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Oil Hits 12-Year Low: Short Energy Stocks With ETFs

No doubt, last year’s chaos in the energy sector has spilled over into this year with many stocks piling up heavy losses in the first couple of weeks of 2016. In fact, the worries have deepened this year with renewed concerns over the slowdown in the world’s second-largest economy and the Iran sanctions’ lift off. This is especially true, as the relaxation in sanctions would add a fresh stock of oil in the global market, which is already facing a supply glut. Iran, a member of the Organization of the Petroleum Exporting Countries (OPEC), is expected to increase its crude oil exports by half a million barrels a day immediately and a million barrels a day within a year of lifting the ban. Though the Iran sanctions were widely expected and the development of oil in the country will take some time to fully ramp up after 40 years, the move unnerved investors, spreading panic among them. That being said, oil price tumbled to a level not seen in more than 12 years with U.S. crude plunging below $29 per barrel and Brent slumping to below $28 per barrel. From a year-to-date look, oil price has lost more than 20% this year, representing the worst two-week decline since the 2008 financial crisis (read: 4 Country ETFs to Gain from Oil Price Crash ). Trend Remains Weak Currently, the outlook for oil and energy sector seems gloomy. This is because oil production has risen worldwide with the OPEC continuing to pump near-record levels, and higher output from the likes of U.S., Iran and Libya. Additionally, a strengthening U.S. dollar backed by a rate hike is making dollar-denominated assets more expensive for foreign investors and thus dampening the appeal for oil. In particular, it will make the borrowings for high-yield firms costlier and result in less money flows into capital-intensive shale oil and gas drilling projects. This in turn will lead to higher bankruptcies, which would hit the already battered energy sector. On the other hand, demand for oil across the globe looks tepid given slower growth in most developed and developing economies. In particular, persistent weakness in the world’s biggest consumer of energy – China – will continue to weigh on the demand outlook. The negative demand/supply imbalance would push oil prices and the stocks further down at least in the short term. Moreover, the ultra-popular United States Oil Fund (NYSEARCA: USO ) , tracking the price of US light crude with an asset base of around $2.2 billion and average daily volume of around 32.3 million shares, has hit new all-time lows several times this year. Given the continued sell-off and the bearish outlook, the appeal for energy ETFs is dulling (read: Oil and Energy ETFs That Hit All-Time Lows ). As a result, investors who are bearish on oil right now may want to consider a near-term short on the energy sector. Fortunately, with ETFs, this is quite easy as there are many options to accomplish this task. Below we highlight them and state how each stands out among the rest: ProShares Short Oil & Gas ETF (NYSEARCA: DDG ) This fund provides unleveraged inverse (or opposite) exposure to the daily performance of the Dow Jones U.S. Oil & Gas Index. The ETF makes a profit when the energy stocks decline and is suitable for hedging purposes against the fall of these stocks. The product has amassed $14.1 million in AUM while volume is light at under 10,000 shares. Expense ratio comes in at 0.95%. It has added nearly 10% so far this year. ProShares UltraShort Oil & Gas ETF (NYSEARCA: DUG ) This fund seeks two times (2x) leveraged inverse exposure to the Dow Jones U.S. Oil & Gas Index, charging 95 bps in fees. It has amassed $46.1 million in its asset base and trades in good volume of more than 183,000 shares per day on average. DUG returned 19.8% in the first couple of weeks of 2016. Direxion Daily Energy Bear 3x Shares ETF (NYSEARCA: ERY ) This product provides three times (3x) inverse exposure to the Energy Select Sector Index. Though it charges the same annual fee of 95 bps, it is extremely popular and trades in heavy volume nearly 1.7 million shares. The fund has a decent AUM of $74 million and has gained 32% so far this year. Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3x Shares ETF (NYSEARCA: DRIP ) This ETF provides three times bearish exposure to the oil & gas exploration and production corner of the broad energy space tracking the S&P Oil & Gas Exploration & Production Select Industry Index. It has accumulated $6.1 million in its asset base while trades in a lower volume of 32,000 shares per day on average. The fund charges 95 bps in annual fees and has gained 62.9% since the start of the year. ProShares UltraShort Oil & Gas Exploration & Production ETF (NYSEARCA: SOP ) This fund seeks two times inverse exposure to the S&P Oil & Gas Exploration & Production Select Industry Index, charging 95 bps in fees. It failed to garner enough investor interest with AUM of just $4.6 million and sees a paltry volume of about 3,000 shares a day. SOP is up 40.6% in the year-to-date timeframe. Bottom Line As a caveat, investors should note that such products are suitable only for short-term traders as these are rebalanced on a daily basis. Still, for ETF investors who are bearish on the energy sector for the near term, either of the above products could make an interesting choice. Clearly, a near-term short could be intriguing for those with high-risk tolerance, and a belief that the “trend is the friend” in this corner of the investing world. Link to the original post on Zacks.com

