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FXZ And RTM: Material Evidence

Summary An opportunity for long term investors to be pre-positioned in the materials sector. One fund is equally weighted, conservatively invested; the other more diversified and alpha weighted. Either fund challenges the investor to take advantage of the business cycle. There’s an old Wall Street adage to ‘buy low, sell high’ and based on the basic principles of investment, this statement is axiomatic. However, it does beg the questions, ‘how low is low?’ and ‘how high is high?’ So to apply this axiom, the idea would be to find an investment that is low. Anyone who has paid attention to global financial news over the past few months is well aware that the supply of strategic materials, as well as production, has run far, far ahead of demand. But just what is the ‘materials sector’? According to Investopedia : … A category of stocks that accounts for companies involved with the discovery, development and processing of raw materials. The basic materials sector includes the mining and refining of metals, chemical producers and forestry products. .. So apparently, this is a starting point: supply is high, demand is low therefore prices decline, thus profits, thus stock prices of ‘basic materials’ producers. (click to enlarge) Unless one has the time, effort, patience and knowledge to analyze and filter through the hundreds, if not thousands of global basic materials manufactures, it best to select a basic materials ETF and then a ‘plain vanilla’ one at that. Lastly, the individual would be wise to select the best fund in the class. By filter U.S.Equities => Basic Materials=> All, then excluding ‘Leveraged’, ‘Inverse’ and ‘ETN’, the very handy Seeking Alpha’s ETF Hub tool identifies nine suitable results. There are two candidates with a “least bad” one year performance and the best three year performance. First is the Guggenheim’s S&P Equal Weight Materials ETF (NYSEARCA: RTM ) and second is the First Trust Materials AlphaDEX ETF (NYSEARCA: FXZ ) . According to Guggenheim , the investment’s objective is to: … replicate as closely as possible, before fees and expenses, the performance of the S&P 500 Equal Weight Index Materials[S15] … Clearly, the 28 component holdings of the Guggenheim Materials fund are then equally weighted and readjusted quarterly according to the index it tracks. The underlying S&P tracking index: …imposes equal weights on the index constituents included in the S&P 500 that are classified in the GICS® materials sector… (Note that ” GICS ® ” is an abbreviation for G lobal I ndustry C lassification S tandard , developed by S&P and M organ S tanley C apital I nternational ). (click to enlarge) The First Trust fund’s investment objective: … is to seek investment results that correspond generally to the price and yield, before fees and expenses, of an equity index called the StrataQuant® Materials Index [STRQMT]. .. This is an: … enhanced index developed, maintained and sponsored by the NYSE Euronext or its affiliates which employs the AlphaDEX stock selection methodology to select materials stocks from the Russell 1000 Index .. The AlphaDEX methodology , as the name suggests will identify index components with the greatest potential for capital appreciation. In plain speak, the fund will weight companies in the sector which are performing better than the average company in the sector. So instead of just trying to just replicate the index, it weights its holdings more towards the best performing stocks. (click to enlarge) Observe though that both funds have performed similarly in both good and bad market cycles, but interestingly, the Guggenheim fund conservatively equally weights its holding whereas the First Trust Funds weights slightly more towards risk. The Guggenheim Fund has a far more simple subsector allocation construction, five in all and then most heavily weighted in Chemicals at 57% of the fund’s total holdings. The First Trust fund allocates among ten subsectors, also most heavily weighted in Chemicals, 34%, but also includes an allocation for Aerospace and Defense, 5%, normally part of the Industrial Sector. (click to enlarge) (data from First Trust and Guggenheim) Both companies, as might be expected, have holdings in common; 21 in all. These are listed by First Trust’s weightings; (since Guggenheim equally weights): Holdings in Common Name and Symbol FXZ Weighting SEALED AIR (NYSE: SEE ) 3.47% MARTIN MARIETTA (NYSE: MLM ) 3.12% VULCAN MATERIALS (NYSE: VMC ) 3.03% NEWMONT MINING (NYSE: NEM ) 2.70% The MOSAIC (NYSE: MOS ) 2.61% NUCOR (NYSE: NUE ) 2.42% LYONDELLBASELL (NYSE: LYB ) 2.26% ALOCA (NYSE: AA ) 2.25% DOW CHEMICAL (NYSE: DOW ) 1.89% SHERWIN-WILLIAMS (NYSE: SHW ) 1.89% EASTMAN CHEMICAL (NYSE: EMN ) 1.86% CF INDUSTRIES (NYSE: CF ) 1.65% BALL CORP (NYSE: BLL ) 1.24% AIRGAS (NYSE: ARG ) 1.18% E.I. du PONT de NEMOURS (NYSE: DD ) 1.11% WESTROCK (NYSE: WRK ) 0.76% ECOLAB (NYSE: ECL ) 0.68% AIR PRODUCTS & CHEMICAL (NYSE: APD ) 0.65% PRAXAIR (NYSE: PX ) 0.58% INTL PAPER (NYSE: IP ) 0.56% PPG INDUSTRIES (NYSE: PPG ) 0.53% Data From First Trust and Guggenheim As a general rule, the investor should take the time and trouble to compare the holdings of any ETFs in the same asset class for a reason exemplified here. Of the 28 holdings of the Guggenheim Fund, only 7 are not in common with the First Trust fund. Of those 7, four are in the Chemical subsector, 2 in Containers & Packaging and one in Metals and Mining. Further, as mentioned above, the Guggenheim fund seems rather heavily weighted in Chemicals compared to the First Trust fund; 57.06% vs. 34.09%. In Containers & Packaging the Guggenheim fund is slightly more weighted than Firsts Trust; 18.17% vs. 13.25%. First Trust is a little more weighted in Metals and Mining; 14.23% vs. 20.10%. Lastly, by applying some simple arithmetic, the average weighting of the First Trust’s holding which are not in the Guggenheim fund is just over 2%. The equally weighted unadjusted Guggenheim holding averages 3.57%. The point being that Guggenheim fund is mostly contained in the First Trust fund in terms of holdings, similar in allocation and reasonably close in average weighting. Also as noted above, the First Trust fund has two Aerospace & Defense holdings, 4.69%; a subsector more properly defined as an Industrial subsector. One is Hexcel Corporation (NYSE: HXL ) and the other is Precision Cast Parts (NYSE: PCP ) . In the case of these two companies, the sector to which it belongs just might be a matter of perspective since both companies manufacture specialized materials . Hexcel manufactures: … everything from carbon fiber and reinforcement fabrics to pre-impregnated materials… …and honeycomb core, tooling materials and finished aircraft structures … Precision Cast Parts, as the name implies, manufactures precision and complex casting using high performance nickel and titanium alloys. Hence, although classified as Aerospace and Defense companies, they do produce materials used in industry so are appropriate holdings for a materials fund. Fund and Inception Expense Ratio 1 Year Return 3 Year Return 5 Year Return TTM Yield P/E 3 Month Average Volume Beta Guggenheim [RTM] 11/1/2006 0.40% -7.48% 11.67% 10.78% 1.54% 17 12020 1.09 First Trust [FXZ] 5/8/2007 0.70% -11.43% 9.36% 10.65% 1.57% 17 85131 1.08 (Data from YaHoo!, Guggenheim and First Trust) So what it boils down to is this. RTM is investing conservatively in this volatile sector. FXZ may be viewed as an extension of RTM, with the opportunity for capital appreciation. However, in doing so its accepting a little more risk in this volatile sector. Both are good choices, but the decision of which to choose depends on the risk tolerance of the investor. Having described both funds, the original point must be reiterated: Is this the time to buy into the Material Sector? By referring to the included price divided charts, it is evident that both funds are well off their lows, both lows having occurred in the recession year of 2008. Hence both funds appreciated during the recovery years, in particular those years for which emerging market nations created a seemingly insatiable demand for materials. If those emerging market nations are correcting towards a more sustainable growth rate, then the Materials sector correction may not yet be over. However, this is precisely what is meant by the ‘business cycle’. Eventually, excess supply will be worked down and production capacity will adjust accordingly so that supply and demand will again come into balance. Hence, for a risk tolerant individual investor, a gradual accumulation in the materials sectors, in particular, by patiently dollar cost average in over a long period of time will put the investor in an advantageous position to be able to take advantage of the next, inevitable, up cycle and put to the test the old adage, buy low, sell high.

