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The Strong U.S. Dollar Could Pressure S&P 500 Earnings

Summary U.S. dollar is strengthening against a basket of foreign currencies. How a stronger dollar could affect S&P 500 company earnings. Sectors that are exposed to foreign exchange currency risks. The quickly appreciating U.S. dollar could begin to weigh on corporate earnings, especially among large-cap S&P 500 stocks and related exchange traded funds with significant overseas exposure. The SPDR S&P 500 ETF (NYSEArca: SPY ) , which tries to reflect the performance of the S&P 500 index, has increased 11.5% over the past year but is down 1.9% year-to-date. The stronger USD is expected to diminish profits for large companies that do business overseas, and some strategists contend that the strengthening currency and low energy prices could constrain quarterly S&P 500 earnings growth to just 3%, compared to previous calls for a 7% rise at the start of October, reports Eric Platt for Financial Times . The PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP ) has increased 13.1% over the past year and rose 2.6% year-to-date. The appreciating greenback, which has been rallying against a basket of foreign currencies since July, could pressure the S&P 500 where foreign sales make up over two-fifths of total turnover, with 261 companies in the index generating over 15% of revenues overseas. Deutsche Bank calculates that for every 10% increase in the USD against major currency baskets, the S&P 500 earnings face a potential decline of “slightly over $2,” or each 10 cent drop in the euro from about $1.2 could cut $1 from S&P 500 earnings. “The uncertainty in commodities, foreign exchange and interest rates across the curve is high, confounded by uncertainty in quantifying their influence on earnings per share and price-earnings,” David Bianco, strategist at Deutsche, said in the FT article. “We expect more cuts during fourth-quarter earnings season, especially for those with FX exposure.” For instance, GameStop (NYSE: GME ) has already blamed the “strength of the US dollar” for part of its slide in holiday same-store sales. On a sector-by-sector basis, observers believe the technology, materials and energy sectors will likely be the most affected by a stronger dollar as each sector generates over half of revenues abroad. Year-to-date, the Technology Select Sector SPDR (NYSEArca: XLK ) fell 5.0%, Materials Select Sector SPDR (NYSEArca: XLB ) decreased 1.5% and Energy Select Sector SPDR (NYSEArca: XLE ) dipped 2.4%. Cantor Fitzgerald analysts have warned that companies with “material international exposure,” such as Google (NASDAQGM: GOOG ), Facebook (NASDAQGM: FB ), Amazon (NASDAQGM: AMZN ) and eBay (NASDAQGM: EBAY ), could report reduced earnings forecasts if the “trend is sustained.” XLK includes GOOG 6.4%, FB 4.0% and EBAY 1.6%. SPY holds GOOG 1.6%, FB 0.9%, AMZN 0.6% and EBAY 0.3%. SPDR S&P 500 ETF (click to enlarge) Max Chen contributed to this article .

Materials ETFs Mauled By Falling Oil Prices

Summary Energy prices are falling. Low oil prices are weighing on the materials sector. Materials are experiencing lower activity on energy fallout. Oil’s slide has identified some winners at the sector level, namely consumer-related shares, but beyond the energy sector, there are some losers as well. Those losers include the materials sector, which was already scuffling heading into 2015. Last year, the Materials Select Sector SPDR ETF (NYSEARCA: XLB ) rose just 7.2%, including paid dividends. XLB’s 2014 showing was 630 basis points worse than the S&P 500, and enough to make the fund the second-worst of the nine sector SPDR ETFs, behind only the Energy Select Sector SPDR ETF (NYSEARCA: XLE ) . To this point in the new year, only three of the nine sector SPDRs have traded higher. XLB is not a member of that trio. In theory, materials stocks should be winner in a low energy price environment, because lower oil and gas prices reduce input costs for energy-intensive materials producers and chemicals manufacturers. In reality, that has not been the case. While the materials sector’s earnings warnings have not yet reached alarming heights, it is clear oil’s plunge is taking a toll on the sector. Of XLB’s top 10 holdings, a group that combines to make up about two-thirds of the ETF’s weight, only three have traded higher to start 2015. “The investment markets reflect these winners and losers in the economy. Consumer driven sectors of the market have performed quite well. The energy and commodity sectors of the market have not. Between oil stocks, the materials sector, and industrial and utility names in commodity-related businesses, roughly 20 percent of the S&P 500 is a loser with falling oil prices.” – Jones & Associates LyondellBasell Industries (NYSE: LYB ), one of XLB’s top 10 holdings, said that in the fourth quarter low oil prices will damp its margins. That after the company helped materials ETFs perform well in the first half of 2014 on the back of rising crude prices . A recent Morgan Stanley report highlighted PPG Industries (NYSE: PPG ), a top 10 holding in XLB, as one materials name that could endure lower oil prices, but the bank also identified Eastman Chemical (NYSE: EMN ), LyondellBasell and Dow Chemical as potentially challenged by lower oil prices. Those stocks combine to make up over 16% of XLB’s weight. XLB’s five-year correlation to The United States Oil ETF (NYSEARCA: USO ) is over 59%, according to State Street data . Materials Select Sector SPDR ETF (click to enlarge)

