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Fed To Hike In June? Expected ETF Moves

Taking most investors by surprise, minutes from the Fed April meeting pointed to interest rate hike possibilities in June. While this seemed unfeasible a few days back, a volley of upbeat economic data lately sparked off possibilities for further policy tightening. Also, plenty of positive vibes were felt in the market, including a healing labor market and the latest uptick in global sentiments buoyed by stabilization in China and oil. All these opened the door for a likely hike in June. Most Fed officials sought signs of economic improvement in the second quarter including a strong employment and inflation scenario. Inflation rose at the quickest clip in three years in April, as the consumer price index jumped a seasonally adjusted 0.4% (read: TIPS ETF (NYSEARCA: TIP ) Hits New 52-Week High). Upbeat Data Points Though April’s non-farm payroll reading of 160,000 was below the estimated 205,000 and the prior-month reading of 208,000, the unemployment rate was unchanged at 5%. Other key indicators including workweek and average hourly earnings showed increases. Hourly earnings in April rose 0.3% month over month and 2.5% year over year. Meanwhile, overall retail sales expanded 1.3% in April from March, representing the largest gain since March 2015. April retail sales beat economists’ forecast of a 0.8% rise . The University of Michigan indicated that its consumer sentiment index rose 6.8 points to 95.8 in early May, marking the strongest reading since June (read: Retail Sales Back to Health; ETFs to Watch ). Since consumer spending makes up about 70% of the U.S. GDP, April retail sales data indicates that the U.S. economy is progressing at a decent clip to end Q2 and is less likely to falter like it did in Q1. In the first quarter, the economy grew at an annual rate of just 0.5%, marking a two-year low. The housing market is also giving bullish signals. Lately, the economy was gifted with strong new home construction and building permits data. All these might encourage the Fed to take the next policy tightening decision sooner than expected. The last hike was seen in December 2015. Investors’ Perception Following the release of the minutes, investors’ bet over the possibility of a June hike shot up to 34% from 19% (according to CME Group) as indicated by the prices for futures contracts on the Fed’s benchmark overnight lending rate. And by late Wednesday, traders wagered on a 56% possibility of a hike by July, up from 20% on Tuesday. Possible ETF Moves Some subtle moves in various markets and asset classes are likely to be observed if the Fed goes hawkish in June or July. Below we discuss a few ETFs that were among the biggest movers and could remain in focus ahead. PowerShares DB USD Bull ETF (NYSEARCA: UUP ) As widely expected, the U.S. dollar will likely gain strength. The U.S. dollar ETF UUP was up about 0.7% on May 18. iShares 7-10 Year Treasury Bond ETF (NYSEARCA: IEF ) The yield on the 10-year U.S. Treasury jumped 11 bps to 1.87% on May 18, following the Fed minutes. The ultra-popular bond ETF IEF shed over 0.8%. But since global growth worries are still extensive with Brexit fears looming large, the intermediate and long-term U.S. Treasury bonds should be in fine fettle. SPDR S&P Regional Banking ETF (NYSEARCA: KRE ) Banking stocks should rally if the Fed hikes in June as these perform better in a rising rate environment. KRE added 4.24% on May 18, 2016. PowerShares FTSE RAFI Emerging Markets Portfolio ETF (NYSEARCA: PXH ) Emerging markets ETFs will likely be losers if the Fed goes ahead with a hike. Dearth of cheap money inflows would hit this space. PXH was down about 1.4% on May 18. iShares Select Dividend ETF (NYSEARCA: DVY ) The dividend ETFs, one of the biggest beneficiaries of subdued Treasury yields, might stall a bit if the Fed hikes sooner than expected. However, it all depends on how the global market shapes up and investors’ appetite for risk. Vanguard Total Stock Market ETF (NYSEARCA: VTI ) Normally, the initial reaction of a rate hike is a slide in stock prices. However, the reaction should vary across capitalization and the turbulence should settle down with time. Total stock market ETF was down 0.01% on May 18, and may be under pressure immediately after the tightening move. Link to the original post on Zacks.com

Catch These Poland ETFs On The Upswing

Poland’s currency zloty, bonds and stocks gained on Monday (May 16, 2016) as Moody’s reaffirmed its long-term credit rating for the country at A2. And unsurprisingly two ETFs tracking the country – the iShares MSCI Poland Capped ETF (NYSEARCA: EPOL ) and the VanEck Vectors Poland ETF (NYSEARCA: PLND ) – jumped 3.4% and 3%, respectively. Poland, one of the outperformers in the EU, has been lagging in recent months thanks to growth slowdown in the emerging markets. Eurozone troubles also continue to weigh on the country. Still, as per IMF forecasts, the country’s GDP growth rate is expected to touch 4% in 2016 as compared to 3.6% in 2015 building investors’ confidence in the country. Headwinds Remain Although Poland did not get a downgrade from Moody’s, the rating agency revised its outlook for the country to negative from stable. The agency cited several reasons for the change in outlook including fiscal risks arising from a substantial increase in current expenditures, uncertainty as to offsetting revenue measures and the government’s intention to lower the retirement age. Another factor affecting the outlook was the risk of deterioration in the investment climate thanks to unpredictable policies and legislations. The President’s office has recently presented a proposal to implement a law converting Swiss franc mortgages into zlotys. The International Monetary Fund (IMF) has criticized this proposal and stated that the country’s financial system along with credit and economic growth will stand to suffer if the country goes ahead with its plan to convert foreign-currency denominated mortgages. The IMF has also warned that the increase in government expenditure would lead to a rise in budget deficit to 2.8% in 2016. The rising budget deficit could even cross 3% in 2017, breaching the European Union’s budgetary rules. Instead, the IMF has encouraged the Polish government to follow policies that are market friendly. Despite these concerns, investors who believe that Poland is poised for a turnaround could catch the Poland-focused ETFs. Both the ETFs carry a favorable Zacks ETF Rank of 3 or ‘Hold’ rating, suggesting room for upside. EPOL in Focus EPOL has about $173.4 million in AUM and an average daily volume of 274,000 shares. The product tracks the MSCI Poland IMI 25/50, charging 63 basis points a year from investors. With 40 stocks in its basket, this fund puts as much as 46.1% of its total assets in the top five holdings, suggesting high concentration risk. Financials actually makes up roughly half of the portfolio with 44.7% exposure. Energy and materials round off the top three sectors with exposure of 17.3% and 9.6% respectively. Shares of EPOL fell roughly 5.4% in the last one-month period ended May 16, 2016. PLND in Focus The fund looks to track the VanEck Vectors Poland Index and has 26 securities in its basket, charging investors 60 basis points a year in fees. The fund has 36.4% of its total assets in the top five holdings. PLND also puts heavy focus on financials, with as much as 37.1% exposure, followed by a 14.1% allocation to energy, 12.7% coverage in utilities and 11.4% in consumer discretionary. PLND sees a paltry volume of around 13,000 daily, while the ETF lost more than 5.8% in the last 30 days. Original Post

