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ETFs To Hit $5 Trillion In Assets By 2020: PwC

By Clayton Browne A new report from PwC highlights the ETF industry continues to mature Exchange Traded Funds (ETFs) have been only been around for two decades, but they have grown far beyond their initial function of tracking large indices in developed markets and have become an investment sector of their own. As of year-end 2014, ETFs now hold over $2.6 trillion of assets globally and continue to grow rapidly. In fact, PwC projects that the ETF space will top $5 trillion in assets by 2020. Tax and and audit consultancy firm PwC recently published a report titled “ETF 2020: Preparing for a new horizon”. The report is based on a survey of 60 financial industry firms including ETF managers , asset managers and service providers. Increasing segmentation in ETF sector The PwC report points to the increasing segmentation of the ETF market. Institutions are committing more assets as more and more firms find uses for them. Also of note: “The advisor market continues to evolve quickly, with ETF strategists playing a growing role in the U.S. market and now emerging in Europe . Segment and channel trends are largely driven by local considerations, so regional differences abound.” (click to enlarge) While the growth of ETFs has slowed in the U.S. in the last few years, the industry is still expanding in other regions (such as Europe and Asia). According to the PwC report non-traditional indexing is becoming more important in many markets, “while active ETFs are on the verge of radically changing the AM [asset management] industry in the U.S.” Non-transparent active ETFs potential growth area (click to enlarge) In a setback for the industry, two firms seeking approval from the SEC to launch non-transparent active ETFs, which would offer less than the current daily transparency of the portfolio holdings using a blind trust, were denied late last year. However, the sector did get some good news when SEC approved the request of another firm to launch a different type of non-transparent active investment product referred to as exchange-traded managed funds in November last year. The report notes that this new innovation has caught the eye of current and prospective ETF sponsors. The authors anticipate that firms will continue to seek approval to set up non-transparent active ETFs, and argue this “could provide another phase of growth and innovation in the coming years.” Issues facing industry PwC acknowledges that the ETF industry will face numerous challenges in the coming years. One potential issue is changing demographics forcing asset managers to design solutions suitable for a rapidly aging population. Technology is also likely to radically alter the way investment advice and products are evaluated and consumed, and ETF firms must be ready to evolve. The report also notes that regulatory constraints and distribution dynamics benefiting other investments may reduce growth in some markets. The increasingly saturated U.S. marketplace is also a major concern. Disclosure: None. Share this article with a colleague

Dull Industrial Earnings Put These ETFs In Focus

As previously expected the Industrial sector has come out with lukewarm results for the fourth quarter earnings season. The major players in the space, such as General Electric (NYSE: GE ) , Caterpillar Inc. (NYSE: CAT ) and 3M Company (NYSE: MMM ) , have reported lackluster results, missing either on revenues or earnings. In fact, a disappointing performance from industrial leader Caterpillar and weaker-than-expected data on durable-goods orders sparked fears about a slowdown in economic growth, leading the Dow Jones Industrial Average to plunge more than 350 points in yesterday’s trading session. Industrial Earnings in Focus General Electric Operating earnings for the reported quarter came in at 56 cents per share compared with 53 cents a share in the year-ago quarter, beating the Zacks Consensus Estimate by a penny. The company posted net earnings of 51 cents per share, up 61% year over year. Total revenue for the quarter increased 4% year over year to $42 billion but fell short of the Zacks Consensus Estimate of $42.4 billion. The company’s operating profit in the Industrial segment increased 9% in the reported quarter as its businesses that sell power-generating turbines and jet engines helped offset weak sales in its oil and gas unit. However, GE Capital’s profit declined 19% year over year to $1.9 billion. The company, however, is committed to increasing its focus on industrial operations, away from finance. Caterpillar Mining and equipment behemoth Caterpillar however missed Q4 earnings estimates and also guided lower for 2015. Earnings per share declined 20% year over year to $1.35 per share, missing the estimates by 13%. Revenues declined 1% year over year to $14.2 billion in the quarter but surpassed the Zacks Consensus Estimate of $14.1 billion. The company blamed the muted mining environment and lower prices of oil and key mined commodities, particularly copper, coal and iron ore as the key factors behind the earnings miss. Moreover, the company also guided materially lower for 2015 due to continued weakness in oil prices. The company expects 2015 EPS of $4.75 on $50 billion in revenues, significantly below the current Zacks Consensus Estimate for 2015 of $6.69 in EPS on $54.6 billion in revenues Union Pacific Corporation (NYSE: UNP ) The rail transportation operator, Union Pacific , managed to beat our estimates on both fronts. Earnings per share rose 27% year over year to $1.61, beating the Zacks Consensus Estimate of $1.51, while revenues increased 9% year over year to $6.2 billion, ahead of the Zacks Consensus Estimate of $6.1 billion. 3M Company Like General Electric and Caterpillar, 3M also reported mixed financial results, beating on the earnings front but missing on revenues. Earnings per share came in at $1.81 per share, up 11.7% year over year, beating the Zacks Consensus Estimate by 2 cents a share. Net sales during the quarter were $7,719 million, up 2% year over year, but below the Zacks Consensus Estimate of $7,779 million. Market Impact Uneven earnings results from the top industrial stocks saw mixed reactions. While GE is up 5% since its announcement on January 23, Caterpillar shed 7% yesterday following its disappointing results. Meanwhile, 3M and Union Pacific closed marginally lower following their earnings. Given the uninspiring earnings results from some of the top industrial players, investors should cautiously play the industrial ETF space for the upcoming days. Below, we have highlighted three industrial ETFs having a sizeable exposure to the above stocks. Industrial Select Sector SPDR (NYSEARCA: XLI ) XLI is the most popular fund in the space with an asset base of $8.8 billion and an average daily trading volume of 9.9 million shares. The fund provides exposure to a basket of 66 stocks charging 65 basis points as fees. General Electric occupies the top spot with 9.3% allocation, while Union Pacific, 3M and Caterpillar have a combined exposure of roughly 14.2% in the fund. XLI lost 1.32% on Tuesday but is up 13.1% in the past one year and currently has a Zacks ETF Rank #3 or Hold rating. Vanguard Industrials ETF (NYSEARCA: VIS ) VIS is also quite a popular fund in the space with an asset base of more than $1.9 billion and trading with moderate volumes. VIS tracks the MSCI U.S. Investable Market Industrials 25/50 Index to provide exposure to 352 industrial stocks. The four stocks have a combined exposure of roughly 21%. VIS lost 1.2% in yesterday’s session and currently has a Zacks ETF Rank #3 or Hold rating. iShares U.S. Industrials ETF (NYSEARCA: IYJ ) IYJ tracks the Dow Jones U.S. Industrials Index to provide exposure to U.S. companies that produce goods used in construction and manufacturing. General Electric, Union Pacific, 3M and Caterpillar are among the top 10 holdings with a combined exposure of roughly 19.4%. The fund manages an asset base of $ 861.5 million and is slightly expensive with 43 basis points as fees. IYF currently has a Zacks ETF Rank #3 or Hold rating.

