Tag Archives: income

ETF Deathwatch For May 2016: List Jumps To 450

The quantity of exchange-traded funds (“ETFs”) and exchange-traded noted (“ETNs”) continues to zoom higher. There are now 450 products on the list, and the growth trajectory is on a path to surpass 500 by the end of the year. For May, there are 26 new names joining the list and 11 coming off. Only seven of the removals were the result of improved health – the other four died and lost their listings. The current membership consists of 342 ETFs and 108 ETNs. Further segmentation of the ETF population reveals that 41 are actively managed funds, 151 have smart-beta labels, and the remaining 150 are traditional capitalization-weighted ETFs. The surge of currency-hedged ETF introductions of the past two years continues to be problematic for the industry. The brief nine-month surge of the U.S. dollar in late 2014 and early 2015 generated a slew of currency-hedged ETF launches that continues to this day. However, with the dollar’s decline over the past 14 months, these funds have been at a performance disadvantage. As a result, they are failing to attract new assets, losing some of the assets they had, and ending up here on ETF Deathwatch. This month, six of the additions are currency-hedged ETFs. Twenty-six funds went the entire month of April without a trade, and 269 did not trade on the last day of the month. Additionally, six products have yet to record their first trade of 2016. It remains a mystery why some of these products exist and why the exchanges allow them to have a listing. The NYSE did take action against one ETN issued by Deutsche Bank (NYSE: DB ) in April. As outlined in ETF Stats for April , the NYSE suspended trading and delisted DB Commodity Long ETN (former ticker DPU) because its assets fell below $400,000. However, DB left shareholders holding the bag because it has no intention of automatically liquidating the ETNs and returning money to shareholders. Adding insult to injury, the notes do not mature for another 22 years. If owners are not willing to wait that long, then they will have to pursue the monthly round-lot redemption process or a sale in the over-the-counter markets. Keep this in mind before buying one of the 39 other DB-sponsored products that are currently on Deathwatch. The average asset level of products on ETF Deathwatch increased from $6.6 million to $6.8 million, and the quantity of products with less than $2 million fell from 98 to 96. The average age increased from 46.4 to 46.8 months, and the number of products more than five years of age surged from 148 to 177. The driving force behind the huge jump in five-year-old products on the list is that unloved family of iPath “Pure Beta” ETFs have now been on the market that long. Despite the lack of investor interest in these ETNs, Barclays continues to sponsor them, and the NYSE continues to collect a listing fee. Here is the Complete List of 450 ETFs and ETNs on ETF Deathwatch for May 2016 compiled using the objective ETF Deathwatch Criteria . The 26 ETFs and ETNs added to ETF Deathwatch for May: AlphaMark Actively Managed Small Cap (NASDAQ: SMCP ) CSOP China CSI 300 A-H Dynamic (NYSEARCA: HAHA ) CSOP MSCI China A International Hedged (NYSEARCA: CNHX ) Deutsche X-trackers CSI 300 China A-Shares Hedged Equity (NYSEARCA: ASHX ) ELEMENTS Rogers ICI Energy ETN (NYSEARCA: RJN ) ETRACS 2x Leveraged Long Wells Fargo BDC Series B ETN (NYSEMKT: LBDC ) ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN Series B (NYSEARCA: MRRL ) ETRACS UBS Bloomberg CMCI Series B ETN (NYSEARCA: UCIB ) Guggenheim MSCI Emerging Market Equal Country Wtd (NYSEARCA: EWEM ) iShares Currency Hedged MSCI South Korea (NYSEARCA: HEWY ) John Hancock Multifactor Healthcare (NYSEARCA: JHMH ) Morgan Stanley Cushing MLP High Income ETN (NYSEARCA: MLPY ) PowerShares Developed EuroPacific Hedged Low Volatility (NYSEARCA: FXEP ) PowerShares Dynamic Networking (NYSEARCA: PXQ ) PowerShares Japan Currency Hedged Low Volatility (NYSEARCA: FXJP ) PowerShares S&P 500 Momentum (NYSEARCA: SPMO ) PowerShares S&P 500 Value (NYSEARCA: SPVU ) PowerShares Zacks Micro Cap (NYSEARCA: PZI ) RBC Yorkville MLP Distribution Growth Leaders Liquid PR ETN (NYSEARCA: YGRO ) Reaves Utilities (NASDAQ: UTES ) SPDR MSCI China A Shares IMI (NYSEARCA: XINA ) The Restaurant ETF (NASDAQ: BITE ) VanEck Vectors Solar Energy (NYSEARCA: KWT ) WisdomTree BofA ML HY Bond Zero Duration (NASDAQ: HYZD ) WisdomTree Europe Local Recovery (BATS: EZR ) WisdomTree Global ex-U.S. Hedged Real Estate (BATS: HDRW ) The 7 ETPs removed from ETF Deathwatch due to improved health: Barclays Return on Disability ETN (NYSEARCA: RODI ) Global X Permanent (NYSEARCA: PERM ) Global X Scientific Beta US (NYSEARCA: SCIU ) IQ 50 Percent Hedged FTSE Japan (NYSEARCA: HFXJ ) iShares Global Inflation-Linked Bond (NYSEARCA: GTIP ) O’Shares FTSE Europe Quality Dividend (NYSEARCA: OEUR ) PureFunds ISE Junior Silver (NYSEARCA: SILJ ) The 4 ETFs removed from ETF Deathwatch due to delisting: Highland HFR Equity Hedge (NYSEARCA: HHDG ) Highland HFR Event-Driven (NYSEARCA: DRVN ) Highland HFR Global (NYSEARCA: HHFR ) DB Commodity Long ETN (NYSEARCA: DPU ) ETF Deathwatch Archives Disclosure: Author has no positions in any of the securities mentioned and no positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) is received from, or on behalf of, any of the companies or ETF sponsors mentioned.

Why Low Interest Rates Do Not Imply Perpetual Increases In Stock Prices

Some investors have come to believe that ultra-low interest rates alone have made traditional valuations obsolete. The irony of the error in judgment? Experts and analysts made similar claims prior to the NASDAQ collapse in 2000. (Only then, it was the dot-com “New Economy” that made old school valuations irrelevant.) The benchmark still trades below its nominal highs (and far below its inflation-adjusted highs) from 16 years ago. Without question, exceptionally low borrowing costs helped drive current stock valuations to extraordinary heights. In fact, favorable borrowing terms played a beneficial role in each of the stock bull markets over the last 40-plus years, ever since the post-Volcker Federal Reserve began relying on the expansion of credit to grow the economy. Indeed, we can even take the discussion one step further. Ultra-low interest rates had super-sized impacts on the last two bull markets in assets like stocks and real estate. Bullishness from 2002-2007 occurred alongside household debt soaring beyond real disposable income ; excessive borrowing at the household level set the stage for 40%-50% depreciation in stocks and real estate during the October 2007-March 2009 bear. Bullishness from 2009-2015 occurred alongside a doubling of corporate debt – obligations that moved away from capital expenditures toward non-productive buybacks and acquisitions. Would it be sensible to ignore the near-sighted nature of how corporations have been spending their borrowed dollars? Click to enlarge It is one thing to recognize that ultra-low borrowing costs helped to make riskier assets more attractive. It is quite another to determine that valuations have been rendered irrelevant altogether. For one thing, the U.S. had a low rate environment for nearly 20 years (i.e., 1935-1954) that is very similar to the current low rate borrowing environment. The price “P” that the investment community was willing to pay for earnings “E” or revenue (sales) still plummeted in four bearish retreats. In other words, low rates did not stop bear markets from occurring in 1937-1938 (-49.1%), 1938-1939 (-23.3%), 