How to Outsmart a Choppy, Range-bound Market

From January 26 to February 9, the S&P 500 lost as much as 11.84%. This initial freefall was followed by a rollercoaster-like performance.

The large February drop (340 S&P points) expanded the trading range and complicated the search for low-risk S&P 500 entries (see S&P 500 analysis).

Hunt for a Better Risk/Reward Setup

In fact, there was no low-risk setup for any of the major indexes. However, the February 11 Profit Radar Report featured the chart below and identified this low-risk sector trade:

The Utility Select Sector SPDR ETF (XLU) dropped as much as 17.22% since its November high. As of Thursday, XLU was deeply oversold while testing a long-term support line. On Friday, XLU jumped 2.10%. The only thing missing as a bullish RSI-35 divergence at the low. The risk/reward for XLU looks more appealing. We will leg into XLU is it drops below 48.40.”

Barron’s rates iSPYETF as “trader with a good track record” and Investor’s Business Daily says: “When Simon says, the market listens.” Find out why Barron’s and IBD endorse Simon Maierhofer’s Profit Radar Report.

We anticipated the S&P 500 to rally from the February 9 low, but ultimately relapse. XLU was a lower-risk vehicle to have ‘skin in the game’ just in case stocks continued higher than expected (runaway insurance).

XLU dropped below the 48.40 buy limit on February 12. Although the ride hasn’t been smooth, XLU never dropped below our entry price (allowing us to ‘play with house money’), and is currently up 3.88% (compared to a 1.30% loss for the S&P 500).

Next resistance is above 50.50, support around 49. Failure to move above 50.50 or a relapse below 49 would be a warning signal.

Although the Profit Radar Report’s analysis is centered on the S&P 500, there are times when it makes sense to think outside the box and go where opportunity takes you.

Continued updates are available via the Profit Radar Report.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s profile of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013, 17.59% in 2014, and 24.52% in 2015.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

 

3 Important Things to Know When Investing in ETFs

ETFs are cost effective, tax efficient, liquid and can be traded throughout the day (unlike mutual funds). Most investors are familiar with the appealing ETF basics, but here are a few tricks and traps the average Joe investor may not know.

ETFs (Exchange Traded Funds) have been called the best thing since sliced bread.

The ETF universe has ballooned to well over 1,300 ETFs, controlling nearly $2 trillion in assets. The $15 trillion mutual fund industry is less than thrilled about the splash ETFs made in their investment pool.

ETFs are popular for a reason, but this article addresses not only the ETF basics, it also reveals some tricks and traps the average investor may not be aware of.

ETF Basics

Know what’s under the hood: The initial success of broad market ETFs, like the SPDR S&P 500 ETF (NYSEArca: SPY), sparked much innovation and the need for additional ETF structures.

Today there are five different ETF structures, each with its own pros, cons, and tax treatment. In fact, in recognition of this diversity, what used to be called the ETF universe, has become the ETP (Exchange Traded Product) universe.

A detailed look at the different structures along with advantages and disadvantages is available here: Basic ETF Structures Explained

Diversification:  Most ETPs provide exposure to a basket of stocks or bonds. Most often that basket is linked to an index.

Some ETPs screen their holdings based on certain filters, are actively managed or designed to track the performance of commodities, currencies are other assets classes.

Cost & Tax Advantages: There are exceptions, as you would expect in any group numbering over 1,300, but ETPs in general are more cost and tax effective. The cheapest S&P 500 ETFs costs only 0.05% per year.

Liquidity: ETPs sell like stocks and can be instantly (assuming the market is open and you have a brokerage account) bought or sold with the click of a button. Mutual funds are redeemed (time delay is at least a few hours), often at a price that has yet to be determined.

ETF Tricks & Traps

Like every other investment, ETPs don’t come with a built in protection against moronic decisions.

The emergence of short, leveraged and leveraged short ETPs actually makes it easier for investors to lose (and make) money even faster. The epitome of a two-edged sword.

Due to the structure of short and leveraged ETPs, the odds of landing a profitable trade are not always 50/50.

