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A Diversified, High-Income Bond Portfolio For 2015

Summary A portfolio of selected bond CEFs provides an average distribution of 8.6%. Since 2007, the composite portfolio of selected bond CEFs outperformed HYG, the popular high-yielding bond ETF. Bond CEFs offer excellent diversification when included in a traditional high-yield bond portfolio. I recently wrote an article on a diversified closed-end fund (CEF) portfolio that included a range of equity funds but had only 28% of the assets allocated to bonds. I realized that many retirees would like to have a higher percentage in bonds, so I wrote this article, which focuses exclusively on bond CEFs. I chose only funds that were in existence during the 2008 bear market so that I could judge performance during a recessionary period. Other criteria included: An average daily volume of at least 100,000 shares per day to facilitate liquidity A distribution of at least 6% without excessive amounts of Return of Capital (ROC) A market cap of at least $150 million, but the larger the better A premium of no more than 5% Using these criteria, I then selected funds that would provide a diversified mix of: government and corporate bonds from both the U.S. and internationally, asset-backed bonds, convertible bonds, and senior loans. The 10 CEFs that I chose are summarized below. There is a large universe of bond CEFs, so I welcome alternative suggestions from readers. BlackRock Duration Income Trust (NYSE: BLW ): This CEF sells for a discount of 8.2%, which is a substantially larger discount than the 3-year average discount of 1.7%. The fund concentrates on intermediate-duration debt securities and senior loans. It has a portfolio of 873 securities, with 41% invested in corporate bonds, 32% in loans, and 12% in asset-backed bonds. About 25% of the portfolio is investment-grade. In 2008, the price of this fund dropped about 25%. The fund utilizes 30% leverage and has an expense ratio of 1.1%. The distribution is 7.6%, funded by income with no ROC. Calamos Convertible Opportunities & Income Fund (NASDAQ: CHI ): This CEF sells for a small premium of 1.1%, which is in contrast to 0.1% average discount over the past 3 years. The fund has a portfolio of 278 securities, with 53% in convertible bonds and 41% in corporate bonds. Only about 17% of the portfolio is rated investment-grade. In 2008, the price of this fund dropped 35%. The fund utilizes 28% leverage, and has an expense ratio of 1.5%. The distribution is 8.9%, funded mostly by income but with some ROC. Calamos Convertible & High Income Fund (NASDAQ: CHY ): This CEF sells at a premium of 3.4%, in contrast to a 3-year average discount of 3.7%. The fund has a portfolio of 277 securities, with 59% in convertibles and 36% in corporate bonds. Only about 15% of the bonds are investment-grade. This fund dropped 27% in price during 2008. It utilizes 28% leverage, and has an expense ratio of 1.5%. The distribution is 8.6%, funded primarily from income, but with some ROC. This fund is about 74% correlated with its sister fund CHI. Western Asset Global High Income Fund (NYSE: EHI ): This CEF sells for a discount of 8.8%, which is a greater discount than the 3-year average discount of 4%. The fund has a portfolio of 558 securities, with 77% in high-yield bonds and 16% in government bonds. This fund lost 30% in 2008. It utilizes 22% leverage, and has an expense ratio of 1.5%. The distribution is a high 10.6%, funded by income with no ROC. Wells Fargo Advantage Multi-Sector Income Fund (NYSEMKT: ERC ): This CEF sells at a discount of 11.5%, which is a larger discount than the 3-year average discount of 8.8%. The fund has a portfolio of 679 securities, spread among corporate bonds (54%), government bonds (19%), senior loans (12%), and asset-backed bonds (6%). About 36% of the holdings are investment-grade. The fund only lost 20% in 2008. It utilized 25% leverage, and has an expense ratio of 1.2%. The distribution is 8.5%, funded by income with no ROC. Eaton Vance Limited Duration Income Fund (NYSEMKT: EVV ): This CEF sells at a discount of 10.8%, which is a larger discount than the 3-year average discount of 4.4%. The fund has a large portfolio of 1692 securities spread across loans (38%), corporate bonds (35%), and asset-backed bonds (24%). About 32% of the holdings are investment-grade. The price of this fund dropped 27% in 2008. The fund utilizes a relatively high 40% leverage, and has an expense ratio of 1.7%. The distribution is 8.7%, funded primarily by income, with a very small ROC