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4 Tactical/Momentum ETFs: A Disappointing 1-Year Anniversary

Summary Four ETFs, introduced late last year, have the ability to switch between stocks and bonds, on a tactical/momentum basis. How did these four funds fare during the August correction? Since inception, only one of the four ETFs has outperformed the global market portfolio. Introduction In a Nov. 2014 article entitled ” Comparing 4 Tactical/Momentum ETFs “, I introduced four newly-debuted tactical/momentum ETFs that have, at the minimum, the ability to switch between stocks and bonds depending on tactical factors such as momentum (thus equity-only momentum funds are not considered). I later provided a short update on the performance of the four ETFs in a Aug. 2015 article entitled ” An Update On 4 Tactical/Momentum ETFs “. In that article, I noted that while the four ETFs averaged only -1.19% over the preceding nine months, underperforming U.S. stocks (via the SPDR S&P 500 Trust ETF (NYSEARCA: SPY )) at +5.35%. However, that update article was published just before the S&P 500’s first 10% correction in several years. The last few months of market action has been…interesting, to say the least, and with the 1-year birthday of these four tactical/momentum ETFs having just recently elapsed, I thought that now would be a good time to review the performance and allocation of these four funds. The funds The four funds included in this analysis listed below. For more detailed information regarding these funds, please refer to my previous article . Cambria Global Momentum ETF (NYSEARCA: GMOM ). GMOM invests in the top 33% of a target universe of 50 ETFs based on measures of trailing momentum and trend. The fund rebalance monthly into ETFs with strong momentum and are in an uptrend over the medium term of approximately 12 months with systematic rules for entry and exit. Global X JPMorgan US Sector Rotator Index ETF (NYSEARCA: SCTO ). SCTO invests in a portfolio of one to five ETFs selected out of a pool of ten U.S. sector ETFs and the iShares 1-3 Year Treasury Bond ETF (NYSEARCA: SHY ). The fund rebalances monthly to invest in a maximum of 5 U.S. sectors that have demonstrated the strongest positive recent performance. If less than 5 sectors have demonstrated positive performance over this time period, the remainder will go to SHY. Global X JPMorgan Efficiente Index ETF (NYSEARCA: EFFE ). EFFE invests in any combination of 13 ETFs drawn from 5 asset classes. The fund rebalances monthly, constructing an “efficient frontier” by calculating the 6-month returns and volatilities of multiple hypothetical portfolios based on different combinations of the index component universe, then selects the combination of assets that resulted in the highest return over the 6 month observation period with an annual realized volatility of 10% or less. Arrow DWA Tactical ETF (NASDAQ: DWAT ). Implements a proprietary Relative Strength Global Macro model developed by Dorsey Wright & Associates, holding approximately 10 broad-based positions. Assets include long/short exposure to domestic, international and emerging market equities and bonds (government, corporate, agency), real estate, currencies and commodities. Details of the four funds are shown in the table below (data from Morningstar ).   GMOM SCTO EFFE DWAT Yield [ttm] 2.33% 0.50% 0.68% 0.39% Total expense ratio 0.94% 0.86% 0.86% 1.52% Management fee 0.59% 0.69% 0.69% 1.22%* Acquired expense ratio 0.35% 0.17% 0.17% 0.30% Inception Nov 4,2014 Oct 22,2014 Oct 22,2014 Oct 1,2014 Assets $25.92M $13.47M $8.11M $7.80M Avg vol. 12K 11K 12K 7.6K Annual turnover 16% 63% – 111% *Composed of management fee 1.00%, other expenses 0.22%. All four funds have low but not negligible volume, and should provide sufficient liquidity for ordinary investors. Additionally, all four funds have increased in assets since a year ago. GMOM increased slightly from $23.85M to $25.92M, while SCTO increased from $11.54 to $13.47. DWAT showed a sizable increase from $5.18M to $7.80. However, the biggest winner over the pats year appears to be EFFE, which more than tripled in size, from $2.58M to $8.11M. Performance Let’s now take a look at the performance of the four tactical/momentum ETFs in 2015, with the U.S. market (via SPY) included for comparison. GMOM Total Return Price data by YCharts The analysis of this total return price chart reveals some interesting features. Firstly, none of the tactical/momentum ETFs