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4 Sector ETFs Jump To Top Ranks As Q1 Earnings Hit

By now, we are all aware of the fact that the Q1 earnings season, which has just taken off, is going to be a soft one. Earnings of the S&P 500 index are likely to decline 10.3% in the first quarter while revenues are expected to fall 0.6% as per Zacks Earnings Trends issued on April 14, 2016. The key drag was the energy sector as evident from the 5.2% expected Q1 earnings decline from the ex-oil S&P 500 index, Revenues enter the growth territory (up 2.4%) if we rule out the energy sector weakness from the S&P 500. Notably, the energy sector is expected to report a 105.8% decline in earnings for Q1 on 29.8% lower revenues. But then, the other 15 sectors constituting the S&P 500 index (as per Zacks methodology) are not sturdy enough. Only six sectors will likely post mild-to-positive earnings growth this season with acute recessionary impact expected in basic materials (down 23.8%), industrial products (down 25.7%) and conglomerates (down 23.7%). Needless to say, stocks and the related ETFs will come under pressure post earnings releases of such sectors. Investors might be at a loss as to where to bet their money to reap the return of a bull market, without being perturbed by earnings weakness. For them, below are four sector ETFs that have soared to the top Zacks Ranks (#1 or #2) at the threshold of the earnings season (read: Winning ETF Strategies for Q2 ). Guggenheim S&P 500 Equal Weight Technology ETF (NYSEARCA: RYT ) – #2 (Buy) to #1 (Strong Buy) Technology ETFs were badly hit in the first quarter of 2016, having returned minutely or posting massive losses as risk-off sentiments loomed large. However, things took a turn for the better lately as a flurry of upbeat U.S. economic data and a dovish Fed whet investors’ risk appetite. The sector is expected to post 6.7% decline in earnings on 2.6% revenue growth. So, investors intending a momentum play in the tech space can bet on RYT which is an equal-weighted version of the S&P 500 Information Technology Index and gives exposure to a broader technology sector. RYT has a Medium risk outlook. Guggenheim S&P Equal Weight Health Care ETF (NYSEARCA: RYH ) – #3 (Hold) to #1 The scenario was almost the same for the broader healthcare sector which returned to health recently. A biotech rebound, compelling valuation, increasing merger and acquisition activities and several important product approvals act as tailwinds to the sector. The broader medical sector is projected to post 0.9% growth in earnings in Q1 on bumper 9.1% higher revenues. No points for guessing why investors should target this space right now. An intriguing bet on this sector is RYH which is an unmanaged equal-weighted version of the S&P 500 Health Care Index. RYH has a Medium risk outlook. Market Vectors Gaming ETF (NYSEARCA: BJK ) – #3 to #1 This gaming sector falls into the consumer discretionary category, which should be on a smooth road ahead on compelling valuation, expectations of a longer low-rate environment due to a dovish Fed and a softer dollar driving earnings of companies with considerable exposure in foreign lands. The consumer discretionary space looks better placed than many other sectors for the first-quarter earnings season. The sector is likely to record 1.8% earnings growth on 5.8% growth in revenues. The fund, BJK, gives investors exposure to the overall performance of the largest and most liquid companies in the global gaming industry. From a country look, U.S. takes the top spot at 34.0% while Australia and China round off the top three with a double-digit exposure each. IQ US Real Estate Small Cap ETF (NYSEARCA: ROOF ) – #3 to #2 As the U.S. Treasury bond yields are hovering at lower levels despite a slowly improving economy, the outlook for real estate is looking up. The sector performs well in a low-yield environment while a growing economy ensures demand for real estates. Investors can bet on this trend via ROOF which is made up of small-cap stocks – the best capitalization to play the recovering domestic economy. Plus, ROOF yields about 5.80% annually (as of April 14, 2016) and can act as a decent income destination for investors. Link to the original post on Zacks.com

Inside WisdomTree’s New Dividend Growth ETF