component. Western Asset Emerging Markets Debt Fund (NYSE: ESD ): This CEF sells at a discount of 11.1%, which is a larger discount than the 3-year average discount of 7.2%. The fund has a portfolio of 222 securities, with 54% in government bonds, and 46% in corporate bonds. About 64% of the bonds in the portfolio are rated investment-grade. This fund only lost about 20% in 2008. The fund only uses 10% leverage, and has an expense ratio of 1%. The distribution is 8.7%, funded by income with no ROC. MFS Charter Income Trust (NYSE: MCR ): This CEF sells at a discount of 11.7%, which is a larger discount than the 3-year average discount of 7.8%. The fund has a portfolio of 857 securities, with about 45% in corporate bonds, 12% in government debt, and 35% in foreign securities. About 34% of the portfolio is investment-grade. The fund utilizes 15% leverage, and has an expense ratio of 0.9%. The distribution is 6.2%, funded by income with no ROC. PCM Fund (NYSE: PCM ) : This CEF sells at a discount of 1.3%, which is well below the 3-year average premium of 5.8%. The fund focuses on commercial mortgage backed securities and non-investment grade securities. The portfolio is spread over 247 holdings, with 82% in asset-backed bonds and 18% in corporate bonds. About 35% of the holdings are investment-grade. The price of the fund dropped about 30% in 2008. The fund utilizes 32% leverage, and has an expense ratio of 2%. The distribution is 9%, with only a small ROC component. PIMCO Income Opportunity Fund (NYSE: PKO ): This CEF currently sells at a discount of 2.2%, which is in contrast to the 3-year average premium of 2.5%. The portfolio has 470 holdings allocated primarily among asset-backed bonds (42%) and corporate bonds (40%). Only about 30% of the holdings are investment-grade. The price of the fund dropped 24% in 2008. The fund utilizes 38% leverage, and has an expense ratio of 1.9%. The distribution is 8.3%, with only a small return of capital component. For comparison with other popular high-yield bond funds, I also added the following Exchange Traded Fund (ETF) to my analysis. iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA: HYG ): This ETF tracks an index of about a thousand high-yield U.S. corporate bonds across all sectors of the economy. The fund does not use leverage, and has an expense ratio of 0.5%. It yields 5.7% without any ROC. During 2008, the price of this ETF dropped by 17%, but the NAV dropped by 23%. It is unusual for an ETF to have a large difference between price and NAV, but this just illustrates the dislocations that occurred during the 2008 bear market. Composite Portfolio If you equal-weight each of the selected CEFs, the resulting composite portfolio has the allocations shown graphically in Figure 1. As you can see, the composite portfolio is well diversified. Numerically, the allocations are: 5% U.S. government, 30% corporate, 16% asset-backed, 11% convertibles, 9% senior loans, 9% foreign government, 16% foreign corporate, and 4% other (cash, preferred issues, etc.). Personally, I would have liked a larger allocation to U.S. government bonds, but it was difficult to find Treasury-focused funds that had distributions exceeding 6%. Overall, this portfolio had 31% investment-grade securities. Figure 1: Composition of bond portfolio The composite portfolio has an average distribution of 8.6%, which certainly meets my criteria for high income. But total return and risk are as important to me as income, so I plotted the annualized rate of return in excess of the risk-free rate (called Excess Mu in the charts) versus the volatility for each of the component funds. I used a look-back period from October 12, 2007 (the market high before the bear market collapse) to 21 January, 2015. The Smartfolio 3 program was used to generate the plot shown in Figure 2. (click to enlarge) Figure 2: Risks versus rewards over the bear-bull cycle The plot illustrates that the CEFs have booked a wide range of returns and volatilities since 2007. To better assess the relative performance of these funds, I calculated the Sharpe Ratio. The Sharpe Ratio is a metric developed by Nobel laureate William Sharpe that measures risk-adjusted performance. It is calculated as the ratio of the excess return over the volatility. This reward-to-risk ratio (assuming that risk is measured by volatility) is a good way to compare peers to assess if higher returns are due to superior investment performance or from taking additional risk. In Figure 2, I plotted a red line that represents the Sharpe Ratio associated with HYG. If an asset is