Tag Archives: consumer

Fed-Free Week Still Full Of Obstacles For ETFs

Summary A 2015 rate hike is off the table. In the near term, USDU might be the preferred option of the pair simply because it is short several emerging markets currencies, which have the potential to continue falling. As is often the case with weekly ETF previews, some familiar ETFs frequently re-emerge, and that is the case this week. By Todd Shriber, ETF Professor After a week spent worshiping at the altar of the Federal Reserve, financial markets will be spared the specter of a Fed meeting in the week ahead. However, that does not mean a 2015 rate hike is off the table. San Francisco Fed President John Williams told reporters last week that a rate hike this year could be appropriate. Richmond Federal Reserve President Jeffrey Lacker on Saturday said he dissented at a Fed policy meeting because he thought the economy was now strong enough to warrant higher interest rates, Reuters reported . Federal Reserve Bank of St. Louis President James Bullard said he argued against the continuation of the Fed’s zero interest rate policy. The ETF Situation The PowerShares DB USD Bull ETF (NYSEARCA: UUP ) and the actively managed WisdomTree Bloomberg U.S. Dollar Bullish ETF (NYSEARCA: USDU ) are the two primary exchange traded funds tracking greenback fluctuations, so suffice to say these ETFs would like 2015 rate hike momentum to reemerge and do so soon. In the near term, USDU might be the preferred option of the pair simply because it is short several emerging markets currencies, which have the potential to continue falling. UUP tracks the dollar against major developed market currencies, some of which could and should rally the longer the Fed puts off higher interest rates. There is some evidence to suggest some market participants were not reassured by the Fed’s no-hike call last week. For example, the Consumer Staples Select Sector SPDR ETF (NYSEARCA: XLP ) and the Utilities Select Sector SPDR ETF (NYSEARCA: XLU ) , each among the most rate-sensitive sector ETFs, lost a combined $382.3 million in assets last week. XLP posted a modest gain, while XLU climbed 1.6 percent – which could mean the latter is worth monitoring in the week ahead. Watch List As is often the case with weekly ETF previews, some familiar ETFs frequently re-emerge, and that is the case this week. It should be noted the Global X FTSE Greece 20 ETF (NYSEARCA: GREK ) merits a place on traders’ watch lists in the week ahead. In what feels like a monthly occurrence, Greece holds national elections again this weekend. Even with potential for increased volatility due to the election and news of a major index provider lowering Greece’s market classification , the Global X FTSE Greece 20 ETF climbed 3.8 percent last week and is up 6.3 percent over the past month. It could be a sign of a renewed risk appetite, though only time will tell, but the PowerShares QQQ Trust ETF (NASDAQ: QQQ ) , the NASDAQ-100 tracking ETF, hauled in over $1.2 billion in new assets last week despite suffering a modest drop. Remember what investors are doing by being long QQQ. They are making an ETF proxy bet on the likes of Apple, Microsoft and Amazon, as those stocks combine for over a quarter of QQQ’s weight. Disclaimer: Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation. 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.

