Tag Archives: investment

Does FlexShares’ New Corporate Bond ETF Stand Apart?

Corporate bond market has been hit by global growth concerns lowering the investor outlook on the credit worthiness of the corporations as well as looming interest rate hike. Further, there are concerns about corporate bond market liquidity (read: 3 Bond ETFs to Consider in a Market Slump ). In an attempt to take care of this situation and attract the investment grade corporate bond ETF investors, FlexShares – a unit of Northern Trust Corporation (NASDAQ: NTRS ) – has launched the FlexShares Credit-Scored US Long Corporate Bond Index Fund (NASDAQ: LKOR ) , which focuses on longer maturity corporate bonds. LKOR in Details LKOR follows a recently developed Northern Trust Credit-Scored US Long Corporate Bond Index. As per FlexShares, the index covers a liquid issuer universe, employs a proprietary model for credit scoring and optimizes the index’s constituents to maximize the credit score while maintaining duration, spread and other investment grade-like characteristics. More than 66% of LKOR’s holdings have maturities ranging from 20 to 30 years while more than 27% have maturities ranging from 15 to 20 years. This results in a weighted average effective duration of 13.25 years, as per the issuer. The ETF comprises 136 holdings with Apple Inc. ( OTC:APPL ) occupying the top position with 1.43% share, followed by Time Warner Inc. (NYSE: TWX ) with 1.34% share and JPMorgan Chase & Co. (NYSE: JPM ) with 1.29% share. The top 10 holdings constitute around 12.5% of the fund. As far as sector allocation is concerned, Industrials (23.7%), Consumer (20.8%) and Energy (18.9%) make up the top three positions. Considering country-wise allocation, the fund is heavily biased towards the U.S. with 87.6% share while Canada, U.K., Netherlands, Australia and Spain hold minimal shares. The fund is cheap as it charges only 22 bps in fees from investors per year (see all Investment Grade Corporate Bond ETFs here). How Does it Fit in a Portfolio? LKOR seems to have addressed the investors’ concern about the companies’ ability to repay their debt as economic slowdown in China and low commodity prices may lead corporations to face financial crisis. This is because the issuer has targeted corporate bonds with higher credit quality, lower risk of default and potential for higher yield and price appreciation. On the Standard & Poor’s ratings scale, the fund’s quality breakdown includes investment-grade ratings AAA (2%), AA (14.8%), A (36.6%) and BBB (46.6%). Moreover, the fund seeks to improve liquidity and transparency by excluding illiquid and smaller issuers. The question of liquidity is of high importance as banks, serving as brokers, have reduced their inventories of corporate bonds following post-financial crisis regulations, making bond trading difficult. It is for these reasons the issuer has stated that the ETF provides “a contemporary approach to optimizing credit risk, with improved transparency and liquidity relative to legacy corporate bond benchmarks”. ETF Competition LKOR definitely stands apart from other long term corporate bond ETFs as it addresses the present ailments in the corporate bond market. Still, there are a number of such ETFs that worth to mention due to their popularity. A couple of long term corporate bond ETFs includes the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEARCA: LQD ) and the Vanguard Long-Term Corporate Bond Index ETF (NASDAQ: VCLT ) . LQD tracks the iBoxx $ Liquid Investment Grade Index focusing on 600 highly liquid investment grade corporate bonds in the U.S. It has an asset base of $22.1 billion and focuses on all-term bond duration. On the other hand, VCLT follows the Barclays U.S. 10+ Year Corporate Index focusing on corporate bonds issued by industrial, utility, and financial companies, with over 10 years in maturities. It manages an asset base of $991 million. Both LQD and VCLT look attractive on the cost front with expense ratios of 0.15% and 0.12%, respectively. However, in terms of yield, VCLT (4.14%) is a better option than LQD (3.13%). Link to the original post on Zacks.com

Which Gold ETF Is Right For You?

