etf performance & perspectives · 2012. 12. 14. · 4 etf model performance october 14, 2008 -...

ETF PERFORMANCE & PERSPECTIVESFROM S&P CAPITAL IQ MARKETSCOPE ADVISOREach month, we compile a selection of timely and actionable Trends & Ideas reports published on S&P Capital IQ Marketscope Advisor. The research reports inside include positive and negative implications for certain stocks, mutual funds and ETFs, and selected performance charts.

ETF INSIGHTS WITH TODD ROSENBLUTH Page 2

ETF MEDIA MENTIONS Page 3

ETF PORTFOLIO PERFORMANCE through November 30, 2012 Page 4

ETF PERFORMANCE & PERSPECTIVES

All of the views expressed in these research reports accurately reflect the research analyst’s personal views regarding any and all of the subject securities or issuers. No part of the analyst’s compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. For important regulatory information, go to www.standardandpoors.com and click on Regulatory Disclosure. Copyright © 2012 Standard & Poor’s Financial Services LLC, a wholly owned subsidiary of The McGraw-Hill Companies. All rights reserved.

DECEMBER 2012

IN APPAREL RETAIL, IT’S ALL ABOUT HAVING THE RIGHT PRODUCT Page 6 11/27/2012. Year to date through November 23, the S&P Apparel Retail Index was up 30.5%, versus a 12.0% increase for the S&P 500. In our view, the positive price performance of the sub-industry index has reflected sales and earnings that have beat expectations.

2013 INTERNATIONAL OUTLOOK: VISIBILITY VACUUM Page 8 11/26/2012. Before delving into our 2013 outlook, a brief recap of year-to-date trends is useful in setting the table. After outperforming foreign stocks in 2011 when their flat showing bested big overseas declines, U.S. equities are at it again in 2012. The S&P 500 is up 8.1% YTD vs. smaller 3.9% and 5.8% price gains for the MSCI EAFE and MSCI EM indices, which track the developed overseas and emerging market (EM) asset classes, respectively (as of 11/16 in USD).

READING THE CHINESE TEA LEAVES 1 11/15/2012. Asian markets, ex-Japan, sold off overnight after the makeup of China’s Polit-buro was formally announced. Although Asian markets’ weakness may persist in the short term, investors should not view the selloff as the beginning of a negative long-term trend, in the view of S&P Capital IQ.

TAX-HIKE CONCERN TO CONTINUE BUT SO WILL TELECOM, UTILITY PAYOUTS Page 13 11/07/2012. With the election over, S&P Capi-tal IQ is turning its attention to what a second term by President Barack Obama will mean for equities, especially those traditionally paying a dividend, such as telecom and utilities.

NOT ALL CONSUMER DISCRETIONARY ETFS ARE ALIKE Page 15 11/12/2012. Consumer discretionary stocks within the S&P 500 Index are once again col-lectively outperforming the broader market, having risen 17% year to date through No-vember 9 versus a 9.7% gain for the S&P 500 Index. This comes on the heels of a 440 basis point outperformance in 2011.

A LOOK AT TOP-RANKED ETFS IN A NEWLY FAVORED SECTOR Page 17 11/15/2012. Earlier today, S&P Capital IQ’s Eq-uity Strategy Group raised its recommendation the U.S. Health Care sector to Overweight from Marketweight, noting its view of its defensive characteristics, dependable earnings growth and below average valuation.

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ETF INSIGHTSwith Todd RosenbluthNovember was a busy month for investors, as they needed to prognosticate on the impact of the election and the looming fiscal cliff, the holiday shopping season and perhaps start to rebalance their portfolios for the year ahead. Fortunately, all of these topics and more were covered by S&P Capital IQ analysts, strategists and financial writers, with appropriate implica-tions for ETFs, in content published on our proprietary MarketScope Advisor platform and for clients through a feed.

In this packet, you will see a two-pronged look at the Consumer Discretionary sector, which is currently favored by S&P Capital IQ’s Equity Strategy Group. One piece focused broadly on the sector, looking at whether or not the better-performing sub-industries in 2012 still had strong fundamentals and what exposure three large consumer ETFs had to these groups. The second piece dug deeper into the Apparel Retail sub-industry to discuss what S&P Capital IQ thinks the biggest trends are for the industry, as the holiday season kicked off. In the article, we highlight-ed two ETFs that had exposure to retail stocks our analysts are recommending for purchase.

In ranking equity ETFs, S&P Capital IQ conducts holdings-level analysis, using inputs such as S&P STARS and S&P Quality Rankings to provide a valuation and risk perspective in combina-tion with a review of its expense ratio and bid/ask spread. We have reports on approximately 750 ETFs.

During mid-November, S&P Capital IQ’s Equity Strategy Group also became more positive on the Health Care sector noting what it considers its defensive characteristics, dependable earnings growth and below-average valuation. In a related Trends & Ideas piece, we reviewed six ETFs that earned a top ranking from S&P Capital IQ, some well diversified and some with greater concentration in the Pharmaceuticals and the Managed Care sub-industries.

While the Telecom Services and Utilities sectors share defensive traits with the Health Care sector, Telecom and Utilities also have above-average dividend yields, and some investors might be concerned about dividend taxes. With the re-election of President Obama, there is concern that taxes on dividends could jump beginning next year even as Washington seeks to compromise over spending and revenue and avoiding the so-called fiscal cliff. The failure to compromise could hurt U.S. economic growth. However, as we noted in our article, many companies in both sectors have a history of raising their dividends annually. We think inves-tors looking at ETFs in these sectors should understand the dividend prospects of a fund’s key underlying holdings.

Macroeconomic factors are also on the minds of investors focused outside of the U.S. market. As we note in two international pieces, it is important to understand the top-down develop-ments in other regions before sorting through investment opportunities. In a 2013 Interna-tional Outlook, S&P Capital IQ highlighted a few Europe- and Latin America-focused ETFs that we believe are positioned favorably. Separately, we highlighted ways to play China, a country expected to grow more than 7% in 2013. We delve into some sector-specific investments as well as more diversified ETFs.

With plenty of good investment opportunities, in our view, it is not surprising to us that money continued to flow globally into ETFs during November. Year to date, a record $219 billion was added to ETFs, according to data from BlackRock, as investors sought out low-cost, diversified investment vehicles.




@spmarketscope ETF PERFORMANCE & PERSPECTIVES


DECEMBER 2012

Todd Rosenbluth S&P Capital IQ ETF Analyst

http://www.getmarketscope.com










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Consumer Discretionary ETFs in Focus For Holiday Shopping Season “Thus far in 2012, some of the best performing sub-industries in the consumer discretionary sector are cable & satellite, homebuilding, household appliances and Internet retail. All of these are up more than 30% this year...,” S&P Capital wrote in a note.

Media Mentions




@spmarketscope ETF PERFORMANCE & PERSPECTIVES


DECEMBER 2012

A compilation of news clippings highlighting S&P Capital IQ’s influence in the ETF marketplaceClick on a box to access the full article. Follow @spmarketscope and #ETFHour for additional ETF coverage.S&P Reiterates Bullish View on Health Care ETFs “Sam Stovall, S&P Capital IQ’s Chief Equity Strategist, noted that the health care group is trading at a 17% discount to its median relative P/E ratio since 1995, and that six of its 10 sub-industries are projected to post above-market EPS growth in 2013,” the firm said in a research note.”