were able to keep pace with SPY in the first eight months of the year, i.e. before the August correction. This might not be surprising for GMOM, even EFFE and DWAT, as these draw ETFs from a wide pool of asset classes and not only U.S. equities, which has been one of the best-performing markets during this difficult year. However, the egregious performance of SCTO is concerning. The fact that SCTO underperformed SPY by the largest margin over the first eight months of 2015 is especially surprising given that its investment universe is restricted to only U.S. industry sectors and what is essentially a cash proxy! How on earth did it lag SPY by nearly 10% over the first eight months of the year if its mandate is to “invest in a maximum of 5 U.S. sectors that have demonstrated the strongest positive recent performance.” Global X provides a monthly allocation report for SCTO. We can see from the report that has had significantly allocations to SHY (i.e. cash) during the first eight months of the year, ranging from 20% in Feb. 2015 to 80% in Jul. 2015. (click to enlarge) Can we understand the reasons for SCTO’s serious underperformance compared to both SPY as well as the other three tactical/momentum ETFs? Analysis of the monthly allocations of SCTO suggests that this may have been due to the ETF being too sensitive to fluctuations in the equity markets, causing it to switch very frequently between equity and cash. For example, SPY suffered a -2.96% loss in Jan. 2015, which caused SCTO to switch to 80% equities in defensive sectors such as REITs (NYSEARCA: RWR ), consumer staples (NYSEARCA: XLP ), healthcare (NYSEARCA: XLV ) and utilities (NYSEARCA: XLU ) and 20% cash at the start of February. Of course, SPY then posted a 5.62% return in February, led by high-beta stocks, and the defensively-positioned SCTO sorely lagged during this rally. Similarly, SCTO was 100% invested in equities when SPY suffered a -2.03% loss in Jun. 2015, then switched to 80% cash for July, during which SPY reversed course to the tune of a 2.26% gain. SCTO then switched BACK to 100% equities at the start of August, just in time for the correction. Talk about bad timing! But let’s step back and analyze all four of the ETFs during this period. Responding to the correction The following chart shows the total return performance of the four tactical/momentum ETFs as well as the U.S. equity market and the U.S. bond market (NYSEARCA: AGG ) from just before the August correction to the end of the year. GMOM Total Return Price data by YCharts All four tactical/momentum ETFs dropped sharply with SPY in August as the correction hit. This is not surprising given that most of these ETFs would be expected to have a sizable allocation to U.S. equities given its status as one of the better-performing markets in early 2015. However, what happens after the correction is illuminating. At the start of September, GMOM, SCTO and EFFE decrease suddenly in volatility, suggesting that they have shifted significantly to bonds or cash. This is confirmed at least for SCTO which showed a 100% allocation cash in September. This shift therefore allowed those three funds to avoid the equity market gyrations in September. On the other hand, the performance of DWAT tracked closely with SPY, suggesting that this fund had not yet made a switch away from equity holdings. As expected, none of four ETFs were able to capture the ferocious snap-back rally exhibited by SPY in October (+8.51%). DWAT increased by around half that of SPY, while SCTO also rose slightly due to its 18.6% allocation to REITs and 21.4% allocation to utilities, however, the rest of SCTO was in cash. Rather unfortunately, all four funds appear to have switched back into an equity-heavy portfolio in November and December, just as the rally subsided and choppy market behavior resumed. This can be deduced given that all four ETFs follow the ebbs and flow of the broader market during these two months. Discussion and conclusion To say that all four tactical/momentum ETFs have disappointed in their first year of existence would be an understatement. None of the four funds were able to avoid the August correction of 2015. Three of the four funds (GMOM, SCTO and EFFE) then switched to cash or bond-heavy portfolios in September, which caused them to completely miss the stock market rebound a month later. This phenomenon was more comprehensively analyzed for GMOM in my Nov. 11 article ” GMOM: Momentum Swings From Bonds Back To