First Trust Materials AlphaDEX Fund (ARCA: FXZ)

最新ニュース First Trust Materials AlphaDEX Fund (ARCA:FXZ)

First Trust Materials AlphaDEX Fund

Basic Materials

Industrials

Energy

Consumer Cyclical

The Fund will normally invest at least 90 percent of its net assets (including investment borrowings) in the securities that comprise the Index. The Fund, using an indexing investment approach, attempts to replicate, before fees and expenses, the performance of the Index. The Index is part of the StrataQuant Series, a family of custom enhanced indices developed, maintained and owned by ICE Data Indices, LLC or its affiliates (IDI or the Index Provider). The Index Provider reserves the right to, at any time, change the number of stocks comprising the Index by adding or deleting one or more stocks, or replacing one or more stocks contained in the Index with one or more substitute stocks of its choice, if in the Index Providers discretion, such addition, deletion or substitution is necessary or appropriate to maintain the quality and/or character of the Index.

Fmc Corp.

United States Steel Corp Common Stock

Reliance Steel & Aluminum Co.

Nucor Corp.

Steel Dynamics Inc

Celanese Corp. Class A

Mosaic Co.

Newmarket Corp

Timken Co

Cf Industries Holdings Inc.

Celanese Corporation&nbsp;(NYSE:<a class="ticker" href="https://www.benzinga.com/stock/CE#NYSE">CE</a>) shares are trading lower on Thursday after several analysts slashed price forecasts following fourth-quarter&nbsp;<a target="_blank" href="https://www.benzinga.com/quote/CE/analyst-ratings" rel="noreferrer noopener">earnings&nbsp;reported on Tuesday</a>.&nbsp;
Celanese reported adjusted earnings per share of $1.45, beating analysts' estimate of $1.20 and sales of $2.37 billion, which came&nbsp;<a href="https://www.benzinga.com/trading-ideas/movers/25/02/43830036/whats-going-on-with-celanese-shares-wednesday" target="_blank" rel="noreferrer noopener">in line with analysts' estimates</a>.
The company issued guidance for the 2025&nbsp;first-quarter. It sees earnings per share from 25 cents to 50 cents, versus analysts'&nbsp;estimate&nbsp;of $1.63.
Celanese expects its 2025 second-quarter earnings per share to be about&nbsp;<a target="_blank" href="https://www.benzinga.com/calendars/guidance" rel="noreferrer noopener">$1 higher than in the first quarter</a>.&nbsp;
JPMorgan analyst Jeffrey J. Zekauskas lowered the price forecast from $92 to $54 with a Neutral rating.
The analyst writes that Celanese is facing simultaneous challenges in earnings, cash flow, and credit.&nbsp;
The company has exposure to the automotive industry in Europe and the U.S., where demand is expected to remain flat. 
Zekauskas says that the Acetyl Chain segment may experience pricing pressure in 2025, as lower spot pricing in 2024 impacts large customer contract resets.&nbsp;
Additionally, the new acetic acid capacity in China could exert downward pressure on pricing in the medium to long term, adds the analyst.
The analyst says he recommends waiting for greater earnings stability and predictability.&nbsp;
As a result, Zekauskas revised the 2025 EPS forecast down to $6.30 from $9.05.
Other&nbsp;analyst&#8217;s&nbsp;price forecast/rating revisions include:
<ul>
<li>Baird&nbsp;analyst Ghansham Panjabi maintained an Outperform rating and lowered the price forecast from&nbsp;$110&nbsp;to&nbsp;$67.</li>
<li>Wells Fargo&nbsp;analyst Michael Sison reiterated an Equal-Weight rating and cut the price forecast from&nbsp;$75&nbsp;to&nbsp;$55.</li>
<li>UBS&nbsp;analyst analyst Joshua Spector kept Neutral and lowered the price forecast from&nbsp;$72&nbsp;to&nbsp;$60.</li>
<li>Deutsche Bank&nbsp;analyst David Begleiter maintained a Buy rating and slashed the price forecast from&nbsp;$85&nbsp;to&nbsp;$70.</li>
<li>RBC Capital&nbsp;analyst Arun Viswanathan downgraded the company from Outperform to Sector Perform and lowered the price forecast from&nbsp;$84&nbsp;to&nbsp;$56.</li>
</ul>
Investors can gain exposure to the stock via&nbsp;First Trust Materials AlphaDEX Fund&nbsp;(NYSE:<a class="ticker" href="https://www.benzinga.com/stock/FXZ#NYSE">FXZ</a>) and&nbsp;Pacer CFRA-Stovall Equal Weight Seasonal Rotation ETF&nbsp;(NYSE:<a class="ticker" href="https://www.benzinga.com/stock/SZNE#NYSE">SZNE</a>).
Price Action: CE shares are down 5.04% at $52.15 at the last check Thursday.
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<li><a href="https://www.benzinga.com//node/43856681" target="_blank" rel="noreferrer noopener">Bloom Energy Strengthens 10-Year Equinix Partnership, Deploying Next-Gen Fuel Cells For Data Center Power</a></li>
</ul>
Image: Shutterstock

Equities

Mid Cap

Downgrades

Price Target

Movers

Pacer CFRA-Stovall Equal Weight Seasonal Rotation ETF

SZNE

Celanese Analysts Brace For Tough 2025 As Price Cuts Pile Up

FMC Corporation (NYSE:<a class="ticker" href="https://www.benzinga.com/stock/FMC#NYSE">FMC</a>) shares plunged on Wednesday after the company reported fourth-quarter results on Tuesday and <a href="https://www.benzinga.com/quote/FMC/analyst-ratings" target="_blank" rel="noreferrer noopener">analysts downgraded the stock.</a>
FMC reported adjusted EPS of $1.79, beating the $1.60 estimate, while sales of $1.22 billion missed <a target="_blank" href="https://www.benzinga.com/pressreleases/25/02/n43478114/fmc-corporation-announces-2024-fourth-quarter-and-full-year-results-provides-2025-outlook" rel="noreferrer noopener">the consensus of $1.31 billion</a>.
The company expects first-quarter adjusted EPS of $0.05 &#8211; $0.15 (vs. $0.94 estimate) and revenue of $750 million &#8211; $800 million<a target="_blank" href="https://www.benzinga.com/calendars/guidance" rel="noreferrer noopener"> (vs. street view of $1.031 billion)</a>.
For FY25, FMC forecasts adjusted EPS of $3.26 &#8211; $3.70 (vs. $4.38 est.) and revenue of $4.15 billion &#8211; $4.35 billion (vs. consensus of $4.406 billion).
BofA Securities analyst Steve Byrne downgraded the company from Neutral to Underperform and cut the price forecast from $61 to $48.
The analyst cited a weak first-quarter outlook, raising doubts about full-year volume growth assumptions and increased competition in diamides as key concerns.
Additional concerns includes limited EBITDA growth despite an easy 2024 comparable and renewed worries over leverage and dividend sustainability, per the analyst.
Byrne writes that he is at the upper end of FMC&#8217;s 2025 EBITDA guidance and project adjusted free cash flow of $369 million (within the company&#8217;s $200 million-400 million guidance range).
With an annual dividend of $300 million, the analyst sees net debt reduction of just $100 million in 2025, bringing gross debt/EBITDA to 3.4x by year-end and increasing the risk of a credit rating downgrade to non-investment grade.
For 2026, the analyst estimates post-dividend free cash flow of $150 million, leaving FMC needing $850 million in new debt to cover $1 billion in maturing bonds.
Given these challenges, Byrne believes a dividend cut is increasingly likely possible.
Apart from this, RBC Capital analyst Arun Viswanathan downgraded FMC from Outperform to Sector Perform and lowered the price forecast from&nbsp;$78&nbsp;to&nbsp;$47.
Investors can gain exposure to the stock via&nbsp;First Trust Materials AlphaDEX Fund (NYSE:<a class="ticker" href="https://www.benzinga.com/stock/FXZ#NYSE">FXZ</a>) and Global X AgTech &amp; Food Innovation ETF (NASDAQ:<a class="ticker" href="https://www.benzinga.com/stock/KROP#NASDAQ">KROP</a>).
Price Action: FMC shares are down 34.79% at $35.23 at the last check Wednesday.
Read Next:
<ul>
<li><a href="https://www.benzinga.com/government/regulations/25/01/42980550/increased-demand-trump-administration-risks-analyst-picks-celanese-as-chemical-winner-adm-as-loser-for-2025" target="_blank" rel="noreferrer noopener">Increased Demand, Trump Administration Risks: Analyst Picks Celanese As Chemical Winner, ADM As Loser For 2025</a></li>
</ul>
Image via Shutterstock.

