Tag Archives: europe

Continental Europe Materializing As Intermediate-Term Beta Play

In a mid-February address in front of the European Parliament, ECB President Mario Draghi highlighted both the progress of the Eurozone’s economic recovery as well as the evolving challenges still confronting the region, particularly as it relates to mounting concerns over emerging market economies and broader geopolitical risks. In his speech , however, Draghi helped eliminate one of the big question marks facing investors in the region when he affirmed unequivocally that the European Central Bank “will not hesitate to act” if required to help put the euro-area economy on still firmer ground. This, in addition to other catalysts, is among the key factors driving optimism around European equities, as the region could provide one of the more attractive destinations for investors over the next 12 to 18 months. As most marketwatchers are well aware, the economic travails in Europe in the years following the 2008 financial crisis left many investors in the region with white knuckles and lingering suspicions around the durability of any recovery. But today, some 18 months after the U.S. economy has stabilized, it’s becoming evident that European business and economic cycles have finally established a foundation from which more growth will likely come. With an improving macro-economic picture and Mario Draghi affirming his commitment to maintain an accommodative monetary policy, investors in the region can still benefit from valuations that on a relative basis reflect the region’s plodding, indirect path to recovery as opposed to the improving opportunity set now materializing. And while renewed global economic unrest and market volatility may give pause to investors still battle worn from the region, we believe the improving macro picture, the ECB’s ongoing commitment to stimulus, and the attractive valuations, together, make Continental Europe one of the more compelling areas for investors seeking returns amid a volatile global environment. Normalizing Growth In a lot of ways, the opportunity for equities in Continental Europe resembles a coiled spring. The double-dip recession served to defer the start of the region’s economic cycle, but with real GDP growth now beginning to accelerate, the gap between the euro area and the rest of the world is quickly closing (see charts, below). Click to enlarge And while the OECD recently lowered its global growth forecasts , it still projects the Eurozone economy to expand by 1.4% and 1.7% in 2016 and 2017, respectively. Even as the macro picture doesn’t necessarily signal the likelihood for rapid growth, the transition to more consistent and steady expansion will lend itself to improved performance at the corporate level. As companies in the region have focused on cost-cutting initiatives over the previous seven years, the transition back to a growing economy means a large proportion of these businesses are well positioned to increase revenue and earnings and improve margins. Moreover, even as the banking sector in Europe remains an area of concern, bank balance sheets have improved and significant reforms have been implemented, which together have translated into a more robust capital markets environment with available capital to support business expansion. Coupled with GDP growth, the added liquidity is a critical catalyst as most key sectors in Europe seek to resume a growth trajectory. According to S&P Investment Advisory Services, eight out of 10 sectors from the Euro 350 are expected to show significant earnings growth in 2016. Of the eight sectors expected to grow profits, seven are pegged to show double-digit increases this year, led by Technology, Consumer Discretionary and Financials. Only the Energy and Materials sectors are currently projected to show year-over-year profit declines. Click to enlarge Incoming Wave of Liquidity While the European Central Bank was slower to respond than the United States Federal Reserve coming out of the financial crisis, since 2014 the ECB has made up for lost time. In June 2014, the ECB pushed the deposit rate into negative territory, while subsequent interest rate cuts have left the deposit rate at negative 0.4 percent, the most recent cut coming in the second week of March. The ECB also enacted its version of quantitative easing at the start of 2015 and alongside its March interest rate cut, also boosted its bond-buying program from €60 billion a month to €80 billion and made euro-denominated non-bank corporate bonds eligible for the first time. These efforts have had a positive effect, reflected in both economic growth as well as a gradual recovery in credit conditions. In 2015, loans to both non-financial corporations and households showed material increases. (See charts, below.) Click to enlarge For those parsing the minutes from the ECB’s February monetary policy meeting , it was clear that the European Central Bank remains intent on using all means necessary to ensure the recovery stays on track. The ECB, four separate times, underscored that it expected policy rates to remain at current or lower levels for an extended period