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Commodity ETFs: It pays to do the research

By Emily Doak, Managing Director of ETF Research for Charles Schwab Investment Advisory.
Just because an investment drops in value doesn’t mean it’s a bargain.
The post Commodity ETFs: It pays to do the research first appeared on ETF Strategy.

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By Emily Doak, Managing Director of ETF Research for Charles Schwab Investment Advisory.

Commodity ETFs: It pays to do the research

Commodity ETFs: It pays to do the research.

Just because an investment drops in value doesn’t mean it’s a bargain. That’s a lesson many investors learned the hard way back in April when they scooped up shares of a popular oil ETF after the spot price of crude dropped below zero.

Contrary to some investors’ expectations, the ETF continued to struggle for several days after the price of oil recovered. So where did investors go wrong?

What they thought was a fund that tracked the spot price of West Texas Intermediate crude – the US benchmark for oil – was in fact a fund that tracked the benchmark’s futures contracts, which can produce very different returns.

With any fund, but especially those that track commodities, it’s important to understand the fund’s strategy before you buy. Here are three questions to ask when researching commodity ETFs for your portfolio.

  1. Does it hold physical assets or futures?

Some precious-metal ETFs actually purchase the physical commodities – such as bars of gold or silver – and warehouse them in secure vaults. These ETFs tend to closely track the spot price of the commodity in question because the metals can be retrieved and sold on the spot market at any time.

However, most commodities – including livestock, oil, and wheat – are too costly or cumbersome for an ETF to transport and store. Instead, ETFs typically invest in these commodities via futures contracts, which are agreements to buy a commodity on a future date for a specified price, with the intention of selling the contract before it expires rather than taking possession of the commodity in question.

As a result, ETF managers must regularly sell expiring contracts and purchase new ones with later expiration dates – with two potential consequences:

  • When contracts approaching expiration have higher prices than those with expiration dates further out, ETFs are effectively selling high and buying low with every contract rollover – a condition known as backwardation. This happens when the current demand for a commodity is higher than investors expect it to be in the future, relative to its supply.
  • Conversely, when contracts approaching expiration have lower prices than those with expiration dates further out, ETFs are effectively selling low and buying high with every contract rollover – a condition known as contango. This happens when the current demand for a commodity is lower than investors expect it to be in the future, relative to its supply.

While contango obviously isn’t ideal, fund managers often invest in futures contracts of various durations to help mitigate its effects.

A fund’s prospectus will tell you whether the ETF relies on physical assets or futures contracts. Schwab clients can log in, search its ticker symbol, and click the Prospectus link.

  1. How volatile is it?

Commodity ETFs are notoriously volatile because of the supply-and-demand characteristics of their underlying holdings, which can be dramatically impacted by certain events. Unseasonably cold or wet weather, for example, can be catastrophic to some agricultural commodities, while OPEC (to say nothing of COVID-19) can unduly influence oil prices.

One solution to this potential problem is to consider ETFs that track a broadly diversified commodity index. That said, the degree of diversification will vary by index. For example, 61.7% of the S&P GSCI Commodity Index is allocated to the more-volatile energy sector (as of May 2020), while the Bloomberg Commodity Index’s allocation is roughly a third of that, at 23.4% (as of July 2020).

  1. What is its tax treatment?

The complexities of commodity ETFs can also create unusual tax issues. Funds with direct ownership of precious metals, for example, are taxed as collectibles under US rules. Depending on your income tax bracket, the tax bill for this investment may be higher than the long-term capital gains rate or even your ordinary income tax rate.

Funds that invest in futures and other derivatives contracts, on the other hand, may be structured as partnerships, meaning you get a K-1 tax form at the end of the year instead of the typical 1099. To avoid the complications and added expense K-1s can create at tax time, some newer funds pass their investments through an offshore entity, which allows the fund to be taxed like a traditional mutual fund. However, it’s important to note that such funds are actively managed and may offer less visibility into their underlying holdings.

Know your fund

Investing in commodity ETFs can be a low-cost way to add diversification and inflation protection to your long-term portfolio. However, if you’re looking to make shorter-term tactical moves, be sure you understand how the ETF you’re considering is constructed, since a fund’s volatility, in particular, can have an outsize impact on your short-term prospects.

(The views expressed here are those of the author and do not necessarily reflect those of ETF Strategy.)

The post Commodity ETFs: It pays to do the research first appeared on ETF Strategy.