Some leveraged (short) ETPs have a tendency to enhance returns in a down market, others in an up market. Sideways markets may deliver unpredictable returns, even returns unrelated to the underlying benchmark.

For example, the popular but notoriously declining iPath S&P 500 Short-term VIX ETN (NYSEArca: VXX) has been a trap for many investors.

The first chart below plots VXX against its benchmark, the VIX. I’ve inserted a 50-day SMA to show the basic trend. VXX has been down even though VIX has been trading predominantly sideways.

The second chart plots VelocityShares Daily Inverse VIX ETN (NYSEArca: XIV) against its benchmark, which is also the VIX.

You probably get the point. The choice of ETPs can influence the odds of winning beyond the normal odds dealt by the market.

More details about the subtle, but important idiosyncrasies of ETPs is available here: The Must Know Basics of Short & Leveraged ETFs

Know Thy ETF Universe

With over 1,300 ETPs comes the freedom of choice. The following criteria should be considered when on the prowl for the best ETP:

  • Cost
  • Trading volume
  • Performance track record
  • Structure and tax advantages/disadvantages
  • Tracking method (sampling or replication) and accuracy

ETPs also offer exposure to asset classes and currencies that, in the past, used to be off limits for the average investor. So take a stroll through the ETP universe. You may find asset class ‘galaxies’ that may harmonize with your portfolio on planet Earth.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF to get actionable ETF trade ideas delivered for free.

Basic ETF (or ETP) Structures Explained

Much to the dismay of many mutual funds, ETFs have taken the financial world by storm. In recognition of the incredible variety available, ETFs are now considered Exchange Traded Products (ETP). Here’s a list of them along with advantages and disadvantages.

There are more than 1,300 ETFs with nearly $2 trillion in assets.

But not every ETF (Exchange Traded Fund) is created equal. In fact, the term Exchange Traded Products (ETPs) better describes what used to be called the ETF universe.

There are five different ETP structures. Although the difference in ETP structures may be subtle, they can affect overall returns, tax treatment and credit risk.

Here is a cheat sheet of the five ETP structures along with advantages and disadvantages:

Open-end funds

The vast majority of ETFs are structured as open-end funds, which is one of two types of ETF registered investment companies regulated under the 1940 Act. The open-end structure is generally used by ETFs whose primary objective is to provide exposure to stock and bond asset classes.

Dividends and interest received by an open-end ETF can be immediately reinvested, and derivatives, portfolio sampling, and securities lending can be utilized in the portfolio. Open-end ETFs that meet certain Internal Revenue Service standards are treated for tax purposes as pass-through entities (known as regulated investment companies), with income and capital gains distributed to shareholders and taxed at the shareholder level.

Advantages

  • Investors receive protections under the 1940 Act, as well as the 1933 and 1934 Acts.
  • Funds avoid cash drag through immediate reinvestment of dividends.
  • Funds can use derivatives, sample an index, and engage in securities lending.
  • Investors can access nearly any equity or fixed income sector or subsector.

Disadvantage

  • Funds have a limited ability to access alternative asset classes such as commodities or currencies.

Unit investment trusts (UITs)

A UIT is an investment company that holds a generally static investment portfolio and is used by a small number of ETFs that track broad asset classes. With no boards of directors or investment advisors managing the portfolio, UITs have less investment flexibility than open-end ETFs. For example, UITs do not reinvest dividends and instead hold them until they are paid to shareholders, usually quarterly. During rising markets, this can create a disadvantage known as cash drag.

In addition, UITs are not permitted to lend securities in the portfolios or use derivatives, and they must fully replicate the indexes they track. However, like an open-end fund, UITs are registered investment companies regulated under the 1940 Act and therefore offer the same level of investor protections as open-end funds. UIT ETFs that meet certain Internal Revenue Service standards are treated for tax purposes as pass-through entities (known as regulated investment companies), with income and capital gains distributed to shareholders and taxed at the shareholder level.

Advantages

  • Investors receive protections under the 1940 Act, as well as the 1933 and 1934 Acts.
  • A UIT is highly transparent because it fully replicates its underlying index.
  • A UIT has no investment manager to pay, which helps keep costs low.