of time, and reinforced that policy makers were reviewing the technical conditions to ensure “the full range of policy options” would be available if needed. And when the ECB met again in March, it followed through with a 10 basis point cut and the expansion of its QE program. In its decision to include corporate bonds in the QE program, the minutes released in April reveal that the ECB premised the move on an anticipated spillover effect for small and medium-sized enterprises. Finding Value The renewed urgency from the ECB stems from worries over weak energy prices that while positive to household income and corporate profits, are also helping to frame an uncertain backdrop along with skittishness over emerging market growth and renewed geopolitical tensions. Since the ECB’s December 3 policy announcement, the STOXX 600 index had lost as much as 15% leading up to Mario Draghi’s comments in front of the European Parliament in mid February. But as an intermediate-term play, these near-term worries overshadow the fact that on a historical basis, the stock market capitalization of European equities remains near its nadir. Click to enlarge Going back to 2009, the S&P 500 has significantly outperformed the STOXX 600, and European equities today remain far less expensive than US stocks. This is true on both an absolute and relative basis, using a cyclically adjusted price-to-earnings ratio. (See charts, below.) Moreover, as of March 31, 2016, the forward-looking price-to-earnings ratio of 15.2x for the STOXX 600 index remains below the index’s long-term average. When coupled with the consensus expectation of an 11.5% increase in earnings, the upside potential to investors in Europe is clear. Going Passive From the perspective of fund investors, the opportunity set can perhaps be best realized through pure exposure to Continental Europe, excluding the United Kingdom, whose equity markets, today, more closely resemble US stocks on a valuation basis. We also see Europe as a beta play, as current valuations and the ECB’s commitment to stimulus provides a floor for investors offering downside protection, whereas the potential for alpha, via stock selection through actively managed funds, is somewhat muted given the efficiency of the large-cap segment in the region. Of course, those familiar with Europe understand too that several unknowns still weigh on equities. Ongoing efforts to fix the European banking system, which has moved in fits and starts, remain critical to future growth, and marketwatchers already understand that Europe has considerably more exposure to China than U.S. equities. These are two of the primary drivers behind the volatility witnessed at the close of 2015 and into 2016. Not to be overlooked, the left-leaning Socialist movements are another cause for concern, especially as the market witnessed what can happen when the Greece debt crisis unfolded last year, necessitating a third bailout agreement. Today, the biggest unknown facing European equities is around a potential “Brexit” and whether or not UK voters will opt to stay in the European Union. Should voters decide to depart the EU, Britain’s exit would have significant spillover across the continent. On top of all of this, investors have to contend with the “unknown” unknowns, be it terrorism, world affairs or other unforeseen, black swan events. All that being said, over the intermediate term few regions in the world today can match the catalysts currently favoring European equities – benefiting from the improving macro environment, the ECB’s commitment to stimulus and historically attractive valuations. Even as the near-term promises more noise and the long-term may see valuations level off, over the intermediate term, continental Europe represents one of the more attractive destinations for investors in a market suddenly devoid of obvious alternatives. Michael A. Mullaney is a Vice President and Chief Investment Officer in the Boston office of Fiduciary Trust Company ( fiduciary-trust.com ), having joined the firm 15 years ago. Disclosure: The opinions expressed in this publication are as of the date issued and subject to change at any time. The materials discuss general market conditions and trends and should not be construed as investment advice. Any reference to specific securities are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Nothing contained herein is intended to constitute legal, tax or accounting advice and clients should discuss any proposed arrangement or transaction with their legal or tax advisors. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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. Additional disclosure: The opinions expressed in this publication are as of the date issued and subject to change at any time. The materials discuss general market conditions and trends and should not be construed as investment advice. Any reference to specific securities are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Nothing contained herein is intended to constitute legal, tax or accounting advice and clients should discuss any proposed arrangement or transaction with their legal or tax advisors.

