SET Portfolio Update June 2016

| June 28, 2016

portfolio update


It’s like driving past a terrible wreck.  This past Friday morning, we couldn’t help but take a look at what was happening with the iShares MSCI United Kingdom ETF (EWU)

On Thursday, it closed at $16.55.  Friday, it closed at $14.57.

iShares MSCI United Kingdom ETF

But here’s some context for you.  Less than six months ago, on January 20th, EWU hit a low of $13.94.  Talking heads on the telly clearly love the drama.  We’re not immune from a good thriller either, but when it comes to investing in ETFs, we’ll go with data.  From the perspective of stock prices, things on the UK markets were uglier in January than in June.

Enough of the Brexit and UK uncertainties. On to other adventures… 

Halfway Through 2016 And What Do We See? 

It’s actually what we don’t see.  We don’t see the economic growth.  And this missing element was apparent before Thursday night’s UK thriller. 

As we’ve mentioned before, the performance of the stock market and the performance of the economy are rarely joined at the hip.

Last month, we told you why we were positioning our ETF portfolio with defense in mind.  Our cautious approach has paid off.  It’s also a reminder that playing it safe doesn’t mean folding the tent and giving up on gains.

One of the lovable aspects of Wall Street is the collection of sayings, mantras, and pearls of wisdom.

“Don’t fight the Fed” is one of them.  (Closely related to this… “The trend is your friend.”)

We are also reminded of this observation from John Bogle, founder of The Vanguard Group…

“Your success in investing will depend, in part, on your character and guts, and in part on your ability to realize at the height of ebullience and the depth of despair alike, that this too shall pass.”

Are we at a point of despair as far as economic growth goes?

When Federal Reserve board Chair Janet Yellen told us a few weeks ago that interest rates were going nowhere, and the Federal Open Market Committee was keeping its federal-funds rate target at 0.25-0.5%, nobody was surprised.

But here’s what caught our attention.  The committee has retreated on previously announced plans to nudge up rates over the next two years.

What’s happening and why?  The Fed sees slow economic growth ahead because of lower productivity here in the U.S. and uncertainties overseas.  Low interest rates are the natural byproduct of slow economic growth.

This shadowy outlook leads us to the challenge of identifying areas of the economy that will buck the trend and outperform.

Two sectors where we’re not inclined to invest in anytime soon are financials and financial services.  Each has been through a rugged six months.  At the close of the market on Friday, year-to-date performance for financials was off 7.34% and the financial services sector was down 10.34%.

Despite all the Brexit noise, we’re keeping a watchful eye on something else.

The elephant in the room is health care. This is essentially two sectors in one… businesses that provide healthcare equipment and services, and companies in the pharmaceutical and biotech business.

We have one holding in the equipment sector, our iShares Medical Devices ETF.  It’s been doing well, up 14% since our buy recommendation.

Our interest in the sector is sparked by the opportunity of uncertainty. But there is too much uncertainty right now for us to be willing to turn our backs on our cautious outlook.

On the plus side, offsetting the uncertainty of public policy and political rhetoric is solid financial performance.  Balance sheets are by and large healthy.  The demand for more and more health services isn’t about to vanish, and neither are the innovations that propel businesses.

On the downside, there’s volatility, increased bureaucratic oversight and regulation, and possible pricing caps.

How does this tug of war play out?  Credible arguments can be made for a number of outcomes.  For now, we’ll let the drama play out on another stage and protect our subscribers’ investments. 


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

We recommended the ETF at $25.90 earlier this month.  Today, it closed at $24.15.

When commodity prices fell back following the Brexit vote, largely stemming from amplified concerns of a global economic slowdown, natural gas followed suit.

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 $15.61.

It’s the same story as natural gas prices… concerns about demand given economic uncertainties.

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

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

We recommended the ETF at $35.87 in April.  Today, it closed at $36.21.

For the short term, as the financial and financial services suffer because of low interest rates, QABA will be held back.  But we continue to believe small banks will weather the storm better than larger banks.

The price target is $46.00.  Buy up to $38.00.

. . . . Aberdeen Chile Fund $CH  BUY

We recommended the ETF at $5.73 earlier this year.  Today, it closed at $5.89.

There’s been a setback because of falling commodity prices.  Copper, Chile’s primary export, was particularly hard hit on Friday.  The combination of slower manufacturing in China and the strong U.S. dollar is keeping a lid on prices.

The price target is $11.00.  Buy up to $6.25. 

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

We recommended the ETF at $29.64 earlier this year.  Today, it closed at $32.50.

Despite low interest rates, the rate of new home sale growth slowed slightly in May.  But the market remains strong, a bright spot in the generally sluggish economy.

The price target is $50.00.  Continue holding. 

. . . . iShares Medical Devices ETF $IHI  HOLD

As we mentioned in our mid-year outlook, the medical devices sector is the one corner of the shadowy health care sector where we feel comfortable.

We recommended the ETF at $117.25.  Today, it closed at $130.85. 

The price target is $140.00. Continue holding.

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

We recommended the ETF at $40.51.  Today, it closed at $51.22.

This ETF has earned its position as the ultimate safe harbor in the market storm.  On Friday, when the down took it’s 610 point dive, XLU closed up.

The price target of $42.50 has been exceeded. Continue holding. 

Action to Take

  • None at this time

Category: SET Portfolio Updates

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