Etikett: Small Caps

The Midterms Are Over … Time to Move On to the Second Semester

The Midterms Are Over … Time to Move On to the Second Semester ETF WisdomTreeRelief Rally in Equities

In market commentary from Professor Jeremy Siegel ahead of the midterms, we suggested that if the widely expected outcome of Democrats taking the House and Republicans keeping control of the Senate were to actually occur—as it did on Tuesday in the midterm elections—we thought there would be a bounce higher in equity markets due to “nothing bad happening.” There were no major surprises in the election results, and we saw this rally in equities come through.

With the uncertainty over the election out of the way, a main issue confronting equities now will turn to how fast interest rates will increase from the Federal Reserve (Fed) tightening monetary conditions and the readjustments in portfolio allocations as the risk-free rate ticks higher. We had very strong growth in earnings in 2018 as a result of the tax cut, and that earnings growth rate was front-loaded—we will not see the same type of continued growth next year. Rather, one of the challenges for the market next year is that earnings estimates may still be too high and will have to be marked down.

This challenge from earnings markdowns for 2019 is one reason we prefer strategies that are priced at reasonable valuation multiples.

Across the U.S. markets, WisdomTree has been discussing three strategies as our best ideas for U.S. equity exposure: quality dividend growth and mid- and small-cap earnings. Each of the three Funds have lower than 16x estimated P/E ratios—while the mid- and small-cap Funds are both around 15x even on a trailing 12-month earnings figure.

In contrast to many who think small caps are expensive because of the large percentage of unprofitable companies in traditional market cap-weighted small-cap indexes like the Russell 2000, we see a 15.5x P/E ratio for our small-cap earnings Fund as being quite attractive.

Small caps and mid-caps are also more particularly sensitive to local conditions in the U.S. economy—with revenue from the U.S. just over 80% in the WisdomTree U.S. SmallCap Earnings Fund (EES), compared with the WisdomTree U.S. Quality Dividend Growth Fund (DGRW), which has revenue from the U.S. of about 62%.

For standardized performance of each Fund in the chart, please click their respective ticker: EZM, DGRW, EES.

We also have suggested expectations for large-cap U.S. equities were to see real returns being 5.5% with 2% inflation added, giving longer-term expectations of 7.5%. Our quality dividend growth Fund, DGRW, which has a 2.34% dividend yield and a net buyback yield of 2.61%, shows a current cash distribution yield of 4.96% (i.e., total shareholder yield). As we have written before, this current distribution requires no growth on top of current cash flows to return nearly 5% to investors. If any of the investments that firms are making translate to future cash flow growth, returns can move even higher than 5% real returns. We thus believe DGRW serves as a great anchor to core U.S. equity portfolios, both for the current environment of the late stage of an economic cycle and also current valuations being attractive on these stocks.

Further, given the rising interest rate pressures we continue to see from the U.S. economy outperforming some of the other global economies, we like the mid- and small-cap earnings strategies, like the WisdomTree U.S. MidCap Earnings Fund (EZM) and EES, as Funds with more exposure to the U.S. economy but priced at very reasonable multiples.

Bonds Move on Quickly

Unlike the 2016 U.S. election, the fixed income arena was not greeted with any surprises this time around, so based upon the initial reaction, it appears as if the bond market has moved on quickly. The focus shifts right back to the domestic fundamental setting—namely, growth prospects, inflation expectations and any attendant monetary policy decisions from the Fed.

Once again, the outlook for U.S rates needs to be broken down into two parts: short-term and intermediate to longer-dated yields. For the former, it appears as if the Fed will continue on its gradual rate hike path, with some balance sheet normalization thrown into the mix. With respect to its balance sheet, the Fed may actually need to make some tweaks to its current path because of operational issues in the funding markets, but that’s a topic for another blog post.

As far as future rate hikes go, an increase at the December FOMC meeting followed by at least two more in 2019 (March and June) seems to be the more probable outcome. So, if you do the math, by mid-2019, the top end of the Federal Funds Rate target could be 3%.

