Tag Archives: european

Q4 Outlook For Oil And Gas ETFs

Crude Oil The free fall in oil prices have made energy the most talked-about sector of the entire market in 2015, apart from the fact that its performance has been the worst. Year-to-date, The Energy Select Sector SPDR ETF (NYSEARCA: XLE ) has posted a loss of 20%. On the other hand, the broad-based Dow Jones Industrial Average and the S&P 500 index shed just 8% and 5%, respectively, over the same period. As of now, crude prices are trading just above the key psychological level of $40-a-barrel after hitting a new 6-1/2 year low of $37.75 recently. This, despite a short spike that saw the commodity scale a year-high of $61.43 per barrel in June. (Read: 4 Ways to Short the Energy Sector with ETFs ) Oil is facing the heat on several fronts. Perhaps, the most important of them pertains to the mounting worries about China’s crude demand. In particular, the Asian giant’s currency devaluation has stoked speculation about soft economic growth in the world’s No. 2 energy consumer. What’s more, in the absence of production cuts from OPEC, the effects of booming shale supplies in North America and a stagnant European economy, not much upside is expected in oil prices in the near term. Moreover, a stronger dollar has made the greenback-priced crude more expensive for investors holding foreign currency. The Iranian nuclear framework agreement, which has the potential to release more of the commodity in the already oversupplied market, has put the final nail in the coffin. As it is, with inventories near the highest level during this time of the year in 80 years at least, crude is very well stocked. On top of that, OPEC members (like Saudi Arabia) have made it clear time and again that they are more intent on preserving market share rather than attempting to arrest the price decline through production cuts. Therefore, the commodity is likely to maintain its low trajectory throughout 2015. (Read: Still Believe in Goldman’s $20 Oil, Go Short with These ETFs ) This has forced the oil companies and associated service providers to make deep cost cuts by reducing their workforce. Oilfield services behemoths like Halliburton Co. (NYSE: HAL ), Schlumberger Ltd. (NYSE: SLB ) and Weatherford International plc (NYSE: WFT ) were the first to respond to the worsening situation, announcing substantial redundancies earlier in the year. Of late, they have been joined by integrated majors including Royal Dutch Shell plc (NYSE: RDS.A ) and Chevron Corp. (NYSE: CVX ). In the medium-to-long term, while global oil demand will be driven by China – which continues to be the main catalyst to liquids consumption growth despite the current slowdown – this will be more than offset by sluggish growth prospects exhibited by Asian and the European economies. In our view, crude prices in the next few months are likely to exhibit a sideways-to-bearish trend, mostly trading in the $40-$50 per barrel range. As North American supply remains strong and demand looks underwhelming, we are likely to experience a pressure in the price of a barrel of oil. Natural Gas Over the last few years, a quiet revolution has been reshaping the energy business in the U.S. The success of ‘shale gas’ – natural gas trapped within dense sedimentary rock formations or shale formations – has transformed domestic energy supply, with a potentially inexpensive and abundant new source of fuel for the world’s largest energy consumer. With the advent of hydraulic fracturing (or “fracking”) – a method used to extract natural gas by blasting underground rock formations with a mixture of water, sand and chemicals – shale gas production is now booming in the U.S. Coupled with sophisticated horizontal drilling equipment that can drill and extract gas from shale formations, the new technology is being hailed as a breakthrough in U.S. energy supplies, playing a key role in boosting domestic natural gas reserves. As a result, once faced with a looming deficit, natural gas is now available in abundance. Statistically speaking, the current storage level – at 3.261 trillion cubic feet (Tcf) – is up 473 Bcf (17%) from last year and is 127 Bcf (4%) above the five-year average. Expectedly, this has taken a toll on prices. Natural gas peaked at about $13.50 per million British thermal units (MMBtu) in 2008 but fell to sub-$2 level in 2012 – the lowest in a decade. Though it has recovered somewhat, at around $2.70 now, the commodity is still way