Summary There are many gold ETFs available for investors who want exposure to physical gold without the hassle of buying/selling, storing, and insuring the precious metal. If you are a very short-term trader, leveraged physical gold funds can offer substantial gains over a short period, as well as the risk of substantial losses. Gold miner ETFs provide the best of both worlds for investors, as they give exposure to the gold sector and offer a lot more leverage than physical gold. There are a plethora of ETFs on the market for investors that want exposure to the gold sector. If you are looking for a physical gold ETF, a leveraged physical gold ETF, or a gold miner ETF, there are a range of options available. This gold ETF guide will discuss many of the exchange-traded products that currently exist for the gold sector. Before I proceed, investors are encouraged to fully read the prospectus of any and all funds in which they may considering investing. Physical Gold ETFs If you want to purchase physical gold, then it’s a slightly tedious and costly process. You need to find a reputable dealer to buy the gold from, you need to find a secure place to store the metal, and you need to insure it. There is also the fact that you are going to pay a premium over the spot price, and that premium amount can vary depending on the demand for gold at the moment as well as the price for the precious metal. Typically it runs about 5%, and decreases with larger-volume purchases. So given all the up-front costs, if you invest in physical gold, then right off the bat you are in the hole. The advantage is you own the metal yourself; you can see and touch it, and it’s the most “personal” way you can own this asset. However, there are many gold ETFs available for investors that want exposure to physical gold, but don’t want the hassle of buying/selling, storing, and insuring the precious metal. That’s what these products are designed for. They make buying and selling gold as simple as the click of a mouse. There have been countless articles about whether these types of physical gold investment vehicles are truly safe, as it comes down to having a lot of faith and trust in these ETFs and their claims about what they own. The gold held by these ETFs is stored in secure vaults and audited at least once per year, so most investors consider these legitimate products. Still, owning a physical gold ETF isn’t the same as owning physical gold itself. It’s up to each individual investor to decide how comfortable they are with that and weigh the risks factors. The following are four of the largest ETFs/ETVs that are intended to track the performance of physical gold, less each trust’s expenses: SPDR Gold Trust ETF (NYSEARCA: GLD ) iShares Gold Trust ETF (NYSEARCA: IAU ) ETFS Physical Swiss Gold Trust ETF (NYSEARCA: SGOL ) Sprott Physical Gold Trust ETV (NYSEARCA: PHYS ) GLD is the most popular of the above mentioned ETFs, as well as the largest. This is due to first-mover advantage, as it was the pioneer in the physical Gold ETF space, having introduced itself to the market in 2004. Since that time, it has remained the top choice for many gold investors — and especially traders, given its liquidity. GLD is listed on the NYSE Arca and has an expense ratio of 0.40%. The current Net Asset Value of the ETF is $25.2 billion, as it owns roughly 22 million ounces (or 684 tonnes) of gold. Each share is based on the price of 1/10th of an ounce of gold. An investor can take physical possession of the gold backing his/her GLD shares via “authorized participants,” but the stipulation is that they must be redeemed in “baskets” of 100,000 shares. That’s over $10 million worth of GLD per basket at today’s price. The companies involved in GLD include the following: Sponsor – World Gold Trust Services, LLC Custodian – HSBC Bank plc Trustee – BNY Mellon Asset Servicing, a division of The Bank of New York Mellon Marketing Agent -State Street Global Markets, LLC The gold owned by GLD is stored in the London vaults of HSBC Bank in the form of allocated London Good Delivery Bars – typically referred to as 400 oz bars. Representatives of the Trustee (BNY Mellon) and of GLD’s Sponsor (World Gold Trust Services) visit and inspect these vaults twice a year. GLD’s independent auditors also audit the gold holdings in the vault as part of their audit of the financial statements of GLD. A list of all gold bars owned by the ETF is updated at the end of every working day. IAU, a physical gold ETF by BlackRock (NYSE: BLK ), is the biggest competitor to GLD. The advantage that this smaller rival has is a lower expense ratio of just 0.25%. Its net assets are $5.9 billion, which consists of 5.15 million ounces (or roughly 160 tonnes) of gold. Each share represents 1/100th of an ounce. Investors can redeem their shares in exchange for physical gold, but they must be redeemed in “baskets” of 50,000 