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Real Estate Inflows Highest In 6 Months: 6 MF And ETF Picks

While U.S.-based stock funds continued to witness significant outflows, real estate funds emerged as one of the few bright spots in terms of inflows, according to Lipper. The stock funds registered an outflow of $3.9 billion for the week ending May 18, raising the total withdrawals in the year-to-date frame to $45 billion. Moreover, stock funds have not seen inflows for two consecutive weeks since November. However, real estate funds are the ones that emerged as one of the few sectors that attracted significant investor sentiment during the week. These funds registered an inflow of $750 million, the biggest inflow witnessed since November 2015. Encouraging data related to the sector and a bright outlook may have boosted investor sentiment. Against this backdrop, investing in mutual funds and ETFs from this sector may prove profitable for investors in the coming months. Concerns Affecting Stocks Weak first-quarter earnings and intensified rate hike fears affected financial markets. As of May 18, total earnings for 466 S&P 500 members were down 7.0% from the same period last year on 1.2% lower revenues. Like the last few quarters, disappointing results from energy companies marred the first-quarter earnings season. Without energy earnings results, total earnings of the S&P 500 members would have been down 1.3% from the year-ago quarter. Also, minutes of the Federal Reserve’s two-day policy meeting in April indicated that most of its officials remain optimist for a rate hike in the June meeting. Moreover, New York Fed President William Dudley said that he is “quite pleased” to see strong possibilities of a rate hike in June-July. Dudley also said that the Fed is “on track to satisfy a lot of the conditions” for a rate rise. Also, Richmond Fed President Jeffrey Lacker pointed to a June rate hike, after “risks from global and financial developments having virtually entirely dissipated.” Lacker previously wanted a rate hike in April, and now agrees that “the case would be very strong for raising rates in June.” These have intensified rate hike fears among investors, which in turn affected the major benchmarks recently. What is Boosting Real Estate Funds? Despite these concerns, real estate mutual funds registered a return of 8.5% over the past three months, banking on optimism in the sector, according to Morningstar. While most of the broader sector found it difficult to post encouraging first-quarter earnings results, total earnings for S&P 500 construction companies jumped 27.5% from the same period last year on 3.9% higher revenues. Encouraging first-quarter results from the sector indicated that it is on a track for impressive growth at least in the near future. Along with the upbeat earnings results, the sector also got a boost from recently released housing data and a positive outlook. Encouraging Housing Data Among the recent encouraging data, a 1.5% uptick in residential construction spending led expenditure on construction to rise 0.3% from February to a seasonally adjusted annual rate of $1,137.5 billion in March. Over the last 12 months, construction spending has gained 8%. During this period, non-residential construction has increased by 8.3%. Also, the National Association of Home Builders (NAHB) reported that the home builder sentiment index (HMI) remained flat at 58 in May for the fourth consecutive month. This also indicates that the sector continues to experience steady growth, fueled by an improving job market and low mortgage rates. Moreover, the National Association of Realtors reported that existing homes sales gained 1.7% last month to a seasonally adjusted annual rate of 5.45 million, higher than the consensus estimate of 5.38 million. Existing homes sales rose for the second consecutive month. Meanwhile, housing starts increased 6.6% from March to an annual rate of 1,172,000 in April. Housing starts increased by 10.2% during the first four months of 2016, compared with the year-ago period. Significantly, single-family housing starts increased 16.8% year over year during this period. Also, building permits increased 3.6% from March to 1,116,000 last month. Bright Outlook Recently, economists in the NAHB Spring Construction Forecast Webinar predicted that single-family construction may jump 14% from 2015 to 812,000 units this year. Moreover, single-family construction is expected to surge another 19% next year. They also projected 3.3% and 1.3% gains in residential remodeling activity in 2016 and 2017, respectively. Separately, as per the Freddie Mac forecast, total home sales may hit the highest level of 5.9 million units in 2016 in nearly a decade. Sales were estimated to increase further to 6.2 million units next year. Mutual Funds and ETFs to Buy Banking on this encouraging scenario, we have highlighted three mutual funds and three ETFs from the real estate sector that carry favorable Zacks Ranks. Mutual Funds Each of these real estate mutual funds carries a Zacks Mutual Fund Rank #1 (Strong Buy). We expect these funds to outperform their 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, but also on the likely future success of the fund. Moreover, these funds have encouraging year-to-date and one-year returns. The minimum initial investment is within $5000. Also, these funds have a low expense ratio and carry no sales load. Fidelity Real Estate Investment Portfolio No Load (MUTF: FRESX ) primarily focuses on acquiring common stocks of companies involved in operations related to the real estate domain. FRESX has year-to-date and one-year returns of 3.6% and 9.5%, respectively. Its annual expense ratio of 0.78% is lower than the category average of 1.29%. John Hancock II Real Estate Securities Fund (MUTF: JIREX ) invests a large chunk of its assets in equity securities of companies from the real estate sector and REITs. JIREX has year-to-date and one-year returns of 2.8% and 6.5%, respectively. The annual expense ratio of 0.79% is lower than the category average of 1.29%. VY Clarion Real Estate Portfolio S (MUTF: IVRSX ) invests the lion’s share of its assets in equity securities, including common and preferred stocks of domestic real estate companies, including REITs. IVRSX has year-to-date and one-year returns of 1.4% and 4.7%, respectively. The annual expense ratio of 0.96% is lower than the category average of 1.29%. ETFs The three popular real estate ETFs carry a Zacks Mutual Fund Rank #2 (Buy) each and have Medium risk outlook. These ETFs have also attracted significant inflows in the month-to-date period and gained significantly in recent times. Vanguard REIT Index ETF (NYSEARCA: VNQ ) provides exposure across 150 stocks of REITs by tracking the MSCI US REIT Index. With $30.6 billion assets under management (AUM) and a strong daily average volume of around 4 million shares, VNQ is the most popular ETF in its category. The ETF has 0.12% in expense ratio, compared with the category average of 0.45%. The fund has returned 7.7% and 2.9% over the three-month and year-to-date frame, respectively. VNQ has seen an inflow of $535.17 million in the month-to-date period. iShares U.S. Real Estate ETF (NYSEARCA: IYR ) provides exposure across 117 domestic real estate securities by tracking the Dow Jones U.S. Real Estate Index. With $4.6 billion AUM and strong daily average volume of around 9 million shares, it is the second most popular ETF in its category. The ETF has 0.43% in expense ratio, compared with the category average of 0.45%. The fund has returned 8.6% and 2.2% over the three-month and year-to-date frame, respectively. IYR has seen an inflow of $557.95 million in the month-to-date period. iShares Cohen & Steers REIT ETF (NYSEARCA: ICF ) provides exposure across 30 securities large-cap real estate companies by tracking the Cohen & Steers Realty Majors Index. It has $3.7 billion AUM and moderate daily average volume of around 220,000 shares, and is currently the third largest ETF in its category in terms of AUM. The ETF has 0.35% in expense ratio, compared with the category average of 0.45%. The fund has returned 6.9% and 1.2% over the three-month and year-to-date frame, respectively. ICF has seen an inflow of $26.35 million in the month-to-date period. Original Post

