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ETFs’ Strong Growth Invites More Scrutiny: EY

With ETF assets continuing to perform strongly against other investment vehicles, the industry’s increasing size is receiving an ever-growing level of external attention, notes EY. EY published a report titled: ” ETFs: a positive force for disruption ” after interviewing nearly 80 leading promoters, investors, market makers and service providers across the U.S., Europe and Asia-Pacific. ETFs to grow 18% every year for next 3-5 years Beginning with a confident tone, the EY report points out that the ETF industry’s growth over the last two decades represents one of the financial sector ‘s greatest recent success stories. According to EY’s latest global survey of the ETF industry, a weighted average of global responses suggests that respondents anticipate their businesses to grow by around 18% every year for the next three to five years. The report highlights that over 90% of those surveyed anticipate the industry as a whole to enjoy positive net new business over the next 18 months, with 34% predicting net inflows of over 20%: The survey notes innovations are now considered as the most significant source of differentiation between promoters, with product strategies also considered as increasingly important: Focusing on the defining themes of U.S., European and Asian markets, the EY survey points out that while the industry as a whole is shaped by global trends, regional differences in regulation, demand and infrastructure continue to shape different ETF markets in different ways. Highlighting the rapid growth in Asia-Pacific, the report notes the majority of Asian respondents anticipate their own businesses to grow by 25% to 30% per annum over the next three to five years. Asian markets, including Japan and Australia, are identified as the most attractive targets for geographic expansion by both global and local respondents: ETFs have the ability to turn investment problems into solutions Innovation has always been integral to the ETF story, with 83% of respondents anticipate to increase spending on new products over the next 18 months. Focusing on “smart beta”, the report, however, wonders whether it is ETF’s brightest hope for the future, or a Trojan horse that threatens to lead the industry astray. The report notes currency hedged ETFs have been the industry’s success story of 2015, accounting for the world’s two most successful funds during the first eight months of the year. The EY report notes investor demand is expected to drive continued growth in hedged ETFs, typically alongside matching unhedged share classes: The EY report also examined three hot topics viz.: structural innovation, digital distribution and the search for efficiency. It also highlights that the development of ETF share classes of mutual funds – ETF sub-funds under a mutual fund umbrella – is seen as the second most promising structural innovation after currency-hedged funds: Focusing on digital distribution, the report points out that dedicated sales teams remain a vital area of focus. Of note, the ETF industry is also undergoing a huge surge of interest in online distribution: Delving deeper into the third hot topic viz.: search for efficiency, the EY survey reveals that stronger links with authorized participants and market makers are seen as the greatest priority for technology improvement, with better client and investor dashboards and reporting also identified as key priorities: Concluding with a warning note, the EY survey cautions that in its rush to deliver growth over the next two to three years, the ETF industry needs to make sure it doesn’t do anything rash to harm its potential expansion over the next 5, 10 or 20 years. Disclosure: None