Use This ETF For Canadian Bank Exposure “We expect total revenues for these five to have increased 8.4% for the year in the aggregate, just above the 8.2% growth recorded in 2011 and the 7.1% rise in 2010,” S&P said in the note.

Healthcare ETFs: A Post-Election Buying Opportunity? “Jeff Loo, who heads the health care equity research team for S&P Capital IQ, says that with Pres. Obama winning a second term and the Demo-crats maintaining control of the Senate, the path is clear for Healthcare reform.

Use This Tiny ETF to Play Global Energy Stocks “S&P Capital IQ’s Buy recommendation on Total is supported by its above-average 6% dividend yield and a belief that its conventional upstream portfolio is strong,” the firm said in the note.

Follow @spmarketscope and #ETFHour for additional ETF insight throughout the day.

S&P Likes 2 Tech ETFs, Lukewarm on Another S&P Capital IQ also has an Overweight rating on the Technol-ogy Select Sector SPDR (XLK), which the research firm called the “most pure” of the three ETFs highlighted in the note.

http://www.etftrends.com/2012/11/consumer-discretionary-etfs-in-focus-for-holiday-shopping-season/


















http://www.marketwatch.com/story/sp-reiterates-bullish-view-on-health-care-etfs-2012-11-16






http://www.marketwatch.com/story/use-this-etf-for-canadian-bank-exposure-2012-12-04





http://www.etftrends.com/2012/11/healthcare-etfs-a-post-election-buying-opportunity/





http://www.minyanville.com/trading-and-investing/etfs/articles/energy-etfs-xom-rds-a-bp/12/6/2012/id/46449






http://www.foxbusiness.com/news/2012/12/06/sp-likes-2-tech-etfs-lukewarm-on-another/





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ETF MODEL PERFORMANCEOctober 14, 2008 - November 30, 2012

A model portfolio comprised of ETFs with an overall S&P Capital IQ ETF ranking of Overweight has outperformed the S&P 500 Total Return Index.

A model portfolio comprised of ETFs with an overall S&P Capital IQ ETF ranking of Marketweight has outperformed the S&P 500 Total Return Index.

A model portfolio comprised of ETFs with an overall S&P Capital IQ ETF ranking of Underweight has underperformed the S&P 500 Total Return Index.

ETF ranking categories are models only. Please see the next page for additional important disclosures regarding the inherent limitations of model performance. Model performance is gross of all investor level fees and expenses. The S&P 500 index is the benchmark for the ETF model portfolios. The S&P 500 index assumes reinvestment of dividends. Indexes are unmanaged, statistical composites and their returns do not include payment of any sales charges or fees an investor would pay to purchase the securities they represent. It is not possible to invest directly in an index. Inclusion of fees and expenses in the model or S&P 500 index would lower performance. Past performance of the models or S&P 500 index is no indication of future results.




@spmarketscope NOVEMBLER 30, 2012

AVGERAGE ANNUALPERFORMANCE Since 10/14/08

HYPOTHETICAL GROWTH OF $100

Invested on 10/14/08

OVERWEIGHT +19.1% $206MARKETWEIGHT +14.1% $172

S&P 500 TOTAL RETURN INDEX +11.3% $156

UNDERWEIGHT +1.6% $107As of November 30, 2012

For Financial Advisor Use Only. Not For Public Distribution.

60708090

100110120130140150160170180190200210220

Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12











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Performance Disclosure The exchange-traded fund (“ETF”) model performance chart on the prior slide is only an illustration of S&P ETF research; it shows how all ETF’s that received a particular Overall S&P ETF ranking of Overweight, Marketweight or Underweight performed. The Overall S&P ETF rankings in the above chart are model portfolios only; they are not collective invest-ment funds. (The ETF model portfolios are also collectively referred to as “model” or “model portfolio”.) Model perfor-mance has inherent limitations. The ETF model performance does not show how any actual portfolio has performed. ETF model performance does not represent the results of actual trading of investor assets. S&P maintains the model and calculates the model performance shown or discussed, but does not manage actual assets. Thus, the performance shown or discussed does not reflect the impact that mate-rial economic and market factors had or might have had on decision-making if actual investor money had been man-aged. Performance of an investor’s actual portfolio will not necessarily match the performance of the model portfolio due to differences in the weightings of the individual securi-ties. In addition, the model results do not take into account timing differences between the selections by S&P and purchases that were or would have been made based on those selections by any advisor or by actual investors. While model performance for some or all ETF ranking categories may have performed better than the illustrative reference point for the period shown, the performance during any shorter period may not have, and there is no assurance that the model will perform better than the illustrative reference point in the future. The model does not take into account any particular investment objective, financial situation or need and are not intended as an investment recommenda-tion or strategy. Investments based on the ETF methodology may lose money. Past performance of the ETF model is no guarantee of future results.

Performance is calculated daily using a time-weighted rate of return. The model performance calculation takes into account dividends and distributions but does not take into account reinvestment of dividends. ETF’s in each model will change over time, and some or all of the ETF’s that received rankings during the time period shown may not have main-tained their ranking during the entire period.

For model performance calculation purposes, the ETF’s within each model at October 14, 2008 were equally weight-ed. Thereafter, additions to the composition of the ETF’s in each model are made at the average market value of the ETF model at the preceding month end with no rebalancing. The average market value of the ETF equals the total market value of the ETF model at the prior month-end divided by the number of ETFs in the ETF model at the prior month-end. The number of shares of the new ETF added equals the average value of an ETF in the ETF model at the preceding

month-end divided by the price of the added ETF at the close of the day it was added. The number of shares remains fixed unless there is a subsequent distribution. Subsequent to the addition of the equity, the performance calculation is based on the number of shares and the daily closing prices. An ETF is deleted in its entirety, and the deletion is made at the closing price of the day that the deletion is made.

ETF model performance reflects the fees and expenses of the underlying ETFs. The model performance does not consider taxes and brokerage commissions, nor does it re-flect the deduction of any advisory or other fees charged by advisors or other parties that investors will incur when their accounts are managed in accordance with the model. The imposition of these fees and charges would cause actual performance to be lower than the performance shown. For example, if the model returned 10 percent on a $100,000 investment for a 12-month period (or $10,000) and an an-nual asset-based fee of 1.5 percent were imposed at the end of the period (or $1,650), the net return would be 8.35 percent (or $8,350) for the year. Over 3 years, an annual 1.5% fee taken at year end with an assumed 10% return per year would result in a cumulative gross return of 33.1%, a total fee of $5,375 and a cumulative net return of 27.2% (or $27,200).

An investment based upon any of the models should only be made after consulting with a financial advisor and with an understanding of the risks associated with any invest-ment in securities, including, but not limited to, market risk, currency risk, political and credit risks, the risk of economic recession and the risk that issuers of securities or general stock market conditions may worsen, over time. Foreign investing involves certain risks, including currency fluctua-tions and controls, restrictions on foreign investments, less governmental supervision and regulation, less liquidity and the potential for market volatility and political instability. As with any investment, investment returns and principal value will fluctuate, so that when redeemed, an investor’s shares may be worth more or less than their original cost.