FXG: Consumer Staples With Less Of The Consumer Staples

Summary The portfolio for FXG just doesn’t look right to me. The ETF uses fairly low allocations for some core consumer staple holdings. I’d like to see a heavier weighting for companies with massive market share or addictive products because those firms should be able to protect margins better. Investors should be seeking to improve their risk-adjusted returns. I’m a big fan of using ETFs to achieve the risk-adjusted returns relative to the portfolios that a normal investor can generate for themselves after trading costs. One of the funds that I’m considering is the First Trust Consumer Staples AlphaDEX ETF (NYSEARCA: FXG ). I’ll be performing a substantial portion of my analysis along the lines of modern portfolio theory, so my goal is to find ways to minimize costs while achieving diversification to reduce my risk level. Expense Ratio The expense ratio for FXG is a fairly unappealing .67%, which leaves me feeling that there is some substantial room for improvement. Holdings I was able to grab a chart with all of the holdings for FXG: (click to enlarge) Is this really a consumer staples portfolio? Procter & Gamble (NYSE: PG ) is only 1.68% of the portfolio? Altria Group (NYSE: MO ) is less than 1% of the portfolio? Costco (NASDAQ: COST ) is entirely absent from the portfolio. Coca-Cola (NYSE: KO ) and Pepsi (NYSE: PEP ) are entirely absent. When I’m looking at an ETF of consumer staples, I want to see products that people are going to buy regardless of what is happening in the economy. I’m not a fan of smoking, but I wouldn’t mind a substantial allocation to tobacco. For that matter, I would prefer a portfolio built on companies that have enormous market share and sell addictive products. The fundamental goal of creating a consumer staples allocation in the portfolio is to provide the portfolio with more protection from weakness in the economy. Despite the challenges with firms missing, I do think a large allocation to Tyson Foods (NYSE: TSN ) and ConAgra Foods (NYSE: CAG ) does make sense. There has been enough concentration in this part of the industry that the major players are controlling a large part of the market and are unlikely to be forced to take major price cuts even if the market enters another recession. Building the Portfolio This hypothetical portfolio has a moderately aggressive allocation for the middle-aged investor. Only 25% of the total portfolio value is placed in bonds and a fifth of that bond allocation is given to high-yield bonds. If the investor wants to treat an investment in an mREIT index as an investment in the underlying bonds that the individual mREITs hold, then the total bond allocation would be 35%. Given how substantially mREITs can deviate from book value, I’d rather consider the allocation as an equity position designed to create a very high yield. This portfolio is probably taking on more risk than would be appropriate for many retiring investors since a major recession could still hit this pretty hard. If the investor wanted to modify the portfolio to be more appropriate for retirement, the first place to start would be increasing the bond exposure at the cost of equity. However, the diversification within the portfolio is fairly solid. Long-term treasuries work nicely with major market indexes, and I’ve designed this hypothetical portfolio without putting in the allocation I normally would for equity REITs. An allocation is created for the mortgage REITs, which can offer some fairly nice diversification relative to the rest of the portfolio and they are a major source of yield in this hypothetical portfolio. The portfolio assumes frequent rebalancing which would be a problem for short-term trading outside of tax advantaged accounts unless the investor was going to rebalance by adding to their positions on a regular basis and allocating the majority of the capital towards whichever portions of the portfolio had been underperforming recently. Because a substantial portion of the yield from this portfolio comes from REITs and interest, I would favor this portfolio as a tax exempt strategy even if the investor was frequently rebalancing by adding new capital. The portfolio allocations can be seen below along with the dividend yields from each investment: Name Ticker Portfolio Weight Yield SPDR S&P 500 Trust ETF SPY 35.00% 2.06% Consumer Discretionary Select Sector SPDR ETF XLY 10.00% 1.36% First Trust Consumer Staples AlphaDEX ETF FXG 10.00% 1.60% Vanguard FTSE Emerging Markets ETF VWO 5.00% 3.17% First Trust Utilities AlphaDEX ETF FXU 5.00% 3.77% SPDR Barclays Capital Short Term High Yield Bond ETF SJNK 5.00% 5.45% PowerShares 1-30 Laddered Treasury Portfolio ETF PLW 20.00% 2.22% iShares