Tag Archives: nasdaq

Did GLD Just Enter A Bull Market?

Summary Both GLD and the HUI looked like they were on the verge of one big final drop, then on October 2, the U.S. nonfarm payrolls data for September was released. There are some bearish hurdles that suggest this rally might soon run out of steam. Possible rotation out of the market and into gold is one bullish aspect to consider right now. When you look at the big picture, the chart of the HUI doesn’t show a huge move over the last few months. I started to buy in big on October 2, as I anticipated a run to at least that level given what gold did that day. In June of this year, I turned very bearish on the precious metals sector, as the HUI was starting to break down. Long-term, I’m extremely bullish on gold, and this is where I plan to be invested heavily over the next several years. But the sector needed to put in a final bottom first, and four months ago it began that process. Since that time, the price action in the HUI was playing out almost exactly as I described it would. At the beginning of this month, we were set up perfectly for a final decline in October/November. And then a “curveball” came. As I said in a previous article : “Besides, I simply don’t have a crystal ball. I can’t be 100% sure where the exact bottom is at. Rarely do things in the market go EXACTLY as you expect them to. There will probably be some curveballs along the way.” So what do we make of this latest rally in the SPDR Gold Trust ETF (NYSEARCA: GLD ), as well as the strong rebound in the gold and silver stock indexes such as the HUI and XAU? Is this the start of a new bull market, or is this just one last bear market rally before the final lows are hit? Does this curveball (meaning the HUI deciding to break higher, not lower) change the outlook? Well, I’m certainly still very cautious right now, but I have moved back to neutral until we get more clarity on a few things. Both GLD and the HUI looked like they were on the verge of one big final drop, and then on October 2, the U.S. nonfarm payrolls data for September was released. The report said the U.S. economy created only 142,000 jobs in September, economists were expecting 203,000 new jobs for the month. And the data from August was revised downward to 136,000, from the first reported 173,000 figure. (Source: CNBC ) Investors interpreted this miss as further proof that the Fed would most likely hold off even longer when it came to raising rates, and gold spiked as a result. You can see the huge move in price and the massive volume that occurred just after the jobs report was released at 8:30 a.m. EST. (Source: Business Insider ) GLD has added to its gains over the last week or so, as have the precious metal companies. Many gold stocks have had strong percent increases during that time – climbing 25% or more. Hurdles To Overcome Given the rebound that has taken place this month, or maybe I should say stick save, some would argue that the lows are in. But there are some bearish hurdles that suggest this rally might soon run out of steam. These would need to be overcome before we could start to talk about a new bull market. The first hurdle is we didn’t see a capitulation type event in gold and silver, but one could make the argument that we did in the HUI. GLD had a slight downdraft in June and July, which amounted to only about a 9% decrease during those months. The HUI on the other hand, dropped 40%. Gold and silver stocks have a lot more leverage than GLD, but the massive carnage in the miners seemed to be suggesting that GLD was about to drop further. It didn’t though, instead, GLD rebounded and now it’s only down about 2.5% from where it was at the start of June. The HUI, on the other hand, is still down 21%. There is a big divergence occurring, and the gold stocks are still predicating more downside. Unless they can get back in line with the price of gold very soon, then GLD is going to decline once again. It almost feels like an incomplete bottom. Had GLD moved down a lot further, then it would be easier to say the lows are in. But that is not what has happened. Gold would need to move above $1,200, or 115 on GLD, for this rally to have some real momentum behind it. Until that happens, it’s too early to say the bear market is officially over. The short-term trend might be up, but the long-term trend isn’t yet. The second hurdle is, given that the mining stocks are down significantly for the year, they could start to be hit with tax-loss selling. The recent rebound has “painted some lipstick on these pigs,” as the losses were a lot worse just a scant 2 weeks ago. But the vast majority of these gold and silver miners are still showing hefty declines YTD. Goldcorp (NYSE: GG ) is down 21.7%; it was down 35% YTD at the beginning of this month. The rest listed below are still lower by a sizable percentage. There has been a major improvement since October 2, but as you can see the losses are still there. It’s possible that the rally continues and most of these are erased, but if it doesn’t, then tax-loss selling can feed on any stagnation or further decline in the HUI and XAU. (Source: YCharts) The third hurdle is the Fed still hasn’t waived the white flag. It delayed hiking rates, but in no way has it suggested they are completely off the table for this year – even if economic data is weak. The temper tantrum that the stock market threw in August was the main reasoning the Fed has pushed back its timing for the