Author Archives: Scalper1

5 Costly ETF Mistakes You Can Easily Avoid

ETFs are becoming increasingly popular with investors due to their low cost, transparency, easy tradability and tax efficiency. The ETF revolution has made it possible for individual investors to get a convenient, diversified access to almost any investment strategy in virtually any corner of the investing world. Retail investors now have access to many investment opportunities that were earlier available only to sophisticated, high net worth individuals. Despite their widespread use, there are many misconceptions regarding ETFs leading to costly errors, which can be easily avoided. This article aims to help investors avoid some of those mistakes and become more successful ETF investors. Buying an ETF above Its NAV ETFs usually trade at fair prices, i.e. close to their intrinsic values or aggregate values of their holdings. But at times certain ETFs’ prices deviate from their NAVs and they can trade at a premium or discount to their NAVs. If you buy an ETF (or an ETN) when it is trading at a premium, you can incur losses if you sell after the premium crashes. The popular oil ETN, the iPath S&P Crude Oil Total Return Index ETN (NYSEARCA: OIL ), was trading at an almost 50% premium over its NAV for some time earlier this year. In fact, Barclays had issued a notification warning investors about ETN premiums. As expected, the premium plunged after some time, making investors vulnerable to unexpected losses. Investors should make sure to check the previous day’s closing indicative value on the sponsor’s website. They can also check the intraday indicative value on Yahoo Finance using the ticker for the ETF and adding “^” and “-IV” at the beginning and end. So, for OIL ETN, the ticker for intraday indicative value is ^OIL-IV. Avoiding Low Volume ETFs Many investors confuse low trading volumes with the liquidity of an ETF and some even avoid newer ETFs, which may have better strategies but low trading volumes, in favor of older, more popular products with higher trading volumes. ETFs are different from stocks in this area and their trading volume should not be interpreted like stock trading volume. The liquidity of an ETF is not determined by its trading volume but by the liquidity of underlying shares (ETFs’ holdings). At the same time, low volume does usually lead to wider bid-ask spreads, which add to the trading costs. So, these ETFs are not suitable for frequent trading. And it does make sense to use limit orders while trading in low-volume ETFs. Using Market Orders during Volatile Markets The market mayhem on Monday, August 24, last year (ETF Flash Crash) left some harsh lessons for ETF investors. Many ETFs fell 20% or more and some as much as 30%-45% that morning, even though their underlying stocks had not declined so much. Large dislocations in ETFs’ prices were seen not only in smaller ETFs but in some very large and popular ETFs such as the Guggenheim S&P Equal Weight ETF (NYSEARCA: RSP ) and the Vanguard Consumer Staples ETF (NYSEARCA: VDC ). While these discrepancies lasted only for a short period of time, none of the trades executed during that time were canceled. There were many factors that caused ETFs’ pricing problems. But the biggest mistake that ETF investors could have avoided was using “market orders” during those turbulent market conditions. Investors who had left a sell market order or a sleeping stop-loss sell order for one of the ETFs that had severe distortion in pricing probably saw their orders hit at worst possible prices, much below fair values. Ignoring the Contango Impact on Commodity ETFs While some commodity ETFs, mainly those tracking precious metals hold the physical commodity, most commodity ETFs use futures contracts to track the price of commodities due to high storage costs. These futures contracts are required to be rolled over when they are close to expiration. At times, futures price of the commodity is higher than the spot price – known as “contango” – which results in losses at the time of rolling over the contracts. Contango affects the performance of ETFs since the futures contracts’ return will be lower than spot price returns of the commodity. A recent article in WSJ highlighted this issue in the performance of ETFs that track the performance of oil using futures, including the PowerShares DB Oil ETF (NYSEARCA: DBO ), the United States Oil ETF (NYSEARCA: USO ) and OIL. While US crude futures were down about 20% through February 22 this year, oil funds fared much worse. Always Buying Currency Hedged International ETFs Currency hedged ETFs have been quite hot in the past couple years as the US dollar surged against most other currencies. By hedging out the currency exposure, through currency hedged ETFs, investors get access to pure equity returns in international markets. Investors should also remember that often stocks and currencies move in the same direction. That is, if an economy strengthens, its stock market as well as the currency will perform well. In such cases of positive correlation, hedging will actually work against investors. However in some cases, particularly in cases of export oriented economies, stocks and currencies have shown a negative correlation historically. That’s why currency hedged Japan funds performed so well in the recent past. That said currency hedging is not always a good idea. Take the example of Japan ETFs – while currency hedged products like the WisdomTree Japan Hedged ETF (NYSEARCA: DXJ ) outperformed the unhedged ones like the iShares MSCI Japan ETF (NYSEARCA: EWJ ) over the past couple years, as the yen weakened against the dollar, they have underperformed over the past 2-3 months, as the Japanese currency rebounded, thanks mainly to its safe-haven status and worse-than-expected stimulus measures announced by the BOJ. Original Post

Will Gold Continue Its Dominance Over Silver ETFs?