Mortgage Real Estate Capped ETF REM 10.00% 14.45% Portfolio 100.00% 3.53% The next chart shows the annualized volatility and beta of the portfolio since April of 2012: (click to enlarge) A Quick Rundown of the Portfolio Using SJNK offers investors better yields from using short-term exposure to credit-sensitive debt. The yield on this is fairly nice, and due to the short duration of the securities, the volatility isn’t too bad. PLW on the other hand does have some material volatility, but a negative correlation to other investments allows it to reduce the total risk of the portfolio. FXG is used to make the portfolio overweight on consumer staples with a goal of providing more stability to the equity portion of the portfolio. FXU is used to create a small utility allocation for the portfolio to give it a higher dividend yield and help it produce more income. I find the utility sector often has some desirable risk characteristics that make it worth at least considering for an overweight representation in a portfolio. VWO is simply there to provide more diversification from being an international equity portfolio. While giving investors exposure to emerging markets, it is also offering a very solid dividend yield that enhances the overall income level from the portfolio. XLY offers investors higher expected returns in a solid economy at the cost of higher risk. Using it as more than a small weighting would result in too much risk for the portfolio, but as a small weighting, the diversification it offers relative to the core holding of SPY is eliminating most of the additional risk. REM is primarily there to offer a substantial increase in the dividend yield which is otherwise not very strong. The mREIT sector can be subject to some pretty harsh movements, and dividends from mREITs should not be the core source of income for an investor. However, they can be used to enhance the level of dividend income while investors wait for their other equity investments to increase dividends over the coming decades. If you want a really quick version to refer back to, I put together the following chart that really simplifies the role of each investment: Name Ticker Role in Portfolio SPDR S&P 500 Trust ETF SPY Core of Portfolio Consumer Discretionary Select Sector SPDR ETF XLY Enhance Expected Returned First Trust Consumer Staples AlphaDEX ETF FXG Reduce Beta of Portfolio Vanguard FTSE Emerging Markets ETF VWO Exposure to Foreign Markets First Trust Utilities AlphaDEX ETF FXU Enhance Dividends, Lower Portfolio Risk SPDR Barclays Capital Short Term High Yield Bond ETF SJNK Low Volatility with over 5% Yield PowerShares 1-30 Laddered Treasury Portfolio ETF PLW Negative Beta Reduces Portfolio Risk iShares Mortgage Real Estate Capped ETF REM Enhance Current Income Risk Contribution The risk contribution category demonstrates the amount of the portfolio’s volatility that can be attributed to that position. Despite TLT being fairly volatile and tying SPY for the second highest volatility in the portfolio, it actually produces a negative risk contribution because it has a negative correlation with most of the portfolio. It is important to recognize that the “risk” on an investment needs to be considered in the context of the entire portfolio. To make it easier to analyze how risky each holding would be in the context of the portfolio, I have most of these holdings weighted at a simple 10%. Because of TLT’s heavy negative correlation, it receives a weighting of 20% and as the core of the portfolio SPY was weighted as 50%. Correlation The chart below shows the correlation of each ETF with each other ETF in the portfolio. Blue boxes indicate positive correlations and tan box indicate negative correlations. Generally speaking lower levels of correlation are highly desirable and high levels of correlation substantially reduce the benefits from diversification. (click to enlarge) Conclusion FXG has resisted weakness in the market as demonstrated by both the lower annual volatility and the lower max “drawdown” of -9.8% relative to the market’s worst performance of -11.9%. Despite that, the portfolio composition simply does not match the way I would want the consumer staples exposure constructed. Simply put, the portfolio does not offer strong enough allocations to some of the companies that have both enormous market share and addictive products. Heavy allocations to a few food companies look solid, but I’d rather see less of the convenience stores and more of the major retail low cost leaders such as Costco and Wal-Mart (NYSE: WMT ). Even if WMT is having a rough time lately, it is a long-lived dividend champion with a large market share and powerful economies of scale. 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.

