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Mining ETFs Crumble On Copper Collapse

Acting as a leveraged play on the underlying commodities, metal & mining stocks, and ETFs have been under pressure over the last two years on weak global commodity trends. The year 2015 might dig up the same sad story, with perhaps more pain in store. Geopolitical tensions, global growth uncertainty, oil price havoc, strong dollar, and global supply glut continue to weigh on this corner of the space. Notably, a rising U.S. currency makes dollar-denominated assets more expensive to foreign investors, thereby dulling the appeal for the commodities. Inside the Slump The most recent plunge came from a broad selloff in the industrial metal sector on Tuesday and Wednesday. Copper was hit the hardest, plunging to below the five-year low. The red metal is vital to the growth of the global economy as it is a raw material in construction and manufacturing activities. About 45% of the demand comes from China, which is struggling with slow growth and thus weak consumption. Lead dropped to a 31-month low, nickel close to a one-year low, while zinc and aluminum are trading at eight- and seven-month lows, respectively. The downward revision to the global outlook this week by the World Bank unnerved investors across the board. The bank lowered its global growth forecast to 3% from 3.4% for 2015 and to 3.3% from 3.5% for 2016. This is primarily thanks to sluggishness in Euro zone, recession in Japan, and weakness in key emerging markets like Russia, Brazil and China despite the stronger U.S. economy. Further, oil price is not showing any signs of reversing, raising fears of deflation across the globe. Adding to the woes is Citigroup’s reduced price target for iron ore to $58 and $62 for 2015 and 2016, respectively, from $65 for both years. Further, it stated, “the industrial commodities are being in the midst of a deflationary spiral, driven by lower oil prices, falling fx and efficiency gains.” The firm also expects earnings of major miners to fall 9-21% in 2015 and 3-16% in 2016. Given this, the mining stocks have seen terrible trading with most of them losing in double digits in the last two sessions. Below, we have highlighted three ETFs that slipped to multi-year lows and could see steeper falls in the days ahead if the current trends persist. SPDR S&P Metals & Mining ETF (NYSEARCA: XME ) This ETF offers broad exposure to the metal and mining industry by tracking the S&P Metals & Mining Select Industry Index. Holding 36 stocks in its basket, it uses an equal weight methodology and does not put more than 4.4% of assets in a single security. In term of industrial exposure, steel makes up for large chunk at 39%, while coal & consumable fuels, and diversified metal and mining round out the top three. The product has $347.7 million in AUM and is liquid with solid trading volumes of more than 2 million shares per day on average. It charges 35 bps in fees and expenses. The fund slid to a multi-year low of $26.89, having lost about 10.5% so far in the year. iShares MSCI Global Metals & Mining Producers ETF (NYSEARCA: PICK ) This fund follows the MSCI ACWI Select Metals & Mining Producers Ex Gold & Silver Investable Market Index, which provides global exposure to companies that are involved in the extraction and production of diversified metals, aluminum, steel, and precious metals and minerals. It has amassed $159.5 million in its asset base while trades in light volume of under 50,000 shares. Expense ratio came in at 0.39%. The ETF holds a broad basket of 209 securities with the largest allocation to BHP Billiton (NYSE: BHP ) and Rio Tinto Plc (NYSE: RIO ) with 10.9% and 8.4% share, respectively. About three-fifths of the portfolio is dominated by metals & mining, closely followed by steel (32%). Australia, U.S. and United Kingdom are the top three countries with double-digit allocation. PICK has dropped 8.7% so far this year to an all-time low of $14.22. Global X Copper Miners ETF (NYSEARCA: COPX ) This ETF targets the copper mining industry across the globe. It follows the Solactive Global Copper Miners Index and holds 25 stocks in its basket with none holding more than 6.25% share. In terms of a national breakdown, Canada takes the top spot with 36% of assets while Australia, Mexico and United Kingdom round out the next three spots with double-digit exposure. The product has managed $19.9 million in AUM while charges 65 bps in fees per year. It trades in light volume of 37,000 shares a day on average. The fund lost about 16% in the first few days of 2015 and hit an all-time low of $6.07.

