Tag Archives: zacks funds

Still Believe In Goldman’s $20 Oil? Go Short With These ETFs

Oil has become the most perplexing commodity this year with wild swings in recent weeks. The latest and worst culprit is the China meltdown with global repercussions that is weighing heavily on demand. Further, ever-increasing production and a large supply glut are tempering its appeal across the board. As the Fed kept the rates on hold at its latest meeting on Thursday, oil price tumbled about 5% the next day. This is because the Fed’s decision of no rates hike led to further worries over the health of the global economy and will likely put more pressure on the price of oil. Notably, both U.S. and Brent crude have plunged about 15% in the year-to-date time frame with some forecasting a bigger drop in the days ahead. In particular, Goldman predicts that crude price could slide to $20 per barrel if production cuts fail to clear supply glut and new investments in the oil shale industry are not reduced (read: ” Oil ETFs Slide Again: More Pain in Store? “). Behind the Lower Forecast The demand and supply dynamics for oil is becoming worse by the day. This is especially true, as the Organization of Petroleum Exporting Countries (OPEC) has pumped out maximum oil in more than three years to maintain market share. Iran is looking to boost its production once the Tehran sanctions are lifted and inventories continue being built up. Additionally, oil production in the U.S. is hovering around its record level and crude stockpiles remain about 100 million barrels above the five-year seasonal average. However, the International Energy Agency (IEA) believes that the recent oil slump would force both the U.S. and other non-OPEC producers like Russia and the North Sea to cut their production sharply next year. It expects non-OPEC supply to reduce by 0.5 million barrels per day, the biggest decline in more than two decades, to 57.7 million barrels per day next year. Meanwhile, shale oil production in the U.S. will drop by 385,000 barrels per day. On the demand side, the agency expects global oil demand to climb to a five-year high of 1.7 million barrels per day this year and moderate to an increase of 1.4 million barrels per day next year (read: ” Positive News Flow Sparks Off Rally in Oil ETFs “). Though reduced output from non-OPEC and higher demand could check the global supply glut, the oil market will still remain oversupplied. As a result, Goldman lowered its 2016 price target for Brent and crude (WTI) to $49.50 per barrel and $45 per barrel from $62 and $57, respectively. Further, it also warned of crude hitting as low as $20 per barrel. How to Play? Given the bearish fundamentals, the appeal for oil will remain dull in the months ahead. This might compel investors to make a short play on the commodity, especially if they believe in Goldman. For those investors, while futures contracts or short-stock approaches are possibilities, there are a host of risk inverse oil ETF options that prevent investors from losing more than their initial investment. Below, we highlight some of these ETFs and the key differences between them: The United States Short Oil ETF (NYSEARCA: DNO ) This is an unpopular and liquid ETF in the oil space with an AUM of $24.7 million and average daily volume of 32,000 shares. The fund seeks to match the inverse performance of the spot price of light sweet crude oil WTI. It charges 60 bps in fees per year from investors and has gained about 28.2% in the trailing 13-week period. PowerShares DB Crude Oil Short ETN (NYSEARCA: SZO ) This is an ETN option and arguably the least risky choice in this space as it provides inverse exposure to the WTI crude without any leverage. It tracks the Deutsche Bank Liquid Commodity Index – Oil – which measures the performance of the basket of oil futures contracts. The note is unpopular as depicted by an AUM of $28.5 million and average daily volume of nearly 35,000 shares a day. Expense ratio came in at 0.75%. The ETN gained 30.2% over the last 13-week period. ProShares UltraShort Bloomberg Crude Oil ETF (NYSEARCA: SCO ) This fund seeks to deliver twice (2x or 200%) the inverse return of the daily performance of the Bloomberg WTI Crude Oil Subindex. It has attracted $152.7 million in its asset base and charges 95 bps in fees and expenses. Volume is solid as it exchanges nearly 1.7 million shares in hand per day. The ETF returned about 56% over the last 13 weeks (read: ” Oil Tumbles to Six-Year Low: ETF Tale of Two Sides “). PowerShares DB Crude Oil Double Short ETN (NYSEARCA: DTO ) This is also an ETN option providing 2x inverse exposure to the Deutsche Bank Liquid Commodity Index-Light Crude, which tracks the short performance of a basket of oil futures contracts. It has amassed $47.7 million in its asset base and trades in a moderate daily volume of roughly 103,000 shares. The product charges 75 bps in fees per year from investors and is up 28.3% in the same time frame. VelocityShares 3x Inverse Crude Oil ETN (NYSEARCA: DWTI ) This product provides 3x or 300% exposure to the daily performance of the S&P GSCI Crude Oil Index Excess Return. The ETN is a bit pricey as it charges 1.35% in annual fees while average daily volume is good at over 1.8 million shares. It has amassed $222.6 million in its asset base and delivered whopping returns of nearly 72.2% in the same period. Bottom Line As a caveat, investors should note that such 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 those ETF investors who believe in Goldman and are bearish on oil, either of the above products could make an interesting choice. Clearly, a near-term short could be intriguing for those with high-risk tolerance, and a belief that the “trend is a friend” in this corner of the investing world. Original Post

Time For These Top-Rated Cyclical ETFs?

