April 23, 2009
NIA Report: Our Favorite ETFs and ETNs
NIA is pleased to release its first report on Exchange traded funds (ETFs) and Exchange traded notes (ETNs). We believe one of the best ways to prepare for hyperinflation is by investing into ETFs and ETNs.
ETFs and ETNs trade like stocks on a stock exchange but are used to track the price of a single commodity, a basket of commodities, or an index of stocks.
The difference between an ETF and an ETN is: an ETF represents ownership in underlying assets; whereas an ETN is a debt note issued by a bank.
An ETN is more risky than an ETF because of counterparty risks. If the financial firm issuing the ETN goes bankrupt, they may not be able to pay out the money they owe you. When investing in an ETN, it would be a good idea to keep an eye on the bank that issued it. If the bank runs into any trouble, you might want to immediately sell.
With an ETF, the biggest risk is their accounting is wrong and they don't own the amount of a commodity they are supposed to own. We consider this to be a very small risk and believe it is safer to own an ETF than to attempt to store a commodity on your own.
Now let's go over the ETFs and ETNs we feel everybody should consider in order to diversify your portfolio with hedges against inflation and potentially make a fortune.
The first ETF we would like to suggest is what we feel to be the safest investment with the least amount of risk. The ETF we are referring to is the SPDR Gold Shares (GLD) trading at $87.38.
GLD is an ETF seeking performance corresponding to the price of gold bullion. Simply put, it follows the price of gold. We believe gold prices are going higher as the dollar collapses, and the best way to play gold is by buying GLD. Investing into GLD means you are investing into gold.
Gold tends to rise as the dollar falls and purchasing a gold ETF may help you hedge that exposure and capitalize on gold’s rally to new highs.
The second gold ETF we would like everybody to consider is Market Vectors Gold Miners (GDX) trading at $31.60. GDX seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the AMEX Gold Miners index. The fund generally invests in all of the securities which comprise the AMEX Gold Miners index in proportion to their weighting in the index. The index is comprised of publicly traded companies involved primarily in mining for gold and silver. GDX owns stock in many gold companies rather than gold bullion itself like GLD. We feel GDX is a little more risky than GLD but could also be a lot more rewarding because when gold starts to take off many of these undervalued gold mining companies could make significant gains compared to the commodity.
Another great way to play gold is with the PowerShares DB Gold Double Long ETN (DGP) trading at $18.44. DGP seeks to replicate, net of expenses, twice the daily performance of the Deutsche Bank Liquid Commodity index - Optimum Yield Gold Excess Return. The index is intended to reflect changes in the market value of certain gold futures contracts and is comprised of a single unfunded gold futures contract. We at NIA prefer DGP over GLD because it has the potential to make double the gains of GLD, but it is also more risky. Not only could you lose twice as much money if gold were to go down, but DGP also has counterparty risks. Since your investment is a note issued by Deutsche Bank, you bare the risk of the bank going bankrupt and losing your entire investment. Even though we highly doubt this will happen, there is still a risk that it could.
Here are some other ETFs that we feel will prosper in an inflationary environment:
iShares Silver Trust (SLV) $12.13: SLV is an ETF that reflects the price of silver owned by the trust less the trust's expenses and liabilities. The fund is intended to constitute a simple and cost-effective means of making an investment similar to an investment in silver. Although the fund is not the exact equivalent of an investment in silver, they provide investors with an alternative that allows a level of participation in the silver market through the securities market. Since we feel silver could potentially outperform the price of gold, SLV is a safe way to diversify your portfolio into this precious metal. Silver is currently very cheap, closing the day around $12 per ounce. The gold to silver ratio is currently 73.5. This means you can get 73.5 ounces of silver for every 1 ounce of gold. Historically, this ratio has always returned to a level of 16. Therefore, silver could be a better value at this time compared to gold and it is possible SLV will outperform GLD in the years ahead.