first rate increase. But the market is now assuming that the Fed will wait until 2016, or possibly even later, before it raises rates. I’m not convinced that is going to happen. The Fed stands to lose a lot of credibility if it doesn’t begin to increase the Fed Funds rate this year. It might come as a shock to some investors, but the Fed has been implying for the last 3 years that it would raise rates during 2015. It hasn’t deviated at all from that plan. If you look below, you will see that the latest meeting in September showed a large majority of Fed members/participants believe that policy tightening should happen in 2015. That has been a consistent message since September 2012. Imagine how it would look if all of the sudden they flipped. (Source: Federal Reserve) After the September meeting concluded, Fed Chair Janet Yellen said at the news conference that followed: “The recovery from the Great Recession has advanced sufficiently far, and domestic spending is sufficiently robust, that an argument can be made for a rise in interest rates at this time. We discussed this possibility at our meeting. However, in light of the heightened uncertainty abroad, and the slightly softer expected path of inflation, the committee judged it appropriate to wait for more evidence including some further improvement in the labor market to bolster its confidence that inflation will rise to 2 percent in the medium term.” “Now, I do not want to overplay the implications of these recent developments, which have not fundamentally altered our outlook.” “The economy has been performing well. And we expect it to continue to do so.” Yellen further made it clear that the crash in the Chinese market, as well as the severe decline here in the U.S, was the reasoning for the delay in rate hikes: “The Fed should not be responding to the ups and downs of the markets and it is certainly not our policy to do so. But when there are significant financial developments, it’s incumbent on us to ask ourselves what is causing them. And of course while we can’t know for sure, it seemed to us as though concerns about the global economic outlook were drivers of those financial developments.” “And so they have concerned us in part because they take us to the global outlook and how that will affect us.” Even though the disappointing September jobs report was released a few weeks after Yellen’s news conference, it should have no major influence on the decision of when to hike rates, as Yellen stated at the time: “As I noted earlier, it remains the case that the timing of the initial increase in the federal funds rate will depend on the committee’s assessment of the implications of incoming information for the economic outlook. To be clear, our decision will not hinge on any particular data release or on day-to-day movements in financial markets. Instead, the decision will depend on a wide range of economic and financial indicators and our assessment of their cumulative implications for actual and expected progress toward our objectives.” The Fed is looking at the big picture, not single pieces of economic news. Major declines in global stock markets are really the only thing that would probably give the Fed a good reason to pause. The economy is in decent shape, and the Fed isn’t going to wait until things look peachy either, as per Yellen: “If we waited until inflation is back to 2 (percent), and that will probably mean that unemployment had declined well below our estimates of the natural rate, and only then did we start to begin to … diminish the extraordinary degree of accommodation for monetary policy, we would likely overshoot substantially our 2-percent objective and we might be faced with then having to tighten monetary policy in a way that could be disruptive to the real economy. And I don’t think that is a desirable way to conduct monetary policy.” Even Stanley Fischer, vice chairman of the Federal Reserve, said in August that officials: “would not be able to postpone a decision until all doubts were resolved.” “When the case is overwhelming,” he said, “if you wait that long, then you’ve waited too long.” The statements from the Fed, as well as their consistent expectations over the last few years for policy tightening starting during 2015, seem to strongly suggest that we will see at least a 25 basis point move at either the October or December meeting (most likely December). Investors should recall that just two years ago, the expectation was for the Fed to announce at its September 2013 meeting that it was going to taper its bond purchases. The stock market, and in particular the bond market, started acting up in May of that year in anticipation of this major change in policy. The Fed decided to hold off at the September meeting, as it wanted to give the market a little more time to adjust. It finally started to taper in December of that year. We could see a repeat when it comes to the first rate hike, sometimes the market just needs a bit more time. So I believe that rate hikes are still on the table, and this should be clear at the conclusion of the next Fed meeting in a few weeks. If this occurs, then gold could come under pressure again. But it will be short-lived, I’m looking for a “sell the rumor, buy the news” event. One Bullish Aspect In Play If I had to point to one positive development for gold, it would be the decline we have seen in the major U.S. indices. Some readers might recall that I have always said the main competition