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Will $20 Crude Soon Be A Reality? Short These ETFs

Oil has been the most perplexing commodity of 2015, with big busts and occasional rises seen in a very short period of time. In particular, oil tanked to a seven-year low on Monday after the Organization of the Petroleum Exporting Countries (OPEC) failed to address the growing supply glut. Crude plunged 6% to $37.50, and Brent oil tumbled more than 5% to $40.73. What Happened? At its meeting on Friday, OPEC members decided to continue pumping near-record levels of oil to maintain market share against non-OPEC members like Russia and U.S. in an already oversupplied market. Iran is also looking to boost its production once the Tehran sanctions are lifted. As per the Iran oil minister, Bijan Namdar Zanganeh, production will likely increase by 500,000 barrels a day within a week after the relaxation in sanctions and by 1 million barrels a day within a month. Oil production in the U.S. has also been on the rise, and is hovering around its record level. Further, the latest bearish inventory storage report from the EIA has deepened the global supply glut. The data showed that U.S. crude stockpiles unexpectedly rose by 1.2 million barrels in the week (ending November 27). This marks the tenth consecutive week of increase in crude supplies. Total inventory was 489.4 million barrels, which is near the highest level in at least 80 years. On the other hand, demand for oil across the globe looks tepid given slower growth in most developed and developing economies. In particular, persistent weakness in the world’s biggest consumer of energy – China – will continue to weigh on demand outlook. Notably, manufacturing activity in China shrunk for the fourth straight month in November to a 3-year low. The International Monetary Fund (IMF) recently cut its global growth forecast for this year and the next by 0.2% each. This is the fourth cut in 12 months, with big reductions in oil-dependent economies, such as Canada, Brazil, Venezuela, Russia and Saudi Arabia. That being said, the International Energy Agency (IEA) expects the global oil supply glut to persist through 2016, as worldwide demand will soften next year to 1.2 million barrels a day after climbing to the five-year high of 1.8 million barrels this year. In addition, a strengthening dollar backed by the prospect of the first interest rate hike in almost a decade as soon as two weeks is weighing heavily on oil price. This suggests that the worst for oil is not over yet, with some forecasting a further drop in the days ahead. Notably, the analyst Goldman and OPEC predict that crude price will slide to $20 per barrel next year. How to Play? Given the bearish fundamentals, the appeal for oil will remain dull in the coming months. This has compelled investors to think about shorting oil as a way to take advantage of the strong dollar and commodity weakness. While futures contract or short-stock approaches are possibilities, there are host of lower-risk inverse oil ETF options that prevent investors from losing more than their initial investment. Below, we highlight some of those and the key differences between them: 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 WTI crude without any leverage. It tracks the Deutsche Bank Liquid Commodity Index – Oil, which measures the performance of the basket of oil future contracts. The note is unpopular, as depicted by its AUM of $17.2 million and average daily volume of nearly 20,000 shares a day. The expense ratio came in at 0.75%. The ETN gained 17.5% over the last 4-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 $126.8 million in its asset base, and charges 95 bps in fees and expenses. Volume is solid, as it exchanges nearly 1.3 million shares in hand per day. The ETF returned 38.8% over the last 4 weeks. PowerShares DB Crude Oil Double Short ETN (NYSEARCA: DTO ) This is 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 $67.1 million in its asset base, and trades in a moderate daily volume of around 59,000 shares. The product charges 75 bps in fees per year from investors, and surged about 34% 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 it trades in heavy average daily volume of 1.6 million shares. It has amassed $174 million in its asset base, and has delivered whopping returns of nearly 61% in the trailing four weeks. 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 (see all Inverse Commodity ETFs here ). Still, for ETF investors who are bearish on oil for the near term, 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 the friend” in this corner of the investing world. Original Post

