xli – Scalper1

Lipper U.S. Fund Flows: Risk-On Despite Uncertainties

By Tom Roseen During the fund-flows week ended October 21, 2015, investors pushed the markets back and forth without strong conviction either way. Third quarter earnings news was hit and miss, with growth fears at the back of investors’ minds. Mixed economic reports kept many on the sidelines, with the Federal Reserve’s Beige Book and the October Philadelphia Fed manufacturing index magnifying fears about the economic recovery. Offsetting those worries during the week, the number people applying for first-time jobless benefits fell for the most recent week, coming in below expectations. Gains in defensive sectors during the flows week helped prop up the major indices to highs not seen since August, sending them to their third straight week (Friday to Friday) of gains. The Shanghai composite posted a 6.5% weekly return as some investors looked to Beijing to continue to provide more stimuli to the Chinese economy. Nonetheless, expectations of a slowing global economy kept oil prices in the cellar. On Monday, October 19, global markets reacted cautiously to news that Chinese economic growth slowed to 6.9% for Q3, beating expectations but missing Beijing’s target. The reported slowdown in fixed-asset investments and industrial production weighed heavily on the price of oil, pushing it down to $45.89 per barrel. This sharp decline pressured oil stocks as well. Despite reports coming out during the latter portion of the flows week of a jump in home builder confidence in October and housing starts being near eight-year highs, mixed corporate results, China’s slowing growth, the EIA’s report of a big jump in crude oil supplies, and the Fed’s inaction kept some investors wary. Nonetheless, investors were net purchases of fund assets (including those of conventional funds and exchange-traded funds (ETFs), injecting a net $6.3 billion for the fund-flows week ended October 21, 2015. Investors turned their back on money market funds, redeeming $2.6 billion for the week, but they were net purchasers of the other three fund macro-groups, injecting some $4.4 billion into taxable bond funds, $4.3 billion into equity funds, and $0.2 billion into municipal bond funds for the week. For the second week in a row equity ETFs witnessed net inflows, taking in $4.5 billion. Despite continued concerns about the Q3 earnings season, authorized participants (APs) were net purchasers of domestic equity ETFs (+$3.2 billion), injecting money into the group for a second consecutive week. They also padded the coffers of nondomestic equity ETFs (to the tune of +$1.3 billion) for the sixth week running. As a result of the relative increase in risk-seeking behavior at the beginning of the week, APs turned their attention to a broad spectrum of domestic equity offerings, with the iShares Russell 2000 ETF (NYSEARCA: IWM ) (+$0.6 billion), the SPDR S&P MidCap 400 ETF (NYSEARCA: MDY ) (+$0.4 billion), and surprisingly-given the slide in oil prices for the week – the Energy Select Sector SPDR ETF (NYSEARCA: XLE ) (+$0.4 billion) attracting the largest amounts of net new money of all individual domestic equity ETFs. At the other end of the spectrum the SPDR S&P 500 ETF (NYSEARCA: SPY ) (-$424 million) experienced the largest net redemptions, while the Industrial Select Sector SPDR ETF (NYSEARCA: XLI ) (-$423 billion) suffered the second largest redemptions for the week. Once again, in contrast to equity ETF investors, for the fourth week in a row conventional fund (ex-ETF) investors were net redeemers of equity funds, redeeming $0.2 billion from the group. Domestic equity funds, handing back $0.8 billion, witnessed their fourth consecutive week of net outflows. Meanwhile, their nondomestic equity fund counterparts witnessed $646 million of net inflows-attracting money for the first week in four. On the domestic side investors lightened up on equity income funds and real estate funds, redeeming a net $0.9 billion and $0.3 billion, respectively, for the week. On the nondomestic side international equity funds witnessed $0.6 billion of net inflows, while emerging market equity funds handed back some $187 million. For the second consecutive week taxable bond funds (ex-ETFs) witnessed net inflows, taking in a little less than $2.3 billion for the week, for their second largest weekly inflows since the week ended May 20, 2015. Corporate investment-grade debt funds suffered the largest redemptions for the week, witnessing net outflows of $0.8 billion (for their thirteenth consecutive week of redemptions), while corporate high-yield funds attracted the largest net new money for the week, taking in $2.3 million (their third largest weekly net inflows on record). For the third week in a row municipal bond funds (ex-ETFs) witnessed net inflows, taking in $148 million this past week.