for gold over the last several years has been the stock market, not the USD. Gold is always going to increase over time, no matter what the U.S. dollar is doing. What has taken the shine off of gold over the last few years has been the gargantuan rally in stocks. The concept of investors chasing returns is a familiar one, and with the run that the Nasdaq, S&P, and DJIA have had since 2011, it shouldn’t come as a shock that the gold market was suffering from lack of attention and investor dollars. (Source: StockCharts.com) It has been my argument that only when the market finally peaked and started to roll over, that gold would bottom out. Since this time last year, I have expressed my belief that not much in the way of gains would be seen in the stock market during 2015. In an article this past June, before the market started to collapse, I said the following: “The stock market has had an incredible run over the last 31/2 years. While they don’t ring a bell at the top of a bull market, I would say this is either close to being over or is over. That doesn’t mean we can’t keep hitting marginally higher highs during the next 6 months or so, just like we have been doing since the beginning of the year….There is always the possibility for a blow-off top to occur as well, but either way the easy money has been made and the stock market is very unappealing right now.” I was expecting a big sell-off in the stock market towards the end of this year or early 2016. Well, the time-table got pushed up, as investors started to liquidate in August. This market now officially looks broken, and I don’t believe we are going to see new highs anytime soon, especially not with the Fed looming in the background. So one could make the argument that the smart money knows the bull market in stocks is over, and it’s time to look for assets that are undervalued and have underperformed everything else since 2011-2012. The most logical place to rotate into would be the precious metals sector. Unless the stock market can have one final hurrah and stage a decent rally over the next few months, this rotation could continue, and that would put a firm bid under the price of gold. Below is a chart that I created using historical data points for the S&P, Gold, M2, and the USD. I showed this chart in a previous article a few months ago when I talked about this eventual rotation out of the stock market and back into gold. Unless you are in some type of hyperinflationary environment, when gold does well, the stock market will underperform, and vice versa. This inverse correlation was very apparent in the 1970s, and has been since that time. Keep in mind we are talking long-term trends here, as gold and the stock market can rise and fall in tandem for months at a time. But when you compare long-term performances over many years, they just don’t have their respective bull markets occurring during the same dates. As you can see, gold and the S&P continually move higher with the money supply. But gold and the S&P usually move inverse to one another and oscillate around M2, as it increases in quantity. So when the S&P is in a long-term bull market (such as from 1980-2000), gold is in a bear market, and vice versa. This will eventually reverse course again, and it could be starting now. If that is the case, then over the next few years, the gold line will start to trend above the red one, and the blue line will trend below it. Over the long-term, the direction of the USD is irrelevant. Source: Ycharts.com/author/FRED As the saying goes, “never fight the Fed.” The stock market has had an incredible run over the last several years; it’s going to take a monumental effort to keep that going if rates are about to increase. Money is rushing out of stocks a little sooner than I anticipated, and this “hot money” needs to find a home somewhere. Gold is the most logically choice. So possible rotation out of the market and into gold is one bullish aspect to consider right now. If This Is The Start, It’s Still Very Early In The Game There is a lot of anxiousness and confusion right now in the precious metal sector. Everybody wants to time this perfectly, or maybe I should say those on the sidelines that are calling for lower lows. This is a great opportunity and investors want to maximize their gains. But most that are familiar with this sector know just how volatile it can be, and they know that the gold stocks can be down 30-40% in a heart beat. Nobody wants to step in front of this train if there is even the remote possibility for more downside. The gold sector hasn’t been kind to many portfolios over the last few years. But while it would be extremely rewarding to nail the lows in gold and the precious metal stocks, it’s not necessary. The sector was massively undervalued to begin with, and still is, even considering the money that has been made since early October. When you look at the big picture, does the chart below reflect a huge move in the HUI over the last few months? No, it doesn’t, it looks like a blip on the screen. Even at 250, the index would appear to be just barely off the mat. If this is in fact the start of a new bull market, and I’m not suggesting it is yet, then it’s very early in the game. Heck, we are just at the “singing of the national anthem stage,” the game hasn’t really even begun yet. Of course the chart below also supports the bearish argument that there simply isn’t enough evidence yet to call a bottom. (Source: StockCharts.com) It’s important to keep perspective here. So if you are still on the sidelines, know that if this is the start of a new bull market, then we have a long-long way to go. If you are even paying attention to this sector right now then you are at a big advantage compared to everybody else. My Updated Plan Of Action As I mentioned at the start of this article, I have been very bearish on gold since the beginning of June. However, as I told readers in early August, I was hedging my bets. The HUI was extremely oversold at the time, and at minimum, I expected some sort of rebound. I wasn’t convinced that the lows in August were the final lows, but if they were then I would at least have a decent size build-up of precious metal shares. It was a very low risk opportunity at the time given the incredible pricing of the gold and silver stocks, and I felt that it was imperative to take advantage of it. I didn’t jump all in, but I did establish many positions. The plan since then has been to get in heavily, if the HUI breaks above 130; that was the key level to be taken out for me to get a lot more constructive in the short term. But I started to buy in big on October 2, as I anticipated a run to at least that level given what gold did that day. I’m not acquiring these stocks on the notion that the bear market is officially over, rather I always just follow major support and resistance (as well as my gut). It has allowed me to avoid losing money in this sector, and is the reason I’m up for 2015 even though the precious metal complex is showing losses – sizable ones for many of the stocks. I’m now neutral on the sector, given the recent gains. I’m going to hold for a bit and see what happens. I have some good profits so I don’t think I’m taking a big risk. Should this short-term move peter out, then I will look to book some of those. The real tests still lie ahead, until those are passed, we can’t label this a bull market yet. For now, let’s see how this rally plays out and what the Fed says at the conclusion of its October meeting.

Smead Capital Q3 Shareholder Letter

Summary David Dreman’s Red Room and Green Room provides a useful framework for thinking about investments. We argue that a new “Beige” room representing passive investments should be added to the construct. We conclude that the Green Room still offers the best approach for the long-duration investors. The inevitability of market fluctuations caught up with the U.S. stock market and the Smead Value Fund (MUTF: SMVLX ) in the third quarter of 2015. The fund fell 5.93%, while the S&P 500 Index fell 6.44% and the Russell 1000 Value Index fell 8.39%. We were pleased with how our portfolio held up in the decline, but are realistic with our investors about the likelihood that there are periods when our fund will either decline in value and/or underperform the indexes we measure ourselves against. We used the declining prices in the quarter to reduce the number of companies we own and to raise the quality and cheapness of our holdings. Our stocks that contributed the most alpha in the quarter were H&R Block (NYSE: HRB ), NVR (NYSE: NVR ) and Chubb (NYSE: CB ). H&R Block announced a massive stock-buyback totaling 35% of outstanding shares and a Dutch-auction tender offer for $1.5 billion of its shares. NVR has continued to have the wind behind them as home building recovers from a population-adjusted depression in household formation and home buying from 2007-12. Chubb was taken over by Ace LTD at a sizable premium and was sold during the quarter. Among the worst drags on performance was Tegna (NYSE: TGNA ), which fell sharply after splitting from Gannett. Tegna’s ownership of network-affiliated TV stations got caught in cord-cutting and advertising revenue competition fears. We find this ironic. As the value of cellular spectrum increases and a blowout political advertising season looms in 2016, we get very excited about their future. Even today, 55% of adults in America use local TV news as their prime form of news. PayPal (NASDAQ: PYPL ) suffered from its popularity prior to the split with eBay (NASDAQ: EBAY ). Many major companies covet their 75% share of the secure online payments market and it has corrected along with other stocks with above-average P/E ratios. Navient (NASDAQ: NAVI ) disappointed investors during the quarter. They have experienced unusual loan losses in their portfolio and we sold the stock during the quarter. The Red, Green, and Beige Room One of the great investing books of the last 40 years was David Dreman’s, Contrarian Investment Strategy . He started it by telling of a hypothetical gaming casino with two separate, but adjoining, rooms: the red room and the green room. The red room was packed with people and excitement and almost every day someone hit a huge jackpot setting the building on fire with electricity. Every seat was packed, others waited their turn to play and the anticipation was palpable. Yet most of the players left the casino each night without their money, because the odds were stacked heavily in the house’s favor. The green room was relatively quiet and included many empty seats. Players sat patiently and most of them had amassed large chip stacks. Virtually nobody hit it big each day, but through patience and odds stacked heavily in their favor, most the participants in the green room created wealth. In the last 20 years, we think a new room should be added to Dreman’s imaginary casino. We call it the “beige” room. This room is filled with investors who had the natural reaction to bad experiences in the red room, but lacked the patience to succeed in the green room. In this room, you will find participants in passive indexes. Additionally, we think stock market difficulties since 2000 triggered former green room participants to lose their patience, thus contributing to the popularity of being average. Dreman was trying to explain the difference between investing in common stocks based on excitement about future prospects versus buying stocks based on value or intrinsic value. This has been over-simplified by using monikers such as growth stock and value stock. For the sake of our discussion, let’s say that a value stock is one priced below the average stock and a growth stock is one priced above the average. The most common averages used are the price-to-earnings ratio (P/E) and the price-to-book ratio (P/B). Every academic study we’ve seen shows that over one, three, five and seven-year time periods, the cheapest stocks outperform the average and most expensive stocks. The most famous of these studies are the ones in Dreman’s book (see below), Fama and French’s P/B study and Francis Nicholson’s study from 1937-1962. Dreman used P/E quintiles, while Fama and French used P/B ratios and both studies rebalanced at the end of each year. They argued that excess return could be had by simply starting the year with the cheapest stocks in the S&P 500 Index and replacing the ones which found favor during the year with the latest ones to find the doghouse. These studies led to the “Dog’s of the Dow” strategy, where an investor purchases the 10 cheapest stocks in the index based on dividend yield (another measurement of cheapness). We found Nicholson’s study (see below) even more fascinating because his portfolio was static. It showed that cheap stocks at the beginning not only outperform in the next 12 months, but that their outperformance continues on for seven years. We like to say that cheap stocks are the gifts which keep on giving. Warren Buffett, the number one disciple of the father of value investing, Benjamin Graham, started out being a green room common stock investor and continues to do so in the private equity realm as well. In the 1960s, he ran into his investing partner, Charlie Munger. Mr. Munger advocated for a qualitative addition to these quantitative strategies. He and Buffett believe that the long duration investor, with great patience, can benefit from owning very high quality businesses purchased at a time of distress. They believe that the primary responsibility of the wise long duration investor is to wait until a splendid business gets in the doghouse due to a bear market in stocks or a temporary corporate stumble. Then they pounce on that opportunity by “backing up the truck” and loading up on shares. Munger’s theory was proven correct in a seminal study done by Ben Inker at Grantham, Mayo and Van Otterloo (see below). His study showed that certain qualitative characteristics like low leverage, high and sustainable profitability, low earnings volatility and low volatility in stock trading have proven to add alpha over long durations. We at Smead Capital Management start our research by leaning toward Dreman’s study, because “valuation matters dearly.” We love Nicholson’s study because the seven-year holding period shows that you can own businesses for a long time and keep your portfolio turnover down. Turnover is a huge annual tax on large-cap equity portfolios and the cost averages 81 basis points or 0.81% annually among large-cap U.S. equity funds. However, we at Smead Capital are risk averse and recognize that human nature gets in the way of holding businesses for a long time, especially in the low-quality arena. This is where Munger and Inker, with their focus on high-quality, come into play and how we seek to reduce portfolio risk proactively. In late 2008, after getting clobbered all year, we received many calls to the effect of “Bill, we know you want to own stocks for a long time and we believe in what you are doing. But shouldn’t we get out of the way of this decline in case we have a total economic meltdown like in the 1930s?” Our answer was simple. The only “safe” alternative was investing in Treasury bills/bonds or government-insured certificates of deposit. We pointed out that the merit of those “safe” investments was the backing of the U.S. government. Our government’s guarantee is no better than its ability to collect income taxes. Those taxes are paid by the largest companies in the U.S. and their employees. Therefore, the safety of Certificates of Deposits and T-bonds came from the safety provided by the qualitative characteristics of the stocks in our portfolio. Selling quality stocks at a time of distress was an especially bad idea, in our opinion. What does the red room look like today? It is filled with investors seeking above-average returns by paying extremely high P/E and P/B ratios for companies with perceived “bright” futures in an attempt to hit the jackpot. Red room regulars are excited about social media, internet-based information/advertising, online shopping, fast food, cloud computing and the “sharing” economy. It is enough to make you want to open a bureau in Silicon Valley. What is going on in the beige room lately? The beige room (index investing) has a tendency to work great in an uninterrupted bull market like the one we enjoyed from March of 2009 to