Disadvantages

  • Since a UIT has no investment advisor, it is less flexible than open-end funds. (For example, it cannot use derivatives or lend securities.)
  • A UIT has a limited ability to access alternative asset classes such as commodities or currencies.
  • There is potential for higher tracking error due to cash drag.

Grantor Trusts

Grantor trusts are typically used by ETFs that invest solely in physical commodities or currencies. Grantor trusts are required to hold a fixed portfolio, as opposed to a variable one, making the structure ideally suited for physical commodities and currencies.

Because the nature of the underlying investments prevents grantor trusts from being classified as investment companies under the 1940 Act, grantor trust ETFs are regulated only by the 1933 and 1934 Acts. Therefore, while grantor trust ETFs must disclose regular financial information, they provide none of the additional investor protections laid out in the 1940 Act. Grantor trust ETFs also do not qualify for regulation by the Commodity Futures Trading Commission (CFTC), unlike partnership ETFs (described below).

ETFs that use the grantor trust structure consider investors direct shareholders in the underlying basket of investments. As such, investors are taxed as if they directly owned the underlying assets.

Advantages

  • Grantor trust ETFs are highly transparent because of the simple, fixed nature of the portfolio.
  • They have the ability to invest in alternative investments such as commodities and currencies.

Disadvantage

  • They are not regulated by the 1940 Act or the CFTC.

Exchange-traded notes (ETNs)

ETNs are issued as prepaid forward contracts that, like a bond, contractually promise to pay a specified sum—in this case, the return of a given index (minus the issuer’s expenses). ETNs are different from other ETF structures because they don’t hold any underlying assets. Instead, they represent a promise by the issuer (usually a bank) to pay a return. Investors in ETNs become unsecured creditors of the issuing bank and therefore need to take into account an additional risk—credit risk—when they are considering the purchase of an ETN.

ETNs have a preset maturity date, and they usually do not pay out an annual coupon or dividend. They are also frequently created for niche markets, sectors, or strategies, including commodities, currencies, and certain emerging markets. Since ETNs are simply a promise to pay a specified return, tracking error is eliminated once costs are taken into account.

ETNs are debt instruments, not investment companies. They are not regulated under the 1940 Act and lack many of the investor protections provided under that act’s framework.

Under current tax law, ETNs typically enjoy favorable tax treatment as prepaid forward contracts. Any accrued interest or dividends, and any appreciation in the value of the index, are generally rolled into the value of the ETN, so investors typically don’t incur taxes on them until the time of sale. However, it’s important to know your client’s tax bracket and investment time horizon, especially in light of some of the uncertainties surrounding the future taxation of ETNs.

Advantages

  • ETNs provide access to niche markets that could be difficult to track with a traditional 1940 Act ETF structure.
  • Tracking error is eliminated after factoring in costs. There is the potential for favorable tax treatment.

Disadvantages

  • There is the potential for significant credit risk.
  • There is the potential for concentration risk since ETNs tend to invest in very narrow market segments.
  • Investors in ETNs receive no protections under the 1940 Act.

Partnerships

Among the least common types of ETFs, partnership ETFs are unincorporated business entities—such as a statutory trusts or limited partnerships—that elect to be taxed as a partnership. Partnership ETFs are considered publicly traded partnerships because they trade on a stock exchange. They generally are treated as partnerships for tax purposes, which avoids double taxation at both the entity and the investor level. The income and realized gains and losses from a partnership ETF flow through directly to investors, who then pay taxes on their share. However, depending on what they invest in, partnership ETFs could be taxed as corporations.

Partnership ETFs can accommodate many different types of investments, including futures that provide exposure to certain types of commodities that are hard to store physically. For example, while grantor trust ETFs can be used to invest in gold or silver (commodities that don’t deteriorate over time and can be stored at relatively low cost), partnership ETFs generally track commodities such as natural gas and oil (which are difficult to store and lose their value over time). So instead of holding these items physically, partnership ETFs access these products through the futures market.

