Tag Archives: investing

Will Falling Silver Production Start To Impact SLV?

Summary The price of SLV lost 9% of its value during 2015. Silver production may drop in 2015 — for the first time in over a decade. As the deficit in silver keeps rising, this could eventually start affecting the price of SLV. The silver market didn’t have a good year as the price of the iShares Silver Trust ETF (NYSEARCA: SLV ) shed over 9% off its value. The direction of silver will continue to be dictated by the direction of long term interest rates and U.S. dollar (among other things that silver investors look for when investing in the precious metal). But what about the changes in the physical demand and supply for silver? After all, the ongoing low silver prices contributed to the decline in silver production this year – perhaps 2015 will be the first year since in well over a decade, in which production won’t rise. Will this be enough to drive up the price of SLV? I have already addressed the recent rate hike by the Fed and its impact on SLV. Currently, the market isn’t convinced the Fed will raise rates by another 1 percentage point as its members estimated in the last FOMC meeting. The implied probabilities , as collected by Fed-watch, suggest the market projects only two hikes of 0.25 basis points in 2016. If the Fed wind up raising by only 0.25bp or not raise at all, this could bring back down long term interest rates and perhaps even depreciate the U.S. dollar – two shifts that could behoove the price of SLV. What about the changes in production? According to the Silver Institute the balance between supply and demand was in deficit (i.e. the demand was higher than the supply). And this has been the case for the past 12 consecutive years . This year’s deficit is expected to settle at 21.3 million oz – the lowest deficit in a decade. This decline in deficit is mostly due to net outflows from ETFs holdings and derivatives exchange inventories. Basically, as the demand for silver as investment diminishes, it helps ease the physical deficit. But there is also the matter of falling production that could increase this deficit. Up to 2014, production has been rising. This year, however, it seems production hasn’t picked up and perhaps even slightly declined. Among the top leading countries the produce silver: Mexico, Peru, China, Australia and Chile, according to one outlet , total production in these countries is slightly down for the year (up to August) – by less than 1%. So it’s still unclear how the year will end for the silver balance. But even if this year the deficit expands again, it doesn’t mean this trend will be enough to push up the price of silver. The high deficit in recent years including 2013 and 2014 hasn’t helped rally the price of silver. But perhaps this could also be a matter of timing. Eventually the deficit in supply-demand balance will matter enough to pull up the price of silver, especially as silver loses its shine as investment. When will this happen? That’s unclear. Therefore, for the near term it still seems that the direction of SLV will be govern firstly by the changes in the demand for silver as an investment tool and only secondly by the changes in supply and demand for physical silver. This means the direction of the U.S. dollar, other precious metals – most notably gold – and long term interest rates will set the pace for SLV. In the coming months, I won’t be surprised if the Fed takes a more dovish tone than it took in its recent statement, which could actually slightly pull up SLV. Finally, in the medium term, the growing deficit in silver – mostly driven by falling production and rising physical demand – may take a bigger role in moving the price of silver. For more please see: What’s Up Ahead for Silver in 2016?

