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8 ETFs To Watch In December

Traditional investors may pin hopes on the Santa Claus rally in the most successful month of the year, i.e., December, but they should note that this time Christmas might be a little dull, defying the natural progression of the end-of-season rally. A consensus carried out from 1950 to 2013 has revealed that December has ended up offering positive returns in 49 years and negative returns in 16 years, with an average return of 1.59%, as per Moneychimp , the best of the year. But this year, the Fed is scheduled for a rate hike after a decade, provided the economic momentum remains the same. And though the move now seems well digested by the market, a certain shock is inevitable post lift-off. In any case, 2015 had been quite downbeat so far. Even historically strong months couldn’t live up to investors’ expectations. All these made December a keenly watched month for the investing legion. We thus pinpoint a few ETFs that are highly in focus and could hop or drop in December. iPath U.S. Treasury Flattener ETN (NASDAQ: FLAT ) As the Fed hikes the benchmark interest rate, the initial blow would be at the short-end of the yield curve. The investing world has already started to prepare for the move. As a result, yield on the 6-month Treasury note soared 15 bps, from the 0.27% level seen at the start of November to 0.42% on November 30. In the same time frame, the yield on the 10-year Treasury note rose just 1 basis point to 2.21%. In fact, in the recent sessions, yields on 10-year U.S. Treasuries declined, indicating a flattening of the yield curve. So, a keen watch on the inverse bond ETF FLAT is needed to earn some quick gains from the bond market. This product provides inverse exposure to the Barclays US Treasury 2Y/10Y Yield Curve Index, which delivers returns from the steepening of the yield curve through a notional rolling investment in U.S. Treasury note futures contracts. FLAT was up 1.3% in the last one month. ALPS Barron’s 400 ETF (NYSEARCA: BFOR ) This all-cap U.S. equity ETF could be in watch in December. The fund could be used as a representative of the total stock market performance in a volatile (expectedly) month. It is made up of high-quality U.S. stocks. Since the month of December is likely to stay volatile and large-cap stocks might be hurt by a rising greenback post Fed tightening, an all-cap quality U.S. ETF might be the key to win ahead. ALPS U.S. Equity High Volatility Put Write Index ETF (NYSEARCA: HVPW ) The markets are likely to be wobbly post lift-off, and volatility levels should spike. Going bull on high-beta stocks may lead you to losses then. If this happens, investors can have a look at alternative ETFs like HVPW. The fund looks to take advantage of the stocks with the highest volatility in the U.S. equity markets. As the volatility in a given stock rises, so does the price of the options traded on it. The underlying index of the fund seeks to generate income by selling put options on the most volatile stocks in a given two-month period, along with interest earned on T-bills. HVPW added over 0.6% in the last one month. Vanguard High Dividend Yield ETF (NYSEARCA: VYM ) Since income ETFs underperform when rates rise, this high-income U.S. equities ETF might fall out of investors’ favor in December. However, still-subdued inflation and global growth worries might keep the yields on benchmark 10-year U.S. Treasury from rising fast. If this happens, VYM may not be as hit as it is feared right now. As of November 30, 2015, the fund yielded about 3.09%, while the yield on benchmark 10-year U.S. Treasury is 2.21%. VYM is down about 0.9% in the last one month (as of November 30, 2015). iShares U.S. Preferred Stock ETF (NYSEARCA: PFF ) Even in a rising rate environment, there are ways beat to the benchmark Treasury yield and earn smart income. Preferred stocks are one such option. Preferred stocks are hybrid securities that are characterized by both debt and equity. They have a higher claim on assets and earnings than common stock. These securities are less volatile than stocks, and yield in the range of 5-6%. PFF yields 5.87% as of November 30, 2015, while it charges 47 bps in fees. The fund was up about 3% in the last one month. iShares Russell 2000 ETF (NYSEARCA: IWM ) Small-cap stocks are the barometer of domestic economic health. So, when the U.S. economy shifts gear in December