Despite EU OK, Regeneron Crumbles Below 200-Day

Biotechs and drugmaker stocks are leading today’s losses, and Regeneron Pharmaceuticals (REGN) is showing particular weakness. Despite announcing European Commission marketing approval for its cholesterol drug Praluent, the biotech’s shares are crumbling. The stock was down 8% in afternoon trade. Volume was heavy. The move is a substantial blow to shares, which are now trading below the 200-day line for the first time in more than a year.

Compelling Case For Investing In India Focused ETFs

India has overtaken china as the fastest growing economy (of significance) in the world. One should take notice and start investing in India focused ETFs. With commodity prices falling off the cliff, India stands to gain as it is one of the major importers of all major commodities. There is a reasonable chance of double-digit growth in India compared to the low single digits in other parts of the world. The summary above highlights the reasons for my bullish stance on the Indian equity market, the next leader in this growth deprived world. “Bull markets”, they say, often climb a wall of worry and “bear markets” crash even with a lot of optimism. There is one question everyone would like an answer to – as the Dow Jones starts scaling back from its peaks of above 18,000 to today’s closing of slightly above 16,300 – “Will the bull market last?” History shows that most bull markets have come on the back of rising profits, lower interest rates, and tapering inflation. The present bull market, which can be termed the “Fed bull market”, has taken the Dow Jones from the lows of 8,000 to the peaks of 18,000 on the back of lacking company profits (for most part of the rising market), negative to very low inflation, and almost zero interest rates. The bull market was further given a “turbo boost” with additional liquidity through bond purchases (or simply printing money) – similar to cars in Formula 1 getting an extra boost out of their KERS systems to help accelerate from 0-60 mph. The worrying part of this bull market is that it was kick-started after bringing interest rates to almost zero and on the back of no inflation. The even bigger worry is that the stubborn inflation doesn’t want to go above the 1% mark, forget the 2% target the Fed has in mind. In the midst of all this, a no rate hike decision would only postpone the inevitable deflation scenario and only help fuel asset prices to even higher peaks. A good market correction might just be the best thing the equity markets need at this point. The problems are not that of the United states alone. France has been downgraded on growth fears ( WSJ article ), the UK is growing at less than 1% , Japan is going in and out of negative growth for the past few quarters, and Germany is growing at 0.5%. It seems growth is struggling to make a comeback in any of the developed economies (the US seems to be far better with 3.9% the past quarter). Remember, these are growth numbers reported after taking extreme measures to boost growth; to still have such numbers, in most cases not even inching 1%, is disheartening. At this point, the growth engine that all countries were feeding off, China, has given the biggest scare in over a decade with growth rates coming off the double digits to 7%. We need a new leader and clearly it is not coming from the developed markets. Amidst all the noise of crude at less that $50 and rate hikes looming, no wages growing, commodity prices crashing, and a currency war – we need another leader to replace China. Herein lies the central point I wish to make in this article. India can be the next China. With a solid political majority at the Upper house and one of the fastest growing economies in the world (faster than China with recent data), India is in a sweet spot. India imports 75% of its crude – crude prices have fallen more than half in the past one year. India is a net importer of commodities like gold, silver, zinc and other metals all of which are in severe bear markets India is one of a handful of countries in the world that have the ultimate “luxury” of inflation (approx. 5-6% in 2015), something most countries in the world wish they had. Interest rate in India has peaked at 9% last year and is on its way downwards after 2 rate cuts already implemented this year. The current account deficit (imports – exports) is sharply lower from over 4% to 1.2% in the past 18 months. The fiscal budget is balanced, and with oil at $50, it only looks better. The government has started a spending heavily on infrastructure and other investment activities. The economy has just started picking up and might be the growth engine we are all desperately looking forward to. Bull markets come on the back of rising profits, lower interest rates, and tapering inflation. Start a good investing plan on ETFs that invest in India, such as the iShares S&P India Nifty Fifty Index ETF (NASDAQ: INDY ), the iShares MSCI India Index ETF (BATS: INDA ), and the WisdomTree India Earnings ETF (NYSEARCA: EPI ). India has to be separated from the emerging market pack as they offer a lot more than any of the other BRICS countries do. Brazil and China rely heavily on the export of commodities, whereas India is an importer. Russia is almost in recession and with all the troubles it has with sanctions and currency, etc., it cannot be in the same basket for a while now. South Africa has struggled to live up to its potential with such wide corruption. The downside risk to these funds is going to be excessive volatility in the stock markets that no emerging market fund is immune to. The solidity of any of the developed countries will never be seen in any of the emerging market equities. Any jitters in the plans of government spending can lead to more volatility since that is the kick start needed for growth to pick up. Rains have been playing spoilsport the whole time and can have short-term effects on the earnings of some companies. Any spike in inflation to unmanageable levels will invariably halt the downward trend of interest rates and that will be a huge roadblock to reviving growth. The INR (Indian Rupee) has more potential for stability during these times than most other emerging markets. With the dollar appreciating, there is still a positive for India-focused ETFs. These funds invest in the “Nifty50” Index that has earnings of almost 50% coming in US dollar terms – heavyweight software and pharma industry players like Infosys, TCS, Sun Pharma make up a sizeable percentage of the index along with banks that have sizeable dollar earnings. The Indian story should be a part of every investor’s long-term portfolio.