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4 ETFs In Focus As Iran Reaches Nuclear Deal

The tension in the Middle East has eased following the historic nuclear deal between Iran and world powers. After decade-long negotiations, the Islamic Republic is ready to back down the development of nuclear weapons for over a decade in exchange for relief in oil sanctions imposed in the late 2000s. This seems to be a major development for Iran, the U.S. and the six world powers. The deal would open the doors for international oil and gas giants like Royal Dutch Shell (NYSE: RDS.A ), Total S.A. (NYSE: TOT ) and Eni SpA (NYSE: E ), previously barred under sanctions, to invest in the Iranian oil and energy sector thanks to Iran’s huge oil reserve. This is especially true as Iran is the world’s fourth-largest reserve holder of oil with 158 billion barrels of crude oil, according to the Oil & Gas Journal . Notably, it accounts for almost 10% of the world’s crude oil reserves and 13% of reserves held by the Organization of the Petroleum Exporting Countries (OPEC). On the other hand, any relaxation in sanctions would boost Iranian oil exports and production, adding to the global supply glut. However, it will take at least six months for the sanctions to be lifted due to vast legislative procedure involved in the historic deal. Additionally, the relief to oil sanctions will be gradual when it starts and thus could take years or more for Iran to increase oil production significantly or fully ramp up its export capacity. As per Fitch Ratings, Iranian oil production will increase in 2016 but will take a number of years to reach its previous peak. Iran currently exports about 1.1 million barrels per day, which more than halved from 2.6 million barrels per day exported in 2011. The development has put the spotlight on many corners of the investing world with investors keeping a close eye on them for the coming days. In particular, crude oil price has seen huge volatility following the historic nuclear deal. Crude price slumped as much 2.3% on the day but bounced back later to settle 1.6% higher at the close. As a result, we have highlighted four ETFs, which are especially in focus in the wake of nuclear deal: United States Brent Oil Fund (NYSEARCA: BNO ) Oil ETFs which directly deal in the futures market will be on the top of investors’ list. While there are many, the focus would be on Brent crude oil that serves as a major benchmark of oil worldwide instead of WTI, which is more of a benchmark for American prices. The fund provides direct exposure to the spot price of Brent crude oil on a daily basis through future contracts. It has amassed $95.4 million in its asset base and trades in good volume of roughly 215,000 shares a day. The ETF charges 75 bps in annual fees and expenses. BNO gained 0.5% on Tuesday trading session and is down about 9% in the year-to-date period. SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA: XOP ) As Iran is expected to increase oil production after sanctions are lifted, a closer look at the exploration and production sector is warranted. XOP is one of the largest and popular funds in the energy space with AUM of $1.7 billion and expense ratio of 0.35%. It trades in heavy volume of more than 9.7 million shares a day on average. This fund provides an equal-weight exposure to 75 firms by tracking the S&P Oil & Gas Exploration & Production Select Industry Index. None of the firms accounts for more than 1.84% of the total assets. The product is skewed toward small cap securities, as these account for 56% share in the basket, while the rest is almost evenly split between large and mid caps. The ETF surged 3% on the Iran deal but is down 4.8% so far in the year. iShares U.S. Aerospace & Defense ETF (NYSEARCA: ITA ) A nuclear agreement could be a boon for the U.S. defense sector, as it will prompt the Mideast partners to seek improved defense systems from American contractors. While there are other two quality options in the defense space – PPA and XAR – ITA will garner huge investors’ interest for its liquidity and AUM. The fund follows the Dow Jones U.S. Select Aerospace & Defense Index and holds 36 stocks in its basket. It allocates higher weights to the top two firms – Boeing (NYSE: BA ) and United Technologies (NYSE: UTX ) – at over 8% share each. Other securities hold no more than 6.70% of total assets. The fund has accumulated $533.6 million in AUM while charges 44 bps in fees a year. The product is up 0.6% on Tuesday trading session and 6.4% so far this year. Market Vectors Gulf States Index ETF (NYSEARCA: MES ) The deal could be the game changer for the Middle East, as it would make the relationship with the Western countries smoother with increased investments, new business, and a pickup in other economic activities. Given this, MES having AUM of just $15.3 could be potential winner in the coming years. The fund provides exposure to the 63 largest and most liquid stocks in the Gulf region by tracking the Market Vectors GDP GCC Index. Emaar Properties, Qatar National Bank and National Bank of Kuwait occupy the top three spots with at least 6% share each. Other firms hold no more than 4.3% of total assets. From a sector look, financials dominates the portfolio with 66.7% share while industrials and telecom round off the next two spots with double-digit exposure each. The ETF charges 99 bps in annual feeds and trades in a paltry volume of about 6,000 shares. The fund added 1.3% on the day and over 4% in the year-to-date time frame. 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Inside ProShares’ Bull And Bear Leveraged Homebuilding ETFs