Stocks “. On the other hand, based on its price action compare to SPY, DWAT appeared to remain fully invested in equities in September, but reduced its equity exposure to approximately 50% in October. As DWAT is an actively-managed ETF, it is not clear whether the delayed reduction of equity exposure involved any discretionary decisions by the portfolio manager. The next chart shows the total return performance, over the past 13 months, of the four ETFs compared to both SPY and a global market portfolio (via the Cambria Global Asset Allocation ETF (NYSEARCA: GAA )) at -1.02%, which Seeking Alpha author GestaltU has proposed is a superior benchmark for global tactical asset allocation [GTAA] strategies than the S&P500. We can see from the chart below that DWAT has had the best total return performance of -2.77% out of the four tactical/momentum ETFs during this time span, followed by GMOM at -6.87%. EFFE and SCTO had the lowest total return performances of -8.02% and -8.96%, respectively. Thus, DWAT was the only ETF to outperform the global market portfolio GAA since last November, and all four ETFs underperformed SPY. GMOM Total Return Price data by YCharts Going forward, what can we expect from these ETFs? Currently, the four ETFs show very different equity/bond distributions (data from Morningstar). SCTO has the highest equity allocation at nearly 100%, followed by DWAT at 74%. GMOM has a nearly 50:50 split of equities and bonds. EFFE is the only ETF with more bonds (60%) than stocks (40%). However, given that at least three of the four funds (all except DWAT, whose schedule is unspecified) rebalance monthly, these allocations are likely to change in January. In terms of the North American (mainly U.S.) versus international allocation of their equity portion, all except GMOM are fully domestic. GMOM contains 87% U.S. equities and 13% international equities. On a personal level, I have sold my holdings of GMOM a few months ago. I have replaced this the iShares MSCI USA Momentum Factor Index ETF (NYSEARCA: MTUM ) (as described in Left Banker’s article here ). My existing holding of the First Trust Dorsey Wright Focus 5 ETF (NASDAQ: FV ) has also done very well. Both have outperformed SPY over the past year. MTUM Total Return Price data by YCharts Note that those two ETFs are momentum-based but are not “tactical” in the sense that they cannot switch to bonds or cash, and moreover they are purely U.S. based. If the U.S. market enters a bear market, it is likely that those two funds will underperform the tactical/momentum ETFs described above. I am simply performance chasing the U.S. market here? Perhaps, but I lost patience in watching the NAV of GMOM gradually decline as it got caught between whipsaws. With my sale of GMOM, this will likely be my last article on tactical/momentum ETFs for the time being, unless their performance improves to such an extent that they warrant consideration for investment.

CEFL: A Year In Review, And A Prediction Of What’s Ahead

Summary 2015 has not been a good year for CEFL unitholders: income declined by 20% while price declined by 33%. This article presents a review of CEFL happenings in 2015, and a forecast of what’s ahead for 2016. Based on the publicly available index methodology, the CEFs to be added or removed are predicted. Introduction The ETRACS Monthly Pay 2xLeveraged Closed-End Fund ETN (NYSEARCA: CEFL ) is a 2x leveraged exchange-traded note [ETN] that tracks twice the monthly performance of the ISE High Income Index [symbol YLDA]. The YieldShares High Income ETF (NYSEARCA: YYY ) tracks the same index, but is unleveraged. CEFL is a popular investment vehicle among retail investors due to its high income (24.52% trailing twelve months yield), which is paid monthly. With 2015 nearly behind us, I thought I would review the characteristics of this year’s iteration of CEFL, and also look ahead at what might be in store for us in 2016. (Source: Main Street Investor ) 2015 portfolio YLDA holds 30 closed-end funds [CEFs], and is rebalanced annually. As I have previously discussed in my three-part “X-raying CEFL” series, this year’s iteration of CEFL (and thus also YYY) had the following characteristics: CEFL is comprised of approximately one-third equity and two-thirds debt, is effectively leveraged by 240% and has a total expense ratio of 4.92% per dollar invested in the fund (or 2.05% per dollar of assets controlled) (discussed in ” X-Raying CEFL: Leverage And Expense Ratio Statistics “). CEFL contained around two-thirds of North American (primarily U.S.) assets, with the rest being international. Moreover, the North American component of CEFL contains a higher allocation to debt vs. equity than the European component of CEFL (discussed in ” X-Raying CEFL (Part 2): Geographical Distribution “). CEFL is not very interest-rate sensitive as most of the holdings of CEFL are most-correlated with high-yield debt (discussed in ” X-Raying CEFL (Part 3): Interest Rate Sensitivity “). Actually, I might have been inaccurate in my last prediction. Over the last year, the price action of CEFL has actually moved in the same direction to interest rates, which is exactly opposite to what would be expected for a traditional bond fund. But this is not entirely surprising for CEFL, because high-yield debt usually tend to trade in tandem with equities and in the opposite direction to treasuries. Indeed, CEFL had a positive +0.71 correlation with U.S. equities (via SPDR S&P 500 ETF (NYSEARCA: SPY ) over the past year, but a negative -0.24 correlation with treasuries (via the iShares 20+ Year Treasury Bond ETF) (NYSEARCA: TLT ) (source: InvestSpy ). Thus, readers who worried that higher interest rates would lower the price of CEFL may actually have been pleasantly surprised that the opposite has held true this year. Decreasing yield Seeking Alpha author Professor Lance Brofman has done a wonderful job predicting the upcoming distributions for CEFL (see his latest article here ), while also providing expert commentary in his area of expertise. The distribution history for CEFL, which now has paid out 24 months of dividends, is presented below. Unfortunately, we see that the distributions paid out by CEFL have been in decline. In 2014, each share of CEFL paid out $4.74 of distributions, but in 2015, each share of CEFL only paid out $3.82 of distributions. This means that the distribution of CEFL has declined by 19.5% year on year. I believe that a large reason for the distribution decline can be attributed to the rebalancing debacle that occurred at the turn of this year (see below). CEFL has a current trailing twelve months yield of 24.52%. Rebalancing debacle The annual rebalancing in the index YLDA was disastrous for CEFL and YYY holders. The reasons for this have been summarized in my recent article ” Are You Ready For CEFL’s Year-End Rebalancing ?” In short, up to 10% of the net asset value of CEFL may have been lost due to traders (including, perhaps, UBS themselves) buying and selling the CEFs to be added or removed from the index ahead of the actual rebalancing date (a form of “front-running,” see this Bloomberg article for more information on this phenomenon). For further study on the rebalancing issue, consult my previous articles on this issue in the below links: Predicting the 2016 portfolio How might the portfolio of CEFL change upon the next rebalancing event, which is scheduled to occur in the next few days? As discussed in my most recent CEFL article, the index provider has decided that upcoming index will not be announced 5 days in advance. This was intended to prevent “front-running” of the index. However, with the index methodology published and available to all, I had little doubt that professional investors would be able to use the selection rules to determine which stocks would be added or removed from the index. Therefore, in an attempt to level the playing field for everyone else, I have tried to approximate the index methodology in order to predict CEFL’s portfolio for 2016. The selection methodology for the index is reproduced below (source: ISE ). 1. Restrict selection universe to closed-end funds with market cap > $500M and six month daily average volume > $1M. 2. Rank each fund by the following three criteria: i. Fund yield (descending) ii. Fund share price Premium / Discount to Net Asset Value (ascending) iii. Fund Average Daily Value (ADV) of shares traded (descending) 3. Calculate an overall rank for each fund by taking the weighted average of the three ranks with the following weightings: yield: 50%, premium/discount: 25%, average daily value: 25%. 