Benchmark Disclosure The S&P 500 index is the benchmark for the ETF model portfolios. Indexes are unmanaged, statistical composites and their returns do not reflect payment of any sales charg-es or fees an investor would pay to purchase the securities they represent. Such costs would lower performance. It is not possible to invest directly in an index. The methodology for calculating the return of the S&P 500 index differs from the methodology for calculating returns for the ETF ranking categories. The S&P 500 index has different risk character-istics than the ETF model portfolios, and its performance calculation takes into account reinvestment of dividends and distributions. Past performance of the S&P 500 Index is no guarantee of future results.

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ETF TRENDS & IDEASFROM S&P CAPITAL IQ MARKETSCOPE ADVISOR

In Apparel Retail, It’s All About Having The Right Product

Year to date through November 23, the S&P Apparel Retail Index was up 30.5%, versus a 12.0% increase for the S&P 500. In our view, the positive price performance of the sub-in-dustry index has reflected sales and earnings that have beat expectations.

Fashion newness (e.g., bright colors this past spring), promotional activity, and double-digit online growth have enabled many apparel retailers to achieve strong sales in 2012. Ap-parel inflation has also contributed to top-line growth. Higher cotton prices and rising manufacturing costs drove retail prices up last fall (2011) and this spring. Fortunately, many apparel retailers found that their custom-ers, while demanding value, were willing to stretch their budgets when the product was right. However, as price increases only partially offset higher apparel costs, most retailers felt a pinch on their merchandise margins.

With cotton prices declining this year, apparel costs are lower this fall. However, many retail-ers have kept their prices flat, year-over-year, in order to regain lost margin. Some retailers have also used their cost savings to improve the quality of their apparel offerings. In our view, lower product costs will continue to be a tailwind for apparel retailers through next spring.

Based on our expectation of a slow and uneven economic recovery, and with many apparel retailers facing more difficult sales comparisons ahead, S&P Capital IQ Equity

Research has a neutral fundamental outlook for the apparel retail sub-industry over the next 12 months. Among retailers, we believe leadership in a well-defined market segment and the ability to quickly “read and react” to consumer demand will separate the winners from the losers. Two companies we see fitting this bill are Limited Brands (LTD 50 ****) and TJX Companies (TJX 43 ****).

Limited Brands is the leading U.S. specialty retailer of women’s intimate apparel through its Victoria’s Secret brand. We see Victo-ria’s Secret successfully engaging shoppers, building brand loyalty, and driving sales with frequent inflow of new products and targeted promotions. We also see Victoria’s Secret expanding its addressable market beyond intimate apparel through adjacent categories such as athletic attire, accessories, swimwear and personal care products, as well as the

11/27/2012-02:36 PM ET

TAKEAWAY: Among apparel retailers, we see execution separating winners from the losers.

POSITIVE IMPLICATIONS

LIMITED BRANDS [LTD]

MARKET VECTORS RETAIL ETF OVERWEIGHT [RTH]

POWERSHARES DYNAMIC RETAIL PORTFOLIO

MARKETWEIGHT [PMR]

TJX COMPANIES [TJX]

ETF TRENDS & IDEAS





@spmarketscope NOVEMBER 27, 2012











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Pink sub-brand. We believe Limited Brands has an opportunity to ramp up the opening of franchised- and company-owned Victo-ria’s Secret stores next year to take advantage of global demand.

Through its T.J. Maxx, Marshalls, and HomeGoods stores, TJX is the largest U.S. off-price family apparel and home fashion retailer. A growing presence in Canada and Europe also sets the company apart from its competitors, in our view. With our view of its strong value proposition across brands, more than 15,000 vendors worldwide, and its proven ability to quickly respond to changes in customer buying preferences, TJX is positioned well, we believe, for market share gains.

For those investors looking for exposure to apparel retail compa-nies, we advise considering two exchange-traded-funds (ETFs). The first is the PowerShares Dynamic Retail Portfolio ETF (PMR 25 Marketweight). This ETF tracks the price performance of the Dynamic Retail Intellidex Index, which is comprised of U.S. retail companies. As of October 31, 2012, 45.1% of PMR’s holdings were in the apparel retail sub-industry. Limited Brands and TJX are its sixth and seventh largest holdings, making up 4.9% and 4.5% of assets, respectively. This ETF receives neutral scores for all inputs for Performance Analytics, Risk Considerations and

Cost Factors (with the exception of a negative input for its high 0.87% gross expense ratio), supporting the overall Marketweight ranking.

Investors may also want to consider the Market Vectors Retail ETF (RTH 45 Overweight). RTH tracks the price performance of the Market Vectors U.S. Listed Retail 25 Index. As of October 31, 2012, 8.5% of this ETF’s holdings were in the apparel retail sub-industry. TJX is its ninth largest holding, making up 4.1% of assets. RTH’s overall Overweight ranking reflects positive scores on S&P Quality Rank and bid/ask spread, neutral scores on S&P STARS, S&P Fair Value, S&P Credit Rating (Standard & Poor’s Ratings Services operates independently of S&P Capital IQ), gross expense ratio, and price to NAV, and a negative score on S&P Risk Assessment compared to other ETFs in its asset class.

Jason Asaeda S&P Capital IQ Equity Analyst

ETF TRENDS & IDEAS FROM S&P CAPITAL IQ MARKETSCOPE ADVISOR

ETF TRENDS & IDEAS NOVEMBER 27, 2012

8


2013 International Outlook: Visibility Vacuum

Before delving into our 2013 outlook, a brief recap of year-to-date trends is useful in set-ting the table. After outperforming foreign stocks in 2011 when their flat showing bested big overseas declines, U.S. equities are at it again in 2012. The S&P 500 is up 8.1% YTD vs. smaller 3.9% and 5.8% price gains for the MSCI EAFE and MSCI EM indices, which track the developed overseas and emerging market (EM) asset classes, respectively (as of 11/16 in USD). While many foreign markets like Ger-many, Mexico and Turkey have done very well, this has been diluted by the underperformance of foreign heavyweights like Japan and Brazil, which have lagged notably. As a result of per-sistent U.S. alpha since 2010, the S&P 500 has recouped far more of its bear market losses than its overseas counterparts. Since all three indices peaked in October 2007, the U.S. benchmark is down only 13.1% vs. 38.6% and 27.5% respective bear market price declines for developed overseas and EM equities.

Nonetheless, unlike last year’s sea of red, both developed international and EM equities are higher YTD, most notably on a total return ba-sis which incorporates their healthy dividend yields of 4% and 3.1%, respectively. On that score the MSCI EAFE Index is up a respectable 7.7%, while its EM counterpart has notched a healthy 8.9% gain. This hasn’t surprised us as our 2012 forecast (Hostage to Headlines; published 12/9/11) noted that we expected volatile, but modestly positive foreign equity

returns in 2012 with dividends being a key component of total return, given our expec-tation for only moderate price appreciation. In terms of what drove this year’s better YTD performance, we think it can largely be at-tributed to very low valuations coming into the year combined with unprecedented global monetary policy easing which together helped stoke investor risk appetite in an otherwise highly challenged global growth environ-ment. Our 2013 international equity outlook is detailed below.

