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ETF Update: 4 New Launches And 2 Closures

Welcome back to the SA ETF Update. My goal is to keep Seeking Alpha readers up to date on the ETF universe and to gain some visibility, both for the ETF community, and for me as its editor (so users know who to approach with issues, article ideas, to become a contributor, etc.) Every weekend, or every other weekend (depending on the reader response and submission volumes), we will highlight fund launches and closures for the week, as well as any news items that could impact ETF investors. So far January has not been the best month for buy and hold investing. As a long term investor I know stock dips are really opportunities to buy into strong companies that will not just recover but bloom again. However, even having studied behavioral portfolio management, I still get that flight response that all investors will feel at some time. As you can see in the fund flows YTD tables below, I am not the only person feeling this way. Top Redemptions Fund Name Net Flows in USD Millions SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) -4,073.29 iShares Russell 2000 ETF (NYSEARCA: IWM ) -2,108.65 PowerShares QQQ Trust ETF (NASDAQ: QQQ ) -1,996.87 iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA: HYG ) -1,648.93 iShares MSCI Emerging Markets ETF (NYSEARCA: EEM ) -1,349.74 Data Source: ETF.com Top Creations Fund Name Net Flows in USD Millions iShares Short Treasury Bond ETF (NYSEARCA: SHV ) -4,073.29 Vanguard S&P 500 ETF (NYSEARCA: VOO ) -2,108.65 iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ) -1,996.87 iShares 7-10 Year Treasury Bond ETF (NYSEARCA: IEF ) -1,648.93 iShares 1-3 Year Treasury Bond ETF (NYSEARCA: SHY ) -1,349.74 Data Source: ETF.com Inflows and outflows can be a great reflection of what investors and money managers actually think is happening in the markets. As I don’t offer investment advice, and none of my articles should be seen as advice, I will leave it to readers to decide what these data points mean in the comments section below. However, I do want to point out that most of the top new creations are Treasury ETFs, while the redemptions are funds tracking the popular U.S. equity indices. It is up to you to decide how (or if) this information from 3 weeks of market activity will affect your portfolio strategy. Even with the churning markets there were 4 new funds launched in the last 2 weeks, so let’s jump in: Fund launches for the week of January 11th, 2015 Van Eck launches the first generic pharmaceuticals ETF (1/13): The Market Vectors Generic Drugs ETF (NASDAQ: GNRX ) focuses on companies that make the majority of their revenues from generic medication. While there are other pharmaceutical ETFs avaliable to investors, the largest being the Dynamic Pharmaceuticals ETF (NYSEARCA: PJP ), GNRX is the first funds to highlight companies focused on the generic medication market. The fund currently holds 84 companies and the top holdings feature names biotech investors are likely already familiar with; Allergan Plc (NYSE: AGN ) (8.69%), Teva Pharmaceutical (NYSE: TEVA ) (8.60%) and Baxalta Inc (NYSE: BXLT ) (5.83%). Reality Shares launches 2 more DIVCON ETFs (1/14): Last week saw the launch of the Reality Shares DIVCON Leaders Dividend ETF (BATS: LEAD ) and the company already has two more out of the gate. However, the Reality Shares DIVCON Dividend Defender ETF (BATS: DFND ) and the Reality Shares DIVCON Dividend Guardian ETF (BATS: GARD ) are both long/short portfolios, which is new for the firm. As a refresher, the DIVCON methodology “rates companies’ dividend health based on seven weighted factors our research shows are correlated with dividend growth.” According to each ETFs homepage, DFND seeks to provide long-term capital appreciation through the use of a hedged equity portfolio, while GARD provides exposure to large-cap U.S. companies with the highest probability of increasing their dividends, as measured by their DIVCON Scores. However, GARD has some twists as well. It dynamically adjusts its market exposure based on the firm’s Guard Indicator market strength gauge, making it a much more complex fund. State Street (NYSE: STT ) rolls out its innovation ETF (1/14): The SPDR FactSet Innovative Technology ETF (NYSEARCA: XITK ) tracks an index of companies selected by FactSet meant to represent the most innovative segments of the technology and electronic media industries. As described on the fund homepage, “the Index Provider considers the most innovative segments of the Technology sector and Electronic Media sub-sector to be those with the highest revenue growth and believes that these companies are often involved in cutting edge research, innovative product and service development, disruptive business models, or a combination of these activities.” Top holdings include Rovi Corporation (NASDAQ: ROVI ) (2.22%), Super Micro Computer Inc. (NASDAQ: SMCI ) (1.49%) and CyberArk Software Ltd. (NASDAQ: CYBR ) (1.42%). There were no fund launches for the week of January 18th, 2015 There were no fund closures for the week of January 11th, 2015 Fund closures for the week of January 18th, 2015 ETRACS 2xMonthly Leveraged S&P MLP Index ETN (NYSEARCA: MLPV ) UBS ETRACS 2x Leveraged Long Alerian MLP Infrastructure Index ETN (NYSEARCA: MLPL ) Have any other questions on ETFs or ETNs? Please comment below and I will try to clear things up. As an author and editor I have found that constructive feedback is the best way to grow. What you would like to see discussed in the future? How can I improve this series to meet reader needs? Please share your thoughts on this first edition of the ETF Update series in the comments section below. Have a view on something that’s coming up or a new fund? Submit an article.