ETF Tactics For A Rate-Proof Portfolio

With back-to-back months of solid jobs growth and moderate inflation, the era of tightened policy might kick in as early as in two weeks, as the chance of the first rate hike in almost a decade now looks more real. The Fed is slated to increase interest rates at its upcoming December 15-16 policy meeting, but at a gradual pace. The initial phase of increase will actually be good for stocks as it will reflect an improving economy and a lower risk of deflation. Plus, higher rates would attract more capital to the country, thereby boosting the U.S. dollar against the basket of other currencies. However, since a strong dollar should have a huge impact on commodity-linked investments, a rising rate environment will also hurt a number of segments. In particular, high-dividend-paying sectors such as utilities and real estate would be the worst hit given their higher sensitivity to rising interest rates. Further, securities in capital-intensive sectors like telecom would also be impacted by higher rates. In such a backdrop, investors should be well prepared to protect themselves from higher rates. Here are number of ways to create a rate-proof portfolio that could prove extremely beneficial for ETF investors in a rising rate environment: Bet On Rate-Friendly Sectors A rising rate environment is highly beneficial for cyclical sectors like financial, technology, industrials, and consumer discretionary. Investors seeking protection against rising rates could load up stocks in these sectors through diversified or niche ETFs. Some of the broad ETFs having double-digit exposure to these four sectors are the iShares Core S&P Total U.S. Stock Market ETF (NYSEARCA: ITOT ), the Schwab U.S. Broad Market ETF (NYSEARCA: SCHB ), and the iShares Russell 3000 ETF (NYSEARCA: IWV ). Other sectors make up for a smaller part of the portfolio of these funds. Investors seeking a concentrated exposure to the particular sector could find the iShares U.S. Financial Services ETF (NYSEARCA: IYG ), the Technology Select Sector SPDR ETF (NYSEARCA: XLK ), the First Trust Industrials AlphaDEX ETF (NYSEARCA: FXR ) and the Consumer Discretionary Select Sector SPDR ETF (NYSEARCA: XLY ) intriguing. All these funds have a Zacks ETF Rank of 2 or “Buy” rating, suggesting their outperformance in the coming months. Focus On Ex-Rate Sensitive ETF The timing of interest rates hike is resulting in higher market volatility. For protection against both, the PowerShares S&P 500 ex-Rate Sensitive Low Volatility Portfolio (NYSEARCA: XRLV ) could be an ideal bet. This fund provides exposure to 100 stocks of the S&P 500 that have both low volatility and low interest rate risk. This approach looks to exclude the stocks that tend to underperform in a rising interest rate environment, and is tilted toward financials (28.1%), industrials (21.5%) and consumer staples (15.2%). As such, XRLV is a compelling choice to play the rising rate trend. Follow Niche Bond ETF Strategies Though the fixed income world will be the worst hit by rising rates, a number of ETFs like the iShares Floating Rate Bond ETF (NYSEARCA: FLOT ) and the iPath U.S. Treasury Steepener ETN (NASDAQ: STPP ) that employ some niche strategies could see huge gains. This is because a floating-rate note ETF pays variable coupon rates that are often tied to an underlying index (such as LIBOR) plus a variable spread depending on the credit risk of the issuers. Since the coupons of these bonds are adjusted periodically, they are less sensitive to an increase in rates compared to traditional bonds. On the other hand, the Steepener ETN directly capitalizes on rising interest rates and performs better when the yield curve is rising. The ETN looks to follow the Barclays US Treasury 2Y/10Y Yield Curve Index, which delivers returns from the steepening of the yield curve through a notional rolling investment in the U.S. Treasury note futures contracts. Shorten Bond Duration Higher rates have been cruel to bond investors, especially the longer-term ones, as an increase in rates has always led to rising yields and lower bond prices. This is because price and yields are inversely related to each other and might lead to huge losses for investors who do not hold bonds until maturity. As a result, short-duration bonds are less vulnerable and a better hedge to rising rates. While there are several options in this space, the SPDR Barclays 1-3 Month T-Bill ETF (NYSEARCA: BIL ), the iShares Ultrashort Duration Bond ETF (BATS: NEAR ) and the Guggenheim Enhanced Short Duration ETF (NYSEARCA: GSY ) with durations of 0.16, 0.36 and 0.17 years, respectively, seem intriguing choices. Original post

Is The Time Ripe For 50% Currency Hedged ETFs?

The global currency world has been on a tumultuous ride on central banks’ comments. The basic perception has been that the currency-hedged developed market ETFs will be on a roller-coaster ride since the second half of 2015 and in 2016 on divergent economic policies between the U.S. and others. So far, the investing trend has paralleled the belief as the greenback peaked to multi-year highs on looming policy tightening and currencies like euro and yen plunged on the ongoing QE measures. However, the trend was volatile at the start of December. While the Fed repeatedly put stress on a slower rate hike trajectory once the action is taken, the European Central Bank (ECB) – widely viewed as stepping up its QE measure – fell short of expectations. The ECB maintained the amount of monthly government bonds purchase at €60 billion. Additionally, the cut in deposit rates (by 10 bps) was also below the expected 0.15-0.20%. Thanks to a less dovish ECB, the common currency euro surged and logged its largest one-day gain against the greenback in over six years. The CurrencyShares Euro Trust ETF (NYSEARCA: FXE ) was up 3.2% on December 3. Across the pond, the Fed is preparing for a rate hike this month but is expected to apply a petite and slow hike which in turn can cut some strength from the greenback. Now that the oil price is due for more pain ahead with OPEC members agreeing on pumping up more oil, global inflation will remain for a few more months. This leaves the Fed with no option other than taking the policy tightening issue easy. After all, the U.S. economy is yet to meet a key Fed agenda of 2% inflation. Plus, the greenback has advanced over 7% so far this year (as of December 7, 2015). The U.S. dollar ETF, the PowerShares DB US Dollar Bull ETF (NYSEARCA: UUP ), is now just 3.2% down from the 52-week high price, indicating less upside potential from the current level. All in all, though the greenback is likely to remain strong ahead and euro is likely to weaken, volatility is likely to crop up now and then. In the last five sessions (as of December 7, 2015), UUP lost over 1.3% while FXE gained about 2.4%. This might put the currency hedging global investing at risk. Notably, currency hedging is a beneficial technique when the USD is strengthening relative to the concerned foreign currency. But investors would incur losses on repatriating their foreign income while the USD is falling. In this backdrop, a 50% hedged ETF can be an intriguing option to minimize risks and sail through all kind of market dynamics. Below we highlight three ETFs that could be on watch in the coming days, if the U.S. dollar slips and other currencies strengthen on central bank policies and economic developments. These funds may guard your portfolio from extreme situations and will likely deliver moderate returns. IQ 50 Percent Hedged FTSE International ETF (NYSEARCA: HFXI ) The fund follows the FTSE Developed ex North America 50% Hedged to USD Index and has amassed about $41.6 million in assets after debuting in July. The fund charges 35 bps in fees. The fund added over 2.1% in the last three months (as of December 7, 2015) (see all broad developed world ETFs here). IQ 50 Percent Hedged FTSE Europe ETF (NYSEARCA: HFXE ) The $37.6-million fund tracks the FTSE Developed Europe 50% Hedged to USD Index. The fund charges 45 bps in fees and was up about 1% in the last three months (as of December 7, 2015). IQ 50 Percent Hedged FTSE Japan ETF (NYSEARCA: HFXJ ) The $26.6-million fund looks to follow the FTSE Japan 50% Hedged to USD Index. The fund charges 45 bps in fees and gained over 7% in the last three months. Original Post