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Q2 Outlook For Retail ETFs

Retailing involves buying large quantities of goods and selling them in smaller quantities to consumers for a profit. The health of the retail industry is an important economic indicator, as it is linked directly to consumers and their propensity to spend. Consumer spending is the key to the well-being of any economy, as it accounts for more than two-thirds of economic activity. The link between consumer spending and the retail industry becomes more relevant, as retail sales attract approximately 30% of total consumer spending in the U.S. Also, the retail industry ranks among the top U.S. industries and employs an enormous workforce, contributing to the health of the job market. Before jumping onto the trends in retail, here’s a peek into the key economic indicators, which suggests where the market is heading. Recent data revealed that U.S. consumer spending rose a marginal 0.1% in February 2016, following a revised January 0.1% rate of increase, which was previously reported at a 0.5% increase. Adjusted for inflation, consumer spending rose 0.2%. This slowdown in consumer spending has lowered the predictions for economic growth in the first quarter of 2016. We note that income rose by a modest 0.2% in February, after a 0.5% increase in January, which marked the strongest income growth in seven months. Analysts suggest that the slowdown in incomes is rather temporary amid a tightening job market that is driving wages higher. Despite this recent weakness, market pundits still expect consumer spending to pick up as the year passes, as the improvement in employment levels will likely drive up incomes and ultimately encourage consumers to spend. Concurrently, a report by the Commerce Department suggests that the third estimate of real gross domestic product (GDP) expanded at an annual rate of 1.4% for the fourth quarter of 2015, above the second estimate of 1%. Also, according to the report, real GDP for 2015 rose 2.4%, at the same rate as for 2014. These reports collectively advocate that the U.S. economy is definitely showing resilience, while keeping rumors of an upcoming recession at bay. Seconding these views, we note that the U.S labor market looks quite stable, with unemployment rate for March standing slightly up from last month at 5%. The report by the Bureau of Labor Statistics indicated that a total of 215,000 nonfarm payroll was added in March, of which retail employment increased 48,000. Given a rebounding U.S. economy, the retail space is bubbling with optimism. This is evident from March’s 0.5% rise in retail sales, excluding automobiles, gasoline stations and restaurants, from February 2016, as reported by the nation’s largest retail trade group – National Retail Federation (NRF). The federation pointed out that the growth in March came despite the uncertain global economic outlook and challenges in the industrial and financial sectors. Sales for the month benefited from an early Easter that increased retailers’ sales, as well as steady improvements in labor market and increased incomes that determine consumers’ spending appetite. As reported in February, NRF projects retail sales in 2016 to rise 3.1%, which is higher than the 10-year average sales growth of 2.7%. Online sales in 2016 are expected to increase in the band of 6-9%. Market experts expect retail sales growth in 2016 to come on the back of improving wages, new job creations as well as steady consumer confidence, which will negate the headwinds from an uncertain global environment, particularly the economic slowdown and financial mayhem in China, the strong U.S. dollar and persistent problems in the energy sector. Playing the Sector through ETFs ETFs present a low-cost and convenient way to get a diversified exposure to this sector. Below, we have highlighted a few ETFs tracking the industry: SPDR S&P Retail ETF (NYSEARCA: XRT ) Launched in June 2006, the SPDR S&P Retail ETF is a fund that seeks investment results corresponding to the S&P Retail Select Industry Index. It consists of 98 stocks, the top holdings being Office Depot Inc. (NASDAQ: ODP ), Fresh Market Inc. (NASDAQ: TFM ) and Children’s Place Inc. (NASDAQ: PLCE ), representing asset allocation of 1.56%, 1.36% and 1.32%, respectively, as of April 1, 2016. The fund’s gross expense ratio is 0.35%, while its dividend yield is 1.17%. XRT has $632.14 million of assets under management (AUM) as of April 1, 2016. Market Vectors Retail ETF (NYSEARCA: RTH ) Initiated in December 2011, the Market Vectors Retail ETF tracks the performance of Market Vectors US Listed Retail 25 Index. It comprises 26 stocks, the top holdings being Amazon.com Inc. (NASDAQ: AMZN ), Home Depot Inc. (NYSE: HD ) and Wal-Mart Stores Inc. (NYSE: WMT ), representing asset allocation of 13.65%, 8.68% and 7.20%, respectively, as of April 4, 2016. The fund’s net expense ratio is 0.35% and its dividend yield is 2.25%. RTH has managed to attract $141.5 million in AUM as of April 4, 2016. PowerShares Dynamic Retail Portfolio ETF (NYSEARCA: PMR ) The PowerShares Dynamic Retail Portfolio ETF, launched in October 2005, follows the Dynamic Retail Intellidex Index and is made up of 30 stocks that are primarily engaged in operating general merchandise stores, such as department stores, discount stores, warehouse clubs and superstores. Its top holdings are The Walgreens Boots Alliance Inc. (NASDAQ: WBA ), CVS Health Corp. (NYSE: CVS ) and Home Depot Inc. ( HD ), reflecting asset allocation of 5.13%, 5.06% and 5.05%, respectively, as of April 4, 2016. The fund’s net expense ratio is 0.63%, while its dividend yield is 0.74%. PMR has managed to attract $22.5 million in AUM as of April 4, 2016. Original Post

