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Ride The Coming Fourth Wave Of Wealth Creation With This ETF

Summary Rising yields generally mean the economy is improving, which should benefit companies that depend on corporate and consumer spending. Technology is at the edge of another transformative wave. The acceleration of global population aging is going to drive demand across the biotech sector. Ride the coming transformative wave with this unique ETF that targets both technology and biotech and has consistently outperformed the broader market by a wide margin. Michio Kaku is a world-renowned, American futurist and theoretical physicist. He is a Professor of Theoretical Physics at the City College of New York (CUNY). Kaku has written several books about physics and related topics and has made frequent appearances on radio, television, and film. I recently had the pleasure of listening to him speak at an event in Boston. During his talk, he described the past three waves of wealth generation and shared his vision of how technology will shape the future. The question today is: what is the fourth wave? The first wave was steam power, the second wave was electricity, the third wave was high technology – all of it unleashed by physicists. What is the fourth wave of wealth generation? It’s going to be on the molecular level: nanotech, biotech and artificial intelligence . – Michio Kaku. According to Kaku, we’re at the edge of another wave of technological transformation. The world is growing increasingly dependent on technology. Products and services based upon or enhanced by information technology have revolutionized nearly every aspect of human life. The use of IT and its new applications has been extraordinarily rapid across all industries and an IT-Biotech convergence is already well underway. The acceleration of global population aging and technological breakthroughs are going to drive demand across the biotech sector. Longer life spans and increasing rates of chronic conditions will continue to fuel demand for new products and services. Nanotech breakthroughs will spur innovations across a wide range of applications in biotech and healthcare, potentially curing human illness. Multiple platform technologies working in combination – nanotechnology, biotech/genomics, artificial intelligence, robotic and ubiquitous connectivity – are going to lead to increasing profits for the dominant players utilizing these technologies. Many ETF issuers are coming up with innovative concepts targeting these technological transformative areas. The iShares Exponential Technologies ETF (NYSEARCA: XT ), with an annual expense ratio of 0.30%, attempts to track the developed and emerging market companies which create or use exponential technologies such as big data and analytics, nanotechnology, medicine and neuroscience, networks and computer systems, energy and environmental systems, robotics, 3-D printing, bioinformatics, and financial services innovation. (click to enlarge) There are funds targeting cloud computing such as the First Trust ISE Cloud Computing Index Fund (NASDAQ: SKYY ), which has annual expense ratio of 0.60%. The Robo-Stox Global Robotics and Automation Index ETF (NASDAQ: ROBO ), with an annual expense ratio of 0.95%, targets the robotics industry or you could own the Purefunds ISE Cyber Security ETF (NYSEARCA: HACK ), for 0.75% per year, which holds a portfolio of companies in the cyber security space. SKYY and HACK both follow the technology sector solely while ROBO and XT follow multiple sectors. Although many of these ETFs hold a few well-known, large-cap companies, most are fairly expensive and have so far proven to be more volatile than the broader technology sector. Because they have a short history, and until many of the smaller Exponential Technology companies achieve consistent profit growth, I prefer to ride the coming tech-biotech transformative wave with a portfolio of large, high-quality companies – market leaders within their respective industries, with a history of delivering consistent revenue growth. These large-cap market leaders are, no doubt, aware of how emerging technologies might bring them new customers or force them to defend their existing bases or even inspire them to invent new strategic business models. Many successful small-cap companies with disruptive technologies will eventually become