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The Guggenheim S&P 500 Equal Weight Utilities ETF: Utilitarianism

An alternatives to a traditional government bond holding. Utilities offer steady, consistent returns and are largely immune to the business cycle. This equal weight utilities fund is biased towards low dividend risk, yet has a respectable return. The world of investing has changed much over the past five years due to the financial crises of 2008 and its subsequent recession. The realization that investing may never be the same is a growing one, particular when it comes to income. As it stands now, even if central banks are able to normalize policy, it still may be years before government bond yields normalize, and that’s under the assumption that all advanced economies will continue to grow uniformly. Recent economic reversals in newly emerged economies, particularly the “BRICS” along with the collapse in commodity prices and the astonishing overproduction of crude petroleum have all weighed on high quality assets yields. High quality government securities have been pressed to their limits. Furthermore, cross market technology, institutional trading, pension fund demands and ‘carry asset’ strategies have created much higher volatility in the once mundane government bond market. The point of the matter is that the individual investor may be saving for retirement in a completely new world. The strategy of holding long term government bonds as a portfolio cornerstone has become an ‘old world’ concept. Utilities assets may be one replacement solution for government bond holdings. There are several to choose from, and one of the top yielding in the class is the Guggenheim S&P 500 Equal Weight Utilities ETF (NYSEARCA: RYU ) . According to Guggenheim, the fund “… Seeks to replicate as closely as possible, before fees and expenses, the performance of the S&P 500 Equal Weight Index Telecommunication Services & Utilities. ..” A word about the ‘equal weight’ S&P Index: according to S&P, the equal weight S&P 500 index is an alternative version of its renowned S&P 500 market cap weighted index. In the equal weight index each S&P 500 member constitutes 20 basis points of the S&P 500 index with a quarterly rebalancing in order to prevent excessive turnover. The S&P 500 equal weight Telecommunications and Utility Index is merely a subset of the equal weight S&P 500 index. Since the fund is based on ‘equal weightings’, it seems superfluous to analyze the top ten holdings. Instead, since the objective here is dividend risk assessment it would be more useful to analyze the potential risk to regular distributions. This may be achieved by comparing a company’s payout ratio to the dividend. Since a payout ratio is defined to be the proportion of earnings paid out as dividends, the lower the payout ratio the less likely the dividend will be reduced and conversely, the higher the payout ratio, the more likely a dividend may be reduced. The fund has 34 holdings and an average dividend yield of 4.0571%. The average payout ratio is 73.62%. (This is less than the S&P 500 market cap weighted payout ratio of almost 85). Five of the holdings have payout ratios of over 100%; 21 of the 34 holdings are below the average payout ratio; 11 are above; 2 have non applicable payout ratios; 14 of the holdings are above the fund’s average yield, and 20 are below the fund’s average yield. Hence, the fund is biased towards the ability of the holding to continue to pay or increase dividends. The chart below summarizes the payout ratio (in blue) and the yield (in red). (click to enlarge) (Data from Reuters and Guggenheim) The 10 lowest payout ratios average out to 44.39% with an average yield of 3.563%. There are no Telecom Service companies in the fund with a payout ratio low enough to place it in the ten lowest of the fund. (Data from Reuters and Guggenheim) The 10 holdings with the lowest payout ratio are