Monday, August 10, 2015

ETFG Grey Market Insights

It was another shaky week as domestic equities confronted the reality that the Fed is likely on course to raise rates this September.  With investors focused on prepping their portfolios, they can almost be forgiven for overlooking that we’re still in earnings seasons with another seven percent of the S&P 500’s market cap due to report in the next two weeks.  And while there’s still more fun to come, most of the largest components of the S&P 500 have reported and according to the Factset Earnings Insight report, Q2 2015 will have the first negative earnings growth rate since 2012 with many analysts expecting earnings growth to stay negative throughout 2015.  Given the doom and gloom, we thought that it was time to check in on the ETFG Grey Market Report and find out which stocks with disappointing earnings have the most potential to drag on equities in the weeks ahead.

A quick glance at the ETFG Grey Market Summary page can shed some light on one of the biggest drags on domestic equities over the last few weeks as Apple (AAPL) has risen steadily over the last few years to be the biggest name in ETF portfolios with nearly $30 billion tied up in the stock across the ETF universe.  It was only a few months ago that investors were debating whether Apple would have the honor of being the first company to have a market capitalization greater than $1 trillion but since its quarterly earnings on July 21st, the stock has dropped 11.25% as investors and equity analysts reacted to slightly slower iPhone sales growth and weaker Chinese market.  That 11.25% drop is roughly equivalent to shedding $85 billion in market cap or to put it into perspective, it would be like McDonalds, Boeing or 3M suddenly just vanishing from existence and taking roughly .5% of the SPDR S&P 500 ETF (SPY) with it.  While SPY’s 1.6% loss since the Apple earnings release can’t be laid entirely at the feet of the company’s rapidly vanishing market cap (looking at you energy stocks), the ETFG Grey Market report can help pinpoint which ETF’s are hurting the most from Apple’s woes.  35 funds currently have an allocation greater than 5% of their assets in Apple from broad market bellwethers like the PowerShares QQQ with a 12.5% weighting (and $40 billion in AUM) to tech funds such as the Technology Select Sector SPDR Fund (XLK) with 16.2% and growth funds such as Vanguard Growth Fund (VUG) at 8%.

Apple’s missteps might be weighing heavily on the market but entertainment and media stocks are partly behind the recent sector rotation where utilities and consumer staples have seen a powerful momentum shift to displace consumer discretionary stocks.  If SPY took it on the chin, the Consumer Discretionary Select Sector ETF (XLY) got its teeth kicked in, shedding 2.5% in the last days as concerns over cord-cutting finally hit old-media titans like Viacom (VIAB) which dropped over 20% last week along with Fox (down 11%), cable companies like Comcast (so long 6%) but most of all Disney who’s prized ESPN asset and it’s supposedly rabid fan base were supposed to shield it from the on-demand reality.

Going back to our ETFG Grey Market Summary page you’ll find Disney currently holds the 23rd spot with a nominal long exposure of $6.6 billion and where a 8.8% drop last week rippled throughout the markets but fell most squarely on XLY where the stock makes up 7.2% of the allocation.  Media stocks on the whole make up nearly 30% of the fund’s assets and generally investors will find a very old media feel with Disney being closely followed by a number of last week’s other biggest losers like Comcast with a 6.28% weighting along with Time Warner Inc at 2.8 and Fox at 2.3%.  New Media giants like Netflix make up a much smaller percentage of the overall portfolio at 2.28% although there aren’t many funds with a larger allocation than XLY’s.  The Grey Market Report shows a nominal long exposure of $2.47 billion and only six funds with a larger allocation to Netflix than XLY.

Focusing on the week ahead, there are 13 earnings reports coming out from S&P 500 constituents making up 1.7% of the index’s market cap with perhaps the biggest coming on Wednesday after the close when Cisco (CSCO) is due to report.  CSCO’s nominal long value of $6.9 billion comes largely from being a small part of large funds such as SPY and QQQ where it makes up .78% and 2.72% of the assets respectively although the fund compromises more than 8% of the assets of smaller tech funds like the iShares North American Tech-Multimedia Networking ETF (IGN) and the First Trust NASDAQ Technology Dividend Index Fund (TDIV) so it could still have market moving implications for tech investors.  Oddly enough one possible market mover comes from the utility sector where AES Corporation reports before the open on Monday.  While AES’ nominal long exposure of $532 million is around 1.8% that of Apple, the stock makes up 1.6% of the Utilities Select Sector SPDR Fund (XLU) that has rocketed to the top of our technical scores for the select sector SPDR series thanks to recent strong price momentum as utility investors finally see the light after a difficult first half of the year.  Friday’s 1.23% gain put the fund in the black for the week and the market will have to wait and see if AES can help keep the momentum going for the fund.

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