4. Select the 30 funds with the highest overall rank. Using CEFAnalyzer , I obtained a list of the 141 CEFs with market cap > $500M. Unfortunately, I was unable to apply a volume filter because I was not sure what specific time period CEFAnalyzer reports volume data for. I then replicated the index methodology for the 141 CEFs on this list. The below table shows the top 30 CEFs for either distribution yield or discount among the CEFs with market cap > $500M. Rank Ticker Yield Rank Ticker Discount 1 GGN 17.14% 1 BCX -16.92% 2 PHK 14.58% 2 AOD -16.88% 3 KYN 14.44% 3 AWP -16.29% 4 NHF 14.23% 4 IGR -16.19% 5 HIX 13.06% 5 FAX -16.09% 6 TDF 13.03% 6 RNP -15.64% 7 IGD 12.67% 7 GLO -15.33% 8 RVT 12.40% 8 RVT -15.07% 9 CEM 11.73% 9 NFJ -15.04% 10 PTY 11.69% 10 DPG -15.04% 11 GLO 11.37% 11 UTF -14.93% 12 GAB 11.21% 12 ADX -14.92% 13 EXG 11.17% 13 TY -14.81% 14 BCX 11.12% 14 WIW -14.79% 15 CHI 11.11% 15 TDF -14.63% 16 ETJ 11.05% 16 NXJ -14.58% 17 EAD 10.94% 17 NHF -14.57% 18 DSL 10.89% 18 NIE -13.63% 19 CHY 10.89% 19 NQP -13.40% 20 PFN 10.75% 20 USA -13.32% 21 PCI 10.74% 21 FSD -13.31% 22 FEI 10.44% 22 BIT -13.04% 23 ETW 10.36% 23 GDV -12.81% 24 AWP 10.24% 24 JQC -12.70% 25 NTG 9.95% 25 CAF -12.50% 26 PCN 9.86% 26 IGD -12.41% 27 CSQ 9.81% 27 VTA -12.33% 28 PDI 9.62% 28 RQI -12.27% 29 NFJ 9.62% 29 BDJ -12.10% 30 EVV 9.59% 30 NQU -12.04% The yield ranking was then weighted by 50% while the discount ranking was weighted by 25% (the rankings are assigned to all 141 CEFs, and not only to the top 30). The ranking for volume is not shown above because I was not sure about the time period used by CEFAnalyzer to calculate volume, as alluded to earlier. However, because I did not have time to manually calculate the ADV for 141 CEFs, the CEFAnalyzer data was still used to obtain a volume ranking for the funds, which was weighted by 25%. The weighted rankings were then summed, and the top 30 CEFs with the highest overall ranking are shown below, along with their composite individual ranks. A quick check on Yahoo Finance indicated that the 3-month ADV of these 30 CEFs was above the $1M cut-off (which is actually for the 6-month ADV, but I did not calculate this). Rank Ticker Yield Discount Volume Overall 1 (NYSE: RVT ) 8 8 18 10.50 2 (NYSE: BCX ) 14 1 25 13.50 3 (NYSEMKT: GGN ) 1 42 16 15.00 4 (NYSEMKT: GLO ) 11 7 39 17.00 5 (NYSE: NFJ ) 29 9 15 20.50 6 (NYSE: IGD ) 7 26 48 22.00 7 (NYSE: EXG ) 13 50 13 22.25 8 (NYSE: PCI ) 21 39 11 23.00 9 (NYSE: HIX ) 5 79 12 25.25 10 (NYSEMKT: EVV ) 30 35 17 28.00 11 (NYSE: DPG ) 33 10 38 28.50 12 (NYSE: AOD ) 44 2 24 28.50 13 (NYSE: NHF ) 4 17 96 30.25 14 (NYSE: DSL ) 18 77 8 30.25 15 (NYSE: CEM ) 9 100 5 30.75 16 (NASDAQ: CSQ ) 27 52 19 31.25 17 (NYSE: KYN ) 3 119 2 31.75 18 (NASDAQ: CHI ) 15 96 1 31.75 19 (NYSE: TDF ) 6 15 104 32.75 20 (NYSE: AWP ) 24 3 83 33.50 21 (NYSE: USA ) 31 20 58 35.00 22 (NYSE: BGB ) 36 46 26 36.00 23 (NYSE: NTG ) 25 88 6 36.00 24 (NYSE: FEI ) 22 97 7 37.00 25 (NYSE: BIT ) 47 22 32 37.00 26 (NYSE: UTF ) 54 11 29 37.00 27 (NYSE: BOE ) 40 41 30 37.75 28 (NYSE: GHY ) 39 47 27 38.00 29 (NYSE: ETJ ) 16 56 71 39.75 30 (NYSEMKT: FAX ) 41 5 72 39.75 At this point, I would like to compare notes with reader waldschm85 : I’ve attempted to follow the index methodology and came up with the below holdings from largest to smallest as of the open. How does this compare to your list Stanford Chemist?: BCX, TDF, GGN, RVT, KYN, PCI, NFJ, NTG, IGD, NHF, EXG, CSQ, GLO, DPG, CEM, , FEI, CHY, DSL, CHI, USA, HIX, PHK, GAB, TYG, EAD, ETJ, PTY, ETW, PFN, PCN Comparison of our two lists show that we have 20 out of 30 CEFs in common, which is quite high considering that [i] we did our analyses every days apart and [ii] I used an unspecified volume figure for ADV ranking while waldschm85 may have used a more accurate method. While the weighting methodology is too complex to be reproduced here, it can be noted that last year’s rebalance produced the CEF distribution shown below. The methodology states that no CEF can comprise more than 4.25% of the index. Additionally, the top 15 largest CEFs after last year’s rebalance all had weights of above 4%. I expect the weighting distribution of the 30 CEFs after this year’s rebalance to be quite similar to the last. Additions and deletions (predicted) Here we get to the interesting part! Which funds are completely new, and which will be completely removed? Which CEFs are in both 2015 and 2016 (predicted) portfolios? The following will be performed with my list of top 30 CEFs – obviously results will differ using waldschm85’s list or that of another person’s. CEFs are presented in alphabetical order. Added CEFs: BCX, BOE, CEM, CHI, CSQ, DPG, ETJ, FEI, IGD, KYN, NFJ, NHF, NTG, PCI, RVT, TDF, USA, UTF Removed CEFs: BGY, CHW, EAD, EDD, ERC, ESD, ETY, FPF, HYT, IGD, ISD, JPC, MRC, MMT, NCV, NCZ, PCI CEFs that remain from last year: AOD, AWP, BGB, BIT, DSL, EVV, EXG, FAX, GGN, GHY, GLO, HIX. The information above shows that 18 CEFs will be added to the index and 18 will be removed. 