and experiences policy normalization, small-cap stocks should be the most beneficial zone. While small-cap growth ETFs like the PowerShares Fundamental Pure Small Growth Portfolio ETF (NYSEARCA: PXSG ) and the iShares Russell 2000 Growth ETF (NYSEARCA: IWO ) have already started rallying, we believe these could be high-risk choices, as smaller-capitalization and growth stocks are highly volatile in nature and succumb to a slowdown once the Fed hikes rates. So, investors can keep a close watch on small-cap blend ETFs like IWM. This Zacks Rank #2 (Buy) ETF was up over 3.2% in the last one month. WisdomTree International Hedged Dividend Growth ETF (NYSEARCA: IHDG ) While the Fed is preparing for a hike, other developed economies of the world and a few emerging economies are going the opposite direction. Due to growth issues, global superpowers like Europe, Japan and Australia are presently pursuing easy money policies. While stocks of the concerned region are likely to soar, a currency-hedged approach is essential to set off the effect of a surging greenback. IHDG serves both aspects. Moreover, IHDG takes care of investors’ income too, as the fund selects dividend-paying companies with growth features in the developed world ex-U.S. and Canada. This Zacks ETF Rank #3 (Hold) ETF was up over 1.9% in the last one month and yields 1.86%. Market Vectors ChinaAMC SME-ChiNext ETF (NYSEARCA: CNXT ) China, the epicenter of the global chaos in summer, should also be in focus in December. In any case, this segment is exhibiting excessive volatility lately, throwing shocks and surprises now and then. While Chinese stocks and ETFs soared at the start of November on a flurry of economic and demographic policy easing, it suffered its worst decline since summer to conclude the month. News about securities regulators’ probe into brokerages caused a stock market rout in China. On the positive side, the IMF agreed to declare yuan as a reserve currency, which hints at a stable economy. So, Chinese ETFs are on the fence now, with possibilities and perils on either side, and investors may be interested in tracking its course in December. Original Post

High-Yield Utility That Has Fallen Off Everyone’s Radar

Summary Brookfield Renewable Energy yields 6.6%, over 1.6% higher than the typical utility that yields under 5%. The company is riding on the mega-trend train of a global growing demand in renewable energy, and the business has the expertise to bank on acquisition opportunities. The business forecasts dividend growth of 5-9% per year through 2020 and a long-term shareholder return of 12-15%. I’m primarily a dividend growth investor. So, current income and growth of that income is important to me. Utilities are typically known for their high yields. So, buying utilities, I expect a good part of returns to come from their dividends. The lower the price goes, the higher the yield climbs. That’s the case with Brookfield Renewable Energy Partners LP (NYSE: BEP ), as it has fallen over 18% from a year ago. (click to enlarge) Compared to most other popular utilities, Brookfield Renewable has performed quite poorly price-wise in the past year. Particularly, I’ve put it in a chart with Consolidated Edison, Inc. (NYSE: ED ), Duke Energy Corp (NYSE: DUK ), WEC Energy Group Inc (NYSE: WEC ), and Southern Co (NYSE: SO ). Source: Google Finance The utility group typically yields in the 4-5% range, and Brookfield Renewable stands out by yielding 6.6%. But, perhaps, that’s because it is viewed as higher risk with an S&P credit rating of BBB, while the others all have a rating of A-. BEP Dividend Yield (TTM) data by YCharts To consider it as a potential utility holding, the question you want answered is probably: “Is Brookfield Renewable Energy’s distribution sustainable?” First, let’s find out if it’s the kind of business you want to own. Business and Assets Brookfield Renewable has started investing in hydropower facilities 20 years ago. Today, it has become one of the biggest public pure-play renewable businesses with global assets. It focuses on accumulating long-life and low-cost assets that will continue generating cash flows. Since it requires deep operational knowledge and marketing expertise to enter the space, there’re significant barriers to entry. Brookfield Renewable has $19B worth of power assets, including around 250 power generating facilities across 14 markets in 7 countries. 