For the U.S. Treasury (UST) 10-Year yield, one could argue that a good portion of the backup in rates has already occurred because the market’s pricing mechanism has allowed for improved economic growth, a moderate increase in inflation and increased Treasury supply. Developments on the wage front will need to be monitored closely, with any upside surprises potentially putting upward pressure on yields. Taking the midterm election results into consideration, the only potential boost from fiscal policy seems to be in the area of infrastructure, but that would require both sides of the political spectrum working “across the aisle.”

And don’t forget those flight-to-quality issues that have a way of showing up when least expected. Keep your eye on any headlines stemming from the Italian budget saga on this front, to name one example.

So, what’s an investor to do? We continue to advocate an approach that concentrates on a Treasury floating rate strategy. The WisdomTree Floating Rate Treasury Fund (USFR) offers investors a solution that not only could provide a rate hedge but also offers protection for future Fed rate hikes. In the process, as the USFR yield “floats up with the Fed,” this strategy can also help solve income needs without the duration risk.

Important Risks Related to this Article

There are risks associated with investing, including possible loss of principal. Funds focusing their investments on certain sectors and/or smaller companies increase their vulnerability to any single economic or regulatory development. This may result in greater share price volatility. Securities with floating rates can be less sensitive to interest rate changes than securities with fixed interest rates, but may decline in value. The issuance of floating rate notes by the U.S. Treasury is new, and the amount of supply will be limited. Fixed income securities will normally decline in value as interest rates rise. The value of an investment in the Fund may change quickly and without warning in response to issuer or counterparty defaults and changes in the credit ratings of the Fund’s portfolio investments. Due to the investment strategy of this Fund, it may make higher capital gain distributions than other ETFs. Please read each Fund’s prospectus for specific details regarding the Fund’s risk profile.

Don’t Forget about the “Little Guys”

The equity market has been extremely focused on when the Federal Reserve (Fed) is going to raise interest rates, and expectations are consistently changing with the release of any relevant data point. Consensus is that the Fed will abandon its zero interest rate policy at some point over the next year, but the timing of this first interest rate hike has been highly debated. Even more uncertainty surrounds the rate hike trajectory and the longer-term target level of interest rates. What is not debated is the fact that many investors need their portfolios to generate income, and this percentage is expected to increase as the baby boomers transition into retirement. But with interest rates still near record lows across the globe, many investors continue to look beyond traditional asset classes for income generation. We think that they mistakenly overlook mid- and small-cap dividend payers. We believe mid- and small-capdividend payers deserve a larger allocation in most investors’ long-term portfolios—particularly portfolios targeting income strategies—for both their current income and potential growth characteristics.  

In Search of Income: Look to Mid- and Small Caps

We believe that many investors mistakenly assume that mid- and small-cap companies are solely focused on growth and therefore reinvest their earnings instead of paying them out in the form of dividends. When looking at traditional market cap-weighted indexes for the United States in particular, this assumption seems to be accurate. Going down the size spectrum, from the S&P 500 (large cap) to the S&P 400 (mid-cap) and the S&P 600 (small cap), in the Standard and Poor’s index family of market cap-weighted indexes illustrated in figure 1, the indexes that focus on larger market capitalization companies have higher trailing 12-month dividend yields.

However, this does not necessarily have to be the case; there are many profitable mid- and small-cap companies that can afford to, and do, pay dividends. Market capitalization-weighted indexes provide the benefit of as broad an exposure as possible to a given universe of stocks, but they do not directly focus on dividends or dividend payers.

When WisdomTree applies its domestic dividend methodology, it includes only dividend-paying companies and then weights these constituents based on their Dividend Streams®. These elements tend to produce very different trailing 12-month dividend yields for WisdomTree’s LargeCap, MidCap and SmallCap Dividend Indexes. 

