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Industrial Metals ETFs Investing 101

A stronger greenback, falling oil prices and an economic slowdown in China have lately emerged as major headwinds for the global metal industry. Moreover, excess supply has been a perennial problem for the industry. Iron ore has lost 50% of its value in 2014, the biggest annual decline in at least five years, impacted by excessive inventory along with abundant supply and slow economic growth in China. Global steel production has also been weak, mainly dragged down by a slowdown in China’s output, which affected demand for iron ore, its main ingredient. The low prices have squeezed margins of iron producers leading to the cancellation or suspension of mining projects. Moreover, softness in China amid an oversupply had led to a decline in copper prices in 2014. Copper prices further dipped to a four-year low in November end to $2.861 per pound on falling oil prices. Overall, copper fared the worst among all industrial metals, with prices declining 11% through the year. On the other hand, during 2014, the global aluminum industry went through a substantial change to correct the supply-demand imbalance. Major aluminum producers like Rusal and Alcoa Inc. (NYSE: AA ) cut their aluminum production, resulting in tightening of aluminum supply, which sent the metal’s prices northward. However, in the last months of 2014, falling oil prices and weak industrial data from China have led to a drop in aluminum prices. Aluminum is an energy intensive industry, with energy costs accounting for nearly 30% of the total cost of production. Falling oil prices tend to have a deflationary effect on aluminum. Nevertheless, aluminum prices ended the year with a 13% gain, higher than January levels. What’s in Store? Iron : The threat of oversupply looms large over the iron ore industry as major producers, Rio Tinto, BHP Billiton Ltd. (NYSE: BHP ), Vale S.A. (NYSE: VALE ) and Fortescue Metals Group Ltd. ( OTCQX:FSUGY ), continue to ramp up production. Australia, the world’s top exporter, cut its iron ore price estimate for next year by 33% as the surging output will outpace Chinese demand growth, leading to a supply glut. Global apparent steel use is expected to grow 2% in 2015 to reach 1,594 Mt. Softness in steel demand in China will continue to be a drag on the same. China is the largest consumer of iron ore, accounting for around 60% of the global seaborne market. Thus, the mismatch between the excess supply and demand for iron ore will keep iron ore prices subdued in the near term. Aluminum : Aluminum consumption is expected to improve on a global basis spurred by the automotive and packaging industries, its key consumer markets. The airline industry is also expected to boost demand for the metal. Following China, which accounts for over 40% of the global aluminum consumption, India appears promising given its current low level of aluminum consumption and high urban population growth. With demand remaining strong and the industry pulling in the reins on supply, the aluminum market is likely to witness deficits for a prolonged period. This will support high aluminum prices going forward. Copper : The copper market seems to be shifting into supply surplus. In the near term, prices will be influenced by economic activity in the U.S. and other industrialized countries. Revival in demand from China will also act as a catalyst. Notwithstanding the current volatility in prices, we have a long-term bullish stance on copper, supported by its widespread use in transportation, manufacturing and construction, limited supplies from existing mines and the absence of new significant development projects. To Sum Up A revival in the Chinese economy on the back of policy support and correction of the supply-demand imbalance will be instrumental in driving growth in the industry, while projected earnings growth for 2015 instills optimism in the same. ETFs to Tap the Sector An ETF approach can help spread out assets among a variety of companies and reduce company-specific risk at a very low cost. There are currently two ETFs available to play this sector. SPDR S&P Metals & Mining ETF (NYSEARCA: XME ) Launched in Jun 2006, XME seeks to replicate the S&P Metals and Mining Select Industry Index. The S&P Metals & Mining Select Industry Index represents the metals and mining sub-industry portion of the S&P Total Market Index. The fund currently has AUM of $390.4 million. XME has a trading volume of roughly 1.6 million shares a day, suggesting little or no extra cost in the form of bid/ask spreads. The ETF is a low-cost choice, charging a net expense ratio of 35 