Tag Archives: investing

Hot Launches

By Jeff Tjornehoj Click to enlarge With just $23.9 billion in net inflows this year, exchange-traded products (ETPs) are having their slowest start since the first five months of 2010 when only $18.7 billion in net inflows were made. But the industry continues to launch new products anyway and through this week (May 18) another 88 products have been unveiled. We took a look to see which ones have had the best luck attracting cash. Through May 18 the fastest-growing ETP is the SPDR SSGA Gender Diversity Index ETF (NYSEARCA: SHE ) , which tracks a market-cap weighted index of large U.S. companies that that exhibit gender diversity in their senior leadership positions; it’s attracted $264 million this year. Not too far behind in the asset race, the WisdomTree Dynamic Currency Hedged International Equity Fund (BATS: DDWM ) has brought in $238 million. This fund holds a basket of dividend-weighted stocks headquartered outside of the U.S. and Canada and dynamically hedges foreign currency exposure for U.S. dollar investors. While three others have managed to accumulate $50 million in assets so far, the rest of this year’s launches are still waiting for investors to find them: the remaining 81 launches this year collectively hold $700 million or just as much as these five.

The Fundamental Difference: Through A Lens Of Net Buybacks

By Jeremy Schwartz At WisdomTree, we believe that screening and weighting equity markets based on fundamentals such as dividends or earnings can potentially help produce higher total and risk-adjusted returns over a complete market cycle. One of the most important elements of a fundamental index is the annual rebalance process, where the index screens the eligible universe and then weights those securities based on their fundamentals. In essence, the process takes a detailed look at the relationship between the underlying fundamentals and price performance and tilts weight to lower-priced segments of the market. One way to illustrate the benefits of this approach for our earnings-weighted family is to compare the net buyback yield of the WisdomTree Earnings Index to a market cap-weighted peer universe. Below we look at how the net buyback yield changes when you screen and weight U.S. equity markets by firms’ profitability instead of market cap. Earnings Weighting vs. Market Cap Weighting Click to enlarge The WisdomTree Earnings Index consistently had a higher net buyback ratio than did a market cap-weighted universe consisting of the 3,000 largest securities by market cap. The WisdomTree Earnings Index averaged a net buyback yield of 2.2% over the period, compared to just 1.1% for the market cap peer universe. We believe that having an annual profitability screen for inclusion in the WisdomTree Earnings Index helps avoid speculative and unprofitable smaller-capitalization firms that have a tendency to raise capital by periodically issuing new shares. The earnings-weighted approach that tilts weight to more profitable firms can also be a reason the weighted average net buyback yield is higher. The chart below looks at the net buyback yield on a universe of the lowest price-to-earnings (P/E) ratio stocks within the 3,000 largest stocks by market cap and contrasts that with the net buyback yield on the highest P/E ratio stocks. Net Buyback Yield by P/E Ratio Click to enlarge If corporate America responds well to incentives, the higher-priced basket would issue more shares (given that their stocks are high priced and issuing more of them would be an effective way to raise growth capital) and the lower-priced basket would issue fewer shares or actually buy back shares to reduce their shares outstanding and thus power their earnings-per-share growth. What we see in the data is the higher-priced universe buys back fewer share, and instead issues more shares (having more companies with negative net buyback yields). Why Earnings Weight Going back to the WisdomTree Earnings Index in the first chart-weighting by Earnings Stream is essentially tilting weight from a market cap-weighted scheme to over-weight those companies with below average P/E ratios and to under-weight those companies with high P/E ratios. The Earnings Stream can be defined as earnings per share times shares outstanding or market cap x earnings yield (which is equivalent to 1/PE ratio). Tilting weight to the higher-earnings-yield stocks by earnings weighting thus is one effective way to tilt the net buyback yield balance in one’s favor. Companies reducing shares outstanding are essentially locking in earnings-per-share growth by reducing their share count, while companies that are issuing more shares are creating a higher hurdle to overcome to achieve earnings-per-share growth. There is a philosophical debate about the motivations for all the buybacks we are seeing today as well as fears that companies are failing to reinvest for future growth (or that they just see no growth opportunities, hence all the dividends and buybacks). One thing is clear to us from the data: the lower-priced stocks issue fewer shares, and the more expensive stocks issue more shares (and have lower net buyback yields). This can be especially true in the small-cap space, as we will discuss in a future blog post. The consistently greater-than 2% net buyback yields seen on the WisdomTree Earnings Index over the last five years, combined with 2% dividend yields on this basket today, provides critical valuation support and also helps explain why we think the earnings-weighted approach can add value over time. Jeremy Schwartz, Director of Research As WisdomTree’s Director of Research, Jeremy Schwartz offers timely ideas and timeless wisdom on a bi-monthly basis. Prior to joining WisdomTree, Jeremy was Professor Jeremy Siegel’s head research assistant and helped with the research and writing of Stocks for the Long Run and The Future for Investors. He is also the co-author of the Financial Analysts Journal paper “What Happened to the Original Stocks in the S&P 500?” and the Wall Street Journal article “The Great American Bond Bubble.”