Sizemore Capital 4th Quarter 2015 Letter To Investors

I wasn’t sad to see 2015 end. It was called “the year that nothing worked.” And while that’s not entirely true – if you happened to be long the “FANG” stocks Facebook (NASDAQ: FB ), Amazon (NASDAQ: AMZN ), Netflix (NASDAQ: NFLX ) and Google (NASDAQ: GOOG ) (NASDAQ: GOOGL ), you did quite well – it was certainly true for my Dividend Growth portfolio. The strategy had a poor second half to the year, erasing the gains of the first half and leaving it with a loss of 11.3% for the full year net of fees. And the volatility didn’t end on December 31; it spilled over into January. As I’m writing this letter, the maximum drawdown from the April 2015 highs to the mid-January lows was a gut wrenching 27.6%. That might be tolerable if I were running an aggressive growth portfolio full of speculative names. But I distinctly built my Dividend Growth model with low volatility in mind. The portfolio entered the year with a beta of 80%. In layman’s terms, that means that the Dividend Growth portfolio was about 20% less volatile than the broader market. And with an R-squared that generally stays in the 60s or 70s, the portfolio’s correlation to the broader market has historically been low. This is a portfolio designed to march to the beat of its own drum, regardless of the direction of the market. So, what happened? And more importantly, what is the outlook for 2016? I’ll address each of those questions. The short answer is that we got bogged down in a credit crunch and that the portfolio should enjoy a nice recovery once credit conditions return to “normal.” Now let’s get into the details. What Went Right in 2015 Let’s take a moment to review the Dividend Growth portfolio’s mandate. Its primary objective is to provide a high and growing stream of income. And on this count, the portfolio delivered. The portfolio started 2015 with a trailing dividend yield of 4.8%, more than double the dividend yield of the S&P 500. And we achieved very respectable dividend growth: Total cash received from dividends in 2015 was up 8.7% over 2014. We had two stocks – Kinder Morgan (NYSE: KMI ) and Teekay (NYSE: TK ) – take us by surprise with dividend cuts. But portfolio wide, the theme was one of growing dividend payouts. I’m willing to stomach quite a bit of market volatility if I’m confident that the stocks I own will continue to deliver a reliable dividend stream to my investors. Providing income in retirement or dividend compounding at younger ages are my primary objectives, after all. But it’s hard to enjoy that income when you see the value of your portfolio grinding lower every day. What Went Wrong in 2015 Where do I start. REITs started to come under pressure in the first quarter due to fears that (eventual) Fed tightening would raise their cost of capital. REITs started to stabilize…right about the time that oil took a major leg down and dragged the entire MLP sector with it. Then China started to buckle, and several of my standard divided-paying stocks started to sell off due to their exposure to China. And all throughout the year, there was nearly continuous selling of mortgage REITs, business development companies and closed-end bond funds, mostly due to fear of Fed tightening. But what really hurt my returns was the implosion of the MLP sector in the last two months of the year. MLPs depend on stock and bond sales to fund growth. During the boom years, the bond market all but tripped over itself giving cheap financing to the midstream pipeline MLPs. But when the bond vigilantes sobered up and noticed the junk bond market’s exposure to oil and gas exploration companies, yields began to rise and credit ratings came under scrutiny…even for the quality names in our portfolio. And I should emphasize here again that the MLPs we owned throughout 2015 were the blue chips of the midstream segment. Kinder Morgan faced a choice: Either they kept the dividend intact and sacrificed growth…or they cut the dividend and used the saved cash to “self-fund” their growth projects for the future. Kinder opted to cut the dividend, sending the entire sector reeling. (Teekay faced a similar issue. They worried that, in the current credit market, one of their subsidiaries wouldn’t be able to roll over a large maturing bond issue. So they opted to conserve cash and avoid the capital markets altogether.) To show how quickly things change, as recently as the summer both Kinder Morgan and Teekay raised their dividends and gave every indication that more dividend growth was coming. My, what a difference a couple months can make. If there is an underlying theme here, it is credit. The sectors of my portfolio that got hit the hardest – MLPs, small and mid-cap REITs, business development companies and mortgage REITs – were the sectors most dependent on financing. We had a slow-motion crisis throughout 2015 that effectively took a wrecking ball to all of these sectors indiscriminately. The good news here is that the underlying business fundamentals haven’t changed. The midstream MLPs continue to build out their highly-profitable empires. The small and mid-cap REITs continue to collect their rent checks and pass them along to investors as dividends. Defaults remain very low in our one business development