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A Top-Ranked India ETF To Tap The Growing Consumer Sector

The Indian stock market has hardly looked back from the astounding journey it set forth on in May 2014 following the formation of the new government. Most economic factors are presently in favor of Asia’s third-largest economy, including the revival of the currency, a drastic fall in inflation thanks mainly to the oil price crash and an improvement in current account deficit. India’s wholesale price inflation – which was an acute concern leading to a series of rate hikes in the past couple of years – plunged to a five-year low in September. Though India’s Q3 GDP growth rate of 5.3% was not great, analysts from HSBC expect over 6% growth rate from this nation next year. This is noteworthy since the nation’s bourses suffered a lot last year as foreign investors remained skittish about putting more capital in the nation, leaving many questions about the potential of the country in the near term. Actually, given that India isn’t a commodity-oriented emerging market like its BRIC brothers Brazil or Russia, the nation has immensely benefited from the recent natural resource weakness. If this is not enough, Credit Suisse forecasts that Indian economy will log ‘fastest USD nominal growth in the world’ next year as noted by Reuters. To add to this, Credit Suisse believes that Indian equities are not pricey relative to the nation’s growth outlook. This recent bullish tone did spread cheers across every corner of the Indian economy as evident by at least a 25% return received from each India ETF this year. However, some specific corners need special mention. One such space is the Indian consumer sector. What Drives Consumer Sector Higher? The middle income population in India is mushrooming. This fraction of the population has an inclination to spend on discretionary items like travel and leisure which in turn boosts the sales of consumer products like automobiles and personal goods. For example, auto sales displayed a speedy annual expansion of 10% in November (yoy). Notably, auto sales are often regarded as a well-being of an economy. Lower fuel prices seemed to have done the trick. Moreover, with cooling inflation, many are speculating a rate cut in the coming days, though no such thing has taken place formally as of yet. And if in any case, the interest rate goes down, the auto industry should soar. India basically has a compelling investment proposition with its rising importance as a ‘consumer driven’ economy. As per Indian Brand Equity Foundation (IBEF), the present consumer spending will likely grow two-fold by 2025. The consumer confidence score rose to 126 in Q3 of this year from an all-time low of 92 reached in Q1 of 2010. The market is motivated by favorable demographics and expanding disposable income. IBEF also predicts that per capita income in India will likely see a meaningful CAGR of 5.4% within the span of 2010-2019 with food products and personal care taking about 65% share of the market revenue. Other forecasts by IBEF include doubling of the consumer durables market by FY15 from FY10. The young generation’s inclination toward tech-driven products will also facilitate this growth trajectory. This calls for a bullish stance over the consumer sector of the Indian economy. Here we would like to highlight the Zacks top-ranked ETF providing exposure to this very corner of the Indian market. EGShares India Consumer ETF ( INCO ) has a Zacks ETF Rank #1 (strong Buy) with a Medium risk outlook and we expect it to outperform most of its peers in the coming months meaning it could be an excellent pick for investors seeking more exposure to this economy. INCO in Focus This ETF targets the consumer industry of India and follows the Indxx India Consumer Index. It holds 30 stocks in its basket and has amassed $21.5 million in its asset base. The fund trades in a paltry volume of 15,000 shares, suggesting additional cost in the form of wide bid/ask spread beyond the expense ratio of 0.89%. The fund offers a moderately concentrated bet in the top 10 holdings as indicated by its 52% exposure to these stocks. Among individual holdings, MRF Ltd., Motherson Sumi Systems Ltd. and Bosch Ltd form the top positions of the fund with total investment of 17.7%. The fund allocates 79.42% of its asset base to consumer goods. A small proportion of the asset base has also been assigned to Industrials (15.4%) and Consumer Services (4.8%). Industry-wise, automobiles – which is presently a well-performing sector in India – accounts for 37.5% followed by personal goods (27.14%) and industrial engineering (15.4%). INCO has hit a low of $19.64 and a 52-week high of $34.89. The fund is currently hovering near its 52-week high price and could be an interesting choice in 2015 for investors seeking more Indian market exposure.

