Tag Archives: zacks funds

SEC Proposals To Lower Liquidity Risk In Mutual Funds

Periods of large investor withdrawals may spell doom for both fund houses and investors. Many funds have piled up hard-to-sell assets, which are non effective during such periods of withdrawals. The five-member Securities and Exchange Commission (“SEC”) unanimously voted last week to recommend new rules to help the multitrillion asset-management industry with effective liquidity risk management. These additional safety measures will require mutual funds and ETFs to implement new plans to manage liquidity risks. The proposal calls for funds to keep a minimum amount of cash or cash equivalents that can be easily sold within three days (down from seven days currently required for mutual funds). Moreover, fund families may charge investors who redeem their holdings on days of increased withdrawals. The move comes as part of five initiatives framed by the SEC to minimize risks imbedded in such funds and adequately shield them from any financial shock. Since the financial crisis, the asset management sector has been under increasing regulatory scrutiny. The proposals came after the Fed and IMF warned that certain funds may be incapable of keeping up with investor redemptions if there is a market rout. Addressing the Redemption Challenges The challenge is to meet shareholder redemptions during periods of stress and ensure smooth functioning of the funds amid large withdrawals. The SEC targets lower overall systematic risks in the $60 trillion asset-management industry and protection of investors’ interests. “Promoting stronger liquidity risk management is essential to protecting the interests of the millions of Americans who invest in mutual funds and exchange-traded funds,” said SEC Chair Mary Jo White. “These significant reforms would require funds to better manage their liquidity risks, give them new tools to meet that requirement, and enhance the Commission’s oversight.” The Reforms Under the proposal, mutual funds and ETFs must implement liquidity risk management programs and enhance disclosure regarding fund liquidity and redemption practices. These would lead to timely redemption of shares and collection of assets by investors without hampering day-to-day running of the funds. Further, the open-end funds will have to allow the use of “swing pricing” in certain cases. Swing pricing is a liquidity management tool designed to reduce the dilution impact of subscriptions and redemptions on non-trading fund investors. This step would enable mutual funds to reveal the fund’s net asset value (NAV) costs related to shareholders’ trading activity. In addition, the proposed reforms would put a 15% cap on investments that can be made in hard-to-trade assets. As reported by The Wall Street Journal , some of the largest U.S. bond mutual funds have 15% or more of their money invested in such illiquid securities. Need for Covering Liquidity Risks Assets are deemed liquid when an investor can buy or sell large quantities rapidly at an expected price. During market rout, investors may engage in intense panic selling, for which funds must have adequate the liquidity or return cash to investors. For instance, there are fears of bond liquidity once the Fed decides to hike rates. There is a growing concern that a massive exit from bonds may freeze the markets as the number of sellers may not match the number of buyers. An ideal market would have the right level of liquidity at the right price. Redemption of bonds will increase the sell-off and then fund managers will have to sell the less liquid assets to match investors’ cash demands. However, if a mutual fund or an ETF holds illiquid bonds, the price swings will be rapid and would create a vicious cycle as price drops will again end up in selling pressure. Funds with High Liquidity & Low Redemption Fees In such scenario, investors may buy funds that offer high liquidity and low redemption costs. As for liquidity, substantial stock holdings would provide the edge during a debt market sell-off. While withdrawing money from mutual funds, there are certain charges or penalties that investors may have to bear. The charges may include sales load and 12-b1 fees. While selling a fund, investors may have to incur Deferred Sales Charge (Load). There may be funds that carry no sales load, but have 12-b1 fees, which are operational expenses between 0.25% and 