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How To Find The Best Style ETFs: Q3’15

Summary The large number of ETFs hurts investors more than it helps as too many options become paralyzing. Performance of an ETFs holdings are equal to the performance of an ETF. Our coverage of ETFs leverages the diligence we do on each stock by rating ETFs based on the aggregated ratings of their holdings. Finding the best ETFs is an increasingly difficult task in a world with so many to choose from. How can you pick with so many choices available? Don’t Trust ETF Labels There are at least 67 different All Cap Blend ETFs and at least 281 ETFs across twelve styles. Do investors need 23+ choices on average per style? How different can the ETFs be? Those 67 All Cap Blend ETFs are very different. With anywhere from 4 to 3794 holdings, many of these All Cap Blend ETFs have drastically different portfolios, creating drastically different investment implications. The same is true for the ETFs in any other style, as each offers a very different mix of good and bad stocks. Large Cap Value ranks first for stock selection. Small Cap Blend ranks last. Details on the Best & Worst ETFs in each style are here . A Recipe for Paralysis By Analysis We firmly believe ETFs for a given style should not all be that different. We think the large number of All Cap Blend (or any other) style ETFs hurts investors more than it helps because too many options can be paralyzing. It is simply not possible for the majority of investors to properly assess the quality of so many ETFs. Analyzing ETFs, done with the proper diligence, is far more difficult than analyzing stocks because it means analyzing all the stocks within each ETF. As stated above, that can be as many as 3794 stocks, and sometimes even more, for one ETF. Any investor worth his salt recognizes that analyzing the holdings of an ETF is critical to finding the best ETF. Figure 1 shows our top rated ETF for each style. Note that there are no ETFs currently under coverage in the All Cap Growth or All Cap Value styles. Figure 1: The Best ETF in Each Style (click to enlarge) Sources: New Constructs, LLC and company filings How to Avoid “The Danger Within” Why do you need to know the holdings of ETFs before you buy? You need to be sure you do not buy an ETF that might blow up. Buying an ETF without analyzing its holdings is like buying a stock without analyzing its business and finances. No matter how cheap, if it holds bad stocks, the ETF’s performance will be bad. Don’t just take my word for it, see what Barron’s says on this matter. PERFORMANCE OF ETF’S HOLDINGS = PERFORMANCE OF ETF If Only Investors Could Find Funds Rated by Their Holdings The Arrow QVM Equity Factor (NYSEARCA: QVM ) is the top-rated Large Cap Blend ETF and the overall best ETF of the 281 style ETFs that we cover. The worst ETF in Figure 1 is the State Street SPDR S&P 600 Small Cap Growth (NYSEARCA: SLYG ), which gets a Neutral rating. One would think ETF providers could do better for this style. Disclosure: David Trainer and Max Lee receive no compensation to write about any specific stock, style, or theme. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Paladin Energy Is Trying To Survive

Summary Paladin could be breaking even this year, as it will be able to reduce its production costs per pound of uranium at Langer Heinrich. However, the main unknowns here are the overhead costs and the expenses to keep its Kaleyekera mine on care and maintenance. Paladin bought more time with its debt restructuring, but the clock is ticking and a higher uranium price would be very welcome. Introduction As the current glut in the uranium market will have to end sooner rather than later, I am keeping my fingers on the pulse of some uranium companies to make sure I’m making an informed decision when I’m ready to sharply increase my exposure to this commodity. Paladin Energy (OTCPK: PALAF ) has released its full-year financial results and has updated its outlook for the current financial year, so it could be a very interesting moment to check up on how the company is doing. Source: annual report Paladin Energy has more liquid listings on both the Toronto Stock Exchange and the Australian Stock Exchange, and I’d recommend to trade on the ASX. The ticker symbol there is PDN and the average daily volume is a pretty decent 9 million shares. The current market capitalization is approximately $230M, so its market cap is almost twice as high as the information page on Seeking Alpha would want to make you believe. The full-year financial results are showing the impact of selling uranium at the spot price Paladin has produced 5.04 million pounds of uranium and has sold almost 5.4 million pounds as it had some uranium in inventory which it sold during the financial year. Unfortunately, Paladin has not entered into any long-term contracts and it was definitely feeling the pain of the low uranium price on the spot market as the average received price was just $37/lbs for a total revenue of $199M . Source: financial statements This resulted in a gross profit of just $1.8M as Paladin also had to record an $8M impairment charge on the value of its inventory as the uranium price continued to decrease. The after-tax net loss was a stunning $300M and this was predominantly caused by a $240M impairment charge (of which $1M was attributed to an aircraft). I’m a little bit relieved the net loss was mainly caused by an impairment charge as that’s a non-cash charge and shouldn’t have an impact on the cash flow numbers. Source: financial statements So, let’s have a look at those cash flow statements; unfortunately, the situation doesn’t look much better here as the operating cash flow was negative, resulting in a total negative free cash flow of $40M. Keep in mind the cash flow statements exclude the impact of an impairment charge so there are no excuses at all here. What will Paladin do different this year? The company has now just one mine which is still in production, Langer Heinrich in Namibia. The mine will produce approximately 5-5.4 million pounds of uranium in the current financial year so there might be a small production increase, but the impact will be minimal. However, there will be an impact on the total production rate attributable to Paladin Energy, as the company sold a 25% stake in Langer Heinrich to a Chinese consortium for $190M last year. This cash infusion was be very welcome, but it also means Paladin is giving up on a lot of future potential cash flow. Langer Heinrich has a total resource estimate of 150 million pounds, so the company has sold 37.5 million pounds for $190M, or just $5 per pound. This decision is understandable, as it needed to improve the balance sheet, but should the received price per pound of uranium increase to $50+ again, Paladin might regret the sale. Paladin expects the production cost per pound to decrease by 7-14% to $26/lbs, but despite an uranium price of $35/lbs, this doesn’t mean the company will be free cash flow positive. There still is an ongoing cost of approximately $12-15M per year, which equals approximately $4 per attributable pound of uranium produced at Langer Heinrich. Throw in an additional $20M for exploration and administration (another $5/lbs) and you clearly see Paladin needs an uranium price of approximately $35-38/lbs to be able to even start thinking about breaking even. And that will be a difficult task in FY2016. Don’t get me wrong, it is possible as Paladin expects to receive a premium of $4/lbs over the spot price, but you surely shouldn’t expect any miracles from Paladin this year. Investment thesis Paladin’s re-financing activities in the past financial year have reduced the pressure on the balance sheet, but Paladin has just bought some more time, as it doesn’t look like the company will be able to generate a substantial amount of free cash flow in the current financial year, which could have been used to reduce the net debt. Paladin is a leveraged play on the uranium price and there will be a huge difference between a uranium price of $35/lbs and $50/lbs as, at the latter price, Paladin should be generating a pretty decent amount of free cash flow. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Correction Seems Over: Time For China ETFs?

Concerns over the Chinese economy had reached a delirious pitch in August. Issues like credit crunch, shadow banking activities, faltering manufacturing activity and a weak domestic market had first surfaced in 2012 and led to a hard landing for the economy. These concerns kept bothering the economy at regular intervals during the last three years. But recently these swelled up to take a gargantuan shape and tormented business globally. The economy’s GDP growth rate skidded to 24-year low in 2014. With no let-up in the downbeat data flows from the Chinese economy, investors have now started to doubt its ability to deliver the growth target for this year. Still the Chinese stocks performed phenomenally in the first half of 2015 with some of the ETFs having almost doubled. A series of rate cuts and easy policy measures made this possible. But this astounding run had to have a finishing line somewhere and thanks to this logic, the Chinese equities fell in the trap of a steep correction from June. A host of factors prompted this correction. Among these, overvaluation concerns after a steep ascent for about one year, small doses of economic stimulus failing to boost the struggling economy and the Chinese securities’ regulator’s repeated warnings about riskier trading as well as tightened rules for margin lending triggered the sell-off. Apart from this, to arrest the market crash, the Chinese government stopped new companies from selling shares to the public, introduced a fund to be used for purchasing shares earlier this month and banned investors with an over 5% stake from abandoning their shares for six months. In fact, the Chinese stock market underwent heavy panic-induced sell-offs