Partnership ETFs are usually regulated as commodity pools by the CFTC. While regulations by the CFTC include disclosure and reporting requirements, they are not as stringent as those required by the Securities and Exchange Commission under the 1940 Act.

Advantages

  • Partnership ETFs provide access to a broader range of investments beyond equities and fixed income.
  • Commodity-based futures ETFs are regulated by the CFTC and the National Futures Association and must comply with the Commodity Exchange Act.

Disadvantages

  • Investors in partnership ETFs must file a complicated Schedule K-1 tax form each year.
  • Investors in partnership ETFs receive no protections under the 1940 Act.

Information courtesy of the Vanguard Group.

Simon Maierhofer is the publisher of the Profit Radar ReportThe Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF to get actionable ETF trade ideas delivered for free.

10 Hottest ETFs For December

Hot or not? How can you buy ‘hot’ ETFs without ending up with a hot potato? Obviously there’s no foolproof way to eliminate losers before they spoil your portfolio, but here is a list of the 10 hottest ETF screened according to ‘hot potato risk.’

How can you buy a hot ETF without ending up with a hot potato?

Although there’s no foolproof protection (don’t shoot the messenger) against “today it’s hot, tomorrow it’s not” portfolio decisions, there are things that can be done to separate the wheat from the chaff.

Here’s a look at some of the hottest Exchange Traded Products (ETPs; include ETFs and ETNs) around. The list at the bottom of this article shows which ETPs have the potential to remain (or turn) hot throughout December.

VelocityShares Daily Inverse VIX Short-term ETN (XIV)

This is the best performing non-leveraged ETP over the past three years, up 546.23%. XIV is the inverse counterpart of the popular iPath S&P 500 VIX Futures ETN (NYSEArca: VXX).

Unlike VXX, XIV actually benefits from contango at times of low volatility. Over time this benefit of contango averages about 0.25% per day (click here for an explanation of contango).

VIX seasonality is pointing lower for another few weeks, but things may get a bit rocky for the VIX and XIV thereafter. XIV is a quick mover, but buying XIV at times of significant VIX spikes tends to deliver nice returns.

iShares Russell 2000 ETF (IWM)

IWM is by no means a top performer going into December, however, starting in mid-December, small cap stocks often outperform large cap stocks.

A low-risk strategy to profit from this potential small cap outperformance is this pair trade. Buy IWM and short the S&P 500 ETF (SPY).

VelocityShares 3x Inverse Crude Oil ETN (DWTI)

DWTI is the hottest ETP over the past four weeks, up 31.53%. Crude oil prices just sliced to the lowest level since May 2010.

Although trade is stretched to the down side, and – like a rubber band – oil may rally at any given time, the crude oil chart does not yet display the classic signs of a major low.

It appears that new lows are still ahead, but milking DWTI at this stage may be a bit greedy. Hey, but there’s nothing wrong with enjoying the trip to the pump for a change.

ProShares UltraShort Silver (ZSL) – iShares Silver Trust (SLV)

The 2x leveraged short silver ETF (ZSL) is up 32.20% over the past three months, but ZSL has ‘hot potato risk’ written all over it.

Silver futures painted a massive green reversal candle on Monday. Now may be the time to trade in ZSL for the iShares Silver Trust (NYSEArca: SLV).

iShares Nasdaq Biotechnology ETF (IBB)

Biotechnology is the best performing sector year to date, up 31.42%. Investing in biotech is always a bit of a gamble, but the trend for IBB is up as long as support at 300 and 275-280 holds.

Coffee ETFs

A look at coffee prices may explain why your Starbucks venti, half caff, one-pump, skinny, soy latte with extra whipped cream costs more than 5 bugs.

It also explains why two coffee ETPs made it into this year’s list of top 5 hottest non-leveraged ETFs:

  • iPath DJ-UBS Coffee ETN (NYSEArca: JO) +61.34%
  • iPath Pure Beta Coffee ETN (CAFE) +56.84%

Will JO and CAFE continue to caffeinate portfolios or is there risk of a sugar crash? A combination of chart analysis and cycles suggests this low-risk strategy: Buy JO and/or CAFE on a 10% pullback.

