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How To Trade In Gold ETFs After Robust 30-Year Rally?
Thanks to global growth concerns, reduced expectations for rate hike, geopolitical tensions and bearishness in the stock market, gold posted the biggest first-quarter gain in three decades. In addition, the adoption of negative interest rates by most central banks such as Japan, Sweden, Switzerland, Denmark and Europe boosted the demand for gold bullion and pushed the prices higher. Investors should note that most of the gains came in the first six weeks of the year and thereafter the momentum of increase slowed down. What’s In Store? The Fed signaled that interest rates in U.S. would stay low for some time and dialed back its projection from four lift-offs to two hikes in its recent meeting. This is weighing on the dollar and propelling the price of gold. The release of minutes last week showed that the Fed is unlikely to raise interest rates in April, signaling that weak global growth could hurt the ongoing recovery in the U.S. economy. Further, continued rise in the Japanese currency dampened investors’ faith in central banks’ ability to boost growth across the globe. Further, an erratic market showed up again as volatility in oil price and weak corporate earnings in the U.S. raised demand for the yellow metal as a store of value and hedge against market turmoil ahead of the Q1 earnings season. However, the recent slew of encouraging data especially on the manufacturing activity and job growth fronts reflect strength in the U.S. economy and perked-up risk-on sentiment. As a result, the strongest Q1 rally of the yellow metal seems to be fading given that gold was up just 1.3% in the first few trading sessions of April. Considering the robust gains in the first quarter, gold is still off about 35% from its 2011 all-time high of $1,900 per ounce (read: ETFs to Gain or Lose After Strong Jobs Report ). To sum up, the stability in the financial market and an improving U.S. economy could bolster the case for rate hike again and may dull the appeal for the safe haven asset in the coming months. Given the volatile environment for gold investment, investors should place their bet on gold ETFs cautiously or could take advantage of the quick turn in sentiment with the help of leveraged or inverse ETFs. Gold ETFs These ETFs are directly linked to the spot gold price or futures and are worth watching in the coming months. These have a favorable Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook. SPDR Gold Trust ETF (NYSEARCA: GLD ): This is the largest and most popular ETF in the gold space with AUM of $32.6 billion and average daily volume of around 8.8 million shares. The fund tracks the price of gold bullion measured in U.S. dollars, and kept in London under the custody of HSBC Bank USA. Expense ratio comes in at 0.40%. The fund has added 0.6% so far this month. iShares Gold Trust ETF (NYSEARCA: IAU ) : This ETF offers exposure to the day-to-day movement of the price of gold bullion and is backed by physical gold under the custody of JP Morgan Chase Bank in London. It has AUM of $7.5 billion and trades in solid volume of more than 8 million shares a day on average. The ETF charges 25 bps in annual fees and has gained 0.7% this month (read: Ride on Gold Rally with Best ETFs and Stocks of 2016 ). Van Eck Merk Gold ETF (NYSEARCA: OUNZ ): This product seeks to provide investors with a convenient and cost-efficient way to buy and hold gold through an exchange-traded product with the option to take physical delivery of gold when desired. It charges 40 bps in fees per year but is unpopular and an illiquid option with AUM of $99.5 million and average daily volume of 42,000 shares. OUNZ is up 0.7% this month. Leveraged Gold ETFs Investors who are bullish on gold right now may consider a near-term long on the precious metal with the following ETFs depending on their risk appetite. ProShares Ultra Gold ETF (NYSEARCA: UGL ): This fund seeks to deliver twice (2x or 200%) the return of the daily performance of gold bullion in U.S. dollars. It charges 95 bps in fees a year and has amassed $89.3 million in its asset base. Volume is light at under 40,000 shares per day. The ETF has gained 0.86% in the first few trading sessions of April. PowerShares DB Gold Double Long ETN (NYSEARCA: DGP ): This ETN seeks to deliver twice the return of the daily performance of the DBIQ Optimum Yield Gold Index Excess Return, charging 75 bps in fees per year. It has accumulated $131 million in its asset base so far and trades in an average daily volume of 69,000 shares. The ETN is relatively flat so far this month. VelocityShares 3x Long Gold ETN (NASDAQ: UGLD ): This product provides three times (3x or 300%) exposure to the daily performance of the S&P GSCI Gold Index Excess Return plus returns from U.S. T-bills net of fees and expenses. The ETN has been able to manage an asset base of $64.6 million while charging a higher fee of 1.35% annually. However, the note trades in solid volume of over 546,000 shares a day on average and has returned 2% this month. Inverse Gold ETFs Any encouraging data on the economy could provide investors’ a near-term short opportunity on the bullion according to their risk appetite. DB Gold Short ETN (NYSEARCA: DGZ ): This ETN offers inverse (opposite) exposure to the performance of the DBIQ Optimum Yield Gold Index Excess Return. It has managed assets of $23.7 million so far this year and trades in a solid volume of 146,000 shares a day on average. It charges 0.75% in annual fees and has lost about 0.7% so far in April. ProShares Ultra Short Gold ETF (NYSEARCA: GLL ) : This fund seeks to deliver twice the inverse return of the daily performance of gold bullion in U.S. dollars, charging 95 bps in fees a year. It has $75.4 million in AUM and trades in lower average daily volume of 25,000 shares. The ETF has shed about 2% so far this month. VelocityShares 3x Inverse Gold ETN (NASDAQ: DGLD ): This product provides three times inverse exposure to the daily performance of the S&P GSCI Gold Index Excess Return. It has been able to manage an asset base of $17.4 million while charging investors a higher fee of 1.35% annually. The note trades in a light average daily volume of 43,000 shares and is down 2.1% so far this month. Link to the original post on Zacks.com
Pain Or Gain Ahead For Bank ETFs?
