Tag Archives: security

Will Semiconductor ETFs See A Brighter 2016?

The semiconductor industry has been on a roller coaster ride in recent times. The space hogged investors’ attention in 2014 only to plunge the very next year. The struggling PC market took all the shine out of this segment. Two independent research firms – Gartner and International Data Corporation – validated the fact. As per Gartner, PC shipments in 2015 totaled 288.7 million units, marking an 8% decline from 2014. Meanwhile, according to IDC, PC shipments witnessed a decline that was “the largest in history ” breezing past the 9.8% drop registered in 2013. In fact, the fourth quarter of 2015 marked the fifth successive quarter of global PC shipment decline, pointing at soft holiday season sales and a shift in consumers’ PC purchase preference, per Gartner. Both firms agreed that the launch of Windows 10 in third-quarter 2015 had an insignificant impact on PC shipments during the all-important holiday season. This was because customers upgraded their existing PCs rather than buying new ones. Also, a strong greenback, higher inventories in the semiconductor and electronics supply chain are also held responsible for this decline, per the research agencies. What’s in Store in 2016? However, most research agencies expect things to improve in 2016. In any case, the wind is in favor of the broader technology sector. As a result, semiconductor, the value-centric traditional tech area should expand modestly this year, primarily in the second half. Value-oriented trading should be in focus this year thanks to a paradigm shift in global economy. Policy tightening in the U.S., an accommodative stance in most developed economies, and lack of clarity about China’s currency movements should keep value investing busy throughout this year. Secondly, IDC predicts that the take-up of Windows 10 by corporates is likely to pick up and consumer purchase will be steady by the second half of 2016. Also, attractive PCs at affordable prices, the need for higher security and improved performances will eventually drive consumers toward an upgrade. The World Semiconductor Trade Statistics (WSTS) predicts the global semiconductor market to grow 1.4% to $341 billion in 2016 and 3.1% to $352 billion in 2017. This explains that moderate optimism is prevailing around the area. All regions are expected to post positive growth in 2017 with the Americas leading the way. Also, this tech sub-sector might shoot up on the requirement of its products in emerging technology applications like tablets and smartphones despite subdued PC shipments. If this was not enough, the semiconductor space is consolidating rapidly with a number of deals announced lately. ETFs to Play The latest discussion definitely tells you to park your money in semiconductor ETFs, especially after a down year like 2015. At present, there are four regular semiconductor ETFs namely Market Vectors Semiconductor ETF (NYSEARCA: SMH ), iShares PHLX Semiconductor ETF (NASDAQ: SOXX ), SPDR S&P Semiconductor ETF (NYSEARCA: XSD ) and PowerShares Dynamic Semiconductors Fund (NYSEARCA: PSI ) . Why to Look Beyond SMH? Of these, only SMH has a Zacks ETF Rank #3 (Hold) while the other three have a Zacks ETF Rank #1 (Strong Buy). Investors should note that SMH has as much as 18.6% exposure in Intel Corp., the biggest weight of the basket. Though Intel has exposure in three other ETFs, the weight is not as much as it is for SMH. As a result, the recent underperformance by the Intel stock post earnings cast out SMH from the ‘Strong Buy’ league. Below, we highlight three other semiconductor ETFs in detail for the interested investors. SOXX in Focus This ETF follows the PHLX SOX Semiconductor Sector Index and offers exposure to 30 U.S. firms. The fund has amassed $409.3 million in its asset base. The product charges a higher fee of 48 bps a year from investors. Intel (NASDAQ: INTC ) takes the fourth spot at 7.8% of total assets. XSD in Focus This fund tracks the S&P Semiconductor Select Industry Index, holding 42 stocks in its portfolio. It is widely spread across a number of securities as none of these allocates more than 3.44% of the assets. The product has a definite tilt toward small cap stocks at 65% while the rest is evenly split between the other two market cap levels. The $196.7-million fund charges 35 bps in fees per year. PSI in Focus This fund tracks the Dynamic Semiconductor Intellidex Index, holding 29 U.S. securities in the basket. Intel makes up for 5.2% share in the basket and not in the top-three holdings. This $50.7-million ETF charges 63 bps in fees. Original Post