Best And Worst Q3’15: Industrials ETFs, Mutual Funds And Key Holdings

Summary Industrials sector ranks third in Q3’15. Based on an aggregation of ratings of 19 ETFs and 17 mutual funds. XLI is our top-rated Industrials ETF and FSRFX is our top-rated Industrials mutual fund. The Industrials sector ranks third out of the 10 sectors as detailed in our Q3’15 Sector Ratings for ETFs and Mutual Funds report. It gets our Neutral rating, which is based on aggregation of ratings of 19 ETFs and 17 mutual funds in the Industrials sector. See a recap of our Q2’15 Sector Ratings here. Figures 1 and 2 show the five best and worst-rated ETFs and mutual funds in the sector. Not all Industrials sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 20 to 347). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Industrials sector should buy one of the Attractive-or-better rated ETFs or mutual funds from Figures 1 and 2. Figure 1: ETFs with the Best & Worst Ratings – Top 5 (click to enlarge) * Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity. 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 The Fidelity Select Environment and Alt Energy Portfolio (MUTF: FSLEX ) and the Rydex Transportation Fund (MUTF: RYPIX ) (MUTF: RYPAX ) are excluded from Figure 2 because their total net assets are below $100 million and do not meet our liquidity minimums. The Industrial Select Sector SPDR ETF (NYSEARCA: XLI ) is the top-rated Industrials ETF and the Fidelity Select Transportation (MUTF: FSRFX ) is the top-rated Industrials mutual fund. Both earn an Attractive rating. The First Trust RBA American Industrial Renaissance ETF (NASDAQ: AIRR ) is the worst-rated Industrials ETF and the ICON Industrials Fund (MUTF: ICIAX ) is the worst-rated Industrials mutual fund. Both earn a Dangerous rating. 418 stocks of the 3000+ we cover are classified as Industrials stocks. Deere & Company (NYSE: DE ) is one of our favorite stocks held by Industrials ETFs and mutual funds and earns our Attractive Rating. Since 2008 the company has grown after-tax profit (NOPAT) by 8% compounded annually. Deere currently generates a top-quintile return on invested capital ( ROIC ) of 16%. Falling agriculture prices have brought Deere’s stock price down over the past year, and we think this drop gives long-term investors an excellent buying opportunity. At its current price of $92/share, Deere has a price to economic book value ( PEBV ) ratio of 0.6. This ratio implies the market expects Deere’s profits to permanently decline by 40%. This expectation seems unduly low and likely reflects a market overreaction to issues and a failure to recognize the leading position Deere holds in the agriculture industry. Deere currently has an economic book value , or no growth value of $153/share – a 66% upside. FedEx Corporation (NYSE: FDX ) is one of our least favorite stocks held by Industrials ETFs and mutual funds and earns our Very Dangerous rating. Since 2007 the company has only been able to grow NOPAT by 1% compounded annually. Over the same time frame, ROIC has fallen from 9% to 6% and NOPBT margins have fallen from 11% to 9%. When generating over $40 billion in revenue, a 200 basis point decline in margin greatly affects FedEx’s profitability. Despite these fundamental issues, the risk in the stock’s high valuation should give investors pause. To justify its current price of ~$170/share, FedEx must grow NOPAT by 10% for the next 24 years . Expecting the company to increase its NOPAT growth rate tenfold and maintain that rate for 24 years after years of lackluster NOPAT growth seems risky. Figures 3 and 4 show the rating landscape of all Industrials 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 Max Lee 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. (More…) 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.