2013 ETF Strategies: 5 Laggards Due To Rebound
Market leaders of the year seldom come back for a repeat performance year after year. And losers eventually turn around due to the "regression to the mean" theory in which extreme moves up or down even out over the long run.
Here is an overview of five ETFs in alphabetical order that our panel of investment strategists is making contrarian bets on. They explain why each of these is due to rebound in the New Year.
1. IQ Global Resources ETF ( GRES ) 2012 return: 7.89% vs. 16.9% for the MSCI World Index.
Adam Patti, CEO of IndexIQ: Recent predictions from commodities analysts with Goldman Sachs and elsewhere of a pending "commodity renaissance" are just one reason we strongly recommend investors consider GRES, the first global resources hedged ETF.
Goldman and others have pointed to a number of factors that would seem to indicate a new commodities "renaissance" in 2013, spurred by improvements in the global economy and increasing demand for natural resources around the world. Complicating matters though is the fact that not all commodities will see their prices lifted by these factors. Some, such as gold, may in fact be headed for a decline. The key for investors looking to add commodities to a portfolio will be to start with the broadest possible basket of equities. That is what GRES delivers, along with an equity hedge designed to dampen volatility.
GRES is the broadest commodities and natural resources ETF in the market, and the only ETF to include exposure to all of the following commodity sub-sectors: livestock, precious metals, grains, food and fiber, energy, industrial metals, timber, water and coal.
GRES is designed to reweight its allocations to individual commodity sectors monthly. The fund is diversified both by sector and geographically (the U.S. is currently the country with the largest weighting, but equities from the U.K., Japan, Australia, Canada and more provide an added layer of diversification).
2. J.P. Morgan Alerian MLP Index ETN ( AMJ )
2012 return: 4.84%
John Graves, editor of "The Retirement Journal" in Ventura, Calif.: Master Limited Partnership ETFs represent the independent oil and gas producers, distributors, pipelines, storage facilities and transshipment companies in America. They are not the majors, nor are they global. The niche of U.S. energy production and distribution is their playground.
The oil and gas market is in revolutionary turmoil that goes far beyond price-to-earnings, price-to-book, or other market valuation metrics. The change is systemic. Supply of the raw material for power generation, agricultural, metal working and plastics feedstock -- natural gas -- has become a tidal wave. It is overwhelming the market's ability to price effectively. The same can be said for crude oil production and its fuel extracts: gasoline, diesel and aviation.Delta ( DAL ) has just bought a fuel refinery in the Midwest to ensure fuel supply, as example.
The third leg of the supply triad, NGLs (natural gas liquids such as propane, butane and ethane), are in such oversupply today that U.S. exports of these gases have reached all-time highs. Venezuela imports more fuel and NGLs than it produces.
Some 1.7 million new jobs, $65 billion in federal and state tax revenues, a 41% decline in crude imports and a massive 450 million tons reduction in greenhouse gas emissions are important points of awareness in this industry. These macros will drive further price increases over time.
The primary driver of MLP ETFs is demand for natural gas, fuels and NGLs, which grow with the U.S. economy. Further export potential awaits federal approvals. The secondary driver is global demand. Natural gas is far cheaper here than in Europe or Asia. This pricing differential will be taken advantage of by capital players. Crude oil cannot be exported from the U.S., yet.
The risk in this world is oversupply, federal intervention (via the Environmental Protection Agency) and U.S. or global recession. The play is less an energy play than a demand play. Remember this distinction.
3. Market Vectors Agribusiness ETF ( MOO )
2012 return: 12.4%
Andre Weisbrod and Keith Moorhouse of STAAR Financial Advisors in Pittsburgh, Pa.: We like MOO for the long haul, regardless of short-term performance. Global demand for food is strong and will increase as long as global populations continue to grow. In 2006, there were 6.7 billion people in the world. By 2050 there will be 9.2 billion. That's 230,000 new people per day. Food demand is expected to double by 2050 according to the Food and Agriculture Organizations of the United Nations, FAO. By 2030 the world will need at least 50% more food, according to United Nations' reports.
Government policies in India have not favored potash applications; rather they have favored nitrogen. India has gone from shipments of about 6.5 million tons to down around 3 million tons. World demand is currently 53 million tons.
India estimates using a nitrogen-to-potash ratio of 10-to-1. That's ten parts nitrogen for one part potash. The optimal ratio for yield is 3-to-1. When India was buying 6.5 million tons, they were at a ratio in the area of 6-to-1. Assuming India returns to needed levels, world demand would rise to between 56 million and 60 million tons.
We believe the demand for potash will rise in the emerging markets, particularly India and China. India has a big malnutrition problem. In anticipation,Potash Corp. of Saskatchewan ( POT ) expects 13 million tons of potash capacity to be added world-wide over the next five years and of that it will produce 5.3 million tons.
