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Catch These Brazil ETFs On A Rebound

With a highly charged political drama in the backdrop, the Brazil stock market has been one of the best performers this year. The benchmark Ibovespa is up 14.5% year to date (as of Mar 11, 2016). This rebound in Brazil after a disappointing 2015 can be attributed to improving commodity prices and a new round of speculations regarding a change in government. Brazil relies heavily on export to fuel its economic growth. As per data from International Monetary Fund’s World Economic Outlook Database , Brazil’s total Gross Domestic Product amounted to $3.208 trillion in 2015 out of which exports accounted for approximately 6% of the output. The country exports commodities like oil, iron, steel, soy and coffee. With oil prices stabilizing after hitting rock bottom and iron ore and soybean prices up this year, Brazilian exports look poised for a comeback (read: Can Emerging Market ETFs Sustain the Rally? ). Meanwhile, turmoil on the political front continues. Speculations that President Dilma Rousseff will be impeached were afoot after her predecessor and mentor, Luiz Inacio Lula da Silva, was taken into custody for questioning related to a corruption probe. Investors in favor of a change in government believe that new leadership could be in a better position to revive the battered economy. The Brazilian economy has been bearing the brunt of economic slowdown and an endless streak of corruption scandals for some time now. A new government could infuse a fresh lease of life into the ailing economy which otherwise is expected to contract for a second straight year in 2016. After shrinking 3.9% in 2015, the economy is expected to contract by 3.5% this year (read: Brazil Stocks, ETFs Ignore Slump: Rally on Rousseff Issues ). Apart from that, markets were also buoyed by potential rate cuts by Brazil’s central bank. Although in its meeting earlier this month, the central bank kept the benchmark Selic rate at 14.25%, several analysts are of the view that inflation would peak at around the end of the first quarter, which could lead the central bank to consider lowering interest rates later in the year. A rate cut could help boost consumer and corporate spending and bring cash to equities from safer fixed income alternative. ETFs in Focus Even though the Brazilian economy is still in shambles, early signs of a recovery can be seen. In the light of these developments we highlight four ETFs – the iShares MSCI Brazil Capped ETF (NYSEARCA: EWZ ) , the Market Vectors Brazil Small-Cap ETF (NYSEARCA: BRF ) , the iShares MSCI Brazil Small-Cap ETF (NYSEARCA: EWZS ) and the Global X Brazil Mid Cap ETF (NYSEARCA: BRAZ ) – that have jumped 30.8%, 23.9%, 26.9% and 19.6% respectively, in the last 10 days. So, investors looking to tap into this market could consider the following ETFs in the days to come. EWZ This product tracks the MSCI Brazil 25/50 Index and is the largest and most popular ETF in the space with AUM of over $2.5 billion and average daily volume of more than 19.8 million shares. It focuses mostly on large cap stocks and charges 64 bps in fees per year from investors. Holding 61 stocks in its basket, the fund is highly concentrated in its top two holdings with one-fifth of the portfolio invested in them. In terms of industrial exposure, financials dominates the fund’s return at 37.1%, followed by consumer staples (19.4%), energy (10.3%) and materials (10.7%). BRF This fund provides exposure to the small cap equities of the Brazilian market and tracks the Market Vectors Brazil Small Cap Index. The fund holds a total of 67 small cap stocks and has a total asset base of $77.3 million. The fund trades in average daily volume of 55,000 shares. The fund is well diversified with no stock holding more than 5% of weight. Among the different sectors, consumer cyclical and consumer defensive occupy the top two positions with 42% of investment made in these two categories. Market Vectors Brazil Small-Cap ETF charges a fee of 60 basis points for the investment. Investor should invest in small cap companies with caution as these are more volatile than their large cap counterparts and may prove to be weaker than large cap companies at times of global crisis. EWZS Another fund tapping the small cap companies of the Brazilian market is EWZS. The fund seeks to track the MSCI Brazil Small Cap Index. The fund has a total asset base of $19.9 million and trades in average daily volume of almost 49,000 shares. The fund holds a total of 53 stocks with none holding more than 6% weight. Among sectors, the fund has 40.4% of assets invested in consumer discretionary followed by industrials (16%) and finance (13.1%). The fund charges an expense ratio of 64 basis points. BRAZ The Brazil Mid Cap ETF has been designed to tap the mid cap market of Brazil. The fund seeks to track the Solactive Brazil Mid Cap Index. The index comprises mid-market capitalization securities of companies that are domiciled or have their main business operations in Brazil. The fund, through an asset base of $3.3 million, taps 41 stocks. The fund has average daily volume of 1,500 shares. However, BRAZ appears to be highly concentrated in the top 10 holdings with 52% of the assets invested in those securities. Among sectors, the fund has 19% invested in basic materials, thereby holding the top position in terms of sector exposure. The investors pay an expense ratio of 69 basis points for the investment made in the fund. Link to the original post on Zacks.com

