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2 New Alternative ETNs Launched In December

A pair of new exchange-traded notes (ETNs) launched last month: One providing investors with the price return of a diversified basket of MLPs; the other a targeted-volatility and VIX “roll yield” strategy. ETNs, which are unsecured notes backed by the faith and credit of the issuer, trade on exchanges like shares of stock or ETFs. The Credit Suisse S&P MLP Index ETN (NYSEARCA: MLPO ) The Credit Suisse S&P MLP Index ETN debuted on December 2. It provides exposure to the price return of the S&P MLP Index, which includes both MLPs (master limited partnerships) and publicly traded LLCs (limited liability companies). Index components must be from either the energy sector or gas-utility sector, with market capitalizations of at least $300 million. The index is cap-weighted, but no constituent may constitute more than 15% of the total index, and constituents that account for more than 4.5% may not combine to account for more than 45%, as a group. Although the ETN launched last month, the index has been calculated live since September 6, 2007. For the five years ending November 28, 2014, the total return S&P MLP Index returned an annualized 17.80%, besting the S&P 500’s total return of 15.45%. However, the new Credit Suisse S&P MLP Index ETN provides exposure to only the price return of the index, which returned 11.18% for the five years ending 12/31/14. The wide difference between the total return and price return of the index is due to the large yield distributed by MLPs. The net-expense ratio of MLPO is 0.95%. Investors looking for a total return on the S&P MLP Index can look to the iPath S&P MLP ETN (NYSEARCA: IMLP ), which was launched in on January 3, 2013 and carries an expense ratio of 0.80%. As of November 28, the ETNs five largest holdings were Enterprise Product Partners (NYSE: EPD ), Energy Transfer Equity (NYSE: ETE ), Plains All American Pipeline (NYSE: PAA ), Magellan Midstream Partners (NYSE: MMP ), and Energy Transfer Partners (NYSE: ETP ). The new ETN joins the ranks of nine other alternative ETNs offered by Credit Suisse: Long/Short Equity Index ETN (NYSEARCA: CSLS ) Equal Weight MLP Index ETN (NYSEARCA: MLPN ) Merger Arbitrage Index ETN (NYSEARCA: CSMA ) Leveraged Merger Arbitrage Index ETN (NYSEARCA: CSMB ) Market Neutral Index ETN (NYSEARCA: CSMN ) Gold Shares Covered Call ETN (NASDAQ: GLDI ) The Credit Suisse Commodity Benchmark ETN (NYSEARCA: CSCB ) Silver Shares Covered Call ETN (NASDAQ: SLVO ) The Credit Suisse Commodity Rotation ETN (NYSEARCA: CSCR ) For more information about MLPO, read the fund’s prospectus . The ETRACS S&P 500 VEQTOR Switch ETN (NYSEARCA: VQTS ) The ETRACS S&P 500 VEQTOR Switch ETN launched on December 3. The ETN is linked to a volatility-targeted S&P 500 index strategy and a long/short VIX futures strategy. The VIX futures component is intended to capture VIX “roll yields” and volatility drops when allocated to short positions in VIX futures; and VIX upside during volatility spikes when allocated to long positions in VIX futures. The ETRACS S&P 500 VEQTOR Switch ETN tracks the performance of the S&P 500 VEQTOR Switch Index, which seeks to “simulate a dynamic portfolio that allocates between equity and volatility based on realized volatility in the broad equity market.” The index launched on November 17, 2014, and has no prior performance history. The ETN’s net-expense ratio is 0.95%. For more information, download a pdf copy of the fund’s prospectus .