A Year-End Analysis Of The Ark Industrial Innovation ETF

Summary The ARK Industrial Innovation ETF’s expense ratio of 0.95% coupled with the firm’s concentration on riskier holdings makes this an investment to avoid. The overvalued price to earnings ratio of the fund combined with the poor sales growth and historical earnings % makes this ETF unattractive. The leaders of the Ark Industrial Innovation ETF are Delphi Automotive and Nvidia Corp. The main laggard is Stratasys, Inc. In the comment section of my most recent analysis regarding the Robo-Stox Global Robotics and Automation Index ETF (NASDAQ: ROBO ), one person asked if there were any suitable ETF for an individual that craves exposure to robotics and automation. I gave a succinct answer with a mention of the Ark Industrial Innovation ETF (NYSEARCA: ARKQ ). While this ETF may be a bit more attractive than the ROBO-STOX Global Robotics and Automation Index ETF, it is not attractive enough to recommend as an investment. In mathematics, it is not merely sufficient to give the final answer. The math teacher will often insist that we show our work to support the final answer. Consider this article as my shown work. According to Yahoo Finance, here are the 1 month, 3 month, 6 month and YTD Returns for the Ark Industrial Innovation ETF. TIME PERIOD ARK INDUSTRIAL INNOVATION ETF RETURN ROBO-STOX Global Robotics and Automation Index ETF Return 1 MONTH 1.01% -1.16% 3 MONTH 9.15% 10.30% 6 MONTH -3.79% -9.31% YEAR-TO-DATE -1.13% -5.00% In comparison, the ROBO-STOX Global Robotics and Automation ETF only posted a higher 3-month return than the ARK Industrial Innovation ETF. Throughout this ETF, there is a whole lot of evidence that suggest that the fund manager may have invested in full of holdings that have unproven earnings and sales in spite of their overall potential. Evidence of this can be seen in the large percentage of mid-cap, small-cap holdings and micro-cap holdings that is displayed in the following chart. SIZE % OF PORTFOLIO BENCHMARK CATEGORY AVERAGE MEDIUM 30.65 18.63 23.79 SMALL 19.80 5.41 11.69 MICRO 13.15 0.32 1.39 The significant exposure to these riskier holdings seem more inconvenient when one considers the fund’s expense ratio. The ARK Industrial Innovation ETF’s expense ratio is 0.95%, which is 0.41% higher than the Morningstar category average . Investors may be willing to take on this exposure given a more attractive expense ratio. Unfortunately, this fund does not provide that. Value and Growth Measures Stock Portfolio Benchmark Category Average Price/Prospective Earnings Ratio 26.03 19.01 22.08 Price/Book 2.20 3.54 3.87 Price/Sales 2.30 2.61 2.74 Price/Cash Flow 16.77 11.69 11.49 Long-Term Earnings % 13.76 11.87 16.96 Historical Earnings % 3.96 9.38 15.18 Sales Growth 4.18 7.65 16.73 Cash Flow Growth % 16.86 9.82 12.78 If you look at the following chart, one can see that the statistics illustrate overvaluation of holdings with regards to stock price in the price/earnings ratio. One can also see that the fund holds many holdings with unproven sales and earnings as indicated by the fund’s undervalued price/sales ratio. This can also be seen by the paltry sales growth and historical earnings figures compared to their benchmarks and category averages. However, the fund does have a higher cash flow growth rate than the Morningstar benchmark and category average. This should provide some optimism for investors as increased cash flow could hopefully lead to a higher sales and net income in future earnings reports. LEADERS OF THE ARK INDUSTRIAL INNOVATION ETF Delphi Automotive PLC (NYSE: DLPH ) Delphi Automotive PLC is a manufacturer of vehicle components and provides solutions in terms of electrical, electronic, safety and thermal technologies to consumer and commercial vehicles worldwide. Delphi has the fourth highest portfolio weight in the fund at 4.67% and has a total YTD Return of 20.79%. Delphi’s last quarterly earnings report fell short of expectations. In spite of increased EPS and net income , Delphi’s revenue fell 3.6% year-over-year due to unfavorable currency impacts especially with regard to the euro. Delphi’s stock price fell more than 7% on the news but has rebounded by 8.5% since the date of the report. Delphi Automotive has just completed a $1.85 billion dollar acquisition of the HellermanTytonGroup PLC, a worldwide leader in cable management solutions. This acquisition will aid in the company’s effort to position themselves as a leader in the connected car phenomenon. It is expected to boost the firm’s potential EPS by $0.15 and provide 50 million dollars in synergies by the end of 2018. Delphi Automotive has just received an upgrade to “Buy” by Sterne Agee and is rated a “Buy” overall by analysts. Nvidia Corp (NASDAQ: NVDA ) Nvidia Corp is a visual computing company that operates across multiple regions. Nvidia Corp has the ninth highest portfolio weight at 3.41% and a YTD Return of 67.40%. NVIDIA’s stellar quarterly earnings sparked the firm’s stock price increase by 11.8% during the month of November. Nvidia’s revenue increased by 6.5% to a record revenue total of $1.305 billion dollars while its net income increased by 42% year-over-year to $246. Additionally, GAAP EPS increased 42% year-over-year to $0.44. NVIDIA made tremendous progress in its gaming segment with the introduction of the GEForce GTX 950 GPU. Additionally, NVIDIA made strides in the virtual reality space with the introduction of the NVIDIA Gameworks VR and NVIDIA Designworks VR. NVIDIA Corp has also gained firm control of the discrete graphics card market. At one point, the firm surpassed 80% in unit market share during its last fiscal quarter. The firm’s shareholders will be very thrilled with the firm’s 18% increase in quarterly cash dividend due in fiscal 2017. MAIN LAGGARD OF THE ARK INDUSTRIAL INNOVATION ETF Stratasys, Inc. (NASDAQ: SSYS ) It is rather puzzling why this stock has the most portfolio weight (6.71%) in the ARK Industrial Innovation ETF. As I have recently pointed out on Market Eyewitness , Stratasys is ripe for the picking due to increased competitiveness from the low end of the 3-D Printing market. Stratasys, Inc. has the second worst YTD return in the fund with a total of -67.77% Stratasys’s recent 6-K results were so poor that the firm would have had a net loss that was 6x as much as last year’s net loss in spite of the $695 million dollar impairment charge. Stratasys’s product revenue declined by 35.2% in the firm’s latest quarterly report. This is a clear sign that hobbyists and DIY enthusiasts have found other alternatives to the firm’s Makerbot division. In a recent list of the top 20 3-D desktop printers by 3-D Hubs, the Makerbot 3-D Printer did not made the cut. As a matter of fact, the two worst fund holdings in terms of YTD return are Stratasys, Inc. and 3D Systems (NYSE: DDD ). 3D Systems has an YTD Return of -68.06%. BOTTOM LINE: As stated above, I cannot recommend the Ark Industrial Innovation ETF as an investment even though it may be a better alternative than the Robo-Stox Global Robotics and Innovation ETF. In addition to the overvaluation in terms of the fund’s P/E ratio, the fund is too concentrated on riskier firms with an unproven history of sales and earnings. The lack of sales growth is disconcerting and the low price-to-book ratio may be indicative of investing in companies that may have fundamental deficiencies. Stratasys and 3D Systems could be considered Exhibit A and Exhibit B in that regard.

