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A Mid-Cap Idea With Exceptional Return Possibilities: ONEOK

Summary In searching for exceptional return possibilities, I’m looking for three basic things: low expectations, a high dividend yield and a favorable agreement. ONEOK is a great illustration of all three components, having quite solid long-term prospects coupled with low short-term expectations. This article details this possibility, along with an ending enhancement that could allow for improved gains. The investing world is filled with thousands of securities and a variety of varying assumptions. As such, it can be difficult to pinpoint the “best” potential investment. This is because the business performance and investment performance of a security can be two drastically different items. Even if you succeed in finding an excellent-performing business, it does not guarantee excellent investing results. Investor expectations play an important role. You can have a company humming along at a double-digit rate and yet providing negative returns, as was the case with Wal-Mart (NYSE: WMT ) during the turn of the century. From 1999 through 2005, the business grew by nearly 13% per year, yet each dollar invested would have turned into 70 cents. From 2005 through 2014, the business was growing much slower – at less than 8% per year – yet investors would have seen nearly 9% annual gains. The reasoning for this difference is valuation. In the first period, the company’s valuation went from over 50 times earnings to under 20 times. In the second period, expectations were lower, and thus, the “investment bar” was lower as well. Thus, in searching for potential investment opportunities, I like to look for “low bar” situations. If you need everything to work out perfectly, there isn’t much margin of error – and indeed, could be hazardous to your investing program. On the other hand, if you only need marginal improvements for things to work out, you’re starting from a much better position. I’d like to apply this logic to Seeking Alpha’s current mid-cap contest and searching for the “best” long or short idea. Naturally, the “best” is not yet known. And if it were, more investors would pile in to the idea, increase the current demand for said security, and thus negate the potential for an outsized gain. However, this alone does not preclude you from working through the process. It can be instructive to think about what factors could provide an outsized gain. Personally, there are three basic areas of focus, which all work toward the “low bar” investment idea: Low Expectations High Dividend A Favorable Agreement My pick for a mid-cap company with exceptional return possibilities is ONEOK Inc. (NYSE: OKE ). Actually, as you’re about to see, it’s ONEOK with a bit of a twist, but we’ll get to that. ONEOK, with a market cap around $7.5 billion as I write this, is the general partner of ONEOK Partners (NYSE: OKS ). ONEOK Partners is a large publicly traded master limited partnership, which gathers, processes, stores and transports natural gas and natural gas liquids. ONEOK carries an advantage for investors looking for qualified dividends as opposed to the distributions provided by limited partners. The enterprise as a whole has sold long-term prospects on the horizon. In taking a high level view, natural gas makes a lot of sense. It makes sense that we’ll be using more of this resource in the future. It’s abundant, cleaner, more efficient and cheaper. In fact, we’re already seeing the transition take place: for the first time, natural gas provided more electricity in the U.S. as compared to coal. Moving forward, I would expect this trend to continue rather than retreat. It’s not going to be a linear process, but it seems like a reasonable supposition over the long term. Incidentally, Kinder Morgan’s (NYSE: KMI ) Rich Kinder provided the same type of insight during his company’s most recent earnings call . The thesis for using more natural gas is quite simple, and is something that we’re already seeing, but it helps to be backed up with some market insight. Here are a few tidbits as provided by Mr. Kinder: “McKenzie expects 5% year-over-year growth in demand, and 40% growth by 2025.” “The U.S. Energy Information Administration anticipates that by 2030 39% of electricity will be generated by natural gas, as compared to just 18% from coal.” “More coal and nuclear plants are being retired, creating a need for flexible generation alternatives.” “Natural gas exports to Mexico are expected to be 40% higher this year as compared to 2014.” “The American Chemistry Council counts 243 industrial and petrochemical projects with a cumulative investment of $147 billion from 2010 to 2023, requiring more build out.” “Wood Mack estimates that over 2.5 Bcf a day of additional natural gas will be required by 2018 from 2015 levels to meet industrial demand driven by fertilizer and petrochemical projects.” “The Potential Gas Committee estimates that there are over 100 years of remaining resources relative to current demand.” “The White House’s National Economics Counsel has reported that natural gas ‘is playing a central role in the transition to a clean energy future.” In short, natural gas is expected to play a major (and growing) function in the energy space