summarized in the table below. Company Type Price/Earnings (TTM) Price/Cash Flow Price/Book Divided Yield Payout Ratio AES Corp (NYSE: AES ) Independent Power and Renewable 9.70 3.24 2.14 3.31% 23.43% Edison International (NYSE: EIX ) Electric Utility 12.60 5.52 1.72 2.80% 33.70% PPL Corp (NYSE: PPL ) Electric Utility 10.84 6.49 2.11 4.81% 38.81% Dominion Resources (NYSE: D ) Multi-Utility 24.29 12.25 3.40 3.65% 41.43% Scana Corp (NYSE: SCG ) Multi-Utility 10.29 6.69 1.44 4.04% 43.98% Nextera Energy (NYSE: NEE ) Electric Utility 15.56 8.11 2.16 3.02% 45.61% Sempra Energy (NYSE: SRE ) Multi-Utility 17.77 9.24 2.07 2.88% 48.80% Public Service Enterprise (NYSE: PEG ) Multi-Utility 11.13 6.56 1.61 3.85% 52.13% Eversource Energy (NYSE: ES ) Electric Utility 16.76 9.80 1.50 3.46% 55.99% Exelon Corp (NYSE: EXC ) Electric Utility 11.59 4.20 1.15 3.95% 56.51% (Data from Reuters and Guggenheim) There are, as one might expect, different types of Utility Companies. Diversified Telecommunications includes entertainment, mobile, internet and voice services; Electric Utilities are, as the name implies, electricity providers although some, Duke Energy for instance, provide natural gas as well; Independent Power and Renewables generate power through renewable resources like wind and solar and also install residential and business solar systems; Multi-Utilities provide natural gas, electricity, storage facilities and pipeline delivery. (Data from Reuters and Guggenheim) For a few detailed examples: AES is global, providing services to Chile, Columbia, Argentina, Brazil, Central America, the Caribbean, Europe and Asia. AES generates renewable power from solar, wind, hydro, bio mass and landfill gas. Scana Corporation, classified by the Guggenheim fund as ‘Multi-Utility’ provides natural gas as well as fiber-optic and telecomm services. Dominion Resources distributes natural gas, electricity, natural gas storage, LNG transportation and risk management services. It also has an equity stake in a joint venture with Caiman Energy called Blue Racer , a Marcellus Shale natural gas processing company; neither are publically owned companies. NiSource Inc (NYSE: NI ) is a holding company providing services through 13 subsidiaries for gas, electric and pipeline as well as a financing service. Many of these companies also hedge or trade derivative contracts. The point being that for utility funds with only a few holdings, it’s worth examining the descriptions or company profiles of the holdings to fully understand the depth of the individual holdings. (click to enlarge) Lastly, the fund has a reasonably long history, incepted in November of 2006. Its expense ratio is reasonable at 0.40%. Its total net assets are over $112,487,000 distributed over 34 holdings with a cash reserve. The average daily volume is 186,066 shares per day and there are 1.6 million outstanding shares. It currently trades at a slight discount, $-0.08 per share to NAV. The fund has paid a total of $17.80 in quarterly dividends since inception. Hence, the fund provides a reasonable yield in today’s low yield environment, low volatility with a beta of 0.87 and reasonable liquidity. Should the global economy contract because of a readjustment in the Chinese economy, and the U.S. economy remains reasonably strong with depressed commodity prices, a utility fund such as the Guggenheim S&P 500 Equal Weight Utilities ETF would do well generating good returns with relative safety for some time to come. 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. Additional disclosure: Additional disclosure: CFDs, spreadbetting and FX can result in losses exceeding your initial deposit. They are not suitable for everyone, so please ensure you understand the risks. Seek independent financial advice if necessary. Nothing in this article should be considered a personal recommendation. It does not account for your personal circumstances or appetite for risk.

