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ETF PERFORMANCE & PERSPECTIVES FROM S&P CAPITAL IQ MARKETSCOPE ADVISOR Each 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.

Exploring ETF Strategies within Oil & Gas Webinar

REPLAY

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ETF INSIGHTS WITH TODD ROSENBLUTH

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ETF MEDIA MENTIONS

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ETF PORTFOLIO PERFORMANCE through August 31, 2012

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LOOKING UNDER THE HOOD AT A PREMIUMPRICED ETF Page 7 08/08/2012. When you pay more, you expect more. But in the world of ETFs, costs are just one part of the analysis prospective investors should undertake before making a purchase. HOW FIDELITY COULD IMPACT THE ETF LANDSCAPE Page 9 08/08/2012. In addition to offering a number of widely held, diversified equity mutual funds, we think Fidelity Investments provides its clients with a slate of largely successful sector- or industry-focused portfolios. INVESTING IN DIVIDEND ETFS Page 11 08/13/2012. With an uncertain economic environment dampening corporate confidence, more S&P 500 index companies with cash in their pockets have begun paying or are increasing dividends. S&P STRATEGIST’S GUIDE TO 2012’S INTERNATIONAL AFFAIRS Page 13 08/14/2012. S&P Capital IQ believes increased European Central Bank (ECB) activity is likely and could end up spurring advances among the world’s equity markets in the last few months of the year, which could bode well for select ETFs.

EXPOSURE TO HIGH-YIELD ELECTRIC UTILITIES THROUGH ETFS Page 15 08/14/2012. While electric utility stocks have underperformed the broader market in 2012, we believe the above-average dividend yields provided by individual companies and certain ETFs can appeal to investors who may be focused on longer-term total returns. A TOP-RANKED ETF FOCUSED ON MEGA-CAPS Page 17 08/20/2012. Thus far, 2012 has been the year of the mega-cap, with some of the better performing stocks in the S&P 500 Index with market capitalizations much greater than $25 billion. ENERGY ETFS PROVIDE ONSHORE NORTH AMERICA EXPOSURE Page 19 08/29/2012. Based on our outlook for a strong upstream (exploration and production) market environment, most notably in the United States onshore and Canadian oil sands, S&P Capital IQ Equity Research has a positive fundamental outlook on the integrated oil & gas and exploration & production (E&P) sub-industries for the next 12 months.

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.

ETF PERFORMANCE & PERSPECTIVES SEPTEMBER, 2012


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ETF INSIGHTS

with Todd Rosenbluth According to ETFGI, an independent research firm, the exchange-traded product industry hit an all-time high with over $1.7 trillion in global assets at the end of August, with the vast majority invested in U.S. securities. In recent weeks, S&P Capital IQ’s analysts and editors have highlighted a number of ETFs offering attractive dividend payments, given the continued market volatility. Even as the equity markets have bounced higher, we find that investors are still seeking out portfolios that can provide some downside protection as well as the potential for capital appreciation.

Todd Rosenbluth S&P Capital IQ ETF Analyst

One such article looked at various diversified U.S. ETFs where dividend generation is a central focus. The ETFs highlighted in the article received a top Overweight ranking from S&P Capital IQ for their favorable combination of performance, risk and cost attributes. We cover over 750 equity ETFs, using proprietary bottom-up tools such as S&P STARS and S&P Quality Rankings, to look beyond traditional past performance metrics. Other pieces from August looked at specific GICS sectors, namely utilities and energy. Larger-cap holdings by certain ETFs have, in our opinion, the wherewithal to support their above-average yields, due to recent mergers and free cash flow generation. Lastly on this topic, we dug deeply into the holdings from a valuation and risk perspective of one ETF that owns mega-cap companies (greater than $25 billion market capitalization) across various sectors. While capital appreciation is the primary focus, this ETF also offers a steady stream of dividend income.

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Separately, during August a lot of media attention was focused on two ETF providers, FocusShares and Russell Investment Group, which have chosen to close down a number of ETF offerings that had low asset bases. The decisions likely have to do with the fact that industry is highly concentrated, with the top four ETF providers having over 88% market share. However, in a recent article, we discussed the impact Fidelity Investments could have on the ETF industry. Our research suggests the mutual fund company might have some success gathering ETF assets targeted to sector and industry investments if it decided to mimic some of its Select Portfolios. VIDEO In addition, believing that certain investors only look at an ETF’s expense ratio, we highlighted one ETF that was relatively expensive but owned stocks we viewed favorably. All of these pieces were originally published as Trends & Ideas content available to S&P Capital IQ wealth management clients. We encourage you to learn more about our ETF research by continuing to read this publication and contacting the number at the bottom of this page. 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.

ETF PERFORMANCE & PERSPECTIVES SEPTEMBER, 2012

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Media Mentions A compilation of news clippings highlighting S&P Capital IQ’s influence in the ETF marketplace Click on a box to access the full article. Follow @spmarketscope and #ETFHour for additional ETF coverage. S&P Parses Potential Fidelity ETFs

SMA Managers Bullish on Alt ETFs

Active ETFs Come Into View

August 8, 2012

August 12, 2012

August 2, 2012

Time to Follow the Fund Herd

Biggest ETF Gainers and Losers in July

‘Fiscal Cliff’ Tax Hike Won’t Kill Dividend Income

“S&P Capital IQ’s Todd Rosenbluth doesn’t know whether the rumors are true, but he takes a look at what might happen if Fidelity enters the ETF landscape.”

“That isn’t quite the death of equities, but it is a serious maiming of equity fees. ETFs tend to passively track indexes and carry lower costs than actively managed mutual funds ...”

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“Typically, people who are investing in a mutual fund believe that their fund is investing with a long-term horizon.”

“S&P Capital IQ’s Todd Rosenbluth doesn’t know whether the rumors are true, but he takes a look at what might happen if Fidelity enters the ETF landscape.”

“Though fixed-income ETFs make up more than two-thirds of all actively managed ETFs, we’re starting to get a glimpse of how the industry will develop on the equity side.”