the peak in the summer of 2015. There is historical evidence of the index becoming overloaded with shares of the previous era’s most successful companies, ala tech stocks in 1999. In effect, valuation works against the index when it has been particularly effective in the prior five to ten years. The S&P 500 Index has enjoyed the tailwinds of its overweight position in multinational companies, who drafted on emerging market growth in staple products, heavy industrial infrastructure investments in China and technology purchases everywhere. Since we are of the opinion that the U.S. economy will do better in the next ten years as compared to the last ten years, we contend that the index is at a disadvantage because nearly half of its revenue comes from abroad. Lastly, there are some pretty persuasive arguments which surround the idea that index returns will be in the 6% area going forward. These theories take into account dividends that are lower than historical averages and interest rate increases over time which would reduce historically high profit margins. Our opinion is that the beige room is appropriate for those who are incapable of investing in the green room or unable to figure out whom is. Owning U.S. large-cap equity for a long time is preferable to most other liquid investments and you can get average performance from an attractive asset class in the beige room. Where are folks congregating in the green room? They are rummaging around in financial service companies like banks and insurance, which have low P/E and P/B ratios. The death of traditional media and advertising is a foregone investor conclusion and the lowest P/E and P/B ratios lists are sprinkled with TV content and broadcasting companies, network-affiliate station owners and newspaper/magazine publishers. We are always on the lookout for companies on the cheapest list which meet our eight criteria for stock selection because valuation matters dearly, we want to own companies for a long time and to do that we must own very high quality companies. Thank you for your ongoing confidence in our methodology. The information contained herein represents the opinion of Smead Capital Management and is not intended to be a forecast of future events, a guarantee of future results, nor investment advice. The Smead Value Fund’s investment objectives, risks, charges and expenses must be considered carefully before investing. The statutory and summary prospectuses contain this and other important information about the investment company, and it may be obtained by calling 877-807-4122, or visiting smeadfunds.com . Read it carefully before investing. Mutual fund investing involves risk. Principal loss is possible. As of 09/30/2015 the fund held, 6.02% of NVR Inc., 5.61% of Amgen Inc., 5.17% of Tegna Inc., 5.04% of Berkshire Hathaway Inc. Class B, 5.01% of American Express Co., 4.81% of JPMorgan Chase & Co., 4.42% of Bank of America Corp., 4.34% of H&R Block Inc, 4.33% of Aflac Inc., and 4.29% of Wells Fargo & Co. Fund holdings are subject to change at any time and should not be considered recommendations to buy or sell any security. Current and future portfolio holdings are subject to risk. The S&P 500 Index is a market-value weighted index consisting of 500 stocks chosen for market size, liquidity, and industry group representation. The Russell 1000 Value Index is an index of approximately 1,000 of the largest companies in the U.S. equity markets; the Russell 1000 is a subset of the Russell 3000 Index. The Russell 1000 Value Index measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000 companies with lower price-to-book ratios and lower expected growth values. Price/Earnings (P/E) is the ratio of a firm’s closing stock price and its trailing 12 months’ earnings/ share. Price / Book (P/B) is the current price divided by the most recent book value per share. Alpha is the excess return of a fund relative to the return of its benchmark. Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta is used in the capital asset pricing model (CAPM), a model that calculates the expected return of an asset based on its beta and expected market returns. A Dutch auction tender for public offer is a structure in which the price of the offering is set after taking in all bids and determining the highest price at which the total offering can be sold. In this type of auction, investors place a bid for the amount they are willing to buy in terms of quantity and price. Small- and Medium-capitalization companies tend to have limited liquidity and greater price volatility than large-capitalization companies. Active investing generally has higher management fees because of the manager’s increased level of involvement while passive investing generally has lower management and operating fees. Investing in both actively and passively managed funds involves risk, and principal loss is possible. Both actively and passively managed funds generally have daily liquidity. There are no guarantees regarding the performance of actively and passively managed funds. Actively managed mutual funds may have higher portfolio turnover than passively managed funds. Excessive turnover can limit returns and can incur capital gains. Frank Russell Company is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell ® is a trademark of Russell Investment Group. The Smead Value Fund is distributed by ALPS Distributors, Inc. ALPS Distributors, Inc. and Smead Capital Management are not affiliated.