off the heights reached seven years back. In fact, natural gas been trading range bound over the last couple of quarters with investors looking for direction. It has been stuck between $2.50 and $3 per MMBtu over the past 5 months. In response to continued weak natural gas prices, major U.S. producers like Chesapeake Energy Corp. (NYSE: CHK ), Cabot Oil & Gas Corp. (NYSE: COG ) and Range Resources Corp. (NYSE: RRC ) have all taken significant cost-cutting measures, including a reduction in their capital expenditure budgets for the year. With production from the major shale plays remaining strong and the commodity’s demand failing to keep pace with this supply surge, natural gas prices have been held back. Even the summer cooling demand has been of little help. What’s more, with improved drilling productivity offsetting the historic decline in rig count, and expectations of tepid heating demand with the imminent arrival of soft late-summer temperature, we do not expect gas prices to rally anytime soon. Playing the Sector Through ETFs Considering the turbulent market dynamics of the energy industry, the safer way to play the volatile yet rewarding sector is through ETFs. In particular, we would advocate tapping the energy scene by targeting the exploration and production (E&P) group. This sub-sector serves as a pretty good proxy for oil/gas price fluctuations and can act as an excellent investment medium for those who wish to take a long-term exposure within the energy sector. While all oil/gas-related stocks stand to move with fluctuating commodity prices, companies in the E&P sector tend to be the most important, as their product’s values are directly dependent on oil/gas prices. (See all Energy ETFs here ) SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA: XOP ) Launched in June 19, 2006, XOP is an ETF that seeks investment results corresponding to the S&P Oil & Gas Exploration & Production Select Industry Index. This is an equal-weighted fund consisting of 73 stocks of companies that finds and produces oil and gas, with the top holdings being HollyFrontier Corp. (NYSE: HFC ), Tesoro Corp. (NYSE: TSO ) and PBF Energy Inc. (NYSE: PBF ). The fund’s expense ratio is 0.35% and pays out a dividend yield of 1.98%. XOP has about $1,472.9 million in assets under management as of Sep 10, 2015. iShares Dow Jones US Oil & Gas Exploration & Production ETF (NYSEARCA: IEO ) This fund began in May 1, 2006 and is based on a free-float adjusted market capitalization-weighted index of 74 stocks focused on exploration and production. The top three holdings are ConocoPhillips (NYSE: COP ), Phillips 66 (NYSE: PSX ) and EOG Resources Inc. (NYSE: EOG ). It charges 0.45% in expense ratio, while the yield is 1.77% as of now. IEO has managed to attract $403.5 million in assets under management till Sep 10, 2015. PowerShares Dynamic Energy Exploration and Production (NYSEARCA: PXE ) PXE, launched in Oct. 26, 2005, follows the Energy Exploration & Production Intellidex Index. Comprising of stocks of energy exploration and production companies, PXE is made up of 30 securities. Top holdings include Phillips 66, Valero Energy Corp. (NYSE: VLO ) and Marathon Petroleum Corp. (NYSE: MPC ). The fund’s expense ratio is 0.64% and the dividend yield is 2.20%, while it has got $92.9 million in assets under management as of Sep 10, 2015. Original Post

Looking For Juicy Income? New EU Dividend ETF Is Here

European stocks may have been battered by the long-running Greek debt crisis, but when it comes to earning juicy dividends, they don’t turn down investors. If you look at both the MSCI Europe Index (which tracks large- and mid-cap companies across 15 developed markets in Europe) and the STOXX Europe 600 Index (a benchmark of small, midsize and large companies in Europe), dividend yield is handsome at 3.4% (as of August 31, 2015). This compares with a dividend yield of 2.1% paid by Standard & Poor’s 500 Index companies (as of September 17, 2015). There are mainly two good reasons for the European companies to pay fat dividends. Firstly, it is the weaker euro which helps ballooning up exports and therefore the companies’ top lines. Secondly, the European Central Bank’s €1.1 trillion ($1.2 trillion) or €60 billion-a-month quantitative easing program has instilled positive sentiment into the economy. At this juncture, investors should definitely take a look at the newly launched MSCI Europe Dividend Growers ETF (NYSEARCA: EUDV ) by ProShares. EUDV