“Here are some exchangetraded funds and mutual funds for dividend income, suggested by Todd Rosenbluth of S&P Capital IQ.”

August 25, 2012

August 1, 2012

September 5, 2012

Some Advisers Shun Small ETFs, Fearing Closures

The Rookies of the Year From the Fund Class of ‘11

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

August 17, 2012

September 5, 2012

“Advisers may want to consider whether there is another ETF to replace the one that is being shut, Mr. Graves said.”

“That strategy also leads the fund to focus on defensive sectors such as consumer staples and health care, which have been relatively strong performers this year...”

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.

ETF PERFORMANCE & PERSPECTIVES SEPTEMBER, 2012

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ETF MODEL PERFORMANCE October 14, 2008 - August 31, 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. AVGERAGE ANNUAL PERFORMANCE Since 10/14/08

HYPOTHETICAL GROWTH OF $100 Invested on 10/14/08

OVERWEIGHT MARKETWEIGHT

+19.4% +13.8%

$199 $165

S&P 500 TOTAL RETURN INDEX

+11.7%

$154

UNDERWEIGHT

+0.4%

$102 As of August 31, 2012

200 190 180 170 160 150 140 130 120 110 100

S&P Capital IQ MarketScope Advisor

90

• Investment Research • News & Commentary • Insight & Analysis • Tools & Screeners

60

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80 70 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

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. 5

AUGUST 31, 2012 For Financial Advisor Use Only. Not For Public Distribution.


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 investment funds. (The ETF model portfolios are also collectively referred to as “model” or “model portfolio”.) Model performance 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 material economic and market factors had or might have had on decision-making if actual investor money had been managed. 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 securities. 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 recommendation 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 maintained their ranking during the entire period. For model performance calculation purposes, the ETF’s within each model at October 14, 2008 were equally weighted. 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 monthend. 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 reflect 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 annual 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 investment 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 fluctuations 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 charges 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 characteristics 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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VIDEO

ETF TRENDS & IDEAS

FROM S&P CAPITAL IQ MARKETSCOPE ADVISOR

Looking Under the Hood at a Premium-Priced ETF 08/08/2012-10:11 AM ET When you pay more, you expect more. But in the world of exchange-traded funds (ETFs), costs are just one part of the analysis prospective investors should undertake before making a purchase. At S&P Capital IQ, the proprietary ETF ranking model considers the underlying holdings of each security, and analyzes them from a performance and risk perspective in addition to looking at ETF level traits such as expenses and bid/ask spread. A high-cost ETF may still garner an “overweight” or “marketweight” recommendation from S&P Capital IQ if the performance or the risk analysis is strong.

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“Costs alone shouldn’t automatically be reason enough to avoid certain ETFs,” says Todd Rosenbluth, an S&P Capital IQ ETF analyst, even while acknowledging that investors “often look for the cheapest ETF around, regardless of quality.” He recommends that rather than looking only at costs, investors should “look inside and see what these ETFs actually own. While the relative gross expense ratio is a component of the S&P Capital IQ ETF ranking within our cost-factors analysis, we think looking under the hood is more important.” He believes investors should consider an ETF’s sector and individual stock exposure. For instance, if a more costly ETF’s holdings are favorably weighted towards cyclical sectors during times when defensive stocks fall out of favor, the strategy may be reason enough to pay up.

TAKEAWAY: This ETF has a high gross expense ratio but other favorable traits. POSITIVE IMPLICATIONS FIRST TRUST STRATEOVERWEIGHT GIC VALUE INDEX FUND

[FDV]

Another factor to consider is stewardship of the fund. Many ETFs simply track a widelyfollowed index, but a growing number have active managers or use a customized, rulesbased approach and that can often cost more than their traditional index-tracking brethren. Similarly, an ETF that rebalances holdings regularly to limit concentration risk is likely to incur higher costs. “So ask yourself if the ETF is more expensive because there is a quasi-active, rules-based approach behind it that fits in well with your valuation and risk analysis?” Rosenbluth suggests, as the ETF may be able to cover the higher expense with its potential to outperform the index. First Trust Strategic Value Index ETF (FDV TK Marketweight) is a good example of the S&P Capital IQ approach to ETF rankings. Its gross expense ratio is 0.82%, whereas many other large cap value ETFs have expense ratios lower than 0.25%. That alone may cause some investors to turn away. But Rosenbluth notes the ETF’s underlying holdings look strong from both a valuation

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.

ETF TRENDS & IDEAS AUGUST 8, 2012

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

and a risk perspective, according to S&P Capital IQ’s proprietary model. He also notes the S&P Capital IQ model sees bullish trends, from a technical perspective, for this ETF. What’s more, First Trust’s website notes it “has agreed to waive fees and/or pay fund expenses to prevent the net expense ratio of the fund from exceeding 0.65% per year, at least until January 03, 2013.” The ETF holds 50 stocks, mostly domestic, and seeks to replicate the price and yield of the Credit Suisse U.S. Value Index. The topthree sectors represented in the ETF include financials at 25.6%, energy at 18.2%, and information technology at 15.2%, as of the most recent data provided to S&P Capital IQ. Among its top-10 holdings, seven garner a STARS ranking of at least 4. STARS rankings range from 5 (strong buy) to 1 (strong sell). As an input to the ETF Ranking, S&P Capital IQ evaluates the weighted average STARS of the underlying holdings of the ETF compared with other ranked ETFs. The top-10 holdings comprise 22% of the ETF’s assets. S&P Capital IQ also uses other proprietary ranking systems to analyze the holdings of this ETF. One is Fair Value, a quantitative model in which a stock’s weekly Fair Value is calculated -- the price at which it should trade at current market levels -- based

on data such as corporate earnings and growth potential, priceto-book value, return on equity, and current yield relative to the S&P 500. Stocks are ranked from 5, indicating significant undervaluation, to 1, indicating significant overvaluation. For First Value Strategic Value Index ETF, three of the top 10 holdings have S&P Fair Value rankings of at least 4. Another proprietary S&P Capital IQ ranking system is Quality Rankings, which appraise the growth and stability of earnings and dividends over the past 10 years. While Quality Rankings are not intended to predict stock price movements, a recent S&P Capital IQ study showed that over the long term, stocks with the best Quality Rankings posted higher profit margins, higher return on capital, and stronger cash flows than lower quality stocks. In First Value Strategic Value Index ETF, three of the top 10 holdings have Quality Rankings of B+ or higher. For a full report on this ETF, including all the S&P Capital IQ ranking details, please click on the ETFs tab in MarketScope Advisor.