Want To Stay Away From Puerto Rico? Bet On These Muni ETFs

The present rocky investing backdrop has made muni bond ETFs winners along with Treasury bonds. Most of the muni bond ETFs are in the green in the year-to-date frame, and many have hit a 52-week high in the last few days. But do these deserve such love given Puerto Rico’s debt crisis? It is widespread news in the muni bonds investing world that Puerto Rico – a big issuer of muni bonds – runs a high risk of default. In early May, Puerto Rico defaulted on $367 million in debt . Buried under recession for years, the island now bears a huge debt load of $72 billion and requires restructuring . A year ago, Charles Schwab’s data revealed that Puerto Rico’s debt obligation reached as high as 95% of its economic output. This was surprisingly higher than 2.4% of the median debt load for the 50 U.S. states. Needless to say, investing in Puerto Rico muni bonds or ETFs that are heavy on these bonds require a strong risk appetite. This does not mean that investors should shy away from entire array of muni bond ETFs. After all, munis are safer bets than corporate bonds and yield better than Treasuries. Notably, the yield on the 10-year Treasury note has slid 48 bps to 1.76%, and the yield on the long-term 30-year bonds has seen a 39 bps plunge to 2.59% this year (as of May 17, 2016). Usually, the interest income from munis is free from federal tax and occasionally even state taxes, making them particularly intriguing to investors falling in the high tax cohort looking to cut their tax burden. With the Fed still having a patient attitude on the rate hike issue this year, the higher yield nature of the munis should quench the thirst for current income. So, risk-averse investors can definitely play muni bond ETFs that are devoid of Puerto Rico exposure. Below, we highlight a few such options. Notably, all the below mentioned ETFs hit a 52-week high on May 17, 2016. iShares National AMT-Free Muni Bond ETF (NYSEARCA: MUB ) MUB has a trailing 12-month yield of 2.33%. The product provides access to more than 3000 municipal bonds with higher credit quality. It has a Zacks ETF Rank #3 (Hold) with a High risk outlook. SPDR Nuveen Barclays Municipal Bond ETF (NYSEARCA: TFI ) The $1.90 billion ETF holds 882 bonds in its portfolio. The fund charges 23 bps in fees and yields 1.85% annually (as of May 17, 2016). Moreover, this fund houses higher investment-grade bonds. TFI has a Zacks ETF Rank #3 with a Medium risk outlook. VanEck Vectors AMT-Free Long Municipal Index ETF (NYSEARCA: MLN ) Devoid of any meaningful exposure to Puerto Rico, the top priorities of this fund are California (18.8%) and New York (13%). It yields 3.16% annually (as of May 17, 2016). More than half of the portfolio is high-quality in nature. MLN has a Zacks ETF Rank #3 with a High risk outlook. VanEck Vectors AMT-Free Intermediate Municipal Index ETF (NYSEARCA: ITM ) The fund replicates the performance of the medium-duration bonds. New York (16.4%), California (15.5%) and Texas (10.3%) have a double-digit exposure in the fund. ITM yields 2.22% annually (as of May 17, 2016). Investment-grade bonds make up a major share of the fund. It has a Zacks ETF Rank #3 with a High risk outlook. Original Post

