Tag Archives: holiday

Q4 Outlook For Consumer Staples ETFs

Despite a moderate recovery in the U.S. economy, investors are skeptical due to global growth worries that have been haunting the markets lately. The Chinese central bank’s sudden move to cut interest rate and devalue its currency in August to prop up growth not only failed to calm investors, but worsened the economic picture worldwide. This global turmoil has also impacted Asian and European markets. The major U.S. indexes – S&P 500 and Dow Jones Industrial Average – are currently yielding negative year-to-date returns. (Read: Apple ETFs–Value Trap or Value Play ) The softened economic data validates the Federal Reserve’s decision to keep interest rates unchanged. Investors now anticipate further delay in a rate hike due to disappointing job figures last week along with low inflation in the U.S. In fact, the economic scenario is not going to improve in the third quarter earnings season. While China issues will lead the market turmoil across the globe, a persistent weakness in the energy sector and strengthening dollar will add to existing concerns. We also note that the consumer spending pattern is changing and consumers are not willing to spend despite benefiting from lower fuel prices and higher wages. While some are busy boosting their savings, some are burdened with higher health care costs and still-tightened credit availability. (Read: Top Ranked Retail ETFs for a Holiday Season Rally) In fact, there are many consumer staple stocks, which are still suffering from continued pressure in the face of limited consumer spending, foreign exchange headwinds and declining unit volumes. Other global issues including potential price wars, a competitive environment, political turmoil in Russia, sluggishness in Japan, and struggle in Europe continue to hinder the financial health of companies. Needless to say, the equity markets have become extremely volatile and the overall economic picture is quite weak. Given the defensive nature of this sector, it will outperform when equity markets are more bearish and underperform when bullish. The ups and downs of the sector due to the U.S. and global exposure can be played with a wide array of ETFs. The ETFs can act as an excellent investment medium for those who wish to take a long-term exposure within the consumer staples sector. For those interested in taking a look at consumer staples, we have highlighted a few ETFs tracking the industry, any of which could be an interesting pick: Consumer Staples Select Sector SPDR ETF (NYSEARCA: XLP ) : Launched on Dec 16, 1998, XLP is an ETF that seeks investment results corresponding to the S&P Consumer Staples Select Sector Index. This fund consists of 39 stocks of companies that manufacture and sell a range of branded consumer packaged goods. The top holdings include The Procter & Gamble Co. (NYSE: PG ), The Coca-Cola Company (NYSE: KO ) and Philip Morris International, Inc. (NYSE: PM ). The fund’s expense ratio is 0.15% and it pays out a dividend yield of 2.54%. XLP had about $7.794 billion in assets under management as of Oct 8, 2015. Vanguard Consumer Staples ETF (NYSEARCA: VDC ) : Initiated on Jan 26, 2004, VDC is an ETF that tracks the performance of the MSCI US Investable Market Consumer Staples 25/50 Index. It measures the investment return of large-, mid-, and small-cap U.S. stocks in the consumer staples sector. The fund has a total of 101 stocks, with the top three holdings being Procter & Gamble, Coca-Cola and PepsiCo, Inc. (NYSE: PEP ). It charges 0.12% in expense ratio, while the yield is 3.78% as of now. VDC managed to attract $2.48 billion in assets under management till Oct 9, 2015. First Trust Consumer Staples AlphaDEX ETF (NYSEARCA: FXG ) : FXG, launched on May 8, 2007, follows the equity index called StrataQuant Consumer Staples Index. FXG is made up of 39 consumer staples securities, with the top holdings being Archer-Daniels-Midland Company (NYSE: ADM ), Tyson Foods, Inc. (NYSE: TSN ) and The Kroger Co. (NYSE: KR ). The fund’s expense ratio is 0.67% and the dividend yield is 1.62%. It had $2.68 billion in assets under management as of Oct 9, 2015. Guggenheim S&P Equal Weight Consumer Staples ETF (NYSEARCA: RHS ) : Launched on Nov 1, 2006, RHS is an ETF that seeks investment results corresponding to the S&P 500 Equal Weight Index Consumer Staples. This is an equal-weighted fund and constitutes 37 stocks, with the top holdings being Molson Coors Brewing Co. (NYSE: TAP ), The Estee Lauder Companies, Inc. (NYSE: EL ) and Kimberly-Clark Corporation (NYSE: KMB ). The fund’s expense ratio is 0.40% and it pays out a dividend yield of 1.73%. RHS had about $361.8 million in assets under management as of Oct 9, 2015. Fidelity MSCI Consumer Staples Index ETF (FTSA) : FSTA, launched on Oct 21, 2013, is an ETF that seeks investment results corresponding to MSCI USA IMI Consumer Staples Index. This is a cap-weighted fund and constitutes 100 stocks, with the top holdings being Procter & Gamble, Coca-Cola and PepsiCo. The fund’s expense ratio is 0.12% and the dividend yield is 2.85%. FSTA had about $149.0 million in assets under management as of Oct 9, 2015. Link to the original post on Zacks.com

Does This New Consumer Discretionary ETF Look Promising?