dominant large-cap players. In fact, the NASDAQ’s dominant players have changed drastically in the last 15 years and probably will look much different in the future. You can capture this large-cap dynamic dominance with one of our favorite, can’t miss ETFs, the tech-heavy PowerShares QQQ ETF (NASDAQ: QQQ ), a unique fund that targets both technology and biotech and has outperformed the broader market by a wide margin for more than a decade. (click to enlarge) The QQQ is an ETF based on the NASDAQ 100 Index. The Index includes 100 of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization. The fund is rebalanced quarterly and reconstituted annually. Besides being a 5-Star Morningstar-rated ETF with an expense ratio of just 0.20%, QQQ has delivered consistently superior returns during most time periods over the last decade. QQQ Sector Allocation: (click to enlarge) The top 10 holdings of QQQ consist primarily of U.S. technology, and also include Gilead Sciences (NASDAQ: GILD ), a major biotechnology firm, Amazon (NASDAQ: AMZN ), an e-commerce retailer and Comcast (NASDAQ: CMCSA ), a media/entertainment giant. QQQ Top 10 Holdings: (click to enlarge) In addition to the technology names in the above graphic, the QQQ holds another 36 big-tech firms including Qualcomm (NASDAQ: QCOM ), Texas Instruments (NASDAQ: TXN ) and Baidu (NASDAQ: BIDU ) to name a few. Besides Amazon and Comcast , there are 31 additional Consumer Discretionary names including Netflix (NASDAQ: NFLX ), Tesla (NASDAQ: TSLA ) and Priceline (NASDAQ: PCLN ). And besides Gilead, the QQQ’s biotech holdings consist of 15 more companies including Celegene (NASDAQ: CELG ), Amgen (NASDAQ: AMGN ) and Biogen (NASDAQ: BIIB ). Over 55% of the QQQ is tech. Technology is a cyclical industry. When the economy gets stronger, cyclical sectors like technology have tended to generate higher revenues from increased consumer and corporate spending. So its relative performance tends to rise and fall with the strength, or lack thereof, of the economy. However, a number of technological innovations – from nanotech applications to cloud computing to mobile connectivity – are spurring migration to new technologies. This migration may continue regardless of the overall condition of the global economy. Some solid, pure technology funds include the Technology Select Sector SPDR ETF (NYSEARCA: XLK ), the iShares U.S. Technology ETF (NYSEARCA: IYW ), the Vanguard Information Technology ETF (NYSEARCA: VGT ) and the Fidelity Select IT Services Portfolio (MUTF: FBSOX ). However, the aforementioned funds are primarily all tech and not the unique mix of the QQQ. The world’s dependence on technology and the acceleration of global population aging are two megatrends that should drive performance for years to come. Seventy percent of the QQQ’s holdings focus on well-established, high-quality technology and biotech companies. The fund’s consumer discretionary stocks should also benefit from an improving economy while the fund’s consumer staples stocks add a defensive component to the mix. Let’s take a look at how the QQQ has performed over various time frames. The newer Exponential Technology ETFs don’t have a long-term performance record so they cannot be included in this comparison. As you can see in the table below, the QQQ, with its unique structure of one-half tech, one-fifth consumer discretionary and one-seventh biotech, has outperformed the S&P 500 and just about every other large-cap technology fund during most time periods over the past decade, including the iShares S&P 500 Growth ETF (NYSEARCA: IVW ), which holds the fastest growing half of the S&P 500 stocks. QQQ is a kind of quirky fund, but it works. It delivers a unique combination of tech-biotech, growth and large-cap exposure. 10-Year Performance: (click to enlarge) Conclusion Rising yields generally mean that the economy is improving, which should be good for technology and growth companies that depend on corporate and consumer spending. Big tech and biotech companies have the potential to capitalize on two mega-trends for years to come – the increasing global dependence on technology and the acceleration of global population aging. QQQ is in a strong position to benefit from these favorable trends. As Michio Kaku says, “Don’t bet against technology. Be a surfer. Ride the wave of technology, see the wave coming, get on the wave”.

