Tag Archives: fn-start

Is Retail In Retreat?

By Robert Goldsborough As fourth-quarter earnings reports have started coming across the wire, several themes already have begun emerging. One of the biggest themes, however, has been not company-specific, but rather a government report showing surprisingly weak retail sales numbers for December and a downward revision for November’s numbers. According to United States Commerce Department data, retail sales fell nearly 1% in December on a month-to-month basis (and were down fully 1% month-to-month excluding autos), while consumer core sales (retail sales less autos, gasoline, building materials, and food services) were down 0.4% month-to-month. The news surprised both the markets and economists, who had forecast basically flat retail sales in aggregate and a 0.4% rise in consumer core sales on a month-to-month basis. And it indicated that consumers enjoying lower gasoline prices did not take that extra cash in their pockets and spend it at other retailers. Some economists contend that the retail weakness simply is a matter of the calendar and timing differences involved in making seasonal adjustments to economic data. By other measures, they suggest, such as the Federal Reserve’s Beige Book or the National Retail Federation’s data, retail spending is solid. My colleague Robert Johnson, Morningstar’s director of economic analysis, acknowledges that on a headline basis, the retail sales numbers didn’t look great, but he notes that on a year-over-year basis, retail sales growth continues to be strong, exceeding 4% on a nominal basis and growing close to 3.5% on an inflation-adjusted basis. Going forward, he doesn’t see dramatic improvement ahead in retail sales, but he does anticipate generally solid data. Although the retail sector has outperformed the broader market over the past few months, the most recent news in the retail space has pressured the share prices of many retailers a bit. For investors who see this as a buying opportunity in a generally well-valued broader market, there are several exchange-traded funds that investors can consider. An Overview of Retail ETFs There are three passively managed, unleveraged ETFs devoted to the retail industry: SPDR S&P Retail ETF (NYSEARCA: XRT ) , Market Vectors Retail ETF (NYSEARCA: RTH ) , and PowerShares Dynamic Retail ETF (NYSEARCA: PMR ) . Easily the largest and most liquid retail ETF, XRT also offers broad exposure, tracking an equally weighted index of 102 U.S. retail firms. Because XRT’s index is equally weighted, heavyweights like Wal-Mart (NYSE: WMT ) sit shoulder to shoulder in the fund with relative pipsqueaks like women’s fashion specialty retailer Cato Corp. (NYSE: CATO ) . As a result, large-cap companies make up just 15% of assets, while mid-cap firms comprise 30.5% of the fund. Small- and micro-cap companies make up 35.5% and 16% of assets, respectively. XRT holds both defensive retailers, such as Wal-Mart, Costco (NASDAQ: COST ) , and Walgreens Boots Alliance (NASDAQ: WBA ) , and nondefensive retailers, such as specialty retailers and apparel stores. XRT also holds Amazon (NASDAQ: AMZN ) , but it does not hold home-improvement retailers such as Home Depot (NYSE: HD ) and Lowe’s (NYSE: LOW ) . The fund’s 0.35% price tag is appealing, but given the exposure to smaller firms, would-be investors should expect higher beta exposure relative to a more traditional, market-cap-weighted ETF that tilts toward larger firms. RTH tracks a market-cap-weighted benchmark of 25 retail companies. That means that the largest firms, such as Wal-Mart, CVS Health (NYSE: CVS ) , Amazon, and Walgreens Boots Alliance, hold the most sway. RTH is devoted almost entirely to large-cap names, with mega-cap retailers making up 35% of the fund and large-cap companies comprising another 59% of assets. Unlike XRT, RTH holds home-improvement retailers, which gives the fund more exposure to the housing market than XRT. RTH charges 0.35%. Finally, PMR is a small, thinly traded strategic beta ETF that tracks an enhanced index of 30 retailers. The index evaluates firms based on price momentum, earnings momentum, quality, and value, among other factors. The index rebalances and reconstitutes quarterly, ensuring higher turnover. In addition, PMR has a pronounced small-cap tilt, devoting almost 27% of assets to small-cap firms, 11% to micro-cap companies, and another 21.5% to mid-cap retailers. PMR’s performance has lagged that of RTH in the trailing one- and three-year periods ending Jan. 16, 2015 (RTH has not traded for five years), and while it has nicely