SET Portfolio Update August 2016

The Road Ahead For Sector ETFs

Naturally, we’re always looking for sectors where there is a good case to be made for above average returns and growing share prices.

This usually means we need three factors to come together in a perfect storm.

One is market sentiment that’s specific toward a sector.  We are looking for value, underpriced ETFs where the mood of the market is sour, and where we can pick up a bargain.  This year, the market loves utilities and energy stocks, but up until recently, it’s been punishing financials.

This summer, there’s been a back forth ebb and flow in the market between sectors, a lot of which has been driven by algorithmic trading.

The second factor is overall broad market sentiment.  We saw steep and sudden declines in Q1, then a less steep but equally sudden decline in Q2 with Brexit.  This decline was brief.  In retrospect, it was a hiccup.

But memories are short and if you look back to mid-June, you’ll remember that quite a few financial cages were rattled by the U.K.’s decision to leave the EU.

The third factor we look at is the ability of the ETF to grow, for the stocks it tracks to increase in value.  The best way to get a feel for this is to look at profits, which impact the stock price, and to look at how the company actually makes money, which obviously impacts profits.

These three factors are why our Vanguard Information Technology ETF $VGT has gained 11% since we recommended it in early July.

Productivity:  Dull But Important

A big impact on profits is productivity.  One of the reasons why profits have been under pressure for the past few years is a decline in productivity.  On the surface, this might seem strange.  After all, companies have made massive investments in tech to eliminate jobs and streamline efficiencies.

But look at the numbers and you’ll see that labor productivity continues to skid.

Earlier this month, The Bureau of Labor Statistics reported that productivity fell 0.5% (on an annualized basis) for the most recent quarter.  Economists and investors were looking for a 0.4% gain.

It was the third quarter in a row for falling labor productivity.

We can’t expect one stat to tell anything close to a complete story.  But it’s a clear sign that things aren’t exactly rock solid with the economy.  The ability of companies to raise prices, increase margins, and grow profitability is under attack.

The Bottom Line For ETF Investors

The caution we bring to work with us every day remains strong.  We will continue to look for bargains in what we believe are undervalued sectors.

PORTFOLIO UPDATES

. . . . iShares Edge MSCI Minimum Volatility Emerging Mkts $EEMV – BUY

The ebb and flow of global growth concerns, coupled with worries about productivity, have tempered the performance of our most recent acquisition.

We recommended the ETF earlier this month at $54.02.  Today, it closed at $53.59.

The price target is $76.00. Buy up to $59.00.

. . . . Vanguard Information Technology ETF $VGT – HOLD 

We recommended the ETF earlier this summer at $106.29.  Today, it closed at $118.24. 

This ETF has cooled off a bit over the past few weeks after a strong run-up.  We expect continued steady performance.

. . . . First Trust ISE-Revere Natural Gas Index Fund $FCG – BUY

We recommended the ETF in June at $25.90.  Today, it closed at $26.33.

Futures prices are rising.  Supplies are tightening.  We’re looking forward to solid growth through the fall and winter.

The price target is $37.00.  Buy up to $26.70.

. . . . PowerShares S&P SmallCap Energy ETF $PSCE – BUY

We recommended the ETF at $15.66 in May.  Today, it closed at $17.40.

As crude prices continue to stabilize and show signs of holding steady above the $50 a barrel mark, we should see the smaller operators tracked by this ETF do well.

The price target is $27.00.  Buy up to $17.50.

. . . .  First Trust NASDAQ Community Bank Index Fund $QABA – HOLD

We recommended the ETF at $35.87 in April.  Today, it closed at $40.92.

We’re locked in a holding pattern.  Once again, we see QABA is being held back because of low interest rates.  We will be patient.

The price target is $46.00. 

. . . . Aberdeen Chile Fund $CH – HOLD

We recommended the ETF at $5.73 earlier this year.  Today, it closed at $6.44.

We are pleased with the growth.  Because roughly a quarter of the ETF tracks Chilean financial stocks, we anticipate a global uptick in interest rates to add additional momentum to performance.

And CH continues to reward investors with a 10.43% yield.

The price target is $11.00. 

. . . . SPDR S&P Homebuilders $XHB – HOLD

We recommended the ETF at $29.64 earlier this year.  Today, it closed at $36.54.

After a sluggish May, the rate of new home sale growth surged in June to its highest level in eight years.

The price target is $50.00.  Continue holding. 

. . . . Utilities Select Sector SPDR $XLU – HOLD

We recommended the ETF at $41.36.  Today, it closed at $50.18.

The price target of $50.00 has been exceeded. Continue holding.  We believe this ETF will continue to make gains, and is a solid defensive position in a market that can easily return to choppiness in the months ahead.

Action to Take

• None at this time.

Category: SET Portfolio Updates