‘Big Picture’ ETFs

Drum roll please! Here are the top three ETFs of the past 5 years:

  • ProShares Ultra Consumer Services ETF (NYSEArca: UCC) +493.70%
  • Direxion Daily MidCap Bull 3x ETF (NYSEArca: MIDU) +458.23%
  • ProShares UltraPro S&P 500 ETF (NYSEArca: UPRO) +455.29%

Nine of the top 10 best performing ETFs are leveraged U.S. equity ETFs.

This raises the mother of all ‘hot or not’ questions: Are U.S. stocks a hot potato? Is this massive bull market (almost) over?

Ask ten different analysts and you’ll probably get ten different answers. When analyzing stocks, I find it best to leave my ego at home and simply look at the facts.

Obviously different analysts look at different facts (many of which are just biases). I like to look at the indicator that correctly foretold the 1987, 2000 and 2007 tops. The same indicator continued to point higher from 2009 until today (click here for more details on this indicator I call ‘secret sauce‘).

In a nutshell, the stock market is showing signs of aging, but a major S&P 500 or Dow Jones top appears still months away. There’s still time to hold some potatoes before they get too hot. However, most investors should consider using non-leveraged vehicles like the S&P 500 SPDR (NYSEArca: SPY) and Dow Jones Diamond (NYSEArca: DIA).

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

3 Perils of Chasing Red Hot ETFs

Few things are worse than watching an ETF that was on your mental buying list – but not in your actual portfolio – go up … and up … and up. It’s always tempting to chase performance, but here are three risks and one solution.

The seven most notorious words of the financial industry: “Past performance does not guarantee future results.”

In other words, anyone buying a hero and ending up with a zero has no one to blame but him or herself.

+65%, +55%, +38% are the digits of the three hottest ETFs right now (based on 3-month return). Does it make sense to chase those ETFs?

The trend is your friend until it bends, so chasing ETF hot shots isn’t always a terrible idea, but being aware of three common pitfalls may reduce embarrassment at the water cooler investment chat.

Peril #1: Leverage

Leveraged ETFs usually crowd out any ‘Top 10” performance list. Leveraged ETFs are ETFs on steroids. Currently 9 out of the 10 best performing ETFs are leveraged or leveraged short ETFs.

Leverage can be a blessing and a curse. It’s important to know that leveraged ETFs -like carnival mirrors – always skew the real condition of the underlying sector. For more details on the dangers and delights of leveraged ETFs click here: The Must Know Basics of Short and Leveraged ETFs

Weeding out all leveraged (short) ETFs and zooming in on ‘pure ETFs’ will offer a more accurate picture of the best performing sectors and their ETFs.

Peril #2: FOMO

FOMO (fear of missing out) is a powerful motivator, but it’s a terrible reason to buy. If the sole reason for buying a hot ETF is fear of missing out on more gains, it’s probably a bad idea. FOMO is not an investment strategy.

Strong momentum, persuasive fundamentals, or yet unreached up side targets are better reasons to buy an ETF that’s already trading well above its low.

Peril #3: Performance Chasing & Trend Reversals

Here’s a real life example of the perils of performance chasing.

Gold was one of the hottest assets in Q1 2014, but one of the worst performers in Q3.

The SPDR Gold Shares ETF (NYSEArca: GLD) was up as much as 15.13% in March. It’s fallen as much as 17.96% since. The VelocityShares 3x Long Gold ETN (NYSEArca: UGLD) was up as much as 50.69%, followed by a 46.95% drop.

Burnt trend chasers still hear the ringing of those chewed out Wall Street phrases in their ears:

“Past performance is no guarantee of future results”

“The trend is your friend until it bends”

The key question is how you can tell how long a trend is to last.

The gold chart features an observation made by the Profit Radar Report on March 12, three trading days before gold rolled over: “Gold has now reached our initial up side target at 1,365. RSI is lagging price and traders are quite bullish on gold. We are looking to short around 1,400.”

Bullish sentiment and chart resistance capped gold’s up side in March (blue circle).