Figure 1: Market Cap Weighting vs. Dividend Stream Weighting

• In the current environment, WisdomTree’s domestic Dividend Indexes turn this way of thinking on its head—the WisdomTree SmallCap Dividend Index has a yield advantage over the WisdomTree MidCap Dividend Index, and the WisdomTree MidCap Dividend Index has a yield advantage over the WisdomTree LargeCap Dividend Index.  

Figure 2: Market Cap Weighting vs. Dividend Stream Weighting by Sector

• Weighting eligible companies in our Indexes by dividends, rather than by market cap, enables us to magnify the effect dividends have on performance and potentially raise a portfolio’s trailing 12-month dividend yield. Unlike weighting by dividend yield, which can concentrate weights in the highest-yielding sectors, WisdomTree’s process of being broadly inclusive enables our core dividend Indexes to remain properly diversified across sectors while also increasing income.  

Managing Valuation Risk

Another important thing to consider when investing in mid- and small-cap companies, which typically trade at higher multiples as a result of their higher growth potential, is managing valuation risk. With market capitalization-weighted indexes, when constituents increase in price compared to other stocks, they gain greater weight and increase their impact on the performance of the index.

WisdomTree Indexes employ a rules-based rebalancing mechanism that adjusts relative weights based on underlying dividend trends. During the rebalancing process, which occurs once per year for each Index, the relationship between price change and dividend growth is measured. WisdomTree’s Dividend Index rebalance process typically is driven by both:• Dividend growth: Faster dividend growers see weight increased• Relative performance:- Underperformers typically see weight increased- Outperformers often see weight decreased

Important Risks Related to this Article

Dividends are not guaranteed and a company’s future ability to pay dividends may be limited. A company currently paying dividends may cease paying dividends at any time.

Indonesiens storföretag redo för en stadig tillväxt

Indonesiens storföretag redo för en stadig tillväxt

Indonesiens storföretag redo för en stadig tillväxt De börshandlade fonder som replikerar utvecklingen för den indonesiska börsen kan komma att fortsätta stärkas, men i en långsammare takt än vad som har prognostiserats tidigare på grund av den räntehöjning som Indonesiens centralbank nyligen genomförde. Det finns emellertid skäl att anta att de nuvarande förutsättningarna inte kommer att vara lika goda för mindre företag som för de större företagen i Indonesien, så kallade large caps. Indonesien har haft en ekonomisk tillväxt på imponerande 5,2 procent under det första halvåret 2014, en tillväxt som emellertid är den lägsta sedan 2009. Den ekonomiska tillväxten spås emellertid ta fart igen under 2015.

Year-to-date har iShares MSCI Indonesia ETF (NYSEArca: EIDO) stigit med dryga 22 procent, medan konkurrenten Market Vectors Indonesia Index ETF (NYSEArca: IDX) redovisar en värdeökning om dryga 18 procent. Båda dessa börshandlade fonder har en övervikt mot större företags aktier. EIDO har 48,3 procent mot så kallade mega caps, 31,9 procent mot large caps och 11,9 mot mid caps. Motsvarande siffror för IDX är 39,9 mot mega caps, 46,4 procent mot large caps och 10,9 mot mid caps. Notera att båda dessa ETFer är tungt viktade mot finanssektorn, något som är ganska vanligt när det gäller börshandlade fonder som har fokus på tillväxtmarknadsekonomier då denna sektor ofta är en av de första som utvecklas i dessa länder. EIDO har en vikt om 37,5 procent mot denna sektor och IDX 32,4 procent.

Dessa två börshandlade fonder har visserligen inriktat sig på Indonesien, men det finns en stor andel av de företagen vars aktier som dessa ETFer äger som har sitt säte någon annanstans på jorden. När de gäller EIDO finns 15,2 % av kapitalet i företag med säte i Hongkong, 4,3% Storbritannien och 2,3% i Tyskland. IDX inkluderar företag med säte i Kina 19,7%, Singapore 4,6% och Nederländerna 3,0%. Dessa företag har emellertid en betydande del av sin försäljning eller produktion förlagd till Indonesien.

