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The Strong U.S. Dollar Could Pressure S&P 500 Earnings

Summary U.S. dollar is strengthening against a basket of foreign currencies. How a stronger dollar could affect S&P 500 company earnings. Sectors that are exposed to foreign exchange currency risks. The quickly appreciating U.S. dollar could begin to weigh on corporate earnings, especially among large-cap S&P 500 stocks and related exchange traded funds with significant overseas exposure. The SPDR S&P 500 ETF (NYSEArca: SPY ) , which tries to reflect the performance of the S&P 500 index, has increased 11.5% over the past year but is down 1.9% year-to-date. The stronger USD is expected to diminish profits for large companies that do business overseas, and some strategists contend that the strengthening currency and low energy prices could constrain quarterly S&P 500 earnings growth to just 3%, compared to previous calls for a 7% rise at the start of October, reports Eric Platt for Financial Times . The PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP ) has increased 13.1% over the past year and rose 2.6% year-to-date. The appreciating greenback, which has been rallying against a basket of foreign currencies since July, could pressure the S&P 500 where foreign sales make up over two-fifths of total turnover, with 261 companies in the index generating over 15% of revenues overseas. Deutsche Bank calculates that for every 10% increase in the USD against major currency baskets, the S&P 500 earnings face a potential decline of “slightly over $2,” or each 10 cent drop in the euro from about $1.2 could cut $1 from S&P 500 earnings. “The uncertainty in commodities, foreign exchange and interest rates across the curve is high, confounded by uncertainty in quantifying their influence on earnings per share and price-earnings,” David Bianco, strategist at Deutsche, said in the FT article. “We expect more cuts during fourth-quarter earnings season, especially for those with FX exposure.” For instance, GameStop (NYSE: GME ) has already blamed the “strength of the US dollar” for part of its slide in holiday same-store sales. On a sector-by-sector basis, observers believe the technology, materials and energy sectors will likely be the most affected by a stronger dollar as each sector generates over half of revenues abroad. Year-to-date, the Technology Select Sector SPDR (NYSEArca: XLK ) fell 5.0%, Materials Select Sector SPDR (NYSEArca: XLB ) decreased 1.5% and Energy Select Sector SPDR (NYSEArca: XLE ) dipped 2.4%. Cantor Fitzgerald analysts have warned that companies with “material international exposure,” such as Google (NASDAQGM: GOOG ), Facebook (NASDAQGM: FB ), Amazon (NASDAQGM: AMZN ) and eBay (NASDAQGM: EBAY ), could report reduced earnings forecasts if the “trend is sustained.” XLK includes GOOG 6.4%, FB 4.0% and EBAY 1.6%. SPY holds GOOG 1.6%, FB 0.9%, AMZN 0.6% and EBAY 0.3%. SPDR S&P 500 ETF (click to enlarge) Max Chen contributed to this article .

A Weak Start To 2015 For MLP ETFs: Buy On The Dip?

Despite hailing from the energy space, MLPs put up a great fight last year against the oil price slump thanks to their low correlation with the underlying commodity and the U.S. shale oil boom. However, the winning streak reached the verge of a reversal as MLPs entered the New Year. The largest MLP ETF Alerian MLP ETF (NYSEARCA: AMLP ) , which added about 0.3% in the last one year against a 50% decline in oil prices, has lost about 3.2% so far this year (as of January 16, 2015). All energy MLP ETFs/ETNs are deep in the red this year with some products hitting an acute 12.5% loss in such a short span of time. Now, with the no signs of end to the oil price slouch and analysts turning more bearish on this liquid commodity, MLPs might find it tough to stay afloat. Going by a recent article by Bernstein , MLPs had a free cash flow yield of 5% in 2009 while at present these have a free cash flow yield of negative 5%. As you may know, MLPs often operate pipelines or similar energy infrastructures that make it an interest-rate sensitive sector. This group catches an investor’s eye as these do not pay taxes at the entity level and hence must pay out most of their income (more than 90%) in the form of dividends. Investors looking for higher income levels outside the traditional bond sources generally bet on these products. Investors should note that the rate scenario has been subdued since last year with yields on 30-year Treasury notes touching the all-time low in January. While this should brighten the appeal for MLP investing, a six-year low oil price comes in the way of outperformance. Strength & Weakness in the MLP Space Speculations are rife that the U.S. stockpiles will remain high in the coming days. So no matter how bad the oil price situation is, the need for mid-stream MLPs involved in the processing and transportation of energy commodities such as natural gas, crude oil and refined products, under long-term contracts, will always remain due to the energy production boom in the U.S. This is because MLP revenues depend on the volumes flowing through the pipes and not on the commodity price. On the other hand, upstream exploration MLP companies earn from every barrel of oil and are being thrashed by the endless weakness in oil prices. Still, investors’ fears pertaining to oil have hurt the MLP sector as a whole to start the year despite its allure for dividend income. Buy on the Dip Given the fundamentals discussed above, investors might consider the recent dip as an entry point to the mid-stream or energy infrastructure ETFs. Below are three such MLP ETFs for investors. AMLP in Focus It is the most popular product with an asset base of $8.62 billion and average trading volume of more than $6 million shares. The fund’s expense ratio is high at 8.56%. The product tracks the Alerian MLP Infrastructure Index and has exposure to the mid-stream securities like Williams Partners L.P. (NYSE: WPZ ), Energy Transfer Partners, L.P. (NYSE: ETP ), MarkWest Energy Partners, L.P. (NYSE: MWE ) and Magellan Midstream Partners LP (NYSE: MMP ). The fund has lost only 0.5% in the last five trading sessions and 3.2% in the year-to-date frame. AMLP pays out 6.9% in annual yields (as of January 16, 2015). Global X MLP ETF (NYSEARCA: MLPA ) The fund looks to track the Solactive MLP Composite Index. The Index is comprised of MLPs engaged in the transportation, storage, processing, refining, marketing, exploration, production, and mining of natural resources. The fund charges 45 bps in fees. The fund has garnered about $150 million in assets. This ETF too has considerable exposure to Energy Transfer Partners (6.72%), Magellan Midstream (6%) and Buckeye Partners, L.P. (NYSE: BPL ) (5.98%). The fund was off 0.6% last week and has shed about 2.6% so far this year. MLPA has a dividend yield of 6.13% (as of January 16, 2015). Credit Suisse Equal Weight MLP Index ETN (NYSEARCA: MLPN ) The ETN is equally weighted in nature. It is designed for investors seeking exposure to the Cushing 30 MLP Index. The Index tracks the performance of 30 firms which hold mid-stream energy infrastructure assets in North America. MLPN has amassed about $735 million in assets. The fund charges 85 bps in fees. MLPN lost about 0.7% last week and 4% so far this year (as of January 16, 2015). Bottom Line With oil prices falling fast on the 24 -year low Chinese GDP data in 2014 and rocketing volatility in the Euro zone, MLPs seem to be the best bet. Though the space succumbed to a slowdown to start 2015, it pared losses considerably in the middle of the month. Moreover, global growth worries kept the yields at substantial low levels and spurred the appeal for dividends. Apart from the strong return, these MLPs are acting as strong income engines reinforcing its scope for outperformance in the days ahead.

