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3 ETFs And Sectors To Watch

The Institute for Supply Chain Management recently reported that manufacturing crossed into expansion mode and the Federal Reserve Bank of Philadelphia stated that its general economic index measuring manufacturing rose more than 230% from the previous month to a reading of 14.1. 

This is great news beacuse it indicates that businesses are opening their wallets and starting to spend.  One major reason behind this is that businesses implemented lean measures at the beginning of the year which included trimming inventories and supplies and as these inventories started to deplete, they needed to be replenished.  To further add to this, many prominent economists expect the nation’s GDP to grow in the remainder of the year (there will be still be a net contraction for the total year).  Should this trend continue, it could benefit base metals or the PowerShares DB Base Metals (DBB) ETF.

The second place to look is energy.  As emerging markets continue to grow, they will demand more energy and the key will be exploring for and producing this energy.  The iShares Dow Jones U.S. Oil & Gas Exploration & Production (IEO) ETF is an attractive place to look because it will benefit from a recovering economy and the stocks it holds are entirely focused on the exploration and production of oil and natural gas.  This gives the fund more leverage to oil and gas prices, though with less revenue diversification than oil and gas themed funds with sizeable holdings in large integrated oil companies.

A third area to look at is precious metals, particularly silver.  Silver offers many of the same characteristics as gold, in that it offers protection from inflation and a falling US Dollar.  However, what makes the metal attractive is its role and importance in industrials.  Silver is often used in electronics and batteries and therefore, is directly influenced by base metals.  Additionally, most silver is mined as a by-product of other metals such as lead, zinc and copper.  Thus, the supply and demand influences on these metals indirectly influence silver.   As production cutbacks in the output of base metals continues, the global economy continues to show signs of recovery, and investor appetite for risk grows, supply pressures will be placed on the shiny metal.  The iShares Silver Trust (SLV) is a good way to access the silver market.

Innovation in ETFs waning? Far from it!

Some analysts and reporters question the need for additional ETFs and the value that new ETFs bring to investors. For what it’s worth, we heard the same commentary when the universe of ETFs listed on US exchanges stood at 200, 400 and 600 and still had gaping asset coverage holes.

ETFs listed on US exchanges numbered 755 at the end of August, up eight from the end of July according to StateStreet.  There are currently in the neighborhood of 500 ETFs in registration at the SEC, awaiting approvals for issuance.

A closer look at what’s been rolled out since the end of July shows that, in fact, important innovation is still very much alive and well in the ETF space.

Investors are better equipped than they were 60 days ago to make choices about how to protect against inflation risks – thanks to the launch of a short-term TIPS ETF by Pimco (STPZ).  The only two ETFs that have preceded it to market each carry short, intermediate and long maturity TIPS in a single ETF having a considerably longer average duration than the new Pimco fund.

Harry Dent?  Relative strength models?  All rolled up in a tactically-oriented, “actively”-managed ETF?  There is now (DENT), as we discussed yesterday.

US equities markets have been carved up into sector and industry ETFs by no less than a half-dozen index families-turned-ETFs.  And international developed markets equities have three index family alternatives for gaining sector-based exposure.  Since May, though, Emerging Global Advisors has been rolling out emerging markets sector and industry ETFs, with their latest launch made in the past month (EFN).

Investors in physical gold now have the capability to opt for an ETF which holds gold in Swiss vaults rather than in the UK via SGOL.  This also represents a second ETF carrying physical gold carrying a considerably smaller market footprint than the massive $33 billion GLD.

Many regard today’s “frontier” markets as the emerging markets plays of five or ten years ago. Van Eck rolled out the first ETF (VNM) designed to provide exposure to equities domiciled in Vietnam.

ProShares recently rolled out an ETF designed to track – on a daily return basis – the un-leveraged inverse of the Barclays Capital 20+ Year US Treasury Index (TBF).  In the face of the arms race to 2x and now 3x leveraged products, it’s great to see relatively simple, un-leveraged inverse tools still hitting the street.  These allow investors to participate in the continuation of price trends, even when they turn negative – all within a consistent (and un-leveraged) risk management framework.

The first regional ETF to cover Nordic countries (GXF), by Global X, provides equity exposure to Sweden, Denmark, Norway and Finland.

For the vast majority of investment applications and across all major asset classes, investors are discovering the compelling advantages that ETFs bring to the table for providing access to exposure.  And it’s only getting better.