for years to come, and for good reason. Naturally, this doesn’t mean that every company involved in the sector must benefit, but it follows that collecting “toll booth”-type fees for a growing demand is a desirable place to be. ONEOK stands to benefit greatly in the coming years and decades. You have an industry and business that is set up well for the long term. Which brings us to the first opportunity. Low Expectations Despite the clear thesis for long-term growth, investors tend to focus on the short term. It’s the “shiny object syndrome,” whereby it’s easy to see what’s in front of you, but much harder to contemplate the future. If the short term is bleak, so too are investor expectations. With a long-term time horizon, it doesn’t make much sense to have a penchant for what happens next quarter if you expect to hold for the next 10 or 20 years. Indeed, a bleak current outlook, thereby resulting in lowered expectations, could very well provide an opportunity. In September 2014, shares of ONEOK were trading hands above $70 per share. Since that time, commodities in general have declined mightily. ONEOK is reasonably protected from such declines, but the share price has nonetheless seen commensurate “pains” – trading below $36 as of this writing. That’s effectively a 50% price decline. Now, the question you have to ask yourself is this: “Is the business 50% worse off than it was about a year ago?” I would contend that the answer to this question is “no.” In fact, given a higher payout and more demand, I would contend that the long-term prospects could actually be more apparent today. And therein lies the opportunity. When the share price declines much faster than the business’s outlook, you could very well have an opportunity. At the very least, you’re dealing with a situation where investors’ expectations are sufficiently low such that you don’t need a whole lot to go right in order to make a solid investment. If shares were still trading around $70, I wouldn’t be writing this article. The opportunity lies in the short-term uncertainty. As an example, analysts are presently expecting a future dividend payment around $3.30 in five years’ time, along with a dividend yield around 5.8%. Which, incidentally, more or less lines up with the company’s past guidance during the earlier part of this year. A $3.30 future dividend with a 5.8% yield translates to an anticipated share price of about $57. Over the five years, you would expect to collect $15 or so in dividend payments. This adds up to a total expected value of about $72. Against a share price of $70, this simply isn’t intriguing. No one goes around searching for 0.5% annual gains. On the other hand, the same business prospect with a share price around $36 is exceptionally more compelling. In this instance, the total anticipated value would be the same, but your returns would be greatly enhanced. You would expect to see your capital double over a five-year period, equating to annualized returns of nearly 15% per annum. The low expectations, as communicated via a much lower share price, allow for a much improved value proposition. High Dividend Of course, there is no way to guarantee that low expectations turn more “normal.” Just because you have found an opportunity that offers a “low bar” does not mean that the shares must react as you suspect. As such, a secondary factor that can be useful is an above-average dividend yield. Although a cliché, this allows an investor to “get paid as they wait.” I prefer John Neff’s idea of snacking on ” dividend hors d’oeuvres ” as you wait for the main meal, but the concept is a simple one. The future share price is largely unknown. The dividend can play an important role in your overall return. The more cash flow that you receive from dividend payments, the less focus one might have on everyday price fluctuations. Eventually, things more or less work out, but there is no reason why this must occur on your schedule. ONEOK has been not only paying, but also increasing its dividend since the early 2000s. Recently, the company declared a $0.615 quarterly dividend , or $2.46 on an annualized basis. Based on a share price around $36, this represents a “current” yield of about 6.8%. Without any growth in this payout, reinvestment or capital appreciation, this would indicate an annual return of 6% per year. That’s my idea of a “low bar” investment. Five years without any growth whatsoever, and investors could see still reasonable returns. If a bit of growth does formulate, as the company is set up for in the coming years and decades, the opportunity quickly moves from reasonable to quite impressive. Favorable Agreement The current value proposition for ONEOK is simple: There’s a long-term thesis at play that is currently being discounted by short-term concerns. With a dividend yield near 7%, investors don’t need much to go right in order to see double-digit returns. As a baseline, even expecting 15% annual gains is not an outlandish anticipation. However, there is a further opportunity in regard to this security. At present, the proposition is already agreeable in terms of thinking about longer-term returns. Yet, there is a way to enhance this possibility. At the time of writing, there are November 20th $35 Puts for ONEOK with bids around $1.40. Consider