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Equal Weight Energy ETF: A Better Way To Tap Oil Rebound?

The energy sector has been gaining ground in recent months after the U.S. oil price rebounded strongly, gaining over 33% from a six-year low of around $45 per barrel hit in January. This is primarily thanks to the billions of dollars in spending cuts, shrinking U.S. oil rigs counts, higher crude oil processing by the U.S. refiners, and consolidation. Will the bullish trend continue in the coming months too? If we look at the demand/supply trends, demand is definitely on the rise but not enough to meet the growing global supply gut, suggesting range-bound trading for the oil and energy stocks. Additionally, strong dollar has been a major headwind for the oil prices. Mixed Trends The peak summer season will drive up the demand for the oil products, in particular gasoline, pushing the energy prices higher. As a result, the International Energy Agency (IEA) raised the global demand growth outlook by 280,000 barrels a day to 1.40 million barrels, bringing total daily demand to almost 94 million barrels for this year. While the agency projects a rise in global demand, oil supplies continue to exceed demand this year. This is because the Organization of Petroleum Exporting Countries (OPEC) is pumping up maximum oil in more than two-and-a-half years buoyed up by higher output from Iraq and Iran. It is currently producing about a million barrels a day against its target of 30 million barrels a day to protect market share and meet growing demand. Notably, the top oil exporter – Saudi Arabia – has boosted its production to at least a three-decade high. Further, oil production in the U.S. has been on the rise and reached another record high of 9.6 million barrels per day last week, in more than 40 years. However, it is expected to show some signs of slowdown in June through early 2016. This is especially true as oil production from the seven major U.S. shale plays will likely fall by 1.3% in June and further by 1.6% in July. The latest positive inventory data report from the U.S. Energy Information Administration (EIA) also showed that crude supplies fell for the sixth straight week (ending June 5). Given mixed fundamentals, investors are definitely looking for a safe and quality choice in this rebounding sector. While there are several energy ETFs available in the market, the Guggenheim S&P 500 Equal Weight Energy ETF (NYSEARCA: RYE ) could be an excellent play. RYE in Focus The fund offers equal weight exposure to 41 stocks in the basket by tracking the S&P 500 Equal Weight Index Energy. None of the firm holds more than 3.03% of the total assets. In terms of industries, oil, gas and consumable fuels takes the top spot at 70.5% while energy equipment and services account for the remaining portion. The product gained nearly 6.6% over the past three months, easily outpacing the broad sector fund – the Energy Select Sector SPDR ETF (NYSEARCA: XLE ) – by over 200 bps. Further, RYE is also leading the way higher from the year-to-date look, with gains of 0.06% against the loss of 1.03% for XLE. Why RYE is Beating XLE The outperformance was mainly driven by its equal allocation across various securities, which prevents heavy concentration and provides a nice balance across various securities. With quarterly rebalancing, the product tends to cash in on the overvalued stocks and reinvest in the underperforming ones, potentially allowing outperformance on solid fundamentals. RYE is also nicely spread out across the two spectrums of market capitalization levels with 52% in large caps and 40% in mid caps. Further, about three-fifths of the portfolio is tilted toward value stocks that appear safe and appealing for investors in a volatile market. Value investing strategy includes stocks with strong fundamentals – earnings, dividends, book value and cash flow – that trade below their intrinsic value and are undervalued by the market. As a result, value stocks often overreact to both positive and negative news, resulting in movement in the share prices that do not reflect the company’s true long-term fundamentals. This creates buying opportunities in such stocks at depressed prices and offers the potential for capital appreciation when the stock finally reflects its true market price. As a result, the combination of large or mid-caps and value stocks help to provide stability in the portfolio in an uncertain environment while also offer a significant upside potential when the trend reverses. While the fund goes a long way in reducing overall risk, investors should note that it is a relatively high cost choice in the space. It charges a bit higher fee of 40 bps compared with the expense ratio of 0.15% for XLE. Further, RYE is illiquid, exchanging just 43,000 shares a day in hand on average suggesting additional cost in the form of bid/ask spread, though it has a decent level of $173.8 million in AUM. Bottom Line Given its equal weighted strategy and diversification benefits, this energy ETF could prove more beneficial to investors compared to the other products in the space. The solid run in the product is expected to continue in coming months even amid volatile oil trading. Link to the original post on Zack.com

BlackRock Utility And Infrastructure Trust: An Option Player In The ETF Utility Space