Best And Worst Q2’16: Telecom Services ETFs, Mutual Funds And Key Holdings

The Telecom Services sector ranks eighth out of the ten sectors as detailed in our Q2’16 Sector Ratings for ETFs and Mutual Funds report. Last quarter , the Telecom Services sector ranked eighth as well. It gets our Dangerous rating, which is based on aggregation of ratings of six ETFs and 15 mutual funds in the Telecom Services sector. See a recap of our Q1’16 Sector Ratings here . Figure 1 ranks from best to worst the five Telecom Services ETFs that meet our liquidity standards and Figure 2 shows the five best and worst rated Telecom Services mutual funds. Not all Telecom Services sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 24 to 59). This variation creates drastically different investment implications and, therefore, ratings. Investors should not buy any Telecom Services ETFs or mutual funds because none get an Attractive-or-better rating. If you must have exposure to this sector, you should buy a basket of Attractive-or-better rated stocks and avoid paying undeserved fund fees. Active management has a long history of not paying off. Figure 1: ETFs with the Best & Worst Ratings – Top 5 Click to enlarge Sources: New Constructs, LLC and company filings Figure 2: Mutual Funds with the Best & Worst Ratings – Top 5 Click to enlarge * Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings Five funds are excluded from Figure 2 because their total net assets are below $100 million and do not meet our liquidity minimums. State Street SPDR S&P Telecom ETF (NYSEARCA: XTL ) is the top-rated Telecom Services ETF and Fidelity Select Wireless Portfolio (MUTF: FWRLX ) is the top-rated Telecom Services mutual fund. Both earn a Neutral rating. iShares Global Telecom ETF (NYSEARCA: IXP ) is the worst rated Telecom Services ETF and Fidelity Advisor Telecommunications Fund (MUTF: FTUAX ) is the worst rated Telecom Services mutual fund. IXP earns a Dangerous rating and FTUAX earns a Very Dangerous rating. 45 stocks of the 3000+ we cover are classified as Telecom Services stocks, but due to style drift, Telecom Services ETFs and mutual funds hold 59 stocks. Atlantic Tele-Network (NASDAQ: ATNI ) is one of our favorite stocks held by Telecom Services ETFs and mutual funds and earns an Attractive rating. Over the past five years, Atlantic Tele-Network has grown after-tax profit ( NOPAT ) by 13% compounded annually. The company has improved its return on invested capital ( ROIC ) from 5% in 2010 to 10% in 2015 while NOPAT margins have increased from 5% to 17% over the same time period. This impressive fundamental growth could help explain why ATNI is up over 90% over the past five years. However, shares remain undervalued. At its current price of $73/share, ATNI has a price-to-economic book value ( PEBV ) ratio of 1.1. This ratio means that the market expects ATNI’s to grow its NOPAT by only 10% over its remaining life. If Atlantic Tele-Network can grow NOPAT by just 10% compounded annually for the next five years , the stock is worth $98/share today – a 36% upside. CenturyLink (NYSE: CTL ) is one of our least favorite stocks held by FTUAX and earns a Dangerous rating. CenturyLink was placed in the Danger Zone in February 2015 . CTL at one point was down over 40% since the Danger Zone was published, but has since rebounded and has become significantly overvalued again. Over the past decade, CenturyLink’s economic earnings have declined from -$152 million to -$1.2 billion. In fact, the company has never generated positive economic earnings in any year of our model, which dates back to 1998. The company’s ROIC peaked in 2009 at 7% and has since fallen to a bottom-quintile 4%. Despite the deterioration of CenturyLink’s business, the stock is priced for impressive profit growth. To justify its current price of $33/share, CTL must grow NOPAT by 8% compounded annually for the next 11 years . Given the decline in CTL’s operations, this expectation seems overly optimistic. Figures 3 and 4 show the rating landscape of all Telecom Services ETFs and mutual funds. Figure 3: Separating the Best ETFs From the Worst ETFs Click to enlarge Sources: New Constructs, LLC and company filings Figure 4: Separating the Best Mutual Funds From the Worst Mutual Funds Click to enlarge Sources: New Constructs, LLC and company filings D isclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, sector 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.