A New Income Oriented Multi-Asset ETF Hits The Market

Income investing has been on a tear since last year thanks to the plunge in bond yields. Global growth worries, a relentless slide in oil prices, QE talks in the Euro zone, a ‘patient’ Fed and stepped-up stimulus in Japan resulted in easy money policies across the developed world and in turn dragged yields down. This spurred many issuers to put out new products in this income space, greatly enhancing the number of options at investors’ disposal in this key market segment. Many may think that the income investing space is stuffed, leaving no scope for a new theme to perk up investors’ mood. To prove this group wrong, Master Shares recently released a pass-through ETF with an alternative focus, this time on income. The ETF trades under the name of the Master Income ETF (NYSEARCA: HIPS ). Let’s dig deeper. HIPS in Focus The fund looks to track the TFMS HIPS 300 Index, focusing on 300 securities with a pass-through structure. This is done by looking at securities from the sectors including closed-end fund (CEFs), mREITs, commercial/residential/diversified REITs, business development companies and MLPs. The fund charges 87 bps in fees. How Could it Fit in a Portfolio? The fund does look to be a great way to play the alternative securities space in an ETF form, while its yield will be tough to beat. The current period of low interest rates makes this income paying ETF quite attractive. Investors should note that high income paying securities play a defensive role in a portfolio and help to reduce overall volatility in uncertain times. The pass-through structure is basically created to avoid the effects of double taxation. The product could also be an interesting choice for those reluctant to invest in the regular ways of income investing like junk bonds or high-dividend equities. The constituents of the portfolio are un-correlated in nature and bear less relationship with the typical bond and stock exchanges. Thus, barring the income lure, the product should go a long way in hedging marketing volatility in the portfolio. ETF Competition Since the high yield space sees tough competition due to relentless launches over the last two years, the issuer gave this product an unusual packaging to set it apart from the regular pack. Still, some high income products with a focus on alternative securities are presently operating in the market. These include the likes of the ETRACS Diversified High Income ETN (NYSEARCA: DVHI ), the iShares Morningstar Multi-Asset Income Index ETF (BATS: IYLD ), the SPDR Income Allocation ETF (NYSEARCA: INKM ), the Guggenheim Multi-Asset Income ETF (NYSEARCA: CVY ), the First Trust Multi-Asset Diversified Income Index ETF (NASDAQ: MDIV ) and the YieldShares High Income ETF (NYSEARCA: YYY ). Expense ratio wise, the newly launched ETF looks reasonable as other products charge in the range of 60 bps to 165 bps a year. This is especially true given the product’s focus on pass-through entities and wide coverage from CEFs to MLPs. However, to be a winner in a long-distance race, the issuer should dedicatedly focus on the income part of the ETF. Notably, YYY holds the status of the highest yielding product in the space of diversified ETFs, having yielded about 9.6% as of January 13, 2015. To live up to investors’ expectations, the fund should offer something around that high benchmark, otherwise it could be somewhat prohibitive to asset accumulation, at least to those who are highly yield-starved.