Stock Market Control

Summary History shows there is a one in three chance that stocks will drop each year regardless of whatever happened the prior year. We think there are certain things we can’t control in the stock market. We try to control what we own, how cheap it is, how often we make changes to our portfolio and quality from the companies we own. We saw the chart below in a recent Marketwatch.com column from Mark Hulbert. It shows the likelihood of the stock market going up or down in the next year, based on how it did the prior year: This got us thinking about what you can and can’t control in the U.S. stock market. After all, the reason that stocks outperform other liquid asset classes over long stretches of time is the uncertainty and variability of returns. Here is a short list of things, which can’t be controlled in the U.S. stock market: 1. Stock market results The chart shows that there is a one in three chance that stocks will drop each year regardless of whatever happened the prior year. We don’t think investors should buy or own common stocks if they feel emotionally ill-equipped to withstand a losing year. 2. Stock Market Volatility Even in good years, stocks can swing wildly from week to week and month to month. The average year sees a peak to trough decline of 10%, and we have seen a 20% or greater decline about once every five years on average. Twice in the last 16 years, we saw the S&P 500 Index decline by more than 30%. Granted, that is an unusual occurrence, since there have been only five such declines since 1940. We remember telling common stock investors near the bottom of the stock market in March of 2009 that it would likely take about four years to get their portfolio value back to where it was before the decline in 2008-09. Those courageous and patient investors have been well rewarded by the bull market since then. An owner of common stocks should expect gyrations as part of the price of admission and use holding periods, which allow for recovery and success. The wise investor seeks to use wide, sharp and emotional price swings in their favor. 3. Stock Market Unpredictability I am approaching my 36th year participating in the U.S. stock market and can say that nobody has proven any consistent ability to predict price moves in the indexes. I’ve read the prognostications of Joe Granville, Stan Weinstein, Marty Zweig, Comstock Partners, Robert Prechter, George Gilder, Nouriel Roubini, Meredith Whitney and numerous other very smart people in my career. The one thing they have in common is they attracted a large following after being very right on a major stock market prediction. However, doing so consistently is a bit like trying to find the pot of gold at the end of the rainbow. We recently read the musings of a highly respected asset allocation firm about their seven-year predictions of asset class returns. Their prediction for the U.S. stock market is extremely negative, which would scare a normal observer and could very well end up being valid. However, we have been reading their predictions for the last ten years and have seen their consistent pessimism for U.S. stocks. We also remember their optimism about emerging markets and commodities. Surely, these predictions from the last five years must have cost someone who followed their advice some serious money. 4. Relative Performance A study of the best stock picking disciplines of the last 60 years (Buffett, Neff, Templeton, Lynch and Carret) showed that they underperformed the S&P 500 Index 35% of the calendar years during their long and illustrious track records. We expect to be subject to those statistics at best and have very little control over which years we get beat by the index. Our goal is to beat the stock market over ten and twenty-year time periods and we believe those results would be unattainable if you try and smooth that truth. Things We Seek to Control We’re not about being glum or dour. We certainly believe there are things that investors can control. We’ve outlined three key tenets to consider when investing in common stocks. 1. Valuation Matters Dearly You can control which stocks you own, and you are free to emphasize stocks, which are cheap in relation to profits, free cash flow, dividends or book value. Studies show that results are improved over both short and long term holdings periods by constantly reemphasizing cheaper common stocks. This requires a contrarian nature, because when these common stocks are cheap their warts show easily. Therefore, you need to be lonely and courageous. 2. Activity Eats into Returns A wise financial advisor told us in early 2012 that a stock portfolio is like a bar of soap: the more you rub it, the smaller it gets. A 2013 study in the Financial Analysts Journal showed that the average turnover among U.S. large-cap equity funds has been 62% and it costs the average equity mutual fund in the database 0.81% (81 basis points) per year in returns. We seek to own securities for an average of over seven years and attempt to save significantly on trading costs by doing so. If you can control yourself and be very patient, we think you can improve long-term results. 3. Quality Adds Alpha and Promotes Patience Studies have shown that qualitative characteristics like a strong balance sheet, consistently high profitability and low earnings variability add to returns over long time periods. These qualities give owners more ability to stay put in bad stock market environments and/or when a company temporarily stumbles. Riding through thick and thin can be controlled and is augmented if there is no threat of one of your companies going out of business. Again, if you can control yourself, you can use long-durations to let quality help you overcome the forces you can’t control. Conclusion We make no effort to have any control over stock market results, volatility, unpredictability and relative performance. We haven’t got any special ability to know what stocks will do next year or how we will fare on a relative basis. What we do try to control is what we own, how cheap it is, how often we make changes to our portfolio (we subscribe to “lethargy bordering on sloth” – Warren Buffett) and what kind of quality we demand from the companies we buy and own. We do this based on our eight criteria for stock selection. In practicing our discipline, we seek high quality companies, purchased at bargain prices and have a desire to hold them for long time periods. In other words, we try to control ourselves, our portfolio and apply long-durational and favorable probabilities. The information contained in this missive represents SCM’s opinions, and should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results. Bill Smead, CIO and CEO, wrote this article. It should not be assumed that investing in any securities mentioned above will or will not be profitable. A list of all recommendations made by Smead Capital Management within the past twelve-month period is available upon request.