above the line, it has a higher Sharpe Ratio than HYG. Conversely, if an asset is below the line, the reward-to-risk is worse than HYG. Over the bear-bull cycle, all the individual bond CEFs were more volatile than HYG. However, when combined into an equally weighted composite portfolio, the volatility was only slightly more than HYG. This is an illustration of an amazing discovery made by an economist named Markowitz in 1950. He found that if you combined certain types of risky assets, you could construct a portfolio that had less risk than the components. His work was so revolutionary that he was awarded the Nobel Prize. The key to constructing such a portfolio was to select components that were not highly correlated with one another. In other words, the more diversified the portfolio, the more potential volatility reduction you can receive. Some other interesting observations are evident from the figure. All the bonds CEFs had a higher volatility than HYG, but in each case, this was coupled with a higher return. All the CEFs except for CHI were above the “red line,” which means that the investor was adequately compensated for increased risks. The best-performing bond CEF on a risk-adjusted basis was MCR, but PKO was not far behind. The worst-performing bond CEF was CHI, which had a higher return than HYG, but a much larger volatility. This caused the risk-adjusted return associated with CHI to lag slightly behind HYG. The least volatile bond CEF was MCR, and the most volatile was CHI. The composite portfolio handily outperformed HYG on a risk-adjusted basis. I next wanted to assess the diversification of this portfolio. To be “diversified,” you want to choose assets such that when some of them are down, others are up. In mathematical terms, you want to select assets that are uncorrelated (or at least not highly correlated) with each other. I calculated the pair-wise correlations associated with the funds. The data is presented in Figure 3. All the CEFs had relatively low correlations with HYG (in the 40%-60% range). This bodes well for including these CEFs in a more traditional high-yield bond portfolio. Among the CEFs, the correlations were also low, with only a few above 70%. Overall, these results were consistent with a well-diversified portfolio. (click to enlarge) Figure 3: Correlations over the bear-bull cycle My next step was to assess this portfolio over a shorter time frame when the stock market was in a strong bull market. I chose a look-back period of 5 years, from January 2010 to January 2015. The data is shown in Figure 4. During this period, the bond CEFs did not fare as well, with many of the CEF booking a risk-adjusted performance less than HYG. Only 3 of the CEFs (CHY, PKO, and PCM) outperformed HGY. However, I was happy to see that the combined portfolio continued to outperform HYG during this bull market period. (click to enlarge) Figure 4: Risks versus rewards over the past 5 years Based on the above, I wanted to see if the outperformance continued during the more recent past. I next used a look-back period of 3 years, and the results are shown in Figure 5. As you might have expected, HYG had an impressive run during this strong bull period. Only the convertible CEFs (CHI and CHY) were able to keep pace on a risk-adjusted basis. However, as with the 5-year period, the combined portfolio performed well, lagging HYG by only a small amount on a risk-adjusted basis. The major detriment to the portfolio performance was ESD, which has had a horrible 3 years, just barely managing to remain in the black. This was because of a general sell-off in emerging market assets that has only recently abated. Many investors might be tempted to drop ESD from the portfolio, but I am inclined to give it the benefit of the doubt with the expectation that emerging markets may recover in the future. Overall, I continue to be pleased with the portfolio performance. (click to enlarge) Figure 5: Risks versus rewards over the past 3 years Bottom Line The bond CEFs in this portfolio were all volatile, and taken individually, they would not be suitable for a risk-averse investor. As discussed, most of these funds also had substantial losses during 2008. However, if you risk profile allows you to purchase high-yield bonds, the composite portfolio delivered some excellent risk-adjusted performances over the periods analyzed. No one know how this portfolio will perform in the future, but based on past history, I believe it is worthy of consideration for an income investor who is also seeking total return at a reasonable risk.