HACK: Too Much Industry Hype, Too Little Fundamental Support

Summary Cyber-security market top line growth doesn’t necessarily translate to profit growth for companies. Most companies are still spending a large portion of gross profit on R&D for new software/hardware solutions and marketing & selling to boost brand recognition and gain market shares. Until the industry consolidates and SG&A costs stabilize, it’s hard for these companies to retain profits. Recommendation: Sell Although the cybersecurity market is expected to grow at a phenomenal rate, in my opinion it doesn’t necessarily translate to profit growth for companies. Since cybersecurity is a relatively new industry, most companies are still spending a large portion of gross profit on R&D for new software/hardware solutions and marketing & selling to boost brand recognition and gain market shares, resulting in negative bottom line for most companies. Choppy as the cash flow from operation (CFO) growth is, most cybersecurity companies have positive operating cash flow and incur little CapEx. Going forward, keeping up with hacker’s technology requires constant R&D spending on upgrading and updating technology, and large marketing & selling expense to compete for market shares remains a headwind for these companies in this highly fragmented market. Until the industry consolidates and SG&A costs stabilize, it’s hard for these companies to retain profits. ETF Info Price 27.16 52 Wk H 33.91 52 Wk L 18.29 30D Avg Volume 396,270 Market Cap 1,114,917,969 Shares Out 41.05 Return YTD 3.66% Excess Return YTD -1.97% Tracking Error 1.70 Inception Date 11/12/2014 Expense Ratio 0.75% ETF Summary The PureFunds ISE Cyber Security™ ETF (NYSEARCA: HACK ) tracks the price and yield performance of the ISE Cyber Security™ Index, which includes companies or ADRs that are hardware/software developers for cyber security (“Infrastructure Providers”) or non-development service providers (“Service Providers”). The ISE Cyber Security index assigns weights to companies according to category (“Infrastructure providers”/”service providers”) and then is adjusted according to liquidity and market cap. For more information, you can refer to the PureFunds website . Companies Updates When looking at financial statements of the holding companies, other than 6 companies that had negative sales growth for the past year (~-5%), 26 companies had 10%+ sales growth with on average 70% gross margin. A large chunk of gross profit goes to R&D and Selling & Marketing expenses, resulting in negative profit margin for some of the companies. The gap between sales growth and net income growth is largely attributable to SG&A spending. Most of these companies don’t incur much CAPEX and have positive free cash flow when adding back non-cash charges (mostly stock-based compensation and debt amortization). However, the stock-based compensation is a meaningful real expense and will likely to continue due to continuous talent acquisitions. Operating cash flow growths are choppy and unpredictable. These companies have a median forward PE of 22.7x and average forward PE of 40x (vs. S&P 500 average 18.7x forward PE). Among the top 10 holdings, 5 are experiencing fast sales growth for the past several years, 4 have stagnant growth, and 1 had negative growth (shown later in this article). MIN MAX MEDIAN AVERAGE S&P 500 Sales growth (%, FY) -23.2 163.5 8.2 16.1 Net Income growth (%, FY) -2620.1 1865.2 -11.4 -70.9 EBITDA growth (%, FY) -230.5 123.6 5.2 -14.5 CFO growth (%, FY) -122.4 302.8 3.7 21.3 FY Gross margin 9% 95% 76% 67% FY EBITDA margin (adj) -89% 62% 11% 8% FY Operating margin -111% 56% 9% 4% FY Net margin -112% 44% 5% -1% FY CFO/sales -31% 59% 19% 18% FY FCF/sales -47% 56% 14% 14% FY capex -3879.7 -1.4 -14.5 -244.8 FY FCF/capex -2.9 60.7 4.4 8.0 PE(forward) 13.7 312.1 22.7 40.4 18.7 PB 0.9 38.8 5.1 7.5 2.8 *data gathered from yahoo finance and Bloomberg, compiled by author Looking at the table above, the median sales growth is 8%, meaning more than 50% of these companies are doing fine on the top-line. However, median net profit growth is negative, meaning profits for more than 50% of the companies are shrinking. Would you buy into an industry where profits for companies are stagnant or shrinking? Probably not. What worsens the situation is the assigned weights. This ETF is almost as if it’s assigning equal weight to all the companies – the largest holding is 4% and the smallest is

Paris Attack Put These Sector ETFs In Watch