Räntehöjning som ett vapen mot inflation

 

I ett försök att avvärja stigande inflationstryck höjde den indonesiska centralbanken räntan med 25 punkter till 7,75 procent. Höjningen skulle bromsa ekonomin, men det skulle också bidra till att minska underskottet i bytesbalansen och göra att de utländska investerarna inte flydde från den indonesiska marknaden.

Nackdelen är att de högre räntorna tvingar de mindre och ofta inte lika kapitalstarka företagen att betala uppemot 20 procent när de behöver låna pengar. Market Vectors Indonesia Small-Cap ETF (NYSEArca: IDXJ) vars aktier fördelas med 19,7 procent mot mid caps, 76,8 procent mot small caps och 3,6 procent mot så kallade micro caps har emellertid stigit med 21,3 procent under 2014.

Ändå bedöms Indonesiens tillväxt komma att fortsätta i en stadig takt, Asian Development Bank, den Asiatiska utvecklingsbanken, projicerar en tillväxt om 5,8 procent under 2015 men med en inflation som stiger till 6,9 procent vilket är hänförligt till minskade bränslesubventioner. Fördelen med de minskade bränslesubventioner är emellertid att den indonesiska regeringen kommer att ha mer pengar att fördela mot annan infrastruktur och sociala projekt vilket kommer gynna landets ekonomi på lång sikt.

Även Deutsche Bank har en börshandlad fond som replikerar utvecklingen på den indonesiska aktiemarknaden, DB X-TRACKERS DBX MSCI INDONESIA ETF USD (LON: XIDD).

Mid caps, aktiemarknadens försummade barn

Mid caps, aktiemarknadens försummade barn

Mid caps, aktiemarknadens försummade barn Det så kallade mellanbarnssyndromet är en psykologisk benämning för den empiriska iakttagelsen av att mellanbarn inte får lika mycket uppmärksamhet som sina äldre och yngre syskon. Trots en relativ försummelse finns det en hel del självständighet bland både mellanbarnen och aktierna som kategoriseras som Mid Caps.

Aktier i mid cap segmentet är relativt försummade och förbises ofta, något som är en nackdel för många investerare eftersom det är här vi hittar de kommande storföretagen, de så kallade Large Caps.

Fokus på storleksfaktorn

Den relativa obemärktheten kan delvis bero på den akademiska fokus på storleksfaktorn som en strukturell drivkraft för avkastning. ”Small Minus Big (SMB)”, som Fama/French storleksfaktor är känd som, lämnar ingen tanke på ”mid” som ett sätt att driva långsiktiga resultat. En annan orsak kan vara populariteten för Large Cap och Small Cap-index som S & P 500 och Russell 2000.

Som grupp betraktat har emellertid Mid Cap-segmentet många intressanta egenskaper. På många sätt har de potentialen att erbjuda det bästa av två världar, en bättre dynamik är företagen i Large Cap-segmentet och en större mognad än aktierna i Small Cap-segmentet. Det har nämligen visat sig att Mid Cap-segmentet i aktiemarknaden utvecklas väl i förhållande till både Large Cap och Small Caps-aktierna vilket vi ser i stapeldiagrammen nedan. För enkelhet skull har aktierna delats upp i tre olika grupper, vilka här representeras av S & P 500, S & P MidCap 400, och S & P SmallCap 600 index.


Mid Cap-aktier har också utvecklats mycket annorlunda än andra marknadssegment. Detta är ett diagram av totalavkastningsindexsnivåerna för samma tre index.

What’s Ahead for Small Caps?

What’s Ahead for Small Caps?

iShares – What’s Ahead for Small Caps?

Vi kommer sannolikt att närma sig en period av åtstramning av de monetära förhållandena i USA. Blackrocks Chief Investment Strategist Russ Koesterich ger oss i denna video sina utsikter för small caps, What’s Ahead for Small Caps?

 

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