Analyst Color

Large Cap

News

Analyst Ratings

Trading Ideas

KROP

FMC's Dividend In Danger? Analyst Warns Of Debt Pressures And Credit Downgrade Risks

Nucor Corporation (NYSE:<a class="ticker" href="https://www.benzinga.com/stock/NUE#NYSE">NUE</a>) shares are trading lower premarket today. On Monday, the company provided fourth-quarter guidance, expecting EPS of <a target="_blank" href="https://www.benzinga.com/pressreleases/24/12/n42519618/nucor-announces-guidance-for-the-fourth-quarter-of-2024-earnings" rel="noreferrer noopener">$0.55 &#8211; $0.65 vs. the consensus of $0.86</a>.
The primary factor driving the expected earnings decline is lower earnings in the steel mills segment due to decreased<a target="_blank" href="https://www.benzinga.com/calendars/guidance" rel="noreferrer noopener"> volumes and lower average selling prices</a>.
The company projects earnings in the steel products segment to decline, reflecting the same trends. However, the raw materials segment is anticipated to see an increase in earnings, excluding the impairment charge from the third quarter of 2024.
Nucor reported net earnings of&nbsp;$1.05&nbsp;per share in the&nbsp;third quarter&nbsp;of 2024 and&nbsp;$3.16&nbsp;per share in the&nbsp;fourth quarter&nbsp;of 2023.
Notably, during the <a target="_blank" href="https://www.benzinga.com//node/41439525" rel="noreferrer noopener">third-quarter earnings release</a>, Nucor stated that it expects the fourth quarter&nbsp;earnings per share to decrease compared to $1.05&nbsp;reported for the&nbsp;third quarter amid decreased steel mill segment earnings caused by lower average selling prices and decreased volumes.
In the fourth quarter, Nucor repurchased around 2.1 million shares at an average price of $149.81 per share, bringing the total year-to-date repurchases to 13.1 million shares at an average price of $168.75 per share.
Nucor has returned over $2.73 billion to stockholders through share repurchases and dividend payments so far this year.
In October, the company reported quarterly adjusted earnings of $1.49 per share, which beat the analyst consensus estimate of $1.47 and revenue of $7.44 billion, which beat the analyst consensus estimate of $7.28 billion.
Nucor plans to release its fourth-quarter results on&nbsp;Monday, January 27, 2025.
Investors can gain exposure to the stock via&nbsp;VanEck Steel ETF (NYSE:<a class="ticker" href="https://www.benzinga.com/stock/SLX#NYSE">SLX</a>)&nbsp;and First Trust Materials AlphaDEX Fund (NYSE:<a class="ticker" href="https://www.benzinga.com/stock/FXZ#NYSE">FXZ</a>).
Price Action: NUE shares are down 1.51% at $122.29 premarket at the last check Tuesday.
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</ul>

Guidance

Nucor's Q4 Guidance Misses The Mark, Hit By Steel Slowdown; Stock Slides

Cleveland-Cliffs Inc. (NYSE:<a class="ticker" href="https://www.benzinga.com/stock/CLF#NYSE">CLF</a>) shares are trading lower today. The company entered into a definitive agreement to acquire Stelco Holdings Inc. (OTC:<a class="ticker" href="https://www.benzinga.com/stock/STZHF#OTC">STZHF</a>) for a total enterprise <a target="_blank" href="https://www.benzinga.com/pressreleases/24/07/b39767374/cleveland-cliffs-announces-the-acquisition-of-stelco" rel="noreferrer noopener">value of around&nbsp;$2.5 billion (CAD3.4 billion)</a>.
Stelco is an integrated steelmaker consisting of two operational sites, both located in the province of Ontario. Stelco ships approximately 2.6 million net tons of flat-rolled steel annually, primarily hot-rolled steel to service center customers.&nbsp;
As per the deal, Stelco shareholders will receive CAD60.00 per share in cash plus 0.454 shares of Cliffs common stock per Stelco share (or CAD10.00 per share as of July 12, 2024), making a total of CAD70.00 per Stelco share.
The acquisition values Stelco at a multiple of 4.8x the LTM Adjusted EBITDA as of March-end. Cliffs anticipates achieving around $120 million in annual cost savings <a target="_blank" href="https://www.benzinga.com/calendars/guidance" rel="noreferrer noopener">without affecting union jobs</a>.
The transaction is expected to immediately boost CLF&#8217;s EPS for 2024 and 2025, with pro forma net leverage standing at 2.4x the LTM Adjusted EBITDA as of March-end.
The transaction has been approved unanimously by both Cliffs&#8217; and Stelco&#8217;s boards and is expected to close in the fourth&nbsp;quarter of 2024, subject to shareholder and regulatory approvals and other customary closing conditions.
Post-transaction closure, Cliffs shareholders will hold about 95% and Stelco shareholders approximately 5% of the combined company on a fully diluted basis.
Cliffs&#8217; acquisition of Stelco expands its steelmaking footprint and doubles its exposure to the flat-rolled spot market, leveraging cost advantages in raw materials, energy, healthcare, and currency.
This acquisition integrates 1,800 United Steelworkers (USW) union employees into Cliffs&#8217; workforce.
Lourenco Goncalves, Chairman of the Board, President, and CEO of Cliffs, stated, &#8220;The enterprise value of this transaction is significantly lower than the cost of building an equivalent replacement mill in the United States, and the cost structure is lower than what a new U.S. mill would provide us.&#8221;
Cleveland-Cliff&#8217;s total liquidity stood at&nbsp;$4 billion&nbsp;<a target="_blank" href="https://www.benzinga.com//node/38365334" rel="noreferrer noopener">as of March-end</a>.
Investors can gain exposure to the stock via&nbsp;SPDR S&amp;P Metals &amp; Mining ETF (NYSE:<a class="ticker" href="https://www.benzinga.com/stock/XME#NYSE">XME</a>) and First Trust Materials AlphaDEX Fund (NYSE:<a class="ticker" href="https://www.benzinga.com/stock/FXZ#NYSE">FXZ</a>).
Price Action: CLF shares are down 2.41% at $15.78 premarket at the last check Monday.
Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.
Photo via Shutterstock

STZHF

Cleveland-Cliffs Doubles Down on Steel with $2.5B Acquisition, Expects $120M in Annual Savings

FMC Corporation (NYSE:<a class="ticker" href="https://www.benzinga.com/stock/FMC#NYSE">FMC</a>) shares are trading higher today. The company finalized an agreement to sell its Global Specialty Solutions (GSS) business to Environmental Science US, known as Envu, for $350 million, subject to <a target="_blank" href="https://www.benzinga.com/pressreleases/24/07/n39740988/fmc-corporation-signs-definitive-agreement-to-sell-global-specialty-solutions-business-to-envu" rel="noreferrer noopener">closing working capital adjustment</a>.
FMC plans to use the proceeds from the sale to reduce debt. The transaction is expected to close by the end of 2024, pending regulatory approval and other customary conditions.
Also Read: <a target="_blank" href="https://www.benzinga.com/markets/equities/23/12/36300550/agricultural-science-company-fmcs-project-focus-aims-to-harvest-150m-savings-in-global-restructu" rel="noreferrer noopener">Agricultural Science Company FMC&#8217;s &#8216;Project Focus&#8217; Aims To Harvest ~$150M Savings In Global Restructuring &amp; More</a>.
Marco Strizzi, Senior Principal at Cinven, said, &#8220;We are delighted to bring together two highly respected, complementary businesses with a shared focus on delivering seamless customer service and product innovation in the attractive environmental science market.&#8221;
&#8220;We see FMC GSS as a compelling addition to Envu strategically and financially and look forward to continuing to support the combined business&#8217; strong growth trajectory.&#8221;
Notably, in November 2023, FMC disclosed plans to explore strategic alternatives for its GSS business, which serves diverse non-crop markets such as golf courses, <a target="_blank" href="https://www.benzinga.com/markets/equities/23/11/35849634/agricultural-science-company-fmcs-investor-day-plans-non-core-asset-sale-r-d-pipeline-others" rel="noreferrer noopener">sports stadiums, and pest control.</a>
Last month, FMC&#8217;s Board of Directors appointed Pierre Brondeau as chief executive officer and board chairman. He succeeded Mark Douglas, who stepped down after <a target="_blank" href="https://www.benzinga.com/pressreleases/24/06/n39267559/fmc-corporation-board-of-directors-appoints-pierre-brondeau-chairman-and-chief-executive-officer" rel="noreferrer noopener">more than 14 years with the company</a>.
The company plans to release its second quarter 2024 earnings <a target="_blank" href="https://www.benzinga.com/earnings" rel="noreferrer noopener">on July 31, 2024</a>.
Investors can gain exposure to the stock via First Trust Materials AlphaDEX Fund (NYSE:<a class="ticker" href="https://www.benzinga.com/stock/FXZ#NYSE">FXZ</a>) and Global X AgTech &amp; Food Innovation ETF (NASDAQ:<a class="ticker" href="https://www.benzinga.com/stock/KROP#NASDAQ">KROP</a>).
Price Action: FMC shares are up 0.35% at $56.90 premarket at the last check Friday.
Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.
Photo via Shutterstock