Demand for safe-haven assets peaked amid an uncertain global economic outlook and growing volatility across many asset classes. With safe-haven assets in demand, dividend has been an area to watch out for as not all income products are devoid of risks. Stocks that are hiking dividend continuously are on the other hand said to be the best bets. Meanwhile, treasury yields are also showing a downtrend. Yield on 10-year Treasury notes fell by almost 44 bps to 1.80% as of April 14, 2016. This has made investors thirstier for yields lately (read: High Dividend Sector ETFs Hitting All-Time Highs ). Meanwhile, chances of the Fed hiking rates in the near-term have also dropped significantly after the Fed Chair Janet Yellen’s dovish comments, which were further reinforced by Fed Bank of New York President William C. Dudley. Dudley said that due to uncertain outlook for the U.S. economy, a cautious and gradual approach to interest-rate increases is expected. Yield on Japan’s benchmark 10-year government bond has been hitting record lows after it slid to sub-zero for the first time in February. Bank of Japan introduced negative interest rates earlier this year following the European Central Bank (ECB) footsteps. Denmark, Sweden and Switzerland adopted similar measures. Meanwhile, in March, the ECB came up with a more intensified economic stimulus and opted for multiple rate cuts and the expansion of its quantitative easing program to boost the economy. Monthly asset purchases were raised to EUR 80 billion from 60 billion previously (read: Surprise ETF Winners & Losers Post ECB Easing ). Because of these factors, dividend ETFs have gained a lot of popularity as investors continue to search for attractive and stable yield in this ultralow rate interest environment. Probably, this is why WisdomTree recently rolled out a dividend growth ETF targeting international economies. In fact, the global footprint made the fund more attractive given the ultralow interest rate backdrop prevailing in most developed economies. Below, we have highlighted the newly launched fund – WisdomTree International Quality Dividend Growth Fund (BATS: IQDG ) . IQDG in Focus IQDG tracks the WisdomTree International Quality Dividend Growth Index, which provides exposure to dividend paying developed market companies. Index comprises 300 companies from the WisdomTree International Equity Index selected on the basis of both growth factors – long-term earnings growth expectations and quality factors – three-year historical averages for return on equity and return on assets, which are then weighted on the basis of annual cash dividends paid. The fund has a net expense ratio of 0.38%. However, the net expense ratio reflects a contractual waiver of 0.1% through July 31, 2017. As of April 13, 2016, the fund had 207 dividend-paying companies from the developed world, excluding Canada and the U.S. in its basket. The fund is well diversified with none of the stocks holding more than 4% except the top two holdings, British American Tobacco plc (NYSEMKT: BTI ) (5.3%) and Roche Holding AG ( OTCQX:RHHBY ) (4.9%). From a country perspective, U.K. takes the top spot with about 19.4% of the basket followed by Japan (14%), Switzerland (10.1%), Germany (7%) and the Netherlands (6.9%). As for a sector point of view, Consumer Staples dominates the fund with about 22.7% exposure, followed by Consumer Discretionary and Industrials with 18.7% and 16.4% allocation, respectively. Launched on April 7, the fund has already amassed $2.5 million in its asset base. The fund is up 3.5% in the last 5 days. How Could it Fit in a Portfolio? The ETF could be well suited for investors looking for higher dividend paying securities across the globe. It also offers diversification benefits. These low-risk vehicles are excellent options for investors looking to protect their portfolio in a bearish environment. With interest rates being low in most developed nations, the appeal of dividend ETFs has increased as these offer strong yields. However, investors looking for high growth may not be satisfied with this product. Additionally, changes in currency exchange rates may affect the value of the fund’s investment adversely. Competition The ETF could face competition from other dividend ETFs with a global perspective. There are quite a few international dividend ETFs which specifically target this market. Of these, the popular fund, the iShares International Select Dividend ETF (NYSEARCA: IDV ) , has a total asset base of $2.6 billion. This fund tracks the Dow Jones EPAC Select Dividend Index and trades in heavy volume of 911,000 shares per day and charges 50 bps in annual fees. Another fund targeting the international dividend market space, the SPDR S&P International Dividend ETF (NYSEARCA: DWX ) , has AUM of nearly $856.8 million and exchanges 190,000 shares a day. The fund has an expense ratio of 45 bps. Apart from these, IQDG could also face competition from the FlexShares International Quality Dividend Index ETF (NYSEARCA: IQDF ) with an asset base of $342 million and the PowerShares International Dividend Achievers Portfolio ETF (NYSEARCA: PID ) with AUM of $700.1 million. IQDG looks attractive with a lower expense ratio as compared to IDV and DWX. The fund has a chance of making a name for itself if it manages to generate returns net of fees greater than the currently available products in this ETF space. IQDG’s focus on selecting high dividend paying stocks with both quality and growth looks to be a great strategy. Link to the original post on Zacks.com Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Healthcare Stocks Can Heal From Pricing Scares