isabelle Sender S&P Capital IQ Editorial

ETF TRENDS & IDEAS AUGUST 8, 2012

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ETF TRENDS & IDEAS

FROM S&P CAPITAL IQ MARKETSCOPE ADVISOR

How Fidelity Could Impact the ETF Landscape 08/08/2012-10:45 AM ET In addition to offering a number of widely held, diversified equity mutual funds, we think Fidelity Investments provides its clients with a slate of largely successful sector- or industryfocused portfolios. However, in recent years the exchange-traded fund (ETF) industry has continued to gather assets, aided by the appeal of their low cost structure and relatively strong transparency compared to mutual funds. As such, there have been a number of unconfirmed media reports, including from Bloomberg last week, suggesting that Fidelity might launch ETF products leveraging their Select portfolios. While we do not know if, or when, this might occur, we decided to dig into some of these Fidelity Select funds to see how they compare and contrast with established and similarly focused ETFs.

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Fidelity offers 35 Select funds that, combined, have approximately $25 billion in assets. They also offer Advisor classes of related funds that include various front- and back-end loads. For the sake of simplicity we focused on the more established no-load offerings under the Select name. The offerings include some narrow, industry-focused ones such as Fidelity Select Defense and Aerospace Portfolio (FSDAX 82 *****), and more diversified funds such as Fidelity Select Industrials Portfolio (FCYIX 24 *****) that own industrial conglomerates like 3M (MMM 92 ****) in addition to defense companies like United Technologies (UTX 78 ***). Both funds rank well according to S&P Capital IQ.

TAKEAWAY: Fidelity’s Select mutual funds

could gain market share in the ETF arena, but costs and manager tenure matter. POSITIVE IMPLICATIONS FIDELITY SELECT BIOTECH PORTFOLIO

 [FBIOX]

FIDELITY SELECT DEFENSE & AEROSPACE PORTFOLIO

 [FSDAX]

FIDELITY SELECT HEALTHCARE P’FOLIO

 [FSPHX]

FIDELITY SELECT INDUSTRIALS P’FOLIO

 [FCYIX]

FIDELITY SELECT TECH P’FOLIO

 [FSPTX]

HEALTH CARE SELECT SECTOR SPDR FUND

OVERWEIGHT [XLV]

SPDR S&P BIOTECH ETF

NA

VANGUARD IT INDEX FUND; ETF

OVERWEIGHT [VGT]

[XBI]

NEGATIVE IMPLICATIONS DYNAMIC HEALTHCARE SECTOR P’FOLIO

MARKETWEIGHT

DYNAMIC TECH SECTOR PORTFOLIO

OVERWEIGHT [PTF]

FIRST TRUST NYSE ARCA BIOTECH INDEX FUND

MARKETWEIGHT

[PTH]

[FBT]

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.

ETF TRENDS & IDEAS AUGUST 8, 2012

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ETF TRENDS & IDEAS FROM S&P CAPITAL IQ MARKETSCOPE ADVISOR Using our MarketScope Advisor database, we found the collection of Select funds have relatively strong track records as of August 3, with an impressive 54% of them landing in the top quartile of their respective peer groups and additional 14% in the second quartile. However, for 37% of the universe the current manager has not yet been at the helm for three years. We think this should give investors some pause on relying on the aforementioned strong records for these 13 funds, since in some cases, the stock selections that drove its returns were not made by the current manager. Fidelity Select Consumer Discretionary Portfolio (FSCPX 27 ***) is one such top-quartile fund on a three-year basis, whose manager started in 2012. Perhaps a better way to look at is to focus on just the 22 funds that have an established manager (three years or more) at the helm. If we do, the numbers are still strong, as 14 of these funds (64%) have an above average track record. But as you can see, the sample sizes are rather small and of course past performance is not indicative of future results. Any potential ETF would be run with an altered approach due to a more frequent disclosure of holdings. We also mentioned earlier that a key appeal of ETFs is their low expense ratios. We have found that the more traditional ETFs that simply track a widely known benchmark from S&P Dow Jones Indices or MSCI tend to be among the least expensive of the offerings. Meanwhile, the more rules-based ETFs that focus on a specific theme (growth stocks within a sector, low volatility stocks, etc,) tend to cost more. S&P Capital IQ operates independently from S&P Dow Jones Indices. The Fidelity Select portfolios have an average expense ratio of 0.88%, with a relatively tight range between 0.80% and 1.01%. Below, we compare and contrast the expense ratios of the three largest Fidelity Select offerings with some of the larger ETFs that invest in the same respective sector or industry. We also believe that if Fidelity were to roll out ETFs, the expense ratios would be lower than the mutual fund offering, in an attempt to garner assets and benefit from the parent company’s scale. PIMCO Total Return (PTTAX 11 ***) is an appropriate comparison, we think, as the PIMCO Total Return ETF (BOND 107 NR) has an expense ratio of 0.59% in contrast to the 0.85% of the retail mutual fund. Fidelity Select Biotechnology Portfolio (FBIOX 106 ****) is one of the funds that not only has a strong three-year track record, but also has had the same managers on the fund for longer than that, since 2005. The fund has an expense ratio of 0.83%, which we view as modest compared to other health/biotechnology mutual funds. However, this is much higher than the 0.35% expense ratio of SPDR S&P Biotech ETF (XBI 87 NR). If Fidelity were to launch an ETF version of its Select fund, we think it would more likely have an expense ratio near or below that of rules-based offerings such as First Trust NYSE Arca Biotechnology Index Fund (FBT 43 Underweight), which has an expense ratio of 0.61%, providing FBT with competition.