Asset Sales

FMC Cleans Up Portfolio With GSS Sale, Eyes Debt Reduction and Goes Green

A smart beta exchange traded fund, the First Trust Materials AlphaDEX ETF (ARCA:FXZ) debuted on 05/08/2007, and offers broad exposure to the Materials ETFs category of the market.
What Are Smart Beta ETFs?
The ETF industry has traditionally been dominated by products based on market capitalization weighted indexes that are designed to represent the market or a particular segment of the market.
Market cap weighted indexes offer a low-cost, convenient, and transparent way of replicating market returns, and are a good option for investors who believe in market efficiency.
However, some investors believe in the possibility of beating the market through exceptional stock selection, and choose a different type of fund that tracks non-cap weighted strategies: smart beta.
Based on specific fundamental characteristics, or a combination of such, these indexes attempt to pick stocks that have a better chance of risk-return performance.
This area offers many different investment choices, such as simplest equal-weighting, fundamental weighting and volatility/momentum based weighting methodologies; however, not all of these strategies can deliver superior results.
Fund Sponsor &amp; Index
The fund is sponsored by First Trust Advisors. It has amassed assets over $371.37 million, making it one of the average sized ETFs in the Materials ETFs. Before fees and expenses, this particular fund seeks to match the performance of the StrataQuant Materials Index.
The StrataQuant Materials Index is a modified equal-dollar weighted index designed by the AMEX to objectively identify and select stocks from the Russell 1000 Index that may generate positive alpha relative to traditional passive style indices through the use of the AlphaDEX screening methodology.
Cost &amp; Other Expenses
For ETF investors, expense ratios are an important factor when considering a fund&#39;s return; in the long-term, cheaper funds actually have the ability to outperform their more expensive cousins if all other things remain the same.
Annual operating expenses for FXZ are 0.62%, which makes it on par with most peer products in the space.
It has a 12-month trailing dividend yield of 1.62%.
Sector Exposure and Top Holdings
While ETFs offer diversified exposure, which minimizes single stock risk, a deep look into a fund&#39;s holdings is a valuable exercise. And, most ETFs are very transparent products that disclose their holdings on a daily basis.
For FXZ, it has heaviest allocation in the Materials sector --about 90.20% of the portfolio.
Looking at individual holdings, CF Industries Holdings, Inc. (NYSE: <a class="ticker" href="https://www.benzinga.com/stock/cf#NYSE">CF</a>) accounts for about 4.75% of total assets, followed by FMC Corporation (NYSE: <a class="ticker" href="https://www.benzinga.com/stock/fmc#NYSE">FMC</a>) and Albemarle Corporation (NYSE: <a class="ticker" href="https://www.benzinga.com/stock/alb#NYSE">ALB</a>).
FXZ&#39;s top 10 holdings account for about 42.04% of its total assets under management.
Performance and Risk
Year-to-date, the First Trust Materials AlphaDEX ETF has lost about -6.48% so far, and it&#39;s up approximately 2.79% over the last 12 months (as of 07/08/2024). FXZ has traded between $58.78 and $72.04 in this past 52-week period.
The fund has a beta of 1.20 and standard deviation of 24.45% for the trailing three-year period, which makes FXZ a medium risk choice in this particular space. With about 39 holdings, it has more concentrated exposure than peers.
Alternatives
First Trust Materials AlphaDEX ETF is a reasonable option for investors seeking to outperform the Materials ETFs segment of the market. However, there are other ETFs in the space which investors could consider.
Materials Select Sector SPDR ETF (ARCA:XLB) tracks Materials Select Sector Index and the FlexShares Morningstar Global Upstream Natural Resources ETF (ARCA:GUNR) tracks Morningstar Global Upstream Natural Resources Index. Materials Select Sector SPDR ETF has $5.42 billion in assets, FlexShares Morningstar Global Upstream Natural Resources ETF has $5.89 billion. XLB has an expense ratio of 0.09% and GUNR charges 0.46%.
Investors looking for cheaper and lower-risk options should consider traditional market cap weighted ETFs that aim to match the returns of the Materials ETFs.
<a href="https://www.zacks.com/stock/news/2297699/is-first-trust-materials-alphadex-etf-fxz-a-strong-etf-right-now?cid=CS-BENZ-FT-smart_beta_etf-2297699">To read this article on Zacks.com click here.</a>

Markets

ETFs

GUNR

Is First Trust Materials AlphaDEX ETF a Strong ETF Right Now?

United States Steel Corporation&nbsp;(NYSE:<a class="ticker" href="https://www.benzinga.com/stock/X#NYSE">X</a>) inked a definitive agreement to capture carbon emissions generated from the company&#8217;s Gary Works Blast Furnaces in<a target="_blank" href="https://www.benzinga.com/pressreleases/24/04/b38065033/u-s-steel-and-carbonfree-sign-definitive-agreement-to-capture-carbon-dioxide-emissions-at-one-of-t" rel="noreferrer noopener">&nbsp;a first-of-its-kind project.</a>
The initiative employing CarbonFree&#8217;s SkyCycle technology aims to capture and mineralize 50,000 metric tons of carbon dioxide yearly, akin to emissions from 12,000 cars, with potential for expansion.
U.S. Steel&#8217;s participation supports its targets of cutting greenhouse gas intensity by 20% by 2030 and achieving net-zero emissions by 2050.&nbsp;
The SkyCycle project meets rising demand for low-emission products like verdeX steel, serving as an initial step in evaluating technology scalability for broader enterprise adoption.
Construction for the SkyCycle plant at U.S. Steel Gary Works is set to start as soon as summer 2024, targeting operational launch in 2026.&nbsp;
The agreement spans 20 years post its in-service date.
&#8220;Innovating to capture carbon at an integrated mill is the latest example of how steel is enabling a more sustainable future,&#8221; said Scott Buckiso, Senior Vice President &amp; Chief Manufacturing Officer, U. S. Steel. &#8220;Moreover, U. S. Steel has a history of &#8216;firsts&#8217; that we&#8217;re confidently building on. Using SkyCycle technology for the first project of its kind in North America should benefit the community for generations to come,&#8221; Buckiso adds.
Investors can gain exposure to the stock via&nbsp;VanEck Steel ETF (NYSE:<a class="ticker" href="https://www.benzinga.com/stock/SLX#NYSE">SLX</a>) and&nbsp;First Trust Materials AlphaDEX Fund (NYSE:<a class="ticker" href="https://www.benzinga.com/stock/FXZ#NYSE">FXZ</a>).
Price Action: X shares are trading higher by 0.05% to $41.42 premarket on the last check Wednesday. 
Photo by Dennis Diatel on Shutterstock

General

US Steel And CarbonFree Forge Path For Carbon Capture Innovation At Gary Works Blast Furnaces

It has been said throughout much of this year that the financial services sector, the second-largest sector weight in the S&amp;P 500, has been a disappointment as the Federal Reserve has held off on raising interest rates.
Still, traditional, diversified financial services exchange traded funds are, in some cases, sporting year-to-date gains of over 5 percent. Proving that smart beta can really be a smart alternative at the sector level, some alternatively-indexed financial services ETFs are outperforming this year, a group that includes the First Trust Financials AlphaDEX Fd(ETF) (NYSE: <a class="ticker" href="/stock/fxo#NYSE">FXO</a>).
<h3>Foraging Through FXO</h3>
FXO is the financial services counterpart to the First Trust Materials AlphaDEX Fnd (ETF) (NYSE: <a class="ticker" href="/stock/fxz#NYSE">FXZ</a>), <a href="http://www.benzinga.com/trading-ideas/long-ideas/16/08/8408718/a-marvelous-materials-etf#/null">highlighted here</a> earlier this week after making a series of all-time highs. Speaking of a string of all-time highs, FXO has own streak going on its way to a year-to-date gain of 6.8 percent. FXO was one of just seven ETFs to hit new highs Thursday.
<bzrelatedlink>Related Link: <a href="http://www.benzinga.com/trading-ideas/long-ideas/16/09/8418405/from-russia-with-cash-sort-of">From Russia With Cash ... Sort Of</a></bzrelatedlink>
Like the other AlphaDEX ETFs, FXO focuses on &ldquo;growth factors including three, six and 12-month price appreciation, sales to price and one year sales growth, and, separately, on value factors including book value to price, cash flow to price and return on assets,&rdquo; <a href="http://www.ftportfolios.com/Retail/Etf/EtfSummary.aspx?Ticker=FXZ">according to First Trust</a>.
<h3>Industry-Level View</h3>
At the industry level, FXO looks a lot different than its cap-weighted rivals. For example, FXO&#39;s weight to money center banks is well below those found in traditional financial services ETFs. Likewise, the ETF has been at the right place at the right time this year with its 24.1 percent weight to insurance stocks and an almost 22 percent allocation to real estate investment trusts, the two best-performing industries within the broader financial services sector this year.
Insurance ETFs&#39; rising rates advantage is tied to the strong dollar. The stronger greenback affects an array of sectors and industry groups, but not insurance companies because U.S.-based insurance providers write the bulk of their&nbsp;<a href="http://www.thestreet.com/story/13220377/1/insurance-etfs--another-idea-for-profiting-from-rising-rates.html">policies in the United States</a>. In other words, it is impressive that FXO and dedicated insurance ETFs have been delivering for investors this year against the backdrop of essentially no help from the Fed.
The $734.9 million FXO holds 175 stocks, none of which commands a weight of over 1.2 percent. The median market value of those holdings is $8.2 billion, putting the ETF squarely in mid-cap territory, which has been a good place to be this year.
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Long Ideas

Sector ETFs

Not Your Standard Financial ETF And That's OK

Somewhat quietly, the materials sector is enjoying a very solid year. The Materials Select Sector SPDR (NYSE: <a class="ticker" href="/stock/xlb#NYSE">XLB</a>) is up 15.2 percent, putting the largest materials exchange-traded fund in the upper echelon of the sector SPDR ETFs.
Although the materials sector is one of the smallest sector allocations in the S&amp;P 500, there is competition in this corner of the ETF space. For example, XLB and other cap-weighted materials ETFs are facing rising competition from smart beta materials ETFs. The First Trust Materials AlphaDEX Fnd (ETF) (NYSE: <a class="ticker" href="/stock/fxz#NYSE">FXZ</a>) is one of the largest, most seasoned members of the smart beta materials ETF club.
<h3>FXZ</h3>
Up 19.4 percent year-to-date, FXZ was one of 13 ETFs to hit all-time highs Tuesday. Like the other AlphaDEX ETFs, FXZ focuses on &ldquo;growth factors including three, six and 12-month price appreciation, sales to price and one year sales growth, and, separately, on value factors including book value to price, cash flow to price and return on assets,&rdquo; <a href="http://www.ftportfolios.com/Retail/Etf/EtfSummary.aspx?Ticker=FXZ">according to First Trust</a>.
<bzrelatedlink>Related Link: <a href="http://www.benzinga.com/trading-ideas/long-ideas/16/08/8408600/techs-rise-good-for-em-etfs-heres-a-better-idea">Tech's Rise Good For EM ETFs; Here's A Better Idea</a></bzrelatedlink>
The $324.6 million FXZ is home to 51 stocks. Nearly 37.6 percent of the ETF&#39;s holdings are chemicals makers while another 17.4 percent are container and packaging companies. Mining and metals firms are FXZ&#39;s third-largest industry weight at 12.6 percent.
Although no individual holding commands a weight of more than 3.7 percent in FXZ&#39;s lineup, the ETF has some exposure to some of the &ldquo;sub-themes&rdquo; that have been boosting the materials sector this year. In recent days, that has included mergers and acquisitions activity among fertilizer makers. Over the course of this year, steelmakers have been important drivers of the materials sector&#39;s bullishness and FXZ is levered to that theme as well.
<h3>The Bottom Line On Materials</h3>
Commodities are seen as sensitive to U.S. interest rates, but the materials sector is not as inversely correlated to rates as, say, telcom or utilities. As a cyclical sector, materials can actually perform well if the Federal Reserve raises interest rates because that would be a sign the Fed is confident the economy is strong enough to endure higher borrowing costs.
&ldquo;Commodities &mdash; and notably industrial metals&nbsp;and energy, which are the most growth-sensitive&nbsp;subsectors &mdash; did particularly well, with an average&nbsp;gain of more than 25 percent,&rdquo; during previous tightening cycles, reported Mining.com, citing Allianz research.
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Commodities

