Tag Archives: most-popular

Lipper Weekly U.S. Fund Flows: Funds Gain $6.1 Billion During Wild Week

U.S. stocks were on a wild ride during the fund-flows week ended Wednesday, June 24, 2015. Initially, investors sent the NASDAQ and Russell 2000 to new record highs, cheering the perceived dovish tone set at the conclusion of the June Federal Open Market Committee policy meeting. While the indices hit those new records at the margin, the economic data showed a drop in weekly jobless claims, and the Philadelphia Fed’s manufacturing index beat analyst expectations. However, a combination of an impasse in the Greek debt talks along with a purported quadruple-witching day sent the Dow Jones Industrial Average to a triple-digit decline, with Treasuries rallying on the news as investors looked toward safe-haven plays. On Friday, June 19, the Shanghai Composite Index posted its worst week in more than seven years as investors bailed on some recently strong-performing Chinese start-ups during the week. Nonetheless, on Monday and Tuesday news of a potential agreement between Greece and its lenders sent the markets once again to new highs, helped along by news that sales of existing homes rose in May and that sales of new single-family homes hit their fastest pace since February 2008. The rally faded, however, on Wednesday when investors learned no resolution was reached between Greece and its international creditors. The DJIA once again witnessed a triple-digit decline, this time losing 178 points for the day and closing at 17,996.07. With a rally in bonds and on investors’ flight to safety, it wasn’t too surprising to see that for the first week in three investors were net purchasers of fund assets (including those of conventional funds and exchange-traded funds [ETFs]), injecting a net $6.1 billion for the week and padding the coffers of money market funds (+$3.8 billion) and taxable bond funds (+$3.4 billion). However, investors redeemed some $1.0 billion from equity funds and $0.1 billion from municipal bond funds. For the fifth consecutive week equity ETFs witnessed net inflows, taking in $1.1 billion. As a result of better-than-expected U.S. housing news, a possible glimmer of hope for Greece, and a tech rally during the week, authorized participants (APs) were net purchasers of domestic equity funds (but only to the tune of +$0.4 billion), injecting money into the group for a fourth consecutive week. Despite continued nervousness over Greece’s bailout talks, APs were net purchasers of nondomestic equity funds (+$0.6 billion), injecting net new money into the group for the twenty-second consecutive week. As might be expected with interest increasing in tech issues, iShares Russell 2000 ETF (NYSEARCA: IWM ) (+$2.3 billion) and PowerShares QQQ Trust 1 (NASDAQ: QQQ ) (+$0.8 billion) attracted the largest amount of net new money of all the individual ETFs. At the other end of the spectrum SPDR S&P 500 ETF (NYSEARCA: SPY ) (-$2.1 billion) experienced the largest net redemption, while Financial Select Sector SPDR ETF (NYSEARCA: XLF ) (+$0.5 billion) suffered the second largest redemption for the week. For the second consecutive week conventional fund (ex-ETF) investors were net redeemers of equity funds, withdrawing $2.1 billion from the group. Domestic equity funds, handing back $3.0 billion, witnessed their twenty-first straight week of net outflows, even though they posted their first week of plus-side returns (+0.48%) in five. Meanwhile, their nondomestic equity fund counterparts witnessed $0.9 billion of net inflows-attracting new money for the twelfth week in a row. On the domestic side investors lightened up on large-cap funds and equity income funds, redeeming a net $1.7 billion and $0.9 billion, respectively, for the week. On the nondomestic side global equity funds witnessed $0.6 billion of net inflows, while international equity funds took in only $0.3 billion. For the first week in three taxable bond funds (ex-ETFs) witnessed net inflows, taking in a little more than $1.2 billion. Balanced funds attracted the largest sum of new money, taking in a net $1.6 billion (for their seventh week in eight of net inflows), while flexible funds attracted a net $0.4 billion (for their twenty-second straight week of inflows). Corporate investment-grade debt funds (-$132 million) and corporate high-yield funds (-$0.7 billion) suffered net redemptions. Loan participation funds witnessed net outflows (-$151 million) for a fourth consecutive week, while they posted their third week of negative returns (this past week -0.01%). Municipal debt funds (ex-ETFs) witnessed their eighth straight week of net outflows, to the tune of $148 million for this past week.