It appears that bearish sentiment and chart support ended gold’s slide on November 7.

Having a pulse on investor sentiment and technical support/resistance levels does not guarantee winning trades, but it generally prevents against joining the performance chase at the worst of times.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Crude Oil and Energy SPDR ETF Gushing to Major Support

Crude oil prices have been gushing lower since their June high, down 20%. The same is true for the Energy Select Sector SPDR ETF. Those two charts show that the odds for a tradeable bottom are now above average.

Crude oil has plummeted from $107 to $84.

Are falling oil prices good for the economy or are they a reflection of a weak economy?

It’s a chicken or egg kind of question.

The media is certainly at a loss, as those actual headlines from 2011 and 2012 illustrate:

  • AP: “Higher oil prices threaten global economy” – March 10, 2011
  • Reuters: “Oil prices rise on economic optimism” – January 10, 2012
  • AP: “Higher oil prices offset worries about global economic recovery” – May 25, 2011

A simple look at a comparison chart (S&P 500 vs XLE) shows that oil and stock prices can, and often will move independently from each other.

Regardless on how oil prices affect the overall stock market, oil prices are at important support.

Crude Oil Support

The crude oil chart shows trade being repelled by red trend line resistance in August 2013 and June 2014.

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After a 21% drop from high to low, oil is sitting right above important support around 84.

Energy Select Sector SPDR Support

The Energy Select Sector SPDR ETF (NYSEArca: XLE) matched crude oils gush lower, down 20% from its high.

The 81 level offered important support in December 2007, March/April 2011 and February 2014 (blue dots).

Considering the steepness of the recent selloff and proximity to important support, there’s a good chance oil and XLE will find a tradable bottom somewhere around current trade.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Wal-Mart of ETF Providers Offers Most Bang for The Buck

 

Wal-Mart is known for rigorous pricing, swallowing up market share and frustrating competition. The Wal-Mart of the ETF market place is going about business almost the same way, but this Wal-mart can’t offer everything.

The ETF market place offers many exotic choices, such as a Global Carbon ETF, Forensic Accounting ETF, and IPO ETF, but that’s not what makes ETFs attractive and efficient.

Yes, BMW may build an electric car, but their flagship product is the ultimate driving machine.

The flagship ETF product is a plain and simple index ETF. Who builds the best index ETF?

2013 Index ETF Inflows

Since 2010, Vanguards index ETF market share has grown from 15 to 20% while iShares (owned by BlackRock) and State Street bemoan small losses (datasource: Bloomberg).

In 2013 Vanguard ETFs grew by $51 billion, receiving 32 cents of every dollar invested.

Index ETF Fees

The average Vanguard ETF has an expense ratio of 0.14%, compared with 0.35% for State Street’s SPDRs and 0.39% for iShares’ ETFs.

This is not a true apples to apples fee comparison, as State Street and iShares offer some more specialized ETFs with higher fees.

What about the most popular S&P 500 ETF?

The bellwether SPDR S&P 500 ETF (NYSEArca: SPY) has an expense ratio of 0.11%. The iShares Core S&P 500 ETF (NYSEArca: IVV) comes in at 0.07%, while the Vanguard S&P 500 ETF (NYSEArca: VOO) has a price tag of 0.05%.

ETF Holdings

As per its patent, Vanguard is able to pool mutual fund and ETF assets and issue different shares (such as ETF).

As a result, Vanguard ETFs provide a more pure representation of the underlying index. On average, iShares ETF hold 312 securities, State Street ETFs 308, and Vanguard ETFs 1,171.

Unlike iShares and BlackRock, Vanguard is not a publicly traded company and doesn’t have to worry about pleasing Wall Street.

It All Doesn’t Matter, if …

… you buy at the wrong time.

Even if you have the best-in-class product, you will still lose money if you buy at the wrong time. Neither State Street, nor iShares or Vanguard will tell you when to buy (chances are any advisor will always tell you now is the best time to buy).

When is the right time to buy? Here are a few tips.

Buy Low, Sell High – How to Spot the Best S&P 500 Entry Points

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (stocks, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. We are accountable for our work, because we track every recommendation (see track record below).