A Marvelous Materials ETF

The materials sector has been a laggard this year among the 10 industry groups tracked within the S&amp;P 500. Of the nine sector SPDRs ETFs, the Materials Select Sector SPDR (NYSE: <a class="ticker" href="/stock/xlb#NYSE">XLB</a>) has been the worst performer in 2013, though to be fair to XLB, the fund is up 3.2 percent in the past month.

	Investors willing to refine their materials ETF search will find even more impressive, recent gains. The Market Vectors Coal ETF (NYSE: <a class="ticker" href="/stock/kol#NYSE">KOL</a>) is up 6.6 percent in the past week. Seven holdings in the Market Vectors Steel ETF (NYSE: <a class="ticker" href="/stock/slx#NYSE">SLX</a>) have posted double-digit gains in just the past three days, <a href="http://seekingalpha.com/article/1629242-steel-stocks-jump?source=yahoo">according to Bespoke Investment Group</a>.

	Related: <a href="http://www.benzinga.com/trading-ideas/long-ideas/13/08/3832002/a-new-etf-for-resurgent-coal-stocks">A New ETF For Resurgent Coal Stocks</a>.

	The list goes on from there. Just look at this roster of unheralded materials ETFs.

	First Trust Materials AlphaDEX Fund (NYSE: <a class="ticker" href="/stock/fxz#NYSE">FXZ</a>) 
	Year-to-date, the First Trust Materials AlphaDEX fund has performed in line with larger rivals such as XLB, but over the past three months <a href="http://www.benzinga.com/trading-ideas/long-ideas/12/10/2971334/alphadex-etfs-do-things-differently-with-stellar-results">the AlphaDEX methodology</a> has helped FXZ to start breaking away from the pack.

	Nearly 34 percent of FXZ's weight is allocated to chemicals names. Not a bad place to be when Air Products (NYSE: <a class="ticker" href="/stock/apd#NYSE">APD</a>), DuPont (NYSE: <a class="ticker" href="/stock/dd#NYSE">DD</a>) and Dow Chemical (NYSE: <a class="ticker" href="/stock/dow#NYSE">DOW</a>) are drawing interest from activist investors. However, FXZ is not heavy on those names. Those stocks combine for just 3.5 percent of the ETF's weight. Now stock has a weight of over 3.9 percent in the $255.6 million FXZ.

	FXZ's 54 holdings have a median market value of $5.7 billion and the ETF sports a price-to-book ratio of 1.92 and a price-to-cash-flow ratio of 8.3.

	EGShares Basic Materials GEMS ETF (NYSE: <a class="ticker" href="/stock/lgem#NYSE">LGEM</a>) 
	For most of this year, the combination of materials and emerging markets under the umbrella has been a toxic brew, something that <a href="http://www.benzinga.com/etfs/commodities/11/08/1834737/under-the-hood-save-this-one-for-later">has happened before with this ETF</a>. That much is affirmed by LGEM's 32.2 percent year-to-date decline. However, LGEM has perked up in significant fashion.

	Since putting in double bottom around $9, the ETF has reclaimed its 50-day moving average and is now flirting with $10. An emerging markets ETF heavy on materials stocks is bound to be heavy on South Africa, Brazil and LGEM is. Those countries combine for over 48 percent of the ETF's weight, giving the fund considerable leverage to a rebound in base and precious metals prices.

	As is the case with many emerging markets ETFs, LGEM is discounted with a price-to-book ratio of 1.19. Investors are compensated for the risk with an index yield of 4.9 percent, <a href="http://www.emergingglobaladvisors.com/lgem.cfm">according to EGShares data</a>. The rival iShares MSCI Emerging Markets Materials ETF (NASDAQ: <a class="ticker" href="/stock/emmt#NASDAQ">EMMT</a>) is up 4.7 percent in the past week.

	iShares MSCI ACWI ex U.S. Materials ETF (NYSE: <a class="ticker" href="/stock/axmt#NYSE">AXMT</a>) 
	The iShares MSCI ACWI ex U.S. Materials ETF will be met with predictable criticism for its small size (just $2.3 million in assets under management) and lack of volume (just 200 shares per day), but this ETF is up nine percent in the past month. Earlier, we mentioned the Market Vectors Steel ETF and some of that fund's stocks that have recently been surging.

	Some strong SLX constituents, such as Rio Tinto (NYSE: <a class="ticker" href="/stock/rio#NYSE">RIO</a>), Posco (NYSE: <a class="ticker" href="/stock/pkx#NYSE">PKX</a>), Vale (NYSE: <a class="ticker" href="/stock/vale#NYSE">VALE</a>) and ArcelorMittal (NYSE: <a class="ticker" href="/stock/mt#NYSE">MT</a>) are also found in AXMT. The drawback is AXMT's exposure to beaten up fertilizer names. The fund holds 153 stocks and has an annual expense ratio of 0.48 percent.

	For more on ETFs, click <a href="http://www.benzinga.com/etfs">here</a>.

Short Ideas

Emerging Markets

Emerging Market ETFs

Global

AXMT

iShares MSCI Emerging Markets Materials Sector Index Fund

EMMT

LGEM

VALE

Three Materials ETFs Your Broker Forgot to Mention

In the ETF game, size matters. As the exchange-traded products industry has evolved, professional and retail investors alike have become more obsessed with numbers. Underscoring the notion that a herd mentality still permeates financial markets, investors tend to find comfort in the largest, most heavily traded ETFs because those ETFs are big and heavily traded.

That is the case despite the fact that compelling evidence exists to suggest that <a href="http://www.benzinga.com/trading-ideas/long-ideas/12/04/2518724/surprise-surprise-does-size-matter-with-etf-returns">bigger is rarely better when it comes to ETFs</a>. 

Perhaps what is most vexing is that this scenario is not confined to just one area of the ETF world. The conversation is not limited to a couple of China ETFs outperforming the iShares FTSE China 25 Index Fund (NYSE: <a class="ticker" href="/stock/fxi#NYSE">FXI</a>) or a fund or two being better alternatives than one of the sector SPDRs. The examples of <a href="http://www.benzinga.com/trading-ideas/long-ideas/12/10/2955946/argument-for-low-volume-etfs-gains-steam">small ETFs turning in stellar performances</a> are too numerous to completely detail here.

There are some standouts worth examining, though. For example, the iShares Nasdaq Biotechnology Index Fund (NASDAQ: <a class="ticker" href="/stock/ibb#NASDAQ">IBB</a>) is, by most metrics, a fine ETF. Home to $2.5 billion in assets under management, the iShares Nasdaq Biotechnology Index Fund is the largest biotech ETF on the market. It has also performed quite well this year with a gain of 39.7 percent.

Chances are, few investors – professional or retail – would complain about making 40 percent in less than 10 months. On the other hand, those investors, particularly the retail crowd paying fees to advisors, probably would not be pleased to know that of the four major biotech ETFs, IBB is the worst performer on a year-to-date basis. 

The fund IBB is closest to in terms of performance, the SPDR S&amp;P Biotech ETF (NYSE: <a class="ticker" href="/stock/xbi#NYSE">XBI</a>), has outpaced IBB by over 300 basis points. The First Trust NYSE Arca Biotech Index Fund (NYSE: <a class="ticker" href="/stock/fbt#NYSE">FBT</a>) has topped IBB by 660 basis points. A biotech ETF that rarely <a href="http://www.benzinga.com/trading-ideas/long-ideas/12/07/2713872/etfs-winners-that-could-keep-their-momentum-ephe-fbt-xhb">gets the credit it deserves</a>, the Market Vectors Biotech ETF (NYSE: <a class="ticker" href="/stock/bbh#NYSE">BBH</a>), has jumped almost 58 percent this year in near stealth fashion.

Proving that the bigger is not always better argument lingers across multiple sectors, there is the example of the First Trust Materials AlphaDEX Fund (NYSE: <a class="ticker" href="/stock/fxz#NYSE">FXZ</a>). At least this ETF <a href="http://www.benzinga.com/trading-ideas/long-ideas/12/10/2971334/alphadex-etfs-do-things-differently-with-stellar-results">has drawn some praise</a> for trumping its rivals.