1% of the fund’s net asset. Funds may also charge redemption fees. It is different from sales load since it is not paid to a broker but directly to the fund. The SEC has set a 2% maximum ceiling on redemption fees. 3 Funds to Buy Hence, funds carrying no sales load and low expense ratio stuffed with substantial stock holdings in its portfolio should be safe picks. We have narrowed our search based on favorable Zacks Mutual Fund Ranks. The following funds carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or Zacks Mutual Fund Rank #2 (Buy) as we expect the funds to outperform its peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance. The minimum initial investment is within $5000. The funds have encouraging returns for each of the 1, 3 and 5-year periods. The Fidelity Small Cap Growth Fund (MUTF: FCPGX ) seeks long-term capital appreciation. Under normal circumstances, FCPGX invests at least 65% of its total assets in the common and preferred stocks of companies located in at least three countries in Europe, Australia and the Pacific Rim. FCPGX offers dividends, if any, and capital gains, if any, at least annually. Fidelity Small Cap Growth carries a Zacks Mutual Fund Rank #1. While the year-to-date and 1-year returns are 9% and 18%, respectively, the respective 3- and 5-year annualized return is 16.6% and 16.7%. Looking at asset allocation, over 97% is invested in stocks, while it holds 2.8% as cash. Annual expense ratio of 0.90% is lower than the category average of 1.34%. The VALIC Company I Health Sciences Fund (MUTF: VCHSX ) invests the majority of its assets in common stocks of healthcare products, medicine or life sciences related companies. VCHSX focuses mainly on investing in large and mid-cap companies. A maximum of 35% of VCHSX’s assets is invested foreign companies. VALIC Company I Health Sciences carries a Zacks Mutual Fund Rank #2. While the year-to-date and 1-year returns are 13.5% and 26.4%, respectively, the 3- and 5-year annualized returns are 29.9% and 29.7% respectively. Looking at asset allocation, nearly 94% is invested in stocks, while it holds 5.1% as cash. Annual expense ratio of 1.09% is lower than the category average of 1.35%. The Bridgeway Small-Cap Growth Fund (MUTF: BRSGX ) aims to provide total return on capital over the long term. BRSGX invests in a broad range of small cap growth stocks that must be listed on the New York Stock Exchange, NYSE MKT and NASDAQ. Bridgeway Small-Cap Growth carries a Zacks Mutual Fund Rank #1. While the year-to-date and 1-year returns are respectively 6.8% and 12.7%, the 3- and 5-year annualized returns are a respective 16.9% and 16.4%. Looking at asset allocation, 99.5% is invested in stocks. Annual expense ratio of 0.94% is lower than the category average of 1.34%. Link to the original article on Zacks.com

Ill At Ease With Biotech? Prescribing #1 Healthcare ETFs

The recent carnage in biotech investing seems more vicious than anticipated. This hot corner of the broad U.S. healthcare market has seen many a correction before, but none seemed as rigorous as it looks now. The recent rout was instigated merely by a tweet – by presidential candidate Hillary Clinton. Her tweet raised concerns over the over pricing on life-saving drugs. Questions over biotech pricing came on the heels of a 5,455% price hike (in about two months) of a drug called Daraprim, used to treat malaria and toxoplasmosis. This gigantic leap in pricing action was taken by a privately held biotech company Turing Pharmaceuticals (read: How Hillary Clinton Crushed Biotech ETFs with One Tweet ). Pricing issues in the biotech space has long been a concern. On the whole, branded drug prices underwent a rise of about 14.8% last year, as per research firm Truveris. There are several other drugs namely cycloserine, Isuprel, Nitropress, and doxycycline that have seen enormous price hikes this year, per the source. This along with overvaluation concerns led to a bloodbath in this otherwise soaring sector last week. In fact, growing pains for biotech investing led the biggest related ETF iShares Nasdaq Biotechnology ETF (NASDAQ: IBB ) to incur the largest weekly loss in seven years. Plus, investors should note that biotech stocks underperformed the broader market during the last four election cycles, as noted by Barrons.com . Barrons’ analysis shows that the broader market indices including S&P 500, Dow Jones and NASDAQ composite