11/26/2012-09:29 AM ET

ETF TRENDS & IDEAS






TAKEAWAY: Volatile year of modest gains likely for overseas stocks; see dividend focus key to boosting total return.


ISHARES MSCI BRA-ZIL INDEX FUND NA [EWZ]

ISHARES MSCI EAFEINDEX FUND OVERWEIGHT [EFA]

ISHARES MSCIEMERGING MARKETSINDEX FUND

MARKETWEIGHT [EEM]

ISHARES MSCI FRANCE INDEX FUND

MARKETWEIGHT [EWQ]

ISHARES MSCI SWITZERLAND INDEX FUND

OVERWEIGHT [EWL]











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Consensus Sees 2013 Global GDP Growth Rising 0.4% to 2.6%, But Risks Abound

An analysis of consensus economic projections reveals only cau-tious optimism about 2013 global growth prospects. The U.S., U.K., Eurozone, Japan and Canada - which combined represent 60% of global GDP - are all seen growing 2% or less in 2013. The global expansion is seen ramping up very gradually with growth forecast to reach 3% by Q4, up from only 2.2% in Q1. Overall CY 2013 is seen producing global real GDP growth of 2.6%, up from the 2.2% seen for 2012, according to the Bloomberg consen-sus. We believe this cautious outlook reflects three significant macro-economic overhangs currently clouding global economic visibility: the U.S. fiscal cliff, Europe’s recession and debt crisis as well as the still unknown trajectory of China’s growth. All three will go a long way in dictating 2013 corporate profitability and hence our analysis of the 2013 overseas equity outlook begins there.

The U.S. Fiscal Cliff

The U.S. economy represents roughly 25% of world GDP and is the world’s biggest export market. As a result, its current fiscal challenges and their potentially recessionary consequences rep-resent a major potential tail risk for stocks around the world. The looming U.S. fiscal cliff is a $668B combination of tax increases and spending cuts set to kick in on January 1, 2013, which if left unaddressed, threatens to send the world’s biggest economy into recession. According to the Congressional Budget Office, were the U.S. economy to suffer the full brunt of this fiscal drag, it would likely contract 0.5% in 2013 with unemployment rising to 9.1% from 7.9% currently.

While consensus expectations for 2% U.S. growth in 2013 clearly imply markets believe there’s room for a political compromise to mitigate much of this fiscal risk, we believe the mere pos-sibility of such an unprecedented macro headwind has recently served to dampen both U.S. and international growth expecta-tions and hence, equity performance. An extension of current U.S. tax rates for at least six months coupled with a bipartisan agreement to tackle comprehensive tax and entitlement reform in 2013 is needed to diffuse investor concern over this issue, in our view. Ultimately, we believe a compromise along these lines is likely and therefore view this risk as a high impact, low prob-ability event. However, we expect equities to remain volatile until visibility on a deal emerges.

The European Sovereign Debt Crisis

As a consequence of the region’s three-year-old debt crisis, Eu-rope dipped back into recession in Q3 amidst austerity-induced spending cuts and tax increases that have stoked unemploy-ment, especially in hard-hit southern European countries like Spain, Italy and Greece. However, in part due to proactive ECB policy, the consensus sees the Eurozone recession end-ing by Q3 2013, helping drive a modest, back-end loaded 0.3% economic expansion next year, according to Bloomberg. With Europe bogged down with little or no growth for several years now, markets have largely discounted weak growth in the region, in our view. And while the pace of any 2013 recovery will have some bearing on EPS growth and hence equity performance, we

see equities remaining more correlated with sovereign stress in European bond markets than with the real economy. Over the past few years, international stocks have risen and fallen in virtual lockstep with peripheral sovereign bond yields. After a brutal spring swoon that saw stocks drop sharply as yields rose to record highs, equity performance has improved since July when ECB President Mario Draghi introduced a crisis reduction roadmap that promptly drove down peripheral borrowing costs across the yield curve. In a nutshell, the ECB plan calls for Spain to officially ask the EU bailout fund to buy its debt in the primary market (govt. bond auctions) in exchange for committing to strict new fiscal conditions. If this occurs, the ECB has agreed to buy short-term peripheral sovereign debt in the secondary mar-ket to reduce borrowing costs and buy time. In addition, private sector bond holders will not be subordinated to the ECB, as was the case with past ECB bond purchases, which diluted their ef-fectiveness by scaring away private investors.

Unfortunately, the Draghi plan has been so effective in bringing down yields that Spain no longer feels the urgency for an official aid request that would require politically unpopular new austerity measures, preventing the central bank rescue from proceeding. With Spain’s recession worsening, unemployment north of 25% and 10% of all bank loans now non-performing, markets are in-creasingly nervous about Spain’s reluctance to ask for help when the need for it is increasingly clear, in our view. Spanish yields have recently crept higher as a result. Ultimately, we see Spain biting the bullet and making the aid request as we believe it simply can’t afford not to. Overall, we think the worst of the Euro-pean sovereign debt crisis is likely behind us and that a dreaded “Lehman moment” in Europe is improbable if the Draghi plan proceeds. That said, we don’t rule out periodic bouts of height-ened sovereign stress given the political wildcards involved, but relative to the extreme stress and volatility of recent years, we think things will likely be calmer.

Chinese Growth

As the world’s fastest-growing major economy by far, we think China’s ability to maintain strong growth is key to the global outlook, especially given Europe’s recession, anemic growth in Japan and the risk of fiscal drag in the U.S. Recent news has been encouraging with industrial production, retail sales and exports all rebounding from their summer troughs. In addition, Chinese manufacturing moved back into expansionary terri-tory in October led by a rebound in new orders and production. With inflation remaining tame at below 2%, we see room for additional fiscal and monetary policy easing in Q2 of next year, once the new political leadership has had a chance to settle in. The consensus sees China’s 2013 growth remaining solidly in “soft landing” territory at 8.1%, up from the 7.7% seen for all of 2012, according to the Bloomberg. Importantly, in comparison to Europe where evidence of a growth trough remains elusive, the recent firming in China’s data makes the Street’s optimistic outlook more bankable, in our view.

Given China’s trade ties to other developing economies, its stabi-lization is seen benefiting others. India’s growth should rebound somewhat to 6% next year from only an estimated 5.6% this year, according to consensus, although stubbornly high inflation



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of 7.9% is precluding more aggressive central bank stimulus. As for Brazil, its growth is expected to rebound sharply to 4% from only 1.5% in 2012. Lastly, other major developing economies like Mexico, Russia, South Africa and Turkey are all seen posting healthy 3% to 4% growth next year. Overall, IHS Global Insight, an independent forecasting firm, sees emerging economies posting GDP growth of 5.2% in 2013, up from an estimated 4.9% in 2012 and well ahead of the 1.1% growth it forecasts for advanced economies next year.