Guggenheim Defensive Equity: Another Defensive ETF That Failed Miserably To Do Its Job

As the equities markets are crashing all over the planet, more conservative players look to play defense by considering defensive investments and related exchange traded funds to hedge against the current correction. Defensive Stocks and Sectors During market downturns, high volatility and economic uncertainties, many investors use a risk aversion strategy by rotating to defensive sectors through buying defensive stocks and ETFs to shelter from the storm. Defensive Stocks and Sectors are those deemed non-cyclical and not very dependent on the overall economic cycle. The traditional sectors considered defensive are utilities, consumer staples and healthcare. After all, consumers cannot easily manage without gas and electricity, soap and toothpaste and of course their medicine. Other sectors deemed defensive are the telecom sector and the US real estate REIT sectors. Part of what makes defensive stocks and sectors appealing is their relatively higher and “safer” dividend which caters to investors wanting equity exposure but less risk. DEF Fund Description The Guggenheim Defensive Equity ETF (NYSEARCA: DEF ) seeks investment results that correspond to the performance, before the Fund’s fees and expenses, of the Sabrient Defensive Equity Index (the “Defensive Equity Index”). The Fund invests at least 90% of its total assets in US common stocks, American depositary receipts (“ADRs”) and master limited partnerships (“MLPs”). Guggenheim Funds Investment Advisors, LLC (the “Investment Adviser”) seeks to replicate the performance of the Defensive Equity Index which is comprised of approximately 100 securities selected from a broad universe of global stocks, generally including securities with market capitalizations in excess of $1 billion. For more information about this ETF click here . ETF methodology and Sector Allocation Index selection methodology is designed to identify companies with potentially superior risk/return profiles to outperform during periods of weakness in the markets and/or in the American economy overall. The Index is designed to actively select securities with low relative valuations, conservative accounting, dividend payments and a history of outperformance during bearish market periods. The Index constituents are well-diversified and supposed to represent a “defensive” portfolio. The sector allocation of this ETF is as follows: DEF Dividend and Fees DEF pays a respectable dividend of 3.31% and charges an acceptable management fee of 0.65%. The Perfect Defensive ETF? At first glance, DEF looks like a pretty diversified ETF, positioned within the right sectors to hedge against economic downturns in its focus on traditional defensive stocks, including utilities, real estate and consumer defensive. With its highly regarded investment advisor Guggenheim and an investment strategy that seems logical, DEF might even look like the perfect defensive ETF, as its name suggest, but is it really? Performance of DEF in the past 30 days The following chart depicts the performance of DEF against the S&P 500 index tracked by the SPDR S&P 500 ETF (NYSEARCA: SPY ) during the past 30 days ending Friday January 15, 2016: Click to enlarge As noted on the chart above, DEF utterly failed as a defensive ETF as it tumbled 6.4% when the S&P 500 Index fell 8.4%. Let us compare the performance of DEF against the average performance of the five defensive sectors: Source ycharts.com The failure of DEF is even more evident based on the above table as DEF tumbled by 6.4% against an average decline of 4% for the five main sectors considered to be defensive. So what went wrong with this ETF which seems to tick all the right boxes? In order to understand what went wrong we have to dig a little deeper. Three reasons DEF failed to do its job as a defensive ETF Geographical allocation issues A high 9.3% geographical exposure to the Asian market, of which about one-third relating to emerging markets. The allocations include countries such as Singapore, Taiwan, Japan and Asian emerging markets, all of which are very sensitive to China and took a large hit from the Chinese stock market crash. Stocks in this category include Telekomunik Indonesia (NYSE: TLK ), Japanese Nippon Telegraph & Tele (NYSE: NTT ), and Korean SK Telecom Co (NYSE: SKM ). Direct exposure to China (China Mobile (NYSE: CHL ), China Petroleum & Chemicals (NYSE: SNP ), and Chunghwa Telecom (NYSE: CHT )). About 2% is allocated to South American markets which are highly dependent on commodities and tend to be more sensitive to economic and market volatility and uncertainty. Stocks in this category include Banco De Chile-ADR (NYSE: BCH ) and Mexican Grupo Aeroportuario PAC-ADR (NYSE: PAC ). Sector Allocation issues The Fund has a high 8.2% exposure to the energy sector including oil and gas Master Limited Partnerships. These sectors got hammered the past month. DEF holds indeed high risk stocks for the current environment, such as National Oilwell Varco (NYSE: NOV ) and Targa Resources Partners (NYSE: NGLS ). A 3.2% exposure to the basic material sector which has been diving for the past two years, as commodity prices reached multi-year lows on concerns of a China slowdown. Stocks in the ETF include AGL Resources (NYSE: GAS ) and Syngenta AG (NYSE: SYT ). A very high exposure of 14.5% to the telecom sector proved to be too much for a defensive ETF, as the sector plunged 7.6% to become one of the ugliest defensive plays for the past month. Stocks in the ETF include Verizon (NYSE: VZ ), Frontier Communications (NASDAQ: FTR ), NTT Docomo and Vodafone (NASDAQ: VOD ). Passive Investing Strategy The most notable problem with DEF Fund lays in the fact that it uses a “passive” or “indexing” investment approach which makes it vulnerable as economic conditions change. DEF does not have a dynamic system in place to exclude currently risky sectors which once used to be considered safe, such as the oil sector and commodities sector, or to limit exposure to disfavored regions and countries. Conclusion Guggenheim Defensive Equity DEF – don’t get fooled by its name! The same can be said about other Defensive ETFs which may seem right at first glance. Investors should still do their due diligence and closely examine how the underlying assets are invested before putting money at work. Special note I am currently sharing on Seeking Alpha additions to my high-yield “Retirement Dividend Portfolio” (target yield 6% to 9%), with the latest one: Hedging My High Dividends with German Exposure . Follow me for future updates!