Steer Toward Small-Caps With Hands On The Wheel

By James MacGregor, Bruce Aronow, Samantha S. Lau, Shri Singhvi The pullback in smaller US stocks over the past year offers a compelling opportunity for investors who want to restore their exposure to the asset class. But how they go about it matters. Even with a modest recovery this spring, absolute valuations for small-caps remain below their historical average. And after two years of underperforming large-caps, small-caps also look cheap relative to their larger peers. As we detailed in a previous blog post , we think the punishment that small- and mid-cap (SMID-cap) stocks endured during the recent downturn was unwarranted, and we expect a rebound as risk appetite returns. That’s why today’s valuations in much of the small-cap universe look so attractive. For investors who may have lightened up on their holdings, now looks like a good time to reload. Choosing the Right Investment Strategy Still, the strategy investors choose can make all the difference. Investors have lately been putting more money in exchange-traded funds and passive mutual funds that track small-cap indices, such as the Russell 2000 Index. This mirrors the popularity of passive strategies in other asset classes. Here’s the problem: the small-cap market isn’t as efficient as the one for large-caps, and shares are often misunderstood – and mispriced. Over time, a hands-on, active approach has produced better results (Display) . We don’t see that changing, and we suspect passive strategies will benefit less from a small-cap recovery. Click to enlarge Digging Deep and Adding Value Why do active managers have an advantage? To start with, smaller companies get less research coverage than larger ones, so their business models and prospects are not always well understood. Active managers can add value by digging into fundamentals and identifying fast-growing companies that the rest of the market has underestimated or overlooked. Think of it as finding a Netflix (NASDAQ: NFLX ) before video streaming takes off. An active approach works better for value-minded investors, too. Because smaller companies get less attention from analysts, their shares tend to get hit harder than large-cap stocks when markets get volatile. But a bigger price decline means more opportunity for managers to add value. For instance, managers who can distinguish between companies most likely to recover quickly, and those that face steeper challenges stand a good chance of boosting returns and creating value for investors. The Drawbacks of Indexing Of course, not every small-cap stock or sector is cheap today. Investors abandoned most small-cap sectors during the sell-off, but not all. A clutch of “safer” sectors that tend to deliver more stable earnings bucked the trend. These included value-oriented sectors such as utilities and real estate investment trusts (REITs), the so-called “bond proxies.” In the growth space, biotechnology- and Internet-related names also attracted sizable inflows during the multi-year run-up that peaked last summer. These sectors have done very well over the past few years – so well, in fact, that they now look overpriced relative to the rest of the market. But if you’re using a passive, index-tracking strategy to gain access to the market, you’re pouring a lot of money into these sectors, which account for a large share of the broader market. Utilities and REITs, for instance, comprise almost one-quarter of the Russell 2000 Value Index (Display) . Click to enlarge While these sectors have done well during the small-cap pullback, we think they have much less room to rise in the future. The rest of the smaller-cap market, on the other hand, looks attractive, and we think it will outperform in an equity market recovery. A skilled active manager can be choosy and zero in on high-quality, inexpensive stocks that have the most potential to deliver strong returns, while avoiding the pricey ones. Investors who rely on passive vehicles, on the other hand, may miss a good share of any small-cap rebound, because these vehicles, by design, will have large positions in the most overvalued sectors. We think reallocating to a small- or SMID-cap portfolio can boost investors’ return potential. But the key to success, in our view, comes down to strategy. Active managers can structure their portfolios so they benefit only from the risks that are being mispriced. A passive approach can’t match that. The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. James MacGregor, CFA, is Chief Investment Officer – Small and Mid-Cap Value Equities Bruce K. Aronow, CFA, is Chief Investment Officer – US Small/SMID-Cap Growth