12 CEFs will remain in the index. This is a relatively high turnover but it is not unexpected given the fact that both the distributions and premium/discount values of CEFs can vary wildly. Moreover, given that I did not calculate weightings for the 2016 portfolio, I was unable to predict which CEFs will undergo the highest increases or decreases in allocation. However, it should be stressed that the above lists are only approximate. This is because I only performed a crude replication of the index methodology (specifically, I did not use the six-month ADV for either screening or ranking), and also because of the fact that the actual selection and ranking algorithm will be performed on CEF data at year-end rather than from today. Therefore, I am hesitant to recommend the buying of the CEFs to be added and the selling of CEFs to be removed as a potential strategy to profit from the upcoming rebalance. Use the information above at your own risk. Summary 2015 has not been a good year for CEFL unitholders. First, the botched rebalancing mechanism cause permanent loss of value in the index. Second, CEFL holders received 19.5% less income in 2015 compared to last year (this may be related to the first point). Third, CEFL shifted from a 60:40 equity:bond split in 2014 to a 33:67 equity:bond split this year, just in time for the oil-induced credit contagion to wreck havoc with the high-yield debt CEFs in the index. Certainly, a -32.7% YTD price return and -18.4% YTD total return cannot be described as anything other than disappointing for CEFL unitholders. CEFL data by YCharts Will 2016 bring brighter skies for CEFL? This I cannot say for certain. However, it is interesting to note that the predicted portfolio for 2016 contains several MLP CEFs, namely KYN, CEM, NTG, and FEI, whereas this year’s index contained none. Moreover, a myriad of high-yield bond funds will remain or are newly added to the predicted 2016 portfolio. Thus, it remains likely that the fate of CEFL will remain closely tied with the fortunes of the high-yield credit market for the foreseeable future.

PXE: An Outperforming Energy Exploration And Production ETF

Summary Energy, particular exploration and production stocks, have slid over the past year. PXE has thoroughly crushed its competitor XOP and has also outperformed XLE over the past five years. PXE contains a number of refining companies as top holdings which might help it weather this period of low oil prices. Introduction To state that energy-related sectors have done poorly recently would be an understatement. Since the recent high reached on Jun 23., 2014, the benchmark Energy Select Sector SPDR ETF (NYSEARCA: XLE ) has fallen by a good -34.0%. The JPMorgan Alerian MLP Index ETN (NYSEARCA: AMJ ), a basket of midstream MLPs, has performed slightly worse, at -43.0%. However, the worst-performing energy-related stock class over this time period has undoubtedly been those whose main business is focused on the exploration and production (E&P) of oil and gas, with the SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA: XOP ) falling by a whopping -58.0% since mid-June last year. This price action occurred over a time period in which the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) actually rose by 9.69%. Obviously, the woes in the energy sector have been due to the collapse in oil prices that transpired over the past year. Moreover, it is not difficult to understand why XOP has performed so much worse than the other two energy funds, XLE and AMLP. The two top holdings of XLE, Exxon Mobil (NYSE: XOM ) and Chevron (NYSE: CVX ), both have significant downstream businesses that could, in some circumstances, actually benefit from lower oil prices, and they also possess exceptional balance sheets that could aid them through this difficult time. Meanwhile, the midstream MLPs of AMJ, the largest of which are Enterprise Products Partners (NYSE: EPD ) and Energy Transfer Partners (NYSE: ETP ), are considered to be relatively less impacted by price of the commodity itself as their profit is mainly derived from the fee-based transport and distribution of fuels. On the other hand, the fortunes of the E&P, also known as upstream, companies in XOP are more or less directly tied to the price of crude oil. So is XOP a good buy right now? Clearly, if