Over the last few months, issuers have been showing immense interest in the housing ETF space. Before 2015, the space was devoid of leverage and inverse ETFs, but the industry filled this gap this year having seen housing ETF launches in all forms. In fact, a couple of bull/bear leveraged products targeted at the housing market are still in the pipeline. Let’s take a look at two newly launched leveraged housing ETFs by ProShares designed in both long and short manners. Newly Launched ETFs in Focus The ProShares Ultra Homebuilders & Supplies ETF (NYSEARCA: HBU ) looks to offer double the daily exposure to the Dow Jones U.S. Select Home Construction Index, while the ProShares UltraShort Homebuilders & Supplies ETF (NYSEARCA: HBZ ) gives twice the opposite exposure of the daily performance of the same index. Both funds charge 95 bps in fees. The benchmark follows the performance of a basket of 40 homebuilding companies. The index is heavily concentrated on the top 10 holdings in which it puts around 65% of assets. Lennar Corp. (NYSE: LEN ) (11.20%), D. R. Horton Inc. (NYSE: DHI ) (11.15%) and PulteGroup (NYSE: PHM ) (8.47%) take the top three spots in the basket and make up for a combined 31% share. How Do These Fit in a Portfolio? These products could be interesting choices for those seeking a targeted exposure to the U.S. homebuilding sector. The space has turned around this year again on sustained economic recovery, a healing job market, rising consumer confidence, moderating home prices and, of course, low interest rates prevailing in the U.S. Though the first quarter was downbeat for the sector, spring sprung good news for the companies. In any case, its key selling season started in March and will run through the back-to-school season in September. A plunge in yields is another positive for the space. Even if mortgage rates rise in the latter half of the year – as is widely anticipated – housing will likely remain reasonable. To add to the positives, the White House plans to slash premiums on mortgage insurance should prove a tailwind for mortgage availability, pushing first-time homebuyers to purchase houses. Overall, the sector has set off for a decent start for the future and investors can very well capitalize on this trend via the leverage bull ETF HBU. Having said this, we would like note that the space is highly rate sensitive. And with the Fed expected to hike key rates sometime later in 2015, mortgage rates will see some upheaval. This might have investors who are pinning hopes on the housing market boom tread in trouble waters for a short while. However, investors can ride on this momentary dip via HBZ, the objective of which is to gain from a housing market downturn. ETF Competition The homebuilding ETFs space previously used to be closely-tied area. But in 2015, a sudden boom in housing-related product launches has been noticed. Earlier, there were three regular housing ETFs, namely the iShares U.S. Home Construction ETF (NYSEARCA: ITB ) , the SPDR Homebuilders ETF (NYSEARCA: XHB ) and the PowerShares Dynamic Building & Construction Portfolio ETF (NYSEARCA: PKB ) . But this year, two new products from UBS – the ETRACS ISE Exclusively Homebuilders ETN (NYSEARCA: HOMX ) and the Etracs Monthly Reset 2xLeveraged ISE Exclusively Homebuilders ETN (NYSEARCA: HOML ) – have hit the market. Being a twice leveraged product, HOML could pose as a threat to HBU. This is truer given that HOML charges (85 bps in fees) lower than HBU. The difference between daily (in the case of HBU) and monthly resetting technique (for HOML) might have caused this disparity in expense ratio. However, there is no visible risk for the leveraged bear ETF as any product in this category is yet to enter the market. Link to the original article on Zacks.com

Caution Needed In The Current Volatility Market