I recently looked at UTG and UTF, leading readers to ask about BUI. BUI is BlackRock’s entrant into the infrastructure space. The biggest difference it offers is the use of options. I recently wrote an article reviewing two relatively long-standing infrastructure closed-end funds , or CEFs. My conclusion being that Reaves Utility Income Fund (NYSEMKT: UTG ) and Cohen & Steers Infrastructure Fund (NYSE: UTF ) are both good products, though UTF is trading at a wider discount at the moment. Readers of that article asked my take on BlackRock Utility and Infrastructure Trust (NYSE: BUI ), another option (that’s a pun, actually) in the space. What is BUI? BUI opened its doors in late 2011, meaning that it doesn’t have the longevity of UTG or UTF. In fact, it hasn’t really witnessed a major market correction yet, like the pain we all suffered at the turn of the century and more recently during the 2007 to 2009 recession. This is less of a knock than a piece of information to keep in mind. BUI isn’t doing anything outlandish, so it’s unlikely it would “blow up” in a downturn. Actually, just the opposite is likely to be the case, but that expectation is untested. That said, what does it do? As the name implies, like UTG and UTF, BUI invests in things like electric utilities, water utilities, pipelines, bridges, and other similar hard assets. These are the types of things we take for granted, but without which life simply wouldn’t go on as it had before. On that score, it does, indeed, deserve to be looked at with UTG and UTF. However, there’s a not too subtle difference here. UTG and UTF both make use of leverage. BUI does not. It enhances returns, specifically income, through the use of an option overlay strategy . This means two things: return of capital will always be an issue and the options it writes could provide downside protection in a bear market. One of UTG’s big bragging rights is that it has never used return of capital to support its distributions. They have always come out of income and capital gains. You can argue this doesn’t matter much so long as a fund isn’t using destructive return of capital over extended periods. For example, UTF has used return of capital in the past and in one recent year it was destructive (the net asset value went down at the same time as return of capital was being used to support the dividend). However, that was one year and UTF hasn’t used return of capital recently. But some investors are highly suspicious of return of capital distributions. And BUI has made use of return of capital every single year. Why? Because it writes options. Dividends and interest on debt fall into investment income. Capital gains fall into, well, capital gains. Option income isn’t either of those things and winds up getting shoved into return of capital. It hasn’t proven to be a bad thing at BUI, with the net asset value, or NAV, increasing from $19.10 a share at its initial public offering to $21.50 or so more recently. So, at this point, the issue of return of capital hasn’t been a big one and likely only matters if you have a personal issue with that type of distribution. Looking at options from a different angle, the premiums received can provide return during down markets. This protects an option writing fund’s returns to some extent from the full effects of a market decline. In the case of BUI, however, that’s more of an academic issue because the fund has yet to deal with a truly severe downdraft. So, in theory, BUI should hold up better than UTG or UTF in a downturn. But it’s worth noting that the use of leverage at these two funds is likely to result in notable underperformance during a bear market. Both funds, for example, lost more than 40% of their NAV value in 2008. A fact to keep in mind when you consider that options can also limit BUI’s upside because positions will get called away. So BUI should lag in good markets and shine in bad ones compared to UTG and UTF. How has it done? Looking at performance numbers, BUI has underperformed relative to UTG and UTF on an NAV total return basis over the trailing three-year period through May (BUI’s short history means that’s the furthest back this trio can be compared). Interestingly, however, over the trailing six months period, UTG is down 2.7%, UTF is up a scant 0.4%, and BUI is up roughly 1.8%. Although hardly a bear market, while UTG and UTF have struggled, BUI is beating them. BUI’s standard deviation goes right along with that. UTG and UTF have three year standard deviations, a measure of volatility, of 13.5 and 11.4, respectively. BUI’s standard deviation is a far more subdued 8.5% over that span. Looking at cost, UTG is trading at a small discount to its NAV and roughly in line with its historical price trends. UTF, meanwhile, is trading far more cheaply at an around 14% discount. BUI is trading at a discount of around 12%, nearly three percentage points more than its trailing three-year average discount. Investors looking for bargains should be interested in UTF and BUI. That said, if you are concerned about risk, BUI should have the edge (despite the fact that it hasn’t been stress tested by a deep downturn). Yield wise, BUI’s distribution is around 7.5%. That’s in the same area as UTF, but notably above UTG’s 6.3% yield. That said, it’s worth repeating that UTF and UTG use leverage to enhance yield, hopefully earning more in dividends than they pay in interest. BUI, on the other hand, generates income by selling options on its holdings, which generates return of capital, can limit upside potential, yet also helps to reduce volatility. And options are also cheaper to deal with, which is why BUI’s expense ratio is around 1.1%. Both UTG and UTF have to contend with interest costs, which push their expense ratios up to 1.7% and 2.2%, respectively. Who’s BUI for? Whether or not you want to purchase BUI really boils down to your concern about market volatility. If you think the markets are trading at premium levels and could be due for a correction, theoretically, BUI is probably the best choice out of these three funds. It also has the allure of trading at a noticeable discount, like UTF, if you prefer to buy on the cheap. And it’s the least expensive to own based on fees. All of that said, I still like UTG because of its longevity and the fact that it has never cut its distribution. But for risk-averse investors who don’t have an issue with return of capital, BUI is truly worthy of consideration. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Trying To Hedge 7-10 Bond Yields? Consider TBX