tracks the performance of the MSCI Europe Dividend Masters Index focusing on 51 MSCI Europe companies that have increased dividend payments each year for at least 10 consecutive years. The index contains a minimum of 25 stocks which are equally weighted. No single sector can compose more than 30% of the index and no single country may compose more than 50% of the index. The index has a dividend yield of 3.07%. Seadrill Ltd. (NYSE: SDRL ), BHP Billiton Plc (NYSE: BBL ) and Amec Foster Wheeler Plc ( OTC:AMCBF ) are the top three holdings in the fund with a share of 2.16%, 2.13% and 2.07%, respectively. The top 10 companies constitute 20.4% of the fund. As far as sector allocation is concerned, Industrials (19.54%), Healthcare (17.6%) and Consumer Staples (17.43%) make up the top three positions. Considering country-wise allocation, the fund is heavily biased toward U.K. with a 49.49% share while France and Switzerland occupy the second and third positions with 11.6% and 9.61% shares, respectively. The fund charges 55 bps in fees. How Does It Fit In A Portfolio? The fund provides a good opportunity for income-hungry investors willing to put capital in a market that is experiencing heightened manufacturing and trading activities. In August, the Markit Eurozone Manufacturing Purchasing Managers’ Index (“PMI”), which measures the performance of the manufacturing sector, came in at 52.3, which is a tad lower than 52.4 in July, but much higher than 50.7 last year. Meanwhile, Services PMI rose to 54.4 in the month from 54.0 in July. A PMI reading below 50.0 indicates sluggish activity, but a reading above that level indicates increasing activity. On the other hand, Eurozone’s trade surplus in July surged 48.1% to €31.4 billion ($35.5 billion) from €21.2 billion ($24 billion) a year ago, setting a new record. Exports went up 7% on a year-on-year basis while imports rose only 1% in the month on falling energy costs. In the first seven months of the year, exports also escalated 7% year over year while imports grew 2%, leading to a surplus of €146.5 billion ($165.8 billion) compared with a surplus of only €97.1 billion ($109.9 billion) in the period January-July 2014. Enhanced manufacturing and trading activities bode well for the companies paying hefty dividend to its stakeholders making this fund a lucrative option. ETF Competition Although ProShares specifically targets companies that have a good track record of year-over-year dividend growth, there are a couple of funds worth mentioning here that also track the high dividend-paying equity market in Europe. These are the WisdomTree Europe SmallCap Dividend ETF (NYSEARCA: DFE ) and the First Trust Dow Jones STOXX European Select Dividend 30 Index ETF (NYSEARCA: FDD ). DFE tracks the WisdomTree Europe SmallCap Dividend Index targeting the small-cap dividend-paying companies in Europe and manages a robust asset base of $1 billion. On the other hand, FDD with an AUM of roughly $178 million replicates the STOXX Europe Select Dividend 30 Index targeting high dividend-yielding companies across 18 European countries. Notably, the STOXX Europe Select Dividend 30 Index consists of companies from the STOXX Europe 600 Index having a positive five-year dividend-per-share growth. DFE and FDD are almost equally costly with expense ratios of 0.58% and 0.60%, respectively. However, on the yield front, FDD does a better job at 4.55% compared with DFE (2.68%). Link to the original publication on Zacks.com

Who Wants SCHC? I’m Trying To Buy Some

Summary The Schwab International Small-Cap Equity ETF is getting very appealing again as it is dipping much lower amid international fears. I’ve been admiring this ETF for a while but couldn’t get the right entry price, I have a limit order pending. The ETF has a large volume of small-cap securities that are difficult to acquire for your portfolio which enhances diversification. The international equity allocations are fairly diversified. I wouldn’t mind even more diversification, but this is certainly good. I see a reasonable allocation of around 3% to 5% of the portfolio value to SCHC. I’m also using SCHF for part of my international position. The Schwab International Small-Cap Equity ETF (NYSEARCA: SCHC ) is one of the ETFs I have been keeping an eye on over the last month or two. On September 22nd, 2015, I put in a limit buy order for some shares. I’m still waiting to see if the price drops far enough to trigger the order, but it is “good