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Government

Majority Of Maryland Parents Oppose Vaccine Mandates For Students, Teachers, Survey Says

Majority Of Maryland Parents Oppose Vaccine Mandates For Students, Teachers, Survey Says

The results are in: a survey in solidly blue Maryland has found that a majority of parents in the wealthy eastern enclave oppose vaccination mandates…

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Majority Of Maryland Parents Oppose Vaccine Mandates For Students, Teachers, Survey Says

The results are in: a survey in solidly blue Maryland has found that a majority of parents in the wealthy eastern enclave oppose vaccination mandates for both teachers and students.

The survey, which was conducted by the local Patch branch, found that 58.1% of readers responded that they don't believe a vaccine should be required for students, and 56% said teachers also shouldn't be coerced into getting the vaccine.

Source: Patch

Many said the issue came down to that of personal freedom and choice, saying medical decisions should be made by personal doctors, not by government mandate.

"People should be allowed a choice if they want to get the vaccine," one reader replied. "It should not be mandated."

Another respondent agreed, saying it should be up to the parents - not the government - whether their children should be vaccinated.

"We believe all vaccines should be determined by all parents, guardians and their attending physicians," another reader said.

One parent said that mandates leave little room for flexibility for those with medical issues, and that the COVID jab should be just like the flu mandate.

"Medical care should be decided with the physician," the parent wrote. "I understand there are required vaccines, however, if a person cannot get it they are exempt. These mandates are an all or nothing push. It should be treated just like the flu vaccine - recommend but not required."

Earlier today, before the CDC confirmed it would recommend boosters for most older adults, a CDC advisory panel quietly shared safety data showing the heightened risk among young people for rare, but potentially debilitating, side effects.

Many districts in the state of Maryland have already created their own vax mandates for teachers, including Montgomery County and Howard County. In some cases, school leaders have argued that the reasoning behind the mandate was to protect students - most of whom are minors and aren't yet eligible for any of the COVID-19 vaccines.

Tyler Durden Sun, 10/24/2021 - 15:00

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Economics

At the Edge of Chaos: Market Breadth Breakout Signals Returning Uptrend as Options Market Remains Doubtful of Rally

Something’s got to give in the markets. And it may not take long before the next long term trend becomes apparent. The most reliable market indicator since 2016, the New York Stock Exchange Advance Decline line (NYAD), see below for full details, exploded

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Something's got to give in the markets. And it may not take long before the next long term trend becomes apparent.

The most reliable market indicator since 2016, the New York Stock Exchange Advance Decline line (NYAD), see below for full details, exploded to a new all time high on 10/20/21, and did not fall apart by week's end. This is signaling that for now, against all odds, despite the Fed's confirmation that the QE tapering is coming, the uptrend for stocks is back.

More interesting, as I will detail below, is the fact that even though stocks have broken out, options players remain very skeptical of the gains and bond traders are expecting the Fed's actions to slow the economy.

MELA Test Straight Ahead

The likelihood of a major move in the MELA system, where the markets (M), the economy (E), people's life decisions (L) and the algos interact (A), is approaching.

I know this sounds a bit confusing. But here's what seems to be happening. As I've noted here before, the bond market is torn between the sellers, who are afraid of inflation, and the buyers, who are betting that when the Fed tapers the economy will tumble.

Lately, the sellers have been in control of the bond market, as evidenced by the rising yield on the U.S. Ten Year note (TNX). This rise in market interest rates has put a damper on the stock market, which in true MELA fashion, has put a bit of crimp on the economy, especially areas such as home buying, as people have become cautious and slowed down their purchases. All of which has been amplified by the algos and created a choppy trading range for stocks.

Until Friday, that is, when Fed Chairman Powell noted that it was "time to taper," and TNX rolled over after running into intermediate-term resistance near the 1.7% yield area as the buyers came in.

So now we have an interesting setup. With less than a week before November, the month in which the Fed has signaled it will start its taper, bond traders are betting that the Fed's actions will hurt the economy while stock traders are betting that the bull trend in stocks has returned.

How is this possible?

Remember that the stock market is the centerpiece of MELA since it is the source of wealth for a large number of people via their 401 (k) plans and other stock trading related venues. In other words when the 401 (k) does well, as in periods when stocks rise, people feel wealthy and buy things.

And what do stocks like best? They love lower interest rates. All of which means that if the Fed tapers and things slow down, stock traders are betting that the Fed will likely have to restart QE.

In other words, it's all about the Fed and how the bond and stock markets respond because it will all play out in MELA.

It's time to buckle up.

"The edge of chaos is a transition space between order and disorder that is hypothesized to exist within a wide variety of systems. This transition zone is a region of bounded instability that engenders a constant dynamic interplay between order and disorder." Complexity Labs

I own shares in APP as of this writing. For detailed option strategies and stock picks chose a FREE trial to Joe Duarte in the Money Options.com. Click here. You can also check out my latest video which expands on these strategies here.