Time For Dow ETFs?

Dow Jones Industrial Average has been the worst performing index among the popular trio – S&P 500, Dow and Nasdaq – thanks mainly to a freefall in oil prices and rising rate worries in the U.S. Added to this, fears of a hard landing in China and its ripples throughout the world sent this key index into the correction territory in August. So far this year (as of October 9, 2015), SPDR Dow Jones Industrial Average ETF (NYSEARCA: DIA ) is down about 4%. However, things seemed to have been set right for the Dow Jones lately on the oil price jump and the diminishing prospect of a rate hike this year. Oil prices regained some of the lost ground as the U.S. count of oil and gas drilling rigs slipped to a five-year low. Also, the Energy Information Administration (EIA) expects a remarkable drop in U.S. crude production through the middle of next year before a turnaround in late 2016. Oil output is estimated to fall from 9.2 million barrels per day (bpd) in 2015 to 8.9 million bpd in 2016. Needless to say, the rise in oil prices supported energy stocks greatly in recent sessions. On the other hand, a weak September job data pushed the speculative timeline of the Fed rate lift-off to early next year. After all, the year-to-date monthly pace of job gains now averages 198K and the pace for the last three months is much lower at 167K. This compares with the monthly average of 260K for 2014, hinting at the lost momentum in U.S. economic growth. And the stocks surged in hopes of incessant cheap money flows. Moreover, a soft job report curbed the dollar strength which in turn provided a long-awaited boost to the commodities and material stocks. Though all the major benchmarks are correlated and got the boost they needed in October from the Fed and energy-centric optimism, Dow remained relatively more beaten-down and thus is more prone to a sturdy reversal. If this was not enough, a dovish Fed pushed the interest rates down to a lower territory. This in turn brightened the appeal for more yielding securities. Notably, among the top ETFs, Jones Industrial Average-based DIA yields 2.33% annually (as of October 9, 2015) against the S&P 500-based SPY ‘s 2.02% and Nasdaq-100 based QQQ ‘s 1.08%. Below, we highlight a few Dow Jones-based ETF options which could be intriguing options to play: DIA seeks to match the performance of the Dow Jones Industrial Average Index. The index is price weighted and measures the performance of 30 large cap stocks traded in the U.S. markets. Industrials, Financials, IT, Consumer Discretionary and Health Care all hold double-digit exposure in the fund. However, it is subject to company-specific concentration risks as it invests more than half of its portfolio in the top 10 holdings. This $11.6 billion-fund trades in large volumes of over 5 million shares daily and charges 17 bps in fees. It advanced 4.8% in the last 10 trading sessions (as of October 9, 2015). The fund has a Zacks ETF Rank #3 with a Medium risk outlook. iShares Dow Jones U.S. ETF (NYSEARCA: IYY ) This $941.1 million ETF also tracks the Dow Jones U.S. total market index. This fund has a proportionate exposure in almost all sectors with maximum emphasis on IT (19.77%), Financials (17.47%), Health Care (13.91%), Consumer Discretionary (13.55%), and Industrials (10.66%). Unlike DIA, this 1,280-stock fund invests less than 15% share in the top 10 holdings. IYY charges 20 basis points as fees and added 4.2% in the last 10 trading sessions. ALPS Sector Dividend Dogs ETF (NYSEARCA: SDOG ) This fund applies the ‘Dogs of the Dow Theory’ on a sector-by-sector basis using the S&P 500. This could be easily done by selecting the five highest yielding securities in each of the 10 GICS sectors and equally weighing them. These higher yielding stocks will appreciate in order to bring their yields in line with the market, leading to outsized gains. This approach results in a portfolio of 51 stocks with each security accounting for less than 2.33% of total assets. The fund focuses on yield in the large cap market while giving investors roughly equal exposure to all sectors. SDOG has accumulated $1.1 billion in AUM and trades in good volume of more than 180,000 shares. It charges 40 bps in annual fees and has an annual dividend yield of 3.63%. The ETF was up over 5.9% in the last 10 days. Original Post