Fund Managers Are A Frightened Lot!

Today we will focus on Merrill Lynch’s monthly survey of global fund managers, who overlook around $600 billion in AUM. Majority of the time, but not always, surveys such as these should be taken from the contrary perspective and include some great insights as to how the consensus is positioned. As always, there are some pretty good charts and interesting observations, so let’s get started. Click to enlarge Equity allocations remain quite low, especially when one considers the recent multi-month powerful rally in global equities. Fund managers allocations towards the stock market fell to 9% overweight this month, from 13% last month and 54% in April 2015 (just before equities rolled over). The chart above shows that data with MSCI Hong Kong, which has been one of the most oversold markets since the Chinese rout began. However, on our Twitter account readers can also see the same data with the MSCI Australia index. We would assume equities have further to run based on this data alone, however we would advise caution on using only one indicator to make your financial decisions. Click to enlarge Bond allocations remained similar to previous two months, as readings came in at 38% underweight. Worth noting however, fund managers were 64% underweight in December, just before the equity market sold off and bond market rallied. In the chart above, we have shown the difference in allocation of equities vs bonds, together with the ratio of stocks vs bonds. Globally, managers have been quite risk averse. While positioning towards the debt markets is not that extreme (allocations have risen to 20% underweight or even higher historically), there are other sentiment gauges arguing that Treasury yields could rise somewhat from here. Click to enlarge Firstly, small speculators positioning in the futures market shows dumb money is chasing Treasuries with an expectation of lower yields. Secondly, Mark Hulbert’s Bond Newsletter Sentiment Index ( click here to see the chart ) shows record bullish recommendations by various advisors and newsletter writers. Thirdly, number of shares outstanding on various Treasury ETFs has spiked in recent weeks ( click here for the chart, thanks to Tom McClellan ). Finally, according to ICI, fund inflows towards government bonds have been very elevated for weeks. Putting it all together, one can see that there is room for unwinding of positions in the Treasury bond market. We have been long for a few months now and have recently changed our duration towards very short term Treasuries and Corporate grade bonds, as we expect a correction. Having said that, Treasuries still remain attractive for three reasons: 1) relative to rest of the developed world, Treasuries look attractive and could be considered high yielding sovereigns with only Australia & New Zealand paying you more; 2) we still continue to favour assets priced in US dollars as we see the greenback resume its bull market once the current correction runs its course; and… Click to enlarge … 3) we think that longer duration Treasury yields could eventually break down from the technical consolidation patterns. Click to enlarge Finally, cash balance increased in the month of April to 5.4%, from 5.1% a month earlier. As already discussed above, despite a very strong multi-month stock market rally, fund managers continue to hold extremely high levels of cash. Risk averse behavior resembles bear markets of 2000-02 and 2007-09, however, year to date performance of all major asset classes is pretty much positive (chart below). Click to enlarge Our take on high cash allocations by fund managers requires an investor to step away from day to day activities of the financial market, and focus on the longer-term picture. We believe there is an overvaluation in all major asset classes, where global central bankers have goosed up and inflated value of just about everything. We are very nervous and seem not to be the only ones with this view (Bloomberg: Peter Thiel Says Just About Everything Is Overvalued ). Bonds and cash are more expensive than they have ever been, with yields on Treasuries lower than at any other time in the last 220 years. Europe and Japan have gone into “la-la land” of negative interest rates, something that hasn’t happened in over 5,000 years of recorded history . Cash yields essentially zero or even negative in some countries. US stocks are the most expensive ever, apart from a few months during dot com bubble, with some metrics showing future expected returns to be flat over the coming decade. Basically, we have a situation where stocks, bonds and cash are expensive all at once. Depending on how events unfold, returns on all major asset classes could be very low or even negative (in tandem). No wonder global fund managers are frightened! Original post