this scenario: You like the prospects of ONEOK and the industry, anticipate, say, 15% annualized returns in the face of lowered expectations and are willing to partner with the company at a price around $36. At the moment, you have this ability. Yet, there is an even more favorable, in my view, opportunity. You could sell the November 20th $35 Put. Let’s see what this does. The price surely will change in the coming days and weeks, but let’s keep it simple. Perhaps you can sell the Put option and receive a $120 premium (after fees, per contract). This is the deal: You agree to buy shares of ONEOK at a price of $35 in the next 28 days (or less). We’ll also suppose the option is cash-secured, such that you would need the capital on hand. You agree to keep $3,500 aside in order to purchase shares at price below what you’re already willing to pay. One of two things happens. First, the Put could go unassigned. Keep in mind that the company has a dividend payment in this period, and is announcing earnings, so the share price could be volatile. Nonetheless, it’s conceivable that the shares do not go below $35 and the option is not assigned. In this case, you would receive $120 upfront for having $3,500 on hand to buy something that you’d be happy to own. The return over those 28 days would be about 3.4%, or over 50% on an annualized basis. Granted, in order to actually see this annual result, you would have to keep finding these types of situations each month, but it nonetheless illustrates a spectacular gain in less than a month. Alternatively, you could be assigned the shares. The difference is that your cost basis would now be lower – call it a $1 lower than the strike price, with assignment fees. So, your cost basis would be around $34 for a security that you were happy to own at $36. Your total return expectation moves from about 15% to 16%, as a baseline. The key is being happy to own shares at the current price and for the long term. Naturally, the actual outcomes could be much better or worse. Yet, I would contend that this is a rather favorable agreement. Either you collect a solid premium representing 50%+ returns on an annual basis, or you get to partner with a company at an even lower cost basis (and dividend yield over 7%) in a security that could very well provide outsized gains anyway. If you’re looking for a mid-cap idea with exceptional return possibilities, this security and scenario could certainly be of interest.

Coming Prices For Industry ETFs: Compared By Market-Makers

Summary Behavioral Analysis of the players moving big blocks of securities in and out of $-Billion portfolios provides insights into their expectations for price changes in coming months. Portfolio Managers have delved deeply into the fundamentals urging shifts in capital allocations; now they take actions on their private, unpublished conclusions. These block transactions reveal why. Multi-$Million trades strain market capacity, require temporary capital liquidity facilitation and negotiating help, but are necessary to accomplish significant asset reallocations in big-$ funds. Market-making firms provide that assistance, but only when they can sidestep risks involved by hedge deals intricately designed to transfer exposures to willing (at a price) speculators. Analysis of the prices paid and deal structures involved tell how far coming securities prices are likely to range. Those prospects, good and bad, can be directly compared. This is a Behavioral Analysis of Informed Expectations It follows a rational examination of what experienced, well-informed, highly-motivated professionals normally do, acting in their own best interests. It pits knowledgeable judgments of probable risks during bounded time periods against likely rewards of price changes, both up and down. It involves the skillful arbitrage of contracts demanding specific performances under defined circumstances. Ones traded in regulated markets for derivative securities, usually involving operational and/or financial leverage. The skill sets required for successful practice of these arts are not quickly or easily learned. The conduct of required practices are not widely allowed or casually granted. It makes good economic sense to contract-out the capabilities involved to those high up on the learning curve and reliability scale. It requires, from all parties involved, trust, but verification. What results is a communal judgment about the likely boundaries of price change during defined periods of future time. Those judgments get hammered out in markets between buyers and sellers of risk and of reward. The questions being answered are no longer “Why” buy or sell the subject, but “What Price” makes sense to pay or receive. All involved have their views; the associated hedge agreements translate possibilities into enforceable realities. We simply translate the realities into specific price ranges. Then the risk and benefit possibilities can be compared on common footings. A history of what has followed prior similar implied forecasts may provide further qualitative flavor to belief and influence of the forecasts. Certainty is a rare outcome. Subjects of this analysis We look to some 40 ETFs with holdings concentrated in stocks of narrow industry focus. They provide a wide array of interests