The V20 Portfolio: Week 33

The V20 portfolio is an actively managed portfolio that seeks to achieve an annualized return of 20% over the long term. If you are a long-term investor, then this portfolio may be for you. You can read more about how the portfolio works and the associated risks here . Always do your own research before making an investment. Read the last update here . Note: Current allocation and planned transactions are only available to premium subscribers . Over the past week, the V20 Portfolio rose by 3.8% while the SPDR S&P 500 ETF (NYSEARCA: SPY ) increased by 0.4%. Portfolio Update Conn’s (NASDAQ: CONN ) was responsible for most of the gains this week, rising 15.8% from $10 to $11.58. There were no major events other than a credit facility amendment on Friday, so much of this rally can be attributed to shifting sentiment in the market. Some of the amendments relaxed covenants while others were more restrictive. Let’s go over the restricting amendments first. Distributing restricted payments (e.g. dividends, buybacks) will now require a 2.5x interest coverage ratio for two quarters. Borrowing base was reduced by $15 million, which will be waived if interest coverage ratio exceeds 2x for two quarters. Finally, margin on the loan was increased by 25 bps (i.e. making the revolver a bit more expensive). While none of the amendments were crippling, the amendment concerning restricted payments will prevent Conn’s from making any share repurchases in the coming months, as the interest coverage ratio was less than 2.5x for Q4. The positive amendments included eliminating the minimum interest coverage ratio covenant for Q1 and lowering the total coverage ratio to 1x from 2x. Overall, this was a slight setback as buybacks will not be a possibility in the near future. Last week we discussed how Intelsat (NYSE: I ) was buying back bonds at a discount. For whatever reason (possibly the increased likely hood of a rate hike), the bonds in question declined in value from $70s to high $60s. As such, Intelsat lowered its consideration accordingly, lowering the offer by around 500 bps. Our helicopter company was the portfolio’s major laggard. There was no major development. As discussed in last week’s update, the oil and gas division will continue to battle industry wide headwinds, though the recent bounce in commodities may cushion the fall. However, it is unlikely that revenue will suddenly recover to its previous level as the oil and gas industry overall is still at a cost cutting stage. The medical segment should continue to generate profits, as it will not be affected by the commodity downturn. Risk Management Due to additional capital being allocated to Conn’s and its subsequent rally, the position now accounts for more than 10% of the entire portfolio. For a position to account for such a significant portion, it must fulfill two criteria: high expected rate of return and low probability of permanent capital loss. As we’ve seen with Dex Media, even though the shares were undervalued, 100% of the investment will likely be written off. But by allocating a small amount of capital to this speculative position, it only had a tiny impact on the overall portfolio. Conn’s on the other hand fulfills both criteria. It is not under any significant financial distress and is still growing its business. While short-term results have dampened its profitability, its long-term outlook remains bright. Performance Since Inception Click to enlarge Disclosure: I am/we are long CONN, I. 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.