results compared to its peers. The company’s third-quarter 2015 adjusted earnings plunged 56% to 75 cents per share, reflecting the ongoing weakness in mining and oil and gas industries. Earnings, however, came in line with the Zacks Consensus Estimate. Revenues declined 19% year over year to $10.96 billion in the quarter, failing to match the Zacks Consensus Estimate of $11.11 billion due to the unfavorable currency impact along with lower volumes. Nevertheless, shares of Caterpillar rose 2.9% following the earnings release in yesterday’s trading session. Union Pacific Corporation (NYSE: UNP ) The rail transportation operator, Union Pacific reported third-quarter 2015 earnings of $1.50 per share, which came in well above the Zacks Consensus Estimate of $1.43. Earnings, however, declined 2% on a year-over-year basis. Revenues decreased 10% year over year to $5.56 billion in the third quarter, falling short of the Zacks Consensus Estimate of $5.65 billion. A 10% decline in freight revenues hurt the top line. Further, declining coal shipments weighed on the railroad operator’s results yet again. However, shares of the company rose 3.8% following its results in yesterday’s trading session. ETF Impact The upward movement in major industrial stocks caused the shares of industrial ETFs to trade in the green in the past five days (as of October 22, 2015). Below we discuss three of these ETFs having a sizeable exposure to the above stocks. The Industrial Select Sector SPDR ETF (NYSEARCA: XLI ) This product provides exposure to 66 industrial stocks by tracking the Industrial Select Sector Index. General Electric occupies the top spot with 11.5% allocation, while 3M, Caterpillar, Honeywell and Union Pacific have a combined exposure of roughly 16.7% in the fund. XLI has garnered $7 billion in assets and trades in a heavy volume of 10.9 million shares per day. It has a low expense ratio of 0.15%. The product gained 3.4% in the past five days and currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook. The Vanguard Industrials ETF (NYSEARCA: VIS ) This fund follows the MSCI US IMI Industrials 25/50 index and holds about 345 securities in its basket. Of these firms, GE occupies the top position with 11.5% share, while 3M, Honeywell and Union Pacific together comprise 10.8% of the fund’s assets. The fund manages nearly $2 billion in its asset base and charges only 12 bps in annual fees. Volume is moderate as it exchanges roughly 105,000 shares a day on average. The product returned 2.6% in the past five days and currently has a Zacks ETF Rank #3 with a Medium risk outlook. The iShares U.S. Industrials ETF (NYSEARCA: IYJ ) IYJ tracks the Dow Jones U.S. Industrials Index to provide exposure to 213 U.S. companies that produce goods used in construction and manufacturing. General Electric occupies the top spot in the fund with 11.4% share while 3M, Caterpillar, Honeywell and Union Pacific have a combined exposure of roughly 11.5%. The ETF manages an asset base of $587 million and trades in an average volume of 82,000 shares. The fund is slightly expensive with 43 basis points as fees. It rose 2.5% in the last five days and currently has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook. Link to the original post on Zacks.com

Lipper U.S. Fund Flows: Risk-On Despite Uncertainties

By Tom Roseen During the fund-flows week ended October 21, 2015, investors pushed the markets back and forth without strong conviction either way. Third quarter earnings news was hit and miss, with growth fears at the back of investors’ minds. Mixed economic reports kept many on the sidelines, with the Federal Reserve’s Beige Book and the October Philadelphia Fed manufacturing index magnifying fears about the economic recovery. Offsetting those worries during the week, the number people applying for first-time jobless benefits fell for the most recent week, coming in below expectations. Gains in defensive sectors during the flows week helped prop up the major indices to highs not seen since August, sending them to their third straight week (Friday to Friday) of gains. The Shanghai composite posted a 6.5% weekly return as some investors looked to Beijing to continue to provide more stimuli to the Chinese economy. Nonetheless, expectations of a slowing global economy kept oil prices in the cellar. On Monday, October 19, global markets reacted cautiously to news that Chinese economic growth slowed to 6.9% for Q3, beating expectations but missing Beijing’s target. The reported slowdown in fixed-asset investments and industrial production weighed heavily on the price of oil, pushing it down to $45.89 per barrel. This sharp decline pressured oil stocks as well. Despite reports coming out during the latter portion of the flows week of a jump in home builder confidence in October and housing starts being near eight-year highs, mixed corporate results, China’s slowing growth, the EIA’s report of a big jump in crude oil supplies, and the Fed’s inaction kept some investors wary. Nonetheless, investors were net purchases of fund assets (including those of conventional funds and exchange-traded funds (ETFs), injecting a net $6.3 billion for the fund-flows week ended October 21, 2015. Investors turned their back on money market funds, redeeming $2.6 billion for the week, but they were net purchasers of the other three fund macro-groups, injecting some $4.4 billion into taxable bond funds, $4.3 billion into equity funds, and $0.2 billion into municipal bond funds for the week. For the second week in a row equity ETFs witnessed net inflows, taking in $4.5 billion. Despite continued concerns about the Q3 earnings season, authorized participants (APs) were net purchasers of domestic equity ETFs (+$3.2 billion), injecting money into the group for a second consecutive week. They also padded the coffers of nondomestic equity ETFs (to the tune of +$1.3 billion) for the sixth week running. As a result of the relative increase in risk-seeking behavior at the beginning of the week, APs turned their attention to a broad spectrum of domestic equity offerings, with the iShares Russell 2000 ETF (NYSEARCA: IWM ) (+$0.6 billion), the SPDR S&P MidCap 400 ETF (NYSEARCA: MDY ) (+$0.4 billion), and surprisingly-given the slide in oil prices for the week – the Energy Select Sector SPDR ETF (NYSEARCA: XLE ) (+$0.4 billion) attracting the largest amounts of net new money of all individual domestic equity ETFs. At the other end of the spectrum the SPDR S&P 500 ETF (NYSEARCA: SPY ) (-$424 million) experienced the largest net redemptions, while the Industrial Select Sector SPDR ETF (NYSEARCA: XLI ) (-$423 billion) suffered the second largest redemptions for the week. Once again, in contrast to equity ETF investors, for the fourth week in a row conventional fund (ex-ETF) investors were net redeemers of equity funds, redeeming $0.2 billion from the group. Domestic equity funds, handing back $0.8 billion, witnessed their fourth consecutive week of net outflows. Meanwhile, their nondomestic equity fund counterparts witnessed $646 million of net inflows-attracting money for the first week in four. On the domestic side investors lightened up on equity income funds and real estate funds, redeeming a net $0.9 billion and $0.3 billion, respectively, for the week. On the nondomestic side international equity funds witnessed $0.6 billion of net inflows, while emerging market equity funds handed back some $187 million. For the second consecutive week taxable bond funds (ex-ETFs) witnessed net inflows, taking in a little less than $2.3 billion for the week, for their second largest weekly inflows since the week ended May 20, 2015. Corporate investment-grade debt funds suffered the largest redemptions for the week, witnessing net outflows of $0.8 billion (for their thirteenth consecutive week of redemptions), while corporate high-yield funds attracted the largest net new money for the week, taking in $2.3 million (their third largest weekly net inflows on record). For the third week in a row municipal bond funds (ex-ETFs) witnessed net inflows, taking in $148 million this past week.