United States Oil (USO) $27.34: USO is an ETF that reflects the performance, less expenses, of the spot price of West Texas Intermediate (WTI) light, sweet crude oil. The fund will invest in futures contracts for WTI light, sweet crude oil, other types of crude oil, heating oil, gasoline, natural gas and other petroleum based-fuels that are traded on exchanges. It may also invest in other oil interests such as cash-settled options on oil futures contracts, forward contracts for oil, and OTC transactions that are based on the price of oil. The gold to oil ratio recently reached a 10-year high of 25 and is currently 18. This means you can get 18 barrels of oil for every 1 ounce of gold. Historically, this ratio has always returned to a level of 10. Therefore, oil could be a better value at this time compared to gold. USO is a safe way to invest and diversify your portfolio into oil as it heads to higher levels in the upcoming years.
Ultra Oil & Gas ProShares (DIG) $22.65: DIG seeks daily investment results, before fees and expenses, which correspond to twice the daily performance of the Dow Jones U.S. Oil & Gas index. The fund normally invests 80% of assets in financial instruments with economic characteristics that should be twice the return of the index. It may employ leveraged investment techniques in seeking its investment objective. This is a great investment if you believe the stocks of oil and gas companies will perform well in the years ahead. DIG's top holdings include ExxonMobil, Chevron, ConocoPhillips, and Schlumberger. It is designed to make double the gains or losses of this index of oil and gas stocks.
PowerShares DB Agriculture (DBA) $24.24: DBA is an ETF that seeks to track the price and yield performance, before fees and expenses, of the Deutsche Bank Liquid Commodity Index - Optimum Yield Agriculture Excess Return. The index is a rules-based index composed of futures contracts on some of the most liquid and widely traded agricultural commodities such as corn, wheat, soy beans and sugar. The index is intended to reflect the performance of the agricultural sector and we feel is the safest ETF to diversify into agriculture.
Market Vectors Agribusiness (MOO) $29.56: MOO seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the DAXglobal Agribusiness index. The fund normally invests at least 80% of total assets in equity securities of U.S. and foreign companies primarily engaged in the business of agriculture, which derive at least 50% of their total revenues from agribusiness. Such companies may include small and medium-capitalization companies. Like GDX for gold, MOO is a little more risky than DBA since it makes its gains from investing into publicly traded agriculture companies rather than the actual agriculture commodities itself. MOO is more risky but we feel could potentially be more rewarding as well since we believe agriculture companies will make significant gains as the agriculture sector continues to grow consistently during the current economic collapse. Plain and simple, people will always need to eat! MOO's top holdings include Syngenta, Potash, Monsanto, and Archer Daniels Midland.
First Trust Global Wind Energy (FAN) $11.86: FAN is an ETF that seeks to track the price and yield performance, before fees and expenses, of the ISE Global Wind Energy index. The fund normally invests at least 90% of assets in common stocks that comprise the index or in depositary receipts that may include ADRs, GDRs, EDRs, New York shares or global shares representing securities in the index. We feel that with energy costs likely to rise during the upcoming hyperinflationary crisis, there will be a need for alternative energy solutions and in our opinion, wind energy will be one of the top solutions for the world. One of the most successful oil tycoons of all time, Boone Pickens, has been investing heavily into wind energy technology. NIA believes this industry will boom in the next few years and FAN is a great way to diversify into the wind energy sector.
Direxion Financial Bear 3x Shares (FAZ) $9.91: FAZ is an ETF that seeks to replicate, net of expenses, 300% of the inverse daily performance of the Russell 1000 Financial Services Index. The fund will invest at least 80% of assets in securities that comprise the index. It will also utilize financial instruments that, in combination, provide leveraged and unleveraged exposure to the index. This ETF is extremely risky but could be one of the most rewarding ETFs we have profiled. FAZ is triple short (yes TRIPLE short) financials! Recently, many bank stocks have doubled, tripled or more from their lows after reporting what we believe are fake profits. We believe this has been a suckers rally and soon many bank stocks will decline to new lows. FAZ could be a great bet to capitalize on what we feel is an inevitable outcome. However, this is also one of the most dangerous ETFs as it is possible the suckers rally in financial stocks could continue a little while longer.