Consumer discretionary is one of the sectors that have delivered commendable performance so far this year. The credit goes to the recovering U.S. economy, cheap gas prices, subdued inflation and prolonged ultra-low interest rates. The recent Fed minutes revealing its reluctance to raise interest rates in the near term should bode well for the sector, at least for the rest of the year. Notably, the most popular consumer discretionary ETF, Consumer Discret Sel Sect SPDR ETF (NYSEARCA: XLY ), returned 7.7% in the year-to-date time frame, while S&P 500 Index lost 2.1% in the same period. Manulife Financial Corp’s (NYSE: MFC ) insurance and investment manager John Hancock has forayed into the ETF world with six multi-factor smart beta offerings. One of them is JHancock Multifactor Cnsmr Discret ETF , trading under the symbol JHMC . The launch of this consumer-discretionary-focused ETF looks to be timely. Smart beta ETFs aim to obtain a return that’s higher than the return of the benchmark index, which is the fund’s alpha. Apart from higher returns, the fund seeks to reduce costs and enhance diversification. They follow a passive management strategy with a tweak in the component weightings unlike traditional, market-cap-weighted index funds. JHMC in Details Like other ETFs of John Hancock, JHMC is also based on the index that is developed by Dimensional Fund Advisors, which will also act as the sub-advisor to the fund. Dimensional is one of the first managers to work on multi-factor and rules-based investing. The index comprises securities in the consumer discretionary sector within the U.S. universe whose market capitalizations are larger than that of the 1001st largest U.S. company. The ETF comprises 154 holdings with Comcast Corporation (NASDAQ: CMCSA ) occupying the top position with 3.52% share, followed by Amazon.com, Inc. (NASDAQ: AMZN ) with 3.45% share and Home Depot, Inc. (NYSE: HD ) with 3.22% share. The top 10 holdings constitute around 23.96% of the fund. As far as sector allocation is concerned, media takes the top spot with 22.38% allocation, followed by specialty retail, and hotels, restaurants and leisure with 22.32% and 14.66% shares, respectively. The fund is moderately expensive as it charges 50 bps in fees from investors per year. How Does it Fit in a Portfolio? The upbeat September auto sales data triggered optimism in the consumer discretionary sector. U.S. light-vehicle sales increased 15.7% year over year to 1.44 million units in September. Sales on a seasonally adjusted annualized rate (“SAAR”) basis surged to 18.17 million units in the month from 16.53 million units in September 2014. It was the highest SAAR since July 2005. Further, retail sales spending indicates positive consumer sentiment for the sector. Consumer spending accounts for roughly 70% of the economic activity in the U.S. In August, personal spending edged up 0.4% from the prior month, as per the U.S. consumer department. For September, consumer spending is expected to rise as well given higher auto sales and, with the holiday season around the corner, it would likely remain bullish this year. The National Retail Federation predicted that U.S. holiday sales for the last two months of the year will grow 3.7%, higher than the 10-year average of 2.5%. Finally, rising consumer confidence bodes well for the sector. According to the business research group, Conference Board, the consumer confidence index increased to 103 in September after rising to 101.3 in August. The monthly reading was the highest since this January. The bullish trend in consumer spending is not only a positive for the consumer discretionary sector but also for investors interested in this new ETF. ETF Competition Being a smart-beta ETF, JHMC definitely deserves attention. However, there are a number of popular consumer discretionary ETFs that are already on the investors’ tracking list. Among them, the most popular are above mentioned XLY and First Trust Cnsmr Discret AlphaDEX ETF (NYSEARCA: FXD ). XLY tracks the S&P Consumer Discretionary Select Sector Index focusing on companies defined by the S&P 500 Composite Stock Index. The fund’s top ten holdings comprise nearly the same stocks as that of JHMC. It has an impressive asset base of $10.7 billion. On the other hand, FXD follows the StrataQuant Consumer Discretionary Index selecting stocks from the Russell 1000 Index that may generate positive alpha relative to traditional passive style indices. It manages an asset base of $2.4 billion. Both XLY and FXD stand nearly at the same level in terms of yield, with XLY offering 1.4% and FXD offering 0.86%. However, on the cost front, XLY looks very attractive with only 15 bps in fees compared with a much higher annual fee of 70 bps for FXD. Original Post

