3 Low Correlated ETFs Surging in Shaky Markets - ETF News And Commentary
The S&P 500 index managed to close last week with a small
gain as slightly better-than-expected earnings, dovish comments
from the Fed Chairwoman and strong retail sales numbers provided
some comfort to investors.
On the flip side, weak housing numbers and slowing growth in China have added to their worries. (Read: 3 Excellent Dividend ETFs for Growth and Income )
In the next couple of weeks, earnings may drive the market higher or lower. But the chances of a strong rebound remain rather slim and risks of a bigger pull back cannot be ruled out. Broader stock market gains may rather be muted this year as the Fed gradually withdraws its support.
Despite broader stock market gyrations, some ETFs have been shining this year and their outlook suggests that they still have room to run. Further their low correlations with the market make them very attractive as portfolio diversifiers for better risk-return performance over longer-term.
Correlation with SPY
*based on 5 year performance
**based on 3 year performance
PowerShares DB Agriculture Fund ( DBA )
While the broader measure of inflation remains subdued, food prices have been surging this year. Droughts in various grain growing regions have led to a sharp increase in the price of coffee, cocoa and wheat.
Soybean and corn prices have also jumped on tight supplies and rising export demand. Political unrest in Ukraine continues to push up US exports and grain prices. (Read: 5 Long Term ETF Buys for Your IRA )
The price index for pork is up 16.5% from a year ago as pork supplies are being affected by a disease that has killed millions of young pigs. Price for beef has been surging even more and saw its biggest monthly change in February since November 2003, mainly due to tight supplies resulting from drought.
Further, the long-term demand for food will continue to go up thanks to booming global population and rising incomes in emerging markets.
DBA is a convenient way to get exposure to widely traded agricultural commodities through futures. Top futures holdings in the index are corn, soybeans, sugar and live cattle-each with a 12.5% weight. The fund has amassed close to $1.6 billion in AUM and sees volume of over 500,000 shares a day.
ETFS Physical Palladium Shares ( PALL )
Platinum and palladium are the best known among the six platinum group metals (PGMs). Demand for PGMs comes mainly from autocatalysts used to decrease harmful emissions in vehicles.
Palladium is produced mainly in Russia and South Africa, which together account for more than 80% of global supply of the metal. (Read: 3 ETFs You can Love Forever )
Mine production in South Africa has been going down due to worker strikes, safety related stoppages and rising production costs. Supplies from Russia are also uncertain due to potential trade sanctions.
On the other hand, the demand for the metal is on the rise as the global automakers are increasing their production. Further, auto manufacturers are substituting palladium for more expensive platinum in catalytic converters.
According to US Geological survey, as much as 25% palladium can routinely be substituted in diesel catalytic converters; while in some applications, the substitution can be as much as 50%.
Recent launch of two palladium ETFs in South Africa has further boosted the demand for the metal.
PALL, the only physically backed exchange traded product for palladium presents a cost-effective, convenient and secure way of investing in palladium. The ETF introduced in January 2010, currently has $507 million in assets under management. The fund charges 0.60% annually to the clients for operating expenses.
JP Morgan Alerian MLP ETN ( AMJ)
MLPs have been quite popular with income oriented investors in the ultra-low interest rate environment. In addition to attractive yields, they also have solid growth potential and stable cash flows.
Energy production boom in the US remains the long-term growth driver for MLPs. Like all high income products, MLPs also tend to react negatively to rise in interest rates initially.
But research shows there is no material correlation between 10-year treasury rates and Alerian MLP index performance in the long-term. One of the reasons is that many MLPs use fixed rate debt for majority of their borrowings.
AMJ is the most popular ETN in the MLP space with about $6.1 billion in assets under management and daily volume over 1.5 million shares.
The note charges investors 85 basis points a year in fees for its services and pays out an attractive yield of 4.7% currently.
The investors should note that the ETNs are subject to maximum issuance limit and this ETN stopped issuing new notes in June 2012. Investors who buy this ETF at a premium to its NAV incur the risk of loss in case they sell when the premium is no longer present. However as of now, the ETN is trading close to its NAV.
Despite ETN structure, I prefer this to the most popular MLP ETF (AMLP) which suffers from some tax-related issues. (See: Most ETFs are Tax Smart, is Yours? )
Adding ETFs with low correlations to your stock portfolio can provide diversification and better risk-adjusted return. Further the three ETFs discussed above look poised to outperform in the coming months.
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JPM-ALERN MLP (AMJ): ETF Research Reports
PWRSH-DB AGRIC (DBA): ETF Research Reports
ETFS-PALLADIUM (PALL): ETF Research Reports
SPDR-SP 500 TR (SPY): ETF Research Reports
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