A more diversified, yet still successful offering in gathering assets and outpacing its mutual fund peers from Fidelity is the Fidelity Select Health Care Portfolio (FSPHX 135 *****). Fund manager Yoon has been at the helm since 2008, and the fund has an expense ratio of 0.80%. But this active mutual fund costs much more than the Health Care Select Sector SPDR Fund (XLV 38 Overweight), which carries a low expense ratio of just 0.18%. Fidelity’s entry into the ETF space, however, could result in it taking market share from smaller related ETFs such as PowerShares Dynamic Health Care Sector Portfolio (PTH 32 Underweight). PTH aims to identify health care stocks with strong capital appreciation potential using proprietary methods. PTH’s expense ratio of 0.84% is already higher than that of FSPHX. Outside of health care, Fidelity also has Fidelity Select Technology Portfolio (FSPTX 100 ****), which earns a four-star ranking from S&P Capital IQ for its strong top-quartile three-year record under current management, and ownership of stocks viewed as undervalued by S&P Capital IQ equity analysts. In addition, the expense ratio is 0.82%, below that of our science & technology peer group. However, this expense ratio is well above that of Vanguard Information Technology Index Fund (VGT 71 Overweight), which carries an appealing expense ratio to the costconscious investor of 0.19%. Similar to the Health Care sector, we think Fidelity’s possible entry into the ETF arena could hurt the diversified, yet rules-based small technology ETFs. One such ETF is PowerShares Dynamic Technology Sector Portfolio (PTF 26 Underweight), which already bears a higher cost than FSPTX at 0.91%. As you can see, Fidelity has a strong presence with its sectorand industry-focused mutual funds. If it were to enter the ETF landscape, we think there is some room for market share gains, but expense ratios might be a big driver of how successful it could be. While we strongly encourage investors to look beyond this cost factor and take note of the mutual fund’s manager tenure and holdings, we know it is a key differentiator for many. To see reports on any of the ETFs or mutual funds listed above please visit the respective tabs of MarketScope Advisor. Note: The mutual fund rankings in this article - from five star (highest) to one star (lowest) - are quantitatively derived from performance, holdings, risk, and expense analysis. S&P Capital IQ Equity Research’s stock rankings or STARS - using a scale of 5-STARS (Strong Buy) to 1-STARS (Strong Sell) - are based on S&P Capital IQ equity analysts’ qualitative and fundamentally driven outlooks for stocks over the next 12 months; NR stands for Not Ranked. S&P Capital IQ’s ETF rankings use a different scoring system, with Overweight the highest and Underweight the lowest. Todd Rosenbluth S&P Capital IQ ETF Analyst

ETF TRENDS & IDEAS AUGUST 8, 2012

10


ETF TRENDS & IDEAS

FROM S&P CAPITAL IQ MARKETSCOPE ADVISOR

Investing in Dividend ETFs 08/13/2012-09:22 AM ET With an uncertain economic environment dampening corporate confidence, more S&P 500 index companies with cash in their pockets have begun paying or are increasing dividends. Investors also concerned with the weak U.S. economy, and with less appetite for stock market risk, may now be seeking increased income and diversification through dividend exchange-traded funds (ETFs). Year to date through August 7, 2012, 13 S&P 500 Index issues began paying regular cash dividends, bringing the S&P 500 total to 402 dividend paying companies, a level not seen since December 1999, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices (which operates independently of S&P Capital IQ). So far this year, 226 of S&P 500 companies have increased their dividend rates, says Silverblatt, and he expects more than 70% of the S&P 500 issues will pay more in 2012 than in 2011. Last year, S&P 500 companies paid a total of $241 billion in dividends, up 23% from the $196 billion paid in 2009 when the last recession ended.

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“The growing trend of companies paying and increasing their dividends are the direct result of a slowly improving economy, record earnings and cash-flow, as well as a growing appetite from investors for income producing investments,” he explains. Silverblatt expects S&P 500 companies will pay dividends totaling $275 billion this year, which would beat the record $248 billion paid in 2008.

TAKEAWAY: Rising dividend payments by

many S&P 500 companies may benefit these U.S. dividend ETFs. POSITIVE IMPLICATIONS SCHWAB US DIVIDEND EQUITY ETF

OVERWEIGHT

[SCHD]

VANGUARD DIVIDEND APPRECIATION INDEX FUND; ETF CLASS SHARES

OVERWEIGHT

[VIG]

WISDOMTREE DIVIDEND EX-FINANCIALS FUND

OVERWEIGHT

[DTN]

WISDOMTREE LARGECAP DIVIDEND FUND

OVERWEIGHT

[DLN]

“We are seeing new funds flow into dividend instruments, especially ETFs,” says Silverblatt. “There are few alternative instruments for today’s investors, as banks, CDs and treasury rates remain near record low rates. We would expect additional buying pressure on dividend type instruments as the baby-boomers continue to move away from growth and focus on more secure income flows.” Investors turning away from risk and toward income may want to investigate the following dividend ETFs, all with the highest “overweight” ranking from S&P Capital IQ. With assets of $440 million and a 2.94% SEC 30-day yield as of August 10, 2012, the 10-month old Schwab US Dividend Equity ETF

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.

ETF TRENDS & IDEAS AUGUST 13, 2012

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

(SCHD 29 Overweight) tracks the Dow Jones US Dividend 100 Index of high dividend yielding stocks issued by U.S. companies with a record of consistently paying dividends and selected for fundamental strength relative to their peers. S&P Capital IQ’s overall “overweight” ranking for the ETF was derived from positive S&P STARS, S&P Quality Rank, and S&P Credit Rating (from Standard & Poor’s Ratings Services, which operates independently of S&P Capital IQ) inputs, along with a favorable expense ratio and bid/ask spread. As of August 10, 2012, eight of SCHD’s top-10 holdings were rated “buy” or “strong buy” by S&P Capital IQ, which helped it garner a favorable S&P STARS grade. Much larger than SCHD with assets totaling about $1.2 billion as of August 10, and five years older, WisdomTree Dividend ex-Financials Fund (DTN 56 Overweight) recently sported a yield of 3.66%. DTN seeks to duplicate the performance of the WidomTree Dividend ex-Financials Index of high dividend yielding stocks outside the financial sector, consisting primarily of large and midcap companies listed on major U.S. stock exchanges. Like SCHD, DTN receives positive marks from S&P Capital IQ for S&P Quality Rank and bid/ask spread, but also has favorable S&P Technical (price trends) and standard deviation inputs. Another WisdomTree ETF, WisdomTree LargeCap Dividend Fund (DLN 54 Overweight) is slightly larger than DTN with $1.22 billion of assets at the same date, and tracks the WisdomTree LargeCap