Food demand is expected to rise in 2013. Current inventories of fertilizers will be drawn down. This fourth quarter will see more inventory reductions. We expect seed corn prices to trend upward as a result of the historic drought this season in the U.S. Prices could rise 8%. But overall input costs for U.S. farmers are expected to remain relatively flat.
Due to the drought the U.S. corn yield for 2012 is expected to be down over 11%. Corn prices are above their historic trend-line rate of $2.00-$2.50 per bushel and corn prices peaked this past summer. Ethanol demand has been down. And in the current political environment, it is too hard to predict what future ethanol production requirements will come out of Washington.
From a valuation standpoint, MOO is very close to the S&P 500. The S&P 500 has a price-to-earnings ratio of 13. Average P/E for MOO's holdings is 13.51. Potash Corp. of Saskatchewan,The Mosaic Company (MOS), andAgrium (AGU) make up over 20% of assets. We estimate earnings-per-share growth for the top ten holdings in MOO to outpace the market. Current consensus is for earnings growth of 11% for the broad market. We believe that is too high. We think 8-9% growth is more reasonable and put the average growth rate for the top ten holdings of MOO to be 18%-20%.
Overall, conditions should become more positive for the companies that make up MOO. If global growth can be sustained even at slower rates, there is a reasonable rationale for MOO to outperform the S&P 500 in the next few years.
The top-10 holdings, which make up 59.61% of the funds assets, are biased to grain related agribusinesses. Grain prices can swing significantly. Hence the added volatility and the need to balance out the agribusiness allocation with other funds such as IQGlobal Agribusiness Small Cap ETF (CROP).
4. Market Vectors Semiconductor ETF (SMH)
2012 return: 9.4% vs. 17.4% for the S&P 500
Andrew Hill, president of Andrew Hill Investment Advisors Naples, Fla. with $35 million in assets under management: Approximately, 30% of SMH is held inIntel (INTC) andTaiwan Semiconductor (TSM), thus the performance of these two holdings will largely influence the performance of SMH. While TSM has had a good 2012, INTC has not. INTC has been hurt by a downturn in the personal computer (PC) market and the lack of success in capturing a material presence in the mobile computing market.
Summing up all the negatives, analysts have slashed their earnings estimates and investors have given up Intel for being dead. Looking forward to 2013, we see and improving demand for chips and improving interest in chip stocks. The emergence of the Ultrabook and Windows 8 spells out the potential for a turnaround in PC demand. The improved features of the Ultrabook including slim design and fast processing speed, provide a reason to upgrade outdated technology.
The demise of the PC is overstated. Upgrading laptops has been on hold pending release of Windows 8, Ultrabooks and other new machines. It may be three to six months before the corporate world begins to upgrade equipment, so investors may change their opinions from extremely negative views to a more neutral opinion.
Overall chip industry sales will maybe be up 4% to 6%. Increases in sales can lead to a greater percentage increase in profits. Intel's product conversion in 2013 will profit because of investment in the new equipment but that should improve in late 2013 and 2014.
5. United States Natural Gas Fund (UNG)
2012 return: -24.3% vs. +3.33% for Morningstar Commodities Index
Charles Freeman, portfolio manager at Holderness Investments Company in Greensboro, N.C. with $96 million assets under management: In 2012, the perfect storm of advances in drilling technology and above average winter temperatures led to a dramatic increase in natural gas supply.
Weather patterns this winter remain uncertain as some parts of the country are projected to have above average temperatures and some below. Volatility in the natural gas spot price reflects this uncertainty.
Our positive outlook on natural gas, however, comes from two main trends on the demand side that we see happening in the future. First, as the price of natural gas has come down dramatically given newfound supply, it has allowed a surge in conversion for power generation. Natural gas is rapidly replacing coal as the "go to" fuel for power generation.
This is a positive for natural gas since historically consumption has been very seasonal with the most usage in the winter months. On the other hand, electricity generation peaks in the summer months; therefore, demand for natural gas will become more consistent throughout the year as more plants switch from coal.
Secondly, we feel the transportation industry is on the cusp of changes as well by considering LNG (liquefied natural gas) powered trucks for fleets across the country.Clean Energy Fuels (CLNE) has just completed Phase 1 of its plan to install LNG filling stations at truck stops along the major trucking routes of the U.S. All of the major truck manufacturers have CNG (compressed natural gas) and LNG truck options, which allow companies to begin integration as they add new trucks to their fleet.
Companies, likeFedEx (FDX), are beginning to experiment with LNG-only tractors. With Clean Energy andRoyal Dutch Shell (RDSA) providing the initial LNG fueling infrastructure, we could be near the beginning of a significant shift to natural gas for fuel in the transportation industry. With such broad integration possibilities of natural gas, we are investing in UNG; because it has a high correlation to the spot price.
Follow Trang Ho on Twitter @TrangHoETFs .