you believe that oil prices will remain low, then XOP would be an ETF to avoid. On the other hand, given that E&P companies have been among the most beaten-up stocks in the energy sector, any reversal in crude oil prices could send these XOP soaring like a compressed spring. What this article intends to do is actually to introduce an ETF that is related to XOP, but has historically performed much better. Introducing the PowerShares Dynamic Energy Exploration & Production Portfolio ETF (NYSEARCA: PXE ) PXE does not appear to be a well-known ETF on Seeking Alpha. Only 784 Seeking Alpha users have PXE in their portfolio, compared to 5,597 for XOP. The last focus article on PXE was in Dec. 2014. However, the lack of following for PXE is undeserved. Despite the recent turmoil in the energy sector, the five-year total return performance for PXE is still positive at +23.47%, absolutely crushing XOP at -28.2%. Notably, PXE still returned significantly greater than XLE (+8.42%). PXE Total Return Price data by YCharts Some funds outperform in bull markets because they take greater amounts of risk, and thus these same funds will underperform on the downside as well. Is this true for PXE? As can be seen from the chart below, its total return since the XLE peak on Jun 23rd. 2014 (-35.8%), while negative, is still superior to that of XOP (-58.0%) and AMJ (-43.0%) and only slightly worse than that of XLE (-34.0%). The investment mandate of PXE is explained on the fund website : The PowerShares Dynamic Energy Exploration & Production Portfolio (NASDAQ: FUND ) is based on the Dynamic Energy Exploration & Production IntellidexSM Index (Intellidex Index). The Fund will normally invest at least 90% of its total assets in common stocks that comprise the Index. The Intellidex Index thoroughly evaluates companies based on a variety of investment merit criteria, including: price momentum, earnings momentum, quality, management action, and value. The Underlying Intellidex Index is composed of stocks of 30 U.S. companies involved in the exploration and production of natural resources used to produce energy. These companies are engaged principally in exploration, extraction and production of crude oil and natural gas from land-based or offshore wells. These companies include petroleum refineries that process the crude oil into finished products, such as gasoline and automotive lubricants, and companies involved in gathering and processing natural gas, and manufacturing natural gas liquid. The Fund is rebalanced and reconstituted quarterly in February, May, August and November. Further information regarding the proprietary Intellidex methodology can be found here . Fund statistics The following table shows some of the pertinent fund details for PXE, XOP and XLE. Data are from Morningstar unless otherwise noted. PXE XOP XLE Yield 1.95% 1.97% 2.92% Expense ratio 0.64% 0.35% 0.14% Inception Oct. 2005 Jun. 2006 Dec. 1998 AUM $106M $1.66B $11.73B Avg. Volume 36.5K 10.8M 19.7M Morningstar rating **** ** ***** No. holdings 30 63 40 Annual turnover 140% 44% 5% We can see from the table above that PXE is by far the smallest fund, with only $106M in assets. This makes is less than one-tenth of the size of XOP and less than one-hundredth of the size of XLE. It’s liquidity of 36.5K is also far less than XOP and XLE, although it should be still be sufficient for small or medium investors. The final statistic that sticks out is that PXE has a much higher annual turnover of stocks at 140% than XOP at 44%, which in turn has a much higher annual turnover compared to XLE at only 5%. Holdings So why do I consider XOP to be PXE’s closest benchmark? Notwithstanding the fact that both ETFs have “Exploration & Production” in their names, ETF Research Center indicates that the two funds have 42% of their holdings by weight in common. Notably, 25 out of 30 of PXE’s constituents are also found in XOP. In contrast, PXE and XLE have only 27% overlap by weight, while XOP and XLE have 31% overlap. Thus, PXE and XOP are more similar to each other than either of them are to XLE. The top 10 holdings of PXE are shown in the table below. Company Ticker % Assets EOG Resources Inc (NYSE: EOG ) 5.28 Valero Energy Corp (NYSE: VLO ) 5.27 Phillips 66 (NYSE: PSX ) 5.23 Occidental Petroleum Corp (NYSE: OXY ) 5.13 Marathon Petroleum Corp (NYSE: MPC ) 5.11 Hess Corp (NYSE: HES ) 5.00 Apache Corp (NYSE: APA ) 4.98 Devon Energy Corp (NYSE: DVN ) 4.86 CVR Refining LP (NYSE: CVRR ) 2.93 Northern