basis points a year, while the dividend yield is 2.30% currently. The fund currently holds 35 stocks in its basket, with only 38.12% of assets in the top 10 holdings. From a commodities perspective, the product is heavily weighted toward steel with 41% sector weightage, followed by coal and consumable fuels (17%), diversified metal and mining (13%), aluminum (11%), silver (7%), gold (7%) and precious metals and minerals (4%). Among individual holdings, top stocks in the ETF include Hecla Mining Co. (NYSE: HL ), TimkenSteel Corporation (NYSE: TMST ) and Compass Minerals International Inc. (NYSE: CMP ) with asset allocation of 4.19%, 4.14% and 3.88%, respectively. iShares MSCI Global Metals & Mining Producers ETF (NYSEARCA: PICK ) The ETF seeks to match the price and yield performance of MSCI ACWI Select Metals & Mining Producers Ex Gold & Silver Investable Market Index. This index measures the equity performance of companies in both developed and emerging markets that are primarily involved in the extraction and production of diversified metals, aluminum, steel and precious metals and minerals, excluding gold and silver. Launched in Jan 2012, the fund has so far attracted AUM of $158 million. It has a trading volume of roughly 16,257 shares a day. The ETF is currently charging a net expense ratio of 39 basis points a year, with a dividend yield of 2.91%. The fund currently holds 209 stocks with 98% sector weightage toward basic materials. The fund allocates nearly 50% of the assets in the top 10 firms, which suggests that company-specific risk is somewhat high, as the top 10 holdings dominate half of the returns. Among individual holdings, top three stocks in the ETF include BHP Billiton Limited ( BHP ), Rio Tinto plc (NYSE: RIO ) and Glencore Plc (GLEN.L) with asset allocation of 10.81%, 8.4% and 6.76%, respectively. The fund is widely diversified across various countries, and Australia tops the list, holding 24.7% of the fund, followed by the United States (10.9%) and United Kingdom (9.96%). These three nations make up for nearly 46% of the assets.

Couch Potato Model Portfolios For 2015

Call off the hounds: I have finally updated my model Couch Potato portfolios for 2015. Full details appear on the permanent Model Portfolios page , but here are the new versions in downloadable PDF format: You’ll notice some significant changes this year: I have dropped the Complete Couch Potato and Über-Tuber from the lineup. All of the model portfolios now include only traditional index funds tracking the major asset classes: no REITs, real-return bonds, value stocks or small-cap stocks. The new lineup presents three options, with the key difference being the type of product. Option 1, from Tangerine , is a one-fund solution that’s ideal for investors who value simplicity. Option 2, the TD e-Series funds , offers more flexibility and lower cost. Option 3, built from Vanguard ETFs , is the cheapest option, but also the most difficult to manage for new investors. None of the options include ETFs traded on U.S. exchanges. Each option now includes several different asset allocations, ranging from a conservative (70% bonds and 30% stocks) to a aggressive (10% bonds and 90% stocks). The older model portfolios were all 40% bonds and 60% stocks, the traditional mix in a balanced portfolio. For each option and asset mix, we present performance data going back 20 years (1995 through 2014), compiled by Justin Bender . Since none of the funds has a track record that long, we have filled in the gaps using index data minus the MER of the fund in question. This is an imperfect but reasonable proxy for how an index fund would have performed. I thought long and hard about these changes, because I know many readers currently use one of the older model ETF portfolios. But it has now been more than five years since I launched this blog, and I have corresponded with hundreds of investors during that time. I’ve also worked directly with dozens more through PWL Capital’s DIY Investor Service . That depth of experience has given me a few insights. First, simple is usually better than complex. You can now build a portfolio that includes hundreds of bonds and thousands of stocks in some 40 countries using just three ETFs, all for a cost of less than 0.20%. No one needs to diversify more broadly than that. A skilled portfolio manager may be able to boost returns slightly by moving beyond traditional index funds in the core asset classes. But many DIYers make costly mistakes when they try to juggle too many funds. Meanwhile, there are exactly zero investors in the universe who failed to meet their financial goals because they did not hold global REITs or small-cap value stocks. Using U.S.