1939-1942 (-40.4%), or 1946-1947 (-23.2%). Click to enlarge Economic growth was far more robust between 1936 and 1955 than it is in the present. What’s more, during those 20 years, valuations were about HALF of what they are today. If low rates alone weren’t enough to DOUBLE the “P” relative to the “E” back then, why would one assume that low rates alone right now are enough to justify exorbitant valuations in 2016? When top-line sales and bottom-line earnings are contracting? When economies around the globe are struggling? Equally important, the inverse relationship between exorbitant valuations and longer-term future returns since 1870 has taken place when rates were low or high on an absolute level; the relationship has transpired whether rates were falling or rates were climbing. It follows that central bank attempts to aggressively stimulate economic activity and revive risk asset appetite did not prevent 50% S&P 500 losses and 75% NASDAQ losses in 2000-2002, nor did aggressive moves to lower borrowing costs prevent the financial collapse in 2008-2009. Clearly, valuations still matter for longer-term outcomes. In all probability, in fact, fundamentals began to matter 18 months ago. Take a look at the performance of the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) versus the iShares 7-10 Year Treasury Bond ETF (NYSEARCA: IEF ) over the 18 month period. Even with borrowing costs falling over the past year and a half – even with lower rates providing a boost to corporations, households and governments – “risk on” stocks have underperformed “risk off” treasuries. It gets more interesting. The prices on riskier assets like small caps in the i Shares Russell 2000 ETF (NYSEARCA: IWM ), foreign stocks in the Vanguard FTSE All-World ex-US ETF (NYSEARCA: VEU ) and high yield bonds via the SPDR Barclays Capital High Yield Bond ETF (NYSEARCA: JNK ) have fallen even further than SPY. In complete contrast, the price of other risk-off assets – the CurrencyShares Japanese Yen Trust ETF (NYSEARCA: FXY ), the iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ), the SPDR Gold Trust ETF (NYSEARCA: GLD ) have surged even higher than IEF. By the way, 18 months is not arbitrary. That is the period of time since the Federal Reserve last purchased an asset (12/18/2014) as part of its balance sheet expansion known as “QE3.” Since the end of quantitative easing, then, indiscriminate risk taking has fallen by the wayside. Larger U.S. companies may have held up, though the prospect for reward has been dim. Smaller stocks, foreign stocks and higher-yielding assets have not held up particularly well; their valuations may be on their way toward mean reversion. In the big picture, then, are you really going to get sucked in to the idea that low rates justify perpetual increases in stock prices? The evidence suggests that, until valuations become far more reasonable, upside gains will be limited. Additionally, until and unless the Federal Reserve provides more shocking and more awe-inspiring QE-like balance sheet expansion a la “QE4,” where the 10-year yield is manipulated down from the 2% level to the 1% level, low rate justification for excessive risk-taking would be misplaced. What could the catalyst be for indiscriminate risk taking? What could spark a genuinely strong bull market uptrend? Reasonable valuations that are likely to result from a bearish cycle. Fed policy reversal might then force the 10-year yield to 1% or even 0.5%, and we could then discuss how they “justify” still higher valuations than exist in 2016. Nevertheless, unless the Fed has found methods for eliminating recessions outright and permanently inspiring credit expansion, bear markets will still ravage portfolios of the unprepared investor. Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.