Macro-Economic Uncertainty Weighs on Consensus EPS Fore-casts

With macro-economic uncertainties as well as lackluster cor-porate results and guidance since Q2, it’s no surprise to us that consensus EPS expectations have been trending lower around the world. Beyond just fundamentals, the law of large numbers has also weighed on profit growth as EPS comparisons have been getting tougher. At the asset class level, April expectations for 13.9%, 12.9% and 8.1% respective CY 2012 EPS growth for the MSCI EM, MSCI EAFE and S&P 500 indices have been revised down to 2.8%, 2.2% and 3.9%, respectively. And while MSCI EM, MSCI EAFE and S&P 500 CY 2013 EPS expectations remain healthy at 12.8%, 13.1% and 10.1%, respectively, we think these forecasts will similarly be revised lower in the coming months, as they have already begun to edge down and a lack of macro-economic visibility makes this trend likely to persist, in our view. Nevertheless, given our view that the full brunt of the U.S. fiscal cliff will be avoided, China will maintain growth in the 7.5%-8% range, and a Lehman moment will be avoided in Europe, our base case calls for EPS growth to continue in 2013, with mid-single digit percentage gains likely, in our view, both domestically and abroad.

Valuations Seen Leaving Room for Modest 2013 Upside if EPS Growth Persists

Reflecting recent negative EPS revision trends and a murky macro-economic outlook, current 12 month-forward (MF) equity valuations are below their five-year averages in the U.S., developed foreign and EM asset classes. The S&P 500 recently traded at 12.2X 12MF EPS, below its five-year average of 12.9X. Similarly, the MSCI EAFE and MSCI EM indices fetched, 11.2X and 9.9X, respectively, below their five-year averages of 11.9X and 11.1X, respectively. Given our view that EPS will continue to rise in the coming year, albeit only modestly, we believe current valu-ations leave room for modest price appreciation.

With Upside Modest, Dividends Should Remain a Key Int’l. Total Return Driver

Since we don’t see 2013 as a banner year for international stocks, we recommend a continued focus on equity income as a means of supplementing total returns. Owing to weaker price appreciation relative to prior decades, since the start of 2010, dividends have comprised 100% of both developed international and EM equity total returns. This trend has been playing out YTD

as the MSCI EAFE Index’s 7.7% total return is roughly double its 3.9% price gain thanks to it generous dividend yield of 4%. Similarly, EM equities are up 8.9% on a total return basis vs. only 5.8% on a price basis. When price gains are modest, dividends are hugely important to maintaining equity performance that’s in line with historical averages, by our analysis.

Combine High Levels of Current Income with Reasonable Divi-dend Payout Ratios

International equities generally yield more than their U.S. coun-terparts, with developed European markets leading the way. However, high yields don’t tell the whole story. Take Spain. At 6.8%, its recent dividend yield is by far the highest among major world markets. But so is its whopping dividend payout ratio of 151% which undermines its ability to maintain high yields, much less offer valuable dividend growth potential. Instead of simply reaching for yield, we suggest seeking out high levels of current income combined with dividend payout ratios below 60%. On that basis, we see the EM asset class offering attractive income potential as its 3.1% yield is paired with only a 36% dividend pay-out ratio, well below the elevated 87% payout ratio of the MSCI EAFE Index of developed overseas stocks. At the country level, Brazil (iShares MSCI Brazil Index Fund, EWZ, $52, NR) jumps out to us as an attractive income story with a healthy yield of 3.8% combined with a dividend payout ratio of 49%. On the developed side, we see Switzerland (iShares MSCI Switzerland Index Fund, EWL, $26, Marketweight) and France (iShares MSCI France Index Fund, EWQ, $22, Marketweight) as the best overall income plays as they sport yields of 3.8% and 4.4%, respectively, while main-taining what we consider to be reasonable dividend payout ratios of 59%, and 56%, respectively.

Conclusion

While 2013 global macro-economic visibility is less than stellar, we see both developed foreign and EM stocks rising modestly next year with healthy dividend yields key to driving solid total returns. Given our view that the full brunt of the U.S. fiscal cliff will be avoided, China will maintain growth in the 7.5%-8% range, and a Lehman moment will likely fail to transpire in Europe, our base case calls for EPS growth to continue in 2013, with mid-single digit percentage gains likely, in our view. With the MSCI EAFE (iShares MSCI EAFE Index Fund, EFA, $55, Marketweight) and MSCI EM (iShares MSCI Emerging Markets Index Fund, EEM, $42, Underweight) indices trading at 11.2X and 9.9X 12MF consensus EPS forecasts, respectively, below their five-year averages of 11.9X and 11.1X, we believe current valuations leave room for modest price appreciation.

Alec Young S&P Capital IQ Global Equity Strategist

11


Reading the Chinese Tea Leaves

Asian markets, ex-Japan, sold off overnight after the makeup of China’s Politburo was formally announced. Although Asian markets’ weakness may persist in the short term, inves-tors should not view the selloff as the begin-ning of a negative long-term trend, in the view of S&P Capital IQ.

The Shanghai Composite Index fell 1.2%, the Hong Kong Hang Seng Index sold off by 1.3% and the Korea KOSPI Index dropped 1.2% on November 15, and Lorraine Tan, S&P Capi-tal IQ’s director of researchAsia wouldn’t be surprised to see China, Hong Kong and Korean equities come under further pressure.

“Investors were hoping to see expedited market reforms especially in the relaxation of some key price controls,” she points out.

But troubles in developed markets may also be adding to Asia-market weakness, according to Alec Young, S&P Capital IQ’s global equity strategist. “I believe concerns over the po-tentially recessionary impact of the U.S. fiscal cliff, should Congress fail to take any action, also contributed to weakness overnight given Asia’s sensitivity to exports,” he says. As such, Young believes equities globally will likely stay volatile unless a compromise comes out of Washington.

Domestically, Tan thinks markets are con-cerned Beijing’s policies for the world’s second-largest economy are hurting input prices for Chinese companies. She sees rising costs eating into profit margins at a number of companies, including state-owned enterpris-

es. “The inability to raise selling prices is lead-ing to diminished returns and in some cases, some reluctance to reinvest,” she notes.

11/15/2012-05:42 PM ET

TAKEAWAY: China growth should continue, says S&P Capital IQ, and these ETFs could ben-efit.


FIRST TRUST CHINAALPHADEX FUND UNDERWEIGHT [FCA]

FIRST TRUST SOUTHKOREA ALPHADEXFUND

UNDERWEIGHT [FKO]

GLOBAL X CHINACONSUMER ETF UNDERWEIGHT [CHIQ]

GLOBAL X NASDAQCHINA TECHNOLOGYETF

UNDERWEIGHT [QQQC]

GUGGENHEIM CHINATECHNOLOGY ETF UNDERWEIGHT [CQQQ]

ISHARES FTSE CHINA(HK LISTED) INDEXFUND

MARKETWEIGHT [FCHI]

ISHARES MSCI CHINAINDEX FUND MARKETWEIGHT [MCHI]

ISHARES MSCI SOUTH KOREA INDEX FUND

OVERWEIGHT [EWY

POWERSHARES GOLDEN DRAGON CHINA PORTFOLIO

UNDERWEIGHT [PGJ]

SPDR S&P CHINA ETF MARKETWEIGHT [GXC]

ETF TRENDS & IDEAS
















12

Tan also thinks markets were focused and subsequently disap-pointed about the makeup of the remaining members of the Politburo. “Markets were hoping to see a more reform-minded Politburo as this would likely have meant greater agreement to push forward reforms, but the makeup revealed a somewhat conservative stance,” she acknowledges.