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

 

Contrarian Investment Idea: China ETF Looks so Bad, is it a Buy?

Just a couple of years ago China was considered the world’s growth engine, but not anymore. Pretty much every piece of news related to China’s economy is negative and Chinese stocks are close to their 2008 low. Is this a contrarian investment opportunity?

A few days ago, a reporter from Investor’s Business Daily asked me to write about an international investment opportunity. I focused predominantly on the action of the S&P 500, Nasdaq-100, Dow Jones, gold, silver, euro, and 30-year Treasuries, so it took a bit of research to come up with an international trade set up.

The opportunity that stood out most is a highly contrarian one and won’t win you a popularity contest at your next cocktail party: China.

Barron’s July 2, front cover categorized the Chinese economy and stock market as a “falling star.”

Printed in bold black font on the same front cover is this warning: “The Chinese economy is slowing and is likely to slow a lot more. Get ready for a hard landing.”

The Contrarian Opportunity

Contrarian investors know that forecasts of “hard landings” often turn into some of the best buying opportunities (remember how everyone felt about U.S. stocks just a few months ago). Contrarian investing means going against the crowd and requires nerves of steel and often patience, but even technical indicators suggest that a buying opportunity in China is approaching.

The Shanghai Composite Index is only about 15% above its 2008 low (@ 1,679) and currently sits atop important support, right around 2000. Unfortunately, U.S. investors can’t invest directly in the Shanghai Composite Index, but don’t worry, there’s an ETF for that.

The iShares FTSE China 25 Index Fund ETF (FXI) provides exposure to the 25 largest and most liquid Chinese companies. FXI seems to be forming a giant 5-year triangle with well-defined support and resistance.

How to Trade FXI

A break out in Q4 2012 is quite possible. Key support is currently at 31.70 and rising. Key resistance is currently at 36.30 and falling. The key support level lets you know exactly if and when you’re wrong (a break below 31.70) and makes this trade attractive from a risk management perspective.

There are two ways to trade this constellation:

1) Buy on weakness and as close to 31.50 as possible with a stop-loss just below 31.50 (more aggressive option).

2) Buy once prices break above 36.50 with a stop-loss just below 36.50 (more conservative option).

Hopefully, by the time the next cocktail party rolls around it’ll be more fashionable to talk about Chinese investments and how you got in before anyone else did.
Simon Maierhofer shares his market analysis and points out high probability, low risk buy/sell recommendations via the Profit Radar Report. Click here for a free trial to Simon’s Profit Radar Report.

The Stock Market Has Spoken – Even Government’s Biggest Bailout Success is a Failure

Fact and fiction are often separated by nothing more than a thin line. Some consider GM as a government bailout success story and the performance of the Consumer Discretionary Select Sector SPDR (XLY) seems to suggest that this claim is legit. What does the final authority – the stock market – say?

General Motors is once again number one in car sales worldwide. For this and other reasons GM is often heralded as the biggest success story of government bailouts. Is that really so?

According to a September 23, 2010 Wall Street Journal article, the U.S. must sell GM shares at $133.78 to fully recoup the $49.5 billion it spent to rescue the auto maker. The United States owns about one third of General Motors.

Shares of General Motors are currently trading at $22.50, 35% below its IPO price. GM saw a 41% profit decline in the last quarter. Production for the Chevy Volt, anointed to be the car maker’s financial savior a couple years ago, is being suspended due to poor sales.

One Step Forward and Two Steps Back

In an effort to make GM cars more attractive, GM is making it easier to own its product. How? With “attractive” loans, otherwise known as subprime loans.

According to an auto report published by Standard & Poor’s, the weighted average FICO scores for GM owners is only 579. 78% of all GM loans are for more than 5-years and the average loan-to-value on new cars is 110% (the average loan-to-value on used cars is 127%).

Haven’t we seen this movie before? Isn’t that what contributed to GM’s bankruptcy in 2009? Isn’t that what caused the real estate collapse in 2005?

Consumer Anomalies

The Consumer Discretionary Select Sector SPDR (XLY) is trading at an all-time high while consumer confidence shows little confidence.