Why Astra Zeneca's Monoclonal COVID Antibody Gamble May Pay Off

Shares of pharmaceutical giant Astra Zeneca (AZN) have been under quiet accumulation of late and recently scored a price breakout.

The breakout is interesting for sure, mostly because AZN's COVID vaccine has been associated with rare but serious complications. At the same time, other COVID vaccines have also been associated with complications. All of which means that even though the vaccines have been useful against the pandemic, there is clearly a treatment niche that needs filling in the fight against the virus.

Certainly, AZN has a top notch research team, which is why it's no surprise that they have developed a new and very promising monoclonal antibody to treat COVID infections which may fill that niche. Of course, at first glance they seem to be getting to the party a bit late given that Eli Lilly (LLY) and Regeneron (REGN) already have very successful COVID antibodies on the market.

But here is what could be the game changer; AZN's antibody may be useful as a preventive treatment for COVID, meaning that it is a potential vaccine-like product, although not likely a replacement. At least that's what the studies suggest, and what the company is trying to convince the FDA and global health agency approval committees of.

Put another way; AZN may have an alternative or an adjunct to COVID vaccines which would not likely replace vaccines but would give physicians another treatment option based on well accepted clinical situations such as patients at high risk of vaccine reactions. In addition, the AZN antibody can be administered on an outpatient basis, reducing costs and keeping hospital beds open for emergencies.

Moreover, the stock is also attractive based on the fact that AZN has several blockbuster drugs that have been flying under the radar of late such as its diabetes treatment Forxiga and several key anti-cancer drugs which are fueling year over year sales gains above 30% and an earnings growth rate of 20%.

Technically, AZN has cleared long term resistance above $61, where it may consolidate in the short term as traders wait for approval news on the antibody. But the stock is in an excellent setup for sure as Accumulation Distribution (ADI) has flattened out which suggests that short sellers are exhausted while On Balance Volume (OBV) has been moving higher, confirming that buyers have been using recent price dips to move into the stock.

I own shares in AZN as of this writing. For detailed option strategies and stock picks chose a FREE trial to Joe Duarte in the Money Options.com. Click here.

Options Traders Just Don't Trust this Market

In what may be a bullish contrarian sign, put volume continues to outshine call volume at key strike prices on the SPY options. What's most interesting is that even as the market's breadth (see below) has improved, option traders remain skittish and continue to buy puts just below the most current market price.

Of course, the precise nature of this development suggests that algos are hedging their bets. And while market maker algos hedge their bets based on order flow, CTA algos (quant funds) make bets on technical analysis based support and resistance levels.

It's not clear whether what we're seeing is the market makers or the CTAs. If it's the CTAs the odds may favor a rally if the market breakout continues as they will have to cover their shorts further. If the market maker algos are hedging, though, it could mean that the order flows are bearish and that this rally could be short lived.

To get the latest up to date information on options trading, check out "Options Trading for Dummies", now in its 4th Edition – Available Now!

# 1 New Release on Options Trading

Market Breadth Finally Breaks Out

After a nearly five month trading range the stock market's breadth finally broke out with the New York Stock Advance Decline line (NYAD) moving above recent and multiply times tested resistance level. Thus, until proven otherwise the uptrend has been re-established.

The S & P 500 (SPX) is hovering near its all time highs and trading above 4500 as well as its 20,50, 100, and 200 day moving averages with good confirmation from Accumulation Distribution (ADI) and On Balance Volume (OBV).

The Nasdaq 100 index (NDX) did not fare as well as SPX as it did not deliver an all time high and ended last week on a much weaker note.

Meanwhile the S & P Small Cap 600 index (SML) is knocking on the door of a potential breakout, but still remains somewhat further away from its all time highs than NDX and SPX.

Good news! I've made my NYAD-Complexity, Chaos chart (featured on my YD5 videos) and a few other favorites public. You can find them here.

Joe Duarte

In The Money Options


Joe Duarte is a former money manager, an active trader and a widely recognized independent stock market analyst since 1987. He is author of eight investment books, including the best selling Trading Options for Dummies, rated a TOP Options Book for 2018 by Benzinga.com - now in its third edition, The Everything Investing in your 20s and 30s and six other trading books.

Meanwhile, the U.S. Ten Year note yield (TNX) is trading in a The Everything Investing in your 20s & 30s at Amazon and The Everything Investing in your 20s & 30s at Barnes and Noble.

A Washington Post Color of Money Book of the Month is now available.

To receive Joe's exclusive stock, option, and ETF recommendations, in your mailbox every week visit https://joeduarteinthemoneyoptions.com/secure/order_email.asp.