Another challenge Tan sees is more localized. “We think there will still be funding constraints at the provincial level that will prob-ably keep any fiscal spending limited,” she says.

However, China’s change of leadership, both the Politburo’s makeup and the Communist Party appointment of Li Keqiang as secretary general on November 14, doesn’t ultimately alter Tan’s view of China’s economy, which she thinks is still likely to see gross domestic product growth of 7.5%-8.0% in 2013. Markets may see more fiscal spending once Li, and Xi Jinping, the new Premier and President, respectively, take their posts in the sec-ond quarter of 2013, Tan believes.

Furthermore, in a sign economic and fiscal policy decisions may become more streamlined in Beijing, the number of Politburo members was cut from nine to seven, “a move that is seen to expedite decision-making,” she points out.

Plus, she sees consumer confidence throughout developing Asia improving next year, “unleashing pent-up demand,” she notes. As such, she continues to recommend a balanced portfolio between cyclical and defensive sectors in Asia, underweighting industrials and materials, while overweighting consumer discre-tionary, information technology, and utilities.

Exchange-traded funds (ETFs) potentially leveraging Tan’s sector views include Global X China Consumer ETF (CHIQ 14 Underweight), Global X NASDAQ China Technology ETF (QQQC 14 Underweight) and Guggenheim China Technology ETF (CQQQ 21 Marketweight).

The CHIQ ETF splits its sector exposure between consumer cyclicals and staples. In terms of ranking, as determined by S&P Capital IQ’s ETF ranking methodology, the CHIQ ETF receives an underweight assessment of its performance analytics and a marketweight view of its cost factors. The IT-sector focused QQQC ETF gets a marketweight assessment of its performance, but an underweight for its costs, while Guggenheim’s China tech fund, CQQQ, garners marketweight markets for its performance and costs.

For investors seeking broader exposure to developing Asia, exchange-traded funds (ETFs) seeking to track the performance of Shanghai, Hong Kong and Seoul indexes include First Trust China AlphaDEX Fund (FCA 22 Underweight), First Trust South

Korea AlphaDEX Fund (FKO 25 Marketweight), Guggenheim China All-Cap ETF (YAO 23 Overweight), iShares FTSE China (HK Listed) Index Fund (FCHI 44 Marketweight), iShares MSCI China Index Fund (MCHI 44 Overweight), iShares MSCI South Korea Index Fund (EWY 57 Overweight), PowerShares Golden Dragon China Portfolio (PGJ 18 Underweight), and SPDR S&P China ETF (GXC 67 Overweight).

The FCA ETF is heavily invested in China’s financials and indus-trials sectors at about 47% of total assets, according to First Trust’s website. In terms of the fund’s ranking, S&P Capital IQ’s ETF methodology assigns the fund an overweight ranking for its performance, but gives the fund an underweight for cost factors.

Similarly, First Trust’s Korean ETF also garners an overweight ranking for its performance and an underweight for costs from S&P Capital IQ’s methodology. Its largest sector investment is in industrials at 26% of total assets, according to its web site.

Guggenheim’s YAO ETF reports on its web site its top sectors are financials at 32% and energy at 17%. Its ranking, as determined by S&P Capital IQ’s methodology, assigns an overweight ranking on the fund’s performance, but risk considerations and cost fac-tors receive a marketweight ranking each.

Like YAO, the iShares FCHI ETF receives an overweight assess-ment of its performance, but garners S&P Capital IQ’s mar-ketweight views of its risks and costs. The ETF currently has a 44% weighting in financials. IShares’ MCHI ETF is also heavily weighted in the financial sector at 38% of holdings, and receives marketweight assessments of its performance, risks and costs by S&P Capital IQ.

IShares’ Korean ETF, EWY, receives overweight assessments for both its performance and costs, and receives a marketweight view of its risks. Its top two sectors are technology at 33% of as-sets and consumer discretionary at 17%.

Similarly, the tech sector is 43% of the PowerShares PGJ ETF with consumer discretionary at 19%, and the ETF receives mar-ketweight marks for its performance and costs.

The SPDR GXC ETF garners an overweight assessment of its performance, and marketweight views of its risks and costs. In terms of sector, financials maintain 33% of total assets while energy is 15%.

Isabelle Sender S&P Capital IQ Editorial



13


Tax-Hike Concern to Continue But So Will Telecom, Utility Payouts

With the election over, S&P Capital IQ is turning its attention to what a second term by President Barack Obama will mean for equities, especially those traditionally pay-ing a dividend, such as telecom and utilities. Taxes on dividends could jump beginning next year as Washington seeks to compromise over spending and revenue and avoiding the so-called fiscal cliff.

“A potential change in tax policy could dis-courage investors to focus on telecom and utilities stocks, which have above-average dividend yields,” says Todd Rosenbluth, who leads equity research coverage of the tele-communication services and utilities sectors at S&P Capital IQ. Tax breaks enacted under President George W. Bush are set to expire, including a 15% tax rate on dividends.

However, Rosenbluth also believes just be-cause taxes may increase on dividends, com-panies with a long history of paying and often raising their dividend each year are very likely to continue. In fact, AT&T (T 34 ***) boosted its quarterly dividend by 2.3% to $0.45 cents today the company’s 29th consecutive annual increase, which is a sign of the company’s “confidence in our industry and in our future,” its chief executive states in a press release the day after a contentious election handed Obama a second term.

“I’m confident we can continue to deliver for our owners as we invest to position AT&T for

stronger growth in the years ahead,” Randall Stephenson, AT&T chairman and chief execu-tive officer says in a press release.

Indeed, growth may continue, Rosenbluth thinks, because the Obama administration has been a “proponent of greater broadband avail-ability and new spectrum licenses for wire-less.” Furthermore, Rosenbluth foresees the makeup of the sector’s regulator, the Federal Communications Commission (FCC), will not change and “these policies should be positive for wireless-focused companies.”

11/07/2012-03:01 PM ET

TAKEAWAY: These ETFs may benefit despite potential increases in dividend tax rates.


GUGGENHEIM S&P 500 EQUAL WEIGHT UTILITIES ETF

MARKETWEIGHT [RYU]

ISHARES DOW JONES US UTILITIES SECTOR INDEX FUND

MARKETWEIGHT [IDU]

UTILITIES SELECT SECTOR SPDR FUND MARKETWEIGHT [XLU]

VANGUARD TELE-COMMUNICATION SERVICES INDEX FUND; ETF SHARES

MARKETWEIGHT [VOX]

VANGUARD UTILITIESINDEX FUND; ETF SHARES

MARKETWEIGHT [VPU]

ETF TRENDS & IDEAS
















14

For the telecom sector, Rosenbluth believes there remain chal-lenges for wireline voice carriers, but sees operating and capital-spending savings along with broadband growth in telecommuni-cation services in 2012 supporting above-average dividends.