Summary The Greek/Chinese event didn’t even come close to causing a market freakout. We need bigger and better freakouts for the most profitable results. Freakout! Queue “Le Freak” by Chic. This article will focus on historical levels of contango and backwardation and how that can guide your volatility investments. Even though it was a point of contention with some of my readers, we saw a swift and sudden drop off in volatility, just as I predicted. Why? China and Greece. Two very different countries with very different problems. China: China is hunting for market manipulators while banning short selling of stocks and selling in general. Who is manipulating whom over there? Eventually fundamentals will begin to rule the Chinese market, but it will trade at a discount for some time based on a lack of trust from global investors. Greece: Speaking of trust, the Eurozone ran out of it for Greece. After agreeing to a deal that was worse than the one it rejected, Greece is now begging to stay part of the family. I was sure we would get more drama out of this one, but for now fears have subsided. Still a volatility wildcard in the short-term. The continuing question I have on Greece is, what was resolved? Nothing is set in stone yet and you have the IMF stating that the current deal will never work. I personally think the best thing for Greece and the Greek people would be to return to their own currency. Just my two cents. UVXY The ProShares Ultra VIX Short-Term Futures ETF (NYSEARCA: UVXY ) had quite a run over the past few weeks. We will take a look at the chart below after reviewing what drives UVXY (regular readers can skip to the chart). UVXY profits from increasing VIX futures. By investing in second month contracts, usually priced at a premium known as contango, it hopes they will increase in value before being sold off to roll into the new second month. Backwardation is when second month futures are priced higher than from month futures. This benefits UVXY and reverses the usual time value decay caused by contango. For more on contango and backwardation, click here . (click to enlarge) As we spoke about before, UVXY benefits from backwardation. See below for the contango/backwardation in the VIX futures over the past few weeks. (click to enlarge) The VIX futures reached 1.36% into backwardation (higher in intraday) and receded into backwardation several times (again during intraday). Warning If you have been a regular reader of mine you know my strategy is cut and dry. Always avoid trying to catch a spike up in volatility. Wait until VIX futures spike and then initiate a short position. During the next year, you need to be very careful about when to short volatility. As previously pointed out, some writers on Seeking Alpha were screaming “short volatility” the second it spiked after the Greek news came out. This is purely bad advice. Sure you may win some battles, but you will lose the war. Not all spikes in volatility are created equal which is why there isn’t a science that works 100% of the time when investing in volatility. My point is, eventually and I believe in the next year, a market pullback will turn into a correction. Right now the U.S. is a safe haven because things are more risky around the globe. Are you going to go all in shorting volatility 3% into a possible correction? I would hope not. Telling signs The phrase “it will get better” doesn’t always apply to the stock market in the short-term (which is what you should be focused on with volatility). The market has bred a new class of investor that believes every pullback will be followed by a subsequent recovery and market rally. This is simply not true. Advice The contango and backwardation indicators are one of the best resources to use for when to short volatility. The other is your brain. See below: (click to enlarge) I created this chart myself using historical data from The Intelligent Investor Blog . Dates are not included in the chart due to some issues I am having with Excel and axis placements. The chart begins in 2004 and runs to present in 2015. When removing 2008 the normal contango and backwardation events would look like the ones below: (click to enlarge) I have added wording to the chart which describes my personal opinion on events and the level of backwardation they would warrant. Depending on the level of a recession you would most likely see backwardation in excess of 25%. In this period of ultra low volatility I would expect a correction to possibly produce a backwardation event in the 20% range. Conclusion My point in these charts are that 1.36% backwardation should not cause you to go “all in” on volatility, ever. You could bet more when the economy is great, but I would not use that word to describe the current state of the economy. I need much healthier and organic growth to feel rosy about the U.S. economy. UVXY Call Spread (Options) I have posted a call spread strategy to my blog which you can view here . UVXY Recommendation The shorting opportunity for UVXY has passed. I never recommend purchasing or holding UVXY to bet on rising volatility. For more information on my strategy of only shorting volatility, please view my past articles. Patience is key and greed will eventually destroy you with volatility. Now is again a time to be patient and wait for another spike in the VIX. Keep an eye on the backwardation meter to judge the proper timing. Wait until things feel like they can’t get much worse, then wait some more. Thanks for reading and I hope you have a profitable week! 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.