Stock Traders Flock Back To Gold ETFs

American stock investors and speculators started pouring capital back into gold this week in a serious way, aggressively buying GLD ETF shares. This buying was so massive that GLD had to shunt enough stock capital into physical gold bullion to grow its holdings by their fastest pace in about 5 years. And this is likely just the beginning, as American stock investors remain woefully underinvested in gold and not prudently diversified. Gold surged this week on massive buying from stock investors and speculators. This critical group of traders and their vast pools of capital utterly abandoned gold in the past couple years. So to see them start to flock back is a watershed event, heralding a major reversal in gold’s fortunes. And with their gold exposure remaining near extreme lows, they have vast buying left to do to restore prudent portfolio diversification. Successful investors have always practiced this essential concept of not putting all their eggs in one basket. This great wisdom is ancient, stretching back at least three millennia to King Solomon’s reign in ancient Israel. In the Biblical book of Ecclesiastes he advised, “Invest in seven ventures, yes, in eight; you do not know what disaster may come upon the land.” Portfolio diversification is absolutely critical. Most investors today keep the vast majority of their capital in stocks and bonds, which is fine. But truly wise ones also diversify into alternative investments , which simply mean not stocks, bonds, or cash. Gold has always been the leading alternative asset, largely thanks to its strong negative correlation with the stock markets. Gold thrives when stocks are weak, making it indispensable to managing overall portfolio risk. American stock investors’ preferred vehicle for diversifying into gold is the flagship SPDR Gold Trust ETF (NYSEARCA: GLD ). This is the world’s largest gold ETF by far, and offers some great advantages to stock traders. They can instantly buy or sell GLD shares, gaining or shedding gold exposure, with normal stock-trading accounts. And this is very efficient, with very low transaction costs. GLD’s mission is to track the gold price, which it has done flawlessly since its birth in November 2004. Investors and speculators owning GLD shares get gold-price exposure that’s virtually identical to gold’s underlying price moves. Achieving this mirroring isn’t trivial for GLD’s custodians, because the real-time supply and demand of GLD shares rarely matches gold’s own. That requires GLD to act as a conduit . When stock traders buy GLD shares faster than gold itself is being bought, they threaten to decouple to the upside. That would cause GLD to fail its tracking mission. So its custodians quickly step into the markets to offset that excess demand. They issue enough new GLD shares to supply that differential demand, and then use the proceeds to buy physical gold bullion that is held in trust for shareholders. Thus GLD is effectively a capital pipeline directly linking the vast pools of stock-market capital to gold. Differential buying pressure on GLD shares is quickly equalized into the underlying global physical gold market. So the more capital stock investors and speculators choose to deploy into GLD shares, the faster the gold price rises. GLD shunts stock-market capital into and out of gold, a double-edged sword. When stock traders sell GLD shares faster than gold itself is being sold, this ETF’s price will decouple to the downside. GLD’s custodians must quickly absorb that excess share supply, so they buy back enough shares to maintain gold tracking. They raise the capital necessary to make these purchases by selling some of the physical gold bullion held in trust for shareholders. Stock capital sloshes back out of gold. Even though the world’s gold miners launched this flagship gold ETF via their World Gold Council to increase gold investment demand, conspiracy theorists have long attacked it. So GLD has always been super-transparent. Every single day, it publishes its total gold-bullion holdings itemized down to the individual-gold-bar level including refiners, serial numbers, and weights. This week this list was 1,164 pages long! Watching GLD’s daily physical-gold-bullion holdings data is exceedingly important for all gold investors and speculators. It effectively shows stock-market capital flows into and out of gold itself. When GLD’s holdings are rising, stock-market capital is migrating into gold. When they are falling, it is exiting out. And this week an extraordinary reversal happened likely heralding a major sea change in gold investment. This first chart looks at GLD’s gold-bullion holdings over the past year or so in blue, measured in metric tons. They are superimposed over the gold price rendered in red. Stock investors and speculators just flooded back into gold through incredible differential GLD-share buying in recent days. I’ve carefully studied and watched GLD’s holdings for over a decade now, and I’m just amazed by this serious buying. Last Thursday January 15th, stock traders bought enough excess GLD shares to force its custodians to buy 9.6 tonnes of gold bullion. That grew GLD’s holdings by 1.4% that day, its biggest daily build since August 2011 just before the last major gold peak near $1,900! Stock investors flooded back into gold via GLD shares as gold soared 2.4% following Switzerland’s central bank greatly shocking the world’s markets. The Swiss National Bank suddenly and surprisingly abandoned its efforts to cap the Swiss franc in euro terms. This campaign was launched in September 2011 in response to the Eurozone financial crisis. It was intended to protect Switzerland’s export-heavy economy, keeping products affordable