Inside The New Target Factor ETFs From iShares

Deflationary fear and a slowdown have started to trouble developed international markets, and most investors in the ETF world are looking out for quality exposure in the area. In fact, some aggressive investors are hunting for high momentum stocks presuming that these might outperform in the days ahead in the prevailing easy money era. Their search looks justified. After all, the Fed withdrew its gigantic QE program last year and might start walking the way of policy tightening later this year. Thanks to such policy differential in the developed world, iShares – the largest ETF issuer in the world – brought about two products targeting the developed international economies probably to quench investors’ thirst. We have detailed the two newly launched funds below. iShares MSCI International Developed Momentum Factor ETF ( IMTM) : For a broad foreign market play with a focus on large-and-mid cap companies, investors could consider IMTM which focuses on 12 developed countries for exposure. Stocks that exhibit a higher price momentum will be included in the fund. This product follows the MSCI World ex USA Momentum Index, holding 269 securities in its basket and charging a pretty low fee of 30 basis points a year for this relatively unique exposure. Though the fund holds about 28% exposure in the defensive health care sector, it is more inclined toward higher beta sectors like financials, industrials companies and consumer discretionary. Top nations include Japan (29.6%), Canada (18.0%), and Switzerland (12.9%) while the U.K. (8.8%) and Germany (4.7%) round out the top five for this well-diversified fund. The fund does not have much company concentration risk with no stock accounting for more than 5.34% of the fund. Novartis (NYSE: NVS ), Roche and Bayer ( OTCPK:BAYRY ) are the top-three holdings of the fund. IMTM Competition: Momentum strategy is not yet popular in the ETF world. Though the domestic economy has a couple of ETFs including the $1.46 billion-First Trust Dorsey Wright Focus 5 ETF (NASDAQ: FV ), $1.61 billion-PowerShares DWA Momentum Portfolio (NYSEARCA: PDP ) and $515 million-iShares MSCI USA Momentum Factor ETF (NYSEARCA: MTUM ), the international arena is relatively less penetrated. Global Momentum ETF (NYSEARCA: GMOM ) made an entry late last year in the international space and has amassed about $26 million in assets so far. Given GMOM’s high expense ratio of 94 bps and iShares’ own product MTUM’s considerable success in a short span, we expect the issuer to replicate the success on its global version as well. However, the issuer should take note of Cambria’s active approach to the momentum theme which might give it an edge over IMTM in volatile markets. iShares MSCI International Developed Quality Factor ETF ( IQLT) : This fund gives investors exposure to quality stocks (excluding U.S.) by identifying companies that have the highest quality scores based on three main fundamental variables – high return on equity, stable earnings year-over-year growth and low financial leverage. The product charges investors 30 basis points a year in fees and tracks the MSCI World ex USA Sector Neutral Quality Index. The fund holds about 289 securities in its basket with a focus on financials (26.9%). Industrials (12.1%), Consumer Discretionary (11.5%), Health Care (10.8%) and Consumer Staples (10.6%) occupy the next four spots. The fund is heavy on the U.K. with about one-fourth of the exposure followed by Switzerland (15.6%). Roche takes the top-most allocation in the portfolio with about 5.2% exposure followed by Novo Nordisk (2.7%) and Nestle (2.31%). IQLT Competition: There are currently a few products operating in the space including PowerShares S&P International Developed High Quality Portfolio (NYSEARCA: IDHQ ), SPDR MSCI World Quality Mix ETF (NYSEARCA: QWLD ) and Market Vectors MSCI International Quality ETF (NYSEARCA: QXUS ). While neither has developed a huge following so far and IDHQ charges a bit high at 55 bps, IQLT has scope for outperformance.