several times in the last three months – August being the cruelest – mercilessly lashing the global markets. Behind the recent bloodbath was the Chinese policy makers’ devaluation of the country’s currency yuan by 2% in mid-August, apparently to shore up export competitiveness. This along with a six-and-a-half-year low Chinese manufacturing data for August went against the risk-on sentiment among investors. The Shanghai Composite Index has plunged about 39 % since June 12 and Chinese stocks lost over $5 trillion in the recent rout. In the last one month (as of September 8, 2015), db X-trackers Harvest CSI 500 China-A Shares Small Cap Fund (NYSEARCA: ASHS ) lost over 33% while large-cap China ETF iShares China Large-Cap ETF (NYSEARCA: FXI ) was off over 13%. Almost all ETFs erased their gigantic gains earned in the beginning of 2015. ASHS is off over 5%, while one of the top performing Chinese ETFs of the first half Market Vectors ChinaAMC SME-ChiNext ETF (NYSEARCA: CNXT ) is now left with just 4% return. Is the Correction Over? After this high drama, there was only one question in every mind. When will the correction be over? And to soothe investors’ nerves, PBOC which is known for too much interference in the stock market commented that the China market crash is ‘ almost over’ aided by government intervention. Yuan is also settling against the greenback after a topsy-turvy August. To add to this, China announced that it would eliminate personal income tax on dividends for long-term shareholders holding stocks for over a year and halve the tax for those who hold between a month and a year, per Reuters. The move was steered to bolster long-term investments, ward off short-term turbulence from the market and bring in stability over there. Not only this, China intends to launch “circuit breaker” on one of the country’s benchmark stock indexes to calm the market. Per the new norm, a 5% one-day gain or loss in the CSI 300 index (before 2:30 p.m.) would close trading in the country’s all equity indices for 30 minutes. Shifts of over 7% would result in a closed trade for the rest of the day. Though this decision is yet to be confirmed by the market participants, it hints at policymakers’ efforts to put off pointless volatility in the market. As per Goldman , Chinese government invested about $236 billion during the last three volatile months to cool down the stock market tantrum. Notably, China’s margin debts almost halved to about 1 trillion yuan. Rallying Chinese Equities Assisted by government measures, Chinese stocks started rallying from this week and also helped to drive other global markets. While almost all Chinese ETFs added smart gains on September 8, we highlight three beaten-down ETFs that presently carry a Zacks ETF Rank #2 (Buy) and might tide over heavy losses incurred in the recent upheaval. Notably, CNXT and ASHS returned investors around 13% on September 8, but both ETFs are still guilty of high valuation. On the other hand, the P/E (ttm) ratio of below-mentioned ETFs hovers in the range of 12 to 14 times versus CNXT’s P/E of 32 times and ASHS’s P/E of 35 times. This indicates that the trio trades at a cheaper valuation and can be good picks at the current level. db X-trackers Harvest CSI 300 China A-Shares Fund (NYSEARCA: ASHR ) The fund provides exposure to the large-cap segment of China A-share equity market by tracking the CSI 300 Index. The 305-stock portfolio has accumulated $480 million in AUM and sees solid trading volumes of about 4.6 million shares a day on average. The fund is heavy on financial stocks (38.4%) followed by industrials (17.7%) and consumer discretionary (10.74%) stocks. The product charges about 80 bps in fees per year from investors. The fund lost about 25.5% in the last one month while it added about 11.6% on September 8. KraneShares Bosera MSCI China A Share ETF (NYSEARCA: KBA ) This fund follows the MSCI China A International Index, holding about 300 securities in its basket. It is widely diversified across each component with none of these accounting for more than 2.275% share. However, the product is slightly skewed toward financials at about 34%. The ETF has accumulated $10.9 million while it trades in light volumes of around 25,000 shares per day. Expense ratio comes in at 0.85%. The fund was up about 11% on September 8 while it lost 24.2% in the last one month. Market Vectors China ETF (NYSEARCA: PEK ) This fund tracks the CSI 300 Index and holds a large basket of 465 stocks. The portfolio is well spread out across various securities with none holding more than 3.48% of assets. From a sector look, more than one-third of the portfolio is allotted to financials, followed by industrials (18.0%) and consumer discretionary (10.3%). The fund has amassed $80.5 million in its asset base and charges 72 bps per year. Volume is light as it exchanges about 150,000 shares per day on average. The fund was up 9.9% on September 8, while it retreated about 23% in the last one month. Original Post