Tag Archives: stocks

Coffee Prices Crumbling: What Is The ETF Impact?

We certainly enjoy sipping a warm cup of coffee to start the day but when it comes to green unroasted coffee, traders and farmers have no reason to rejoice. This is because their prices are down about 36% in the past one year (as of October 26, 2015) and is currently trading near its two-year low. Meanwhile, the December coffee contract, on the Inter Continental Exchange (ICE) Futures U.S. exchange, is down 41.7% in the last one year. There are three factors that added to the long rout in the coffee market. First is the depreciation of the Brazilian real against the dollar. The real was already under pressure due to rising inflation, an investment-grade rating downgrade by Standard and Poor’s and fears of economic recession. After a short respite at the beginning of this month, the real started depreciating again against the greenback amid growing concerns of a budget deficit (excluding interest payments) and other political woes. A weak real encourages exports of the greenback priced coffee from Brazil – the world’s largest producer – as farmers try to capture higher profits. This will lead to an oversupply in the global market and hurt prices. The second factor is the forecast of excessive rainfall in Brazil’s top coffee-growing state, Minas Gerais. Weather forecasts indicated monsoon rains in fall and the winter and normal rains during the crucial stage of pod development from mid-December to early February. This has erased fears of drought in the region – a primary factor that had caused a surge in coffee prices in early 2014 – and increased the possibility of a longer-than-expected crop season. Lastly, the move by the Columbian government to lower the benchmark on the quality of beans deemed fit for exports could add to the supply glut in the global market. The threat of a surplus production looms large despite the possibility of dry weather due to El Niño in the coffee-growing regions. The battering in coffee prices had an adverse impact on the funds tracking the coffee market. Below we highlight two ETNs that experienced more than a 4% fall in the past five days and more than a 40% slide in the past one year (as of October 26, 2015). iPath Dow Jones-UBS Coffee ETN (NYSEARCA: JO ) This ETN tracks the Dow Jones-UBS Coffee Subindex Total Return, providing the returns that are available through an investment in the futures contracts on the commodity of coffee. The note has garnered nearly $108 million in assets and trades in a solid volume of 167,000 shares on average. The product is expensive with 75 bps in annual fees. The note was down nearly 5% in the last five days and about 48% in the past one year. It has a Zacks ETF Rank #3 (Hold) with a High risk outlook. iPath Pure Beta Coffee ETN (NYSEARCA: CAFE ) This ETN follows the Barclays Capital Coffee Pure Beta TR Index, providing returns that are available through an investment in the futures contracts in the coffee markets. The index consists of a single futures contract but it has a unique roll structure which selects contracts using the Pure Beta Series 2 Methodology. CAFE is quite overlooked as it has gathered only $5 million in AUM and is thinly traded with an average volume of roughly 7,000 shares. This note also charges 75 bps in annual fees and lost 4% in the past five days and 44% in the last one year. It also carries a Zacks ETF Rank #3 with a High risk outlook. Original Post