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Government

EcoHealth Throws NIH Under The Bus Over Wuhan Gain-Of-Function Report; Researcher Claims ‘Massive Cover-Up’

EcoHealth Throws NIH Under The Bus Over Wuhan Gain-Of-Function Report; Researcher Claims ‘Massive Cover-Up’

The question over whether the NIH funded risky gain-of-function research in Wuhan, China was officially ‘answered’ last week, after…

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EcoHealth Throws NIH Under The Bus Over Wuhan Gain-Of-Function Report; Researcher Claims 'Massive Cover-Up'

The question over whether the NIH funded risky gain-of-function research in Wuhan, China was officially 'answered' last week, after the agency claimed that one of their partners - EcoHealth Alliance, failed to report that they had 'accidentally' created a chimeric coronavirus that was able to infect humanized mice.

To review, in a Wednesday letter addressed to Rep. James Comer (R-KY), NIH Principal Deputy Director Lawrence A. Tabak admits to funding a "limited experiment" to determine whether "spike proteins from naturally occurring bat coronaviruses circulating in China were capable of binding to the human ACE2 receptor in a mouse model." According to the letter, humanized mice infected with the modified bat virus "became sicker" than those exposed to an unmodified version of the same bat coronavirus.

The letter claims that EcoHealth CEO Peter Daszak failed to report this finding, and gave Daszak five days to submit "any and all unpublished data from the experiments and work conducted" under the NIH grant.

If true, it would mean Dr. Anthony Fauci, who runs the NIH's National Institute of Allergy and Infectious Diseases, wasn't lying when he told Sen. Rand Paul in July when he denied the agency was conducting GoF research.

Except, according to Vanity Fair, EcoHealth did report their findings in a timely manner.

"These data were reported as soon as we were made aware, in our year four report in April 2018," said New York City-based EcoHealth in a statement.

If that's the case, Fauci is either incompetent for not knowing, or lying.

And so - the left-leaning Vanity Fair admits Rand Paul 'might have been onto something' when he accused Fauci of lying over GoF research.

What's more, VF connects more dots that mainstream outlets pretend don't exist - namely a revelation from a leaked grant proposal which reveals that Daszak attempted to obtain DARPA funding for "the kind of research that could accidentally have led to the pandemic."

As scientists remain in a stalemate over the pandemic’s origins, another disclosure last month made clear that EcoHealth Alliance, in partnership with the Wuhan Institute of Virology, was aiming to do the kind of research that could accidentally have led to the pandemic. On September 20, a group of internet sleuths calling themselves DRASTIC (short for Decentralized Radical Autonomous Search Team Investigating COVID-19) released a leaked $14 million grant proposal that EcoHealth Alliance had submitted in 2018 to the Defense Advanced Research Projects Agency (DARPA).

It proposed partnering with the Wuhan Institute of Virology and constructing SARS-related bat coronaviruses into which they would insert “human-specific cleavage sites” as a way to “evaluate growth potential” of the pathogens. Perhaps not surprisingly, DARPA rejected the proposal, assessing that it failed to fully address the risks of gain-of-function research. -Vanity Fair

According to the article, the leaked documents 'struck a number of scientists and researchers as significant for one reason' - namely that a distinctive segment of SARS-CoV-2's genetic code is a 'furin cleavage site' which makes the virus more infectious because of its ability to enter human cells - exactly the feature EcoHealth proposed modifying in the leaked proposal.

"If I applied for funding to paint Central Park purple and was denied, but then a year later we woke up to find Central Park painted purple, I’d be a prime suspect," said Jamie Metzl, a former executive vice president of the Asia Society, who sits on the World Health Organization’s advisory committee on human genome editing and has been calling for a transparent investigation into COVID-19’s origins (via Vanity Fair).

As one member of the DRASTIC coalition, New Zealand data scientist Gilles Demaneuf told Vanity Fair: "I cannot be sure that [COVID-19 originated from] a research-related accident or infection from a sampling trip. But I am 100% sure there was a massive cover-up."

On Sunday, Fauci appeared on ABC News with trusted softball-thrower George Stephanopoulos, where he hid behind semantics - claiming that the NIH's contract with Daszak adhered to a 'framework' that didn't constitute Gain of Function research.

Of course, we also know that the NIH shielded one of Daszak's grants from review under said framework.

Meanwhile, we'd still love to know what was said on that call between Fauci and NIH Director Francis Collins right after ZeroHedge reported that Indian researchers found "HIV-like insertions" at the furin cleavage site of SARS-CoV-2 in a now-retracted paper.

Related:

And this entire thread by Glenn Greenwald (click on tweet to jump in)

Tyler Durden Sun, 10/24/2021 - 12:00

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