Dividend Index, a fundamentally weighted index comprised of the 300 largest companies ranked by market capitalization from the WisdomTree Dividend Index. With a 2.73% yield as of August 10, 2012, DLN receives “overweight” scores from S&P Capital IQ for its performance analytics, risk considerations, and cost factors, all contributing to the ETF’s overall “overweight” score. Our last “overweight”-ranked dividend ETF, Vanguard Dividend Appreciation Index Fund; ETF (VIG 59 Overweight) seeks results similar to the Dividend Achievers Select Index of U.S. common stocks that have a history of increasing dividends for at least 10 consecutive years. VIG is, by far, the largest of the four dividend ETFs with $11.5 billion of assets, 134 holdings and a 2.09% yield, as of August 10, 2012. VIG also received “overweight” marks for its performance analytics, risk considerations, and cost factors. Aiding VIG’s favorable risk considerations grade, 9 out of its top-10 holdings received the highest S&P Quality Rank of A+ for growth and stability of earnings and dividends, and seven of VIG’s top-10 garnered a “buy” or “strong buy” recommendation from S&P Capital IQ, all as of August 10.

Art Epstein S&P Capital IQ Editorial

ETF TRENDS & IDEAS AUGUST 13, 2012

12


ETF TRENDS & IDEAS

FROM S&P CAPITAL IQ MARKETSCOPE ADVISOR

S&P Strategist’s Guide to 2012’s International Affairs 08/14/2012-08:49 AM ET S&P Capital IQ believes increased European Central Bank (ECB) activity is likely and could end up spurring advances among the world’s equity markets in the last few months of the year, which could bode well for select exchange-traded funds (ETFs). Highly anticipated bond-buying by the ECB will likely put a floor under foreign stocks, according to S&P Capital IQ Global Equity Strategist, Alec Young, who plans to share his views for the rest of the year in a webinar slated for later today. “Markets are hoping Germany and other reluctant Northern European Union (EU) nations will accept a debt-relief compromise as a better, if imperfect, alternative to the volatile status quo,” Young explains, adding he believes ECB President Mario Draghi has introduced a credible roadmap for diffusing the crisis.

S&P Capital IQ MarketScope Advisor • Investment Research • News & Commentary • Insight & Analysis • Tools & Screeners www.marketscope.com 1-877-219-1247

@spmarketscope

Investors wishing to hear more about these views along with S&P Capital IQ’s opinions on corresponding ETFs may register for the ETF Hour webinar “Spirit and Insight on International Markets” planned for 4:15 p.m. E.S.T. on Tuesday, August 14 here: http://ow.ly/cPL1A. Young thinks progress is slowly being made to stem eurozone sovereign risk, thereby reducing market tensions somewhat in the months ahead. But he still believes hurdles remain, as assistance is conditional. Bailout funds would

TAKEAWAY: These four ETFs may be of

interest to U.S. investors seeking international exposure. POSITIVE IMPLICATIONS ISHARES MSCI MEXICO INVESTABLE MARKETWEIGHT [EWW] MARKET INDEX FUND ISHARES MSCI UNITED KINGDOM INDEX FUND

MARKETWEIGHT [EWU]

SPDR S&P INT’L CONSUMER STAPLES MARKETWEIGHT [IPS] SECTOR ETF SPDR S&P INT’L ENERGY SECTOR ETF

MARKETWEIGHT [IPW]

likely require committing to tough new fiscal conditions, likely leading to increased austerity for beleaguered eurozone nations accepting the help, thinks Young. Draghi’s plan presses Spain and other troubled eurozone nations to officially ask the EU for bailout funds. Those funds would be used to buy their own sovereign debt in the primary market by way of government auctions. The European Stability Mechanism must, however, be approved by Germany on September 12. “If this occurs, the ECB will buy short-term peripheral sovereign debt in the secondary market to reduce yields and buy time. And unlike past ECB bond purchases, private-sector

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.

ETF TRENDS & IDEAS AUGUST 14, 2012

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

bond holders will not be subordinated to the ECB, which should boost the bond-buying’s effectiveness,” Young says.

MSCI Emerging Market Index, Fund (EEM 40 Marketweight), which has advanced 7.7% since the start of the year.

In this scenario, Young sees sovereign risk receding from very high levels and price-to-earnings (P/Es) multiples likely expanding. As a result, he sees international equity gains likely through the end of this year.

iShares MSCI Mexico Investable Market ETF recently paid a dividend yielding 1.5%, while expenses are capped at 52 basis points. A look under the hood reveals top sectors include consumer staples at 31.9% of total assets, telecommunication services at 23.9%, and materials at 18%.