The Long-Term Superiority Of Frontier Markets, Emerging Markets, And Gold

Summary Higher value will be found in frontier and emerging markets in the future. I plan to focus solely on frontier and emerging markets in Asia, Latin America, and Africa. The threats these markets are facing have created low valuations, and consequently a flurry of buying opportunities. I was extremely grateful to hear that the Fed decided to delay hiking interest rates, as this would have resulted in an unnecessary relegation of frontier and emerging markets. A strong USD, low commodity prices, and low investor confidence in frontier and emerging markets has resulted in extremely low valuations. Therefore, there are a flurry of investment opportunities available in frontier and emerging markets, for those willing to take a long-term view of these markets’ potential. A rationally constructed portfolio, with low valuation, invested into high-growth frontier and emerging markets, is highly unlikely to fail in the long term. As a Seeking Alpha contributor, my objective is to promote the superior long-term value of frontier and emerging markets in Asia, Latin America, and Africa. The FX risk of frontier and emerging markets is certainly justified by the high growth, low valuation, and high dividend yields. I am skeptical of the recent increased strength of the USD, and personally prefer investing in gold, frontier markets, and emerging markets. Vietnam: Low Valuation + High Growth = Paradise In my opinion, Vietnam is clearly the most superior destination for investment in Asia. I recently posted an article on Market Oracle explaining the growth of the Asian Hedge Fund industry, which mentioned that Vietnam was the superior location for investment, due to high growth and low valuation. I remained shocked as to why a large portion of investors are still deciding to take a wait-and-see attitude with Vietnam, only to potentially arrive too late, when valuation is higher. Increased consumer spending has been a substantial catalyst for Vietnam, which recently experienced annual GDP growth of 6.44% . Vietnam’s stock market has had a P/E of approximately 12, a far cry from the valuations in other Asia. The fusion of low valuation and high growth in Vietnam results in the country being a superior destination for value investors. Moreover, the Vietnamese dong has been a relatively stable currency, and the FX risk is well worth taking, considering the low valuation, high growth, and high dividend yields. Investors can invest in the VinaCapital Vietnam Opportunity Fund( OTCPK:VCVOF ) and Vietnam Holding Ltd.( OTC:VNMHF ) on the US OTC market, although higher liquidity can be found on the London Stock Exchange Listings. Anytime I mention Vietnam, I also highly discourage investors from investing in the Market Vectors Vietnam ETF(NYSEARCA: VNM ), based it on its poor historical performance. India: Small Cap Approach India’s economy has also had substantial growth, with most recent annual GDP Growth of 7% . As ETFs that invest their assets in India generally have high valuation, I have previously promoted the small cap approach to India. Small cap ETFs have lower valuation, and have had substantial earnings growth. This can be accessed through the Market Vectors Small Cap ETF(NYSEARCA: SCIF ) and the EG Shares India Small Cap ETF(NYSEARCA: SCIN ). Other favorable aspects of India include projections for continued high economic growth, high growth driven by consumer spending, relatively low inflation, increasing disposable personal income, and the country having the world’s largest youth population. The Philippines: High Growth at a High Price The Philippines has been experiencing substantial economic growth, with some noteworthy developments including the high growth of the business process outsourcing industry and the growth of townships outside of Manila. While the investment environment and growth is favorable, its appeal is somewhat offset by the high valuation. The Philippines’s stock exchange currently has a P/E of 25.05 , and the iShares MSCI Philippines ETF(NYSEARCA: EPHE ) currently has a P/E of 18. The Philippines can certainly be characterized as a high growth, favorable investment environment, although the valuation is a bit too high. Indonesia: Approach with Caution Indonesia is certainly no economic paradise in Asia, but I have identified a specific buy opporutnity for the Aberdeen Indonesia Fund(NYSEMKT: IF ), due to its low valuation and high discount. Favorable aspects of investing in Indonesia include growth in consumption, recent annual GDP growth of 4.67%, and high loan growth rates. I would not recommend investing in other ETFs with higher valuation, due to the substantial inflation and FX risks that Indonesia presents. Pakistan: A Contrarian Suggestion Pakistan