Tag Archives: gold

NUGT Rides On The Cautious Case For Gold

The Direxion Daily Gold Miners Bull 3x Shares ETF (NYSEARCA: NUGT ) and other gold ETFs might see some sort of stability in the next couple of weeks as gold buyers take cautious views ahead of the Federal Reserve meeting holding next week. The fear in the market before now was the Fed will raise interest rates this month, and the fear has been forcing downward pressure on gold. The WSJ notes that spot gold was trading down 0.02% at $1,121.27 a troy ounce in Europe this morning; yet, the fact that China bought 16 tons of the bullion in August suggests that fears about the situation in China are overblown. Now, weak economic data from last week suggests that the Fed might hold off the rate hike until December. If the Fed waits until December before raising Interest rates, the price of the yellow metal will stabilize as investors breathe a sigh of relief. However, the stability doesn’t mean that gold prices will soar because stable gold prices ahead of a Fed meeting could easily be the calm that precedes a storm. The cautious case for gold The last couple of weeks have seen some analysts take side on the bullish case for gold while other analysts camped on the bearish side of gold. The next couple of weeks however, are likely to see analysts finding common ground in the cautious case for gold. Adrian Ash, head of research at BullionVault says that the bullion has had its slump and it has missed the rally in global stock prices. In his words, “After riding out the risk-off slump in productive commodities last month, gold missed most of today’s risk-on rally.” Lukman Otunuga, a research analyst at FXTM notes that gold has support at $1,110 and that economic data will influence where gold ETFs such as NUGT are heading next. In his words, “if data from the United States this week is robust, then more pressure may be seen for gold which may trigger a selloff to the next relevant support at $1,110 [an ounce]… The major catalyst for a potential heavy selloff in gold continues [to] revolve around whether the Federal Reserve begins to raise U.S. interest rates this year.” Commerzbank sums up the bearish case for gold because the effects of demand and supply in the physical gold market has been mixed. The firm says “In the run-up to the Fed’s meeting next week, market participants are likely to be exercising restraint, so we are unlikely to see any pronounced price fluctuations”. A balanced market, in the meantime NUGT and other gold backed ETFs are not likely to see much changes going forward because the bulls and bears are exerting almost the same amount of pressure on the market. Howie Lee, an investment analyst at Phillip Futures opines that “We are long-term still bearish on gold, but current market conditions may suggest that gold bulls are in control of the market in the near term.” Link back to the original article on Learn Bonds

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

5 Lessons From The S&P 500 Market Crash For ETF Portfolios

Summary ETFs tracking the S&P 500 index had down-side tracking error. Other ETFs based on value, low volatility, dividend payers or equal weight fell more than the S&P 500 Index. Gold, bond and exotic ETFs provided down-side protection during the sell-off. These lessons can be used to build better portfolios. Introduction We review the past few trading days and try to draw some lessons from the rapid expansion in volatility. Naturally, it is still very early, and this edition of the crash is yet to run its course, and more lessons surely wait in the wings. However, we can draw a few lessons about portfolio construction that this market stumble has revealed. S&P 500 ETFs had down-side tracking error We measure the decline in the S&P 500 Cash index (SPX) from the Wednesday, August 19, close to the Monday, August 24, low. We want to check how well the S&P 500 ETFs did in tracking this downdraft. In Figure 1, we show that amplitude of the move from the Wednesday close to the Monday low. There was significant tracking error, particularly for the IVV ETF, which seemed to lost its bearings altogether. Hence, in designing portfolios, one should recognize that the down-side risk could be greater than that experienced by the index itself. (click to enlarge) Figure 1: There was significant down-side tracking error among popular S&P 500 tracking funds. Value, Dividend, Equal Weight Alternatives to SPX Fared Worse One of the portfolio construction principles suggested to reduce volatility and give down-side protection is to use a value approach, or have high dividend payers or change the weighting scheme. We show in Figure 2 that none of these alternatives gave any meaningful down-side protection. So, from a portfolio design perspective, it might be better to just use a good SPX ETF. (click to enlarge) Figure 2: ETFs focused on value, dividends and alternate weights fared worse in the sell-off then the SPX. Data courtesy ETFmeter.com. Low Volatility Funds Were Volatile Low volatility funds were supposed to bounce around less than the typical market ETF. However, these funds crashed harder than the S&P 500 index itself (Figure 3) calling into question their benefit within a portfolio. (click to enlarge) Figure 3: Many ETFs designed with volatility screens were more volatile on the down-side than the S&P 500 index itself and might add little value in a crisis. Data courtesy ETFmeter.com. Long-term bond ETFs and Gold ETFs provide small offset The traditional way to offset weakness in equities is through diversification into long bonds. We show in Figure 4 that the large bond fund provided a small positive offset during this major decline. Since bonds are rising while equities are falling, we measure the performance from the Wednesday close to Monday’s high. . As a store of value in a crisis, some money flowed into gold funds, and gold ETFs provided good diversification during the equity sell-off (see Figure 4). So, the gold related funds could be a source of diversification when one is constructing portfolios, though their long-run trends could dictate the size of the position. (click to enlarge) Figure 4: The major bond and gold ETFs were positive, providing diversification, but the bond ETF amplitude of the move was small compared to the declines in the equity ETFs and the expansion in the VIX index ETFs. Data courtesy ETFmeter.com. Exotic ETFs such as Leveraged Inverse ETFs Provided Diversification Lastly, we look at exotic ETFs, such as leveraged inverse ETFs and long/short strategy ETFs. By design, such ETFs should rise when the market falls, though their leverage means they are probably not the preferred choice for all investors. These inverse ETFs provided excellent on-demand down-side protection as they should, by design. The long/short strategy ETF also did well. So, for those who understand these strategies and the perils of leverage, these may be alternatives to consider during portfolio construction. We emphasize that these ETFs may not be the best alternative for everyone due to the leverage involved. (click to enlarge) Figure 5: The more exotic ETF strategies, such as inverse SPX ETFs, provided much-needed on-demand down-side protection, but due to their leverage, and other complexities, may not be the best choice for all portfolios. Data courtesy ETFmeter.com. Summary A number of lessons could be drawn from the market action so far during this sell-off, and more will surely follow. Perhaps the most important are that all S&P 500-tracking ETFs are not created equal, and that value, dividend, alternate-weighting schemes and low-volatility ETFs fared worse than the index itself. Some of the tracking errors could be attributed to the weak opening in the market, and ETF prices could have fallen more than the prices of the underlying stocks, i.e. to poor quotes in a “fast market”. However, this is a significant risk that should be factored into the portfolio construction process. Reference [1] Tushar Chande, “Eight lessons from the S&P 500 stumble to build better portfolios”, www.etfmeter.com/blog.aspx?id=4425 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. I have no business relationship with any company whose stock is mentioned in this article.