SET Portfolio Update May 2017

Bruised…

But Not Staggering

We’re always happy to take credit for a job well done, and shine some positive light on the performance of sector ETFs in our portfolio.

There’s the iShares MSCI Switzerland Capped ETF (EWL), up 11% since March, and the PowerShares Dividend Achievers ETF (PFM), up 10% since November.

But the portfolio door swings both ways.  So, in the spirit of accountability, we want to let you know what’s happening with the problem child in our portfolio, the SPDR S&P Metals & Mining ETF (XME).

It’s been roughed up since our buy recommendation in April.

It dropped to $28.01 earlier this month, and has rebounded.  Today, XME closed at $29.35, a solid comeback.

We are not interested in selling this ETF.  We see the recent softness as an opportunity to acquire more shares.  The reasons why we made this investment have not changed.

But there are obviously pressures pushing prices down, and many of them are made in China.

Earlier this month, the Chinese stock markets in Shanghai and Shenzhen went on a five-day losing streak.  The CSI300 Index retreated 4% from its April highs.

This is as quantifiable a signal as we can get of what’s happening behind the scenes in China, where economic facts are rarely displayed with the clarity investors need.

The issue is growth.  There is a fresh wave of concerns that tighter liquidity and stricter banking regulations will slam the brakes on growth, and this has pounded commodity prices.

It has also caused turbulence with up and down markets. There have been upticks in some iron ore stocks based on the belief that commodities will not be under fire for long, and that demand in China could rebound.

Is this likely?  It is tough to tell, given the absence of accurate financial data.  What we do know is that the credit system is China is bouncing off the walls.

It’s no surprise that controls have been lame.  The expansion of credit has grown without necessary safeguards.

Why are China’s challenges hurting our SPDR S&P Metals & Mining ETF?

The inescapable laws of supply and demand.  China’s supplies of raw materials now exceed demand.  Economic output is skidding, the country is cutting back on imports, and prices are falling.  Iron ore prices have suffered an especially tough hit.

The stocks tracked by the Metals & Mining ETF have lost ground because of this shift in global demand.

Behind The Scenes

When we recommended the ETF, we pointed out that because of price volatility, the top stocks tracked tend to constantly change.  This has indeed been the case.

When we looked at XME the other day, we saw the top holdings were dominated by Coeur Mining (CDE), Hecla Mining (HL), and Royal Gold (RGLD), three gold and silver mining companies.  This reflects the lower prices for steel and aluminum stocks.

What happens next, and what kind of a wait are we in for?

Better times ahead.  We believe that higher steel prices, higher aluminum prices, and stabilizing gold prices will drive improved performance.

It’s tough to tell exactly when we see the ETF price rebound, but we do know this.  As always, economic cycles are at play, and this is not a good time to sell. 

 

Portfolio Update 

. . . . Vanguard FTSE All-World ex-US Index Fund ETF (VEU) – HOLD 

A modest 2% increase since our recommendation two weeks ago. 

. . . . SPDR S&P Metals & Mining ETF (XME) – BUY 

See our update, and why a big part of the problem this ETF suffers from originates in China. 

. . . . iShares MSCI Switzerland Capped ETF (EWL) – HOLD 

The trend is healthy, and the ETF continues to perform well, even with a slight pullback over the past week.  (We found this retreat curious given the outcome of the French elections.)  BREXIT questions continue to be a drag. 

. . . . Vanguard Mid-Cap Index Fund Investor Shares (VIMSX) – HOLD 

The past month has been solid for mid-cap stocks.  Are we in for a correction?  Perhaps, and if so, we’ll ride it out. 

. . . .  SPDR S&P Pharmaceuticals ETF (XPH) – HOLD 

One of the key holdings in our pharma ETF is Valeant (VRX).  It’s not exactly an industry bellwether, but after its Q1 earnings report, it shot up 24%.

We’re not too excited.  Internal accounting had a lot to do with this, not a surge in profits.  The pharma sector is still riddled with uncertainties, but we’re still happy to patiently await a turnaround.

We recommended XPH at $40.09.  Today it closed at $42.41, up 6%.

Hold for even better times ahead.

. . . . Vanguard REIT ETF (VNQ) – BUY 

Why have REITs been soft lately?  A lot of it has to do with skittishness over the future of the mall (The Amazon Effect).  The #1 REIT tracked by the ETF is Simon Property Group (SPG), which has taken a shellacking this year.

We see this ETF as a solid bargain.  It’s on the sale rack, it pays a 4.41% dividend yield, and is ripe for appreciation.

. . . . PowerShares Dividend Achievers (PFM) – HOLD 

Steady performance from the blue ships that drive this ETF.  The top stocks tracked include Microsoft, ExxonMobil, Johnson & Johnson, AT&T, and Wal-Mart.

. . . . First Trust ISE Global Engineering & Construction (FLM) – HOLD 

There’s still no clarity from the federal government on the specifics of funding for infrastructure projects.  But even so, the ETF has been doing well, with a nice uptick over the past few weeks.

Since our recommendation, FLM is up 12%. 

. . . . Vanguard High Dividend Yield ETF (VYM) – HOLD

We’re happy to hold.  The dividend yield is a respectable 2.95%.

. . . . Utilities Select Sector SPDR (XLU) – HOLD

February saw utility stocks surge, and since then, the ETF has been trading in a narrow range.  As always, we’re happy to hold for the long-term.  The dividend yield is 3.25%.

Action to Take

• Move Vanguard REIT ETF (VNQ) from HOLD to BUY.

Category: SET Portfolio Updates