81% of its 7,300 MW capacity is generated by hydroelectric facilities with about 18% generated by wind power. Currently, 50% of its assets are in the U.S., 25% are in Canada, 20% are in Brazil, and 5% are in Europe. Not Just an Income Play, But Also a Growth Play Demand for renewable energy has been growing. New investments in renewables around the globe have grown from $45B in 2004 to $270B in 2014, a CAGR of 19.6%. More recently, from 2013 to 2014, they grew at a rate of 16.4%, which is still admirable growth. Specifically, hydro power capacity grew at a CAGR of 4% over the decade, and 3.6% from 2013 to 2014. Although its growth only keeps pace with inflation, hydro power generation is low cost, and is more reliable than wind power generation. On the other hand, wind power capacity grew at a CAGR of 22.7%, and 16% from 2013 to 2014. In the last four years, Brookfield Renewable acquired and developed about 3000 MW, which is a CAGR of about 14%. How Does Brookfield Renewable Grow? Over the next 5 years, Brookfield Renewable plans to deploy over $3 billion of equity, expecting 15% returns. The focus will continue to be on hydro power generation, and acquiring global renewable assets at attractive prices. For example, in 2004, Brookfield Renewable acquired a 600MW capacity pumped storage asset with its 50% joint partner during a period of low power prices for $99M. It then entered into a 15-year contract that creates a predictable cash flow stream. At the same time, it’s not shy from selling for good profit as well. For example, in 2009, Brookfield Renewable acquired an early-stage wind power development project for $90 million. It finished constructing it and optimized operations by leveraging its wind expertise to maximize value. In July 2015, it sold the asset by attracting global bidders and generated an internal rate of return of about 30%. Like it did in North America and Brazil starting in 2011, Brookfield Renewable can continue its value creation process and repeat it in Europe, Latin America, and other new markets. A Safely Growing Dividend As Brookfield Renewable grows, it doesn’t forget to reward shareholders. From the distribution that commenced in 2011, it has grown from a quarterly distribution of 33.75 cents per share to 41.5 cents per share this year, a CAGR of 5.3%. About 90% of Brookfield Renewable’s cash flows have a 17-year average contract term with inflation-linked escalation, so its cash flows remain stable to support its distributions. Further, it targets an FFO payout ratio of 70%. With FFO expected to increase by $220-$280M a year, Brookfield Renewable forecasts distribution growth of 5-9% per year through 2020. Valuation Brookfield Renewable believes it’s intrinsically worth $34 a share even when excluding potential for rising prices, and existing project pipelines. At $25, it is discounted by over 26%. Adding in organic growth, the business believes it’s easily worth over $40 in the future, implying a significant discount of over 37%. (click to enlarge) Source: Brookfield Renewable October Investor Meeting – Slide 35 What Should Be Your Returns Expectation? Other than forecasting distribution growth of 5-9% per year through 2020, the business’s objective is to deliver long-term total returns of 12-15% to shareholders annually. With a current yield of 6.6% and the distribution estimated to grow at least 5%, that implies a rate of return of at least 11.6%, which is close to the low-end of that objective. Conclusion I just added to my position in Brookfield Renewable last week. How about you? Did you buy any utilities recently? Share in the comments below! If you like what you’ve just read, follow me! Simply click on the “Follow” link at the top of the page to receive an email notification when I publish a new article. Resources and References Brookfield Renewable October Investor Meeting ( pdf ) Brookfield Renewable November Presentation ( pdf ) Ren21 Renewables 2015 Report ( pdf )

Chasing Beta Outside The U.S

