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Investors Still Betting On Oil ETFs

Summary Russian ETF inflows continued to add exposure to the country in 2014, but first signs of outflows in 2015. Oil ETFs have seen net inflows of $1.3bn so far this year. Investors have pulled $80bn from gold ETFs since 2012. Collapsing oil prices and the free falling Russian market have so far not tested the patience of ETF investors, who continued to double down on these loss-making trades in 2014; a stark contrast to 2013’s gold slump when ETF investors rushed to the door. ETF investors’ Russian affair Russian exposed ETFs saw consistent inflows of $1.5bn in the last five months of 2014 as the Russian market continued to decline with sanctions, declining oil prices and the devaluing rouble hitting the market. However, while these inflows were occurring, the largest Russian exposed ETF, the Market Vectors Russian ETF (NYSEARCA: RSX ), saw its price decrease by over a third from August to December 2014. This trend looks to be reversing somewhat in the New Year, as Russian exposed ETFs are on track for their first monthly outflows in six months, as investors’ resilience and staying power may have begun to wane. Chasing oil’s bottom Oil prices have slid by 50% since mid-June 2014 and the largest Oil ETF, the United States Oil Fund (NYSEARCA: USO ) with AUM of $1.7bn, is down by a parallel 54% over the same time period. ETF investors are continuing to ‘double down’ after catching knives over the past four months while oil prices continued to decline. Prices are currently hovering at $46 per barrel (Brent). Investors’ faith in an oil price recovery seems to have increased, as fund flows into oil exposed ETFs look set to beat December’s total inflows of $1.7bn, with inflows so far this month already standing at $1.3bn. Interestingly, oil was at similar price level back in 2009, when we also saw strong inflows into oil ETFs after a dramatic collapse in global oil prices. ETF investors could see more red in the short term though, as news out this week reveals record oil imports for China hitting highs of 7m barrels per day. These have been cited as being destined for strategic and commercial reserves. Turning against gold Gold has not been so precious in the eyes of ETF investors, as ETFs exposed to the metal’s price movements have continued to see sustained outflows over the last two years. The last two years has seen only four months of net inflows. This comes as the commodity declined from 2011 highs of ~$1800, stabilising at $1259 currently. The end of quantitative easing in the US and an expectation of a strengthening dollar and weaker global demand has seen the precious metal fall out of favour with investors. The largest gold ETF, the SPDR Gold shares ETF (NYSEARCA: GLD ) has $28bn AUM which represents 44% of total AUM exposed to the metal. This AUM figure has fallen by over 60% from the $72bn it managed at start of January 2013.

How My Value Investing Strategies Performed In 2014

Summary 2014 was a tough year in the markets but there was a strategy that outperformed the market with a gain of 24.5%. Quarterly breakdown of results for the 15 different value investing strategies I follow are provided. A detailed look at the stock portfolio that outperformed in 2014. In ancient Roman mythology, there is a god with two faces. His name is Janus, and with two faces, he looks in both directions representing the past and future. It’s also where the word January came from. Although January 2015 is fully under way, it’s appropriate because we are still at a stage of looking back at 2014, while also looking at what lies ahead in 2015. Now one of the very last tasks of the year (or first of the year) that I do is to go through all the performances of the value stock screeners and see what worked and what didn’t. I don’t bother with gathering results for all different asset classes and sectors because there are plenty of people who are better than me at this. It’s easier to leverage the work of others and to put my value strategies into context. Here’s the best chart I came across showing the performance of the major asset classes. (click to enlarge) Yearly Asset Performance Chart (Credit: awealthofcommonsense.com ) Because my focus has always been on value stocks, the stocks shown on the value screens all fall into the large, mid and small cap boxes above. But most of those stocks should be categorized into the small cap group which managed 3% on the year. So in the grand scheme of things, no matter how good the strategy or quality of the company was, small caps had a rough 2014. It goes to show how difficult it is to beat the market. The market isn’t going to award you easily just because the company has strong fundamentals. What works one year, may not the next and it’s a test of conviction and temperament to see it through. That’s why having a clear process to buy and sell stocks and to focus on creating long term wealth is important over short-term gains. Sure it feels good when you beat the market, but that’s something you can leave to fund managers who are judged based on their quarterly or yearly results. You and I have the luxury of looking 5 or 10 years down the road and comparing performance then. A few bad years after having achieved 200% vs. the market’s 100% over a 10-year period isn’t important. The end goal is to outperform the market over the long run because you aren’t trying to invest for a few months and then call it quits. With that in mind, here are the final 2014 results for each of the Value Screeners . 2014 Value Screener Results Before getting into the results, a very common question that I receive daily is whether the OSV Analyzer will screen for stocks and tell people what to buy and sell. I want to start by clearing up that these strategies are not created with the OSV Analyzer. The OSV Analyzer is a deep fundamental analysis and valuation tool. A tool to drill down deeply into a single company quickly instead of just scratching the surface and looking at basic stats. Screening will come in the future. With that out of the way, here are the results. (click to enlarge) Out of 15 value strategies, only 4 managed to outperform the market at the end of the year. The outperforming strategies ( Altman , Graham , Piotroski ) were the ones that contained a lot of mid and large caps. With the Altman Z value screen leading the pack this year, here’s a look at the 20 stocks that made up the list from the beginning of the year and how each performed. (click to enlarge) There are stocks that I definitely wouldn’t purchase, but that’s the beauty of mechanical investing. It’s simplified down to how well you create a strategy and stick with it. This reduces many of the variables that go into individual stock picking. However, I still find it difficult to give up total control of my portfolio. I prefer to further filter the list with my analyzer because screeners still make mistakes. Manual analysis is also required because there are things like off balance sheet items screens can’t recognize and qualitative events that can’t be simulated. But if this was something that I want to follow with real money, I’ll want to create a new account with at least $20k instead of using money from my existing portfolio. Not the Time to Invest in US Net Nets One sure thing about 2014 was that it wasn’t a good year for net nets. It’s especially clear looking at the Net Net performance. Since the results are all US listed stocks, the horrible performance isn’t surprising. When markets are hot, stay away from employing a pure USA net net investing strategy. You need to expand to international net nets if you want to stick with Graham’s net nets. But right now, there aren’t many US net nets that you should be investing in. The ones you see floating around the stock market have serious issues. The official screeners identified around 5-6 stocks at the start of the year and the minimum that I test with is always 20 stocks. For any mechanical strategy where you have to trust the theory and the system, holding 5-6 stocks is going to get you killed. The full 20 stocks are required for the portfolio to be diversified enough for each strategy to work over the long run. As I showed previously , when the number of net nets increase, it’s definitely a sign that the market is getting cheaper and that’s the time to be loading up on good net nets. Just not now. In the next post, I’ll be listing the official stocks for each screen that will be tracked for 2015. It features a list of 225 value stocks you can download and to get ideas.