The weakness in the global financial markets has helped precious metals, like gold and silver, to recover their sheen in 2016. Sluggish growth in China since the beginning of the year and the global oil market turbulence has lifted safe-haven demand. The jump in gold and silver prices was also supported by plunging interest rates on a global scale. With the Fed not expected to raise interest rates in the near term, the rally is expected to continue. While gold has gained 18% and 11% year to date and in the past one month, respectively, silver has risen 10% so far this year and just 4.4% in February. Will the Trend Continue? Gold and silver prices have exhibited a strong correlation in the past 10 years. In fact, some investors regard silver as a leveraged play on gold. Per a regression analysis based on FactSet data, silver prices move 1.4 times the increase in gold prices on an average. In other words, if gold rises by 1% in a particular session, silver is expected to gain 1.45%. However, this year prices have gone the other way round as evident from the year-to-date and monthly figures. The outperformance of gold can be due to the fact that silver is widely used for industrial purposes. Weak manufacturing activities across the globe, particularly in China, have hurt the demand for the white metal, affecting its price. How to Play? But history they say repeats itself and the appreciation of gold prices over silver is not likely to be sustainable over the long run. This is because conditions in the U.S. market are slowly improving and industrial demand for silver is expected to get a boost from stepped-up domestic economic activity. Additionally, silver supply could contract given the dearth in deposits faced by the silver miners , forcing producers to look for fresh projects. Meanwhile, investors returned to risk-on trade sentiment in the recent week, which could affect the demand for gold bullion. Investors could play the market by going long on silver and short on gold. Below, we have highlighted some of the silver and inverse gold ETFs. Investors should note that since these inverse products when combined with leverage are very volatile, these are suitable only for traders and those with a high-risk tolerance and short-term outlook. Additionally, the daily rebalancing – when combined with leverage – may force these products to deviate significantly from the expected long-term performance figures. Still, for ETF investors who expect the outperformance of gold over silver to be short-lived, the products discussed below could make for interesting choices. Long on Silver iShares Silver Trust ETF (NYSEARCA: SLV ) The fund tracks the price of silver bullion measured in U.S. dollars. It is the ultra-popular silver ETF with AUM of over $5 billion and heavy volume of nearly 6 million shares a day. It charges 50 bps in fees per year from investors. The fund holds a Zacks ETF Rank #3 (Hold) with a High risk outlook and has returned 10.2% so far this year. ETFS Physical Silver Trust ETF (NYSEARCA: SIVR ) This fund has amassed $227.8 million in its asset base while trades in moderate volume of more than 82,000 shares per day on average. It tracks the performance of the price of silver less the Trust expenses and is backed by physical silver. Expense ratio is 0.30%. The fund also holds a Zacks ETF Rank #3 (Hold) with a High risk outlook and has returned 10.4% so far this year. PowerShares DB Silver ETF (NYSEARCA: DBS ) This product provides exposure to the silver futures market rather than spot market and tracks the DBIQ Optimum Yield Silver Index Excess Return index. It is has AUM of $19.5 million and average daily volume of less than 3,000 shares, increasing the total cost for the fund in the form of a wide bid/ask spread. DBS is the high cost choice in the silver bullion space, charging 79 bps in fees per year from investors. Like other silver ETFs, the fund holds a Zacks ETF Rank #3 (Hold) with a High risk outlook. In the year-to-date period, it has gained 10.4%. Short on Gold ProShares Ultra Short Gold ETF (NYSEARCA: GLL ) This fund seeks to deliver twice (2x or 200%) the inverse return of the daily performance of gold bullion in U.S. dollars; the gold price is fixed for delivery in London. GLL gains when the gold market falls and is appropriate for hedging purposes against the decline in gold prices. With an expense ratio of 0.95%, the product has AUM of $47 million and average daily volume of 21,000 shares. DB Gold Double Short ETN (NYSEARCA: DZZ ) This ETN seeks to deliver twice (2x or 200%) the inverse return of the daily performance of the Deutsche Bank Liquid Commodity Index-Optimum Yield Gold. DZZ initiates a short position in the gold futures market but charges a relatively lesser price of 75 bps a year. The product has amassed over $49.6 million in AUM. The ETN has volume of 432,000 shares a day. VelocityShares 3x Inverse Gold ETN (NASDAQ: DGLD ) This product provides three times (300%) short exposure to the daily performance of the S&P GSCI Gold Index Excess Return plus returns from U.S. T-bills net of fees and expenses. This $9.9 million ETN charges 135 bps in fees per year from investors and has average daily volume of 24,000 shares. Original Post