Tier Energy LP (NYSE: NTI ) 2.87 46.66 As can be seen from the table above, PXE runs a relatively concentrated portfolio, with 46.66% of its holdings in the Top 10. This compares to 19.35% for XOP and 63.41% for XLE, as depicted graphically below. Notably, the three of the top five holdings of PXE, namely MPC, VLO and PSX, are all heavily involved in the downstream refining segment, and whose fortunes are more closely associated with the refining crack spread rather than the price of crude oil itself. As can be seen from the chart below, these three stocks have actually posted positive price returns since the Jun. 23, 2014 peak for XLE. On the other hand, EOG and OXY have been obvious detractors of the fund. EOG Total Return Price data by YCharts Valuation and growth The table below shows various value and growth metrics for PXE, XOP and XLE. Data for all funds are from Morningstar (value metrics including dividend yield are forward looking). PXE XOP XLE Price/Earnings 10.39 16.77 19.07 Price/Book 0.89 0.89 1.42 Price/Sales 0.43 0.48 0.80 Price/Cash Flow 2.54 2.36 5.09 Dividend Yield % 4.26% 2.32% 3.45% Projected Earnings Growth % 10.33 8.62 9.98 Historical Earnings Growth % 13.48 17.56 3.04 Sales Growth % 3.34 5.34 2.82 Cash-flow Growth % 6.60 11.50 7.44 Book-value Growth % 5.48 7.71 6.06 While aggregate metrics for ETFs sometimes have to be taken with a grain of salt (for example, aggregate P/E calculations usually ignore stocks with negative earnings), a first glance reveals that PXE scores highly on its valuation and growth metrics compared to peers XOP and XLE. It has the lowest P/E, P/B (tied), P/S and highest dividend yield compared to the other two funds, and its P/CF is only slightly higher than XOP’s. In terms of growth metrics, all three funds have had healthy growth numbers over the past year (although this is likely to change as lower oil prices begin to drag), and while PXE has lower CF% and BV% growth than the other two funds, its other three growth metrics are comparable. Size In terms of size distribution, PXE is quite similar to XOP except that it has more large-cap stocks and fewer stocks in the other four size categories. Both PXE and XOP contain smaller-capitalization stocks compared to XLE. PXE XOP XLE Giant (%) 0 3.52 38.32 Large (%) 34.99 17.02 42.95 Mid (%) 26.78 32.33 17.71 Small (%) 30.19 33.44 1.02 Micro (%) 8.04 13.68 0 This data is also shown graphically below. Discussion and conclusion The impressive total return performance of PXE relative to its peers suggests that the Intellidex methodology has worked very well for this ETF. Given the Intellidex’s focus on factors including price momentum, earnings momentum, quality, management action, and value, PXE could easily be considered to be a “smart beta” fund, although its inception (in 2005) took place long before this marketing label became popular. The outperformance of PXE over XOP could be potentially attributed to several factors. First, by running a concentrated portfolio of 30 stocks (compared to 63 for XOP), PXE could avoid exposure to stocks that score less highly in its ranking model. On the other hand, XOP applies no filters other than market capitalization and liquidity for inclusion into the fund. Secondly, PXE applies a two-tier weighting system whereby 8 “large” stocks each receive 5% of the total fund weight and 22 “small” stocks each receive 2.73% of the total fund weight. In contrast, XOP basically run an equally-weighted portfolio. This is reflected in XOP’s greater tilt towards smaller-cap stocks compared to PXE (see data above). Given that large-cap energy stocks have generally performed better than small-cap stocks during this energy bear market, it stands to reason that XOP would suffer more than PXE during this time period, all other things being equal. However, the use of factor screening in conjunction with quarterly rebalancing means that PXE has a much higher annual turnover (140%) compared to XOP (44%). So is PXE a good investment right now? Without a crystal ball able to tell the future price of oil and gas, I cannot say with certainty. However, what this analysis does suggest is that if one were to choose an E&P-focused energy ETF, then PXE would be a better bet than XOP. Moreover, with 5 of the fund’s top 10 holdings currently invested in refining stocks (VLO, PSX, MPC, CVRR, NTI), which are less directly affected by commodity prices compared to E&P companies, PXE might weather the storm better than expected.