The Global X SuperDividend ETF Illustrates The Risks That Come With Yield Chasing

Summary The SuperDividend U.S. ETF has underperformed considerably this year posting a loss this year of 6.5% compared to a gain 0.6% for the S&P 500. The fund’s yield of over 7% may have been tempting for investors but the fund’s composition showed it took positions in riskier investments to achieve that yield. The fund increased its position in MLPs to around 15% of fund assets at the end of Q2 right around the time when losses in MLPs were accelerating. A heavier allocation to underperforming utility stocks also contributed to the fund’s poor performance. As Treasury yields remain near all time lows and bank products struggling to yield as much as 1%, investors often look to riskier products in search of higher yields. Corporate bonds sport modestly higher yields. That leaves a lot of people turning to much riskier equities for income. The SuperDividend family of ETFs from Global X was created to appeal to investors looking for a high yield product. The Global X SuperDividend ETF (NYSEARCA: DIV ) has been around since the beginning of 2014 tempting investors with yields as high as 6% and currently has a 30 day yield of over 7%. The fund has drawn nearly $300 million in total assets since its inception but some investors are now finding out the hard way that those high yields come with risks. High dividend equity ETFs like the Vanguard High Dividend Yield ETF (NYSEARCA: VYM ) and the iShares Core High Dividend ETF (NYSEARCA: HDV ) have performed roughly on par with the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) year-to-date but DIV has lagged considerably. DIV Total Return Price data by YCharts A big chunk of the blame could come from the composition of the fund itself. The Vanguard and iShares ETFs are well diversified broadly among the major sectors. DIV is much more concentrated. As of 10/23/15, utilities and real estate count for nearly half of the portfolio. Real estate has performed in line with the S&P 500 but utilities have lagged the index by about four percent. DIV Total Return Price data by YCharts The biggest offender however could be MLPs. MLPs have gotten hammered this year as the Alerian MLP Index is down 30% year-to-date. The index’s losses accelerated just as DIV begin piling in. DIV Total Return Price data by YCharts Consider some of the fund’s most recent quarterly fact sheets. The holdings as of the end of the first quarter indicate that about 8% of assets were committed to MLPs At the end of the second quarter, MLPs accounted for over 15% of fund assets. It’s right around this time that you can see losses in the ETF began to accelerate. Even now, taking a look at the fund’s current assets shows that about 12% of the fund is still in MLPs. The Alerian MLP Index’s total return is still sitting over 40% below its high reached in 2014 thanks to the fall in oil and other energy prices. The MLP Index rallied over 20% between the end of September and the middle of October but a chunk of that gain has been given back demonstrating again that some of these high yielding investments aren’t necessarily conservative. Conclusion The moral of the story here is pretty simple. Higher yields usually mean higher risk. As we’ve seen this year, risk isn’t always rewarded as there’s been a pretty sizeable shift out of riskier assets into more conservative investments. But maybe another reason is that the ETF has just plain old performed lousy. The relatively high exposure to MLPs at a time when their value was tanking doesn’t help the fact that year-to-date the ETF has lagged almost every sector that it has a reasonable exposure to. It’s understandable that income seeking investors are looking for ways to improve on the low yields that they’re seeing in just about every other corner of the market. But one of the primary principles of investing is that the chance at higher returns usually only comes when taking on additional risk. Sometimes that risk doesn’t pay off and some investors may be learning that rule the hard way.