gained 11%, 8%, and 18%, respectively, on average against 15% loss incurred by the NASDAQ Biotech index during last four election phases. In such a scenario, it is wise to take some rest off biotech stocks and ETFs, and instead spin your attention toward the more stable but equally promising broader healthcare ETFs (read: Guide to Inverse & Leveraged Biotech ETF Investing ). Why Broader Healthcare? The broader healthcare sector is also loaded with potential. A whirlwind of mergers and acquisitions, promising industry fundamentals, plenty of drug launches, growing demand in emerging markets, ever-increasing healthcare spending and Obama care play major roles in making it a lucrative bet for the long term. Moreover, unlike biotech, healthcare ETFs are relatively defensive in nature and do not completely let investors down even in a broader market sell-off. In the latest biotech tumult, when ETFs like the SPDR Biotech ETF (NYSEARCA: XBI ) , the ALPS Medical Breakthroughs ETF (NYSEARCA: SBIO ) and the BioShares Biotechnology Clinical Trials ETF (NASDAQ: BBC ) retreated in the range of 6% to 8% on September 25, most broader healthcare ETFs lost in the range of 2% to 3%. As a result, Zacks Rank #1 (Strong Buy) healthcare ETFs could be in watch ahead, at least until the penchant for biotech investing returns. Investors should note that the following healthcare ETFs hold a Zacks ETF Rank #1. PowerShares S&P SmallCap Health Care Portfolio ETF (NASDAQ: PSCH ) This ETF has delivered a spectacular performance in the broad healthcare world, returning nearly 25% so far this year and losing just 2.4% in the last one month overruling the biotech woes (as of September 25, 2015). The fund offers concentrated exposure to small cap healthcare securities. It holds 74 securities in its basket, with each security holding less than 4.61% share. From an industry perspective, about one-third of the portfolio is allotted toward healthcare equipment and supplies, followed by healthcare providers and services (28.3%) and pharmaceuticals (15.7%). The ETF has amassed $268.5 million in assets and trades in a lower volume of about 40,000 shares per day, while charging a relatively low fee of 29 bps a year. The fund continues to hold a Zacks ETF Rank #1 with a High risk outlook. SPDR S&P Health Care Equipment ETF (NYSEARCA: XHE ) This product looks to track the S&P Health Care Equipment Select Industry Index. Holding 73 stocks in its basket, each security accounts for less than 1.73% of total assets. This is often an overlooked fund with AUM of $51 million and average daily volume of about 5,000 shares. From an industry look, healthcare equipment accounts for over three-fourth of the portfolio while healthcare supplies have a considerable allocation. The product charges 35 bps in annual fees. XHE gained about 18.6% in the last one year and lost 4.2% in the last one month. It was also upgraded from Zacks Rank #3 (Hold) to Rank #1 in our latest Rank updates. iShares U.S. Medical Devices ETF (NYSEARCA: IHI ) This ETF follows the Dow Jones U.S. Select Medical Equipment Index with exposure to medical equipment companies. In total, the fund holds 52 securities in its basket with major allocations going to Medtronic Plc (NYSE: MDT ) and Abbott Laboratories (NYSE: ABT ) at 14.5% and 710.7%, respectively. The fund has been able to manage about $708 million in its asset base while volume is moderate at about 100,000 shares per day on average. It charges 45 bps in annual fees and expenses. This ETF was also upgraded from a Zacks ETF Rank #3 to Rank #1 recently. The product added 12.6% in the last one year and could be a nice pick for Q4. In the last one month, the fund lost 5.8% which was much lower than double-digit losses incurred by biotech ETFs. Link to the original article on Zacks.com

3 Mid Cap Growth ETFs To Buy For Q4

