Tag Archives: etfs

Q4 Sector Momentum Composition

Not all sector exposure is created equal. In fact, there can be significant differences in holdings and performance between a momentum-weighted and capitalization-weighted sector ETF. Consider the table below which shows the top 5 holdings of our PowerShares DWA Momentum Sector ETFs shaded in green and the weights of those same positions in a capitalization-weighted ETF, shaded in blue. (click to enlarge) Source: Powershares and State State Street Advisors, 10/19/15 What accounts for the differences in holdings? A stock can have large capitalization, but weak momentum. The investment universe for the PowerShares Momentum ETFs includes Small, Mid, and Large Cap stocks. Also, keep in mind that the number of stocks in each momentum sector ETF can range from approximately 30-75. When small caps have better relative strength we will tend to have more holdings and when large caps are in favor we will tend to have fewer holdings. See the table below for the current number of stocks in each sector momentum index as well as their current market value. Source: PowerShares, as of 10/19/15 YTD performance of our momentum sector ETFs vs. their capitalization-weighted peers is shown below: As of 10/19/15. The performance above is based on pure price returns, not inclusive of dividends or all transaction costs. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. So far in 2015, 6 of our 9 momentum sector ETFs is outperforming their capitalization-weighted peers. The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value. See www.powershares.com for a prospectus. Dorsey Wright is the index provider for a suite of momentum ETFs with PowerShares.

Tepid Appetite For Risk Implies That Investors Are Still Haunted By Potential Loss

The appetite for risk is decidedly less vibrant than before the August-September meltdown. The notion that investors may still be spooked can be found outside of the bond arena as well. Broader market participation in the October rally is spotty at best. It’s one thing to consider the possibility that we’ve already seen the depths for 2015. It’s another thing to suggest that we will be heading for new heights anytime soon. Is the worst behind us? Maybe. Yet the appetite for risk is decidedly less vibrant than before the August-September meltdown. (Review Market Top? 15 Warning Signs .) Consider high-quality bonds as represented by the Bank of America Merrill Lynch US Corporate A Option-Adjusted Spread. The yield spread between A-rated companies and comparable U.S. treasuries typically falls during periods when investors are feeling confident. This was the case throughout 2014. In contrast, when investors are concerned about their exposure to corporate credit, the spread widens. Indeed, the difference between A-rate corporate bonds and U.S. treasuries steadily rose in the summertime. The Bank of America Merrill Lynch US Corporate A Option-Adjusted Spread spiked above 1.3 during the stock market lows in August and again at the start of October. It has since come down below a high-water mark in 2015, though it remains stubbornly high. Granted, there is nothing magical about this particular yield spread at 1.3 percent. On the other hand, a similar pattern of risk aversion occurred during the summer of 2007, right before the stock market’s bearish collapse (10/07-3/09). Some equity advocates prefer to dismiss warning signs of risk-off behavior in bonds. They have been assigning blame for lack of interest in high-yield “junk” to the ailing energy sector. However, funds like the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA: HYG ) and the SPDR Barclays Capital High Yield Bond ETF (NYSEARCA: JNK ) do not hold single A-rated bonds like Kimberly Clark (NYSE: KMB ) and Target (NYSE: TGT ). “Single As” are highly rated because the risk of default is negligible and they are as reliable as rain in Seattle. What’s more, they usually exhibit narrow spreads with comparable treasuries. It follows that a substantial “risk-on” return to stocks from current levels is unlikely to occur without a meaningful retreat below 1.3% in the Bank of America Merrill Lynch US Corporate A Option-Adjusted Spread. The notion that investors may still be spooked can be found outside of the bond arena as well. For instance, when the investment community is adding to its collective risk profile, high beta stocks in the PowerShares S&P 500 High Beta Portfolio ETF (NYSEARCA: SPHB ) tend to outperform less volatile stocks in the iShares MSCI USA Minimum Volatility ETF (NYSEARCA: USMV ). This can be seen in the rising SPHB:USMV price ratio up through May of 2015. Unfortunately, the price ratio begin to decline in earnest during the summer. It hit new lows in August and September respectively. And while SPHB:USMV bounced off the September lows, the ratio is struggling to reaffirm a genuine uptrend. Even the NASDAQ’s Advance-Decline Line (A/D) is sending mixed messages. One would think that if risk were truly back in vogue, advancing issues in the stock benchmark (NASDAQ) would be pummeling the decliners. That’s not happening… at least not yet. In other words, broader market participation in the October rally is spotty at best. It is certainly possible that the worst for 2015 resides in the rear-view mirror. After all, the Federal Reserve’s inability to raise borrowing costs has sparked intrigue with respect to a “re-reflation” of asset prices in our muddle-through economy. On the flip side, with earnings as well as revenue both expected to decline for a second consecutive quarter (a.k.a. “earnings recession” and “sales recession”), some of that reflation may be kept in check. It’s one thing to consider the possibility that we’ve already seen the depths for 2015. It’s another thing to suggest that we will be heading for new heights anytime soon. Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.