That is exactly what FXZ has done this year. In 2012, FXZ has topped the Vanguard Materials ETF (NYSE: <a class="ticker" href="/stock/vaw#NYSE">VAW</a>) by 150 basis points and the Select Sector Materials SPDR (NYSE: <a class="ticker" href="/stock/xlb#NYSE">XLB</a>) by almost 480 basis points.

Moving on from sector funds, broad market ETFs focused on a particular cap spectrum also give investors bigger is not always better examples. Take the case of the Guggenheim Wilshire Micro-Cap ETF (NYSE: <a class="ticker" href="/stock/wmcr#NYSE">WMCR</a>). That ETF has just $13.4 million in assets under management compared to $478.6 million for the iShares Russell Microcap Index Fund (NYSE: <a class="ticker" href="/stock/iwc#NYSE">IWC</a>). 

Chances are if Joe Six Pack asked his financial advisor to put him into a micro-cap ETF, the advisor would choose IWC because its large by assets and has decent volume for these type of ETFs at almost 80,000 shares per day. Joe would have every right to be mad at his advisor because the choice means being cheated out of almost 700 basis points of alpha this year.

Arguably, three examples is enough to make investors wonder if all they are getting with large ETFs is a security blanket by way of size. In the process, their returns may be suffering.

For more on smaller ETFs that are outperforming, click <a href="http://www.benzinga.com/trading-ideas/long-ideas/12/10/2971334/alphadex-etfs-do-things-differently-with-stellar-results">here</a>.

Broad U.S. Equity ETFs

New ETFs

Currency ETFs

Intraday Update

First Trust NYSE Arca Biotechnology Index Fund

WMCR

Investors Cheating Themselves by Focusing on Largest ETFs

First Trust, the Illinois-based ETF sponsor, is a major issuer of sector funds. As most investors know, there is no shortage of sector ETFs on the market today and this territory long dominated by the biggest fund sponsors, namely State Street's (NYSE: <a class="ticker" href="/stock/stt#NYSE">STT</a>) select sector SPDRs along with sector funds issued by iShares and Vanguard.

That is tough territory to encroach upon, but First Trust has done just that with its AlphaDEX funds that eschew the usual cap-weighting methodology in favor of using other valuation metrics to construct ETF indexes. 

The strategy has proven efficacious. Not only have an array of First AlphaDEX ETF proven proficient in terms of gaining assets under management, some have outperformed iShares, SPDR and Vanguard rivals over time.

"We're more selective in our approach," said First Trust ETF Strategist and Senior Vice President Ryan Issakainen in an interview with Benzinga from the Morningstar ETF Conference in Chicago. "We're overweighting in terms of investment merit. Over time, these attributes predict relative outperformance. We consider momentum and valuation factors that have been vetted and passed through some rigor."

The AlphaDEX methodology includes ranking members of various Russell 1000 sectors on growth factors including three, six and 12-month price appreciation, sales to price and one year sales growth, and, separately, on value factors including book value to price, cash flow to price and return on assets, <a href="http://www.ftportfolios.com/Retail/Etf/EtfSummary.aspx?Ticker=FXN">as First Trust notes on the AlphaDEX funds' web sites</a>.

AlphaDEX has worked for some First Trust sector funds. For example, the First Trust Materials AlphaDEX Fund (NYSE: <a class="ticker" href="/stock/fxz#NYSE">FXZ</a>) has outpaced the Materials Select Sector SPDR (NYSE: <a class="ticker" href="/stock/xlb#NYSE">XLB</a>) <a href="http://www.benzinga.com/trading-ideas/long-ideas/12/09/2930670/etf-showdown-materials-melee">over the past year</a>, quarter and year-to-date.

Still, the AlphaDEX funds are not as large as their counterparts and in most cases are not as voluminous. The First Trust AlphaDEX Energy Fund (NYSE: <a class="ticker" href="/stock/fxn#NYSE">FXN</a>) has $134.5 million in AUM compared to $7.2 billion for the Energy Select Sector SPDR (NYSE: <a class="ticker" href="/stock/xle#NYSE">XLE</a>). The First Trust AlphaDEX Health Care Fund (NYSE: <a class="ticker" href="/stock/fxh#NYSE">FXH</a>) has average daily volume of 138,000 shares while Health Care Select Sector SPDR (NYSE: <a class="ticker" href="/stock/xlv#NYSE">XLV</a>) has average turnover of almost 4.8 million shares.

Issakainen notes that the AlphaDEX ETFs have been well received by investors.

"The ETFs are penetrating registered investment advisors and asset management firms," he said. "They're using AlphaDEX funds more now. The AlphaDEX sector funds have been out for more than five years and we now how they perform in different environments."

The statistics support Issakainen's view that investors are warming to the AlphaDEX methodology. FXH has $642.5 million in AUM. The First Trust Consumer Staples AlphaDEX Fund (NYSE: <a class="ticker" href="/stock/fxg#NYSE">FXG</a>) has $360.9 million in assets. The First Trust Financials AlphaDEX Fund (NYSE: <a class="ticker" href="/stock/fxo#NYSE">FXO</a>) has nearly $187 million in assets. Those are all numbers that imply the AlphaDEX sector funds are not only surviving, but thriving as well.

Due to AlphaDEX sector funds avoiding excessive weights to just one or two stocks, there are times when the funds can lag traditionally weighted ETFs. The technology sector provides a good example.

Year-to-date,the First Trust Technology AlphaDEX Fund (NYSE: <a class="ticker" href="/stock/fxl#NYSE">FXL</a>) is up 8.3 percent. FXL currently has a weight of just 1.9 percent to Apple. On the other hand, the iShares Dow Jones U.S. Technology Sector Index Fund (NYSE: <a class="ticker" href="/stock/iyw#NYSE">IYW</a>) is up nearly 19 percent this year. That fund features the largest allocation of any ETF to Apple with a current weight of 24.2 percent.

"There will be times when AlphaDEX funds trail, particularly during risk averse environments," said Issakainen. "If we're underweight big, safe stocks, we can underperform, but that is not the case the majority of the time."

He is right about that. Over the past five years, a brutal time for bank stocks, FXO is off 16.3 percent compared to a 53 percent plunge for the Financial Select Sector SPDR (NYSE: <a class="ticker" href="/stock/xlf#NYSE">XLF</a>). Since May 2007, the debut month of FXH, that ETF has surged over 70 percent, but XLV is up just 14 percent. In the past year, FXN has delivered almost 400 basis points in additional alpha compared to XLE and has topped the Vanguard Energy ETF (NYSE: <a class="ticker" href="/stock/vde#NYSE">VDE</a>) by more than 500 basis points.

For more on AlphaDEX ETFs, click <a href="http://www.benzinga.com/trading-ideas/long-ideas/12/09/2930670/etf-showdown-materials-melee">here</a>.

Specialty ETFs

iShares Dow Jones US Technology Sector Index Fund

AlphaDEX ETFs Do Things Differently With Stellar Results

Here is the ETF Professor's Watch List for Friday October 5, 2012:

The Global X SuperDividend ETF (NYSE: <a class="ticker" href="/stock/sdiv#NYSE">SDIV</a>) had a strong day on Thursday.

The First Trust Materials AlphaDEX Fund (NYSE: <a class="ticker" href="/stock/fxz#NYSE">FXZ</a>) could be worth a trade.

Give the First Trust STOXX Euro Select Dividend Index Fund (NYSE: <a class="ticker" href="/stock/fdd#NYSE">FDD</a>) a look.

Emerging markets plays of the day: iShares MSCI Philippines Investable Market Index Fund (NYSE: <a class="ticker" href="/stock/ephe#NYSE">EPHE</a>), Market Vectors Brazil Small-Cap ETF (NYSE: <a class="ticker" href="/stock/brf#NYSE">BRF</a>) and the Market Vectors Vietnam ETF (NYSE: <a class="ticker" href="/stock/vnm#NYSE">VNM</a>).

Forex play of the day: PowerShares DB Dollar Bearish (NYSE: <a class="ticker" href="/stock/udn#NYSE">UDN</a>).

Bond play of the day: Vanguard Total Bond Market ETF (NYSE: <a class="ticker" href="/stock/bnd#NYSE">BND</a>).

Pre-Market Outlook

ISHARES MSCI PHILIPPINES INVESTABLE MARKET INDEX FUND

EPHE

First Trust STOXX European Select Dividend Income Fund

SDIV

PowerShares DB US Dollar Index Bearish Fund

ETFs to Watch October 5, 2012 (BND, FXZ, VNM)

The month of October has an interesting track record when it comes to the U.S. equity market. This is the month when the crashes of 1929 and 1987 took place. Those with shorter-term memories likely remember that October 2008 was less than pleasant for stocks as well. 

As the Stock Trader's Almanac points out, October has reversed 11 bear markets since the end of World War II. Additionally, October can be a good time to establish long positions because it is the last month in the six-month period known for being historically unfavorable to stocks.

Keeping with the theme of <a href="http://www.benzinga.com/trading-ideas/long-ideas/12/06/2698806/sound-of-the-seasons-more-etfs-for-seasonal-trends">using ETFs for seasonal profits</a>, here is a look at some ETFs that could be worth scooping up next month.

Vanguard Telecom Services ETF (NYSE: <a class="ticker" href="/stock/vox#NYSE">VOX</a>)

The telecom sector sector has already been mentioned as a possible winner should <a href="http://www.benzinga.com/analyst-ratings/analyst-color/12/09/2939541/s-p-highlights-election-etfs">President Obama win reelection in November</a>. That alone could make an ultra-conservative ETF like VOX worth a look next month. 

As S&amp;P Capital IQ said in a recent research note, "President Obama has been supportive of broadband expansion, through government subsidies, enticing carriers to build out their networks. In addition, the Federal Communications Commission's chairman has been a proponent of moving wireless spectrum from television broadcasters to telecom carriers. If Governor Romney wins, a new chairman would take over and could scuttle these efforts."