-listed ETFs is a another example: the management fees and withholding taxes may be lower, but the steps involved in currency conversion can be complicated and it’s easy to make errors that wipe out any potential savings. If you don’t believe me, try explaining Norbert’s gambit to your mom. These model portfolios are not intended to reduce MERs and taxes to an absolute minimum. The suggested asset allocations were not created using Markowitz’s efficient frontier or portfolio optimization software. They are simply designed to provide broad diversification and low cost while remaining easy to manage on your own. So try not to agonize over the small details: just choose one of the model portfolios with an appropriate amount of risk and get started. It’s OK if convenience trumps cost, especially for young investors with small portfolios: remember, an additional cost of 0.10% works out to $0.83 a month for every $10,000 in your account. The cost of sitting in cash and scratching your head is much higher. And the peace of mind that comes with a simple investing strategy is priceless. Now that you’ve read this, are you Bullish or Bearish on ? Bullish Bearish Sentiment on ( ) Thanks for sharing your thoughts. Why are you ? Submit & View Results Skip to results » Share this article with a colleague

Join Them If You Can’t Beat Them: Stop Picking Individual Stocks And Start Living An Easier Life

Summary The S&P has risen 171%. Time to start stock picking? Not necessarily. Let’s go back in time (15 years ago) to find a similar scenario, and let’s find out what John did. Our imaginary fellow investor from that time, John, made a decent amount of money by sticking to the plan and using common sense, while doing less and exposing himself to less risk. Since regular investors are really lagging behind, performing as good as the market is already setting you apart and makes you one of the top investors. My goal of today’s article was to figure out once and for all whether or not I should be going long – not by stock picking – but by buying an ETF of the S&P 500, so that I actually don’t have to do anything. If I had a dollar for every time I heard and read that “95% of individual investors don’t beat the market”, I’d have a lot of dollars. And yet still, while this seems to be a 100% accurate fact, I refused (until this point) to believe that I’m part of that 95% and hoped that I’ll beat the market over time. Does this make me an idiot or just a typical human being? I don’t know. But what I do know is that there are still a lot of stock pickers out there that are just as stubborn as me. 1 in 20 investors So once and for all, as you’re reading this, I hope you’ll realize that only 1 in 20 investors can select a portfolio of active funds that will outperform the market index over a 20-year period. That’s only a 5% chance of success, or a staggering 95% chance of failure. To put this in perspective: Being diagnosed with cancer in your lifetime: 1 in 2 for men, 1 in 3 for women Beating the house in a hand of blackjack: 1 in 2.2 A celebrity marriage lasting a lifetime: 1 in 3 Successfully climbing Mount Everest: 1 in 3 Living to 100 (if you’re 50): 1 in 8 Today’s article will answer a lot of questions for investing teens, investors in their twenties and even investors in their early thirties who are probably bothered by the same question: Should we be buying individual stocks that appear attractive/cheap after the 171% increase in the S&P 500? Or should we be afraid and wait for the next “big crash” before going long? Or should we just surrender to Mister Market no matter what, and start buying the index as a whole today through the oh-so simple S&P 500 ETF (NYSEARCA: SPY ) that follows the entire index, as we’ll be better off following the market in the long run? Let’s go back in time I believe that the only way to get a possible answer to this question is to present ourselves with a similar scenario where investors were probably also asking themselves the same thing, and then look at how things turned out for them if they had acted a certain way. In order to try and do this, I suggest we jump back in time. In fact, let’s jump back exactly 15 years ago to January 7, 2000. (click to enlarge) (Source: Yahoo Finance) The above graph is a representation of what investors were looking at, at that moment in time. SPY was up 215% since January 7, 1995, and was quoting at an all-time high. This reflects the current situation pretty damn well – if not better. (click to enlarge) (Source: Yahoo Finance) SPY is currently up 171% since its lowest point in February 2009, and is also quoting at