Beware Profiteers Masquerading As Activists

Activist investors are supposed to play a critical role in the economy. They identify underperforming managers or conflicts of interest that prevent a company from achieving its potential. A few activist investors genuinely do great things for companies, their employees and investors. There are, however, many more investors that masquerade as activists for shareholders when they are really just looking to create short-term gains for themselves. The first kind of activist can create significant value for your portfolio. The second kind tends to weaken companies in the long-term. It’s no secret we’ve been on the opposite side of Bill Ackman’s Pershing Square Capital on many recent stock picks, such as Herbalife (NYSE: HLF ), Mondelez (NASDAQ: MDLZ ), and, most notably, Valeant Pharmaceuticals (NYSE: VRX ). We believe Ackman typifies the activist behaviors that destroy, rather than create, long-term shareholder value. “Serial Acquirers” Valeant remains one of Ackman’s most prominent (and most value-destructive ) positions. Valeant has a long history of acquiring other drug makers . This serial acquisition strategy looks superficially accretive due to the high-low fallacy , which allows the acquirer to artificially boost earnings per share (EPS), one of Wall Street’s most hallowed metrics. Certain activist investors love serial acquirers because they can create the illusion of growth by indiscriminately acquiring other companies. The illusion is growth in revenues, EBITDA, or non-GAAP metrics that overlook the price paid for the acquiree, which, more often than not, is so high that the real cash flows of the deal are highly negative and dilutive to shareholder value. Case in point, Valeant’s debt has increased from $372 million in 2009 to $30 billion over the last twelve months (TTM). At the same time, its shares outstanding have more than doubled while its economic earnings , the true cash flows available to shareholders, have declined from $93 million in 2009 to -$685 million TTM. Valeant has finally given up on its serial acquirer strategy, but the massive debt load seriously limits the company’s strategic flexibility going forward, and the lack of cash flow from all the deals has it in trouble with its creditors . Figure 1: Increase In Debt And Share Count For Valeant Click to enlarge Sources: New Constructs, LLC and company filings. Activists such as Ackman love to tout the “platform value” of serial acquirers. They claim these companies can unlock value from the companies they acquire through superior management. While it’s true that some companies have this capability [just look at how Disney (NYSE: DIS ) has unlocked the value in Pixar, Marvel, and Lucasfilm], these cases are few and far between. Playing Both Sides Of the Deal Another favorite Ackman strategy involves buying up shares in one company while working to help another company acquire that position. We saw this with both Allergan (NYSE: AGN ) and Zoetis (NYSE: ZTS ), two companies that Ackman bought shares in while working with Valeant on an acquisition. Beware what you hear about companies where an activist is on both side of the deal. They may be more focused on getting a quick win to boost their performance, while long-term shareholders deserve much more. Shareholders would be better off if activists just left the company alone. Since 2012, ZTS has grown after-tax profit ( NOPAT ) by 20% compounded annually and increased its return on invested capital ( ROIC ) from 11% to a top quintile 17%. Pushing the company to accept an offer from a firm such as Valeant, with a history of value destruction, is a disservice to current shareholders not an unlocking of value. On top of that, these acquisition dramas create unnecessary distractions from the important work of running the business. Allergan’s CEO David Pyott told CNBC that fending off Ackman and Valeant was a full-time job . The run-up in Allergan’s shares netted Ackman $2.2 billion, but one has to believe the company would have been better off with the CEO devoting his time to running the company. Financial Engineering The Valeant/Allergan saga is far from the first example of Ackman extracting short-term value from a company while hurting it in the long-term. For another case-study, look at his 2005 investment in Wendy’s (NASDAQ: WEN ). Ackman convinced the fast food chain to refranchise a number of stores, sell off Tim Hortons-its most profitable business-and use the proceeds to buy back over $1 billion in stock. The move delivered short-term gains to shareholders, and Ackman booked a nearly 100% return when he sold his shares soon after during a feud with management. Wendy’s never recovered from the loss of Tim Horton’s. Its credit rating was cut, making it more difficult to fund investment through debt, and buying back all those shares used up resources that could have helped renovate stores and keep the chain competitive with McDonald’s (NYSE: MCD ), where Ackman tried and failed to push through a similar plan. Today, Wendy’s stock price remains mired below its level from before Ackman’s involvement, and the company consistently earns an ROIC