shares – or $550,000 worth of IAU at today’s prices. That’s a much lower requirement than GLD, but still out of the reach of your average investor. The companies involved in IAU include the following: Sponsor – iShares Delaware Trust Sponsor LLC Custodian – JPMorgan Chase Bank N.A., London branch Trustee – The Bank of New York Mellon The gold that backs IAU is stored at locations in New York, Toronto, or London. It can also be stored in other places with the consent of the Trustee and the Sponsor. You can find the latest audit report here . SGOL is one of the smaller physical gold ETFs available on the market, as its net assets are only $862 million. Its backed by 752,020 troy ounces of gold, all of it stored in a vault in Zurich, Switzerland. The vault is inspected twice per year – once scheduled and once at random – by Inspectorate International. Their gold bullion bar list is posted daily. Some investors prefer SGOL over the other physical gold ETFs because of the storage location, as Switzerland may be considered less risky compared to other countries in terms of possible gold confiscation. SGOL has an expense ratio of 0.39% — a minuscule edge over GLD, but still is higher than IAU. Investors can redeem shares of SGOL in 50,000 share baskets in exchange for physical gold – or over $5 million worth of SGOL at today’s prices. The companies involved in SGOL include the following: Sponsor – ETF Securities USA LLC Custodian – JPMorgan Chase Bank, N.A. Trustee – BNY Mellon Trust Company (Ireland) Limited The last of this grouping is PHYS, which is a physical gold ETV offered by Sprott. PHYS is different than the ETFs listed above, as it’s technically a closed-end fund, which means it can trade at a big discount or premium to its NAV because it doesn’t issue or redeem units on a day-to-day basis. So where PHYS trades, compared to its NAV, mostly depends on the relative supply and demand for its shares in the market. The three ETFs listed above track the gold price more closely, and don’t deviate significantly from their respective NAVs, as they have daily creation/redemption mechanisms. Below is a look at the Premium/Discount to NAV for PHYS over the last 5 years. Investors looking for exposure to a physical gold ETF-type product should be aware that during periods of extreme volatility in the gold market, it’s possible to see big fluctuations in terms of where PHYS trades at in relation to its NAV. Some might consider this an advantage for PHYS; if the discount is high, you not only gain from the price of gold rising, but also gain from the possible reduction in the discount to NAV (and also the possible subsequent premium to NAV). But sometimes the discount can widen even further, and in a flat or declining gold market, this could mean PHYS would underperform ETFs that more closely track gold. Source: Sprott. PHYS’s net asset value is $1.53 billion, backed by 1.223 million ounces of gold bullion, all of which is held at the Royal Canadian Mint in Ottawa. The Royal Canadian Mint, which is owned by the Canadian government, and Ernst and Young audit the gold. Investors in PHYS can redeem their shares in exchange for 350- to 430-ounce gold bars (London Good Delivery bars fall within that range). Shares, however, can only be redeemed on the last trading day of each month, and the trust must be notified of the impending redemption by the 15th of that month. The expense ratio for PHYS is 0.35%, which gives it an advantage over GLD and SGOL. Another perceived advantage for PHYS, at least for U.S. non-corporate investors, is the long-term tax benefits from any gains realized on the sale of shares. The U.S. Internal Revenue Service has established a high 28% tax rate for items it considers collectibles, such as coins, art, silver and gold. Any realized gains from these types of investments that were held at least a year are taxed at that rate. GLD, IAU, and SGOL are considered part of that tax category. However, for U.S. investors in PHYS who hold their shares for more than one year and make a timely Qualified Election Form (QEF) election, the long-term capital gains tax rate is 15-20% (depending on your income tax bracket). This is because PHYS is considered a Passive Foreign Investment Corporation, and there are special U.S. federal income tax rules that apply to U.S. investors that hold stock in a foreign corporation classified as a PFIC. Some might think that PHYS is a slam dunk for an investment compared to the others, because of this tax benefit, but there is a catch. Since the fund does allow for redemptions once a month — and long-term gains by the trust are passed on to shareholders at a rate of 28% – then if the trust has to sell gold to meet redemptions and has a gain on that sale, the tax (at a rate of 28%) is passed on to current shareholders at a pro rata amount. In all fairness to PHYS, this doesn’t seem like a big