for its dominant Eurozone customers. SNB officials constantly called that cap the cornerstone of their bank’s policy. So traders weren’t ready for the SNB to capitulate out of the blue, it was a black-swan currency event sending shock waves cascading through global markets. Gold caught a major safe-haven bid in Europe on the resulting chaos, and American stock traders piled on. They were way underexposed to gold after years of shunning it, and their heavy differential buying of GLD shares certainly helped propel gold higher. Strong rallies feed on themselves, as nothing begets more buying like fast-rising prices. Stock traders snatched up GLD shares at such a furious pace that its holdings surged 13.7t or 1.9% on Friday the 16th and another 11.4t or 1.6% on Tuesday the 20th. All together over that 3-trading-day span, enough stock-market capital poured into gold via the GLD conduit to catapult this ETF’s holdings up 34.7t or 4.9%! This GLD holdings surge is readily evident above, a radical change from the heavy differential selling pressure GLD shares suffered in late 2014. I couldn’t remember the last time GLD’s holdings rocketed up so fast, so I had to crunch some numbers. This recent buying spree turns out to be GLD’s biggest 3-day build in both absolute and percentage terms in many years, a truly extraordinary buying event. GLD’s holdings hadn’t shot up by 34.7t in 3 trading days since May 2010, 4.7 years ago. That was an interesting time as stock traders migrating back into gold via GLD would help drive the yellow metal a whopping 56.3% higher over the next 15 months. Major stock-market capital returning to gold was a very bullish omen . This was also true the last time GLD saw a 4.9% 3-day percentage build in February 2009. That was 5.9 years ago, right after that once-in-a-century stock panic in late 2008 sucked in gold due to the resulting record U.S. dollar rally . But the subsequent big GLD-share differential buying comparable to last week’s heralded the early months of a major new gold up-leg. Over the next 2.5 years the gold price would rocket 92.4% higher as investors returned! So stock traders flooding into GLD is a major buy signal . As of this Wednesday, the data cutoff for this essay, GLD’s holdings were up 31.4 metric tons or 4.4% so far in January. This is serious buying by any standard. The chart above details GLD’s absolute and percentage holdings builds and draws on a monthly basis since early 2013. And the previous best month over this past year is merely July’s 11.1t or 1.4%. GLD’s January-to-date build nearly triples that! Though I was a few months early thanks to the Fed’s extreme financial-market distortions, I had been expecting stock investors to start returning to gold via GLD in a major way. They had totally abandoned gold in 2013 and 2014 as the Fed’s third quantitative-easing debt-monetization campaign had artificially levitated the stock markets. With stocks doing nothing but rally, demand for alternative investments collapsed. But stock markets are forever cyclical and can’t climb forever, no matter how much paper money the world’s central banks choose to print. So stretched to lofty and very-overvalued levels, it was only a matter of time until they inevitably reversed. And once that got underway, investors would remember the ancient wisdom of prudent portfolio diversification and start rebuilding their extraordinarily-low gold exposure. GLD’s holdings slumped to a miserable 6.3-year low of 704.8t earlier this month. At the prevailing gold price of $1,213, they were worth about $27.5b. Meanwhile, the 500 elite stocks of the S&P 500 had a collective market capitalization near $18,881.7b. Stock investors’ gold exposure can be approximated by comparing their capital invested in GLD shares to their capital invested in the leading S&P 500 stocks. That equates to mainstream stock-investor exposure to gold via GLD of just 0.15%! That is incredibly low by all historical standards. Many of the world’s best battle-hardened investment advisors believe that every investor should always have 5% to 10% of their capital deployed in gold. This is a prudent portfolio-diversifying hedge, an insurance policy that will pay out big when the stock markets decisively roll over. Merely to hit 5%, stock investors would have to up their GLD holdings by a staggering 34.3x! That’s not going to happen, but it illustrates just how chronically underinvested in gold stock investors are today. There is a more conservative read on at least how much stock capital will almost certainly flow back into GLD over the next couple years or so. This comes from just a few years ago when gold’s price last peaked. Back in August 2011 gold surged to $1,894 the last time it was in favor. That was inarguably the time gold enjoyed the most popularity among mainstream investors during GLD’s lifespan. That day GLD’s gold bullion held in trust for its shareholders was worth $78.2b, or 2.8x higher than today’s levels. But with the S&P 500’s market cap only at $10,585.3b then, stock investors’ gold exposure was around 0.74%. While that was a far cry from a basic 5% portfolio allocation in gold, it was still 5.1x higher than stock investors’ gold exposure today. So it’s not a stretch at all to expect stock investors’ gold exposure to gradually return to those gold-in-favor levels in the coming years. Gold will slowly regain popularity as these Fed-goosed stock markets inevitably roll over and lapse into their overdue cyclical bear market. Stock investors will remember the wisdom of prudent portfolio diversification to protect themselves from stock downturns. And no alternative investment is better for this critical mission than gold, thanks to its strong inverse correlation to the