an all-time high. So 15 years ago, I bet a lot of investors were wondering the same thing. Should we be stock picking? Or should we continue to follow the market. First of all, let’s just admit that deciding to get a position at an all-time high is never a pleasant occasion. It feels like shooting yourself in the foot. It feels like setting yourself up for losses. Especially when thinking about the typical sayings like: “Sell high, buy low” and “Be fearful when others are greedy and greedy when others are fearful”, which are clearly warning you not to get in at all-time highs after a 200% rally. Let’s meet John However, let’s just assume that one of our fellow investors (we’ll call him John for now) was ready to ignore all of his natural human responses/emotions and would just agree with the fact that 95% of individual stock pickers fail, and thus, that he is better off buying SPY no matter what. John feels that it is better to go with the market, “If you can’t beat them, join them”, right? Waiting for the next big correction before getting in seems to be silly, as no one knows when it’ll come. The strategy and situation of our imaginary investor John is the following: John just turned 20, and has decided that he wants to have a nice pension fund by the time he is 60, or perhaps have a nice pile of money by the time he is in his prime, let’s say, forty years old. This gives our investor friend a time horizon of at least 20 years, and when necessary, even 40 years. He then figures that he can miss at least $500 per month. John starts to deposit $500/month in SPY as of January 7, 2000, and will continue to do this at the beginning of each month. John is 35 Now, let’s take a look at how John’s simple strategy has played out so far – 15 years later. After 15 years, John has invested a total of $90.000 ($500 x 180) in the ETF, and the position seems to be worth $176.567,40 as of today. So without having to do anything special, except depositing $500 per month into the ETF (that was quoting at an all-time high when starting), he would have gained $86.567 if he were to sell today. (click to enlarge) John’s performance could have also been achieved if he would have chosen his stocks individually. However, he then needed to achieve an ~8.45% cumulative annual growth rate (see table below). Which is a rather hard thing to do for the average Joe in today’s market, right? ( Source ) Warren Buffett himself did only slightly better, growing Berkshire’s book value by 8.9% annually during the past 15 years. Thereby, let’s not forget that John has had 15 wonderful years. He never had to waste a single minute of his day in order to achieve this 8.45% annual growth rate. He never slept bad. He never worried that he would wake up and all his money would be gone. All he did was execute his simple plan. Let’s assume John is a smart guy Now, let’s assume that John is a smart guy like you and me, and that he tries to seize opportunities whenever they come along. So one day, he notices that his ETF is starting to drop due to the financial crisis. John thinks this is a temporary problem and decides to stick to the plan; in fact, he even tries to double his efforts, and decides to make a deposit of $1000 per month during 2009. (click to enlarge) By injecting an extra $6000 during the 2009 crash, John’s position is now worth a total $191.352,70, and has thus increased with $14.785 because of his extra efforts. John’s cumulative annual growth rate now lies at ~9.5% for the past 15 years, while doing nothing special except using his common sense. This is way higher than what average investors ( 2.6% ) have been achieving during the past 10 years. Conclusion Either you get a thrill out of proving others wrong and will try to actively beat the market – knowing that there’s a rather high chance you won’t beat it – or you’re just not bothered to achieve above-average results, and are happy with whatever the market does. However, as the average investor has achieved a 2.6% return for the past 10 years, and John has been able to scoop a 9.5% annual return by following the market, perhaps doing as well as the market has become an achievement of itself and is already making you special. Because of today’s analysis, I’ve decided to start depositing $500 into SPY each month as of now, as I feel that there is no downside in doing this in the long term. This way, some of my money will at least perform as well as the market. However, I will nonetheless continue to keep a portfolio full of individual stocks, as I also really enjoy investing actively. Even when this means that I’ll have a 95% chance of underperforming the market with this portfolio.