Federated Launches New Fund, Expands Alternatives Division

On December 17, Federated announced it was putting the Federated Prudent Bear Fund (MUTF: FVOAX ) under its alternatives/managed-risk product umbrella, expanding that fast-growing division. Federated’s alternative and managed-risk products, which are overseen by Michael Dieschbourg, include managed volatility, absolute return, and managed-tail risk strategies, in addition to the recent arrival of the Prudent Bear Fund. Federated’s Managed Volatility Fund had just launched on December 15, two days prior to the migration of Prudent Bear to Federated’s alternatives division. Both moves are seen as efforts by Federated to enhance its alternatives and managed-risk product team, on the heels of the explosive growth of liquid alts in 2014 and ahead of what’s likely to be another big year for the category in 2015. The Federated Managed Volatility Fund’s objective is to provide total return while minimizing volatility. Its co-advisors pursue this goal by investing in equity and fixed-income securities “with total return potential,” and overlay a managed volatility component to achieve a long-term volatility target of 10%, according to its prospectus . The fund has three co-advisors: Federated Equity Management Company of Pennsylvania (FEMCO), which specializes in the equity portion of the fund’s portfolio, including equity-based derivatives; Federated Investment Management Company (FIMCO), which specializes in the fixed-income portion of the fund’s portfolio; and Fed Global, which along with FEMCO, implements the fund’s managed volatility portion using futures contracts. A couple key points from the prospectus regarding the allocation to equities and fixed income securities : Regarding the composition of the Fund’s portfolio, under normal conditions, it is anticipated that approximately 40% of the Fund’s assets will be invested directly into equity securities and 60% of the Fund’s assets will be invested in fixed-income securities and other investments. Fed Global and FEMCOPA may vary this allocation by +/- 10% for each asset class depending upon its economic and market outlook, as well as a result of favorable investment opportunities. A couple key points from the prospectus regarding the volatility overlay : The Federated Managed Volatility Fund is available in three share-classes: A (FVOAX), C (MUTF: FVOCX ), and IS (MUTF: FVOIX ); with a management fee of 0.75% and respective net-expense ratios of 1.05%, 1.8%, and 0.8%. The minimum initial investment for A- and C-class shares is $1,500; the minimum for institutional-class shares is $1 million. Although the growth in the liquid-alts product category is leading the launch of more alternative mutual funds and ETFs, and the expansion of many large firms’ alternatives divisions, not everyone is experiencing the growth equally. Douglass Nolan, a former manager of the Federated Prudent Bear Fund, has left or is leaving the fund. A December 17 SEC filing from Federated instructs investors to delete the information referencing Mr. Nolan from the Prudent Bear Fund’s prospectus “in its entirety,” but that the change won’t take effect until December 31.

KBWY: Small-Cap REIT ETF Has Attractive Yield

Summary FRI offers similar exposure to VNQ, but at five times the cost. Small-cap KBWY delivers a full percentage point more in yield. KBWY has outperformed large-cap REITs when interest rates increased in the past. There are two more ETFs to cover on the domestic side. The first is the First Trust S&P REIT Index ETF (NYSEARCA: FRI ). This one of the smaller REIT ETFs on the market, but has amassed nearly $300 million since inception in 2007. Index & Strategy FRI tracks the S&P United States REIT Index. The index covers U.S. REIT shares, including some specialty REITs such as prisons, but holds no timber REITs. Due to criteria that the companies own properties, the index also excludes mortgage REITs. The holdings are weighted by market cap. The holdings and the weightings in FRI are most similar to those of the Vanguard REIT Index ETF (NYSEARCA: VNQ ), which tracks the MSCI US REIT Index. Performance FRI has slightly trailed other pure real estate REIT ETFs over the past five years. (click to enlarge) The fund most similar to FRI is VNQ. Since FRI costs 0.40 percent more to hold, it has consistently underperformed VNQ. The line is almost perfectly straight, reflecting the extremely tight correlation between the funds. (The dip at the end of the chart is due to FRI going ex-dividend today.) (click to enlarge) Expenses FRI charges 0.50 percent versus the 0.10 percent charged by VNQ. Income FRI has a 30-day SEC yield of 3.23 percent. The yield is solid, but its payouts have been more erratic than VNQ (data from Yahoo Finance). (click to enlarge) Conclusion Investors should stick with Vanguard REIT Index ETF, which delivers almost exactly the same exposure, but at a lower cost and steadier income stream. A more attractive REIT ETF is an offering from PowerShares with a portfolio heavily tilted towards small-caps, the PowerShares KBW Premium Yield Equity REIT Portfolio ETF (NYSEARCA: KBWY ). Index & Strategy KBWY tracks the KBW Premium Yield Equity REIT Index, which is “a dividend yield weighted methodology that seeks to reflect the performance of approximately 24 to 40 small- and mid-cap equity REITs in the United States.” The portfolio is currently about 75 percent invested in small-caps, 22 percent in mid caps and 3 percent in large-caps. The portfolio is diversified, but has only 31 holdings. The largest holding, Government Properties Income Trust (NYSE: GOV ), has 5.14 percent of assets, and the smallest holding, STAG Industrial (NYSE: STAG ), has 1.20 percent. Similar to other REIT ETFs, retail makes up the largest slice of assets at about 27 percent, but healthcare is close behind, with nearly 26 percent of assets as of September 30. Diversified REITs make up 20 percent of assets, followed by 14 percent of assets in office REITs. Performance KBWY has kept pace with other REIT ETFs over the past five years, but trailed from 2011 through 2012. (click to enlarge) KBWY has shown some sensitivity to rates, but it has generally under performed as rates decreased, as shown in this comparison with VNQ. The 10-year Treasury yield is in black. (click to enlarge) Expenses KBWY charges 0.35 percent. It is a relatively low expense ratio adjusting for the fact that the portfolio is in small-caps. Income KBWY has a 30-day SEC yield of 4.74 percent, making it the highest-yielding non-mortgage REIT ETF we’ve covered. KBWY pays monthly dividends. Payouts have been consistent from month to month, and have been generally rising since the end of 2011. Conclusion KBWY has been a consistent performer. It has been more volatile than REIT ETFs which fall in the large-cap category, but its performance hasn’t deviated widely from the pack. KBWY has a three-year standard deviation of 14.64 versus VNQ’s 13.42 standard deviation. The big difference so far has been that more of KBWY’s return comes in the form of income. Investors interested in higher income or monthly payouts can pair KBWY with a fund such as VNQ to up the total payout from their REIT exposure. It remains to be seen if KBWY can outperform when interest rates increase. If it can, it would make the fund a compelling option in a rising rate environment.