VFORX: How A Target Date Fund Should Be Built

Summary The Vanguard Target Retirement 2040 Fund has a simple construction and a low expense ratio. Despite being a very simple portfolio, they have covered exposure to most of the important asset classes to reach the efficient frontier. The fund is mostly in equity but has materially underperformed the S&P 500 over because of a strong allocation to international equity. Lately I have been doing some research on target date retirement funds. Despite the concept of a target date retirement fund being fairly simple, the investment options appear to vary quite dramatically in quality. Some of the funds have dramatically more complex holdings consisting with a high volume of various funds while others use only a few funds and yet achieve excellent diversification. My goal is help investors recognize which funds are the most useful tools for planning for retirement. In this article I’m focusing on the Vanguard Target Retirement 2040 Fund Inv (MUTF: VFORX ). What do funds like VFORX do? They establish a portfolio based on a hypothetical start to retirement period. The portfolios are generally going to be designed under Modern Portfolio Theory so the goal is to maximize the expected return relative to the amount of risk the portfolio takes on. As investors are approaching retirement it is assumed that their risk tolerance will be decreasing and thus the holdings of the fund should become more conservative over time. That won’t be the case for every investor, but it is a reasonable starting place for creating a retirement option when each investor cannot be surveyed about their own unique risk tolerances. Therefore, the holdings of VFORX should be more aggressive now than they would be 3 years from now, but at all points we would expect the fund to be more conservative than a fund designed for investors that are expected to retire 5 years later. What Must Investors Know? The most important things to know about the funds are the expenses and either the individual holdings or the volatility of the portfolio as a whole. Regardless of the planned retirement date, high expense ratios are a problem. Depending on the individual, they may wish to modify their portfolio to be more or less aggressive than the holdings of VFORX. Expense Ratio The expense ratio of Vanguard Target Retirement 2040 Fund is .18%. That is higher than some of the underlying funds, but overall this is a very reasonable expense ratio for a fund that is creating an exceptionally efficient portfolio for investors and rebalancing it over time to reflect a reduced risk tolerance as investors get closer to retirement. In short, this is a very solid value for investors that don’t want to be constantly actively management their portfolio. Composition The fund is running almost 89% stocks to about 11% bonds, but over time the portfolio shifts to sell off stocks and hold more bonds as Vanguard assumes that investors nearing retirement will have a reduced risk tolerance. This portfolio strategy is the embodiment of what financial advisors seek to do for clients. Unfortunately Vanguard does not know the unique circumstances of every client, but for a .18% expense ratio they are doing a great job. Holdings The following chart demonstrates the holdings of the Vanguard Target Retirement 2040 Fund: (click to enlarge) This is a fairly simple portfolio. Only four total funds are included so the fund can gradually be shifted to more conservative allocations by making small decreases in equity weightings and increases in bond weightings. The funds included are the kind of funds you would expect from Vanguard. They are all solid funds with strong internal diversification in the holdings and low expense ratios. The Vanguard Total Stock Market Index Fund is also available as an ETF. The ETF version is the Vanguard Total Stock Market ETF (NYSEARCA: VTI ). To be fair, Vanguard has a great reputation for running funds but not for coming up with creative names. I have a significant position in VTI because it carries an extremely low expense ratio and offers excellent diversification across the U.S. economy. Volatility An investor may choose to use VFORX in an employer sponsored account (if their employer has it on the approved list) while creating their own portfolio in separate accounts. Since I can’t predict what investors will choose to combine with the fund, I analyze it as being an entire portfolio. Since the fund includes domestic and international exposure to both equity and bonds, that seems like a fair way to analyze it. (click to enlarge) When we look at the volatility on VFORX, it is only slightly lower than the volatility on SPY. Despite similar levels of volatility, it has underperformed SPY. Generally investors will expect a target date fund to hold up better in a bear market and to fall behind in a bull market. For a portfolio with a target date as distant as 2040, investors have to expect strong equity positions will result in similar returns to the market. The real weakness demonstrated here was largely a function of the international equity markets underperforming the domestic equity markets. A Suggested Modification Even though this portfolio is designed for investors that are 25 years away from retirement, for the sake of lower annualized volatility I would like to see a slightly larger allocation to very long term treasury bonds. Since Vanguard is regularly rebalancing the fund it should be able to benefit from the strong negative correlation between the domestic equity market and the long term treasuries. To be fair, international markets have also been showing a negative correlation with long term treasury returns, so it really should be able to dramatically reduce the volatility without creating a very large drag on earnings. The benefit of the negative correlation with frequent rebalancing allows investors to be regularly buying low and selling high. Compared to most active investment strategies, a simple rebalancing plan that combines long term treasuries with domestic equities has been a very solid and remarkably simple strategy. Conclusion VFORX is a great mutual fund for investors looking for a simple “set it and forget it” option for their employer sponsored retirement accounts. It is ideally designed for investors planning to retire around 2040, but can also be used by younger employees with lower risk tolerances or older workers with higher risk tolerances.