Exiting A Short VIX Trade

Summary A common question I receive, answered here. An update on the contango and backwardation strategy. Current advice on the VIX. Hello everyone, I hope you have had a profitable month so far. A common question I receive revolves around when to exit a short VIX trade. There really isn’t a common answer to this question but I would be happy to share what I do. Before we begin our discussion I wanted to go over a few things. I believe volatility trading can be done by all different types of investors. I personally follow a very simple method and I know there are many others here that comment with more complex strategies. In reality they all follow the very basic principles of buy low and sell high or in the case of shorting volatility short high cover low. Once you have a good understanding of the basics in volatility, I encourage you to keep increasing your knowledge by reading higher level articles and studies to further your understanding of volatility products. Many times the final piece to understanding lies in the why. Once you can accurately explain why, then you have reached mastery. I have always focused more on the how to than the why. Next summer, I am making a goal to change that and will begin focusing more on the why then the how to. I have spent a great deal of time putting together educational pieces on volatility products and you can view all of those in my Seeking Alpha library. My articles have focused on the basic principles of volatility trading. I started writing to help beginner to moderate level traders who are interested in trading volatility products. When I started trading volatility, not many resources existed for the average investor. I will continuously link back to those pieces and try to promote investor education throughout this transition. One last thing, the comment sections of my articles are always my personal favorite. Even though I don’t respond to every comment, I do read them all and am continuously impressed by what I read. Some of you write such good comments that you should look into actually writing an article or two for Seeking Alpha. Just think about it. I think you would make great contributors. Exiting the short VIX trade A reader suggested strategy for entering a short position in the VIX is posted under this article on contango and backwardation . That article looks into the entry points for shorting the VIX. However, it leaves the exit point up in the air and only causes an exit trade once futures re-enter backwardation from contango. That really isn’t the best overall exit strategy. For the basis of today’s discussion we will use the iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA: VXX ). Another favorite short of mine is the Proshares Ultra VIX Short-Term Futures (NYSEARCA: UVXY ). VXX invests in front and second month futures contracts. For more on how this ETN operates, click here . If you wait until futures have re-entered backwardation to exit your short position in VXX then you lose some of the profit you could have locked in at a previous date. During the bull market, we have seen extremely long periods of contango which drags VXX down over time. If you are short these shares directly then you may be racking up holding costs by not exiting after a certain period of time. If you are short VXX using options, then you might not have the same concerns. See below for an updated table of the contango and backwardation strategy for VXX. Start dare (enters contango) End date (enters backwardation) Percent Change in VXX 5/21/2012 12/28/2012 -51.56% 12/31/2013 2/25/2013 -16.43% 2/26/2013 6/20/2013 -12.50% 6/21/2013 10/07/2013 -24.72% 10/10/2013 10/15/2013 2.9% 10/16/2013 12/16/2013 -12.02% 12/18/2013 1/30/2014 6.45% 2/7/2014 3/14/2014 5.52% 3/17/2014 4/11/2014 -0.44% 4/14/2014 10/9/2014 -27.37% 10/21/2014 10/22/2014 6.79% 10/23/2014 10/27/2014 2.15% 10/28/2014 12/12/2014 11.08% 12/17/2014 1/6/2014 10.1% 1/8/2015 1/12/2015 9.48% 1/21/2015 1/28/2015 7.6% 2/3/2015 7/8/2015 -35.58% 7/10/2015 8/20/2015 -8.7% 9/16/2015 09/17/2015 7.5% 10/08/2015 volatilityetfs.blogspot.com Table created by Nathan Buehler using historical data from the Intelligent Investor Blog . What you should notice from the above table is the very poor results from 10/21/2014 on. Overall the strategy is profitable but requires very long periods of contango to be highly successful. My exit timing After the VIX has reached a peak and volatility begins to wane, I will set a profit and time target once entering a short position. I prefer not to be in a trade longer than a month. The time frame is more of a risk management tool than about profitability. Generally I set a profit target of around 25%. Now my 25% profit target will not follow the above table because it is a mixture of options and inverse volatility products such as the VelocityShares Daily Inverse VIX Short-Term ETN (NASDAQ: XIV ). To be clear on the time target, I am a worrier. You have to remember I am in a classroom all day and can’t really track what is happening in real time. The shorter I can make my profit target and get out, the happier I am. Waiting for backwardation to reappear can have two side effects. First, you are losing out on your full profit potential. Second, you are trading too often and instead of creating opportunities you are sometimes manufacturing loses. Current Advice Many investors initiated short volatility trades during the past few weeks. I encourage you to follow the above recommendations on exiting the position. Set a profit target and then close out the trade. A focus on U.S. economics should remain as any weakness will send the VIX surging again. So far, especially with jobs data, things continue to look positive. Seasonally volatility will wane after October and into the holiday season. All eyes are going to be on The Fed until liftoff. In case of a trend reversal be ready to lock in profits here. I have a small position in XIV and it has done better than I expected it to. Don’t force any trades here and never chase volatility on a fear of missing out. If you missed this one, wait it out for the next round. I highly appreciate you reading, as always!