Consumer Discretionary ETF: XLY No. 7 Select Sector SPDR In 2014

Summary The Consumer Discretionary exchange-traded fund finished seventh by return among the nine Select Sector SPDRs in 2014. The ETF was relatively weak in the first and third quarters, absolutely strong in the second and fourth quarters. Seasonality analysis of Q1 is a mixed bag, but my data interpretation points to a middle-of-the-pack performance. The Consumer Discretionary Select Sector SPDR ETF (NYSEARCA: XLY ) in 2014 ranked No. 7 by return among the Select Sector SPDRs that partition the S&P 500 into nine pieces. On an adjusted closing daily share-price basis, XLY advanced to $72.15 from $65.91, a gain of $6.24, or 9.47 percent. Thus, it behaved worse than its sibling, the Utilities Select Sector SPDR ETF (NYSEARCA: XLU ) and parent proxy, the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) by -19.27 and -4.00 percentage points, respectively. (XLY closed at $70.51 Tuesday.) XLY ranked No. 2 among the sector SPDRs in the fourth quarter, when it led SPY by 3.74 percentage points and lagged XLU by -4.54 points. And XLY ranked No. 3 among the sector SPDRs in December, when it performed better than SPY by 1.15 percentage points and worse than XLU by -2.68 points. Figure 1: XLY Monthly Change, 2014 Vs. 1999-2013 Mean (click to enlarge) Source: This J.J.’s Risky Business chart is based on analyses of adjusted closing monthly share prices at Yahoo Finance . XLY behaved about the same in 2014 as it did during its initial 15 full years of existence based on the monthly means calculated by employing data associated with that historical time frame (Figure 1). The same data set shows the average year’s weakest quarter was the third, with an absolutely large negative return, and its strongest quarter was the fourth, with an absolutely larger positive return. Generally consistent with this pattern last year, the ETF had a very small gain in Q3 and a very large gain in Q4. Figure 2: XLY Monthly Change, 2014 Versus 1999-2013 Median (click to enlarge) Source: This J.J.’s Risky Business chart is based on analyses of adjusted closing monthly share prices at Yahoo Finance. XLY performed worse in 2014 than it did during its initial 15 full years of existence based on the monthly medians calculated by using data associated with that historical time frame (Figure 2). The same data set shows the average year’s weakest quarter was the third, with a relatively large negative return, and its strongest quarter was the fourth, with an absolutely large positive return. It also shows there is no historical statistical tendency for the ETF to explode in Q1. Figure 3: XLY’s Top 10 Holdings and P/E-G Ratios, Jan. 13 (click to enlarge) Note: The XLY holding-weight-by-percentage scale is on the left (green), and the company price/earnings-to-growth ratio scale is on the right (red). Source: This J.J.’s Risky Business chart is based on data at the XLY microsite and Yahoo Finance (both current as of Jan. 13). To me, many of XLY’s component companies appear mispriced, either by a little or by a lot (Figure 3). I discussed one of them in “Amazon.com: The Most Overvalued Profitable Company In The S&P 500, Still” a while ago. Since then, Amazon (NASDAQ: AMZN ) has slipped back to unprofitability from profitability, but it remains overvalued. However, the facts on the S&P 500 consumer-discretionary sector reported by S&P Senior Index Analyst Howard Silverblatt Dec. 31 seem to be at variance with my opinions about it: He calculated its P/E-G ratio as 1.15, the lowest level of any of the index’s 10 sectors. Harrumph. The valuation issue aside, XLY’s prospects may be brighter now than they were six months ago: Among the Select Sector SPDRs, the ETF might be the biggest beneficiary of the collapse in the crude-oil commodity market, where the CME Group front-month futures price per barrel fell to $45.89 Tuesday from $107.26 June 20, a tumble of $61.37, or 57.22 percent, according to the U.S. Energy Information Administration . (The contract settled at $48.48 Wednesday, the CME Group reported.) Therefore, I would be completely unsurprised should XLY be a middle-of-the-pack performer among the sector SPDRs this quarter. Disclaimer: The opinions expressed herein by the author do not constitute an investment recommendation, and they are unsuitable for employment in the making of investment decisions. The opinions expressed herein address only certain aspects of potential investment in any securities and cannot substitute for comprehensive investment analysis. The opinions expressed herein are based on an incomplete set of information, illustrative in nature, and limited in scope. In addition, the opinions expressed herein reflect the author’s best judgment as of the date of publication, and they are subject to change without notice.