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Leveraged Cybersecurity ETFs Are Debuting At A Dangerous Time

Summary Direxion launched two leveraged cybersecurity ETFs this past week. These ETFs may be debuting at a time when the popularity of cybsecurity stocks has already cooled and valuations are still very high. History has taught us the dangers of investors choosing to chase past performance or chasing “hot” stocks. It was probably just a matter of time before Direxion – one of the primary issuer of leveraged and inverse ETFs – jumped on the popularity of cybersecurity stocks. This past week, Direxion launched the Direxion Daily Cyber Security Bull 2X Shares ETF (NYSEARCA: HAKK ) and the Direxion Daily Cyber Security Bear 2x Shares ETF (NYSEARCA: HAKD ) options on the cybersecurity sector. But like many products that get launched after the initial popularity soars, the timing often proves to be a dangerous investor trap. The first ETF to jump on the trend – the PureFunds ISE Cybersecurity ETF (NYSEARCA: HACK ) – has quickly racked up well over $1B in assets and was up over 30% within 8 months of its debut. Cybersecurity stocks have cooled off though thanks to the global economic environment and now the fund is up just marginally since it opened. HACK data by YCharts Followers of behavioral finance will tell you all about investors’ tendency to chase past returns and how it often results in buying high and selling low. You probably won’t be surprised to learn that AUM began ramping up at their fastest pace as cybersecurity stocks were peaking earlier this summer. Just in time for these investors to experience the subsequent pullback. Which is why launching a leveraged cybersecurity ETF right now is dangerous. Investors are still being told in the mainstream media that cybersecurity companies are “hot” and money is still pouring into these products. Even after the recent pullback, many of these cybersecurity companies are trading at very rich multiples. Many of these companies still have yet to turn a profit so measuring them by P/E would be unfair. Instead, let’s use the P/S ratio to try to gauge valuation levels. The S&P 500 as a whole currently trades at a P/S multiple of 1.63. Popular stocks in the sector include Palo Alto Networks (NYSE: PANW ) at 16.98, FireEye (NASDAQ: FEYE ) at 11.13, Fortinet (NASDAQ: FTNT ) at 8.97 and Checkpoint (NASDAQ: CHKP ) at 9.33. While the P/S ratio isn’t necessarily an all-in-one measure, it does go to say that even after the recent pullback cybersecurity companies are still very expensive and could indeed fall much further. Looking back at the Nasdaq bubble in 2000 gives us many examples of investments launched at the wrong time. Take the Jacob Internet Fund (MUTF: JAMFX ). This fund was one of the first mutual funds targeting primarily internet stocks at the time. In the six month period from roughly October 1999 through March 2000, the Nasdaq Composite rose over 175%. The Jacob Internet Fund debuted in December 1999 right as tech stocks were about to hit their peak. What happened next is still a good lesson in the dangers of chasing performance or “hot” stocks. The Jacob Internet rose around 20% in the few months after its debut but by the second half of 2001 the fund had lost around 95% of its 2000 peak value. JAMFX data by YCharts That’s not to suggest that a crash like that is imminent in cybersecurity companies but it does make very clear that jumping into a cybersecurity ETF – especially a leveraged cybersecurity ETF like the two launched last week that are designed to magnify the returns of the sector – could be especially dangerous. Conclusion Direxion is well within their boundaries launching these two ETFs right now but it might not be doing the average investor any favors. These ETFs have a triple whammy of risks – investing in risky cybersecurity stocks, investing in leveraged securities and investing when much of the frothy returns may have already been had. These ETFs are very much a case of “buyer beware” for investors. Disclosure: I am/we are long FEYE. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Don’t Wait For Oil To Hit $20, Sell These Energy Funds