Summary TBX provides a well correlated hedge for intermediate treasury bonds. TBX is associated with significant risks and is intended for achieving short term goals. Recommended for investors who believe interest rates will rise dramatically over an intermediate time frame. Basic Information The ProShares Short 7-10 Year Treasury ETF (NYSEARCA: TBX ) is a n exchange traded note (ETN). ETN’s are unsecured, unsubordinated debt securities. This type of debt security differs from other types of bonds and notes because ETN returns are based upon the performance of a market index minus applicable fees, no period coupon payments are distributed and no principal protections exist. TBX is intended to move inversely (-1x) to the 7-10 year Barclay’s Bond Index. The Barclay’s Bond Index is tied to U.S. treasury yields. TBX seeks investment results for a single day only, not for longer periods. A “single day” is measured from the time the Fund calculates its net asset value (“NAV”) to the time of the Fund’s next NAV calculation. The return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from the inverse (-1x) of the return of the Barclays U.S. 7-10 Year Treasury Bond Index (the “Index”) for that period. For periods longer than a single day, the Fund will lose money when the level of the Index is flat, and it is possible that the Fund will lose money even if the level of the Index falls. Longer holding periods, higher index volatility, and inverse exposure each exacerbate the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as or more than the return of the Index. Expense Ratio: .95% + Portfolio turnover (currently 0% because cash instrument and derivative transactions are not included). How Could it be used? If you are looking for a 10-year hedge, TBX could be a very good play. It is highly correlated to the market and is a useful tool for any skilled investor. I cover a multitude of reasons in this article to illuminate the risks of investing in an ETN, but with adequate forethought TBX is not a bad strategy, especially with the threat of rising interest rates. Principal Investment Strategy All investment strategies are used in combination to achieve similar daily return characteristics as -1x of the index: Derivatives – financial instruments whose value is derived from the value of an underlying asset or assets, such as stocks, bond, funds, interest rates, or indexes. Swap agreements – Contracts entered into primarily with major global financial institutions for a specified period ranging from a day to more than one year. In a standard “swap” transaction, two parties agree to exchange the return (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross return to be exchanged or “swapped” between the parties is calculated with respect to a “notional amount,” e.g., the return on or change in value of a particular dollar amount invested in a “basket” of securities or an ETF representing a particular index. Futures Contracts – Standardized contracts traded on, or subject to the rules of, an exchange that call for the future delivery of a specified quantity and type of asset at a specified time and place or, alternatively, may call for cash settlement. Money Market Instruments U.S. Treasury Bills – that have maturities of one year or less and supported by full faith and credit of the U.S. government. Repurchase Agreements – Contracts in which a seller of securities, usually U.S. government securities or other money market instruments, agrees to buy them back at a specified time and price. Repurchase agreements are primarily used by the Fund as a short-term investment vehicle for cash positions. These are the Principal Risks associated with TBX Risks Associated with the Use of Derivatives Compounding Risk Correlation Risk Fixed Income and Market Risk Counterparty Risk Debt Instrument Risk Interest Rate Risk Intraday Price Performance Risk Inverse Correlation Risk Liquidity Risk Early Close/Late Close/Trading Halt Risk Market Price Variance Risk Valuation Risk Non-Diversification Risk Portfolio Turnover Risk Short Sale Exposure Risk As you can see below, estimated returns are volatile, and the funds actual results may be significantly better or worse than the underlying index. Bolded values, not including the x and y axis percentages, are where the fund performed worse than expected. This is meant to illuminate the possibility of under or over performance. Estimated Fund Returns Index Performance One Year Volatility Rate One Year Index Inverse (-1x) of the One Year Index 10% 25% 50% 75% 100% -60% 60% 147.50% 134.90 94.70 42.40 (8.00) -50% 50% 98.00 87.90 55.80 14.00 (26.40) -40% 40% 65.00 56.60 29.80 (5.00) (38.70) -30% 30% 41.40 34.20 11.30 (18.60) (47.40) -20% 20% 23.80 17.40 (2.60) (28.80) (54.00) -10% 10% 10.00 4.40 (13.50) (36.70) (59.10) 0% 0% (1.00) (6.10) (22.10) (43.00) (63.20) 10% -10% (10.00) (14.60) (29.20) (48.20) (66.60) 20% -20% (17.50) (21.70) (35.10) (52.50) (69.30) 30% -30% (13.80) (27.70) (10.10) (56.20) (71.70) 40% -40% (29.30) (32.90) (44.40) (59.30) (73.70) 50% -50% (34.00) (37.40) (48.10) (62.00) (75.50) 60% -60% (38.10) (41.30) (51.30) (64.40) (77.00) Correlation to 7-10 year yields I aligned TBX with its foil the iShares 7-10 Year Treasury Bond ETF ( IEF). IEF seeks to track the investment results of an index composed of U.S. Treasury bonds with maturities between seven and ten years. IEF is comprised entirely of intermediate government bonds. It is essentially perfectly correlated to the Barclays U.S. 7-10 Year Treasury Bond Index. If IEF moving up in value it is likely overall interest rates are falling due to the nature of the bond. If IEF is moving down in value it is likely overall interest rates are rising. Due to the inverse relationship of IEF and TBX, TBX provides a hedge for 7-10 year bonds. Conclusion If you are trying to hedge your investment on intermediate treasury yields then TBX is probably an ETN you ought to consider. However, it is important for any smart investor to weigh the risks associated with any ETN before jumping into any investment long or short. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.