Using Active Share To Evaluate High-Yield Bond Portfolios

There are two chief ways of measuring a portfolio’s deviation from its benchmark: tracking error and active share. The first, tracking error , is the older and more traditional. It gauges a portfolio’s performance deviation from a benchmark return over time – essentially telling an investor how different the returns are from the benchmark. The second, active share , is newer but steadily gaining steam. It specifically measures how unique a portfolio is, at the holdings level, relative to the benchmark. Tracking Error vs Active Share Of the two, which is best? That’s the question MFS Fixed Income Portfolio Manager David Cole, Chief Risk Officer Joseph Flaherty, and Quantitative Research Analyst Sean Cameron set out to answer in an October 2015 white paper Active Share: A valuable risk measure for high-yield portfolios . As evident from the title, the trio values active share – but not exclusively. While active share can be an alternative to tracking error, one can complement the other, particularly in measuring the relative risk of a high-yield bond portfolio, which is the subject of the paper. Their findings: Active managers are increasingly being asked to demonstrate just how active they really are. Active share is the best measure for making this determination, since it looks at portfolios on the holdings level, whereas tracking error merely shows deviation of performance. Both can be useful, but tracking error is more a proxy for “systematic factor exposure,” whereas active share provides “valuable information on the degree of conviction,” according to the paper’s authors. As stated earlier, active share and tracking error can be used together, and this is especially useful in classifying high-yield bond portfolio managers. Using both measures allows investors to gauge a manager’s “activeness” and determine the sources of that activeness. According to the authors, “relatively high active share in combination with relatively low tracking error would be consistent with an active, diversified, high-yield credit manager.” Portfolio Insights Active share has typically been used in evaluating equity portfolios, but Cole, Flaherty, and Cameron show its usefulness-sometimes in conjunction with tracking error-in assessing high-yield bond portfolios, too. Active share in particular can give investors insight into the drivers of risk and return in credit-oriented fixed-income portfolios, which may have low tracking error but are actually quite active. “This,” according to the authors, “is consistent with a high-yield manager’s investment process, which frequently entails minimizing systematic risk while seeking to maximize returns from the security selection process.”

Going Shopping: Chicken Vs. Beef

The headlines haven’t been very rosy over the last week, but when is that ever not the case? Simply put, gloom and doom sells. The Chinese stock market is collapsing; the Yuan is plummeting; there are rising tensions in the Middle East; terrorism is rising to the fore; and commodity prices are falling apart at the seams. This is only a partial snapshot of course, and does not paint a complete or accurate picture. Near record-low interest rates; record corporate profits (outside of energy); record-low oil prices; unprecedented accommodative central bank policies; and attractive valuations are but a few of the positive, countervailing factors that rarely surface through the media outlets. At the end of the day, smart long-term investors understand investing in financial markets is a lot like grocery store shopping. Similarly to stocks and bonds, prices at the supermarket fluctuate daily. Whether you’re comparing beef (bonds) and chicken (stocks) prices in the meat department (stock market), or apple (real estate) and orange (commodities) prices in the produce department (global financial markets), ultimately, shrewd shoppers eventually migrate towards purchasing the best values. Since the onset of the 2008-2009 financial crisis, risk aversion has dominated over value-based prudence as evidenced by investors flocking towards the perceived safety of cash, Treasury bonds, and other fixed income securities that are expensively priced near record high prices. As you can see from the chart below, investors poured $1.2 trillion into bonds and effectively $0 into stocks . Consumers may still be eating lots of steaks (bonds) currently priced at $6.08/lb while chicken (stocks) is at $1.48/lb (see U.S. Department of Labor Data – Nov. 2015), but at some point, risk aversion will abate, and consumers will adjust their preferences towards the bargain product. Some Shoppers Still Buying Chicken While the general public may have missed the massive bull market in stocks, astute corporate executives and investment managers took advantage of the equity bargains in recent years, as seen by stock prices tripling from the March 2009 lows. As corporate profits and margins have marched to record levels, CEOs/CFOs put their money where their mouths are by investing trillions of dollars into share buybacks and mergers & acquisitions transactions. Despite the advance in the multi-year bull market, with the recent sell-off in the market, panic has dominated rational thinking. Once again, the rare occurrence (a few times over the last century) the dividend yield of stocks once again exceeds the yield on Treasury bonds (2.2% S&P 500 vs 2.1% 10-Year Treasury). But if we are once again comparing beef vs. chicken prices (bonds vs stocks), the 6% earnings yield on stocks (i.e., Inverse P/E ratio or E/P) now looks even more compelling relative to the 2% yield on bonds. For example, the iShares Core U.S. Aggregate Bond ETF (NYSEARCA: AGG ) is currently yielding a meager 2.3%. For a general overview, Scott Grannis at Calafia Beach Pundit summarizes the grocery store flyer of investment options below: While these yield relationships can and will certainly change under various economic scenarios, there are no concrete signs of an impending recession. The recent employment data of 292,000 new jobs added during December (above the 200,000 estimate) is verification that the economy is not falling off a cliff into recession (see chart below). As I’ve written in the past, the positively-sloped yield curve also bolsters the case for an expansionary economy. Source: Calafia Beach Pundit While it’s true the Chinese economy is slowing, its rate is still growing at multiples of the U.S. economy. As a communist country liberalizes currency and stock market capital controls (i.e., adds/removes circuit breakers), and also attempts to migrate the economy from export-driven growth to consumer-driven expansion, periodic bumps and bruises should surprise nobody. With that said, China’s economy is slowly moving in the right direction and the government will continue to implement policies and programs to stimulate growth (see China Leaders Flag More Stimulus ). As we have recently experienced another China-driven correction in the stock market, and the U.S. economic expansion matures, equity investors must realize volatility is the price of admission for earning higher long-term returns. However, rather than panicking from fear-driven headlines, it’s times like these that should remind you to sharpen your shopping list pencil. You want to prudently allocate your investment dollars when deciding whether now’s the time to buy chicken (6% yield) or beef (2% yield). DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs) including AGG, but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.