company, Prospect Capital (NASDAQ: PSEC ). And the mortgage REIT and closed-end bond fund sectors continue to throw off a ton of cash while trading at some of the deepest discounts in history. Credit conditions will normalize in 2016. And when they do, investors will rush back into these high-income sectors for lack of a better place to park their funds. Nature hates a vacuum, and high dividend yields will not remain unnoticed for long, particularly when the 10-year Treasury is yielding a pitiful 2.1% at time of writing. I don’t know how long this will take. But I do know that we’re being paid handsomely to wait. Potential Surprises Despite the Dividend Growth portfolio’s conservative nature, we have several positions that I believe have the potential to double or more in the coming year. Prospect Capital trades for an almost pitiful 60% of book value. A narrowing of this discount combined with the ridiculous 17% dividend yield can get us to 100% profits very quickly. Could Prospect slash its dividend? Perhaps. But as of its last earnings release, it was comfortably covering its dividend, so I don’t see this as being likely over the next several quarters. Likewise, Energy Transfer Equity (NYSE: ETE ) is down by more than 70% at time of writing and now yields a ridiculous 12%. As ETE struggles to complete its takeover, a reduction of the dividend can’t be completely ruled out. But we really need to consider the big picture here. The new post-merger ETE will be the biggest pipeline empire in the world and will be a cash-flow-generating powerhouse. Any reduction of the dividend would be a temporary means to an end to make the merger happen. When ETE traded at $35, I believed that it could be worth $70 per share within a few years. While that might sound a little aggressive right now given that the stock trades for less than $10, I still consider it reasonable, at least by the end of this decade. From today’s prices, that would represent a more than 600% return. Similarly, Teekay is down nearly 90% from its all-time highs. (I added it to the portfolio after it had already dropped by nearly a third.) When Teekay traded at $35 per share, I believed that it would be worth upwards of $70 per share by 2020. That figure might not be attainable at this point given that the deleveraged Teekay will be raising its dividend at a much more modest rate. But considering that Teekay trades at a 25% discount to its tangible book value, it’s hard to see this stock doing poorly starting at these prices. The stock could safely triple from current prices even at the reduced dividend payout. Once Teekay’s subsidiary MLPs restart their distribution growth, I expect Teekay Corp to jump like a coiled spring. Even Apple (NASDAQ: AAPL ) has the potential to jump by 50% or more over the next 12-18 months. Apple stock has sold off aggressively on fears that iPhone sales growth is sagging. Well, yes. iPhone growth will slow. We all knew this. The iPhone 6 windfall was a one-time event, as it was the first large-screen iPhone that could compete with some of the larger Android handsets. No one in their right mind expected that kind of growth to continue. But the thing is, Apple’s stock was never priced with that assumption. When you strip out Apple’s gargantuan cash position, the stock trades at a mid-single-digit price/earnings ratio. That is ludicrous pricing. Carl Icahn believes that Apple is worth more than $200 per share. I agree, though I don’t expect a stock as large as Apple by market cap to get there overnight. But over the next 2-3 years, I consider that not only possible but extremely likely. Parting Thoughts I don’t know what 2016 will bring. When I look at the broader market, I don’t like what I see. Stocks are expensive relative to their cyclically adjusted price/earnings ratios, and this is looking to be a disappointing year on the earnings front. But in looking at the Dividend Growth portfolio, I’m far less concerned. Portfolio wide, we have a strong collection of dividend payers that I expect to significantly boost their payouts over the course of the year. While I don’t particularly like volatility, I don’t fear it. I prefer to view risk the way Benjamin Graham and Warren Buffett do: Not as volatility but as the potential for permanent or long-term loss. At today’s prices, I see very little of this risk in the Dividend Growth portfolio. Here’s to earning a solid return in 2016. Disclaimer : This article is for informational purposes only and should not be considered specific investment advice or as a solicitation to buy or sell any securities. Sizemore Capital personnel and clients will often have an interest in the securities mentioned. There is risk in any investment in traded securities, and all Sizemore Capital investment strategies have the possibility of loss. Past performance is no guarantee of future results. Original Post

ETF Relationships That May Tell You When The Worst Is Over

