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5 Ways To Play The Oil Rebound With ETFs

After a bumpy ride, oil regained its momentum with the start of the fourth quarter, indicating that the worst might be over for the commodity. All credit goes to improving demand/supply dynamics, which are rebuilding the lost confidence in the rebalancing of the oil market. This is especially true as Nymex crude is now comfortably hovering around the key threshold $50 per barrel, having gained 11% since the start of October, while Brent oil jumped 10.4%. Improving Fundamentals The steep gains came on the heels of dwindling supply, improving demand and an increased willingness by major oil producers to support the prolonged slump in the market. In particular, production in the U.S. and non-OPEC countries is declining, while global demand is increasing. U.S. oil output is expected to decline from 9.25 million barrels per day (bpd) in 2015 to 8.86 million bpd in 2016, while non-OPEC production will likely fall by 0.5 million bpd next year, the sharpest drop in more than two decades. The Energy Information Administration (EIA) expects global oil demand for 2016 to increase at the fastest pace in six years, suggesting that oversupply is easing faster than expected. Overall, the OPEC Secretary General, Abdalla Salem El-Badri, projects the oil market to be more balanced next year, as the gap in crude oil supply and demand will likely close in the third quarter of 2016. He foresees global demand to grow to 110 million bpd by 2040, from the current 93 million bpd. On the other hand, Qatar’s energy minister, Mohammed Al Sada, expects oil prices to have bottomed out and supplies from non-OPEC countries to turn negative next year, and the demand to rise to 30.5 million bpd from 29.3 million bpd in 2015. Further, a declining rig count and the weakening dollar of late are adding to the strength. Given the renewed optimism and signs that the oil market may begin to tighten, many investors have turned bullish and are seeking to tap this opportunity. For them, there are two ways to play this surge – one by directly playing through the futures contracts, and the other through equities. Equity ETFs Beating Futures Out of the two ways, equities are leading the current oil rally, given that the ultra-popular United States Oil ETF (NYSEARCA: USO ), providing exposure to the Nymex crude, gained 8.9% since the start of October, while an equity-based ETF like the Energy Select Sector SPDR ETF (NYSEARCA: XLE ) is up 12.6%. This is because revenues and earnings of oil producers are closely tied to oil prices. Acting as a leveraged play, oil stocks tend to experience more gains or losses than oil itself in a rising or falling commodity market. As a result, equity-based oil ETFs will continue to be the real winners in the weeks ahead if oil price continues to rise. Investors can definitely look into the leveraged products in this space for outsized returns. Notably, leveraged ETFs could lead to huge gains in a very short time frame as compared to the simple products. Below, we have highlighted five equity-based leveraged ETFs that could be excellent picks for investors seeking to make large profits from the Energy space in a short span (see: all Leveraged Equity ETFs here ): Direxion Daily Energy Bull 3x Shares ETF (NYSEARCA: ERX ) This fund creates a triple (3x, or 300%) leveraged long position in the S&P Energy Select Sector Index, while charging 95 bps in fees a year. It is a popular and liquid option in the Energy leveraged space, with AUM of $557.2 million and average trading volume of 2.3 million shares. The ETF gained over 41% since the start of October. ProShares Ultra Oil & Gas ETF (NYSEARCA: DIG ) This ETF seeks to deliver twice (2x, or 200%) the daily performance of the Dow Jones U.S. Oil & Gas Index. It has been able to manage $153.4 million in its asset base, with trades in a good volume of more than 186,000 shares per day, on average. The product is up 26.7% in the same time frame. Direxion Daily Natural Gas Related Bull 3x Shares ETF (NYSEARCA: GASL ) This product seeks to deliver thrice the daily performance of the ISE Revere Natural Gas Index, which derives a substantial portion of its revenues from the exploration and production of natural gas. The fund is often overlooked by the investors, as depicted by its AUM of $63.7 million and average daily trading of 161,000 shares. Its expense ratio comes in at 0.95%. The fund has delivered whopping returns of 104.1% since the start of October. Direxion Daily S&P Oil & Gas Exploration & Production Bull 3x Shares ETF (NYSEARCA: GUSH ) This fund offers triple exposure to the daily performance of the S&P Oil & Gas Exploration & Production Select Industry Index. It debuted in the space only four months ago, and has accumulated $10 million in its asset base. The average daily volume is low at around 58,000 shares, while its expense ratio is 0.95%. The product has gained 74.6% in the same time frame. ProShares Ultra Oil & Gas Exploration & Production ETF (NYSEARCA: UOP ) This product also tracks the S&P Oil & Gas Exploration & Production Select Industry Index, but offers twice the returns of the daily performance with the same expense ratio as that of GUSH. It has AUM of just $2 million, and trades in a paltry volume of 1,000 shares. UOP is up over 49% so far this month. Bottom Line As a caveat, investors should note that these products are extremely volatile and suitable only for short-term traders. Additionally, the daily rebalancing, when combined with leverage, may make these products deviate significantly from the expected long-term performance figures. Still, for ETF investors who are bullish on oil for the near term, either of the above products can be an interesting choice. Clearly, a near-term long 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. Original Post

Is The Recovery Of GLD Underway?