issue at the moment. However, you have to wonder what would happen in a gold environment where supply was low and demand was high. Also, the IRS has the authority to issue Treasury regulations applying the 28% tax rate to any gains made in the sale of a PFIC by a non-corporate U.S. Holder — even if there was a QEF election in effect. However, the IRS hasn’t made any such changes, and might not in the future. With the overview of these four Gold ETFs/ETVs out of the way, let’s move on to performance, as well advantages and disadvantages of each. If we look at the respective 5-year performances of all of these against the price of physical gold, you can see each is trailing the physical metal. The is because the expense ratios gradually reduce the value of the shares in relation to the gold price. It makes sense that IAU has held up the best compared to GLD and SGOL, given the lower annual expenses of the ETF. PHYS is tracking below the group given its susceptibility to trading at a bigger discount to its NAV. GLD data by YCharts Each gold ETF I have discussed so far has its advantages and disadvantages. For instance, IAU has the lowest expense ratio and tracks the price of gold very closely. For a long-term investor, they will show a slightly larger gain or smaller loss compared to GLD and SGOL because of this lower annual expense. Below is a 5 year chart that reflects this difference. It’s not a huge amount in percentage terms, but for a sizable holding it would have a substantial impact. Especially if an investor plans to keeps their shares for much longer time periods, say 10+ years. $10 million in shares of IAU would be worth “roughly” $150,000 more in 10 years, compared to the same amount invested in GLD (assuming the expense ratios didn’t change during that time). Investors are picking up on this as IAU has higher inflows. You have to wonder if the inflow trend into IAU will result in GLD lowering its expense ratio sometime in the near future. IAU data by YCharts If you are an active trader, though, you might prefer GLD over IAU, as GLD has a very strong daily volume and is the most liquid of the physical gold ETFs. This also gives GLD a more narrow bid/ask spread compared to IAU. GLD also has a very active options market. GLD is the most controversial physical gold ETF, as many question the fact that gold can be allocated in the vault of a sub-custodian. And some investors feel that it is nothing more than a “paper asset.” But that could be said for any of these ETFs. SGOL doesn’t really have any significant benefits over GLD and IAU, although some investors might prefer this ETF since the gold is stored in Switzerland. SGOL isn’t the best choice for traders, given its minuscule volume. PHYS has some distinct advantages over the group, including potentially lower long-term capital gains taxes for U.S. investors, as well as its modest redemption requirements compared to the gold ETFs. And of course, PHYS’s ability to trade at a big premium/discount to NAV is something to consider as well. There are two other physical gold investment type products that I want to also discuss, as these could be an alternative to the ones described above. The investments I’m referring to are: Central Fund of Canada (NYSEMKT: CEF ) Central Gold-Trust (NYSEMKT: GTU ) These are similar to PHYS, as they are closed-end funds, not ETFs. The reason I didn’t include PHYS in with this group though is because even though it’s a closed-end fund, it has managed to keep its price more in line with its NAV over the last few years. CEF and GTU both own physical gold, and in Central Fund of Canada’s case, some physical silver as well. However, these don’t have any physical gold redemption features, and they are trading right now at significant discounts to their respective NAVs as a result. Or maybe I should say “was” for GTU, as Sprott has made a tender offer for the shares, given how GTU was trading well below its NAV. Since then the discount has narrowed, but is still -3.2%. CEF’s current discount to its NAV is -10%. During bull markets, though, these two funds have outperformed the gold ETFs. If you look at the 10-year performance of GTU, it was showing stronger gains during most of the bull run compared to GLD and IAU, due to its premium to NAV. In a bear market, though, that premium vanishes, and instead turns into a discount. Sometimes a hefty one. GTU data by YCharts Given that CEF contains a lot of silver as well, and silver can show a much higher percentage gain than gold, this fund showed better returns during the bull market than every other physical gold ETF. CEF data by YCharts Some question whether GTU and CEF will ever trade again at a premium to NAV, as “better” products are out there that are not only more liquid but also trade at their intrinsic values. The fact is, GTU and CEF aren’t functioning correctly at the moment, but that might have