Best And Worst August ETFs

August was the cruelest month for the U.S. stock market with volatility levels peaking and China roiling the markets. The worries intensified when China unexpectedly devalued its currency on August 11, triggering off a brutal sell-off across the globe and deepening fears of global growth. The slide in the stocks continued following the weak Chinese factory activity data and the dovish Fed minutes. All these market gyrations raised questions on the six-year bull market and pushed the major bourses into the correction territory, pushing them 10% down from their recent heights. However, the latest slew of better-than-expected economic data, fresh China stimulus, and bargain hunting helped stocks to recover from the correction territory. Still, the uncertainty over the interest rates hike is looming large as one of the Fed officials hinted at an unlikely September rise in interest rates while another sees the hike in the cards. Notably, Dow Jones tumbled 6.6% in August, indicating the largest monthly loss since May 2010 while the S&P 500 and Nasdaq Composite Index dropped 6.3% and 6.9%, respectively, representing the biggest monthly loss since May 2012. Added to the woes are weakness in the emerging markets and the slump in commodities. Though oil prices continued their plunge in the month leading to a further slump in the broad commodities, most of the losses were erased in the final two days of last week. Notably, U.S. oil surged 17% in just two days, representing the biggest two-day rally in six years. On the other hand, the risk-off sentiments led to a flight-to-safety among investors, giving a boost to Treasuries and gold. That being said, we have highlighted the two best and worst ETF performers of last month. Best ETFs C-Tracks on Citi Volatility Index ETN (CVOL ) – Up 91.1% Volatility products gained the most in August, as these tend to outperform when markets are falling or fear levels over the future are high, both of which are happening lately. As such, CVOL linked to the Citi Volatility Index Total Return, jumped about 91% last month. The note provides investors with direct exposure to the implied volatility of large-cap U.S. stocks. The benchmark combines a daily rolling long exposure to the third and fourth month futures contracts on the VIX with short exposure to the S&P 500 Total Return Index. The product has amassed $5.7 million in its asset base while charging 1.15% in annual fees from investors. The note trades in good volume of more than 103,000 shares per day. Sprott Junior Gold Miners ETF (NYSEARCA: SGDJ ) – Up 5.9% Though the rising interest rates concern has dulled the appeal for gold over the past several months, the uncertainty in the timing of the rates hike and global concerns are compelling investors to turn their focus on gold as a store of value. Acting as leveraged plays, gold miners tend to experience more gains than the gold bullion. SGDJ targets the small cap segment of the gold mining industry by tracking the Sprott Zacks Junior Gold Miners Index. The benchmark utilizes the factor-based methodology that seeks to emphasize companies with the strongest relative revenue growth and price momentum. In total, the fund holds a small basket of 33 stocks with the highest allocation to the top firm – Centerra Gold (NASDAQ: CG ) – at 8.8%. Other firms hold less than 5.8% of assets. In terms of country exposure, Canada takes the largest share at 74% while the U.S. receives just 13% of SGDJ. The fund has accumulated $20.1 million in AUM since its debut in March and sees a paltry volume of about 17,000 shares. Expense ratio came in higher at 0.57%. The fund gained nearly 6% in August. Worst ETFs Market Vectors ChinaAMC SME-ChiNext ETF (NYSEARCA: CNXT ) – Down 23.9% Though the Chinese contagion spread globally, A-shares ETFs were the worst hit by the rout. As a result, CNXT, which had a torrid run in the first half of 2015, plunged 23.9% in August. This fund offers exposure to the largest and most-liquid China A-share stocks listed and trading on the Small and Medium Enterprise (SME) Board and the ChiNext Board of the Shenzhen Stock Exchange by tracking the SME-ChiNext 100 index. It holds 102 stocks in its basket with none accounting for more than 4.30% share. About one-third of the portfolio is allotted to information technology, while industrials, consumer discretionary and health care round off the next three spots with double-digit exposure each. The product is unpopular and illiquid with AUM of $33 million and average daily volume of more than 141,000 shares. It charges 66 bps in fees per year. Market Vectors Solar Energy ETF (NYSEARCA: KWT ) – Down 20.4% The solar industry is entangled in vicious oil trading given investors’ misconception that oil price and solar market fundamentals are directly related with each other. Given this, KWT tumbled over 20% last month. The fund manages $17.7 million in its asset base and provides global exposure to 33 solar stocks by tracking the Market Vectors Global Solar Energy Index. It is somewhat concentrated on the top 10 holdings with 57.3% of assets. In terms of country exposure, the U.S. and China account for the top two countries with 37.4% and 30.8% allocation, respectively, closely followed by Taiwan (15.5%). The product has an expense ratio of 0.65% and sees paltry volume of about 2,000 shares a day. Link to the original article on Zacks.com

Is It A Temporary Recovery For Oil?