Time To Embrace Old Tech ETFs…Again

Summary Investors should look at old technology names for sturdy growth. A tech ETF with heavy weights in established, mature tech companies. Why invest in tech, particularly in the old guard. By Todd Shriber & Tom Lydon It was a prominent theme in 2014, though not one widely embraced by many exchange traded fund investors, but old school technology companies worked and did so in significant fashion. Amid various bouts of volatility and routs for Internet and social media funds, ETFs with an emphasis on the tech sector’s old guard shined bright. That includes the iShares U.S. Technology ETF (NYSEArca: IYW ) , which jumped 19.5% in 2014, topping the S&P 500 by 600 basis points in the process. Tech analysts point to sturdy tech names like Apple (NASDAQ: AAPL ) and Microsoft (NASDAQ: MSFT ), well-established companies that generated steady growth. Apple and Microsoft combine for 29.6% of IYW’s weight and the ETF’s 18.5% Apple allocation is one of the largest among ETFs that hold shares of the iPhone maker. Old tech and IYW could repeat last year’s heroics in 2015. Said BlackRock Global Investment Strategist Heidi Richardson in a recent note: I like mature technology companies-think large established brands like Intel (NASDAQ: INTC ), IBM (NYSE: IBM ) and Oracle (NYSE: ORCL ). These companies can use healthy cash balances to unlock shareholder value, are more likely to fare well if the Fed starts raising rates as expected this year and stand to benefit from continued improvement in the U.S. economy. Intel, IBM and Oracle combine for 13.7% of IYW’s weight. Tech’s durability in rising rates environments is an important consideration, particularly at this point in an aging bull market and amid expectations that the Federal Reserve will boost rates later this year. Said J.P. Morgan Asset Management in a research piece out earlier this year: Dispersion between sector valuations should continue to grow. For example, technology stocks appear attractive based on both forward and trailing P/E ratios when compared with their long-run histories. In contrast, the utilities sector, which many have used as a bond substitute, looks expensive on both measures. Tech’s increased credibility as a legitimate dividend destination also boosts the allure of ETFs like IYW. In 2014, the average dividend increase from Apple, IBM, Cisco (NASDAQ: CSCO ) and Qualcomm (NASDAQ: QCOM ) was 14%. Importantly, the tech sector has ample room for dividend growth. Adds Richardson: Some industry-leading companies have been hoarding cash. Consider that four information-age bellwethers―Apple, Microsoft, Google and Cisco―possess a combined $345 billion in cash. And the overall tech sector holds more than half of total corporate cash reserves in the U.S. With strong balance sheets, these companies are well-positioned to deliver returns through share repurchases, dividend increases and mergers and acquisitions. The $4.5 billion IYW has a trailing 12-month yield of 1.13%. iShares U.S. Technology ETF (click to enlarge) Tom Lydon’s clients own shares of Apple.

Watch These Europe ETFs If The ECB Prints Money

The European Central Bank (ECB) is apparently set to embark on the final voyage of its easing policy. At least, the ECB president Mario Draghi’s latest comments in a German financial newspaper give such cues. Going by what Draghi said, we can comprehend that the ECB is all for bank reforms, levying lower taxes and slashing excessive regulations to accelerate the Euro zone’s recovery, which the president was quoted as saying that it is presently “fragile and uneven.” The Euro zone’s manufacturing activity expanded slower than initially estimated in December with each month of Q4 recording the lowest PMIs since Q3 of 2013. Such downbeat data definitely creates a backdrop for the initiation of the QE policy. Thus, investors considered the president’s latest comments as the start of an asset buyback program or some other sort of stimulus program. Sensing potential easing, the common currency euro plunged to a nine-year low against the greenback. As a result, the CurrencyShares Euro Trust ETF (NYSEARCA: FXE ) kick started the New Year with a decent sized loss. Gains were invisible even in the broad large-cap Euro ETFs including the Vanguard FTSE Europe ETF (NYSEARCA: VGK ) and the SPDR Euro STOXX 50 ETF (NYSEARCA: FEZ ) which shed in the range of 0.2% to 0.5% as well. Needless to say, in a falling euro backdrop, hedged Europe ETFs turned out as winners as evidenced by the 0.6% gains offered by the WisdomTree Europe Hedged Equity ETF (NYSEARCA: HEDJ ). But some other areas of Europe investing should be closely watched if the ECB jumps on the bandwagon of QE movement like the U.S. and Japan have already implemented. Normally, smaller companies pick up faster than the larger ones in a growing economy. Since these pint-sized securities usually focus more on the domestic market, these are less ruffled by international worries than their globally exposed larger counterparts. This is especially true as a pile of woes hit the global economy last year. In short, likely monetary easing and currency weakness would support European consumption which in turn may boost small cap ETFs. Per CNBC , a sluggish euro will trigger purchases by the domestic consumers as they will have to pay less money for buying domestically manufactured goods than imported ones. Low oil prices should be another drive to spur consumer purchases. Investors should note that U.S. small-cap stock index Russell 2000 added about 85% return when the QE policy was underway. So, investors can expect the replication of the same trend on the European front. Market Impact Unlike VGK, the WisdomTree Europe SmallCap Dividend ETF ( DFE ) has added about 0.5%. Below, we highlight three ETFs that should be in focus if the QE is actually implemented. DFE in Detail This ETF provides exposure to the small cap segment of the European dividend-paying market by tracking the WisdomTree Europe SmallCap Dividend Index. It is one of the popular funds in the European space with AUM of $698 million. The fund charges 58 bps in annual fees from investors. The fund is heavy on industrials as this segment accounts for more than one-fourth of the portfolio while financials, information technology and consumer discretionary take the remainder. Among countries, United Kingdom (32.6%), Sweden (14.6%), Italy (9.5%) and Germany (8.7%) dominate the holdings list. Heavy focus on some of the better-positioned nations like the U.K., Sweden and Germany is positive of the fund. Plus, a tilt toward dividends was the icing on the cake in a yield-starved continent. The fund was down 1.62% in the last one month (the lowest loss in the space), but was up 0.8% in the last three months, indicating commendable performance in the pack of European ETF losers. iShares MSCI Germany Small Cap Index ETF ( EWGS ) Germany has been a better-placed economy in the Euro bloc. Zew Economic Sentiment Index in Germany expanded for the second successive month to 34.90 in December of 2014 from 11.50 recorded last month and also surpassed analyst expectations. The number was even higher than Euro Area average of 31.80 and 18.40 touched in the U.K. This gives EWGS – an ETF with $26.4 million under management – an edge over its other domestic cousins as well as broader Euro zone counterparts. The fund was up 4.44% in the last three month period – the second best show in the European pack, but lost about 2.4% in the last one month.