By James T. Tierney, Jr. Click to enlarge Fears of price controls for drugs and the crisis at Valeant Pharmaceuticals have infected the US healthcare sector. But we believe that the sector isn’t fatally ill and that investors can still find companies that offer solid growth potential. During the first quarter, healthcare was the worst-performing sector in the S&P 500 Index, falling by 5.5%, compared to the market’s 1.3% gain. At the same time, the iShares NASDAQ Biotechnology Index dropped by more than 20%. Price Controls: Fact and Fiction So what happened? Let’s start with the comical explanations. The presidential election cycle continues to be a source of peculiar promises. Donald Trump surprised investors on February 7 by saying that he would negotiate $300 billion of price concessions for the US government from drug companies. But the math doesn’t quite add up; total industry revenues from federal spending were only $143 billion in 2014. That didn’t stop the headlines, which spooked investors. Some concerns were real. The Centers for Medicare & Medicaid Services announced a proposed rule that would change how they pay for drugs that are not self-administered. There will be a demonstration project to assess the impact of the proposed changes starting later this year, and it will probably run for a couple of years. The initial plan involves reimbursement changes for the providers (hospitals and physicians), rather than changes for the drug companies themselves. These proposals have raised concerns that drug-price controls may be introduced at some point. In our view, the repeated price-control scares are a red herring. Investors need to focus on companies with products that can deliver meaningful benefits for patients. Those that can’t meet these conditions will have a challenged future—price controls or not. Growth Stocks Lagged Market rotation was also a driver of underperformance for the healthcare sector in the first quarter. Generally speaking, investors sold last year’s winners such as Internet stocks and biotech companies, and bought the underperformers, including utilities and energy. In addition, value-related industries in the US market performed better than growth-oriented sectors like healthcare. But style winds can be deceiving. While we understand why more economically exposed cyclical sectors bounced back strongly as recession fears faded, in reality, the world is still in a slow-growth mode. So don’t expect all boats to rise—and growth will likely still be scarce. In these conditions, a sector like healthcare should be well positioned over time, given global demographic trends, as people are living longer and tend to need more pharmaceutical products as they get older. In addition, untapped treatment areas such as cancer and Alzheimer’s disease hold long-term promise for companies that can crack the code and discover effective treatments. Valeant Crisis Shakes Industry Against this messy backdrop, the troubles at Valeant Pharmaceuticals (NYSE: VRX ) have shaken the industry. Valeant’s controversial business model was driven by acquisitions, cost cuts and aggressive price increases. This year, the company’s shares have tumbled more than 65% amid a series of scandals that put it in the eye of the drug-pricing storm, with company executives being called upon to testify before a Senate and House of Representatives committee. Valeant’s high debt levels have raised fears of default, after the company missed its filing deadline for its 10-K report. The most surprising thing about Valeant’s predicament is how the fallout has spread over the rest of the healthcare industry. The increased focus on drug pricing—and negative sentiment around acquisitions—has been more profound than expected. We believe that this fallout will eventually diminish, and quality companies will prosper again, but the rebound will take time. Prescription for Investing Success So what should investors do? Don’t give up on healthcare stocks. It’s very easy to get distracted by the intense noise across the industry. But healthcare stocks offer equity investors defensive positioning and solid growth potential, even in a tough global economy. Companies with solid fundamentals that aren’t really vulnerable to recent developments can be found. Equity investors should focus on identifying companies with solid earnings growth potential and drugs that offer a differentiated and meaningful medical benefit. It’s also important to make sure that drug-pricing structures are in line with the benefit delivered by the product, and that the company’s business model is based on volume growth rather than aggressive price increases. We believe that these guidelines are a prescription for success in the healthcare sector—where many stocks are currently on sale. The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.