The going has been tough for bank ETFs for quite some time now mainly due to the twin attacks of a delay in further Fed rate hikes after a liftoff in December and the energy sector lull. Moreover, UBS Group AG’s (NYSE: UBS ) moderate earnings for the fourth quarter of 2015 triggered a sell-off in banking stocks because the bank pointed to several macroeconomic headwinds and geopolitical issues that will bother its operations in the near term. Not only banking stocks, broad-based risk-on sentiments took a backseat in the first quarter of 2016. Now, with the earnings season impending and the broader markets rebounding, albeit slowly, let’s catch a glimpse of the looming headwinds and tailwinds to the banking sector. Headwinds Tightening Yields: The benchmark U.S. 10-year Treasury note yield slipped to 1.76% on April 6, 2016 (down 48 since the start of the year) while the yield on the short-term Treasury note (one year of maturity) fell to 0.55% on the same day (down just 6 bps since the beginning of 2016). The narrowing gap between the short and long-term yields has been a cause of concern for the backing sector (read: Bank ETFs Hurt by the Dovish Fed ). In fact, in early March, the spread between the two-year and 10-year Treasury yields tapered the most since 2009. Narrowing spread between long- and short-term rates hurts net interest margin, which a key metric for the banking sector. Energy Sector Exposure: U.S. banks have significant exposure to the long-ailing energy sector where chances of credit default are higher. In February, the S&P cut its outlook on several regional banks with the highest energy sector exposure citing a likely increase in non-performing assets. Among the biggies, Wells Fargo (NYSE: WFC ) reported around $42 billion oil and gas credit in February. The situation is the same for JPMorgan (NYSE: JPM ), the energy loan of which accounts for 57% of the investment-grade paper. JPMorgan has ‘ set aside $600 million’ for loan losses emanating from the energy, metals and mining sectors. Panama Papers Scandal: The leaked documents from Panama Law firm Mossack Fonseca & Co. revealing global business leaders and officials moving money to international tax havens may take a toll on bank stocks. Banks may now face more stringent scrutiny and litigation issues to arrest means of evading taxes. Tailwinds Increased Activity: Having described the stress situation, we would like to note that fears of a 2008-like recession or financial market crash are perhaps exaggerated. The lower interest rates should boost capital market activities and benefit banks in other ways. After all, bank stocks have gained their lost ground in the U.S. in a rock-bottom interest rate environment (see all Financials ETFs here). Compelling Valuation: The finance sector has a current-year P/E of 12.6 times, reflecting a 27.6% discount to the S&P while its next-year P/E stands at 11.5 times, reflecting a 25.3% discount to the S&P 500. Such an intriguing valuation might also help the sector to score gains as and when favorable industry dynamics hit the space. ETF Impact All in all, bank stocks are on the fence with pain and gain on either side, though downside risks look higher at the current level. So, investors seeking a financial sector exposure can have a look at the following ETFs: The PowerShares KBW Bank Portfolio ETF (NYSEARCA: KBWB ) , with considerable exposure to Wells Fargo, JPMorgan and US Bancorp (NYSE: USB ). The fund has a Zacks ETF Rank #3 (Hold) with a High risk outlook. SPDR S&P Bank ETF (NYSEARCA: KBE ) also has similar holdings; but it holds stocks in an equal-weighted manner. No stock accounts for more than 2.19% of the fund and diversifies stock-specific risks pretty well. KBE has a Zacks ETF Rank #3 with a High risk outlook. SPDR S&P Regional Banking ETF (NYSEARCA: KRE ) takes into account companies that do business as regional banks or thrifts. KRE also has a Zacks ETF Rank #3. iShares MSCI Europe Financials Sector Index ETF (NASDAQ: EUFN ) measures the combined equity market performance of the financial sector of developed market countries in Europe. The fund has a Zacks ETF Rank #3. Link to the original post on Zacks.com