In a doomsday scenario, Goldman Sachs (NYSE: GS ) projects oil prices may nosedive all the way to $20. Financial and fundamental metrics are said to be weaker this year and a glut in global production may drag oil prices lower. While a doomsday scenario will see oil plunge to $20, the official projection for WTI in 2016 is $45, down from a prior estimate of $57. For 2017, Goldman left the projection unchanged at $60. Last Wednesday, the Energy Information Administration (EIA) reported that the US commercial crude oil inventories dropped 2.1 million barrels for the week ending Sep 11 from the previous week to 455.9 million barrels. US commercial crude oil had increased 2.6 million barrels in the week prior. This encouraging report boosted energy shares. However, these are momentary respites for the crude prices, as they may continue to remain low. For the short term, oil prices may remain muted. A radical slump may not be seen in the short term, as there’s hope that geopolitical news doesn’t act as the igniter. Bearishness will persist though, as it is unlikely that there will be a consistent sharp decline in US shale oil production. Also for oil prices to bounce sharply higher, the OPEC nations would need to cooperate with non-OPEC producers to cut production. In spite of soft pricing, U.S. shale producers and OPEC continue to produce more of the commodity for fear of losing their market share. Most importantly, when the energy market had pushed the cartel to cut output last November, it had clearly refrained from doing so. The $20 Doldrum A decade ago, Goldman projected that oil prices have entered the “super spike” period and that the price of oil would inflate to $105. This was proved right, though the prediction had sparked criticism that Goldman Sachs was marketing its commodity index fund. This time with a $20 prediction for the worst-case scenario, even those criticisms will not make sense. When crude prices were hovering significantly over $100, it must have sounded strange to predict its fall to $40 in a year. But it did happen. Goldman says that there is less than a 50% chance of oil dropping to the $20 figure. The glut or global oversupply of oil is larger than what Goldman had predicted earlier. Below $20, some U.S. shale-oil producers will not be able to recover their operating cost and will eventually be forced to stop pumping. Production Cut Most Wanted A production cut from the U.S. shale players is most needed. The International Energy Agency (IEA) is anticipating U.S. oil production to decrease by 400,000 barrels a day in 2016 as the shale players might soon slip on low crude prices. Most importantly, the declining U.S. oil production trend has already started this year. This was revealed in the short-term energy outlook of the Energy Information Administration (EIA) which provides official energy statistics from the U.S. government. Per this outlook, August oil production declined by 140,000 barrels a day from the prior month. Energy Funds to Sell For risk-averse investors who are cautious of this sector, we present 3 Energy funds below that carry either a Zacks Mutual Fund Rank #4 (Sell) or Zacks Mutual Fund Rank #5 (Strong Sell) as we expect these funds to underperform its peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund. The minimum initial investment for these funds is within $5000. The BlackRock Energy & Resources Portfolio A (MUTF: SSGRX ) seeks capital appreciation over the long run. SSGRX invests a lion’s share of its assets in small cap companies related to sectors including energy, natural resources and utilities. SSGRX has no limit on number of companies it can invest in, but it will invest in a minimum of three countries. SSGRX currently carries a Zacks Mutual Fund Rank #4. The year-to-date and 1-year losses are 26.2% and 47.5%. The 3 and 5-year annualized losses now stand at 15.3% and 8.3%. Annual expense ratio of 1.31% is lower than the category average of 1.45%, but SSGRX carries a front end sales load of 5.25%. The BlackRock All-Cap Energy & Resources Portfolio A (MUTF: BACAX ) seeks capital appreciation over the long term. BACAX invests a majority of its assets in domestic and foreign natural resources and energy companies. BACAX may also invest in related businesses and utilities. However, a minimum of 25% of its assets must be invested in the energy sector. BACAX currently carries a Zacks Mutual Fund Rank #4. The year-to-date and 1-year losses are 24.2% and 38%. The 3 and 5-year annualized losses now stand at 9.2% and 4.6%. Annual expense ratio of 1.38% is lower than the category average of 