and an opportunity to see comparisons being made of expectations for price change on common footings. Please see Figure 1. Figure 1 (click to enlarge) source: Yahoo Finance Market liquidity is addressed in the first four columns of Figure 1. What leaps out is the wide variation in the 5th column calculation of how many market days of trading at the average volume of the last 3 months it would take to provide an exit for all of the present holders in each ETF. Very liquid ETFs have a complete turnover potential in less than two weeks, or 10 days. Sometimes this is due to relatively small investor interest in the ETF’s focus, like the iShares PHLX SOX Semiconductor Sector Index ETF (NASDAQ: SOXX ), where less than a half $ billion of capital has been committed. Despite current disenchantment with its holdings of semiconductor stocks, speculative interest remains high enough to keep daily trading activity at ¾ of a million ETF shares, so a 6-day turnover exists. More frequently active investor commitments parallel the trading traffic, like in the iShares U.S. Real Estate ETF ( IYR) or the Market Vectors Gold Miners ETF ( GDX). They each provide the ease of exit present in SOXX. The potential problem for some ETFs is the roach motel syndrome, where it is easy to get in but may be costly to get out under time pressure. This seems to be a prevalent problem for most of the Power Shares narrow industry focus ETFs where triple-digit days to turnover are common. A normal trading year contains 252 days. The trade-spread cost to trade these ETFs is typically in single basis points of hundredths of a percent. That is in the same region of a $7 commission on a $10,000 trade ticket. Price-earnings ratios for these subjects range from 11 times earnings to 35-38-41 times. Coal’s economic problem of being between the rock of vast quantities of cheap to extract natural gas, and the hard place of ecological purgatory has put the Market Vectors Coal ETF ( KOL) in the bad-boy corner. At the other extreme, REITS and Internet system operation have drawn investor attention, sometimes with disregard for fundamental earnings support. Dividend yield attraction exists for income investors in some of these ETFs. Alerian MLP sources provide two with yields of 7-8%. A number of commodity/materials ETFs tempt the either desperate or unwary with yields of 3-6% recent payments most likely not to have a continuing future. Should that happen, the market may make it apparent that the “dividends” were really an advance form of return of capital. Where behavioral analysis contributes Investor preferences among these ETFs during the past year are indicated in the last two data columns of Figure 1. They are calculated from their price range experiences in that period, shown in the prior two columns. The PowerShares DB Oil Fund (NYSEARCA: DBO ), fluctuated the most, by 134% low to high, but the travel was from High to Low. That path also accompanied the Global X Uranium ETF ( URA), KOL, the SPDR S&P Oil & Gas Equipment & Services ETF ( XES), the Market Vectors Steel ETF ( SLX), and the Market Vectors Gold Miners ETF ( GDX). In the opposite direction we see the First Trust Internet ETF (NYSEARCA: FDN ) and the PowerShares NASDAQ Internet Shares (NASDAQ: PNQI ), both near the top of a YTD double. From a portfolio management viewpoint, what matters more is where holdings are priced now, compared with where their prices may go in coming months. Prices are, after all, what determine the progress of wealth-building, and are what can be a source of expenditure provision as an alternative to interest or dividend income. Ultimately price changes are the principal portfolio performance score-keeping agent. Where prices are now, in comparison to where they have been provides perspective as to what may be coming next. If prices are high in their past year’s range, for them to go higher means that their surroundings must also increase. If price is low relative to prior year scope, a price increase represents recovery, when and if it happens. As you think about the security’s environment, does it seem likely in coming months to be one of stability, of increase, or of possible decline? How would such change be likely to impact the security under consideration? First there is a need to be aware of what has recently been going on. The measure for that is the 52-week Range Index. The 52 week RI tells what proportion of the price range of the last 52 weeks is below the present price. A strong, rising investment likely will have a large part of its past-year price range under where it is now. Something above 50, the mid-point of the range is likely, all the way up into the 90’s. At the top of its year’s experience the 52wRI will be 100. At the bottom the 52wRI will be zero. For the materials ETFs mentioned above [DBO, URA, KOL, XES, SLX, and GDX] the big question is whether 2016 will see a turnaround, just continued limbo, or even worse news. The YTD winners’ questions are “will they continue to outclass their peers, forging ahead?” or “have they finally over-done it and are due for profit-taking-induced retrenchments?”