The markets have been lukewarm lately as participants are holding their breath to study every bit of the Fed-related news. No doubt, signs of a snap-back are pretty much there in the U.S. economy, but the recoil is not flawless and the global market volatility ticked up to a delirious level, thanks mainly to the China issues. Also, previous remarks by the Fed have only added to the uncertainty as the central bank sought more improvement in the labor market and inflation backdrop. The U.S. economy underwent an upward GDP revision for the second quarter of 2015, from 2.3% reported earlier to 3.7% upgraded later on strong domestic demand. If this was not enough, the unemployment rate dropped to 5.1% in August, the lowest since April 2008. While this more-than-seven-year low unemployment rate should bolster the case for an imminent policy tightening, a still-muted inflation backdrop backed by an oil price slump, lackluster wage gains, a missed job expectation in August and a feeble overseas market are blurring the optimism. All these have put this week’s Fed meeting in the high-alert zone. Cyclicality of Sectors Whatever the case, no one can deny the growth in the American economy given the solid housing data, improved confidence among citizens and decent recovery (if not brisk) in several cyclical sectors like retail. Added to this, historically cyclical sectors outperform the defensive ones when the rates normalize. These areas often slump when the economy is tumbling, but are among the biggest winners when the economic environment turns favorable. Among the cyclical ones, as per Fidelity, sectors like consumer discretionary and financials and economically sensitive sectors like industrials and information technology tend to do better in the early cycle of the an economic recovery. Fidelity defines an early cycle phase when economic activity revives, credit starts to grow, policy is still accommodative and sales and profits improve. With many of these conditions present in the U.S. economy, we can conclusively say that the coming months will be fairly dominated by the cyclical sectors. If the Fed at all hikes rates this month, it should not be more than just 25 bps; otherwise, investors might see the timeline shifting to the end of the year. In either of the case, a few cyclical sectors and the related ETFs are expected to perform impressively especially given the expected earnings growth trend. For these investors, we highlight three ETF picks below that have heavy exposure to the cyclical industries: Market Vectors Retail ETF (NYSEARCA: RTH ) The retail sector can best reflect the lift in an economy as it revolves around discretionary purchases. Though the August Retail Sales report was mixed, with the ‘headline’ growth rate falling short of estimates, its internals exhibited improved momentum and the prior-month’s numbers were revised higher. The sector is expected to post earnings growth of 0.4% and 6.4% in Q3 and Q4 of this year, respectively, both better than consumer discretionary sectors. Its sales expectation is also steady at 3.5% for Q3 and 7.1% for Q4, again better than consumer discretionary. More jobs and cheaper fuel should help the sector to grow. This retail fund has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook. The fund has added over 5.7% so far this year. PowerShares DWA Technology Momentum ETF (NYSEARCA: PTF ) The technology sector saw certain setbacks this year as the stocks were crushed during the market correction in August. The sector went into a tailspin on acute sell-offs in tech biggies like Apple (NASDAQ: AAPL ), Goggle (NASDAQ: GOOG ) (NASDAQ: GOOGL ), Microsoft (NASDAQ: MSFT ) and IBM (NYSE: IBM ). However, the nightmare should soon be over, as the sector is expected to register a 2.8% earnings growth in Q3 and an 8.8% jump in revenues. This technology ETF currently has a Zacks Rank #2 (Buy) and has advanced 5.1% in the year-to-date frame (as of September 15, 2015). PowerShares KBW Regional Banking Portfolio (NYSEARCA: KBWR ) This regional banking sector has benefited greatly from approaching Fed policy normalization. The space boasts solid Zacks Ranks. In any case, U.S. banks reported solid earnings this season with 11.6% growth in earnings on 0.6% decline in revenues. Banks recorded 66.7% beat on earnings on 60% top-line beat. Overall the financial sector is expected to deliver stellar earnings growth of 8.6% and 15.1% in Q3 and Q4, respectively. Very few sectors are able to attain this envious growth rate, especially given the even-increasing global growth. However, there will be no expansion in revenues. Regional banking ETF ( KBWR ) is up 3.8% so far this year and has a Zacks ETF Rank #2 with a High risk outlook. Original post .