1.45%, but SSGRX carries a front end sales load of 5.25%. The Rydex Energy Services Fund A (MUTF: RYESX ) seeks growth of capital. The fund invests a majority of its assets in equities of small to mid-cap Energy Services Companies that are domestically traded. It also invests in derivatives. The fund may also buy American Depositary Receipts for exposure to non-Us energy companies. RYESX currently carries a Zacks Mutual Fund Rank #4. The year-to-date and 1-year losses are 25.3% and 48.5%. The 3 and 5-year annualized losses now stand at 15.3% and 5%. Annual expense ratio of 1.6% is lower than the category average of 1.45%, but RYESX carries a front end sales load of 4.75%. The Ivy Global Natural Resources Fund A (MUTF: IGNAX ) seeks capital appreciation. It invests heavily in equity securities of companies across the globe, whose primary operations are related to natural resources, including suppliers and service providers. A minimum of 65% of its assets are invested in a minimum of three countries and may include domestic firms. IGNAX currently carries a Zacks Mutual Fund Rank #5. The year-to-date and 1-year losses are 14.6% and 32.2%. The 3 and 5-year annualized losses now stand at 8.1% and 4.5%. Annual expense ratio of 1.57% is higher than the category average of 1.42%, and IGNAX carries a front end sales load of 5.75%. Link to the original post on Zacks.com

PMR Vs. RTH: Using Your Discretion

Consumer Cyclicals and Consumer Non-Cyclicals may be invested in separate ETFs. An alternative is to choose a ‘blended’ Consumer Cyclicals and Non-Cyclical funds. Blended funds happen to be top performers in their asset class. Consumers drive the economy of the United States. Household spending accounts for, roughly, 70% of the US economy. Some of that spending is done of necessity: food, clothing, transportation, home heating and medical costs to name a few. These fundamental things of life which one must purchase, as time goes by, are classified as ‘ non-discretionary ‘ items. On the other hand, consumer capital which remains after the bills have been paid may be spent as one chooses: entertainment, travel and leisure, home improvements or durable goods. This is classified as ‘discretionary spending’. So important are the differences between discretionary and non-discretionary spending, investment fund managers carefully delineate the two into different sectors. Further, the non-discretionary sector is considered a ‘defensive’ sector since consumers must continue to spend for goods and services produced by those companies which in that sector; whereas discretionary spending is considered cyclically sensitive , that is to say that consumers will spend less on certain items when the economy slows and consumers are uncertain about jobs and incomes. The question the potential investor might ask, especially in the light of economic global uncertainty, is it prudent to invest in the consumer discretionary sector if the economy might contract a bit? The answer is quite general: it is extraordinarily difficult to pick market tops or bottoms. The best any individual investor might do is to accumulate shares through disciplined investing and dollar cost averaging over both good and bad times. If so, does it make sense to have both types in a portfolio? Fortunately, a third alternative is available. There are retail ETF investment products which offer a blend of both consumer cyclical and non-cyclical companies. Two of these are top performers: the Market Vectors Retail ETF (NYSEARCA: RTH ) and the PowerShares Dynamic Retail Portfolio ETF (NYSEARCA: PMR ) . (click to enlarge) According to Van Eck Global , RTH tracks their own Market Vectors US Listed Retail 25 Index (MVRTHTR) , “… a rules based index intended to track the overall performance of 25 of the largest US listed, publicly traded retail companies …” The fund consists of 25 US listed retailers. According to Invesco , PMR is based on the Dynamic Retail Intellidex Index filtering companies based on “… price momentum, earnings momentum, quality, management action, and value …” The fund consists of 30 US listed retailers. Although the funds come under the heading of ‘Consumer Discretionary’ (using the Seeking Alpha ETF Hub filter ) , they are actually a blend of both. The Market Vectors Retail fund blends 55.8% of Consumer Discretionary, with 34.2% of Consumer Staples and some Health Care 