Utilities ETF: XLU No. 1 Select Sector SPDR In 2014

Summary The Utilities exchange-traded fund finished first by return among the nine Select Sector SPDRs in 2014. As it did so, the ETF posted the best annual percentage gain in its 16-year history. However, seasonality analysis indicates it could be facing a tough first quarter. The Utilities Select Sector SPDR ETF (NYSEARCA: XLU ) in 2014 ranked No. 1 by return among the Select Sector SPDRs that break the S&P 500 into nine chunks. On an adjusted closing daily share price basis, XLU rocketed to $47.22 from $36.68, a zooming of $10.54, or 28.74 percent. Accordingly, the ETF outdistanced its parent proxy SPDR S&P 500 ETF (NYSEARCA: SPY ) by an extraordinary 15.27 percentage points. (XLU closed at $47.35 Wednesday.) XLU also ranked No. 1 among the sector SPDRs in the fourth quarter, as it outpaced SPY by 8.28 percentage points. In addition, XLU ranked No. 1 among the sector SPDRs in December, as it outran SPY by 3.83 percentage points. Overall, XLU posted the best annual percentage return in its 16-year history: Its previous record was set in 2003, when it swelled 26.46 percent. XLU appears key to analysis of market sentiment based on the comparative behaviors of the Select Sector SPDRs . If XLU ranks near No. 1 by return during a given period, then I believe market participants are in risk-off mode; if XLU ranks near No. 9 by return over a given period, then I think market participants are in risk-on mode. Figure 1: XLU Monthly Change, 2014 Vs. 1999-2013 Mean (click to enlarge) Source: This J.J.’s Risky Business chart is based on analyses of adjusted closing monthly share prices at Yahoo Finance . XLU behaved a lot better in 2014 than it did during its initial 15 full years of existence based on the monthly means calculated by employing data associated with that historical time frame (Figure 1). The same data set shows the average year’s weakest quarter was the first, with a relatively small negative return, and its strongest quarter was the second, with an absolutely large positive return. The ETF’s October 8.03 percent gain was its sixth-highest monthly return ever. Figure 2: XLU Monthly Change, 2014 Versus 1999-2013 Median (click to enlarge) Source: This J.J.’s Risky Business chart is based on analyses of adjusted closing monthly share prices at Yahoo Finance. XLU also performed a lot better in 2014 than it did during its initial 15 full years of existence based on the monthly medians calculated by using data associated with that historical time frame (Figure 2). The same data set shows the average year’s weakest quarter was the first, with a relatively small positive return, and its strongest quarter was the second, with an absolutely large positive return. Clearly, this means there is no historical statistical tendency for the ETF to explode in Q1. Figure 3: XLU’s Top 10 Holdings and P/E-G Ratios, Jan. 7 (click to enlarge) Note: The XLU holding-weight-by-percentage scale is on the left (green), and the company price/earnings-to-growth ratio scale is on the right (red). Source: This J.J.’s Risky Business chart is based on data at the XLU microsite and Yahoo Finance (both current as of Jan. 7). In the wake of the sea change in bias at the U.S. Federal Reserve , away from loosening and toward tightening, XLU’s record-setting performance in 2014 kind of makes sense, at least in an equity market where share prices are primarily driven by the ebb and flow of asset purchases made by the central bank under one or another of its so-called quantitative-easing programs. It is worth mentioning in this context that the Fed announced the conclusion of purchases under its latest QE program Oct. 29 and that the ends of purchases under its previous two formal QE programs are associated with both a correction and a bear market in large-capitalization stocks, as evidenced by SPY’s dipping -17.19 percent in 2010 and dropping -21.69 percent in 2011. It is also worth mentioning that XLU’s big-time performance last year means that I, as a growth-and-value guy, see neither growth nor value in most of the utilities sector, as indicated by the above chart (Figure 3) and numbers released by S&P Senior Index Analyst Howard Silverblatt Dec. 31. At that time, Silverblatt pegged the P/E-G ratio of the S&P 500 utilities sector as 3.43. In the current environment, I therefore would be completely unsurprised should XLU continue to behave well in the current quarter, not on an absolute basis but on a relative basis (i.e., in comparison with the other Select Sector SPDRs and with SPY). On balance, the ETF may not produce gains, but it might produce losses smaller than those of its siblings. Disclaimer: The opinions expressed herein by the author do not constitute an investment recommendation, and they are unsuitable for employment in the making of investment decisions. The opinions expressed herein address only certain aspects of potential investment in any securities and cannot substitute for comprehensive investment analysis. The opinions expressed herein are based on an incomplete set of information, illustrative in nature, and limited in scope. In addition, the opinions expressed herein reflect the author’s best judgment as of the date of publication, and they are subject to change without notice.