near the bottom of its peer group. By focusing on financial maneuvers such as refranchising, spin-offs, and buybacks, Ackman successfully extracted short-term value from the company while hurting long-term shareholders. Bad Corporate Governance From Focus on Non-GAAP Earnings The use of non-GAAP metrics is something we have warned about many times. The biggest issue with non-GAAP metrics is that management has wide discretion to add income or remove expenses, which means they can easily manipulate the non-GAAP metrics. Unfortunately, activist investors gravitate towards firms that highlight their non-GAAP metrics because it becomes easier to hide shareholder destruction in the short-term. Unsurprisingly, Valeant was one of the biggest proponents of non-GAAP metrics. The company’s executives bonuses were tied to a non-GAAP metric they called “Cash EPS” that excluded costs related to acquisitions, as well as stock-based compensation. Valeant is far from the only example of lax corporate governance on non-GAAP issues. Take for example, Jarden Corporation (NYSE: JAH ), a firm Ackman voiced strong support for in May 2015. We put Jarden in the Danger Zone in October 2015 due in part to its use of non-GAAP metrics for executive compensation. As long as the firm pays executives based on “adjusted EPS,” which conveniently removes certain restructuring and acquisitions costs, JAH will continue to destroy shareholder value. Jarden also fits the description of serial acquirer and takeover target when it agreed to a deal with Newell Rubbermaid in December 2015. “Unlocking Value” Misses Opportunities Valeant might be in the news more of late, but one of Ackman’s most high profile positions might be Herbalife , about which he released details in a 342 slide presentation in late 2012. We highlighted the strengths of Herbalife’s business in August 2013 and despite continued criticism, the company continues to counter each of Ackman’s claims, as well as investigations by the SEC. Instead of going to $0/share, as Ackman predicted, HLF increased over 144% in 2013 and remains up over 80% since Ackman first announced his position. We noted the strength of Herbalife’s business in our report and the thesis hasn’t changed. Over the past decade, Herbalife has grown NOPAT by 15% compounded annually and increased its ROIC from 21% to a top quintile 32% over the same timeframe. Best of all, Herbalife remains undervalued. At its current price of $55/share, HLF has a price to economic book value (PEBV) ratio of 1.4. This ratio means that the market expects Herbalife to only grow NOPAT by 30% over the remainder of its corporate life. If Herbalife can grow NOPAT by just 7% compounded annually over the next decade , the stock is worth $80/share today – a 37% upside. Activists Should Play A Positive Role… But They Don’t There is no shortage of targets out for activists that truly want to unlock long-term value. Many companies have misguided executive compensation plans that push management towards acquisitions and other activities that destroy shareholder value. Just look at how misaligned executive compensation plans helped push profitable Men’s Wearhouse (NYSE: TLRD ) into the disastrous acquisition of Jos. A. Bank . Activists have more opportunity than ever to push back against misaligned executive compensation plans. The Dodd-Frank Act in 2010 requires all companies to allow “Say On Pay” votes where shareholders can make their voices heard on executive compensation. We’d love to see activists with the resources to take on big companies make a push to better align executive compensation with long-term shareholder value. We have compelling proof in the form of AutoZone (NYSE: AZO ) that linking executive compensation to ROIC can help companies deliver market-beating returns . Unfortunately, activists seem to be going the opposite direction. Between 2009-2014 , fewer activist campaigns targeted issues surrounding executive compensation and corporate governance. Instead, activists radically increased their demands for buybacks, spin-offs, acquisitions, and other feats of financial engineering. Activists also seem to be taking a short-term on their investments. 84% of all activist investments last less than two years, according to FactSet. The good news? These types of activists have underperformed this year . Ackman has led the pack downward. Even before Valeant dropped 50% in March, his losses in 2015 and 2016 had already erased any gains he made in 2014. Maybe this underperformance will push activists away from the financial engineering and towards more substantive changes that truly benefit shareholders. Until then, don’t listen to activist investors claiming they can unlock value unless they articulate a focus on ROIC and long-term cash flows. Look past the typical noise and focus on fundamentals. Find companies that consistently generate profit, earn a quality return on invested capital, and have a stock price where expectations for future cash flows are low. Disclosure: David Trainer and Sam McBride receive no compensation to write about any specific stock, sector, style, or theme. 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.