9.9%. The PowerShares Dynamic Retail Portfolio is a blend of 50.09% Consumer Discretionary, 41.95% Consumer Staples, 2.75% Industrials, 2.65% IT and 2.54% Materials. Hence both funds are similar in the number of holdings but differ in the underlying tracking indexes; both funds have comparatively few holdings yet perform rather well. The table below lists four of best performing funds in this sector. Fund Name Number of Holdings 1-Month 1-Year 3 Year Type Market Vectors Retail ETF (RTH) 26 -2.75% 21.63% 75.13% Blend of cyclical, non-cyclical and HealthCare Consumer Discretionary Select Sector SPDR ETF (NYSEARCA: XLY ) 88 -2.71% 14.13% 69.11% Consumer Discretionary PowerShares Dynamic Retail Portfolio ETF (PMR) 30 -3.64% 12.79% 55.46% Blend of cyclical, non-cyclical, IT, Industrials and Materials Vanguard Consumer Discretionary ETF (NYSEARCA: VCR ) 385 -2.94% 12.67% 68.92% Consumer Discretionary Data from Seeking Alpha ETF Hub Since RTH leads the similarly constructed PMR, it would be interesting to make a side-by-side comparison and perhaps determine what makes the difference. Surprisingly, the funds have few companies in common. With the exception of Home Depot (NYSE: HD ) at 8.57% of RTH vs 4.93% of PMR, the weighting of the other companies in common, are roughly the same. RTH with Weightings RTH with Weightings PMR with Weightings PMR with Weightings Costco (NASDAQ: COST ) 5.07% Ltd Brands (NYSE: LB ) 3.07% Costco 5.033% Ltd Brands 5.41% CVS Caremark (NYSE: CVS ) 6.90% Target (NYSE: TGT ) 4.35% CVS Caremark 4.78% Target 4.913% Home Depot 8.57% Walgreen (NASDAQ: WBA ) 5.69% Home Depot 4.93% Walgreen 5.041% Kroger (NYSE: KR ) 4.43% Whole Foods (NASDAQ: WFM ) 1.47% Kroger 5.274% Whole Foods 2.71% Data from Van Eck and Invesco Next, since the top ten heaviest weighted companies affect the overall performance of a fund, the funds ten heaviest weightings should be compared. The bar charts below, demonstrates that PMR’s top ten heaviest weighted holdings are pretty much evenly distributed, and slightly biased towards Consumer Staples at about 56.253% of those top ten. It should also be noted that about 46.54% of the fund’s total holdings are concentrated in the top ten. Data from Invesco The next table demonstrates that RTH’s top ten heaviest weighted holdings are not as evenly distributed as PMR and has a Consumer Discretionary bias at 54.85% of the top ten. Further a large portion of that is concentrated in the top two holdings Amazon (NASDAQ: AMZN ) and Home Depot , accounting for 33.06% of the top ten and almost 22% of the funds entire holdings. Lastly, 65.63% of RTH’s total holdings are concentrated in those top ten holdings. Data from Van Eck Hence, it seems that RTH has a slightly more bias towards Consumer Cyclicals than PMR and is skewed towards its heaviest weighted holdings (as of September 18), and then towards two of those top ten. On the other hand, PMR has a more even distribution of its top ten holdings and those top ten holdings account for less than half of the portfolio’s total holdings. Lastly, a few ETF technical items need to be compared. Fund and Inception Date 30 day SEC Yield Shares Outstanding Net Assets Net Expense Ratio Price/ Earnings 3 year Beta Open Option Interest RTH 12/20/2011 1.19% (annual Distributions) 2,671,531 $204.2 million 0.35% capped until 2/1/2016 20.00 0.88 Yes PMR 10/26/2005 0.70% 650,000 $25.103 million 0.63% 20.83 0.89 Yes Data from Invesco and VanEck The entire point of the matter is this: for a disciplined investor with limited funds, building a well-diversified concise portfolio of ETFs with the long term in mind, there’s no need to allocate towards Consumer Cyclicals and Non-Cyclicals separately. Instead, by selecting one of the available funds with a blend of Consumer Cyclicals and Non-Cyclical, will result in a far more efficient way to invest, and by needing to allocate into one blended fund instead of two separate funds will save on management fees and commissions over the long term. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: CFDs, spreadbetting and FX can result in losses exceeding your initial deposit. They are not suitable for everyone, so please ensure you understand the risks. Seek independent financial advice if necessary. Nothing in this article should be considered a personal recommendation. It does not account for your personal circumstances or appetite for risk.