. All the 52wRI can do is provide perspective. A look to the future requires a forecast. With a forecast, expressed in terms of prospective price changes, both up and down, a forecast Range Index, 4cRI or just RI, gives a sense of the balance between upcoming reward and risk. The historical 52wRI can’t do much more than frame the past, a reference that may produce poor guidance. Knowledgeable forecasting is what behavioral analysis of the actions of large investment organizations, dealing with the professional market-making community, can do. The process of making possible changes of focus for sizable chunks of capital produces the careful thinking of likely coming prices that lies behind such forecasts. Hedging-implied price range forecasts Figure 2 tells what the professional hedging activities of the market-makers imply for price range extremes of the symbols of Figure 1, but in a different row sequence (explanation to follow). Columns 2 through 5 are forecast or current data, the remaining columns are historical records of market behavior subsequent to prior instances of RI forecasts like those of the present. Figure 2 (click to enlarge) A lot of information is contained here, much of potential importance. Some study is deserved. Exactly the same evaluation process is used to derive the price range forecasts in columns 2 and 3 for all the Indexes and ETFs, regardless of leverage or inversion. Column 7’s values are what determine the specifics of columns 6 and 8-15. Each security’s row may present quite different prior conditions from other rows, but that is what is needed in order to make meaningful comparisons between the ETFs today for their appropriate potential future actions. Column 7 tells what balance exists between the prospects for upside price change and downside price change in the forecasts of columns 2 and 3 relative to column 4. The Range Index numbers in column 7 tells of the whole price range between each row of columns 2 and 3, what percentage lies between column 3 and 4. What part of the forecast price range is below the current market quote. That proportion is used to identify similar prior forecasts made in the past 5 years’ market days, counted in column 12. Those prior forecasts produce the histories displayed in the remaining columns. Of most basic interest to all investment considerations is the tradeoff between RISK and REWARD. Column 5 calculates the reward prospect as the upside percentage price change limit of column 2 above column 4. Proper appraisal of RISK requires recognition that it is not a static condition, but is of variable threat, depending on its surroundings. When the risk tree falls in an empty forest of a portfolio not containing that holding, you have no hearing of it, no concern. It is only the period when the subject security is in the portfolio that there is a risk exposure. So we look at each subject security’s price drawdown experiences during prior periods of similar Range Index holdings. And we look for the worst (most extreme) drawdowns, because that is when investors are most likely to accept a loss by selling out, rather than holding on for a recovery and for the higher price objective that induced the investment originally. Columns 5 and 6 are side by side not of an accident. While not the only consideration in investing, this is an important place to start when making comparisons between alternative investment choices. To that end, a picture comparison of these Index and ETF current Risk~Reward tradeoffs is instructive. Please see Figure 3. Figure 3 (used with permission) In this map the dotted diagonal line marks the points where upside price change Prospect (green horizontal scale) equals typical maximum price drawdown Experiences (red vertical scale). Of considerable interest is that the subjects all tend to cluster loosely about that watershed. This strongly suggests that the overall market environment is neither dangerously overpriced or strongly depressed in price. If SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) were on this map, it would be just to the right of and adjacent to [11]. In general, up and to the left are bad risk~return tradeoffs, and down and to the right are the more attractive ones. ETFs in the green area have reward-to-risk ratios of at least 5:1. The poorest Return~Risk tradeoffs are in [16] the SPDR S&P Capital Markets ETF ( KCE), and [24] the SPDR S&P Bank ETF ( KBE). The better ones are [2] the iPath DJ-UBS Livestock Total Return Sub-Index ETN ( COW), [8] the ALPS Alerian MLP ETF ( AMLP), and [18] the iShares U.S. Home Construction ETF ( ITB), the JPMorgan Alerian MLP Index ETN ( AMJ), and the SPDR Biotech ETF ( XBI). Still, there are other considerations that may, or should, influence investors’ preferences in adjusting portfolio holdings. Looking back at figure 2, there are conditions that may disrupt the organized notions drawn from Figure 3. Column 8 tells what proportion of the prior similar forecasts persevered in recovering from those worst-case drawdowns, and for the resolute holder turned into profitable outcomes, often reaching their targeted price objectives. Batting averages or ODDS of 7 out of 8 and 9 out of 10 are quite possible to accomplish by active investors. Column 10 tells how large the PAYOFFS were, not only of the recoveries, but including the losses. And those gains, in comparison with the forecast promises of column 5 offer a measure of the credibility of the forecast. There will be