more to due with the current demand for gold and gold-related products than anything else. They are still popular amongst gold investors, as CEF is the oldest gold fund on the market, having been established in 1961. Its NAV is $3.05 billion, and it owns 1.7 million ounces of gold and 77 million ounces of silver. At an expense ratio of 0.32%, it’s also very competitive to the gold ETFs. GTU’s NAV is $801 million, and it owns roughly 700,000 ounces of gold. It has a slightly higher expense ratio of 0.36%. Both of these funds store their gold (and silver, in CEF’s case) in underground treasury vaults in Canada. They have strict rules, including that “gold holdings may not be loaned, pledged, subjected to options or otherwise encumbered in any way.” The gold holdings are inspected on an annual basis as well. Since GTU and CEF are classified as PFIC’s, they too give U.S. non-corporate shareholders a break on long-term capital gains. So while GTU and CEF are more out of favor at the moment, in a bull market that could change, if history is any guide. Leveraged Physical Gold ETFs There are several physical Gold ETFs/ETNs that use futures contracts and forward contracts to provide investors with increased leverage, both short and long. Due to this leverage, though, most of these funds continually lose value over time as a result of decay or beta slippage. So they aren’t designed for long-term investors; rather, they should only be used by very short-term traders who understand the risks involved with these types of products. Both GLD and IAU can be shorted, but investors also can buy the DB Gold Short ETN (NYSEARCA: DGZ ) to bet against gold. DGZ seeks to replicate the inverse (-1x) daily performance of gold futures contracts. The expense ratio is 0.75% and the NAV is $40.9 million. With only 95,000 shares traded on average, it doesn’t have much liquidity for active traders or large investors. There are two Gold ETF products by PowerShares that hold futures contracts rather than gold bullion, those being: PowerShares DB Precious Metals ETF (NYSEARCA: DBP ) PowerShares DB Gold ETF (NYSEARCA: DGL ) The only difference between the two is that DBP holds some silver futures contracts as well (about 20% of the fund’s holdings), whereas DGL is 100% gold. Both of these ETFs earn interest income from their holdings of primarily US Treasury securities, as they collateralize their futures contracts with these securities. This interest income helps to recoup some of the fees of these two funds, but with rates so low at the moment, it’s not having as big an impact. DBP DGL Expense Ratio 0.78% 0.78% Net Assets $110.3 million $163.3 million Average Volume 26,183 shares 32,367 shares If an investor is looking for two times (2x) or three times (3x) the daily performance of gold bullion – both short and long – the following exchange-traded products are available: As I mentioned earlier, since these are leveraged products, they will continually move toward zero over time. But if you are a short-term trader, these funds can offer substantial gains, as well as substantial losses. These are very high-risk, very high-reward leveraged plays on physical gold, and should be respected if an investor decides to add them to his or her portfolio. GLD data by YCharts Gold Miner ETFs With the amount of research it takes to keep up with the publicly traded gold companies, it makes sense for many investors to buy an ETF instead of individual stocks. A gold stock ETF also minimizes the risk, as most of them contain a well diversified portfolio of companies in the sector. Gold miner ETFs provide the best of both worlds for investors: Not only do they give exposure to the gold sector, but they offer a lot more leverage compared to physical gold. Many of these ETFs also own shares of silver companies, which some investors consider a bonus, since silver can really scream higher in a bull market. There are a range of gold miner ETF options available, and it all comes down to how much risk you want to take. The following four ETFs invest in the sector’s larger-cap names: Market Vectors Gold Miners ETF (NYSEARCA: GDX ) Sprott Gold Miners ETF (NYSEARCA: SGDM ) iShares MSCI Global Gold Miners ETF (NYSEARCA: RING ) PowerShares Global Gold And Precious Metals ETF (NASDAQ: PSAU ) GDX, an offering from Van Eck Global, is by far the largest and most popular gold stock ETF with total net assets of $4.5 billion. A look at the Funds top 10 holdings shows a good dispersion of large cap gold companies, as well as some exposure to silver. Source: Van Eck Global . GDX is designed to track the NYSE Arca Gold Miners Index, and the fund usually tracks the Arca Gold Bugs Index (or HUI) fairly closely as well. If anything, the chart below shows that GDX will more or less perform in line with the HUI during a bull or bear market. There is nothing particularly exciting about GDX, but it does