It’s ironic that the consumer discretionary sector trades at all-time highs even though consumers didn’t get bailed out. The recipient of literally tons of bailout money on the other hand, the financial sector represented by the Financial Select Sector SPDR (XLF), trades 60% below its all-time high.

What’s the moral of the story?

1) The government’s definition of success is likely different from the common sense definition of success.

2) The government can give money to the financial sector. Financial conglomerates turn around and buy consumer discretionary stocks and even though American’s are hurting it looks like consumers are buying. It’s a win/win scenario for everyone but the consumer.
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With Stocks at Multi-Year Highs – QE3 May Be Overkill

The Federal Reserve is the most powerful financial institution in the world. It manipulates the world’s stock market seemingly at will, yet there are reasons to conclude QE3 is farther away than many expect.

Skunks are best known for their ability to spray a liquid with a strong, foul odor. The smell, a combination likened to rotten eggs, garlic, and burnt rubber, can be detected by the human nose up to a mile downwind. Smell aside, the spray can cause irritation and even temporary blindness.

The skunks reputation is well known, that’s why it roams around by day in the open and fears neither dog nor man. Skunks rarely ever have to use their “weapon” since just the threat of getting sprayed keeps predators at a safe distance.

The Fed, a unique financial animal, possesses a similar defense mechanism – it’s called QE .Like skunks, the Fed has established a reputation to use it when needed. This keeps “enemies” – such as market pessimists, realists, and particularly short sellers – at a safe distance. The Federal Reserve doesn’t necessarliy have to spray QE to get the effect of QE, just the threat is often enough.

Why Change a Winning Strategy?

Ben Bernanke is well aware of this fact. Essentially since the end of QE2 (June 2011), which resulted in a 20% stock market meltdown, Bernanke has been telling investors that the “Fed is ready to spray more QE when needed.” That’s been more than enough to keep stocks from collapsing. In fact, just the threat of spraying QE3 has lifted the S&P 500 Index (SPY) to a 51-month high and the Nasdaq-100 (QQQ) to a 12 1/2 year high.

Another animal analogy comes to mind. As long as you keep the carrot dangling the rabbit keeps running.

Why would Bernanke change a winning strategy (that of bluffing to spray or dangling the carrot) if stocks are already trading near multi-year highs? What, the economy is bad you say? The Fed’s past actions tell us that the economy may not be Bernanke’s primary concern. It seems easier to downplay millions of Americans being out of work than big losses of financial institutions on Wall Street.

QE Side Effects

Fortunately for the free market, there’s one asset class that keeps Bernanke and his inkjets honest. Oil. QE is inflationary. Like water in the bathtub that buoys rubber duckies along with all other toys, QE inflates the price of all assets (aside from those that have an inverse relationship).

Higher stock, gold, and silver prices are good for investors, but higher oil prices suffucate the economy. Oil around $110 a barrel coincided with stock market tops in April 2011 and March 2012. Oil at $85 in Apirl 2012 was enough to contribute to a 17% decline in the S&P 500.

With crude oil already trading near $100 a barrel, QE3 now or in the near future could be a double-edge sword with little net benefit for stocks and the economy (see chart below).

More About Skunks and QE

Skunks are reluctant to use their weapon, as they carry just enough of the chemical for five or six uses. The Fed has sprayed outright QE twice since 2008. This doesn’t include covert maneuvers like Operation Twist, currency swaps or low interest rates. How many more sprays of QE-like substances is the Federal Reserve good for? It seems to be running out of bullets.

Ironically, skunks have poor vision. This makes it harder for the stinky little mammal to decide who and when to spray. Bernanke’s “eye sight” (ability to foresee side effects of his actions) is similarly poor (click here for Bernanke’s bloopers). The Federal Reserve failed to see the 2008 financial debacle, or what’s been dubbed the “perfect storm,” brewing and has been playing catch up ever since.

An ounce of prevention is worth more than a pound of cure, but that’s a tough concept to grasp for a blind financial “animal” with a potent weapon.

 

 
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