The biggest risk to VOX or any other U.S.-focused telecom ETF continuing the good times for the rest of this year is that many of these ETFs have already surged. VOX, which allocates 45 percent of its combined weight to Verizon (NYSE: <a class="ticker" href="/stock/vz#NYSE">VZ</a>) and AT&amp;T (NYSE: <a class="ticker" href="/stock/t#NYSE">T</a>), is up 21.2 percent year-to-date, a run that is nearly 700 basis points better than the SPDR S&amp;P 500 (NYSE: <a class="ticker" href="/stock/spy#NYSE">SPY</a>). 

Then again, it has been investors' preference for low-beta fare that has driven VOX higher. If that trend persists through year-end, VOX makes for a good October buy.

First Trust Materials AlphaDEX Fund (NYSE: <a class="ticker" href="/stock/fxz#NYSE">FXZ</a>)

Like telecom, materials accounts for a relatively small percentage of the S&amp;P 500's weight, but the two sectors are far removed from each other in terms of beta and risk profile. Still, materials stocks make for a sound October bet. The Stock Trader's Almanac notes the S&amp;P 500 Materials Sector has a five-year average return of 16.4 percent from mid-October through mid-May.

That is not the index tracked by the First Trust Materials AlphaDEX Fund, but FXZ has shown a penchant for outperforming <a href="http://www.benzinga.com/trading-ideas/long-ideas/12/09/2930670/etf-showdown-materials-melee">larger, more popular materials ETFs over time</a>.

Health Care Select Sector SPDR (NYSE: <a class="ticker" href="/stock/xlv#NYSE">XLV</a>)

Yes, the pharmaceuticals sector is historically a good one to embrace in October, but there is more to the story with XLV or any of the comparable funds. Like VOX, this is another presidential election play, and as is the case with the telecom ETF, investors who are long XLV might want to be pulling for President Obama.

For as controversial as Obamacare has been, it has been good for the pharmaceuticals sector. XLV is up almost 16 percent this year and when it makes a new high, it is not just a 52-week high. It is a new all-time high. 

The thesis is simple, as S&amp;P Capital IQ points out.

""Health care is likely the most obvious sector that would benefit from President Obama holding on, as health care reform would proceed unabated," S&amp;P Capital IQ said in the note. "Most sub-industries have been working toward implementing the law. The pharmaceutical industry would proceed with its plan to pay upfront fees in increased Medicaid rebates and Medicaid discounts with the promise of expanding the insured market come 2014. We also see generic firms and drug distributors benefiting from the government's push toward lower-cost drugs in the newly expanded patient populations. Meanwhile, hospitals should benefit from a sharp drop in total uncompensated care with an increase in insured patients."

For more on ETFs and seasonal ttrends, click <a href="http://www.benzinga.com/trading-ideas/long-ideas/12/08/2852595/september-may-bring-opportunities-with-these-etfs">here</a>.

Politics

These ETFs Could Soar Starting in October

The materials sector accounts for just 3.5 percent of the S&amp;P 500's weight, making it the third-smallest sector in the broader market index ahead of only utilities and telecommunications. Even with that factoid, there are plenty of materials ETFs for investors to choose from. Including the inverse and leveraged products, there are nearly 60 <a href="http://etfdb.com/screener/">materials ETFs on the market today</a>.

No two materials ETFs are exactly the same, but the major funds tracking producers of basic materials such as DuPont (NYSE: <a class="ticker" href="/stock/dd#NYSE">DD</a>) and FreeportMcMoRan (NYSE: <a class="ticker" href="/stock/fcx#NYSE">FCX</a>) have a lot in common. The iShares Dow Jones U.S. Basic Materials Sector Index Fund (NYSE: <a class="ticker" href="/stock/iym#NYSE">IYM</a>), Materials Select Sectors SPDR (NYSE: <a class="ticker" href="/stock/xlb#NYSE">XLB</a>) and Vanguard Materials ETF (NYSE: <a class="ticker" href="/stock/vaw#NYSE">VAW</a>) are not triplets, but one is not vastly different from the other. 

These are standard, passively managed cap-weighted funds. That approach has worked well at least in terms of attracting assets. In the case of XLB, the ETF has almost $2.5 billion in AUM. Impressive, but a smaller fund that does things a little bit differently is a worthy competitor to XLB and IYM and VAW for that matter.

Just look at how the First Trust Materials AlphaDEX Fund (NYSE: <a class="ticker" href="/stock/fxz#NYSE">FXZ</a>) stacks up against XLB. XLB uses the traditional cap-weighted methodology found in so many ETFs. There is nothing wrong with this approach as it keeps costs down, but it does mean a stock's size is often the most important criteria for inclusion in the ETF.

Regarding size, it is not surprising to see Monsanto and DuPont each accounting for 10.4 percent of XLB's weight. Freeport and Dow Chemical (NYSE: <a class="ticker" href="/stock/dow#NYSE">DOW</a>) combine for 16 percent of the fund's weight. That is four stocks representing a 37 percent of one ETF. 

The First Trust Materials AlphaDEX Fund, which is just over five-years-old compared to almost 14-years-old for XLB, does things differently. Home to 57 stocks, FXZ devotes no more than 3.2 percent of its weight to any single holding. FXZ has duplicate holdings with XLB such as DuPont, Dow and Freeport. However, the AlphaDEX selection methodology ensures FXZ is much different than XLB.

The AlphaDEX methodology is not active management per se, but it does employ quality screens on potential constituents for ETFs such as FXZ. FXZ tracks the NYSE Euronext constructs the StrataQuant Materials Index, which uses the AlphaDEX methodology. That ranks Russell 1000 members on metrics such as three, six and 12-month price appreciation, cash flow, book value, return on assets and others.

The stocks are scored and ranked with the bottom 25 percent being tossed aside and the "selected stocks are divided into quintiles based on their rankings and the top ranked quintiles receive a higher weight within the index," according to First Trust. 

That is how FXZ is put together. Not surprisingly, this way of constructing an ETF is pricy compared to the usual cap-weighted methodology. FXZ has annual fees of 0.7 percent compared to just 0.18 percent for XLB. FXZ is also slightly more volatile than XLB. 

This is a reward for the elevated volatility and higher fees: Over the past quarter, year and year-to-date FXZ has outperformed XLB by health margins, proving the AlphaDEX methodology is worth considering.

For more on materials ETFs, click <a href="http://www.benzinga.com/trading-ideas/long-ideas/12/09/2929002/hard-asset-boom-could-lift-these-etfs">here</a>.

iShares Trust Dow Jones US Basic Materials Sector Index Fund

ETF Showdown: Materials Melee 

Financial markets do enjoy news of quantitative easing. U.S. equities proved as much last Thursday when the Federal Reserve unveiled the latest version in what is now a trilogy of monetary stimulus. Part of the rub with QE in any form is that it is good for lifting near-term sentiment, but too much easing can have dour long-term consequences.

First and foremost is the potential for increased inflation. Inflation is not good because it diminishes the purchasing power of the dollar. That could mean a dollar will not buy the same amount of coffee, gold, oil, platinum, silver, etc. in five or ten years as it does today. 

It is an obvious trade. Hard assets rise in price, leading investors to covet the shares of quality hard asset producers. There is no dearth of materials ETFs on the market today with which to play this trend, but there are some not-so-obvious candidates that merit consideration.

FlexShares Morningstar Global Upstream Natural Resources Index ETF (NYSE: <a class="ticker" href="/stock/gunr#NYSE">GUNR</a>)

The FlexShares Morningstar Global Upstream Natural Resources Index ETF debuted a year ago and with almost $515 million in assets under management, it is fair to say this is one of the most successful ETFs that launched last year. Calling GUNR "obscure," is clearly inaccurate and unfair, but it is fair to say the fund does not receive the same notoriety as other materials-focused ETFs.

Popularity aside, GUNR merits consideration as an ETF that will benefit from rising hard asset prices. The ETF is a plethora of materials and natural resources equities. Agri-business and integrated oil names combine for half of the fund's weight, but the ETF also features a 16.7 weight to diversified mining firms and an 8.7 percent allocation to gold miners. 

Exxon Mobil (NYSE: <a class="ticker" href="/stock/xom#NYSE">XOM</a>), the largest U.S. oil company, is GUNR's largest individual holding with a weight of almost 5.4 percent. GUNR is up 10.1 percent this year, easily outpacing the SPDR S&amp;P Metals &amp; Mining ETF (NYSE: <a class="ticker" href="/stock/xme#NYSE">XME</a>) in the process.

Market Vectors RVE Hard Assets Producers ETF (NYSE: <a class="ticker" href="/stock/hap#NYSE">HAP</a>)

As is the case with GUNR, the Market Vectors RVE Hard Assets Producers ETF is home to a robust AUM total ($146.2 million), but HAP is also an example of a hard assets fund that does not draw much acclaim. 

HAP and GUNR are similar in that both offer broad-based exposure to multiple materials and natural resources sub-sectors. For those investors that think the 120 stocks held by GUNR is not enough, HAP holds nearly triple that amount. However, HAP is not diverse as GUNR as the former allocates a combined 82 percent of its weight to energy and materials names. 

Top-10 holdings include Exxon, Monsanto (NYSE: <a class="ticker" href="/stock/mon#NYSE">MON</a>), Potash Corp. of Saskatchewan (NYSE: <a class="ticker" href="/stock/pot#NYSE">POT</a>) and BHP Billiton (NYSE: <a class="ticker" href="/stock/bhp#NYSE">BHP</a>), so there is some duplication with GUNR. HAP is also slightly more expensive with fees of 0.49 percent compared to 0.48 percent for GUNR. 