Todd Rosenbluth, S&P Capital IQ ETF analyst, believes investors may garner exposure to potential U.K. outperformance through the iShares MSCI United Kingdom Index (EWU 17 Marketweight). Four of the ETF’s top-10 holdings are ranked 4-STARS (buy) or better. The fund carries a gross expense ratio of 0.52%, and recently paid a dividend yielding 3.8%. According to the most recent data provided to S&P Capital IQ (June 30) the ETF is concentrated among the following sectors: financials at 17.7% of total assets, consumer staples at 17.1%, and energy at 14.1%. Another intriguing option could be iShares MSCI Mexico Investable Market (EWW 62 NR), especially as Young expects the Mexico markets to outperform the BRIC (Brazil, Russia, India, and China) markets throughout the rest of this year. The ETF is up 16.8% on a market-price basis for the year through August 13, outperforming a broader emerging market ETF, the iShares

For U.S. investors interested in a sector approach rather than a country approach to international investing, Young suggests considering the energy and consumer staples sectors. ETF options include SPDR S&P International Consumer Staples Sector ETF (IPS 34 Marketweight) and SPDR S&P International Energy Sector ETF (IPW 25 Marketweight). Iinvestors may note IPS recently yielded 2.6%, while IPW recently yielded 3.2%. Both ETFs report gross expense ratios of 0.50%.

isabelle Sender S&P Capital IQ Editorial

ETF TRENDS & IDEAS AUGUST 14, 2012

14


ETF TRENDS & IDEAS

FROM S&P CAPITAL IQ MARKETSCOPE ADVISOR

Exposure to High-Yield Electric Utilities Through ETFs 08/14/2012-03:19 PM ET

S&P Capital IQ MarketScope Advisor • Investment Research • News & Commentary • Insight & Analysis • Tools & Screeners www.marketscope.com 1-877-219-1247

@spmarketscope

While electric utility stocks have underperformed the broader market in 2012, we believe the above-average dividend yields provided by individual companies and certain ETFs can appeal to investors who may be focused on longer-term total returns.

TAKEAWAY: These ETFs and stocks provide

Over the past two years, there has been a significant consolidation taking place within the electric utilities industry, with three major mergers completed this year. This followed a major lull in M&A activity that had resulted, in our view, from the fall 2006 termination of the agreed-to mergers between Exelon (EXC 38 ****) and Public Service Enterprise Group (PEG 33 ****) and between FPL Group, later renamed NextEra Energy (NEE 69 ****) and Constellation Energy.

EXELON CORP

Reflecting the chilling effect those terminations had on the industry, there was virtually no major M&A activity until February 2010, when FirstEnergy (FE 46 ***) announced a definitive merger agreement with Allegheny Energy. The merger, which was completed in February 2011, increased FirstEnergy’s customer base by about 33% and its powergenerating capacity by more than 65%. Two months after the announcement of FirstEnergy’s merger agreement, PPL Corp. (PPL 30 ****) announced its $7.625 billion acquisition of Louisville Gas & Electric and Kentucky Utilities. Soon after completing this acquisition, in November 2010, PPL announced its $6.5

exposure to high-yielding electric utilities. POSITIVE IMPLICATIONS

[DUK]

NEXTERA ENERGY

   

NORTHEAST UTILITIES



[NU]

PUBLIC SVC ENTERPRISES



[PEG]

UTILITIES SELECT SECTOR SPDR FUND

MARKETWEIGHT [XLU]

VANGUARD UTILITIES INDEX FUND; ETF

MARKETWEIGHT [VPU]

DUKE ENERGY FIRSTENERGY CORP

[EXC] [FE] [NEE]

billion acquisition of Central Networks, the second largest electric distribution business in the U.K. This acquisition, which closed in April 2011, added some five million customers to the 2.6 million customers PPL already had in its adjacent Western Powers Distribution subsidiary. Although Exelon and Constellation Energy were both unsuccessful in completing their previous merger attempts, they did succeed this past March in completing their merger

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.

ETF TRENDS & IDEAS AUGUST 14, 2012

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

with each other. However, in their effort to obtain approval for the merger from the Maryland Public Service Commission, they felt the need to propose a $1 billion benefits package to the state, a figure that had been doubled twice since the merger was initially announced in April 2011. The proposal made clear the importance the two companies placed on the completion of their merger, which has made the company the largest competitive energy producer in the U.S., and its second largest electric and gas distributor, with about 6.6 million customers in three states. This past April, one month after Exelon closed on its merger, Northeast Utilities (NU 39 ***) completed its merger with NSTAR. Prior to obtaining the final approvals for their merger, the companies had reached settlement agreements with the regulators in Connecticut and Massachusetts, which included distribution rate freezes and respective rate credits of $25 million and $21 million in each state. However, the merger of the two companies, now serving about 3.5 million customers in three states, is expected to lead to significant growth opportunities through expansion of transmission operations. The most recently completed merger, which closed on July 2, was between Duke Energy (DUK 68 ***) and Progress Energy. The final approvals for the merger had been delayed by about half a year as the Federal Energy Regulatory Commission (FERC) had rejected two earlier proposals the companies had filed, due to its concerns that the combined company would have excessive market power in its service territory. Ultimately, the merger received the approval of the FERC and the regulatory commissions in both North and South Carolina, and the company became the largest regulated utility in the U.S., with about 7.1 million electric customers in six states. However, in a move that stunned the industry, Duke Energy announced almost as soon as the merger had been completed that its board had removed William D. Johnson, the former chairman, president and CEO of Progress Energy, as its new president and CEO. It also announced that its chairman, James E. Rogers,

would now retain his prior positions as president and CEO. Since it had been assumed from the original announcement of the merger that Mr. Johnson would take on the agreed-to positions, there were heated accusations that Duke’s management had deceived Progress Energy management as well as the regulatory commissions. While Duke Energy’s action could have a significant impact on its attempt to integrate the combined operations and on its future credibility with the regulators, we believe the potential strengths of the other mergers discussed above retain their validity. However, Duke’s action has raised the issue of how future mergers will have to deal with the credibility of agreements made with the management of the company being acquired, if those agreements can ultimately be overturned by the board of the acquiring company. For investors looking for ETF exposure to electric utilities, with four of the above-mentioned companies included in the top 10 holdings of each, we would suggest the Utilities Select Sector SPDR Fund (XLU 37 Overweight) and the Vanguard Utilities Index Fund (VPU 80 Marketweight). As of August 14, XLU, which had a recent dividend yield of about 3.7%, had total assets of $6.480 billion (with the top 10 holdings accounting for 59.1%) and a market cap of $6.465 billion. VPU, which had a recent dividend yield of 3.46%, had total assets of $1.194 billion (with the top 10 holdings accounting for 44.9%) and a market cap of $1.194 billion. Both ETFs are in the top quartile of their asset class for their low volatility, as well as for their low cost, with gross expense ratios of 0.18 for XLU and 0.19 for VPU.

