SET Portfolio Update September 2016

| September 20, 2016

Time To Take Profits

We are selling two positions…

  • SPDR S&P Homebuilders (XHB)
  • First Trust NASDAQ ABA Community Bank Index Fund (QABA)

Each one of these ETFs shares a common cause for concern.  Each is sensitive to rising interest rates, and even though the drumbeat of rising rates has now been pounding away for months, we believe today is a prudent time to take profits and sell.

Let’s look at each ETF and examine the factors that drive our decision.

SPDR S&P Homebuilders (XHB) – SELL

For the best part of the summer, this ETF held up well compared to other interest rate sensitive ETFs such as utilities, real estate, and consumer stocks with high yields.

But lately, there have been signs of weakness…

SPDR S&P Homebuilders

The declines that began earlier this month are troubling.  Homebuilding is a cyclical business.  Recent increases in the Consumer Price Index, coupled with a slowdown in retail sales, do not foreshadow a rebound.

Some of the major homebuilding stocks have missed the party.  Toll Brothers, one of the ETF’s major holdings, has been trading sideways.

The calendar is now stacked against us.  Homebuilders are moving into a slow time of the year.

This is an opportune time to capture profits and exit this position with a 14% profit.

First Trust NASDAQ ABA Community Bank Index Fund (QABA) – SELL

The same interest rate sensitivities that have been problematic for the homebuilding business should be an early Christmas present for banks.

When rates go up, so do bank profits… so the common wisdom goes.

But the fallout from the Wells Fargo scandal, and jitters about European banks triggered by the recent tumble in the Deutsche Bank stock price, is casting a shadow across the entire banking sector.

What we’re seeing is not rational… the small regional and community banks that our ETF tracks are not directly impacted by the shenanigans of Wells Fargo or the uncertain valuations of European banks.

We could even make a case for disgruntled Wells Fargo customers leaving their big bank for smaller ones.

But instead of making a case we’ll make money.  We’ll sell the First Trust NASDAQ ABA Community Bank Index Fund for a 14% return in five months.

Fueling our belief that a downtrend lies ahead…

We’ve noticed that the ETF’s top holdings, Signature Bank (SBNY), East West Bancorp Inc. (EWBC), and PacWest Bancorp (PACW), all hit highs September 2nd and haven’t done much since.

This makes us think that the sector may give up more ground.  Momentum has cooled, and so has our appetite to hold this ETF.


. . . . Vanguard High Dividend Yield ETF $VYM – HOLD

This is a long-term hold, and a source of income.

We recommended the ETF earlier this month at $73.47.  Today, it closed at $71.28. 

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

The ETF is performing as it should… holding up well against the volatility on emerging markets.

We recommended the ETF earlier this month at $54.02.  Today, it closed at $53.24.

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

The tech sector stumbled a few weeks ago and has recovered its stride.

We recommended the ETF earlier this summer at $106.29.  Today, it closed at $118.36.

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

We recommended the ETF in June at $25.90.  Today, it closed at $24.90.

Recent natural gas price wobbles are not a major concern.  We are still anticipating price increases 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 $16.49.

The uncertainties surrounding crude prices have not gone away, and as a result, the ETF has given up some ground.  Long-term, we expect solid performance.

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

. . . . Aberdeen Chile Fund $CH – HOLD

We recommended the ETF at $5.73 earlier this year.  Today, it closed at $6.06.

Earlier this month, the ETF suspended its managed distribution policy.  This takes effect following the distribution scheduled to be paid September 28.

Look for the board to authorize the buyback of shares, a move designed to narrow the gap between the ETFs trading price and its net asset value.

The price target is $11.00. Continue holding. 

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

We recommended the ETF at $41.36.  Today, it closed at $49.66.

Continue holding.

Action to Take

  • Sell SPDR S&P Homebuilders (XHB)
  • Sell First Trust NASDAQ Community Bank Index Fund (QABA)

Category: SET Portfolio Updates

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