Utilities Funds In Focus If Fed Delays Rate Hike

All eyes are now on the two-day FOMC policy meeting that gets underway today. The importance of this particular meeting has surged ever since hopes started surging of the Fed lifting the key interest rates in the September meeting. Nonetheless, expectations of a September rate hike have started fading as uncertainty took over in recent days. Today, let’s look at funds in focus if the Fed does not announce a rate hike. During the July meeting, the Fed had not provided any clue about the timing of the rate hike, but had somehow left the door open for a September hike. Nonetheless, many new events have changed the financial world scenario since the last Federal Open Market Committee meeting that was held in July. Subdued inflation is a worry, though labor data has been encouraging. But the latest batch of economic data has not really clarified if the Fed can raise rates. Meanwhile, China, the second largest economy, has consistently reported dismal economic data of late; sparking global economic slowdown fears that led to global market sell-offs. Moreover, what is causing much of the uncertainty is market volatility. Rate Hike Uncertainty Moving beyond the economic data, a strong reason for not hiking the rate is market volatility. It may not be easy for the Fed to raise rates amid such a volatile market. In fact, the Fed has never raised the key Federal funds rate when the CBOE Volatility Index (VIX) has been above 25 in the last 20 years. The average level of VIX has been just 15.7 when rates have gone up. This is even lower than the long-run average of 20. VIX is “a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices.” What is worse for investors is that volatility is predicted to continue for some more time. According to the Wells Fargo Advantage Funds chief portfolio strategist Brian Jacobsen, volatility may continue for three to four months. China, one of the primary reasons for the market rout, cannot assure less volatility. Recently, in China, a measure of 50-day volatility had increased to its highest point in 18 years. While a 0.25% rate hike cannot be ruled out completely, recent comments and other events have also come in to suggest otherwise. While traders of short-term interest rate futures are giving a one-in-four chance of a rate hike, primary dealers or economists from banks dealing directly with the Fed have picked December to have a higher chance of the rate hike coming in. Conflicting data points also have intensified the uncertainty. As said, the inconclusiveness is prominent. Opinion Polls Go Against Rate Hike According to The Wall Street Journal , 46% of economists surveyed last week forecasted a rate hike in the September 16-17 meeting, while the majority of them expects a rate hike later this year. The tally fell sharply from an early August poll that saw 82% of economists supporting a rate hike in September. A Bloomberg calculation shows that chances of a rate hike in September have dropped to 30% now. At the start of August, it was at 54%. Meanwhile, Goldman Sachs also forecasts a rate hike in December. Volatile markets and inflation data falling short of expectations strengthened their conviction that a September rate hike is too early. Additionally, the Bankrate Economic Indicator survey shows that China’s currency devaluation leading to a massive sell-off in stocks will compel the Fed to stay on hold with its liftoff this month. Funds in Focus on No Rate Hike The Fed seems to be stuck between global central bank easing and dollar strengthening, deflationary pressures arising from the energy sector and troubles in the global economy. Whether lifting the monetary policy stimulus would be a prudent move is the question that the Fed needs to answer. Going by the chance of the Fed not hiking interest rates now, Utilities funds are the natural choice to buy. Utilities is one of the most rate-sensitive sectors due to its high level of debt volume. Utilities are capital-intensive businesses, and the funds generated from internal sources are not always sufficient for meeting their requirements. As a result, the companies have to approach the capital markets for raising funds. As a result, a movement in interest rate has a significant impact on this sector. The capital-intensive Utilities industry needs to access external sources of funds to expand its operations. The low interest rate environment, which has, for some time, been near a zero level, has been extremely conducive for its growth. A continued low interest rate environment would thus be favorable for Utilities funds. However, the problem with many Utilities funds is that they are in the negative territory considering the year-to-date return. This does not, however, mean that they do not have the potential to gain going forward. With a high yield, some Utilities funds may be on investors’ radar. If the Fed decides against a rate hike now, investors may even buy these funds at a discounted price. Carrying a Zacks Mutual Fund Rank #1 (Strong Buy) , American Century Utilities Fund Investor (MUTF: BULIX ) has high yield of 3.19%. Its portfolio is constructed based on quantitative and qualitative management techniques. Though it is down year to date, the fund comes at a discount and should be a good pick for income-seeking investors. Its 3-year and 5-year annualized returns are 7.1% and 9.9%, respectively. Its annual expense ratio of just 0.67%, as compared to the industry average of 1.18%, also makes BULIX an inexpensive fund to add to the portfolio. Franklin Utilities Fund A (MUTF: FKUTX ) has an yield of 2.79%. It seeks capital growth and current income over the long run. The fund invests a large chunk of its assets in Utilities companies that are involved in providing electricity, natural gas, water, and communications services. The 3-year and 5-year annualized returns are 7.5% and 10.4%, respectively. Its annual expense ratio of 0.75% is also lower than the category average of 1.18%. FKUTX currently carries a Zacks Mutual Fund Rank #2 (Buy) . Another fund with a decent yield is Invesco Dividend Income Fund Inst (MUTF: IAUYX ). A large chunk of the assets of IAUYX is invested in dividend-paying securities and other instruments having similar economic characteristics. IAUYX has a dividend yield of 2.18%. The fund’s annual expense ratio of 0.87% is lower than the category average of 1.10%. Original Post