Material ETFs Up On Dow Chemical, DuPont Earnings Beat

We are in the middle of the earnings season, and the materials sector is seemingly tempering the overall Q3 growth picture after energy. This is especially true as total earnings from 60.9% of the sector’s total market capitalization reported so far are down 26.8% on 21% revenue decline. Despite the earnings weakness, the sector is showing impressive performance, having gained an average 1.76% (average price difference between a day before and after the earnings announcement of a stock), per the Zacks Earnings Trend . In particular, Dow Chemical (NYSE: DOW ) and DuPont (NYSE: DD ) led the rally in the sector as both companies beat on their earnings. However, revenues remained weak and missed our estimates. DOW Earnings in Focus The largest U.S. chemical maker continued its streak of earnings beat for the eight consecutive quarter. Earnings per share came in at 82 cents, easily trumping the Zacks Consensus Estimate of 68 cents and improving from 72 cents earned a year ago. Healthy earnings were credited to the incredible performance by the Performance Plastics segment due to lower cost of raw materials like oil and natural gas. Revenues dropped 16% year over year to $12.04 billion and missed our estimate of $12.25 billion. EBITDA margin expanded 370 bps to 20%, representing the best third-quarter margin since 2005 even as a strong dollar took a toll on revenues. The company remained committed to cost reduction and efficiency programs that are likely to boost margins and shareholders returns in the coming quarters. It is selectively spinning off or selling its underperforming assets and gradually shifting to high-growth markets such as construction, packaging and automotive. Dow Chemical raised its quarterly dividend by 10% to 46 cents, taking the annualized dividend to $1.84 per share, which is the highest in the company’s history. This new dividend is payable on January 29 to shareholders of record on December 31. Driven by a solid earnings beat, shares of Dow Chemical has risen 8.2% to date post its earnings announcement on October 22. DD Earnings in Focus While DuPont crushed our earnings estimate due to cost-reduction initiatives, revenues and profits tumbled on a strong dollar, a soft agriculture business and weakness in emerging markets. The world’s second-largest seed maker reported earnings per share of 13 cents, which beat the Zacks Consensus Estimate by 3 cents but deteriorated from 39 cents from the year-ago quarter. Total revenue slipped 17% year over year to $4.9 billion and fell short of our $5.2 billion estimate. Cost reductions from operational redesign contributed 10 cents to third-quarter earnings and are expected to add 40 cents per share to the full-year bottom line. The action will further save $1.3 billion in annual costs by 2016, a year ahead of the earlier expectation, and an additional $1.6 billion by 2017 end. With its cost-cutting initiatives, the chemicals and seed producer maintained its 2015 earnings per share guidance of roughly $2.75, which was below the Zacks Consensus Estimate of $2.93 at the time of earnings release. It expects currency headwinds to dilute full-year earnings by 72 cents per share. Following the earnings announcement on October 27, DD shares climbed nearly 5% over the past two days. ETFs in Focus Solid price performance of these two chemical titans has led to a rally in material ETFs that are heavily invested in these two stocks. Though these funds have an unfavorable Zacks ETF Rank of 4 or ‘Sell’ rating, they have gained over 3.5% in the past five days and are on investors’ radar for the weeks ahead: Materials Select Sector SPDR (NYSEARCA: XLB ) The most popular material ETF follows the Materials Select Sector Index. This fund manages about $2.1 billion in its asset base and trades in heavy volume of around 6.1 million. The ETF charges 14 bps in fees per year from investors. In total, the fund holds about 30 securities in its basket with DOW and DD taking the top two spots, with nearly 11% allocation each. In terms of industrial exposure, chemicals dominates the portfolio with three-fourth share while metals & mining and containers & packaging round off the top three positions. iShares U.S. Basic Materials ETF (NYSEARCA: IYM ) This ETF tracks the Dow Jones U.S. Basic Materials Index and holds 54 stocks in its basket. The fund has AUM of $361 million and charges 43 bps in fees and expenses. Volume is good as it exchanges around 106,000 shares in hand a day. DOW and DD occupy the top two positions in the basket, with over 10% of assets each. The product is heavily skewed toward the chemical segment, as it makes up for more than three-fourths of the portfolio while steel, forestry & paper, metals & mining receive minor allocations. Vanguard Materials ETF (NYSEARCA: VAW ) This fund has amassed about $1 billion in its asset base and offers exposure to 121 stocks by tracking the MSCI US Investable Market Materials 25/50 Index. The ETF has 0.12% in expense ratio while volume is moderate at 75,000 shares. Here, DOW and DD are the top two firms accounting for nearly 6% share each. Chemicals make up for nearly 70% of assets while container & packaging and steel also make a nice mix in the portfolio. Fidelity MSCI Materials Index ETF (NYSEARCA: FMAT ) This fund provides exposure to 122 materials stocks with AUM of $51.1 million. This is done by tracking the MSCI USA IMI Materials Index. Here too, DOW and DD are the top two firms with nearly 8% allocation. Chemicals accounts for 69.7% share while container & packaging, and metals & mining round off the top three spots with double-digit exposure each. The ETF has 0.12% in expense ratio while volume is moderate at 80,000 shares a day. Original Post