Justin McCann S&P Capital IQ Equity Analyst

ETF TRENDS & IDEAS AUGUST 14, 2012

16


ETF TRENDS & IDEAS

FROM S&P CAPITAL IQ MARKETSCOPE ADVISOR

A Top-Ranked ETF Focused on Mega-Caps 08/20/2012-09:26 AM ET Thus far, 2012 has been the year of the mega-cap, with some of the better performing stocks in the S&P 500 Index with market capitalizations much greater than $25 billion. If you think that many of these stocks are still undervalued and incur relatively modest risk, as we at S&P Capital IQ believe, then the iShares S&P 100 Index Fund (OEF 65 Overweight) might be worthy of additional attention. OEF aims to track the S&P 100 Index, and offers investors diversified exposure to a number of U.S. economic sectors. OEF receives favorable inputs from all three performance factors that S&P Capital IQ uses in ranking ETFs, as well as for its relatively low expense ratio of 0.20% and standard deviation, among other positive factors.

S&P Capital IQ MarketScope Advisor • Investment Research • News & Commentary • Insight & Analysis • Tools & Screeners www.marketscope.com 1-877-219-1247

@spmarketscope

Year to date through August 17, OEF had a total return of 16%. This compares favorably to the iShares S&P 500 Index Fund (IVV 143 Overweight), which is up 14%. We believe the macroeconomic uncertainties that have pressured the U.S. market in recent months have favored OEF in 2012. OEF has significantly greater exposure than IVV to companies with market capitalizations greater than $25 billion (95% vs. 67%). Looking at volatility factors, OEF has both a lower beta (0.96 vs. 1), and more modest standard deviation (15.0 vs. 15.4) than the more diversified IVV. But we believe that past performance should not be the sole reason to select an ETF. Instead, investors

TAKEAWAY: Even with its strong year to date performance, we favor this ETF because of its strong holdings and low costs.. POSITIVE IMPLICATIONS ISHARES S&P 100 INDEX FUND

OVERWEIGHT

[OEF]

should understand what’s inside an ETF and if the stocks look favorable from a valuation and risk perspective. To provide an overall ranking on over 660 equity ETFs, S&P Capital IQ uses 10 individual factors, five tied to the holdings and five tied to the ETF security. We think a holistic view of the performance analytics, risk considerations and cost factors provides a more robust assessment than just using one metric such its past performance track record. Our rankings are refreshed daily to reflect not only changes in the portfolio but what S&P Capital IQ thinks of the underlying holdings. S&P Capital IQ Equity Strategy Group favors relatively high exposure to the Consumer Staples, Energy and Information Technology sectors. As of June 2012, OEF had 50% of its assets in these sectors, compared to 42% for IVV. In contrast, OEF had less exposure to the Materials and Utilities sectors (3% vs. 7%), two sectors that S&P Capital IQ views less favorably from a top-down perspective. Taking a bottom-up look at OEF’s holdings,

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.

ETF TRENDS & IDEAS AUGUST 20, 2012

17


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

across various sectors, we see many stocks that S&P Capital IQ finds favorable from a valuation and risk perspective. Indeed, eight of the 10 largest holdings that collectively comprise 32% of the portfolio are ranked as Strong Buy (*****) or Buy (****) by the S&P Capital IQ equity analytical team. Meanwhile, eight of the top-10 holdings earn an above-average S&P Quality Ranking of A- or higher due to their consistently strong earnings and dividend track record. The ETF also receives a positive ranking input for the above-average credit profiles, as assessed by Standard & Poor’s Ratings Services, which operates independently from S&P Capital IQ. Within Information Technology, Apple (AAPL 648 ****), IBM (IBM 201 ****) and Microsoft (MSFT 31 *****) represent the largest, third and fourth largest positions in the portfolio. All are viewed as undervalued by S&P Capital IQ equity analysts and the latter two have above-average S&P Quality Rankings of A+ and A-, respectively. Within the Energy sector, Exxon Mobil (XOM 88 *****) and Chevron (CVX 113 *****) are top-10 holdings that receive A+ S&P Quality Rankings and have AAA and AA credit ratings from Standard & Poor’s Ratings Services. In the Consumer Staples

sector, OEF’s top holdings include Coca-Cola (KO 40 *****) and Proctor & Gamble (PG 67 ***). Both receive a top S&P Quality Rank of A+. In addition to ranking favorably for many holdings-level inputs, OEF earns positive indicators for its relatively low expense ratio, at 0.20%, and a tight bid/ask spread. Meanwhile, the S&P technical evaluation is positively bullish. Overall, OEF receives an Overweight ranking from S&P Capital IQ. We think this diversified offering provides investors exposure to a number of stocks that are viewed favorably from a valuation and risk perspective at a low cost. Rankings on ETFs are refreshed on a daily basis, so please visit the ETF tab of MarketScope Advisor to see a current assessment of this and other similar portfolios

Todd Rosenbluth S&P Capital IQ ETF Analyst

ETF TRENDS & IDEAS AUGUST 20, 2012

18


ETF TRENDS & IDEAS

FROM S&P CAPITAL IQ MARKETSCOPE ADVISOR

Energy ETFs Provide Onshore North America Exposure 08/29/2012-02:45 PM ET

Exploring ETF Strategies within Oil & Gas Q&A

Watch Q&A

S&P Capital IQ MarketScope Advisor • Investment Research • News & Commentary • Insight & Analysis • Tools & Screeners www.marketscope.com 1-877-219-1247