First Trust Materials AlphaDEX Fund (NYSE: <a class="ticker" href="/stock/fxz#NYSE">FXZ</a>)

The First Trust Materials AlphaDEX Fund is proof positive that index methodology can make a difference in an ETF's return. On the surface, FXZ would appear to be an also ran next to the Materials Select Sector SPDR (NYSE: <a class="ticker" href="/stock/xlb#NYSE">XLB</a>) and the Vanguard Materials ETF (NYSE: <a class="ticker" href="/stock/vaw#NYSE">VAW</a>), just to name a pair. 

For starters, FXZ is not tiny with almost $176 million in assets under management. There are some <a href="http://www.ftportfolios.com/Retail/Etf/EtfSummary.aspx?Ticker=FXZ">moving parts to this ETF's index methodology</a>, but to describe it simple terms, the bottom 25 percent of the Russell 1000 Materials and Processing Index are eliminated. The "selected stocks are divided into quintiles based on their rankings and the top ranked quintiles receive a higher weight within the index. The stocks are equally-weighted within each quintile," according to First Trust. 

That means FXZ features some of the same constituents as XLB and VAW, but with vastly different weights. Asking why First Trust uses this is methodology is not important. Asking about the result is. Year-to-date, in the past year and over the past five years, XLB and VAW come nowhere FXZ in terms of generating alpha. 

For more on ETFs, click <a href="http://www.benzinga.com/etfs">here</a>.

Events

Market Vectors RVE Hard Assets Producers ETF

Hard Asset Boom Could Lift These ETFs

Here is the ETF Professor's ETF Watch List for Friday September 21, 2012.

The First Trust Materials AlphaDEX Fund (NYSE: <a class="ticker" href="/stock/fxz#NYSE">FXZ</a>) warrants consideration.

The Consumer Staples Select Sector SPDR (NYSE: <a class="ticker" href="/stock/xlp#NYSE">XLP</a>) continues to perform well.

Keep an eye on the Direxion Daily Gold Miners Bull 3X Shares (NYSE: <a class="ticker" href="/stock/nugt#NYSE">NUGT</a>).

Emerging markets plays of the day: Market Vectors Poland ETF (NYSE: <a class="ticker" href="/stock/plnd#NYSE">PLND</a>), WisdomTree India Earnings ETF (NYSE: <a class="ticker" href="/stock/epi#NYSE">EPI</a>) and the iShares MSCI Philippines Investable Market Index Fund (NYSE: <a class="ticker" href="/stock/ephe#NYSE">EPHE</a>).

Forex play of the day: CurrencyShares Canadian Dollar Trust (NYSE: <a class="ticker" href="/stock/fxc#NYSE">FXC</a>).

Bond play of the day: SPDR Barclays Capital High Yield Bond ETF (NYSE: <a class="ticker" href="/stock/jnk#NYSE">JNK</a>).

NUGT

PLND

ETFs to Watch September 21, 2012 (FXC, JNK, XLP)

S&amp;P Capital IQ downgraded its rating on the materials sector to Underweight from Marketweight on Europe's worsening sovereign debt crisis and slowing emerging markets growth today, and the research firm has a similarly bearish view on several marquee materials ETFs.

"For chemicals, the largest Materials sector industry group, representing 54% of market capitalization in the S&amp;P 500 Materials sector as of June 22, the team has a positive fundamental outlook due to potential for higher pricing as long as economic growth worldwide continues to look sufficient," S&amp;P Capital IQ said in a research note.

On the downside, S&amp;P notes that chemicals producers could face increased risks if global growth continues to wane because the firms are highly exposed to international demand trends. S&amp;P Capital IQ has three-star ratings on Dow component DuPont (NYSE: <a class="ticker" href="/stock/dd#NYSE">DD</a>), Dow Chemical (NYSE: <a class="ticker" href="/stock/dow#NYSE">DOW</a>), Air Products (NYSE: <a class="ticker" href="/stock/apd#NYSE">APD</a>) and Airgas (NYSE: <a class="ticker" href="/stock/arg#NYSE">ARG</a>).

Those four stocks combine for almost 23 percent of the Materials Select Sector SPDR's (NYSE: <a class="ticker" href="/stock/xlb#NYSE">XLB</a>) weight. XLB, the largest materials ETF, with over $1.9 billion in assets under management, is rated Underweight by S&amp;P. The ETF, which has an expense ratio of 0.18 percent, has lost 8.2 percent in the past three months. Some of the fund's other top-10 holdings include Monsanto (NYSE: <a class="ticker" href="/stock/mon#NYSE">MON</a>), Newmont Mining (NYSE: <a class="ticker" href="/stock/nem#NYSE">NEM</a>) and Freeport-McMoRan (NYSE: <a class="ticker" href="/stock/fcx#NYSE">FCX</a>).

S&amp;P also has an Underweight rating on the Guggenheim S&amp;P 500 Equal-Weight Materials ETF (NYSE: <a class="ticker" href="/stock/rtm#NYSE">RTM</a>). DuPont, Dow Chemical, Airgas and Air Products combine for about 13 percent of that ETF's weight. RTM has almost $31.3 million in assets under management and charges an expense ratio of 0.5 percent. The fund has lost 10.8 percent in the past 90 days.

The First Trust Materials AlphaDEX Fund (NYSE: <a class="ticker" href="/stock/fxz#NYSE">FXZ</a>) also landed an Underweight rating from S&amp;P. That ETF's chemicals exposure stands at 52 percent of its overall weight though DuPont, Dow, Airgas and Air Products represent just 5 percent FXZ's weight. FXZ's top holdings are CF Industries (NYSE: <a class="ticker" href="/stock/cf#NYSE">CF</a>) and Valspar (NYSE: <a class="ticker" href="/stock/val#NYSE">VAL</a>). 

The $172 million fund, which charges 0.7 percent annually and is home to 57 stocks, is the worst-performer over the past three months of the trio of ETFs mentioned in the S&amp;P note. Over that time, FXZ has tumbled 13.1 percent.

After-Hours Center

Rydex ETF Trust Rydex S&P Equal Weight Materials ETF

S&P Bearish on Materials ETFs

Some stocks are more dangerous than others. In an anemic economic environment, the most dangerous stocks are those with issues that are lurking behind the scenes or in footnotes. Too often, investors are willing to invest without much diligence when times are good. But when times get tough, more are willing to roll up their sleeves and do some old-fashioned analysis.



	U.S. Steel (NYSE: X) is an example of a stock that could see significant additional downward pressure as more investors become aware of the $5.2 billion in liabilities related to its “Pension Benefits”, “Other Benefits” and “Other postemployment benefits” plans, which I will bundle under the term “pensions” for the remainder of this article.

	A loophole in GAAP accounting minimizes, at least temporarily, the impact of big pension liabilities on reported earnings.  Eventually, however, these issues can hurt earnings and surprise investors if the company does not take measures to get them under control.

	In a challenging economic environment, taking appropriate measures is not always feasible. As Warren Buffett famously said, “when the water is drained out of the pool, you see who is not wearing trunks”.

	My fear is that US Steel’s pension liabilities will eventually manifest in downward earnings revisions that will drive the stock down.

	Accounting loopholes can provide a short-term boost to earnings, but they can also lead to a long-term drag or possible bankruptcy. Eastman Kodak (EKDKQ.PK) used the same trick to prop up its 2010 earnings, and now it is bankrupt just as I predicted in my March 2011 article “<a href="http://blog.newconstructs.com/2011/03/22/dead-company-walking-sell-eastman-kodak-ek/">Dead Company Walking: Sell Eastman Kodak</a>”.
<h3>
	Pension Accounting Boosts EPS</h3>

	US Steel boosted its 2011 earnings by increasing its expected return on plan assets (“EROPA”) assumption for its pensions to 7.79%<a href="http://blog.newconstructs.com/2012/06/19/us-steel-x-at-risk-of-pension-pressure/#_ftn1">[1]</a>, up from 7.75% in 2010. <a href="http://blog.newconstructs.com/wp-content/uploads/2012/05/X_EROPAassumptions2011_10K.pdf">Page F-40 in US Steel’s 2011 10-K filing</a> has the details.

	An EROPA of 7.79% is abnormally high. Out of the 1,021 companies with pensions that I cover, 90% of them have a lower EROPA. Only 96 of the 1,021 raised their EROPAs in 2012 while 525 lowered and 400 made no changes. US Steel’s EROPA assumption is not only among the highest but it is also rising when the majority is falling.

	Raising its EROPA in 2012 looks worse when compared to my estimates of the company’s actual return on plan assets. I estimate 2011’s actual return on plan assets was 4.96%. I estimate the average return over the last five years is also 4.96%. Over the last ten years, it is 6.30%. These estimates are based on dividing the “Actual return on plan assets” by the “Beginning balance” of plan assets. You can replicate my analysis using data from the company’s annual reports as detailed in <a href="http://blog.newconstructs.com/wp-content/uploads/2012/05/X_actualReturnsOnPlanAssets2001-2011.xlsx">the model used to calculate the actual return on plan assets</a>, which is based on data from the <a href="http://blog.newconstructs.com/wp-content/uploads/2012/05/X_actualReturnonPlanAssetsSourceData_2011-2001.pdf">2001 – 2011</a> 10-Ks.