A New Income Oriented Multi-Asset ETF Hits The Market

Income investing has been on a tear since last year thanks to the plunge in bond yields. Global growth worries, a relentless slide in oil prices, QE talks in the Euro zone, a ‘patient’ Fed and stepped-up stimulus in Japan resulted in easy money policies across the developed world and in turn dragged yields down. This spurred many issuers to put out new products in this income space, greatly enhancing the number of options at investors’ disposal in this key market segment. Many may think that the income investing space is stuffed, leaving no scope for a new theme to perk up investors’ mood. To prove this group wrong, Master Shares recently released a pass-through ETF with an alternative focus, this time on income. The ETF trades under the name of the Master Income ETF (NYSEARCA: HIPS ). Let’s dig deeper. HIPS in Focus The fund looks to track the TFMS HIPS 300 Index, focusing on 300 securities with a pass-through structure. This is done by looking at securities from the sectors including closed-end fund (CEFs), mREITs, commercial/residential/diversified REITs, business development companies and MLPs. The fund charges 87 bps in fees. How Could it Fit in a Portfolio? The fund does look to be a great way to play the alternative securities space in an ETF form, while its yield will be tough to beat. The current period of low interest rates makes this income paying ETF quite attractive. Investors should note that high income paying securities play a defensive role in a portfolio and help to reduce overall volatility in uncertain times. The pass-through structure is basically created to avoid the effects of double taxation. The product could also be an interesting choice for those reluctant to invest in the regular ways of income investing like junk bonds or high-dividend equities. The constituents of the portfolio are un-correlated in nature and bear less relationship with the typical bond and stock exchanges. Thus, barring the income lure, the product should go a long way in hedging marketing volatility in the portfolio. ETF Competition Since the high yield space sees tough competition due to relentless launches over the last two years, the issuer gave this product an unusual packaging to set it apart from the regular pack. Still, some high income products with a focus on alternative securities are presently operating in the market. These include the likes of the ETRACS Diversified High Income ETN (NYSEARCA: DVHI ), the iShares Morningstar Multi-Asset Income Index ETF (BATS: IYLD ), the SPDR Income Allocation ETF (NYSEARCA: INKM ), the Guggenheim Multi-Asset Income ETF (NYSEARCA: CVY ), the First Trust Multi-Asset Diversified Income Index ETF (NASDAQ: MDIV ) and the YieldShares High Income ETF (NYSEARCA: YYY ). Expense ratio wise, the newly launched ETF looks reasonable as other products charge in the range of 60 bps to 165 bps a year. This is especially true given the product’s focus on pass-through entities and wide coverage from CEFs to MLPs. However, to be a winner in a long-distance race, the issuer should dedicatedly focus on the income part of the ETF. Notably, YYY holds the status of the highest yielding product in the space of diversified ETFs, having yielded about 9.6% as of January 13, 2015. To live up to investors’ expectations, the fund should offer something around that high benchmark, otherwise it could be somewhat prohibitive to asset accumulation, at least to those who are highly yield-starved.