Smart Beta ETFs Not So Smart?

Smart beta ETFs that were on fire for quite some time now appear to be losing some momentum. Smart beta strategy helps to exploit market anomalies by adding extra selection criteria to the market cap or rules-based indices. These include among other strategies value – stocks trading cheap but performing better than stocks trading at a higher value, momentum – based on ongoing trend, dividend – stocks paying high dividend perform better in the long run and volatility – stable stocks perform better any day (read: How to Play the Choppy Market with Cheap Smart Beta ETFs ). In fact, the popularity of smart beta has soared to such a point, where a Create-Research survey has found that smart beta ETFs make up for around 18% of the U.S. ETF market. The U.S. markets are experiencing extreme volatility and the factors responsible for it are global growth concerns, escalating geopolitical tensions, a surge in the U.S. dollar and uncertainty over the timing of the next interest rate hike. Against this backdrop, investors look for smart stock-selection strategies to alleviate market risks. But nothing works forever, not even smart strategies. This is as true for smart beta ETFs as for market anomalies. Per a report by Research Affiliates’ analysts, one of the primary reasons why smart beta strategies have been performing well is because of their growing popularity, which led to higher valuations rather than structural alpha. The latter is the quality of the strategy and its potential to beat the benchmark on a sustainable and repeatable basis. This does not mean that one should reject smart beta ETFs altogether. If any inefficiency is spotted in the market, smart beta ETFs enable investors to exploit it at a cheap cost. However, it should be noted that not all smart beta ETFs have fulfilled their promise of delivering market-beating returns (read: Smart Beta ETFs That Stood Out Amid Market Volatility ). Below we have highlighted a few ‘Smart Beta’ options that underperformed the broader U.S. market ETF SPDR S&P 500 ETF (NYSEARCA: SPY ), which has gained about 1.6% so far this year (as of March 30, 2016) First Trust Dorsey Wright Focus 5 ETF (NASDAQ: FV ) This ETF tracks the Dorsey Wright Focus Five Index, which provides targeted exposure to the five First Trust sector and industry-based ETFs that Dorsey, Wright & Associates (DWA) believes have the highest potential to outperform other ETFs in the selection universe. It is a popular ETF with AUM of $4.6 billion and trades in solid volumes of around 2.2 million shares a day on average. The fund charges a higher 89 bps in fees. The ETF has lost 8.2% in the year-to-date period (as of March 30). Guggenheim S&P SmallCap 600 Pure Growth ETF (NYSEARCA: RZG ) This fund tracks the S&P SmallCap 600 Pure Growth Index. The product has a wide exposure across 146 stocks with each holding less than 2% share while healthcare and financials are the top two sectors accounting for over 20% share each. The ETF has AUM of $192 million but trades in light volume of about 28,000 shares a day on average. It charges 35 bps in annual fees and fell 2.4% in the year-to-date period. SPDR Russell 1000 Momentum Focus ETF (NYSEARCA: ONEO ) The fund tracks the Russell 1000 Momentum Focused Factor Index and holds a broad basket of 903 securities that are widely diversified with none holding more than 0.82% of assets. ONEO has accumulated $340.2 million in its asset base. It charges a lower fee of 20 bps per year and trades in solid volume of around 137,000 shares. The ETF fell 0.5% in the year-to-date period (read: 5 Very Successful ETF Launches of 2015 ). Original Post