its job very efficiently in terms of providing more leverage than the price of gold and less volatility/risk compared to other gold stock ETFs that own the smaller producers. In other words, it offers a nice balance for investors. ^HUI data by YCharts SGDM is a brand new offering by Sprott, no doubt in a bid to capture some of the popularity of GDX – as well as some of the fees. But SGDM is very top-heavy, as the largest holdings account for 46% of the total weighting of the fund. But this is because of the formula used to select the stocks it buys. According to Sprott, the index SGDM tracks “uses a transparent, rules-based methodology” that identifies 25 gold stocks that have with the highest beta to the price of gold. Each stock’s weighting in the index is adjusted based on two criteria: Quarterly revenue growth year-over-year, and the quality of its balance sheet as measured by long-term debt-to-equity. It would make sense then that Franco-Nevada (NYSE: FNV ) would have the heaviest weighting, given its strong balance sheet and revenue growth. Source: Sprott. Whether this methodology produces higher returns compared to the other gold stock ETFs in the space remains to be seen. Since its inception, SGDM is trailing the performance of GDX. SGDM data by YCharts RING was launched in 2012, but it hasn’t managed to generate much interest, as net assets only amount to $44 million. The top three holdings are the standard Goldcorp (NYSE: GG ), Newmont (NYSE: NEM ), and Barrick (NYSE: ABX ), and the heavy weighting of those stocks makes the fund less diversified than GDX. Source: iShares. PSAU doesn’t receive much attention either, with only $16.9 million in net assets, but it does own a good mix of companies. You have the standard three at the top, however, the weighting is lower compared to RING, which means more is invested in the higher-beta names. This gives PSAU a better chance to outperform. Source: PowerShares. You can see that in the chart below, over the last 5 years, PSAU has held up the best when compared to RING and GDX. GDX data by YCharts Below is a comparison table of these large-cap gold stock ETFs. GDX is a behemoth next to the others, given its market cap and very impressive share volume. It remains the best option for active traders looking for exposure to the intermediate and senior producers. And while PSAU has technically been the best performer over the last 5 years, the downside is it’s a very thinly traded ETF, so this is not a good option for those looking to readily jump in and out of a gold stock ETF. For long-term investors, it could be considered an alternative to GDX, given its weighting is more evenly distributed and it’s the most diversified of the group in terms of the number of holdings it owns. If an investor wants even more leverage than the gold stock ETFs listed above, there are the following options: Market Vectors Junior Gold Miners ETF (NYSEARCA: GDXJ ) Sprott Junior Gold Miners ETF (NYSEARCA: SGDJ ) Global X Gold Explorers ETF (NYSEARCA: GLDX ) All three of these ETFs comprise small- to mid-cap gold and silver companies, which are riskier than the larger-cap names but have far more upside potential in a bull market. You won’t find Barrick, Newmont, or Goldcorp in these funds; instead, they consist of many unfamiliar companies that the average investor most likely has never heard of. GDXJ is the most popular junior gold miner ETF, with net assets of $1.3 billion and a good diversification of holdings. SGDJ was introduced just this year, a relative newcomer to the field. Its current NAV is only $22.7 million, but it’s a solid alternative to GDXJ given the quality of its gold and silver stock holdings. GLDX is the riskiest of the trio, as it is mostly devoted to small gold and silver exploration companies. The majority of these companies don’t have any production – and might not anytime soon. Instead, they are actively exploring current projects that could one day turn into mines, or looking for future projects. To show you the increased leverage these funds have, take a look at how much GDXJ outperformed the HUI during the 2011 peak. An ETF like GDX won’t be able to duplicate the type of gains GDXJ produces, but GDXJ is a much more volatile ETF. So when it’s good, it’s really good, and when it’s bad, it’s really bad. Which type of gold stock ETF an investor chooses depends largely on this risk tolerance. There are also a several gold stock ETFs on the market today that offer 200% and 300% leverage. ProShares just introduced a series of 2x ETFs, but these are very small funds at the moment as they have a combined NAV of around $2 million. NUGT is the most popular of these leveraged gold stock ETFs, with an NAV of $644 million and very strong average daily volume. ProShares Ultra Gold Miners ETF (NYSEARCA: GDXX ) ProShares UltraShort Gold Miners ETF ProShares Ultra Junior Miners ETF (NYSEARCA: GDJJ ) ProShares UltraShort Junior Miners ETF (NYSEARCA: GDJS ) Direxion Daily Gold Miners Bull 3x Shares ETF (NYSEARCA: NUGT ) Direxion Daily Gold Miners Bear 3x Shares ETF (NYSEARCA: DUST ) Direxion Daily Junior Gold Miners Index Bull 3X Shares ETF (NYSEARCA: JNUG ) Direxion Daily Junior Gold Miners Index Bear 3X Shares ETF (NYSEARCA: JDST ) However, as I warned above, these leverage ETFs all go to zero over time. NUGT tracks the Amex Gold Miners Index, and you can see the end result of this massive leverage. NUGT data by YCharts JNUG tracks GDXJ (well, technically, it tracks the Market Vectors Junior Gold Miners Index, which GDXJ also tracks). Below, you can see the impact of a 3x leveraged fund on a portfolio. These ETFs should not be held for long periods of time. JNUG data by YCharts In Summary Gold investors have so many options when it comes to exchange-traded products, some might say an overwhelming number. But lots of choices means that every investor can find a fund or two that fits their his needs and wants.

IBB Shockwave: Temporary Hiccup Or Start Of The Bear Market?

Summary IBB has corrected from its all time high by up to 30%. Hillary Clinton’s snowball was catched right in the eye of the pharma industry. The scare is partially unjustified. We look on pharma future growth figures and M&A activity that will drive the secular bull market higher. We believe that IBB is a good place to invest in the long term. We mention two recent picks where we expect further share price growth. iShares NASDAQ Biotechnology Index ETF (NASDAQ: IBB ) has corrected 30% from its all time high of around $401. Several investors start to ask if we have been in the bubble territory. We discuss in this article the facts why the pharmaceuticals industry will continue in a secular bull market towards 2020. We do have a correction now, but it is not the start of the bear market in our opinion. Let’s discuss this in more details. Chart Analysis The IBB bull market started a quick acceleration in 2012. Looking on the quick rise, it is normal to have a correction. No bull market runs up without any significant corrections. Now as China spends more money on drugs also IBB is more correlated with Shanghai SSE index as compared to 2007-2008. IBB data by YCharts Now that we have touched the famous 30% correction line, could we go lower to touch 50%? Let’s have a closer look on what drives this bull market. Pharma Revenues Total pharmaceutical industry revenues are expected to increase from $1.23 trillion in 2014 to $1.61 trillion in 2018. This corresponds to a growth rate of 6-8% annually. Such a 30% increase in revenues would drive the secular bull market higher. Some leading economies are also liberating their drug prices. In June 2015 the communist party in China decided to remove the price caps on a majority of the drugs. That serves as a step towards a more liberalized drug market. We wonder if they tweeted this news to Hillary Clinton. Hillary Clinton’s initiatives might cut the healthcare spending in the United States and set some drug price caps or limitations. We hope that her initiative would not be too disruptive for the industry – if it would be implemented one day. Increasing amount of regulations, restrictions and taxes is typically pushing the businesses to delocalize. These drug firms might also allocate differently their risk capital and not always in the benefit of the patients. For this reason we think that Hillary Clinton’s initiative would end up to be a good compromise. Speaking of delocalizations, we will surely see a wave of startups in China. Currently most big drug firms have large R&D centers in China and the pool of talent has been growing up rapidly. Belgium is no worse, there the politicians compete in attracting new pharmaceutical businesses in the country with tax breaks and benefits. Should Hillary read the tweet streams from Belgium? We think so because Belgium has the highest concentration of life science employees in the whole world and the highest number of Phase I to Phase III drugs in development per capita. Consequently, that has a huge impact on the nation’s economy. We talk later of one Belgian biotechnology company in particular where we hold a long position. Pharma Expenses A topic that is rarely covered in the press is pharma industry’s expenses, i.e. operational costs. Cutting cost is an excellent and quick way to improve the P&L. Well managed companies might be busy cutting down the purchasing and inventory costs and rationalizing the working processes to be more lean and efficient. Pharma industry is still far behind the traditional industries in this. Recent study shows that in 2014 only 32% of the pharma companies procurement organizations’ executives had a full leadership of their key spend areas. The savings generated were slumping down by 45% from year 2009. The study investigated some 185 pharma sector companies with an average revenue of $15 billion. 