4 ETFs I’m Planning To Buy Over The Next Few Months

Summary I’m watching VNQ, SCHH, SCHC, and SCHF over the next few months. The equity REIT indexes could see some weakness with the Federal Reserve trying to stimulate higher rates. I think they are more bark than bite. If equity REIT indexes sell off, I’d love to boost my allocation to them at attractive prices. My international allocations are too low. SCHC and SCHF look like great options to fix that. With only two months left to go in the year I’m looking at which ETFs I may want to give a higher weighting in my portfolio. These are ETFs that I already hold, but I am contemplating putting a little more cash in them over the next few months. The List Name Ticker Vanguard REIT Index ETF VNQ Schwab U.S. REIT ETF SCHH Schwab International Small-Cap Equity ETF SCHC Schwab International Equity ETF SCHF These four ETFs are on my watch list for different reasons. VNQ / SCHH I’ve got VNQ and SCHH on the list as attractive funds because I expect long term yields on debt securities to remain fairly low. I don’t expect to see a sustained 3% yield on 10 year treasury notes within the next year or two. There may be some spikes where it happens, but I wouldn’t expect to see those yield levels maintained. With the Federal Reserve constantly talking about raising interest rates, I see the potential for some pricing weakness in the equity REIT indexes. They might raise rates slightly, but I’m not sure that such an increase in rates would even be maintained let alone that they could build on increases to raise rates in each year for the next few years. Since I expect rates to remain weak, I like the equity REITs as a nice source of yield and SCHH and VNQ are two well diversified REIT index ETFs with very low expense ratios. If the Federal Reserve ramps up their talk about raising interest rates it could cause the interest rates to increase in the market for a while. When the rates go up the prices on bonds will fall and I would expect the prices on VNQ/SCHH to drop during that time period. That would be a great opportunity for me to buy more shares before the prices rebounded. I’m holding both of these already and wanting more equity REIT exposure in my portfolio. My current weighting is getting a bit heavy on domestic equity and mortgage REITs. The mortgage REITs are substantially different from the equity REITs, but I’m overweight on the sector because I feel there are some attractive values being presented. SCHC / SCHF These two international plays offer low expense ratios for extremely diversified international exposure. I would classify these as my two my favorite international funds currently. My international equity exposure is dramatically underweight right now. I was holding the Vanguard Global ex-U.S. Real Estate ETF (NASDAQ: VNQI ) for a substantial portion of my international exposure but decided to sell it so I could act on a high conviction play in the mREIT sector. Over the next few months I want to bring the international exposure on my portfolio higher. I don’t want a very heavy weighting to the international equity sectors, but I should probably be putting at least 10% or so of my portfolio there. My most likely method for getting that position will be something similar to dollar cost averaging with quite a few small purchases driving up the allocations. Why I like Them So Much When I first started looking into SCHC, I wasn’t entirely sold on the fund. The expense ratio of .18% is low for international equity but still higher than quite a few of my allocations. As I looked through the fund I became very attracted by it being a play on small-cap equities and holding over 1,600 individual securities and less than 5% of the total fund being in the combined weight of the top 10 holdings. This is a beautiful ETF for getting exposure to a portion of the market that would often be ignored and the diversification within the fund is strong enough that individual securities won’t be creating a large impact on value. If the top holding of the fund suddenly saw the stock price double, the value of the fund would be up less than half of one percent. The top sector weightings for the fund are industrials (21.2%) and financials (20.4%). I would prefer to see those lower and the consumer staples weighting (5.0%) higher, but on the whole I think this is one of the top options for getting this exposure. Currently they are trading around $29.70 to $29.90. If they dip down towards $29 to $28.50 it would be push me to put in a little cash sooner rather than later. For SCHF the expense ratio is only .08%, which is exceptional for international equity, and the fund has over 1,200 holdings. The heaviest sector weight is the financial sector at 26.3%, but consumer staple comes in at 10.9% which is fairly nice. One of the ways my risk aversion manifests itself is having a preference for the consumer staples sector which I consider safer from potential negative events. Conclusion Those are the four ETFs I’m looking at over the rest of the year. I already own all four and due to dividend reinvestment, I can be fairly certain that I will be buying at least a few more shares in each. It is very highly likely that during the next few months I will add some cash to buy up more shares. Due to free trading on the Schwab funds I’m more likely to use allocations to SCHH for building my equity REIT allocation. Investors with free trading on VNQ may find it preferable. The yield on VNQ is over 4.1% per Yahoo Finance while the yield on SCHH is only around 2.4%. Since I’m buying these ETFs into a tax advantaged account and just reinvesting the income the difference in their payouts is not a significant factor for me. Due to dividend reinvestment, my share count in VNQ is likely to grow slightly even though allocations towards SCHH are more likely. SCHC and SCHF are my favorite options for international equity and that is an area where my portfolio could use some additions. The huge factors going in their favor are the very rare exposure for SCHC to the small-cap side and the extremely low expense ratio for SCHF.