The Global X Uranium ETF Is Useless For Uranium Investors Right Now

Summary URA share price doesn’t reflect uranium price development. URA is much more impacted by the overall energy sector sentiment over the last couple of months. Although uranium price increased by 9% since May, URA declined by 30% over the same time period. URA is useless for short term uranium investors and speculators right now, although it provides exposure to the uranium market for long term investors. The Global X Uranium ETF (NYSEARCA: URA ) reached a new historical low of $6.75 per share in late September. Although the share price recovered to $8.01, it is down almost 30% year-to-date. A bigger part of the decline was recorded during the June-September period when URA declined by more than 40%. The important thing is that URA experienced a significant decline while uranium prices were in a side-trend. Moreover, uranium prices have been in an uptrend since May. During this uptrend, uranium’s price increased by approximately 9%. URA’s share price declined by 30% over the same time period. Readers should note that URA doesn’t invest directly in uranium, it holds shares of uranium producers and explorers. Logic says that as uranium price grows, share prices of uranium producers and explorers should follow. But the recent developments show that this relation has been disturbed. Source: futures.tradingcharts.com The divergence between URA and uranium prices has been enormous over the last couple of months. The coefficient of correlation between the URA share price and uranium futures price for the last 5 months (May 11 – October 15) is -0.423, which is a surprisingly high level of negative correlation. The chart below shows the 10-day and 40-day moving correlations between URA and uranium prices. The chart shows that the correlation is highly unstable and that there are some long time periods of negative correlation. Moreover, the 10-day moving correlation approached extremely high levels of negative correlation close to the -1 level twice over the last 5 months. Source: Own processing, using data of Yahoo Finance and futures.tradingcharts.com The chart below shows 40-day moving correlations between URA and oil prices (represented by the United States Oil ETF (NYSEARCA: USO )), energy sector (represented by the Vanguard Energy ETF (NYSEARCA: VDE )) and S&P 500. 40 trading days equal approximately 2 calendar months. As the analysis shows, URA is strongly correlated with VDE. The moving correlation between URA and VDE is far more stable compared to URA-USO and URA-S&P 500 correlations. Especially over the last 5 months the URA-VDE correlation was very stable; it moved in the 0.8 – 1.0 range. There was much higher correlation between URA and VDE and between URA and USO than between URA and uranium prices over the last couple of months. Source: Own processing, using data of Yahoo Finance The data confirm that share prices of uranium producers are heavily impacted by the overall energy sector sentiment. The uranium prices don’t affect URA share price as much as they should. The chart below shows share price development of URA and VDE over the last three months. The similarity of the two price curves is striking. This situation will change and share prices of companies from the uranium industry and URA’s share price will start to reflect uranium price development again, but it is hard to predict when the normalization will happen. For now, the overall energy sector sentiment is the main factor affecting share prices of companies from the uranium industry. Conclusion Over the last couple of months, URA’s share price hasn’t reflected uranium market developments. There is actually a relatively high level of negative correlation between URA share price and uranium futures price. URA is much more impacted by the overall sentiment in the energy sector than by uranium prices. It means that it is useless for the uranium investors right now. If uranium prices increase, it will be reflected by share prices of uranium producers and explorers and by URA in the end, but it is questionable how long it will take for the relations to normalize once again. URA still provides exposure to the uranium market for long term investors, but it is useless for investors with short time horizon and for uranium market speculators right now.