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Palladium ETF To Enjoy Another Year Of Strong Fundamentals

Summary Low gas prices are boosting car sales. As the car industry picks up, increased demand for catalytic converts will help boost palladium prices. Palladium’s role in the industrial space. The palladium-related exchange traded fund could shine this year as low gasoline prices and cheap bank loans help attract more new automobile buyers. The ETFS Physical Palladium Shares (NYSEArca: PALL ) has only increased 1.1% over the past year but could begin to pick up momentum in 2015. The palladium spot price is hovering around $777.3 per ounce Tuesday. Johnson Matthey Plc, a maker of catalytic converters for automobiles that uses palladium to reduce harmful emissions, projects demand for the precious metal will likely exceed supply for a fourth consecutive year in 2015, reports Laura Clarke for Bloomberg . Fueling the increased palladium demand, global car sales increased 3.4% in 2014 to a record 81.6 million vehicles. In the U.S., auto sales rose to an annualized rate of 17.2 million, the highest since November 2003. Morgan Stanley and Deutsche Bank AG both remain bullish on the palladium outlook because 70% of palladium demand comes from car-parts manufacturers. Specifically, an ounce of palladium supplies enough catalytic converters in about 10 vehicles. “Palladium is an exciting place to be because of its exposure to gasoline,” Scott Winship, a fund manager at Investec Asset Management, said in the article. “U.S. auto demand is incredibly strong and might even surpass previous peaks that we saw before the financial crisis.” Bolstering U.S. auto sales, near-zero interest rates, a stronger job market and cheap fuel costs are allowing American consumers to finally purchase some big-ticket items that they pushed off in the wake of the financial crisis. Cheaper fuel “might attract some drivers to buy a car when they otherwise wouldn’t have,” Jonathon Poskitt, the head of sales forecasting for Europe at LMC Automotive Ltd., said in the article. However, palladium investors may be wary of prices rising too quickly. When palladium jumped to a record in 2001, carmakers cut palladium demand by 40% the following year and shifted into platinum as a cheaper alternative. On the supply side, production has lagged consumption since 2012, with output declining in Russia and South Africa, the world’s top producers. Deutsche Bank calculates that the shortfall could diminish to 907,000 in ounces this year, compared to 1.2 million ounces in 2014, and the market will continue to see production deficits until at least 2020. “There’s a very bullish story there that’s going to play out in the long term,” Jeremy Baker, senior commodity strategist at Harcourt Investment Consulting AG, said in the article. “There is a good argument that palladium should outperform other precious metals.” ETFS Physical Palladium Shares (click to enlarge) Max Chen contributed to this article .

Tech ETFs With Global Footprints At Risk

The U.S. dollar continues to appreciate against other overseas currencies. Large-cap companies with heavy overseas exposure could see revenue slow due to currency risks. Tech sector at risk of overseas exposure. As foreign central banks enact loose monetary policies, a strong U.S. dollar will negatively affect prominent technology stocks, along with related-sector exchange traded funds, that have significant overseas exposure. The Technology Select Sector SPDR ETF (NYSEARCA: XLK ) has been outperforming the broader markets, but a strong dollar could crimp the sector’s performance. XLK has declined 1.5% year-to-date and increased 16.0% over the past year. Meanwhile, the S&P 500 has dipped 1.7% year-to-date and risen 12.3% over the past year. A “strong dollar is negative for any company with significant overseas business,” James Kelleher, director of research at Argus, said in a CNBC article. “Companies like IBM and HP can’t totally avoid a currency headwind at the cost of being a global company.” According to Kensho quantitative analytic data, when the U.S. dollar appreciated 5% or more over 60 trading days on 10 separate occasions since January 1, 2005, tech companies were among the worst performers over the following three months. For instance, Hewlett-Packard (NYSE: HPQ ) traded in the red 70% of the time, with a negative median return of 4.51%. Intel (NASDAQ: INTC ) traded negative 70% of the time, with a median return of 2.97%. Adobe (NASDAQ: ADBE ) was negative 60% of the time, with a median negative return of 5.19%. IBM Corp. (NYSE: IBM ) also blamed the strong currency Tuesday for erasing any chance of a revenue increase this year, following its earnings report. XLK includes a 3.8% tilt toward INTC, 3.7% in IBM, 1.5% in HPQ and 0.9% in ADBE. Semiconductor ETFs, like the Market Vectors Semiconductor ETF (NYSEARCA: SMH ) and iShares PHLX SOX Semiconductor Sector Index ETF (NASDAQ: SOXX ) , also have significant exposure to INTC, which makes up 19.8% of SMH and 8.0% of SOXX. Additionally, the increasingly popular tech dividend ETF, First Trust NASDAQ Technology Dividend Index ETF (NASDAQ: TDIV ) , holds large positions in these large and stable tech names, including INTC 8.0%, IBM 8.0% and HPQ 3.0%. FX headwinds were “really the difference between growing pretax income and not growing pretax income in the fourth quarter for us,” CFO Martin J. Schroeter said. “Now, in this currency environment, and with the divestitures we’ve completed, our total revenue as reported will not grow in 2015.” An appreciating U.S. dollar makes U.S. products relatively more expensive in overseas markets. Sales in foreign currencies will translate to a lower U.S. dollar-denominated return in a strong U.S. dollar, or weak overseas currency, environment. Fueling the continued strength in the U.S. dollar, major central banks have been implementing loose monetary policies and enacting quantitative easing. For instance, all eyes were on the eurozone as the European Central Bank contemplated a Federal Reserve-styled bond purchasing program. “Policy diversion is driving this rally,” Win Thin, global head of emerging markets at Brown Brothers Harriman, said in the CNBC article. “The divergence is U.S. raising rates and the ECB, BOJ expected to do more easing, which typically weighs on a currency. Everyone’s very bullish on the dollar. The fundamental backdrop still favors the dollar.”