outperformed XRT in the trailing one-year period, it’s underperformed XRT in the trailing three- and five-year periods. It’s not clear whether investors can count on outperformance from this fund going forward. PMR charges a relatively high expense ratio of 0.63%. What the Economic Outlook for 2015 Means for Retail ETFs In general, Morningstar’s analysts anticipate a healthier and stronger U.S. consumer in 2015 and beyond, which portends well for retail ETFs. A strengthening consumer in particular would favor ETFs with small- and mid-cap tilts, as they hold fewer defensive names and more discretionary, higher-beta firms. So that dynamic could make XRT and PMR more appealing options. At the same time, investors should pay close attention to some retail trends that are less favorable for smaller players. Some of these include the need for retailers to have both a brick-and-mortar business and an e-commerce presence–a requirement that in general requires firms to be larger and have more scale–and a broader trend of the millennial generation spending less money on high-priced items found at specialty retailers offering apparel or luxury goods and instead spending more on experiential items and more expensive places to live. Although any generational shift plays out over a much longer-term time horizon, it’s worth watching closely. E-Commerce Growth Continuing Unabated In addition to disappointing December results, traditional bricks-and-mortar retailers continue to face challenges from online shopping. Many traditional retailers have struggled to keep up with Amazon’s strong fulfillment capabilities and price competition. Although Amazon continues to grow and take share from traditional retailers, it also has problems of its own, as it continues to search for ways to grow its business profitably. In the first few weeks of 2015, the firm’s share price is down sharply. Over the longer term, we have some concerns about smaller retailers’ ability to compete with Amazon from a fulfillment standpoint. Morningstar’s equity analysts note that a variety of retailers have increased their emphasis on logistics and delivery speeds, but even so, only a few retailers at this time can match Amazon’s capacity and geographic reach. The transition to e-commerce is continuing slowly for bricks-and-mortar retailers, as many of their fulfillment centers were not designed for e-commerce. For investors, what this means is that smaller-cap retail names–which are found more in XRT and PMR–may well find themselves more susceptible to the growth in online shopping. So while broader macroeconomic trends–a stronger consumer with more disposable income–could benefit those funds, e-commerce growth could come at the expense of some, if not many, of the smaller firms in those ETFs. Other Options Because retail makes up a large chunk of the consumer discretionary industry, investors seeking broad exposure to the retail space also could consider a consumer discretionary ETF. Consumer Discretionary Select Sector SPDR (NYSEARCA: XLY ) , which charges 0.16% and holds about 85 companies, is a large and liquid fund that devotes about one third of its assets to retailers. Similarly, Vanguard Consumer Discretionary ETF (NYSEARCA: VCR ) costs just 0.12%, holds a broader portfolio of 382 firms, and also invests about a third of its assets in retail firms. Investors interested in ETFs with meaningful exposures to Amazon can consider one of two Internet ETFs, both of which devote between 7% and 8% of assets to Amazon: First Trust Dow Jones Internet (NYSEARCA: FDN ) (0.60% expense ratio) and PowerShares NASDAQ Internet (NASDAQ: PNQI ) (0.60% expense ratio). Internet and catalog retailers like Amazon make up between 20% and 25% of the assets of each ETF. Disclosure: Morningstar, Inc. licenses its indexes to institutions for a variety of reasons, including the creation of investment products and the benchmarking of existing products. When licensing indexes for the creation or benchmarking of investment products, Morningstar receives fees that are mainly based on fund assets under management. As of Sept. 30, 2012, AlphaPro Management, BlackRock Asset Management, First Asset, First Trust, Invesco, Merrill Lynch, Northern Trust, Nuveen, and Van Eck license one or more Morningstar indexes for this purpose. These investment products are not sponsored, issued, marketed, or sold by Morningstar. Morningstar does not make any representation regarding the advisability of investing in any investment product based on or benchmarked against a Morningstar index.

What Is Driving Up SLV Besides Gold?