Guide To European Hedged ETFs

Apart from the oil price havoc, Europe has taken center stage globally with the start of the New Year thanks to the struggling economy, political instability in Greece and tumbling Euro. This is especially true as fears of the opposition party’s win in Greece later in the month led to apprehensions of the country’s departure from the Eurozone. Europe is struggling with slow growth, tumbling inflation, higher unemployment and deflation fears that have been stalling the burgeoning Euro zone economic recovery for several months. This is especially true as PMI Composite index, for the Euro zone fell to 51.4 in December from the flash estimate of 51.7. However, it is up from the 16-month low of 51.1 in November, suggesting that economic and business activity in the Eurozone is growing but at an anemic pace. In fact, the PMI Composite index grew by just 0.1% in the final quarter of 2014 driven by continued downturn in France and Italy as well as a faltering Germany, a powerful engine and the largest economy of Europe. Additionally, several months of decline in energy prices has finally trapped Eurozone into deflation for the first time in more than five years. Inflation has turned negative with consumer prices falling 0.2% year over year in December. All these sluggish fundamentals have bolstered the case for aggressive quantitative easing (QE) measures by the European Central Bank (ECB) that might be similar to the policies that the U.S. or U.K. undertook over the past few years. The ECB signaled last week that it could announce a major bond-buying program later this month to reinvigorate growth in the continent and fight deflation. If successful, this will propel the European stocks higher but continue to weigh on the currency. The euro tumbled to a nine-year low of $1.18 against the greenback. The downfall can also be credited to the measures taken by the ECB last year when it cut interest rates to record lows and supported the purchase of some private-sector bonds. Further, the strengthening the U.S. economy and the prospect of rising interest rates sometime in mid 2015 are driving the U.S. dollar upward, thereby resulting in depreciation of the euro against the USD. However, a slumping euro will actually benefit exporters and the manufacturing industry, resulting in soaring stock prices. This is because Japan is primarily an export-oriented economy and a weaker currency makes its exports more competitive. It will also help in improving the regions’ trade balances. Given this, investors may still want to play the European space while simultaneously seeking protection against the sliding euro. Fortunately, there are a handful of euro-hedged ETFs available on the market, any of which could be excellent choices in the current environment. Below, we have profiled some of these in detail for those who are looking for a hedged European ETF exposure at this time: WisdomTree Europe Hedged Equity Index Fund ( HEDJ ) This fund offers exposure to the European stocks while at the same time provides hedge against any fall in the euro. This will be done by tracking the WisdomTree Europe Hedged Equity Index. In total, the fund holds 126 securities with a heavy concentration on the top 10 holdings at 45.4%. However, it is pretty well spread across a number of sectors with consumer staples, industrials, consumer discretionary, financials and health care taking double-digit exposure. Among countries, Germany (26%), France (24.5%), Spain (18%) and the Netherlands (16.7%) dominate the holdings list. HEDJ is one of the popular and liquid choices in the European space with AUM of about $5.5 billion and average daily volume of more than 1.2 million shares. Expense ratio came in at 0.58%. The fund is up 0.2% in the trailing one-year period. Deutsche X-trackers MSCI Europe Hedged Equity ETF ( DBEU ) This product tracks the MSCI Europe US Dollar Hedged Index, which provides exposure to the European equity market and hedges the euro to the U.S. dollar. The fund holds 442 securities in its basket, which is widely spread out across each component with none holding more than 2.92% of assets. United Kingdom takes the top spot at 28.5% while Switzerland, France and Germany round off the next three spots. From a sector look, financials account for the largest share at 22.2% closely followed by consumer staples (19.2%). Other sectors make up for a nice mix in the portfolio with a single-digit allocation. The fund has amassed $723.2 million in its asset base while trades in good average daily volume of more than 310,000 shares. It charges 45 bps in fees per year and returned 0.7% over the past one year. iShares Currency Hedged MSCI EMU ETF ( HEZU ) This product provides local currency performance of stocks from developed market countries within the EMU (European Monetary Union) while managing currency risk as well. It follows the MSCI EMU 100% USD Hedged Index and is a play on the popular iShares MSCI EMU ETF ((NYSEARCA: EZU ) with a hedge to strip out the euro currency exposure. The fund holds 248 well-diversified securities in its basket dominated by financials (22.7%) and followed by consumer discretionary (13.2%) and industrials (12.7%). The ETF has amassed $64.2 million in its asset base since its debut in July 2014 and trades in small volumes of 39,000 shares a day. The fund charges 51 bps in annual fees from investors and has delivered flat returns since its debut. Currency hedge strategies are gaining immense popularity in recent months on a strengthening U.S. dollar and the prospect of higher interest rates. Given a weak Euro and hopes of stimulus, investors could definitely look to these currency hedged ETFs. These products are expected to perform better than the traditional funds if ECB introduces a massive asset buying program.