UltraShort 20+ Year Treasury ProShares (TBT) $46.27: TBT is an ETF that seeks daily investment results, before fees and expenses, which correspond to twice the inverse of the daily performance of the Lehman Brothers 20+ Year U.S. Treasury index. The fund normally invests at least 80% of assets into investments that, in combination, have economic characteristics that are inverse to those of the index. It also typically invests in taking positions in financial instruments, including derivatives that should have similar daily return characteristics as twice the inverse of the index. We feel the Treasury bond market bubble is soon going to burst and this is a great way to bet against it. This is an UltraShort ETF so it does present some risks but we feel as the Federal Reserve continues to print trillions of Dollars out of thin air while China becomes a net seller of U.S. Treasuries, there will be a perfect storm for this ETF to make significant gains while the Treasury market tumbles.
UltraShort Real Estate Proshares (SRS) $29.05: SRS seeks daily investment results, before fees and expenses, which correspond to twice the inverse of the daily performance of the Dow Jones U.S. Real Estate index. The fund normally invests 80% of assets in financial instruments with economic characteristics that should be inverse to those of the index. It may employ leveraged investment techniques in seeking its investment objective. Since we feel the real estate market has still not seen the worst of things, this could be a risky but very rewarding ETF in the short-term. NIA believes the U.S. has only felt a small part of the downfall and foreclosures in the real estate market. Soon millions of people will not be able to afford their mortgages and will be forced to just walk away from their homes. This is a great way to bet against real estate as it is poised to continue collapsing along with our economy.
As a recap, NIA believes GLD, SLV, USO and DBA are the safest investments to capitalize on the upcoming hyperinflationary crisis. If you believe strongly like us that gold prices will rise substantially higher and you are a more aggressive and risk tolerant investor, you need to strongly consider GDX and DGP. FAZ and SRS are the most risky ETFs in this report and should only be considered as potential short-term trades.
We are not investment advisors and are not giving you investment advise. We are simply making suggestions to be used as a starting point for you to do your own research and make your own investment decisions.
If you have any questions please feel free to contact us at any time.
Update June 6, 2009:
Over the past few months we have seen a huge surge in the price of gold, silver, oil, agriculture and other commodities. We believe natural gas has been left behind and could be the most undervalued commodity at this time.
There’s no other commodity that’s this cheap, battered and oversold. With oil at $69.34 per barrel and natural gas at $3.87 per MMBtu, we currently have an oil to natural gas ratio of about 18. Historically, the oil to natural gas ratio has always returned to 6 and since 2000 it has averaged 8.
NIA believes the safest way to capitalize on the upcoming breakout in natural gas is through the ETF – United States Natural Gas Fund, LP (UNG).
Since the beginning of May big money has been flowing into UNG which sent it soaring from less than $13 to nearly $18 in about two weeks. In our opinion, UNG at its current price of $14.56 is near a major support level and could soon be on its way back up above $18 in the near future.
UNG is a domestic exchange traded security designed to track in percentage terms the movements of natural gas prices.
UNG does NOT seek to use leverage and targets a 1:1 relationship between assets and natural gas exposure making it a safe way for investors and hedgers to manage their exposure to energy.
Natural gas is one of the most important physical commodities in the global economy. Futures contracts for natural gas delivered to the Henry Hub are among the most actively traded, and natural gas delivered to the Henry Hub is the primary U.S. benchmark for natural gas.
UNG's portfolio consists of exchange listed natural gas futures contracts and other natural gas related futures, forwards, and swap contracts. UNG also invests in obligations of the United States government with remaining maturities of two years or less and holds cash and cash equivalents to be used to meet its current or potential margin or collateral requirements with respect to its investments in natural gas futures contracts and other natural gas interests.
If you have any questions please feel free to contact us at any time.
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