S&P Dow Jones Indices, which operates independently of S&P Capital IQ, believes companies raising dividend yields are re-warded by investors who consider increased payouts to share-holders as a positive sign of a company’s overall fiscal health. Also, S&P Dow Jones Indices notes a good portion of total return for investors over the years has come from dividend yields.

“Since 1926, dividends have contributed nearly a third of total equity return while capital gains have contributed two-thirds. Sustainable dividend income and capital appreciation potential are both important in determining total return expectations,” according to S&P Dow Jones Indices.

The S&P 500 telecom sector recently paid a dividend yielding 4.7%.

For utilities, S&P Capital IQ expects the sector’s high dividend yield, recently at 4.2%, to at least be maintained, if not rise slightly, and think electric-utility revenues and gas-utility gross margins will increase.

Investors seeking exposure to these two traditionally high dividend-paying sectors should consider S&P Capital IQ market-weight-ranked exchange-traded funds (ETFs) as of November 7.

Guggenheim Investments S&P 500 Equal Weight Utilities ETF (RYU 58 Marketweight) garners favorable assessments of its

S&P Technical and standard deviation inputs to its overall rank-ing. It recently paid dividend yielding 3.3%.

iShares Dow Jones US Utilities Sector Index Fund (IDU 86 Mar-ketweight), which receives a positive mark for its standard devia-tion input to its overall ranking, recently paid a dividend yielding 3.3%.

S&P Capital IQ assesses the standard deviation and S&P Tech-nicals favorably for the PowerShares Dynamic Utilities Portfolio (PUI 17 Marketweight), which recently paid a dividend yielding 2.4%.

Utilities Select Sector SPDR Fund (XLU 35 Marketweight), which recently paid a dividend yielding 3.9%, garners favorable assess-ments of its standard deviation and bid/ask spread.

S&P Capital IQ gives positive marks to Vanguard Utilities Index ETF (VPU 75 Marketweight) for standard deviation and expense ratio. The ETF also recently paid s dividend yielding 3.7%.

Vanguard Telecommunication Services Index ETF (VOX 70 Mar-ketweight), recently paid a dividend yielding 2.8%, and receives favorable assessments of its S&P Risk Assessment, standard deviation, expense ratio, and price-to-NAV inputs.

Isabelle Sender S&P Capital IQ Editorial



15


Not All Consumer Discretionary ETFs Are Alike

Consumer discretionary stocks within the S&P 500 Index are once again collectively outperforming the broader market, having risen 17% year to date through November 9 versus a 9.7% gain for the S&P 500 Index. This comes on the heels of a 440 basis point outperformance in 2011. S&P Capital IQ’s Equity Strategy Group remains Overweight on the sector relative to others in the “500”, cit-ing in part the equity analytical team’s positive fundamental outlook and a recent discount on a P/E-growth basis using Capital IQ consensus earnings. We think ETFs are a good way to gain low-cost exposure to the sector, but that looking inside the ETF is important as not all consumer discretionary ETFs have the same exposure.

Thus far in 2012, some of the best performing sub-industries in the consumer discretion-ary sector are cable & satellite, homebuilding, household appliances and Internet retail. All of these are up more than 30% this year. In contrast, auto parts & equipment, casino & gaming, footwear and restaurants are all in the red. Interestingly, the S&P Capital IQ equity research team has positive fundamental outlooks on sub-industries within both the top (Internet retail) and bottom performing sub-industries (auto parts & equipment) listed above as well as others that have performed more in line with the broader market, such as general merchandise stores. For one of the best performing groups, homebuilding, there

is a negative fundamental outlook. Meanwhile, two of the largest sub-industries, movies & entertainment and cable & satellite, have neutral outlooks. An ETF’s exposure to these sub-industries is not only going to impact how it performs relative to others within the sector, but also how S&P Capital IQ assesses the ETFs. As you know, our holdings-based analysis leverages the S&P Capital IQ equity research team for performance analytics and risk considerations, and is combined with a re-view of the ETF for volatility and costs factors.

There are currently six ETFs ranked as ei-ther Overweight or Marketweight tied to the Consumer Discretionary sector in our Market-Scope Advisor database and that have over

11/12/2012-12:27 PM ET

TAKEAWAY: We favor consumer discretionary stocks, but these three ETFs offer slightly differ-ent exposure to the sector.


CONSUMER DISCRE-TIONARY SELECT SECTOR SPDR FUND

OVERWEIGHT [XLY]

ISHARES DOW JONES US CON-SUMER SERVICES SECTOR INDEX FUND

OVERWEIGHT [IYC]

VANGUARD CON-SUMER DISCRETION-ARY INDEX FUND; ETF SHARES

MARKETWEIGHT [VCR]

ETF TRENDS & IDEAS






ETF Analyst HourEvery 2nd Wednesday @4:15p

Consumer Discretionary Sector: Update & ETF Takeaways

WEBINAR SLIDES











http://img.en25.com/Web/StandardandPoors/ETF%20Hour-1112.pdf

http://img.en25.com/Web/StandardandPoors/ETF%20Hour-1112.pdf

16

$200 million in assets. Just one of these receives an overall Overweight ranking, for its combination of performance, risk and costs factors. Below, we will look at the distinctions between this ETF and the two largest broadly diversified ETFs in the invest-ment style.

iShares Dow Jones US Consumer Services Sector Index Fund (IYC 84, Overweight)

IYC stands out in our ranking universe for the favorably ranked S&P STARS and S&P Quality Rankings of its underlying holdings and its relatively low standard deviation, while the other inputs are neutral. Some of this is helped by approximately 25% of its assets in stocks outside of the consumer discretionary sector, as the ETF owns stocks classified as consumer staples or informa-tion technology according to us. The ETF’s largest sub-industry equity holdings are in movies & entertainment (11% of assets), cable & satellite (10%) and restaurants (10%). Some of its top-10 holdings include Comcast (CMCSA 36 ****), Disney (DIS 47 *****) and Wal-Mart (WMT 72 ****). The ETF, which is up 19% this year, has a gross expense ratio of 0.47%

Consumer Discretionary Select Sector SPDR (XLY 45, Market-weight)

XLY also has positive S&P STARS and S&P Quality Rankings in-puts along with ones for its low expense ratio (0.18%) and tight bid/ask spread, but the overall ranking is hurt by negative inputs for S&P Fair Value and S&P Technical. Tied to the S&P 500 Index, this is a pure play way to get exposure to stocks classified as consumer discretionary by S&P Capital IQ. Movies and entertain-ment (14% of assets), restaurants (12%) and cable and satellite (12%) are the top sub-industries in this ETF as well, though the

weightings are slightly different. The three largest holdings are Comcast, Home Depot (HD 61 **) and Disney, two of which are considered overvalued based on S&P Fair Value. XLY is up 18% thus far in 2012.