circumstances where credibility will be low and recovery odds worse than 50-50. When such conditions appear pervasive, cash is a low-risk temporary investment, sometimes the treasured resource. Most of the time there are prospective investment candidates that have odds of profitable outcomes of at least 6 or 7 out of 8 (above 75%) over a forecast horizon of 3 months. Several of these will have attractive combinations of prospective payoffs and credible ratios based on achieved payoffs. To sort these out Figure 2 has segregated its content rows by the Win Odds column into greater than and less than 75% and provided a blue subtotal of the 19 passing that screen. Those 19 have been further ranked by a figure of merit shown in column 15 that considers odds, payoffs, credibility and frequency of presence. Beyond Risk and Reward, Odds and Payoffs are critical considerations in the timely selection of portfolio asset adjustments. For these 37 industry-focus ETF candidates Figure 4 provides a comparative map. Its dimensions follow the same desirability parameters as in the Reward~Risk map of Figure 3, up and left is poorer, down and right is better. Figure 4 (used with permission) If Figure 4 leaves you with the impression that this may not be an exciting time to invest in ETFs with a narrow industry focus, you would be right. Maybe not a bad time, but perhaps a time to look elsewhere to see if these choices are the best available now. To have a different set of alternatives to consider, we offer up today’s list of the top 20 equities we evaluate daily from the 2,500+ issues that provide a sufficient source of information to produce price range forecasts. Compare Figure 5 with figure 4: Figure 5 (used with permission) The ETFs in Figure 4 have histories of price recovery from drawdowns that span the horizontal Win Odds scale from 80 of 100 to 100 of 100, and extend into the left space of 75 of 100 that is the top of the vertical Payoffs scale. In that space, [12] of Figure 4 is SPY, as a market-average reference comparison. It has Win odds of only 71 of 100, so is artificially bounded on the left, and has achieved payoffs of +2.2%, so it is positioned about as far up the payoff scale as is possible. Few of the industry-focus ETFs have achieved payoffs at their present Range Index forecasts of much above +5%, suggesting modest attraction at this point in time, despite their high win odds in several cases. But are there any better alternatives? That is why we included Figure 5, the Odds & Payoffs map of today’s top20 analysis list. A number of specific single stocks and one ETF have produced gains in excess of +10%, with Win Odds comparable to those in Figure 4. So there are alternatives to narrow-focus ETFs. The other blue comparison rows of Figure 2 provide perspectives in terms of an average of all the 37 narrow-industry focus ETFs above. An average of the day’s 20 best-ranked stocks and ETFs, from an overall population of over 2,500 securities, using an odds-weighted Risk~Reward scale, are also presented. This kind of comparing between alternative investments is what often distinguishes the experienced investor from the neophyte. There are so many intriguing possible stories of investment bonanzas that it may be difficult to keep focus. And for the newbie investor it may be a daunting challenge to decide on what combination of attributes may be most important. An advantage of the behavioral analysis approach is that price prospects suggested by fundamental and competitive analysis are being vetted by experienced, well-informed market professionals on both sides of the trade. Conclusion At present there is no outstanding sector ETF choice for asset allocation emphasis or the commitment of new capital. Neither is there grave concern for dangerous outcome from present sector positions. The Biotech Industry is well represented by ETFs including the XBI, the Market Vectors Biotech ETF (NYSEARCA: BBH ), and the First Trust NYSE Arca Biotech ETF (NYSEARCA: FBT ). But of these, at current forecast levels, a +5% to +7% achievement is what may be expected. Prior forecast gestation periods of 5-7 weeks imply annual compounding of 9 or 10 times to generate CAGRs of +50% to +80%, which are far from revolting. Still, among specific equities there are many that have produced better than the blue-row 20 best-odds average CAGR of +97%. So while ETFs suggest a more protected reward~risk tradeoff via the diversity of a fund, there are at least 20 alternative stocks averaging ratios of 1.9 times as much prospective return as their prior-forecast actual experienced price drawdown risks. The same measure for the 19 current best ranked industry ETFs is only 1.5 to 1 (Figure 2, column 14, blue summary row). The Win Odds recovery rate from their -4.3% typical maximum drawdowns at 85 is almost competitive with the 20 individual equities 88 Win Odds recoveries from a modestly higher -5.8% bad experience average, but their +11% achieved payoffs are triple those of the ETFs. It all depends on which dimensions of the investing challenge are most important to the investor. At present it appears from a Behavioral Analysis comparison that there are favorable choices that can be made. Even the market proxy alternative SPY does not display reason for serious defensive concerns.