Increasing uncertainty pertaining to the China turmoil, global growth worries, slumping commodities and timing of the interest rates hike in the U.S. are general concerns. In this backdrop that has lasted for quite some weeks now, the broader U.S. market has trapped itself in a nasty web of trading. While the U.S. economy is on a firmer footing, calling for a rates hike sometime later in the year, the fundamentals in other developed and developing markets are deteriorating. This is especially true given the slowdown in Japan, sluggishness in Europe, technical recession in Canada and weak growth in emerging markets. Additionally, investors are wary of third-quarter earnings, which are expected to drop 5.8% on 3.9% lower revenues for the S&P 500 index, as per the Zacks Earnings Trends . Moreover, the ongoing battle over the funding for Planned Parenthood between Republicans and Congress could lead to the possible shutdown of the federal government at the end of the month. All these conditions are increasing the volatility in the market, putting the stocks’ returns at risk. However, the bullish sentiment for U.S. stocks remains intact given the substantial improvement in the economy and a healing job market. In such a scenario, investors seeking to participate in the growing economy, but are worried about uncertainty, should consider mid-cap stocks in the basket form. Why Mid Caps? While large companies are normally known for stability and smaller ones for growth, mid caps offer the best of both the worlds, allowing growth and stability in portfolios simultaneously. These middle-of-road securities are arguably safer options and have the potential to move higher in turbulent times, especially if political issues or financial instability creeps into the picture. Further, honing in on growth securities in this capitalization level allows investors to earn more returns. This is because growth stocks refer to those high quality stocks that are likely to witness revenues and earnings increase at a faster rate than the industry average. These stocks harness their momentum in earnings to create a positive bias in the market, resulting in rocketing share prices. There are currently a number of ways to tackle this overlooked part of the market segment through ETFs, giving exposure to various styles including broad, value and growth. With such a large number of choices, it may be difficult to choose the right funds. After all, many of these products target the same securities though they have different tilts, weighting schemes or focus for their portfolios. How to Pick Right ETFs? One way to narrow down the list is to utilize the Zacks ETF Rank. This system looks to find the best ETFs in a given market segment based on a number of factors such as industry outlook and expert surveys; and then apply ETF-specific factors (like expense ratios and bid/ask spreads). And given the rise of the outlook for mid caps of late, it shouldn’t be too surprising that a few have moved to the top Zacks ETF Rank of 1 (Strong Buy) from Zacks ETF Rank 2 (Buy) or 3 (Hold) in the latest ratings’ update. Below, we have highlighted these three surging funds in brief detail for investors seeking a way to make a great play on the overlooked mid cap growth space in basket form: Vanguard Mid-Cap Growth ETF (NYSEARCA: VOT ) This fund follows the CRSP US Mid Cap Growth Index. Holding 177 securities in its basket, it is highly diversified across each component with none holding more than 1.5% share. In terms of sector exposure, industrials occupies the top position at 19.3%, followed by consumer services (19.2%), technology (14.7%), and consumer goods (14.2%). The product has managed nearly $3.4 billion in its asset base and trades in moderate volume of around 177,000 shares. Expense ratio came in at 0.09%. VOT has lost 1.6% in the year-to-date timeframe. iShares Morningstar Mid-Cap Growth ETF (NYSEARCA: JKH ) With AUM of $217.4 million, this product tracks the Morningstar Mid Growth Index. In total, it holds 204 mid cap securities with none accounting for more than 1.53% of assets. Information technology, industrials, consumer discretionary, health care and financials are the top five sectors with double-digit exposure each. The ETF charges 30 bps in annual fees and trades in a light volume of less than 5,000 shares a day. It has shed 2.2% so far this year. Vanguard S&P Mid-Cap 400 Growth ETF (NYSEARCA: IVOG ) This ETF tracks the S&P MidCap 400 Pure Growth Index, charging investors 20 bps in fees per year. It has amassed $379.3 million in its asset base while sees a light volume of less than 13,000 shares. The fund holds 229 stocks with a well-diversified portfolio as each firm holds no more than 1.4% of total assets. However, it is skewed toward financials with one-fourth share while information technology, consumer discretionary, industrials and health care round of the top five. The ETF has gained 1.6% in the year-to-date timeframe. Link to the original article on Zacks.com