Summary Shares of GLD have bounced back in the past couple of weeks. The recent depreciation of the U.S. dollar has helped pull up the price of GLD. Will the recent rally of GLD continue? Shares of the SPDR Gold Trust ETF (NYSEARCA: GLD ) have rallied in the past couple of weeks, following the disappointing non-farm payroll market and a weaker U.S. dollar. The gold market isn’t out of the woods just yet – even though some analysts already suggest the recovery of gold is underway – as the Fed is still on course to raise rates in the coming months, and the U.S. dollar may start to climb back up if future U.S. economic reports such as JOLTS and consumer sentiment show better-than-expected results. But for now, the gold market benefits from the current market conditions. The U.S. dollar isn’t picking up, for now The appreciation of the U.S. dollar during the first few months of 2015 came to halt. Although the gold market saw short-term gains during the first half of the year, it dropped between April and July. Since then, however, gold has remained relatively flat, as the U.S. dollar also remained relatively (compared to the beginning of the year) stable. (click to enlarge) (Source: FRED ) The hesitation of the FOMC in raising rates, and the lower-than-expected growth in non-farm payroll report helped pull up the price of GLD. The minutes of the last FOMC meeting also didn’t offer much input as to when the Fed plans to raise rates, or any new insight behind the Fed’s deliberations. But the main issue will remain the progress of the U.S. economy, including when it comes to inflation and labor. As for labor, the JOLTS report will be released this week, and may boost the U.S. dollar if it shows better-than-expected results. It may offset the adverse impact the NFP report had on the U.S. dollar. Nonetheless, the market isn’t convinced that the Fed is ready to raise rates. As of the end of the week, the implied probabilities of an October rate hike are below 10%, while in December, the odds are still nearly unchanged at 37%. And these odds suggest the market isn’t convinced that the Fed will raise rates. And in a recent interview, Federal Reserve Vice Chairman Stanley Fischer opened the door for a scenario in which the Fed may opt out from raising rates this year, as opposed to repeated claims that the Fed, including Chair Yellen , aims to raise rates this year. He stated that a rate hike is expected, but isn’t a commitment. As long as the Fed isn’t raising rates, the U.S. dollar may remain flat or even decline against other currencies, which will keep fueling the rally of GLD. But GLD isn’t the only way people invest in the yellow metal – some also consider buying coins. And the demand for coins seems to have gone up in previous months. Higher demand for coins? The U.S. mint experienced a rise in gold coin sales back in July-September. Since then, however, sales have gone down and are at among the lowest levels for this year, as presented in the following chart. (Data Source: U.S. Mint ) This is only a signal as to the changes in the physical demand for gold for investment purposes in the U.S. So far, the slow fall in gold prices in the past few months may have fueled a rise in demand for gold during the summer. I have pointed out in a previous article that total demand for gold declined in the second quarter. So even though this recent finding may signal (albeit it should be taken with a grain of salt, considering it’s not a complete account of the changes in the demand for gold coins on a global level – less than 10%) a modest gain in demand for coins during the third quarter, it’s still too early to determine if this means the gold market is tightening, and how this could affect the price of gold in general and GLD in particular. Final note The recent rally in GLD may not last long, especially if the U.S. reports including JOLTS and consumer sentiment show promising results. If not, the recent rally of GLD is likely to continue until other central banks boost their QE programs (ECB or BOJ), which will drive up the U.S. dollar, or until the Fed starts to drop stronger hints as to timing of the historic rate hike, which seems less likely to occur this year. As long as the Fed keeps pushing the rate hike to a later date, the price of GLD will keep seeing modest relief. For more please see: ” Gold and Inflation ”

Fidelity Select Funds Portfolio Optimized For Low Volatility Performed Well In 2015