Valuation Dashboard: Technology – Update

Summary Four key factors are reported across industries in the technology and telecom sectors. They give a valuation status of industries relative to their history. They give a reference for picking stocks in each industry. This is part of a monthly series of articles giving a valuation dashboard in sectors and industries. The idea is to follow a certain number of fundamental factors for every sector to compare them to historical averages. This article covers technology and telecommunications. The choice of the fundamental ratios used in this study has been justified here and here . You can find in this article numbers that may be useful in a top-down approach. There is no analysis of individual stocks. You can refine your research by reading articles by industry experts here . A link to a list of stocks to consider is provided in the conclusion. Methodology Four industry factors calculated by portfolio123 are extracted from the database: price/earnings (P/E), price to sales (P/S), price to free cash flow (P/FCF), and return on equity (ROE). They are compared with their own historical averages ” Avg .” The difference is measured in percentage for valuation ratios and in absolute for ROE, and named “D-xxx” if xxx is the factor’s name. For example, D-P/E = (AvgP/E – P/E)/AvgP/E. It can be interpreted as a percentage in underpricing relative to a historical baseline: the higher, the better. It points to overpricing when negative. ROE is already a percentage. A relative variation makes little sense. That’s why we take the simple difference: D-ROE = ROE – AvgROE. The industry factors are proprietary data from the platform. The calculation aims at eliminating extreme values and limiting the influence of the largest companies. These factors are not representative of capital-weighted indices. They are useful as reference values for picking stocks in an industry, not for ETF investors. Industry valuation table on 12/8/2015 The next table reports the four industry factors. For each factor, the next “Avg” column gives its average between January 2001 and October 2015. It excludes the dot-com bubble and may be taken as an arbitrary reference of fair valuation. The next “D-xxx” column is the difference as explained above. So there are three columns for each ratio. P/E Avg D- P/E P/S Avg D- P/S P/FCF Avg D- P/FCF ROE Avg D-ROE Internet 59.55 38.33 -55.36% 3.58 2.93 -22.18% 34.55 29.72 -16.25% -24.54 -26.83 2.29 IT Services 27.53 23.34 -17.95% 1.54 1.16 -32.76% 20.69 18.68 -10.76% 10.25 2.42 7.83 Software 42.9 33.79 -26.96% 4.17 2.81 -48.40% 35.12 23.95 -46.64% -10.77 -8.17 -2.6 Communications Equipment 33.73 28.48 -18.43% 1.42 1.61 11.80% 24.56 24.1 -1.91% -2.79 -9.61 6.82 Computers & Peripherals 20.86 24.67 15.44% 1.26 1.24 -1.61% 20.87 21.68 3.74% -12.67 -8.33 -4.34 Electronic Equipment 21.54 21.26 -1.32% 1.29 1.3 0.77% 22.54 21.35 -5.57% 1.27 -1.77 3.04 Semiconductors* 29.16 31.77 8.22% 2.43 2.41 -0.83% 31.92 28.86 -10.60% 1.47 -1.34 2.81 Diversified Telecom Services 24.42 19.95 -22.41% 1.64 1.2 -36.67% 26.64 23.83 -11.79% 0.93 -11.97 12.9 Wireless Telecom Services 21.01 27.57 23.79% 1.04 1.75 40.57% 46.5 31 -50.00% 3.22 -14.25 17.47 * Averages since 2003 Valuation The following charts give an idea of the current status of industries relative to their historical average. In all cases, the higher the better. Price/Earnings: Price/Sales: Price/Free Cash Flow: Quality (ROE) Relative Momentum The next chart compares the price action of the Technology Select Sector SPDR ETF ( XLK ) with SPY (chart from freestockcharts.com). (click to enlarge) Conclusion XLK has outperformed SPY by about 5% in the last three months. On this period, the five best performing S&P 500 tech/telecom stocks are Autodesk (NASDAQ: ADSK ), Activision Blizzard (NASDAQ: ATVI ), KLA-Tencor (NASDAQ: KLAC ), Nvidia (NASDAQ: NVDA ) and SanDisk (NASDAQ: SNDK ). ADSK and ATVI have hit an all-time high recently. IT services, software, computers and peripherals have improved their valuation factors since last month. Electronic equipment and semiconductors look good, with fair valuation factors and a quality factor above the historical average. Wireless telecom services also are above their average quality, and two valuation factors out of three point to underpricing. The software industry looks like the weakest one from a fundamental point of view, with all metrics in negative territory. However, there may be quality stocks at a reasonable price in any industry. To check them out, you can compare individual fundamental factors to the industry factors provided in the table. As an example, a list of stocks in technology beating their industry factors is provided on this page . If you want to stay informed of my updates on this topic and other articles, click the “follow” tab at the top of this article.