PPL Remains On Track Despite Spin-Off

When a company spins off part of its business, it may look like shareholders lost money, but in most cases, it’s just a technical adjustment. PPL’s stock hasn’t “fallen,” per se, but instead PPL shareholders now own a portion of newly-created Talen Energy, a stake of which they can do with what they want. After the spinoff, PPL management reaffirmed its 2015 ongoing EPS guidance of $2.05-$2.25, as well as its expected earnings CAGR of 4%-6% through at least 2017. Certainly there’s been a lot of share-price noise at PPL as of late, but the firm continues to execute, and we still like the utility. By Kris Rosemann PPL Corp’s (NYSE: PPL ) shares have been adjusted lower recently, as the firm officially completed the spinoff of its energy supply business June 1. The move finalizes PPL’s transition to a focus on regulated utilities in the US and UK. PPL’s spinoff, now trading under the name Talen Energy Corporation (Pending: TLN ), also includes the addition of RJS Power of Riverstone Holdings. As previously announced , all of the common stock of Talen Energy will be distributed pro rata to PPL shareholders. PPL shareholders received ~.1249 shares of Talen Energy common stock for each share of PPL owned as of May 20. Fractional shares were not issued; instead they were aggregated and sold in the open market, with the cash proceeds distributed pro rata to PPL shareholders. The affiliates of Riverstone Holdings will receive common shares of Talen Energy in compensation for RJS Power, resulting in their owning 35% of Talen Energy. PPL shareholders will own 65%. After the spinoff, PPL management reaffirmed its 2015 EPS from ongoing operations guidance of $2.05-$2.25, as well as its expected compound annual earnings growth rate of 4%-6% through at least 2017. The firm expects substantial rate base growth in the coming years, projecting a CAGR of 7% through 2019, though we note currency headwinds from its UK operations will continue to negatively impact earnings in the near term. Management also stated as recently as February of this year that it expects dividend growth potential to become realizable following the spinoff. The dividend potential of Talen Energy remains to be seen, but the assets that make up the company generated $4.3 billion in revenue in 2014. The newly-created firm will boast a competitive cost structure and the financial agility to pursue additional growth options. At its inception, Talen’s generation capacity of about 15,000 megawatts will be primarily located in the Mid-Atlantic and Texas, two of the largest and most competitive energy markets in the US. Its generation mix is approximately 43% natural gas or oil, 40% coal, 15% nuclear, and 2% hydroelectric. The energy-generating plants will continue to be operated and maintained by the same employees before the spin off, and the firm’s leadership team is partially comprised of former PPL leadership. The drop in PPL’s share price should not come as a surprise, and intuitively, it makes sense. Though at face value it appears that PPL shareholders suffered a decline in the value of their position, the spinoff is a net-neutral one in the sense that the value lost by PPL shareholders in the market will be realized by the receipt of new Talen stock and cash distributions. Our opinion of PPL is relatively unchanged following the spinoff, and we maintain the company is still one of the best-performing utility companies available. We see no need to adjust our holding of PPL in the Dividend Growth Portfolio, though we may view the new shares of Talen Energy as a source of cash. Our fair value estimate already reflects the anticipated spinoff. We value shares of PPL at $30 each at the time of this writing. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: PPL is included in the Dividend Growth Newsletter portfolio.