til cancelled” and the standard period is 60 days until it would automatically cancel. Why I like SCHC The Schwab International Small-Cap Equity ETF is a fairly nice fit the diversified equity portfolio. While there are many options for international exposure, there are only a few of them that focus on the small-cap international market. Quite a few years ago there was a theory that small capitalization companies were capable of delivering superior performance because a lack of coverage by analysts would result in less efficient pricing and therefore higher risk premiums could be demanded. With the advent of total market indexes and broad market indexes, the demand for small cap companies increased and it was capable to effectively diversify the risk. International markets tend to be less developed than the U.S. financial market and I believe we may witness the same kind of performance in those markets. As more research is done and risk premiums are reduced, the international small-cap market may see some fairly solid performance. Heads I Win, Tails We Tie If my theory fails to pan out, there is still a benefit to SCHC that qualifies as “good enough”. Because the fund is focused on small-cap holdings it has very little overlap with other major international funds. I already use the Schwab International Equity ETF (NYSEARCA: SCHF ) for part of my international exposure. While there may be some solid correlation in returns due to similar risk factors for international markets, the individual holdings are very different. By adding a small position in SCHC to my international holdings I’m hoping to gain a slight amount of additional diversification. If SCHC simply matches SCHF for total return over the next few years but excels in different quarters, there will still be some benefits to be had from rebalancing the positions. These are probably going to be limited to fairly minor gains, but minor gains rather than a loss is a perfectly acceptable outcome to me. Volume of Holdings SCHC has a fairly impressive 1,666 holdings to go with an expense ratio of .18%. Since the expense ratio remains under .20%, it isn’t high enough to really chase me off and it feels reasonable when considering the sheer volume of international small-cap holdings. These are not the most liquid and easiest to acquire securities. All in all, I feel that I’m getting some value out of paying that ratio. Geography The following map breaks down the geographic allocations of the fund: (click to enlarge) I wouldn’t mind seeing slightly larger allocations to the smaller sections, but this is certainly a reasonable diversified batch. The top 3 countries are on different continents, which is a refreshing change from some of the “international” ETFs that place almost all of the equity in Europe. I have no issue with holding equity in European countries, but I’m buying these funds for diversification so seeing a strong mix of different markets is very favorable. Ideal Allocation I like SCHC as an allocation for 3% to 5% of my portfolio. I would still aim to keep a significant portion of the international equity allocation in the larger capitalization markets that may be more resilient to a sell off. If the markets really turn south and SCHC does sell off, I would want to keep increasing my allocations to take advantage of fear based selling. I think the best way to do that may be to just set ranges for where I want the position to be within the portfolio and to rebalance whenever it gets too high or too low. Since the ETF is free to trade from Schwab accounts, I can rebalance without much concern. What Goes with SCHC? Naturally investors will want a core position in domestic equity funds, but SCHC also benefits from being in a portfolio with long duration treasury securities. Those securities have a negative correlation with SCHC and would be ideal for a portfolio that includes rebalancing. Conclusion After another day of fear drove market prices around $28.50 per share, it seemed worth tagging on a limit buy order and seeing if I’d be able to snag some shares of this ETF. I’ve liked it for a while but didn’t have an order ready and waiting on the August 24th event where so many funds went on incredible sales. Now that we are seeing another attractive entry range, I have an order waiting to scoop up some shares. Disclosure: I am/we are long SCHF. (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. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.