general stock markets. The recent serious differential GLD-share buying by stock investors is likely only the start, as they remain chronically underinvested in the yellow metal. This last chart illustrates how much differential GLD buying is still left to go. It extends GLD’s holdings and the gold price back to early 2013, when the Fed’s QE3 campaign and associated jawboning started levitating the U.S. stock markets. As alternative investments fell out of favor, the differential selling that hammered GLD shares was epic. The quarterly draws and builds in GLD’s holdings are shown here. This past week’s serious differential GLD-share buying by stock investors was a radical change, even at this scale. But GLD’s holdings have a long ways left to go to mean revert out of recent years’ extreme selling. Interestingly just days before the Fed more than doubled QE3’s debt monetizations to include U.S. Treasuries in December 2012, GLD’s holdings were at an all-time record high of 1353.3 metric tons. And that certainly wasn’t some anomalous extreme. Back 2.4 years earlier in the summer of 2010, they had hit 1320.4t. They averaged 1238.2t in 2011 and 1294.2t in 2012, and gold was actually suffering a major correction and consolidation throughout most of that span so it certainly wasn’t in favor among investors. So there’s no reason at all not to expect GLD’s holdings to fully mean revert back to those levels. Even after this week’s stunning surge of stock-market capital flowing into gold via GLD shares, this ETF’s holdings still have to climb another 553.8t to regain 2012’s average levels. That’s a staggering amount of marginal gold investment demand, and if it happens within a year or two it will help catapult the gold price dramatically higher. 2013’s epic outlying record plunge in GLD’s holdings puts this into perspective. That year as the Fed seduced stock investors into abandoning portfolio diversification, GLD’s holdings plummeted 552.6t. Nearly half of this extreme selling happened in 2013’s second quarter, which saw gold’s worst quarterly loss in an astounding 93 years! Those massive GLD gold-bullion liquidations that year driven by extreme differential selling helped batter gold down 27.9% in 2013. Imagine that all reversing. If stock investors merely migrate enough capital back into gold through the GLD conduit to regain those 2012 average GLD-holdings levels, gold is going far higher. Its price actually averaged $1,669 that year before 2013’s extreme selling. And with 2012’s correcting and consolidating, those gold levels were certainly nothing special and this metal wasn’t popular among investors. Such levels should easily return. Financial markets are forever cyclical , no trend lasts forever. No matter what money-printing mischief central banks are up to, stock bulls aren’t perpetual. They always eventually yield to subsequent bears. And just as stock markets can’t rise forever, gold can’t fall forever. Major reversals are afoot in both the lofty euphoric stock markets and depressed loathed gold market. Stock investors diversifying will lead the way. Their major GLD differential buying that is coming to help protect their portfolios will greatly accelerate gold’s young new up-leg. And gold’s gains will entice even more stock investors to participate by moving some of their own capital into GLD shares. This process will not only be self-feeding among the stock investors, but it will spawn major new buying in the crucial American gold-futures market as well. It wasn’t just American stock investors fleeing GLD shares that were responsible for 2013’s extreme gold downside anomaly, but American speculators aggressively dumping gold futures. And even though these guys recently reached selling exhaustion and started buying, they have a massive amount left to go to restore their total long and short gold-futures contracts to their normal years’ averages between 2009 to 2012. Stock investors buying GLD shares and futures speculators adding longs and covering shorts will work together to amplify gold’s coming upside. And the longer, faster, and higher gold rallies, the more it will motivate more investors to deploy capital to participate. This week’s incredible differential GLD-share buying is only the earliest vanguard of a major reversal getting underway in gold, it’s very exciting. Investors and speculators can certainly play gold’s big mean reversion higher in GLD shares, that’s the most-efficient and least-risky way. But since GLD’s mission is to mirror the gold price less this ETF’s annual 0.4% management fee, gold’s gains are the best GLD will see. Meanwhile the stocks of the gold miners, which were recently trading at fundamentally-absurd levels, will greatly leverage gold’s gains. The bottom line is American stock traders started pouring capital back into gold this week in a serious way. They bought GLD shares so aggressively that this ETF had to shunt enough stock capital into physical gold bullion to grow its holdings by their fastest pace in about 5 years. And this is likely just the beginning, as American stock investors remain woefully underinvested in gold and not prudently diversified. As the lofty overvalued U.S. stock markets inevitably roll over without Fed money printing forcing them higher any more, gold will gradually return to favor. Stock investors have vast GLD buying left to do to attain even a semblance of portfolio diversification. This massive buying is going to propel today’s low gold prices far higher, earning fortunes for contrarians brave enough to buy in early ahead of the herd. Copyright 2000-2015 Zeal LLC ( ZealLLC.com ) Additional disclosure: I am long extensive gold-stock positions which have been recommended to our newsletter subscribers.