Summary LOW volatility portfolio: FIBIX, FSBIX, FSPHX, FSELX, FSCHX, FBMPX. MID volatility portfolio: FLBIX, FSBIX, FSPHX, FSELX, FSCHX, FBMPX. HIGH volatility portfolio: FLBIX, FIBIX, FSPHX, FSELX, FSCHX, FBMPX. The LOW volatility portfolio had a positive return so far in 2015 despite the interest rate uncertainty. In a previous article we presented the performance of a portfolio made up of five Fidelity select mutual funds. That portfolio had a stellar performance over the whole 27 year period starting in 1987. Back in July we decided to replace the GNMA fund (MUTF: FGMNX ) with two high quality government bonds. The performance of the two portfolios was discussed in the July article, the conclusion being that the new portfolio performed slightly better than the old one. In the first article I used a Relative Strength (RS) strategy based on a three-month look back evaluation period. In the second article I used a Mean-Variance Optimization (MVO) algorithm with 65-day look back evaluation period. While the MVO algorithm may approximate the RS algorithm if one selects the proper volatility target, the MVO strategy is very flexible, and it allows the investor to adapt it to the variable market environment. It turns out that during the first nine months of 2015 the RS strategy, as well as the Dual Momentum (DM) one, has performed poorly with a return of -15.22% for a 3-month look back, or -10.15% for a 12-month look back. The interested reader may verify the performance of Dual Momentum and Relative Strength on the portfoliovisualizer.com site. In this article we shall use only the MVO strategy and we want to emphasize the performance of the new portfolio during the first three quarters of 2015. We shall present three versions of this new portfolio for three levels of volatility: low, mid and high. The three versions are meant for investors with different risk tolerance. They also are meant for investors who may want to vary their risk level based on their evaluation of the markets. The portfolios are made up of the following funds: Fidelity Select Multimedia Portfolio (MUTF: FBMPX ) Fidelity Select Chemicals Portfolio (MUTF: FSCHX ) Fidelity Select Electronics Portfolio (MUTF: FSELX ) Fidelity Select Health Care Portfolio (MUTF: FSPHX ) Fidelity Spartan Long Term Treasuries Fund (MUTF: FLBIX ) Fidelity Spartan Intermediate Term Treasuries Fund (MUTF: FIBIX ) Fidelity Spartan Short Term Treasuries Fund (MUTF: FSBIX ) With the seven funds above, we created three portfolios to be used at three volatility levels: low, mid and high. All portfolios include the same four equity funds, but each one includes only two of the three treasury funds. The high risk uses FLBIX and FIBIX, the mid risk includes FLBIX and FSBIX, while the low risk has FIBIX and FSBIX. The data for the study were downloaded from Yahoo Finance on the Historical Prices menu for FBMPX, FSCHX, FSELX, FSPHX, FLBIX, FIBIX and FSBIX. We use the daily price data adjusted for dividend payments. The portfolio is managed as dictated by a variance-return optimization algorithm developed on the Modern Portfolio Theory ( Markowitz ). The allocation is rebalanced monthly at market closing of the first trading day of the month. In table 1 we present the performance of the portfolio for three levels of risk. Table 1. Portfolio performance from January 2007 to October 2015 TotRet% CAGR% VOL% maxDD% Sharpe Sortino 2015 return LOW risk 109.22 8.80 5.49 -7.50 1.60 2.10 1.75 MID risk 287.58 16.75 13.37 -16.97 1.25 1.69 -0.49 HIGH risk 569.16 24.26 20.22 -16.97 1.20 1.70 -2.45 The realized volatilities of the portfolios are in agreement with their names; the LOW risk had 5.49% annualized volatility, the MID had 13.37%, while the HIGH had 20.22%. Also, please notice the strong correlation between the returns CAGR and volatility of the portfolios. On the other hand, during 2015 the LOW volatility portfolio produced a positive return of 1.75%, while the MID and HIGH risk portfolio suffered negative returns. In figure 1 we show the graphs of the portfolio equities for the period from January 2007 to October 2015. (click to enlarge) Figure 1. Equity curves for three portfolios adaptively optimized for low, medium and high risk targets. Source: All charts in this article are based on EXCEL calculations using the adjusted daily closing share prices of securities. In figure 2, 3 and 4 we show the time variation of the percentage allocation of the funds for the period since January 2014 to October 2015. We opted for this shorter time period to get graphs that are easily readable. We are mostly interested in the allocations during 2015. (click to enlarge) Figure 2. Percentage allocation of the funds for low risk portfolio January 2014 to October 2015. One can see in figure 2 that most of the time the portfolio was invested about 50% in the short term treasury fund FSBIX. In figure 3 we show the time variation of the percentage allocation of the funds for mid risk. (click to enlarge) Figure 3. Percentage allocation of the funds for MID risk portfolio January 2014 to October 2015. (click to enlarge) Figure 4. Asset allocations for the portfolio adaptively optimized for the HIGH risk target January 2014 to October 2015.. Since July 2015 the high risk portfolio was invested 100% in treasuries; in FSLBX in July and August, and in FIBIX in September and October. The current fund allocations are shown in table 3. Table 3. Asset allocations for October 2015 FSELX FBMPX FSPHX FSCHX FLBIX FIBIX FSBIX LOW risk 0% 0% 0% 0% 0% 0% 100% MID risk 0% 0% 0% 0% 88% 0% 12% HIGH risk 0% 0% 0% 0% 0% 100% 0% Conclusion The low risk Fidelity select portfolio performed better than the mid and high risk portfolios. While the return of 1.75% is relatively modest, it is better than many other choices. The losses of the mid risk portfolio are very small at -0.49%, while the high risk portfolio lost the most at -2.45%. In hindsight, investing in a low risk portfolio was the better choice due to the fact that the market environment was very difficult since the beginning of 2015.