New Actively-Managed ETF

AdvisorShares recently launched its first ETF product, the actively-managed DENT Tactical ETF (NYSE:  DENT).  This “ETF of ETFs” uses Harry Dent’s relative strength models to specify entries and exits.  Dent’s analysis is rooted in the Dent Method – an approach which uses changes in demographics to forecast future economic trends. AdvisorShares states that the fund seeks to achieve its investment objective of long-term capital growth “by identifying, through proprietary economic and demographic analysis, the overall trend of the U.S. and global economies and how consumer spending patterns may change based on this analysis.  Then, the portfolio manager implements an investment strategy using ETFs across several asset classes such as domestic and foreign equities, domestic or foreign fixed income or commodities”.

Actively-managed ETFs do not attempt to track an index like most other ETFs but instead, attempt to generate excess returns based on individual manager performance.  While the passive versus active management debate rages on, there is certainly no lack of demand for actively-managed products.  And by using the ETF structure, active managers can reduce the operational costs of managing the fund, thereby providing lower costs to investors when compared to actively-managed mutual funds.  In addition, these ETFs can offer greater tax efficiency and easier accessibility than mutual funds (a number of which are only offered through certain brokers whereas ETFs can be bought and sold through just about any broker).

One potential downside to actively-managed ETFs is that the transparency they provide (holdings must be reported daily) could minimize any advantage that the fund manager believes they have.  Outside investors can track the moves of the fund, potentially front-running entries and exits.  However, many in the industry aren’t overly concerned that this will have a meaningful impact on the performance of actively-managed ETFs and could be perceived as an advantage in an environment where investors are demanding greater transparency.

AdvisorShares has also filed preliminary prospectuses to launch two additional actively-managed ETFs – the WCM/BNY Mellon Focused Growth ADR ETF and Legacy Long/Short ETF.

UNG Announces It Will Issue New Shares

As commodity ETFs have grown in popularity and have been heavily scrutinized by the Commodities Futures Trading Commission (CFTC), many commodity-tracking ETFs stopped issuing new shares in fear that position limits would soon be imposed. 

One of the first to do so, despite having approval from the SEC to issue new shares, was the United States Natural Gas Fund (UNG).  As a result and with continued investor demand, this ETF was trading at more than a 16% premium from the value of its underlying index.  However, most recently UNG has announced that it will go against what it previously said and will issue new shares starting September 28.

In a recent filing with the SEC, UNG said it would resume offerings of creation baskets in blocks of 100,000 units.  This announcement came after the CME announced that it will enforce existing position limits on the New York Mercantile Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade and the COMEX division of NYMEX.   

This could potentially benefit UNG in that it is possible that the resumption of creation activity by the fund could reduce or remove any premium over NAV that is currently present.  From an investor’s perspective, it could be good news for those who want to gain easy exposure to natural gas without paying a hefty premium.  For those who paid a substanital premium for shares of UNG and held onto them, the announcement could be detrimental.

Me and My Renminbi

One ingredient, one very, very big ingredient, has been lacking in the menu of emerging market currency plays: the dollar de-coupling of the only true 800 pound gorilla of emerging market central banks.

At long last, though, that may be changing. The Financial Times reports that later this month China will, for the first time, sell renminbi-denominated bonds to offshore investors.

While the size of the sale is rather modest at Rmb 6 billion (approx. $879 million), it represents an important first step in the integration of China’s sovereign debt and currency with global capital markets – characterized as a move to “improve the international status” of the renminbi.

FT reported that the Chinese government has taken several steps to promote the use of the renminbi in settlement of trade with China. But a viable presence in international sovereign debt markets is also regarded as critical to providing foreign investors the means by which to hold renminbi-denominated Chinese debt.

Globally, once recovery-related demand kicks in and government stimulus spending tabs come up for payment, inflation and very lumpy government debt issuance and money-printing appetites are likely to emerge – on a scale without historical precedent – particularly in developed markets such as the U.S.

That environment will have risk managers and investors leaning heavily on physical assets and currencies to manage risk and to benefit from massive macro trends. Emerging market currencies, given the far more robust growth rates likely to be experienced by emerging economies, are poised to play an increasingly important role.

Given the aggressive historical pegging of the renminbi to the dollar, it’s not surprising that neither product market nor investors have yet rushed to stake out positions in the currency. In fact, at present there are only two renminbi currency Exchange-Traded Products (ETPs – an exchange traded fund, or ETF, and an exchange-traded note, or ETN).

For emerging market currencies that are able to float more freely there’s already an abundance of choices – covering individual currencies of Brazil, India, Russia, Mexico and South Africa as well as emerging markets currency baskets that also include Turkey, Poland, Chile, Taiwan, South Korea and Israel.

And now the stage is set – at least for the first Act – in what promises to be an important rise to prominence of the renminbi and, for investors, the evolution of an asset segment that may prove to be quite important down the road. Keep your ear to the ground on related news and keep your eye on CYB and CNY for evidence of a more dynamic renminbi /  dollar performance than what we’ve seen in the longstanding pegged currency regime – it’ll take some time to really get rolling.