Earn 5% Plus Yield With These Global ETFs

With mixed U.S. economic data and the global growth worries, the prospect of the first interest rates rise in almost a decade for later this year has faded. The dismal job report for September and the latest Fed minutes have confirmed this, suggesting accommodative policy for longer than expected in the domestic economy (read: ETFs that Gained & Lost Post Dismal Job Data ). This has pushed the Treasury yields down with 10-year Treasury yields currently hovering around 2% while U.S. dollar has also weakened in the past few days, raising the appeal for the international stocks. Notably, the iShares MSCI ACWI Index ETF (NASDAQ: ACWI ), which targets the global stock market, surged 6.8% since the start of the fourth quarter. This is especially true, as a lot of hot money has been flowing into the international markets lately though bouts of volatility have rekindled investors’ love for income-focused products. In particular, persistent slowdown in China has spread fears of global repercussions, Japan has been on an uneven recovery path, Europe is struggling with slower growth and many emerging economies are experiencing a slowdown. Early this month, the International Monetary Fund (NYSE: IMF ) cut its global growth forecast once again to 3.1% from 3.3% for this year and to 3.6% from 3.8% for the next. In this backdrop, the ongoing easing monetary policies across the globe are driving investors in search for higher income. After all, dividend-focused products offer best of both the worlds – safety in the form of payouts and stability in the form of mature companies that are less volatile to the large swings in the stock prices. The dividend paying securities are the major sources of consistent income for investors to create wealth when returns from the equity market are at risk. This is because the companies that pay dividends generally act as a hedge against economic uncertainty and provide downside protection by offering outsized payouts or sizable yields on a regular basis read: 5 Overlooked Dividend ETFs Worth Buying Now ). That being said, we highlight four global dividend ETFs for investors seeking yields and returns in a rocky market. All these funds yield 5% or more, making them excellent choices for yield-hungry investors. Global X SuperDividend ETF (NYSEARCA: SDIV ) – Annual Yield: 7.13% This ETF provides exposure to 102 high yield stocks from around the world with each holding less than 2% of assets each. This can be easily done by tracking the Solactive Global SuperDividend Index. The fund is well spread out across the market spectrum with 43% in small caps, 33% in mid caps and the rest in large caps. Real estate firms take the top spot at 35% followed by financials (19%) and utilities (12%). From a country look, about one-third of the portfolio is allocated to America while Europe and the Asia-Pacific account 32% and 26%, respectively. The product has amassed $891.6 billion in its asset base and sees good trading volume of about 246,000 shares a day on average. Expense ratio came in at 0.58%. The fund pays a solid dividend yield of 7.13% while its 30-day SEC yield is higher at 7.37%. It has gained 6.2% since the start of October. Guggenheim S&P Global Dividend Opportunities Index ETF (NYSEARCA: LVL ) – Annual Yield: 6.03% This fund follows the S&P Global Dividend Opportunities Index, holding 99 securities in its basket. It is well diversified across components as each security holds no more than 4.3% share. However, it has a slight tilt toward large cap stocks, followed by mid caps and small caps. In terms of country exposure, the U.S., Canada, Australia and United Kingdom make up for the top four countries with double-digit exposure each. The ETF has been overlooked by investors as depicted by AUM of $60.2 million and average daily volume of about 31,000 shares. It charges 0.65% in fees per year from investors and yields 6.03% in annual dividends. The 30-day SEC yield stands at 5.98% and the fund surged 9.3% in the first half of October. SPDR S&P International Dividend ETF (NYSEARCA: DWX ) – Annual Yield: 5.56% This fund follows the S&P International Dividend Opportunities Index and holds 121 securities with each holding less than 4.1% of assets. Energy and utilities take the top two spots with nearly one-fourth share each, followed by energy (15.4%) and telecommunication (15.1%). Australian firms dominate the returns at 24.2% while United Kingdom and Canada make up for 17.1% and 10.3% share, respectively. From a market cap look, mid caps and large caps combine to make up for 85%, leaving little room for the small caps. The ETF is one of the popular choices in the dividend space with AUM of $1.1 billion and average daily volume of more than 221,000 shares. It charges 45 bps in annual fees and has gained 8.6% in the same time frame. It has an annual dividend yield of 5.56% and 30-day SEC yield of 5.65%. First Trust Dow Jones Global Select Dividend Index Fund (NYSEARCA: FGD ) – Annual Yield: 5.45% The fund tracks the Dow Jones Global Select Dividend Index, providing exposure to the 98 highest-yielding stocks that have passed the eligibility screens for dividend quality and liquidity. None of the securities accounts for more than 2.7% of the assets. From a sector look, financials take the top spot at 20.7% while utilities, telecom, energy, consumer discretionary and industrials round off the next five spots with double-digit exposure each. About half of the portfolio is tilted toward large cap stocks while mid caps and small caps take the remainder. In terms of country profile, Australia, United Kingdom, U.S. and Canada occupy the top four positions. The product is tilted toward large cap stocks as it accounts for roughly half of the portfolio while mid caps and small caps take the remainder. It is rich with AUM of $434.6 million and average daily volume of 88,000 shares a day on average. Expense ratio came in at 0.60%. FGD has 5.45% in both annual dividend and 30-day SEC yield. It added 2.2% in the last couple of weeks. Link to the original post on Zacks.com