5 ETFs To Buy For Q2

After a terrible start to the year, the U.S. stock market made a stunning comeback in the last six weeks of the first quarter. This is especially true as the major U.S. bourses recouped all the losses after falling more than 14% (as of February 11) from their recent peak levels. Notably, both the S&P 500 and Dow Jones were in the green at the end of the quarter, having logged in 0.8% and 1.5% gains, respectively. The impressive rally was driven by a rebound in oil prices, a spate of upbeat U.S. economic data, extra easing policies in Europe and Japan, and stabilization in the Chinese economy. Additionally, the Fed’s dovish comments infused more optimism in the stock markets lately. The bullish trend is likely to continue at least in the second quarter given the substantial improvement in the economy, an accelerating job market, pick-up in inflation as well as increasing consumer confidence. Further, the Fed is not expected to raise interest rates anytime soon given the global growth concerns that should drive the U.S. stocks higher. Nevertheless, bouts of volatility will keep threatening the bulls. Some of the headwinds include relatively higher valuations, risk of earnings weakness like what we saw in the fourth quarter, and oil price instability. As the U.S. economy is leading the way amid global uncertainty, investors should focus on the domestic market. We have highlighted five picks for 2Q that should outperform and cost less than many other products. These funds have either a Zacks Rank of 1 (Strong Buy) or 2 (Buy). iShares MSCI USA Minimum Volatility ETF (NYSEARCA: USMV ) Low volatility products generate impressive returns or often outperform in an uncertain or a crumbling market while providing significant protection. This is because these funds include more stable stocks that have experienced the least price movement in their portfolio. As a result, low-volatility strategies appear safe in a turbulent market, and reduce losses in declining markets while generating decent returns when the markets rise. As such, USMV could be a great pick with an AUM of $11.3 billion and an expense ratio of 0.15%. It offers exposure to 168 U.S. stocks having lower volatility characteristics than the broader U.S. equity market by tracking the MSCI USA Minimum Volatility Index. The fund is well spread across a number of securities with none holding more than 1.71% of assets. From a sector look, financials, health care, information technology and consumer staples take the top four spots with a double-digit allocation each. The fund trades in solid volume of 3 million shares a day and has gained 6.4% in the year-to-date time frame. It has a Zacks ETF Rank of 2. SPDR S&P Dividend ETF (NYSEARCA: SDY ) Dividend-focused ETFs have been riding high this year on investors’ drive for income amid heightened uncertainty in the stock market. This is because dividend paying securities are the major sources of consistent income when returns from the equity market are at risk. Dividend-focused products offer safety in the form of payouts and stability in the form of mature companies that are less immune to the large swings in stock prices. Further, longer-than-expected interest rates have made this corner a hot investment area. As a result, SDY seems an interesting choice for the second quarter. This is one of the popular and liquid ETFs in the dividend space with AUM of $13.2 billion and average daily volume of about 940,000 shares. This fund provides exposure to the 109 U.S. stocks that have been consistently increasing their dividend every year for at least 25 years. This can be done by tracking the S&P High Yield Dividend Aristocrats Index. Though the fund is slightly skewed toward the financial sector with 22.7% share, industrials, utilities, consumer staples, and materials make up for a nice mix in the portfolio with a double-digit allocation each. The fund charges 35 bps in fees per year and yields 2.51% in annual dividend. It has added 9.9% so far this year and has a Zacks ETF Rank of 2. Consumer Discretionary Select Sector SPDR Fund (NYSEARCA: XLY ) With the U.S. economy on a modest growth path and the spring season underway, the consumer discretionary sector is expected to get a boost. The auto industry is booming, the manufacturing industry seems to be stabilizing having ended a five-month declining streak with accelerated production and rising new orders, and the housing market is geared up for the spring buying fervor. Further, cheap financing will continue to entice consumers to buy more homes and avail auto loans, thereby propelling the stocks of this sector higher. While there are several options to play the surge in the sector, the ultra-popular XLY having AUM of $10.7 billion and average daily volume of around 8.2 million shares looks attractive. It tracks the Consumer Discretionary Select Sector Index and holds 88 securities with higher concentration on the top four firms at 30%. Other firms hold less than 4.9% share each. In terms of industrial exposure, media takes one-fourth share while specialty retail, internet retail, and hotels, restaurants & leisure round off the next three spots with a double-digit exposure each. The fund charges 14 bps in fees per year and has added 2% so far this year. It has a Zacks ETF Rank of 1. SPDR S&P Homebuilders ETF (NYSEARCA: XHB ) A solid labor market along with affordable mortgage rates will continue to fuel growth in a recovering homebuilding sector, creating a buying opportunity in homebuilders and housing-related stocks. In addition, slower and gradual rate hikes will not impede the growth prospect of the sector, at least in the second quarter. The most popular choice in the homebuilding space, XHB, follows the S&P Homebuilders Select Industry