Businesses, consumers and the federal government have taken on enormous amounts of debt since the Great Recession. Optimists argue that total debt is irrelevant; that is, they believe the only thing that matters is the cost of servicing those debts. Fair enough. Then what happens when interest expense does rise? Assuming total debt remains the same, higher rates would increase the percentage of household income or the percentage of corporate/government revenue that must be allocated to debt servicing. In earlier commentary, I provided data showing how the total debt of corporations has DOUBLED since 2007. Thanks to seven years of zero percent rate policy, alongside a number of iterations of quantitative easing (QE), the average rate on corporate debt is down from eight years ago. More critically, however, average interest expense has risen substantially . That’s right. Corporations need to assign more and more of their “gross” toward paying back the interest on their loans. What about households? Well, we’re back to the 2007 record debt level of $14.1 trillion in mortgages, credit cards, auto loans, student loans and credit cards; the typical household has nearly $130,000 in total debt. The good news? Years of stimulative monetary policy has made it easier for households to service these debts. The bad news? Americans “re-leveraged” rather than “de-leveraged.” Any amount of rate hike activity would damage the ability of average Americans to borrow-n-spend. In fact, recent retail data demonstrate just how little Americans feel they have left over to spend, in spite of massive savings at the gas pump. Traditional home affordability measures like median sales price-median income illustrate just how dependent we are on ultra-low interest rates. Specifically, the historical home price-to-household income ratio is 2.6. Where are we at today? Back near the housing bubble highs of 4.0. It certainly does not get any better if one looks at U.S. government obligations. The national debt is roughly $19 trillion, excluding the country’s unfunded liabilities (e.g., Social Security, Medicare, Medicare prescription drug program, federal pensions, etc.). According to Dave Walker, the former head of the Government Accountability Office (NYSE: GAO ) under Presidents George W. Bush and Bill Clinton, the national debt is closer to $65 trillion, including unfunded liabilities. Does anyone believe that those numbers are going to get smaller? Or even, heaven forbid, remain the same? In other words, rising interest expense or rising debt levels would make it even more difficult for the government to honor its obligations. Is it any wonder, then, how schizophrenic riskier assets are? It is the direction of the Fed’s rate normalization path – no matter how gradual – that has nudged the bear out of hibernation . China? Its slowing economy adversely affects corporate profits, but it’s the Fed’s perceived reluctance to “save stocks” that has agitated market participants. Oil? Its rapid-fire descent highlights the possibility of a worldwide recession, though it is the Federal Reserve’s disinclination to “step in” that is rocking investor confidence. Fortunately, there are a number of ETF relationships that can help a cash-heavy investor identify when things may be getting better. More precisely, when “risk-off” relationships abate, one may feel more upbeat about shifting from a mode of capital preservation to a mode of wealth accumulation. Consider the relationship between gold and oil. When people prefer the precious metal to the natural resource, they are expressing a preservation preference. And vice versa. When investors speculate that oil prices will rise, they are typically expressing confidence in the growth of the global economy. It follows that the SPDR Gold Trust ETF (NYSEARCA: GLD ) : The United States Oil ETF, LP (NYSEARCA: USO ) price ratio is likely to climb in troubling times; it is likely to spike in panicky stock sell-offs. One might wish to see the slope of the GLD:USO 200-day moving average flatten out – and the GLD:USO price settle down a bit – prior to making huge commitments to riskier assets. Granted, the rapid depreciation of oil itself has had a fair amount to do with the general trend of GLD:USO. Nevertheless, all three of the most recent corrective phases in U.S. stocks – October of 2014, August-September of 2015, January of 2016 – dovetail perfectly with spikes in GLD:USO. In the same vein, the flattening of the yield curve tells market watchers that participants are concerned about recession probabilities. The difference between the 10-year Treasury bond yield and the 2-year Treasury bond yield has fallen to lows that we haven’t seen since the Fed shocked-n-awed the world with its most powerful stimulus ever, QE3. Of course, some folks prefer to remain in the world of specific ETF assets as well as rising/falling price ratio relationships. For those investors, I suggest that they track the iShares 7-10 Year Treasury Bond ETF (NYSEARCA: IEF ):iShares 1-3 Year Treasury Bond ETF (NYSEARCA: SHY ) price ratio. A rising price ratio implies that people are seeking safety in the middle of the yield curve, while others may be avoiding the short end of the yield curve due to Federal Reserve rate hike intentions. Thus, the yield curve is flattening when IEF:SHY is rising. Since the stock market highs in July, IEF:SHY has, for the most part, been on a steady path higher. A sustained reversal in this trend would be an indication that investors are growing more comfortable with the health of the domestic economy. Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.