DEX: This Balanced Closed-End Fund Is Trading At A Big Discount

Summary DEX is a leveraged, global balanced CEF about 60% equities, 40% bonds. The 17+% discount to NAV is at three year highs. High distributions produce alpha by capturing some of the discount with every monthly payout. The Delaware Enhanced Global Dividend and Income Fund (NYSE: DEX ) was formed in June, 2007. It invests globally in income-generating securities across multiple asset classes. (Data below is sourced from the Delaware Investments website unless otherwise stated.) The Fund’s primary investment objective is to seek current income, with a secondary objective of capital appreciation. The Fund also uses enhanced income strategies by engaging in dividend capture trading, option overwriting, and realizing gains on the sale of securities, dividend growth and currency forwards. There could be a good medium-term trading opportunity in DEX setting up from now until year-end because of tax loss selling. Over the last year, the average discount to NAV has been -12.75%, while it is currently around -17%. The 1-year discount Z-score is -2.20, which means that the current discount to NAV is more than two standard deviations below the average. Source: cefanalyzer Three Year Historical Premium/Discount for DEX (click to enlarge) From an overall asset allocation perspective, DEX is similar to a global 60-40 balanced fund, but because of the leverage and wide range of asset classes, it is much more diverse than a typical balanced fund you would find at Vanguard or Fidelity. Under normal conditions, the Fund will invest: At most 60% of its net assets in securities of U.S. issuers. At least 40% of its net assets in securities of non-U.S. issuers (but the fund managers have discretion to lower this percentage to 30% if they feel market conditions are unfavorable). This was the asset allocation breakdown as of June 30, 2015: Asset Allocation Breakdown Large-Cap Value 11.54% Real Estate 2.80% International equity 29.76% Emerging markets equity 6.51% Convertible securities 13.13% High yield bonds 32.68% Investment grade bonds 2.36% Other 1.24% DEX has had about average long term NAV performance. But it may be good for a swing trade now because of the very high discount to net asset value. Since inception, it had one big losing year in 2008 when the net asset value fell -38.52%, and it is also struggling so far this year. Here is the total return NAV performance record since inception along with its percentile rank compared to Morningstar’s World Allocation category: DEX NAV Performance World Allocation NAV Percentile Rank in Category 2008 -38.52% -39.30% 50 2009 +48.43% +46.71% 38 2010 +16.60% +23.98% 50 2011 -1.44% -3.21% 38 2012 +17.68% +19.81% 34 2013 +19.01% +11.07% 34 2014 -0.46% +6.14% 90 YTD -7.10% -5.76% 73 The “Top 5” tables below are all as of June 30, 2015: Top 5 Countries United States 51.02% Japan 7.96% France 5.79% United Kingdom 5.24% Canada 2.88% Top 5 foreign equity holdings Teva Pharmaceutical (NYSE: TEVA ) 1.35% Mitsubishi UFJ Financial ( OTCPK:MBFJF ) 1.30% AXA S.A. ( OTCQX:AXAHY ) 1.15% Novartis AG (NYSE: NVS ) 1.14% Toyota Motor (NYSE: TM ) 1.12% Top 5 U.S. equity holdings CA Inc. (NASDAQ: CA ) 0.55% AT&T Inc. (NYSE: T ) 0.52% Pfizer Inc. (NYSE: PFE ) 0.49% ConAgra Foods Inc. (NYSE: CAG ) 0.49% Merck & Co. Inc. (NYSE: MRK ) 0.48% Top 5 U.S. fixed income holdings Inter-American Development Bank 0.46% NuVasive Inc. 0.42% Meritor Inc. 0.41% Blackstone Mortgage Trust Inc. 0.39% Cardtronics Inc. 0.38% Top 5 foreign fixed income holdings Indonesia Govt. Intl. Bond 0.73% Mexican Bonos 0.65% Mexico Govt. Intl. Bond 0.56% Indonesia Govt. Intl. Bond 0.53% Australia & N. Zealand Banking 0.49% Bond Rating Distribution AAA 8.38% AA 0.15% A 5.40% BBB 9.73% BB 24.63% B 36.34% CCC 15.24% CC 0.09% D 0.04% DEX is run by a large team of eleven portfolio managers, which is helpful because of the many asset classes held in the fund. Nine of the managers have earned the CFA designation. The lead manager is Roger A. Early, CPA, CFA. Roger is a Managing Director, Head of Fixed Income Investments with 39 years industry experience. He has been with the fund since 2008. Alpha is Generated by High Discount + High Distributions The high distribution rate of 9.34% along with the 17% discount allows investors to capture some alpha by recovering some of the discount whenever a distribution is paid. Whenever you recover NAV from a fund selling at a 17% discount, the percentage return is 1.00/ 0.83 or about 20.5%. So the alpha generated by the 9.34% distribution is computed as: (0.0934)*(0.205)=0.01915 or about 1.92% a year. Note that this is more than the 1.13% baseline expense ratio, so you are effectively getting the fund managed for free with a negative effective expense ratio! Here are some summary statistics on DEX: Delaware Enhanced Global Dividend and Income Fund Total Assets: 273 Million Total Common assets: 186 Million Annual Distribution (Market) Rate= 9.34% Last Regular Monthly Distribution= $0.075 (Annual= $0.90) Fund Baseline Expense ratio: 1.13% Discount to NAV= -17.44% Portfolio Turnover rate: 56% Credit Rating: Fixed income holdings are mainly high yield Effective Leverage: 30.35% Average Daily Volume (shares)= 65,160 (Source: Yahoo Finance) Average Dollar Volume = $630,000 DEX is only a moderately liquid stock and usually trades with a bid-asked spread about two cents. There is often limited size available on both the bid and asked, so some care must be taken when trading DEX. DEX is an attractive purchase at current levels when the discount to NAV is 15% or higher, although there may be even additional opportunities later this year when tax loss selling kicks in. A reasonable trading approach may be to scale in gradually over the next few months.