is certainly a contrarian place to suggest , although the country’s decreasing terrorism and stock market’s yearly gain of 16.31% certainly justify this as a viable suggestion. Valuation is substantially low given the consistent rise of the Karachi Stock Exchange, making now a strategic time to enter. The newly launched Global X MSCI Pakistan ETF(NYSEARCA: PAK ) provides exposure to a variety of publicly listed companies in Pakistan, and currently has a P/E of 9.12. Chile: Latin America’s Highest Credit Rating Chile is another excellent site for investment , although its economic growth has been offset by the plunging price of copper. However, the country is continuing to fare well in terms of economic growth, and has the prestige of its banking industry to offer to investors. Chile’s banking industry has the highest credit rating in Latin America, and three of its banks are available to US investors at extremely low valuation. These banks include Banco de Chile (NYSE: BCH ), Banco Santander Chile (NYSE: BSAC ), and CorpBanca (NYSE: BCA ). General exposure to Chile’s economy can be accessed through the iShares MSCI Chile Capped ETF (NYSEARCA: ECH ) Colombia: Rebound I have also been following Colombia, based on my conclusion that low oil prices have unjustly lowered the valuation of many companies in Colombia, particularly in the banking industry. The most convenient way for investors to gain exposure to Colombia is through the Global X MSCI Colombia ETF (NYSEARCA: GXG ) which currently trades at 9.02, a far cry from its 52 week high of 19.72. Despite the current low oil price, Colombia has still been able to economically thrive and lead Latin America in terms of economic growth, with most recent annual GDP growth of 3% . A rebound in oil prices is essential for full recovery, but now is certainly an excellent time to investigate investment opportunities in Colombia. Investors can gain exposure to Colombia’s high growth banking industry through BanColombia S.A. (NYSE: CIB ) and Grupo Aval Acciones Y Valores S.A. (NYSE: AVAL ). Nigeria: Strength in its Newly Diversified GDP I have previously mentioned that Nigeria’s newly diversified GDP offsets the risk of the current low oil price environment. Moreover, while the threat of Boko Haram is substantial, it can not offset the high growth of consumer products, construction, and banking industries in Nigeria. The Global X MSCI Nigeria ETF (NYSEARCA: NGE ) offers very convenient exposure to Nigeria, with my biggest concern being the high valuation of the consumer products industry. The construction and banking industry are the most favorable sites for investment, with low valuation and high growth. The fund’s P/E is currently 8.22, which further justifies the logic of investing in Nigeria, although a further plunge in oil prices would prove to be damaging to the fund in the short term. Gold: On the Rise after The Fed’s Delay The Direxion Daily Junior Gold Miners Bull 3X ETF (NYSEARCA: JNUG ) rose by 10.63% after the Fed announced its decision to delay hiking interest rates. Historically, this fund has traded substantially higher, before QE in 2014. The historically higher price of gold, and this fund in particular, presents opportunities for investors willing to take a long term bullish view on gold. Volatility of this fund has been substantial, but its recent bottoming out presents opportunity. Investors should be willing to hold long term, as some financial experts have mentioned the likelihood of gold falling near $800/ounce. JNUG data by YCharts Conclusion To quote Jim Rogers , ” The US Dollar is not a safe haven, but people think it is; that’s why they put money there.” The rise of the USD, and its prestige as the world’s reserve currency, should be questioned by those investing in companies in the United States. Gold is certainly a conservative alternative, for those who do not want to risk investing in frontier and emerging markets. Furthermore, I consider the high growth environment of frontier and emerging markets to be superior to options in the United States. Plunging commodity prices and the strong USD are relevant threats to be acknowledged, but will be unsuccessful in presenting a long term threat to frontier and emerging markets. I do not focus on general emerging market funds, due to the discrepancies in opportunities in emerging markets. Thailand Malaysia are two examples of countries that I am concerned with, and would not invest in. Proper due diligence can result in a successful value based investing in frontier and emerging markets. The undertakings of the Fed will not be able to offset this in the long term. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks. Disclosure: I am/we are long JNUG, GXG, NGE, IF, BCA, BCH, BSAC. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.