Defensive ETFs Outperforming The Market

2016 has been a year filled with plenty of volatility and large scale moves. Markets have recovered well off their lows and investors are now reviewing stocks and ETFs that have outperformed the overall market. This examination better prepares investors for any storm that may hit the markets in the future. If the market pulls back, the ETFs that did well earlier in the year will more than likely continue to outperform the S&P 500. Investors will look to hide in these ETFs until they feel like the weather is clear and economic certainty is better known. I wanted to examine a couple ETFs that have outperformed the S&P and will continue to do so if the market has another setback. These ETFs won’t be fully immune to a market pullback, but they will do better than most if the lows of the year are tested once again. In addition to the sector ETFs, I wanted to examine some top ranked stocks that might move with the ETF. The individual stock provides an opportunity for an investor who would want a bit more risk/reward. The Utilities Select Sector SPDR ETF (NYSEARCA: XLU ) seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of publicly traded equity securities of companies in the Utilities Select Sector Index. Utilities are considered a safe place in times of uncertainty. The water, lights and the heat will be the last cuts a consumer makes if a recession hits. This certainty of cash flow makes utilities an attractive play. The dividend also makes utility stocks attractive because of the current atmosphere of low interest rates. The ETF has an expense ratio of .14% and is up almost 7% on the year. It sports a 3.4% dividend and has a P/E of 16. The biggest holding in XLU, with an 8.90% weighting, is NextEra Energy (NYSE: NEE ), a Zacks Ranked #3(Hold). Those looking for individual names might hold off on NextEra and instead look to RWE AG ( OTCPK:RWEOY ), a Zacks Ranked #1(Strong Buy). RWE is active in the generation and transmission of electricity and gas. The company is also active in the water business and is one of Europe’s five largest utilities. The company sports Zacks Style Scores of “A” in Value and Momentum and pays a dividend of 6.71%. The company has a $7 billion market cap and is seeing estimates being taken higher for fiscal year 2016. Over the last 90 days, estimates have been revised 8% higher, from $.091 to $0.99. The Consumer Staples Select Sector SPDR ETF (NYSEARCA: XLP ) seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of publicly traded equity securities of companies in the Consumer Staples Select Sector Index. Consumer staples are companies that make products that people will buy no matter what. Think toothpaste, food, drugs, beverages and other household items. Stocks in this sector will typically outperform in weak markets due to the constant strength of demand of their products. The biggest holding in XLP is Proctor and Gamble (NYSE: PG ) with a 12% weighting. The stock has a Zacks Rank #4(Sell) so if looking for an individual name, it might be best to look at Clorox (NYSE: CLX ), which has a Zacks Rank #2 (Buy). Clorox has a $16 billion market cap with a forward P/E of 25. The company pays a 2.45% dividend and expects EPS growth of 7.34%. Over the last two months, estimates for the current year are rising up 1.1% from $4.85 to $4.91. The SPDR Gold Trust ETF (NYSEARCA: GLD ) seeks to reflect the performance of the price of gold bullion. The Trust holds gold bars and from time to time, issues baskets in exchange for deposits of gold and distributes gold in connection with redemptions of baskets. Gold has had a nice run over the last three months and has held up as the market has rallied. GLD reflected that with an 18% move higher. Gold and gold ETFs are looked at as safe havens for uncertainty, and the fact that they have held up tells investors that 2016 might see some rough waters ahead. There are no individual holdings of stocks in GLD. If investors are interested in gold stocks, they should look to the miners as a way to benefit from rising gold prices. Looking at the chart below, we see how gold has performed against the S&P 500 over the past three months. The iPath S&P 500 VIX ST Futures ETN (NYSEARCA: VXX ) is an ETN that is designed to provide investors with exposure to the VIX. The VIX is commonly referred to as the fear gauge and will shoot higher when the market sells off. Just like GLD there are no individual stocks held within the ETN, but rather it offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects the implied volatility of the S&P 500. In Summary Investors should be positioning themselves for another pullback at some point this year. The defensive sector ETFs offer a way to stay invested and outperform the market. The fear ETF plays of gold and the VIX offer investors a way to play offense in a defensive market. Original Post Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.