Is Budget Deal A Boon/Bane? Look At These Sector ETFs

After crossing swords for months, President Barrack Obama finally signed the two-year government budget deal early this week that lifted the debt ceiling to March 2017 and increased spending limits through September 2017. The deal was also passed by the House and the Senate last week. The accord has given the American economy a shot in the arm, thrusting it to the positive direction for the first time since 2010, as per Bloomberg. In the past five years, fiscal policies at local, state and federal governments dragged down economic growth. Now, Washington will spend more money over the next two years, boosting fiscal conditions and securing modest GDP expansion. As a result, a number of sectors will be the direct beneficiaries of the deal while one space will face a blow. Below we highlight them in detail and spell out their related ETFs: Sectors to Win Defense The new government budget deal is a huge boon to the defense stocks and ETFs. This is especially true as the deal vowed to raise $50 billion in spending for fiscal 2016 and $30 billion for fiscal 2017, split evenly between defense and non-defense programs. Additionally, it will provide an additional $32 billion in overseas contingency operations, divided equally between military and the State Department. Investors could play this sector with any of the three options available in the space – iShares U.S. Aerospace & Defense ETF (NYSEARCA: ITA ) , Power Shares Aerospace & Defense Portfolio (NYSEARCA: PPA ) and SPDR S&P Aerospace & Defense ETF (NYSEARCA: XAR ) . The trio gained over 2% on solid third-quarter earnings and the budget agreement in the past week. The three products currently have a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook. Social Security Disability The new budget deal averts a looming shortfall in the social security disability trust fund, which was about to run out of money next year and threatened to cut disability benefits by a big 20%. The pact will reallocate funds from the Social Security retirement program to the disability insurance program. In addition, another 0.57% will be taken from the 12.4% payroll tax for the next three years, starting 2016. With these amendments, the disability insurance program will remain solvent until 2022. Currently, there is only one pure play product – Barclays Return on Disability ETN (NYSEARCA: RODI ) – targeting this niche segment. This ETN offers exposure to the companies that have attracted and serve people with disabilities along with their friends and family as customers and employees. The fund follows the Return on Disability US LargeCap ETN Total Return USD Index, which measures the 100 largest companies that are outperforming in the disability market. The note charges 45 bps in annual fees from investors and trades in a meager volume of about 100 shares. The ETN added 0.3% in the past one week. Healthcare Like the social security disability benefits, the accord also prevents an unprecedented 52% rise in the premiums for Medicare Part B, the healthcare program that covers the costs for doctor’s visits, outpatient services and durable medical equipment, slated for next year. The new budget deal calls for just a 14% increase in Medicare premiums to a rate of $120 per month plus a $3 per month surcharge instead of an increase from a rate of $104.90 to $159.30. Notably, about 16 million Americans receive the Medicare Part B benefits. Though a number of healthcare ETFs will likely gain from the prevention of big hikes in Medicare premiums, iShares U.S. Healthcare Providers ETF (NYSEARCA: IHF ) is much more directly related to this industry. The ETF follows the Dow Jones U.S. Select Healthcare Providers Index with exposure to companies that provide health insurance, diagnostics and specialized treatment. In total, the fund holds 52 securities in its basket. United Health takes the top spot in the basket with 12.9% share while the other firms hold no more than 8.7% of assets. The fund has amassed $844.7 million in its asset base while volume is moderate at about 151,000 shares per day on average. It charges 43 bps in annual fees from investors and gained 1.5% over the past week. The product has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with a Medium risk outlook. Energy Sector: A Bane While the above three sectors will benefit the most from the deal, the problems of the energy sector will aggravate. This is because the budget has the provision to sell 58 million barrels of oil from the U.S. emergency reserves, which hold more than 695 million barrels of crude, over the six years starting in fiscal 2018 in order to help funding. The sale will raise $5 billion in federal revenue during the same period. In particular, the sale of oil started with 5 million per barrel annually and then ramped up to 10 million by 2025. Further, the deal allows the Department of Energy (DOE) to sell another 25-40 million barrels of oil or $2 billion from the reserve in case of any oil disruption emergency. The move, if taken, will crush the already battered energy sector, especially its oil production corner, which is struggling as it is, with declining profit margins and high debt loads. That being said, the SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA: XOP ) , iShares U.S. Oil & Gas Exploration & Production ETF (NYSEARCA: IEO ) and PowerShares Dynamic Energy Exploration & Production ETF (NYSEARCA: PXE ) will be impacted the most by the budget deal. The trio has a Zacks ETF Rank of 4 or ‘Sell’ rating with a High risk outlook. However, the product gained in double digits over the past week on a rise in oil prices. Original post .