A New Income Oriented Multi-Asset ETF Hits The Market

Income investing has been on a tear since last year thanks to the plunge in bond yields. Global growth worries, a relentless slide in oil prices, QE talks in the Euro zone, a ‘patient’ Fed and stepped-up stimulus in Japan resulted in easy money policies across the developed world and in turn dragged yields down. This spurred many issuers to put out new products in this income space, greatly enhancing the number of options at investors’ disposal in this key market segment. Many may think that the income investing space is stuffed, leaving no scope for a new theme to perk up investors’ mood. To prove this group wrong, Master Shares recently released a pass-through ETF with an alternative focus, this time on income. The ETF trades under the name of the Master Income ETF (NYSEARCA: HIPS ). Let’s dig deeper. HIPS in Focus The fund looks to track the TFMS HIPS 300 Index, focusing on 300 securities with a pass-through structure. This is done by looking at securities from the sectors including closed-end fund (CEFs), mREITs, commercial/residential/diversified REITs, business development companies and MLPs. The fund charges 87 bps in fees. How Could it Fit in a Portfolio? The fund does look to be a great way to play the alternative securities space in an ETF form, while its yield will be tough to beat. The current period of low interest rates makes this income paying ETF quite attractive. Investors should note that high income paying securities play a defensive role in a portfolio and help to reduce overall volatility in uncertain times. The pass-through structure is basically created to avoid the effects of double taxation. The product could also be an interesting choice for those reluctant to invest in the regular ways of income investing like junk bonds or high-dividend equities. The constituents of the portfolio are un-correlated in nature and bear less relationship with the typical bond and stock exchanges. Thus, barring the income lure, the product should go a long way in hedging marketing volatility in the portfolio. ETF Competition Since the high yield space sees tough competition due to relentless launches over the last two years, the issuer gave this product an unusual packaging to set it apart from the regular pack. Still, some high income products with a focus on alternative securities are presently operating in the market. These include the likes of the ETRACS Diversified High Income ETN (NYSEARCA: DVHI ), the iShares Morningstar Multi-Asset Income Index ETF (BATS: IYLD ), the SPDR Income Allocation ETF (NYSEARCA: INKM ), the Guggenheim Multi-Asset Income ETF (NYSEARCA: CVY ), the First Trust Multi-Asset Diversified Income Index ETF (NASDAQ: MDIV ) and the YieldShares High Income ETF (NYSEARCA: YYY ). Expense ratio wise, the newly launched ETF looks reasonable as other products charge in the range of 60 bps to 165 bps a year. This is especially true given the product’s focus on pass-through entities and wide coverage from CEFs to MLPs. However, to be a winner in a long-distance race, the issuer should dedicatedly focus on the income part of the ETF. Notably, YYY holds the status of the highest yielding product in the space of diversified ETFs, having yielded about 9.6% as of January 13, 2015. To live up to investors’ expectations, the fund should offer something around that high benchmark, otherwise it could be somewhat prohibitive to asset accumulation, at least to those who are highly yield-starved.