The fall in the U.S. treasuries yields keeps up the price of SLV. The rally of gold is only partly related to the recovery of silver. Despite the recovery in silver prices, SLV’s silver holdings didn’t pick up. The silver market has started off the year on a positive note as shares of iShares Silver Trust (NYSEARCA: SLV ) added nearly 14% to their value (up to date). Is most of this recovery related to the rise in gold? Let’s reexamine the relation between silver and gold and further explore other factors that drive up SLV. Despite the progress of SLV in the past few weeks, its rally seems, at first glance, less related to the rise in gold prices. The chart below shows the linear correlation of gold and silver on a month-to-month basis (daily percent changes). Source: Bloomberg In the past month the linear correlation was around 0.615; even though this is still a significant and strong correlation, it’s also well below the levels recorded in the preceding months. Moreover, the ratio between SPDR Gold Trust (NYSEARCA: GLD ) and SLV has zigzagged with an unclear trend in recent weeks, as indicated in the chart below. Source: Google finance The ratio is still at a high level of around 7.2, which means GLD has still outperformed SLV in the past year. Some investors, however, might consider the high level of the GLD-to-SLV ratio as an indication that the latter is actually cheaper than the former. I put less faith in this assessment. This ratio could keep going up or remain at this level for a long time. After all, back in the early 90s the ratio between gold and silver started off at around 70 – this is the current ratio – and kept rising up to the low 90s and remained in the 70s and 80s range up to 1997. This doesn’t negate the fact that SLV’s recovery in the past few weeks was driven, in part, by the rise in gold. It only goes to show that other factors may have come into play in pushing up silver prices. One other factor to consider is the ongoing drop in long- and mid-term U.S. treasuries yields – they may have also contributed to the rise in SLV prices. The chart below shows the progress in the 7-year U.S. treasury yield and the price of SLV in the past several months. During the period presented below, the linear correlation between the two was around -0.3 – a mid-strong correlation. Source: Bloomberg and U.S Department of the Treasury Even though the FOMC is still expected to raise its interest rates, which are likely to bring back up the U.S. treasury yields in the second half of 2015, the recent developments in the markets including low inflation – mainly due the fall in oil prices – and higher economic uncertainty drove down U.S. treasuries yields. If yields continue to come down in the short term, this could keep pushing up the price of SLV. The recent developments in Europe including the Swiss National Bank’s decision to stop pegging its currency and ECB’s upcoming announcement of its QE program also seem to drive the demand for precious metals. In terms of growth of physical metal, this seems to play a secondary role, at best, in moving the price of silver. After all, China is one of the leading silver importers. The country recently published its fourth-quarter growth rate update; it showed a 7.4% growth in annual terms. This is slightly higher than market expectations of 7.3%. But this is still lower than its growth rate of 7.7%, which was recorded in the same quarter in 2013. This year, the World Bank estimates China’s GDP will expand by only 7.1% – this is 0.4 percentage points below its previous estimate back in June 2014. The IMF also revised down the global economic growth from 3.8% to 3.5% this year. A slower growth rate for China could suggest, at face value, a slower rise in the demand for silver. Lower growth in the world economy isn’t expected to increase the industrial demand for silver but it’s likely to drive more investors towards silver. This only serves as another indication that the demand for silver on paper leads the way for the price of SLV. But is the demand actually picking up for SLV? The chart below presents the changes in SLV’s silver holdings in the past few months. Source: SLV’s website Since the beginning of the year, silver holdings have actually slightly come down by 1.4% to 325 million ounces of silver. This could be an indication that some SLV investors have taken money off the table after the price of silver rallied. Looking forward, however, the recovery of silver is likely to slowly bring more people back to SLV. The silver market has seen a recovery in recent weeks. Over the short term, silver could keep rising especially if the global economy keeps showing slower growth. For more see: 3 Reasons to Prefer Silver Wheaton

Can India ETFs Continue To Soar After The Rate Cut?