Vanguard Consumer Discretionary Index Fund (VCR 73, Market-weight)

VCR is up 19% this year and it too has exposure to just con-sumer discretionary stocks according to S&P Capital IQ. The overall Marketweight ranking is a combination of positive S&P STARS and S&P Quality Rankings inputs and a low expense ratio (0.19%) offset by negative S&P Fair Value and S&P Technical inputs. This Vanguard portfolio also has high exposure to movies & entertainment (11% of assets), restaurants (11%) and cable & satellite (10%), but holds 200-plus more stocks than XLY includ-ing many that mid- or small-caps. The three largest holdings were Comcast, McDonald’s (MCD 85 ****) and Home Depot.

As you can see, these three ETFs will provide you with exposure to a sector that has not only performed well this year, but that S&P Capital IQ remains positive on. However, there are subtle differences between them if you look at the underlying holdings and expenses. To learn more about these ETFs and their industry exposure and to see the ranking inputs for each, please see the ETF tab of MarketScope Advisor, as our research is updated daily.




17


A Look At Top-Ranked ETFs In A Newly Favored Sector

Earlier today, S&P Capital IQ’s Equity Strategy Group raised its recommendation the U.S. Health Care sector to Overweight from Market-weight, noting its view of its defensive char-acteristics, dependable earnings growth and below average valuation. For investors looking to increase their exposure to the sector, but in a low-cost, diversified way, there are a number of ETF options. We highlight the ones that ranked the best according to S&P Capital IQ’s ETF methodology, looking at both the under-lying holdings and traits of the ETF security such as expenses and volatility.

Sam Stovall, S&P Capital IQ’s Chief Equity Strategist, noted that the health care group is trading at a 17% discount to its median rela-tive P/E ratio since 1995, and that six of its 10 sub-industries are projected to post above-market EPS growth in 2013. From a technical perspective, he added that the sector remains in a bullish channel that began in 2011, and has continued to trace out higher highs and higher lows since 2009.

Jeff Loo, who heads the health care equity research team for S&P Capital IQ, added that with President Obama winning a second term and the Democrats maintaining control of the Senate, the path is clear for Healthcare reform. He believes the battle moves from Republicans attempting to repeal the law to some Republicans resisting the implementa-tion of certain parts of the law, mainly the cre-

ation of state healthcare exchanges and the expansion of Medicaid. Loo thinks these issues have resulted in some short term downward pressure on some healthcare sub-industries, particularly the managed care sub-industry. However, he believes the vast majority of states will eventually participate in the expan-sion of Medicaid, as the law offers the states very generous terms. S&P Capital IQ see this

11/15/2012-12:49 PM ET

TAKEAWAY: There are a number of ways to gain exposure to health care through ETFs, but you need to look inside first.


HEALTH CARE SELECT SECTOR SPDR FUND OVERWEIGHT [XLV]

ISHARES DOW JONES US HEALTHCARE PROVIDERS INDEX FUND

OVERWEIGHT [IHF]

ISHARES DOW JONES US HEALTHCARE SEC-TOR INDEX FUND

OVERWEIGHT [IYH]

ISHARES S&P GLOBAL HEALTHCARE SECTOR INDEX FUND

OVERWEIGHT [IXJ]

SPDR S&P PHARMA-CEUTICALS ETF OVERWEIGHT [XPH]

VANGUARD HEALTH CARE INDEX FUND; ETF CLASS SHARES

OVERWEIGHT [VHT]

ETF TRENDS & IDEAS







18

as benefiting the managed care sub-industry. Separately, Loo and team also view positively this group’s efforts to diversify internationally as well.

Within the Pharmaceutical sub-industry, which accounts for about 50% of the sector’s S&P 1500 weighting, S&P Capital IQ sees both sales and EPS gains in 2013 within several of the large-cap names after expected declines in 2012. Although patent expiration will likely adversely impact this sub-industry over the next several years, Loo notes that several major drugs, such as Lipitor, that went off-patent have anniversaried, making comparable sales and EPS easier in 2013.

There are six ETFs tied to the Health Care sector that earn a top ranking of Overweight from S&P Capital IQ. It should be noted that the ranking of the ETF is not directly tied to the Equity Strat-egy Group’s view, as there are ETFs in the sector that do not have a top ranking. Rather, an ETF is ranked Overweight if it scores in the top 25% of our equity ETF universe, based on aggregate of various performance, risk and cost factors including S&P STARS, S&P Quality Ranking and expense ratio.

The largest Health Care ETF to earn a top ranking is Health Care Sector SPDR (XLV 39 Overweight), which is tied to the S&P 500 Index. This ETF is the cheapest of the six, with a gross expense ratio of 0.18%. The largest industry exposure is in pharmaceuti-cals, but also has notable biotechnology and health care equip-ment exposure. Top holdings include Johnson & Johnson (JNJ 69 Buy), Merck (MRK 43 Buy) and United Health Group (UNH 51 Buy), all viewed as undervalued by Loo and team. This ETF, as well as others that have exposure to these industry leaders, are viewed favorably for their above-average S&P Quality Ranking.

Vanguard Health Care Index Fund (VHT 70 Overweight) is the second cheapest of these ETFs, with an expense ratio of 0.19%. It has a similar industry breakdown as XLV and it too owns a number of stocks S&P Capital IQ equity analysts favor like JNJ and MRK, but has additional small- and mid-cap stocks in the portfolio. Also helping its ranking is a low standard deviation and a tight bid/ask spread.

iShares Dow Jones US Healthcare Sector Index (IYH 81 Over-weight) is the third broadly diversified sector ETF with an Over-

weight ranking, and is focused on the U.S. It is more expensive than the two others,with an expense ratio of 0.47%, but it owns large stakes in S&P Capital IQ recommended stocks JNJ, MRK and Pfizer (PFE 24 Buy), and has a positive input for its S&P Quality Ranking.

For investors looking for a more exposure to non-U.S. health care stocks, iShares S&P Global Healthcare Sector Index (IXJ 62 Overweight) might be worthy of a look as it has 40% of its assets in non-U.S. domiciled companies such as Roche (ROG 180 Buy), combined with exposure to JNJ and other U.S. stocks. Phar-maceuticals is 66% of the total portfolio, with smaller stakes in other industries such as health care equipment. The ETF costs 0.48%, but the ranking is helped by its low volatility among other factors.

The two other ETFs ranked favorably have a greater industry focus than the others. SPDR Pharmaceuticals ETF (XPH 54 Over-weight) is a pure play on the pharma space, with MRK, JNJ and PFE joined in the top positions by Watson Pharmaceuticals (WPI 82 Buy). This ETF costs 0.35%.

Last is iShares US Healthcare Providers Index (IHF 64 Over-weight), which has most assets split between managed care and health care services sub-industries. Its top-10 holdings include UNH and Express Script Holding (ESRX 50 Buy). The ETF costs 0.47%.

As you can see, there are a number of ways to position your portfolio to follow the S&P Capital IQ Equity Strategy Group’s favorable stance on the health care sector. But before you act, we encourage you to look at the ETF reports on these funds at the ETF tab of MarketScope Advisor for additional details about its industry breakdown, underlying holdings and other key traits that drive the Overweight ranking. Our research is updated daily to reflect the latest views of S&P Capital IQ.




etf performance & perspectives · 2012. 12. 14. · 4 etf model performance october 14, 2008 -...

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