Long only, value, newsletter provider, registered investment advisor “}); $$(‘#article_top_info .info_content div’)[0].insert({bottom: $(‘mover’)}); } $(‘article_top_info’).addClassName(test_version); } SeekingAlpha.Initializer.onDOMLoad(function(){ setEvents();}); Vahan Janjigian looks for undervalued stocks based on a conservative methodology and shares some stocks he likes now. Share this article with a colleague
After a rough patch in the first few months of the year, the consumer discretionary sector seems back on track. A stronger dollar, a harsh winter and the West coast port congestion took a toll on the performance of these stocks and gave them compelling valuations at the current level. Retail sales saw ” the first quarterly decline in almost three years” in Q1 of this year, per Bloomberg. Though the space kicked off the second quarter on an offhand mood, sales picked up momentum from May. U.S. consumer sentiment, which plunged to a six-month low in May, grew better than expected in June, going by the University of Michigan’s preliminary reading. After all, the sentiment is very strong for both the job and the housing markets, helping many to feel better about their economic situation. With rebounding U.S. economic indicators since the start of the second quarter, cyclical stocks have begun to show signs of life. Consumer stocks, especially those that center on discretionary spending, have since then been riding high. The space is also shaping up nicely for the upcoming earnings season. Total earnings are expected to be up 4.8% on revenue growth of 2.9%. For the full fiscal 2015 and 2016, the sector is likely to exhibit 9.7% and 16.2% gain in earnings on 3.4% and 6.2% revenue expansion respectively, as per Zacks Earnings Trends . To add to this, the Fed struck the space with good luck by promising a slower rate hike trajectory once the step is actually taken, most probably sometime later on in 2015. If this was not enough, the Fed has reduced the long-term rate projections for 2016 and 2017, which in turn, has spread enthusiasm among investors who started to envisage a few more months of easy money inflows. Moreover, a still subdued oil price, which is hovering around $60 per barrel, should continue to add up to consumers’ fuel price savings and encourage consumers to buy more discretionary products and services. Best Plays for Q3 Given these positive developments, a look at some of the top-ranked ETFs in the space could be a good way to target the best of the segment before stepping into Q3. In order to do this, investors can check the Zacks ETF Rank and find the top-ranked consumer discretionary ETFs best suited for their purpose. SPDR S&P Retail ETF (NYSEARCA: XRT ) This product tracks the S&P Retail Select Industry Index, holding 104 securities in its basket. The fund charges 35 bps in fees. It is widely spread across each component, as none of these holds more than 1.16% of total assets. Sector-wise, apparel retail takes the top spot at around one-fourth share, while specialty stores, Internet retail and automotive retail also have double-digit allocation each. XRT is a popular and actively traded ETF in the retail space, with AUM of about $1.31 billion and average daily volume of nearly 2.2 million shares. The fund has a Zacks ETF Rank of 1 (Strong Buy), with a Medium risk outlook and a year-to-date return of about 5%. First Trust Consumer Discretionary AlphaDEX ETF (NYSEARCA: FXD ) This is one of the more popular and liquid ETFs in the consumer space, with AUM of $2.63 billion and an expense ratio of 0.70%. The fund follows an AlphaDEX methodology and ranks the stocks in the space by various growth and value factors, eliminating the bottom-ranked 25% of the stocks. This approach results in a basket of 135 stocks that are invested in various market spectrums. Each security holds not more than 1.47% of assets. Specialty retail is the top sector with about one-fourth allocation, followed by media (13.1%) and household durables (10.6%). The ETF has added more than 4.6% so far this year. FXD has a Zacks ETF Rank #1 with a Medium risk outlook. iShares U.S. Consumer Services ETF (NYSEARCA: IYC ) IYC targets the Dow Jones US Consumer Services Index. The 178-stock fund has accumulated about $1.09 billion in assets. It has moderate company-specific concentration risk, with the top holding, Walt Disney (NYSE: DIS ), accounting for 5.72% share of the basket. The fund charges 43 bps in fees. It has a tilt toward retail (33.03%) and media (26.67%) stocks. So far this year, the fund is up 6.6%, and it has a Zacks ETF Rank #1 with a Medium risk outlook. Original Post
Summary Dividend ETFs may generate attractive yields, but they are exposed to rate-sensitive sectors. Highlight of the First Trust Value Line Dividend Index Fund. Significant utilities sector position is weighing in on performance. By Todd Shriber & Tom Lydon With Treasury yields rising and concerns that the Federal Reserve will boost interest rates in the coming months doing the same, some dividend exchange traded funds are lagging broader benchmarks. That is true of the First Trust Value Line Dividend Index ETF (NYSEARCA: FVD ) , which has traded modestly lower this year while the S&P 500 has gained 2.5%. FVD follows the Value Line Dividend Index, which equally weights components and utilizes the proprietary Value Line research to select components. Specifically, stocks are ranked by the Value Line Safety Ranking of 1 or 2 out of 5, which are based on price stability and financial strength. Additionally, the index excludes stocks with a dividend yield lower than the S&P 500. “Over the last 10 years, FVD produced an annual average 10.4% gain vs. 7.9% for the S&P 500,” according to Investor’s Business Daily . “Their difference in their current dividend yield is modest. FVD yields 2.2% and SPY 1.9%.” Though its yield is attractive relative to the S&P 500, it is the source of that yield that could be a strike against FVD in a rising rate environment. Specifically, the ETF allocates 22.6% of its weight to utilities stocks, the most vulnerable group to rising interest rates . FVD devotes another 13.5% of its weight to consumer staples stocks, another sector that historically lags when interest rates climb. FVD’s utilities and staples exposure is somewhat offset by a combined 32.3% weight to financial services and industrials names, groups that often perform as Fed policy turns hawkish. Rising Treasury yields and slumping utilities stocks have not been enough to sour investors on FVD. The ETF is home to nearly $1.21 billion in assets under management up from $955 million in October. The ETF’s technology weight of 8.1% is fair among dividend funds, but FVD allocates less than 2% to telecom, another highly rate-sensitive sector. FVD’s holdings are also equally weighted. FVD currently shows 187 holdings and its largest component stocks only make up 0.65% of the underlying portfolio. However, this strategic beta index-based ETF is more costly than the average dividend ETF. FVD shows a 0.70% expense ratio, compared to the average 0.58% expense ratio for dividend yield weighted ETFs and 0.5% expense ratio for the average dividend weighted ETF, according to XTF data. At 0.7%, FVD is twice as expensive as the SPDR S&P Dividend ETF (NYSEARCA: SDY ) and seven times as expensive as the Vanguard Dividend Appreciation ETF (NYSEARCA: VIG ) . First Trust Value Line Dividend Index Fund (click to enlarge) Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.