@spmarketscope

Based on our outlook for a strong upstream (exploration and production) market environment, most notably in the United States onshore and Canadian oil sands, S&P Capital IQ Equity Research has a positive fundamental outlook on the integrated oil & gas and exploration & production (E&P) sub-industries for the next 12 months. This reflects our longterm outlook for strong energy demand, high oil prices, growing onshore North American oil production, active merger and acquisition (M&A) markets, and strong industry rig counts and capital spending. We remain focused on oil and, to a lesser extent, natural gas liquids (NGL) production, as opposed to dry natural gas, which continues to be depressed by an oversupplied domestic market from shale play development over the past several years. We think U.S. integrated oils, such as ExxonMobil (XOM 88 *****) and Chevron (CVX 112 *****) are attractive under current market conditions because of their low debt levels, strong cash positions, free cash flow generation and attractive valuations and dividend yields. Strong oil prices, particularly overseas, and a focus on more profitable oil (versus natural gas) production are driving financial returns. Separately, a better than anticipated refining margin environment, most notably in the U.S., is adding to the integrated oils’ superior earnings, cash flow and dividend growth. However, many integrateds continue to shed, or downsize, downstream assets to focus on higher-growth upstream opportuni-

TAKEAWAY: Domestic upstream players are

expected to benefit from record North American oil activity. POSITIVE IMPLICATIONS ANADARKO PETROLEUM



[APC]

APACHE CORP

  

[APA]

CHEVRON CORP CONOCOPHILLIPS

ENERGY SELECT OVERWEIGHT SECTOR SPDR FUND

[CVX] [COP] [XLE] [EOG]

EXXON MOBIL

 

OCCIDENTAL PETROLEUM



[OXY]

SCHLUMBERGER LTD



[SLB]

EOG RESOURCES

[XOM]

ties. With limited avenues for growth globally, integrateds have begun to look for innovative deals in frontier regions (Russia, Arctic, Africa) and increased exposure to North American unconventional resources. Independent E&Ps are benefiting from many of the same fundamentals. However, the group is primarily focused on domestic prospects. We remain more heavily weighted toward the large-cap companies, with their oil exposure and above average growth rates. We believe

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.

ETF TRENDS & IDEAS AUGUST 29, 2012

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

these companies carry less balance sheet risk and exhibit more conservative spending habits than smaller peers, whose funding could become an issue as U.S. natural gas prices remain depressed. After heavy M&A activity in 2011 as integrateds and national oil companies (NOCs), particularly Asian NOCs, continued to seek new growth avenues and E&Ps sought funding aid, we see a strong global M&A environment in 2012. M&A is being driven by North American onshore growth, fueled by massive unconventional resources such as shale and oil sands. Many of the deals have been structured in the form of joint ventures, as NOCs look to gain technological expertise to use on their own domestic sources. We have seen many E&Ps sell offshore assets, essentially leaving the Gulf of Mexico to the bigger E&Ps or integrateds. With total U.S. oil production expected to ramp up as a result of new technologies used for shale natural gas drilling now being applied to oil extraction, we think many independent E&Ps possess have attractive production and reserve growth prospects, with an improving oil mix, and have been exhibiting cash flow growth and widening margins. E&Ps that remain heavily exposed to natural gas are reducing drilling activity and seeing earnings and cash flow declines and narrowing margins. After an estimated 30% drop in E&P capex in 2009, spending has been on the rise. We believe capex in our coverage universe grew about 30% per year in 2010 and 2011, and we are forecasting a 9%-12% rise in 2012. We expect natural gas focused E&Ps to see a 7%-9% decline in capex in 2012, reflecting oversupplied domestic gas markets. Conversely, we see an 18%-21% rise in oil-directed capex. Spending for the integrateds is diversified globally, but budgets indicate a 15% rise in overall capex, with significant portions invested in North America. The U.S. rig count, which softened recently likely on a lower natural gas count, stands at 1,725 rigs, below 1,800 rigs for the first time since the second quarter of 2011, according to The Land Rig Newsletter. The most active unconventional plays onshore remain the Eagle Ford Shale (221 rigs) in South Texas and the Bakken Shale (155 rigs) in North Dakota, reflecting high oil content in these regions. Also, resurgence in the Permian Basin (314 conventional and unconventional rigs) is providing for another major growth platform, as emerging shale plays continue to be tested. Oil rigs now represent a record 70% of the total land rig count, compared to the historical norm of 20%.

After a major pullback in May, crude oil prices have risen since early July on hopes that the European Union, China and the U.S. will provide additional economic stimulus to counteract slowing global growth. Sanctions on Iran and threats by Iran to block oil from the Strait of Hormuz could impact the transport of about 20% of the world’s petroleum. Furthermore, the possibility of Israeli action against Iran’s nuclear facilities, and concerns about reduced production in the North Sea due to turnarounds, have prompted upward crude oil price pressure. West Texas Intermediate (WTI) crude oil ($95.72 per barrel) continues to trade at a discount to other price benchmarks, on Mid-Continent (Cushing, Oklahoma) transport concerns, as evidenced by a $16 per barrel price spread with Brent crude oil ($111.93 per barrel), which has widened over the past two months. As of August 2012, using S&P estimates based on data from IHS Global Insight, West Texas Intermediate (WTI) spot oil prices were projected to average $91.96 per barrel in 2012 and $89.50 in 2013, versus $95.08 in 2011. We believe these forecasts remain within the industry’s comfort zone. For investors seeking exposure to a broad range of upstream companies, with global diversification, we believe an efficient way to gain access to the space is through the use of ETFs. We advise considering the Energy Select Sector SPDR Fund (XLE 72 Overweight). This ETF has top 10 holdings in 5-STAR (Strong Buy) recommended ExxonMobil, Chevron Corp., Apache Corp. (APA 87 *****) and equipment services provider Schlumberger Ltd. (SLB 74 *****). It has major stakes in areas such as oil and gas equipment and services, storage and transportation and refining and marketing. XLE currently carries S&P Capital IQ Equity Research’s highest overall ETF Ranking of Overweight. XLE’s top 10 holdings account for 62.9% of its total assets of $7.6 billion. For more information on this topic, S&P Capital IQ will be conducting an ETF Analyst Hour webinar September 12, 2012, on energy stocks and related ETFs. Please use the following link to register, if interested: http://ow.ly/dhSHD23

Michael Kay S&P Capital IQ Equity Analyst

ETF TRENDS & IDEAS AUGUST 29, 2012

20

ETF Performance & Perspectives - September 2012 Edition  

Each month, we compile a selection of timely and actionable Trends & Ideas reports published on S&P Capital IQ Marketscope Advisor. The rese...

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