The Indian stock market took giant strides last year gaining about 30% on optimism that the much-anticipated win of the pro-growth government would drive Asia’s third-largest economy higher. After all, the euphoria around one of the members of the BRIC nations was justified when investors saw robust corporate earnings, a drastic decline in inflation helped by the unbelievable decline in global oil prices and a stable currency despite the ascent of the greenback. All these tailwinds set the stage for the Indian central bank to go for the much-awaited rate cut on Thursday, Jan 15, by 25 basis points to 7.75%. The move, was prompted by consumer prices below the Reserve Bank of India’s ( RBI ) target for the third month in a row. RBI governor Raghuram Rajan also sounded hopeful that inflation might remain below 6% until January 2016. Though India’s inflation rate nudged up to 5% in December 2014 from a record-low of 4.38% in the earlier month, the number was way behind the average 8.98% noticed from 2012 until 2014 (per tradingeconomics). In fact, the number even touched the high of 11.16% in November 2013, compelling a cycle of rate hikes in the past one-and-half years that India had to undergo in order to contain rising prices. What’s Behind the Falling Inflation? India’s present economic background, created on both domestic and international parameters, is in one word – satisfactory. While a drastic slump in oil price caught the global stock market on the wrong foot, it came as a boon to the Indian economy. This was because India imports more than 75% of its oil requirements, thus being highly susceptible to oil prices. Per U.S. Energy Information Administration, India was the world’s fourth-biggest user of crude oil and petroleum products in 2013. Last June, Financial Times indicated that the Barclays’ projected $10 per barrel rise in crude oil price would cost India 0.5 percentage points in its growth rate. When the oil price moved in the opposite direction, the scene turned around as well. And now, with several research houses projecting oil prices to remain around $40 per barrel in the first half of 2015, Indian foreign reserves paired with policy makers have every reason to cheer. This in turn is easing pressure on India’s currency, that too at a crucial time like this when the greenback is soaring higher and might gain more strength after the inevitable Fed rate hike. Market Impact India’s benchmark stock index rose the most in eight months following the rate cut announcement. No doubt the latest rate cut and a host of transformational measures including coal reforms, opening up the road for 100% FDI in railway infrastructure and easing FDI policies in construction, defense and insurance will provide a good boost to investors’ sentiments. As a result, India ETFs are poised to surge in the coming days on this surprise rate cut. Investors should note that almost all India ETFs are Buy-rated at the current level. Below are three funds that could strengthen investors’ portfolio with enhanced returns. These products have generated excellent returns over the trailing one-year period and are off to a good start in 2015 as well. WisdomTree India Earnings ETF (NYSEARCA: EPI ) This product tracks the WisdomTree India Earnings Index, holding 230 securities in its basket. The fund measures the performance of the profitable Indian companies. As we all know, a rate cut should spur corporate India, EPI should make a wise investment proposition in the coming weeks. About one-fourth of the portfolio is dominated by financials, followed by energy (18.70%) and information technology (17.94%). EPI is the largest and most popular ETF targeting India with AUM of over $2.1 billion and average trading volume of around 4.5 million shares. The expense ratio comes in at 0.83% for this product. The fund was up 31.7% over the past one year and has added about 6.7% so far this year. The fund has a Zacks ETF Rank #1 (Strong Buy) with High risk outlook. iShares S&P India Nifty Fifty Index ETF (NASDAQ: INDY ) INDY is a large cap centric fund that follows the CNX Nifty Index, which seeks to track the performance of the largest 50 Indian stocks. As the fund tracks the key Indian stock market gauge, it should be an eye-catcher for foreign investors. The ETF has amassed $778 million in assets. The fund charges 94 bps in fees. Banks take the top spot in the portfolio. This Zacks ETF Rank #1 (Strong Buy) fund was up nearly 32% in the last one year and 7.6% in the year-to-date frame. EGShares India Consumer ETF (NYSEARCA: INCO ) This ETF targets the consumer industry of India and follows the Indxx India Consumer Index. It holds 30 stocks in its basket and has amassed $27.1 million in its asset base. The fund trades in a paltry volume of 20,000 shares in an average day, suggesting additional cost in the form of a wide bid/ask spread beyond the expense ratio of 0.89%. As the name suggests, the product is focused on the consumer sector. From an industry look, automobiles, which perform better in low rate environment, occupy the top position with 37.5% share while personal goods and industrial engineering round off the next two places at 27.1% and 15.4%, respectively. This Zacks ETF Rank #1 fund was up 56% in the one-year frame and 12% in the year-to-date frame.