41% of the companies were based in the U.S. So, the investors should better check how the spend dollars are controlled when investing in individual big pharma companies. A good control over the expenses is the key for creating very profitable businesses. This is why we wanted to discuss this largely uncovered reality of non-optimally managed spends in the pharma industry. There is an opportunity of billions of dollars in savings. Such a greater discipline could have a great impact on IBB over the upcoming years through higher net profitabilities. M&A’s Are Booming There have been a triple amount of mergers and acquisitions in H1 2015 as compared to H1 2014. We have already seen $221b worth of pharmaceutical deals in H1 2015. This hasn’t been considered yet in the long term industry forecasts. It is a very recent news. These M&A’s will give a further necessary tailwind for IBB. These deals will increase the industry’s key players’ profitability through operational synergies. Risks & Opportunities There are many risks and opportunities and we want to highlight here just a few: Risks Hillary Clinton’s initiatives to push down the healthcare spending in the U.S. Patents expiry on several blockbuster drugs Changing regulatory requirements Rich industry valuations: IBB is trading at a PE of 25.19 and Price/Sales ratio of 7.72 Opportunities Increased focus on Orphan indications with higher margin opportunities Drug price cap removal in China Emerging digital healthcare applications market (drug administration, patient monitoring, etc.) Faster drug development with more modern technologies available in R&D Increase of aging patient populations We believe that by balancing out the risks and opportunities the overall picture is quite positive for the pharma industry. The digital healthcare applications will become a hot market in our opinion. Speaking of the healthcare industry in the wide sense we have covered prior some surgical robotics companies. This is a good example of how the modern technology can revolutionize the market segments and bring benefits to the patients and payers. The readers may have a look on TransEnterix as one example. How To Invest? Surprisingly, we are not holding IBB in our portfolio. Such index is better suited for a passive investor. We prefer to pick individual names and do lots of due diligence on them, that we partially publish at SA articles. We currently have two promising companies in our radar with an imminent share price catalyst in Q1-16. If you want to learn more you can read our articles on Mast Therapeutics and TiGenix. Wake-Up Calls for Two Hidden Gems TiGenix has run up already over 44% since our exclusive article at SA but its valuation is still at a ridiculous level in our opinion. TiGenix (OTC: TGXSF ) already published on 23rd August 2015 that their Phase III study primary end-point was met with the final and full results coming out in Q1-16 for a treatment of perianal fistulas in Crohn’s disease. Their Cx601 allogeneic expanded stem cells drug seems to be very safe as no difference was observed between the drug and placebo groups. The peak sales potential is estimated at $900m and TiGenix trades currently at a market cap of $182m. We think that is making no sense and the share price might have quite a lot of potential to go up with the final Phase III results coming out in Q1-16. We covered Mast Therapeutics (NYSEMKT: MSTX ) at SA on 28th September 2015. It has went up quite a lot after our article was published. It is again an example of a very misunderstood company with a good pipeline drug MST-188 running in late Phase III to treat sickle cell patients. SCD patients have had no proper drug for the past 17 years and this is the first one we expect to arrive on the markets. Both these micro-cap stocks offer a good example of what we look for when picking individual names across the biotechnology sector. We are having long positions with both. Conclusions We believe that IBB is in a secular bull market. This index could still correct lower than the latest 30% drop from the all time high. Eventually, the increased industry revenues towards 2018, recent tripling in M&A activity and a better control over the spend dollars could send IBB to much higher levels. We believe that active investors might be more successful in hand picking individual companies instead of buying IBB. This would go along with a higher risk. Disclaimer: Please do your own research prior to investing and taking investment decisions. This article is provided for informal purposes only and any information mentioned may change at any time without a notice. Please consult your investment advisor for finding a proper allocation for your portfolio that is adjusted with your risk levels and personal situation. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.