TYO: The Worst Inverse Bond ETF

Summary TYO has a high expense ratio. It is illiquid. The ETF is too volatile and does not adequately cover its underlying market. Introduction I have written a number of articles about my favorite inverse bond ETFs. I have also compiled a comprehensive list of the inverse bond ETFs I hate the most. I have discussed these securities extensively over the past few weeks, because I believe we are in an economic environment unavoidably poised to experience rising interest rates. Inverse bond ETFs can be used shrewdly to capitalize on this market inevitability, and they are valuable hedging tools for bond-heavy portfolios. However, there is long list of risks associated with investing in an inverse bond ETF, and it is prudent to research and analyze each security before investing. For this reason, I decided to write an article about the single worst inverse bond ETF on the market, the Direxion Daily 10-Year Treasury Bear 3X Shares ETF (NYSEARCA: TYO ). What Makes an Inverse Bond ETF Bad? When evaluating an inverse bond ETF, it is important for an investor to find a security that has a low expense ratio and correlates well to its underlying index. The three most important metrics for determining the quality of an inverse bond ETF are liquidity, expense, and coverage. A good inverse bond ETF has a low expense ratio, is highly traded, and maintains assets with wide coverage. A bad inverse bond ETF does just the opposite. Another metric that ought to be considered is the strength of the underlying institution that issues the inverse bond ETF. If the institution cannot honor an investment, an investor stands to lose everything. Another factor that ought to be considered is the inverse bond ETFs’ leverage multiple. Inverse Bond ETFs come in three sizes: 1X, 2X and 3X . 2X and 3X ETFs are designed to multiply the returns (or inverse returns) of the daily performance of an underlying index. 1X ETFs follow the daily returns of its underlying index one for one. Since 3X inverse bond ETFs track daily returns by three times, the risks already associated with inverse bond ETFs are exacerbated exponentially. Compounding risk greatly affects the returns of 3X ETFs particularly when tracking range-bound indexes. To read more about the risks of 2X and 3X leveraged ETFs, read my article here . TYO Analysis TYO is the worst inverse bond ETF because its expense ratio is high, it is not highly traded, it does not have wide coverage, and it is triple leveraged (which magnifies the risks associated with investing in it particularly for periods longer than one day). TYO is really the only option for 3X exposure to intermediate-term US Treasury bonds, however, just because it is the only option, does not mean it is a good option. It is the responsibility of issuing institutions to produce a good product that creates its own demand. TYO simply fails in all regards. I included a graph as more of a visual aid to show how TYO works. TYO Performance I included a graph mainly to show how TYO performs relative to its underlying index. The Direxion Daily 10-Year Treasury Bull 3X Shares ETF (NYSEARCA: TYD ) (green) is the 3X bull for 7-10 year Treasury bonds and TYO (orange) is the bear. I also included 10-year Treasury yields to show the correlation between bonds, yields and inverse bond ETFs. From a broad perspective, TYO is well correlated to 10-year yields and provides the results an investor would hope and expect from its underlying index TYD (about .99% correlation). TYO Analysis Continued On the surface, TYO seems to perform the job it is meant to perform. To see how TYO fails, one must examine the security closely. First, TYO’s net expense ratio is very high. The industry average for much more respected and liquid inverse bond ETFs is about 0.9%. Based on TYO’s total assets however, its average competitor has a net expense ratio of about 0.7%. TYO itself boasts one of the highest net expense ratios at 0.95% . What this means is, the investor must pay 0.95% just to hold TYO. The biggest risk of holding TYO, however, is its liquidity risk. It has an average volume of 10,228. TYO’s price is 18.15*10,228=$189,320. Basically, the ETF is off limits to any wealthier investors or money managing firms. Those who hold TYO run the risk of not being able to sell when they want, or causing a drop off in price when attempting to sell large volumes. Either way it’s a huge risk that can be avoided by investing in a more liquid inverse bond ETF. Lastly, TYO only has 49 million in total assets. It does not have an adequate amount of market exposure to fully correlate to changing market conditions. Conclusion The market speaks loudly and prices drive demand. An overpriced inversely leveraged ETF like TYO is going to have very little volume because investors do not want the risk. It is 3X leveraged, so it is designed to be inherently volatile. I can only imagine a poor investor losing money and being unable to sell their shares because no one is buying (or selling). Pick a better, more liquid ETF like the ProShares UltraShort 20+ Year Treasury ETF (NYSEARCA: TBT ) if you are trying to utilize an inversely leveraged ETF. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.