Can Grain ETFs Sustain The Recent Rally?

Taking the market by surprise, grain prices and the related investments popped lately. This is perhaps the sole good news in the investing world to start 2016 as the broader market has seen choppy trading so far. And as far as commodities are concerned, nobody knows when and where their prolonged rout will end. Lower estimates for U.S. crops showered these unexpected gains on grains. Lately, USDA reduced its numbers for the 2015 corn and soybean harvests and sharply cut winter wheat planted acreage to 36.61 million acres, which was “the smallest winter crop in six years.” The figure exceeded analysts’ expectation of a decline of 141,000 acres. Per USDA, corn harvest is presently at 13.6 billion bushels, lower than USDA’s December reading of 13.654 billion. The soybean produce was recorded at 3.93 billion while USDA’s latest reading was similar to the 2014 levels. While many agricultural commodities advanced, wheat prices soared the most in two months. As a result, the Teucrium Wheat ETF (NYSEARCA: WEAT ) , the iPath DJ-UBS Grains Total Return Sub-Index ETN (NYSEARCA: JJG ) , the Teucrium Soybean Fund (NYSEARCA: SOYB ) and the Teucrium Corn ETF (NYSEARCA: CORN ) added about 2.1%, 1.8%, 1.4% and 1%, respectively, on January 12 (read: Invest in America with These 4 ETFs ). Can the Positive Momentum Sustain? Per Bloomberg, while U.S. output may moderate, global supplies of wheat remain ample thanks to solid output in Russia, Pakistan and the European Union. On the other hand, the demand scenario is as sluggish as it has been in recent times. Global growth worries mainly in most of the developed economies and in some emerging economies too resulted in softer demand for food. USDA also pointed to this issue with “a small reduction in domestic usage and a cut to exports.” USDA lowered the export numbers for corn and soybean to 1.7 billion bushels from its previous 1.75 billion and to 1.69 billion from 1.715 billion, respectively. Still, there are a few agro-based products which could deliver decent gains to investors despite the broad-based gloom. Below we highlight those products in detail (read: 3 Commodity ETFs Defying Weakness in 2015 ). iPath Dow Jones-UBS Sugar Total Return Sub-Index ETN (NYSEARCA: SGG ) The sugar prices are expected to remain steady though most of the other commodities are finding the going tough. This is because; supply glut is an easing issue in the global market due to adverse weather. SGG tracks the Dow Jones-UBS Sugar Subindex Total Return Index, which provides returns that are in an investment in the futures contracts on the commodity of sugar. The note has garnered nearly $53.2 million in assets. It charges 75 bps in annual fees. The note was up 1.1% in the last five days (as of January 13, 2016). iPath Dow Jones-UBS Cotton Total Return Sub-Index ETN (BAL Notably, cotton price is also showing hopes on higher purchase from the spinners and exporters. Also, in India, a key grower of cotton, the central government’s move to intervene in the pricing of cotton might help in shoring up the commodity. The product has amassed about $17 million in assets and charges 75 bps in fees. BAL gained 1% in the last five days (as of January 13, 2015). iPath Dow Jones-UBS Softs Total Return Sub-Index ETN (NYSEARCA: JJS ) The note looks to provide the returns that are available through an investment in the futures contracts on the softs sector of the commodity world. Components currently include sugar, coffee, and cotton. This $2.6-million ETF charges 75 bps in fees. Though the product lost 2% in the last five days, it added about 1.5% on January 13. Link to the original article on Zacks.com