Spike In eBay Shares On Q4 Earnings Puts These ETFs In Focus

The e-commerce giant eBay Inc (NASDAQ: EBAY ) came out with Q4 results after the closing bell on January 21. Overall, the mood was optimistic on an earnings beat and restructuring initiatives, though a sales-miss restrained investors from full-hearted optimism on the stock. Net income in the fourth quarter rose to $0.81 from $0.66 per share a year earlier, based on Zacks data. This beat the Zacks Consensus Estimate of $0.77, which excludes stock options and non-recurring expenses. Net revenues of $4.92 billion fell shy of the estimate of $4.97 billion but grew 9% year over year. Revenues were primarily volume driven. eBay’s Marketplaces segment generating revenues from the sale of goods available on eBay properties, recorded a 1% jump in net transaction revenues. However, as expected, pricing was an issue for the company which is why on the margin front, the e-commerce giant clearly underperformed. The non-GAAP operating margin was down 150 bps to 29.2% in the quarter. Restructuring procedure is on with the e-commerce player. eBay’s plan to spin off the PayPal business will be completed in the second half of 2015 and the online marketplace announced that it would lay off 7% of its workforce in the first quarter. The company also announced it has entered into a standstill agreement with Carl Icahn, who is the company’s largest activist shareholder . Weak Guidance Though the story was decent so far, the guidance took a beating. The company expects net revenues in the range of $4.35-$4.45 billion, failing the analysts’ projection of $4.71 billion, per Bloomberg . The company’s non-GAAP earnings per share are guided in the range of $0.68-$0.71. The company expects net revenues of $18.60-$19.1 billion for the full year and non-GAAP earnings per diluted share of $3.05-$3.15. Market Impact The company’s streamlining initiatives might have given its stock a boost post earnings. The stock gained 3.5% after hours on January 21. The results have put some ETFs with considerable exposure to eBay in focus. These funds are highlighted below: PowerShares Nasdaq Internet Portfolio (NASDAQ: PNQI ) This fund follows the Nasdaq Internet Index, giving investors exposure to the broad Internet industry. The fund holds about 94 stocks in its basket with AUM of $248 million while charging 60 bps in fees per year. The in-focus eBay occupies the second position with an 8.37% allocation. In terms of industrial exposure, Internet software and services make up for more than two-thirds of the basket, followed by Internet retail. PNQI has lost nearly 2.2% so far this year (as of January 21, 2015). First Trust Dow Jones Internet Index (NYSEARCA: FDN ) This is one of the most popular and liquid ETFs in the broad tech space with AUM of over $1.96 billion and average daily volume of more than 250,000 shares. The fund tracks the Dow Jones Internet Index and charges 57 bps in fees per year. In total, the fund holds 41 stocks in its basket with the in-focus eBay taking the third spot with a 5.53% share. From a sector look, information technology accounts for about 70% of the portfolio while consumer discretionary makes up 22%. The ETF is down about 2.9% year to date. Market Vectors Wide Moat ETF (NYSEARCA: MOAT ) This ETF follows the Morningstar Wide Moat Focus Index and provides equal-weighted exposure to 21 U.S. securities that have a unique sustainable competitive advantage in their respective industries. Here, eBay occupies the tenth position in the basket, accounting for 5% of total assets. The product is pretty spread out across various sectors with energy, information technology and consumer discretionary taking double-digit allocation. The fund has accumulated $898 million in its asset base and sees good volume of about 200,000 shares a day. Its expense ratio comes in at 0.49%. The fund has added nearly 5% so far this year. Bottom Line eBay currently carries a Zacks Rank #4 (Sell) with poor fundamentals. However, investors should note that Internet commerce segment – the industry eBay operates in – presently resides in the top 23% allocation of Zacks Industry Rank. The company itself is also striving hard to turn around by adopting every possible measure. All these point to a moderately bullish long-term outlook. So, investors counting on the long-term potential in the space can consider the recent rally in eBay shares as a start to the wining trend. However, an ETF approach may be better; at least it can cover up eBay’s short-term weakness with some other components’ strength.