Index. In total, the fund holds about 37 securities in its basket with none accounting for more than 5.73% share. The product focuses on mid-cap securities with 65% share, followed by 27% in small caps. The fund has amassed about $1.5 billion in its asset base and trades in heavy volume of about 3.6 million shares. Expense ratio comes in at 0.35%. XHB has lost modestly 0.1% in the year-to-date timeframe and has a Zacks ETF Rank of 2. iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ) Treasury bonds, in particular the long-term ones, are the biggest beneficiaries of lower interest rates. The longer the duration, the more sensitive the fund is to the changes in interest rates. As such, bonds having a higher duration will experience significant gains for as long as interest rates remain low. Additionally, long-term bonds will continue to get an impetus from the negative interest rates in the other developed world like Europe and Japan that made the U.S. bonds attractive to foreign investors. Given this, the ultra-popular long-term Treasury ETF – TLT – looks exciting for the second quarter. It tracks the Barclays Capital U.S. 20+ Year Treasury Bond Index, holding 32 securities in its basket. The fund focuses on the top credit rating bonds with average maturity of 26.61 years and effective duration of 17.77 years. It charges 15 bps in annual fees and exchanges about 8.7 million shares in hand per day. With AUM of $8.1 billion, TLT has gained 8.6% so far this year and has a Zacks ETF Rank of 2. Original Post

ETF Update: Smart Beta Launches As Far As The Eye Can See

Welcome back to the SA ETF Update. My goal is to keep Seeking Alpha readers up to date on the ETF universe and to gain some visibility, both for the ETF community and for me as its editor (so users know who to approach with issues, article ideas, to become a contributor, etc.). Every other week (depending on the reader response and submission volumes) we will highlight fund launches and closures for the week, as well as any news items that could impact ETF investors. As you might have noticed from the title, smart beta funds were on my mind this week. This might have something to do with the last 8 launches falling into that self-proclaimed category. It might also be due to a great read from Abnormal Returns, ” Finance blogger wisdom: smart beta bubble? ” In the linked article the author presented the following question to his online peers: The ‘smart beta’ or factor-investing bubble seems to be in full bloom. Is ‘smart beta’ simply the new active investing? If so, what happens to the entire fund industry which was built on the high fees associated with active management? This is a question that many have also covered on Seeking Alpha, but the most recent example is from Benjamin Lavine, CFA , whose article was posted on Wednesday (3/30). I would highly recommend it for any readers wondering what is behind the smart beta trend and how to interpret the term when considering an investment. With that disclaimer aside, let’s jump into the most recent round of smart beta launches: Fund launches for the week of March 21st, 2016 Principal expands into smart beta (3/22): The Principal Price Setters Index ETF (NASDAQ: PSET ) and the Principal Shareholder Yield Index ETF (NASDAQ: PY ) are the first smart beta launches from Principal Funds; both target mid- and large-cap domestic firms. However, PSET “focuses on companies with sustainable pricing power, consistent sales growth, high/stable margins, quality earnings, low leverage, and high levels of profitability,” while PY is for investors more concerned with “sustainable shareholder yield, strong cash flow generation, and capacity to increase dividends and/or buybacks.” Both funds are a relatively large departure from the Principal EDGE Active Income ETF (NYSEARCA: YLD ), which was launched in July 2015. This first venture into ETFs is an active fund investing across multiple income-producing asset classes in search of high-income investments. Victory Capital Management rolls out an emerging market fund (3/23): The Victory CEMP Emerging Market Volatility Wtd Index ETF (NASDAQ: CEZ ) was the third smart beta launch of the week. The in-house CEMP Emerging Market 500 Volatility Weighted Index “combines fundamental criteria with volatility weighting to seek to improve an investor’s ability to outperform traditional indexing strategies.” It is worth noting that the top countries represented at this time are Taiwan, China, South Korea and India; all of which are still considered emerging by MSCI , but many have argued that they are quickly evolving out of the traditional definition. Fund launches for the week of March 28th, 2016 Fund closures for the weeks of March 21st and 28th, 2016 Direxion Value Line Conservative Equity ETF (NYSEARCA: VLLV ) Direxion Value Line Mid- and Large-Cap High Dividend ETF (NYSEARCA: VLML ) Direxion Value Line Small- and Mid-Cap High Dividend ETF (NYSEARCA: VLSM ) ALPS Sector Leaders ETF (NYSEARCA: SLDR ) ALPS Sector Low Volatility ETF (NYSEARCA: SLOW ) ALPS STOXX Europe 600 ETF (NYSEARCA: STXX ) Global Commodity Equity ETF (NYSEARCA: CRBQ ) iSharesBond 2016 Corporate Term ETF (NYSEARCA: IBDA ) iSharesBond 2016 Corporate ex-Financials Term ETF (NYSEARCA: IBCB ) Have any other questions on ETFs or ETNs? Please comment below and I will try to clear things up. As an author and editor, I have found that constructive feedback is the best way to grow. What you would like to see discussed in the future? How can I improve this series to meet reader needs? Please share your thoughts on this first edition of the ETF Update series in the comments section below. Have a view on something that’s coming up or a new fund? Submit an article. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.