Summary According to famous value investor Murray Stahl, beta is out of favor. The contrarian play is to seek out beta. The Powershares S&P Intl Dev Hi Beta ETF is one way to go long beta outside the U.S. Examination of its valuation and contents show how contrarian this bet really is and whether there is value. In his latest investment commentary , famous investor Murray Stahl says investors are now en masse shunning beta in favor of stability. This influx of funds into ETFs with stable prices further helps this category to stabilize. This powers a virtuous cycle that has led to large inflows to so-called low-volatility products or low-beta products. The contrarian thing to do is to go high beta. I don’t think it is a coincidence I’m finding lots of bargains among companies with highly volatile earnings patterns. The contrarian idea can be played through ETFs very easily and one option is the PowerShares S&P Intl Dev Hi Beta ETF (NYSEARCA: IDHB ). IDHB data by YCharts What is beta? Beta shows you the level of volatility in asset prices compared to a benchmark. The baseline volatility is that of the benchmark and it is equal to 1. Assets exhibiting more volatile prices have a beta above 1 and assets with more stable pricing profiles have betas below 1. It is all about movement and it doesn’t matter in which direction it goes. Portfolio Holding high-beta stocks isn’t easy. At times it requires nerves of steel. Often they are highly levered, as leverage amplifies underlying developments for better or for worse. This particular ETF is focused on developed markets ex-U.S. and ex-South Korea and within those markets targets specifically the 200 stocks with the highest beta over the past 12 months. Generally stocks with float under $100 million or less than $50 million of annual trading volume are excluded. So how does such a portfolio look in practice? Well, its top 10 holdings are: Penn West Petroleum (NYSE: PWE ), Alibaba Health Information Technology ( OTC:ALBHF ), Canadian Oil Sands ( OTCQX:COSWF ), Meg Energy Corp. ( OTCPK:MEGEF ), Det Norske Oljeselskap ASA ( OTCPK:DETNF ), Tullow Oil PLC ( OTCPK:TUWOY ) ( OTCPK:TUWLF ), Nokian Tyres PLC ( OTCPK:NKRKY ) ( OTC:NKRKF ), Raiffeisen Bank International AG ( OTC:RAIFF ) ( OTCPK:RAIFY ), Hargreaves Lansdown PLC ( OTCPK:HRGLF ) ( OTCPK:HRGLY ) and DNO ASA ( OTCPK:DTNOF ) ( OTCPK:DTNOF ). Most of the portfolio companies have large or medium market caps. Together these categories make up 68% of the portfolio. On average, the companies have one-third the market cap of the benchmark constituents, so on this front there is a clear discrepancy between the two. It makes sense that prices of small caps are somewhat more volatile, as their earnings are more profoundly impacted by a subset of real-world events. Financial services is the largest sector taking up 24% of the portfolio. This is 9% below the benchmark weighting. The ETF allocated 21.55% of its funds to the energy space, which is double that of its benchmark. A recovery in oil would definitely not hurt this ETF’s performance. One last important sector is basic materials at 14.39%. Another sizeable bet that is different from the benchmark. From a geographic diversification perspective, the ETF disappoints because 83% of the money is bet on companies in continental Europe and another 16% on companies in the U.K. In summary, this ETF is a short cut to bet on Europe / Energy and Leverage. Sounds good, doesn’t it? Valuation The concept of overweighing Europe / Energy and Leverage does not really excite me either, but looking at the ETF from a valuation perspective, it starts to look quite a bit more attractive. It doesn’t score well on forward earnings, but beats the benchmark easily on a present price/cash flow basis. It is also much more attractive on a price/sales basis and offers a slightly higher dividend yield. PowerShares S&P Intl Dev HI Beta ETF MSCI ACWI Ex USA Value NR USD Price/Forward Earnings 14.03 12.56 Price/Book 0.86 1.13 Price/Sales 0.56 0.82 Price/Cash Flow 3.49 4.02 Dividend Yield % 4.9 4.45 Data: morningstar Expenses The ETF’s expense ratio is about 0.35%, but Invesco agreed to waive 0.10% of fees until 2016. Probably in an attempt to increase the assets under management. The expenses are modest, especially considering it invests in mostly foreign issues. Bottom line Even if the contrarian play of going long beta but the idea of going long this ETF does not it is still a useful starting point for further research. Beta is a decidedly backward-looking way of evaluating stocks. If you can dig up companies that experienced high volatility in the past twelve months but where it’s smooth sailing from here on out and buy them at low price/cash flow multiples, you are doing great even if beta stays out of favor. For the brave and lazy, this ETF can serve as an all-in buffet. 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.