Friday the thirteenth made itself literal in Paris when it encountered the worst terror attack in Europe in over a decade. A chain of Islamic State-backed terrorist attacks killed around 130 people in the city and left hundreds injured that night. As a payback and pledge to establish a terror-free world, France launched several air raids and bombed Islamic State targets – especially in Raqqa – in Syria. This was the most hostile anti-terrorism strike by France against this Islamic group ISIS. As expected, the entire risk-pro global investing backdrop took a beating after the annihilation and is yet to return to its prior shape. However, among all asset classes and sectors, there are a few which stand to gain from this horrible incident, while other are likely to be badly hit. Below we highlight some sectors which are in focus after the Paris attack. Defense The defense sector should benefit from France’s retaliation to ISIS in Syria. Along with the terror-stricken France, several of its western allies shared this mission. Washington has strengthened its strikes in ISIS-heavy regions and destroyed 116 ISIS oil trucks in Eastern Syria. Russia also joined hands with the West, probably to show vengeance against its plane crash in Egypt. The Islamic State of Iraq and the Levant’s Sinai Branch had taken responsibility of this incident. Defense stocks gained post Paris attack on November 13 and might see further expansion as such geo-political risks are favorable for weapon manufacturers and defense contractors. In any case, defense stocks have tested all-time highs ever since the ‘ rise of Islamic State in Iraq and Syria.’ Since the major global superpowers are likely to pursue an combined attack against ISIS militants, investors should watch aerospace and deference ETFs, namely iShares US Aerospace and Defense ETF (NYSEARCA: ITA ), SPDR S&P Aerospace & Defense ETF (NYSEARCA: XAR ) and PowerShares Aerospace & Defense Portfolio (NYSEARCA: PPA ) for gains. Cyber Security Cyber security is a red hot area at present. While technology has been a great boon to mankind, it has lugged with it the ills of ‘cyber-crime’. Enterprises and government agencies constantly face cyber-attacks and are always in the want of rigorous cyber security to keep hackers at bay. Several government databases store susceptible national information that should be kept safe from terrorist invasion. After the serial Paris assault avoided the eye of national intelligence, the need for enhanced security both online or offline has become a prerequisite. In fact, the topic trending the most now is whether governments should have access to technology that preserves the confidentiality of people’s ‘communications and transactions’, for the sake of national security . Needless to say, these talks would put cyber security stocks and the related ETFs, namely PureFunds ISE Cyber Security ETF (NYSEARCA: HACK ) and First Trust NASDAQ CEA Cybersecurity ETF (NASDAQ: CIBR ) in focus in the coming days. Hospitality Since tourism and hospitality sectors are hit hard when a terror attack takes place in a certain place, France will also bear the same fate. Not only France, big American and European cities which are basically the soft targets of ISIS might see a fallback in their tourism and hotel industry. Notably, the tourist industry accounts for about 8% of the French economy. Thanks to this fear for tourism, already big U.S.-based hotel chains that have considerable exposure in Europe as well, witnessed a retreat in their share prices. Starwood Hotels & Resorts Worldwide Inc. (NYSE: HOT ), Marriott International Inc. (NASDAQ: MAR ), Hyatt Hotels Corporation (NYSE: H ) and Wyndham Worldwide Corporation (NYSE: WYN ) lost about 7%, 5%, 3.6% and 5%, respectively, in the last five days (As of November 17, 2015). Not only hotels, since travelers are likely to abandon cruise trips, the apprehensive stocks of Carnival Corporation (NYSE: CCL ) and Royal Caribbean Cruises Ltd. (NYSE: RCL ) shed about 5% each in the last five trading sessions. Notably, consumer discretionary ETF PowerShares DWA Consumer Cyclicals Momentum Portfolio (NYSEARCA: PEZ ) invests over 25% in Hotels, Restaurants & Leisure and over 11% in Airlines, while another product PowerShares Dynamic Leisure and Entertainment Portfolio (NYSEARCA: PEJ ) invests about 5% each in Carnival and the online travel company Expedia (NASDAQ: EXPE ), and about over 10% in two airlines. Investors might thus view these two ETFs for potential losses. Airlines Needless to say, lower tourism means lower air travel. Though the impact of the attack is likely to be short-lived, travelers might take some more time to get back to their previous euphoria, shrugging off all fears. The Russian plane crash in October also point to this fact. The pure play Airline ETF U.S. GLOBAL JETS ETF (NYSEARCA: JETS ) could thus see losses in the coming days. JETS lost over 2.6% in the last five days (as of November 17, 2015). Original Post