Famous American industrialist, Jean Paul Getty once said: “Formula for success: rise early, work hard, strike oil.” Though the major oil suppliers followed Getty’s formula seriously, they forgot to consider the demand side. Since the middle of last year, the market is witnessing a free fall in crude prices. In fact, the price of West Texas Intermediate (NYSE: WTI ) fell nearly 60% as compared to mid-2014, when oil was trading above $100 each barrel. Though the price of WTI surged nearly 6% on Friday after jumping 10% a day before, there are still speculations that the momentum is hardly sustainable. The slump in oil prices took a toll on energy shares over the past few months. The biggest energy fund – the Energy Select Sector SPDR ETF (NYSEARCA: XLE ) – lost 8% and 17% in the past one-month and three-month periods, respectively. The slowdown in Chinese economy, an increase in the U.S. rig count, a stronger dollar and oversupply concerns emerged as the key reasons behind the slump. Will It Sustain? The recovery in crude prices at the latter half of last week comes as a surprise, since the fundamentals driving oil price are not so strong. A better-than-expected second-quarter U.S. GDP report, the rebound in Chinese stock markets and the decline in oil inventory emerged as the main reasons behind the surge. However, it is anticipated that these factors had a temporary effect on crude price, and will fail to offset the weak global economic picture and oversupply concerns in the long term. In China, which is the world’s second largest consumer of oil, manufacturing activity for the month of August touched the lowest level in the last six and a half years, basically underlining a frail economy. This also highlights that if China wants to reach its 7% GDP growth target in 2015 – the lowest in years – the country will have to come up with measures to stimulate its economy. In fact, without a step-up, some analysts apprehend that China’s economic activity may fall below 7% in the third quarter. Moreover, news that oil producers increased their rig count for five straight weeks shocked an already oversupplied market. Separately, the nuclear deal between Iran and the U.S. raised concerns about increased oil supply. Moreover, buoyed by higher output from Iraq and Saudi Arabia, the Organization of Petroleum Exporting Countries (OPEC) is currently producing oil higher than their target. Also, foreign oil companies are finding it more profitable to sell crude in an environment of stronger dollar, which in turn, is putting pressure on oil supply. Who are Making the Most? Recently released auto sales data indicates the benefits from the low oil price environment. U.S. auto sales came in ahead of expectations in July, fueled by demand for light trucks and sports-utility vehicles rather than fuel-efficient cars. The seasonally adjusted annual sales rate (SAAR) climbed 3.2%, from June to 17.6 million in July, its second highest tally in a decade. Meanwhile, the airline industry is one of the major gainers from this situation. In the second quarter, the aviation industry is said to have amassed a record quarterly profit of more than $5 billion. The plunge in fuel prices, along with strategic investments to bring in more passengers on board has buoyed profit margins. In this situation, the Auto fund – the First Trust NASDAQ Global Auto Index ETF (NASDAQ: CARZ ) – and airlines fund – the U.S. Global Jets ETF (NYSEARCA: JETS ) – will remain on investors’ radar in the coming days. Separately, along with strong labor market conditions, the decline in oil prices has played an important role in boosting consumer spending. According to the “advance estimate” released by the U.S. Department of Commerce, Real Personal Consumption Expenditure rose 2.9% during the second quarter, higher than the first quarter’s growth rate of 1.8%. Moreover, the Commerce Department reported that retail sales increased 0.6% in July from the previous month, in which sales had remained flat. Core retail sales increased 0.3%, following revised gains of 0.2% in June. In this favorable environment, investors will closely watch the performances of top two retail funds, the SPDR S&P Retail ETF (NYSEARCA: XRT ) and the Market Vectors Retail ETF (NYSEARCA: RTH ), in order to analyze the sector trend in coming days. Bottom Line With less and less possibility of a sustainable oil price recovery in the upcoming months, investors will do well to focus on the sectors discussed above in this volatile environment. Original Post