	US Steel’s investor relations contact, Dan Lesnak, asserted that the company’s EROPA assumption was not high compared to actual historical returns. When I shared my analysis of the actual returns going back to 2001, he said that I was not looking at a long enough time horizon. When I asked for the appropriate time horizon, he would not provide one. Nevertheless, Mr. Lesnak’s assertion is consistent with this statement on page 57 of the 10-K in reference to using a 7.75% EROPA for 2012: “Actual returns since the inception of the plans have exceeded this 7.75 percent rate and while some recent annual returns have not, it is U. S. Steel’s expectation that rates will return to this level in future periods.”

	In my opinion, that is a rather big expectation given that 30-40% of plan assets are in corporate bonds, Treasury bonds and government-backed mortgages, which are not offering yields anywhere near 7.75%. The remainder of plan assets are in equities, which will have to earn 9.8% for the portfolio return to be 7.75% assuming a 70/30 equity/fixed income split and a 3% yield on the fixed income.

	I think most professional money managers would be happy with 9.8% return over the same long-term time frame assumed for the EROPA.
<h3>
	Pensions Can Have Big Impact On EPS And Cash</h3>

	Since US Steel’s pensions are so large, its pension costs play a prominent role in earnings, much more so than most companies. US Steel’s net periodic benefit cost (the cost attributable to pensions with the current EROPA reported in GAAP earnings) is over 3% of revenue. We cannot analyze how large a part of net income the net periodic benefit expense is because X’s net income was negative in 2011. However, given that net income margins are at best in the high single digits, it is safe to say that, at 3% of revenue, US Steel’s net periodic benefit cost has a big impact on the company’s financial bottom line.

	A high EROPA enables US Steel to lower the costs it must report in earnings for paying into its pensions. In turn, the company’s overall expenses are lower and accounting earnings are higher.

	A 0.5% decrease in US Steel’s EROPA would wipe away $0.23 per basic shares outstanding. A 0.5% reduction to a 7.29% EROPA would be below the median (7.5%) EROPA for the 1,021 pensions we analyzed. It would still be significantly above my estimate of the company’s actual return on plan assets over the last ten years.

	Note that US Steel has been making significant cash contributions, not reflected in EPS, to its pensions. In 2011, the company contributed $626 million to its pension obligations, compared to $534 million in 2010 and $658 million in 2009. Those are big numbers, especially to maintain over a long period, for a company whose reported cash flows were negative in 2011 and 2010. Since 2009, the company’s cash and cash equivalents declined from $1,218 million to $408 million at the end of fiscal 2011.
<h3>
	Pensions Are Underfunded by $5.2 billion</h3>

	US Steel’s pensions were under-funded by $5.2 billion as of 12/31/2011. The sum of the “net funded status” for the “Pension Benefits” and “Other Benefits” plans on page <a href="http://blog.newconstructs.com/wp-content/uploads/2012/05/NewConstructsModel_X_netFundedStatusPensionsAndPostretirementBenefits.pdf">F-38 of the company’s 2011 10-K</a> shows $5.1 billion in underfunded status. An additional $100 million in underfunded obligations to employees is found near the bottom of page F-48. All together, $5.2 billion is about 1.5 times the company’s market cap. For comparison, American Airlines’ (AAMRQ.PK) pensions were underfunded by $8.1 billion coming out of 2010, and it filed bankruptcy about 11 months later with its pensions underfunded by about $10 billion, not a good precedent for US Steel.

	Part of the increase in the underfunded level of X’s pension is due to lower discount rates used to determine the value of its pension obligations. These discount rates are based on “certain corporate bond rates” according to page 57 in the 2011 10-K. The discount rate in 2011 was lowered to 4.5% from 5.0% for most of its “pension” liabilities. Accordingly, a meaningful rise in corporate bond rates would meaningfully reduce the pension obligations and the underfunded level of US Steel’s pensions.

	Such a rise would be a welcome sign as would also likely correspond with a rebound in economic activity. I am not sure, however, if we can expect either anytime in the next couple of years.
<h3>
	Doubtful That US Steel Can Grow Its Way Out Of Its Liabilities</h3>

	If US Steel were in a high growth industry with excellent prospects for future profits, one could argue that the company could eventually earn its way out of the underfunded pensions hole. That is a tough argument for a company in such a competitive and low margin business.

	Worse yet, my financial model suggests that US Steel is more unprofitable than reported GAAP earnings suggest, even if one assumes its EROPA is fair and accurate. Figure 1 compares US Steel’s <a href="http://blog.newconstructs.com/2010/08/05/economic-versus-accounting-earnings/">economic earnings</a> to its accounting earnings. In 2011, US Steel reported -$53 million in accounting losses while I believe the company’s losses were closer to -$1,050 million.
<div>
	
		Figure 1: Accounting Profits Are Not Truly Indicative Of Financial Health
	
		<a href="http://blog.newconstructs.com/wp-content/uploads/2012/06/US_SteelFig1.jpg"><img alt="" height="219" src="http://blog.newconstructs.com/wp-content/uploads/2012/06/US_SteelFig1.jpg" title="US_SteelFig1" width="363" /></a>
	
		Sources: New Constructs, LLC and company filings
</div>

	One of the largest drivers of the differences in reported accounting and <a href="http://blog.newconstructs.com/2010/08/05/economic-versus-accounting-earnings/">economic earnings</a> for US Steel is $1.1 billion in off-balance sheet reserves (about 33% of the company’s market cap). In addition, US Steel is in a very capital-intensive business and generates relatively little cash compared to the amount of <a href="http://www.newconstructs.com/nc/help/glossary.htm#investedCapital">invested capital</a> in the business.

	From where I sit, the company is in a tough spot. It is not making much, if any, money and its liabilities are formidable: pensions at $5.2 billion plus total debt of $4.4 billion equals $9.6 billion.
<h3>
	Stock Valuation Could Suffocate Under Looming Liabilities</h3>

	Assuming that US Steel’s liabilities do not increase, equity investors should be intimidated by the $9.6 billion in existing liabilities that have a senior claim on the company’s future profits. If US Steel does generate future profits, those profits have to be large enough to cover the $9.6 billion in senior claims plus the expectations baked into the current stock price before equity investors can make significant money in US Steel.

	For those that say all of this information is already baked into the stock price, I suggest you look again. According to my discounted cash flow model, to justify the stock valuation at $18.41/share, the company has to grow its after-tax cash flow (<a href="http://www.newconstructs.com/nc/help/glossary.htm#nopat">NOPAT</a>) by 9% compounded annually for over 15 years. That is a rather high growth rate for a long time for a commodity business. I underscore that those are the expectations baked into the current stock price. For investors to believe US Steel deserves a higher valuation/stock price, they must believe that the company’s future profit growth will be even greater than that baked into the current stock price.

	I would say the odds are rather low that US Steel can meet the current expectations baked into the stock price and the odds are rather high the company’s future profits will be much lower than what the market expects.
<h3>
	Footnotes Diligence Pays</h3>

	In summary, using the footnotes to lift the accounting veil on US Steel’s financial situation reveals some earnings and liabilities issues for a stock that is already expensive and could suffer downward pressure when investors become more aware of these issues.
<h3>
	Avoid ETFs and Mutual Funds That Hold US Steel</h3>

	Here is a list (as of June 6, 2012 when I sent my original note to clients) of the ETFs and mutual funds that allocate the most to US Steel. Get free reports on these funds from my free <a href="http://bit.ly/Me0qvO">mutual fund and ETF screener</a>.

	Mutual funds
<ol><li>
		WorldCommodity Funds Inc: WorldCommodity Fund (WCOMX) – Dangerous Rating</li>
	<li>
		Thornburg Investment Trust: Thornburg Value Fund (TVIFX) – Dangerous Rating, same for TVCFX, TVBFX, TVRX, TVAFX, TVIRX, TVRRX</li>
	<li>
		Monetta Trust: Monetta Mid-Cap Equity Fund (MMCEX) – Dangerous Rating</li>
	<li>
		Professionally Managed Portfolios: Hodges Blue Chip 25 Fund (HDPBX) – Neutral Rating</li>
	<li>
		Flex-funds Trust: Quantex Fund (FLCGX) – Dangerous Rating</li>
</ol>


	ETFs
<ol><li>
		Rydex S&amp;P Equal Weight Materials ETF (RTM) – Neutral Rating</li>
	<li>
		SPDR S&amp;P Metals &amp; Mining ETF (XME) – Dangerous Rating</li>
	<li>
		PowerShares S&amp;P 500 High Beta Portfolio (SPHB) – Dangerous Rating</li>
	<li>
		First Trust Materials AlphaDEX Fund (FXZ) – Dangerous Rating</li>
	<li>
		Materials Select Sector SPDR (XLB) – Neutral Rating</li>
</ol>


	This report is part of my series on stocks at risk because of abnormal accounting practices. My first <a href="http://blog.newconstructs.com/2012/05/18/bail-out-of-dal-before-the-stock-crashes/">article was on Delta Airlines (DAL)</a> on 5/10/12. Only logged-in users can access Premium Picks reports under the <a href="http://www.newconstructs.com/nc/research/report/investment-perspectives-reports.htm">Investment Insights</a> section of our Reports library.

	Disclosure: I am short X. I receive no compensation to write about any specific stock or theme.

Small Cap Analysis

SPHB

Short US Steel Before Pensions Go Bust

There are instances in life when size does matter - but when it comes to ETFs, size can be deceiving. 

Investors have a tendency to equate a fund's size with quality, but there is no empirical evidence to suggest that simply because an ETF is home to a large assets under management and robust average daily trading volume that it is a "good" fund. 

In fact, the volume argument has <a href="http://www.benzinga.com/trading-ideas/long-ideas/12/02/2356406/five-thinly-traded-etfs-to-consider-ald-scin-bno">already been proven wrong</a> as a plethora of thinly-traded ETFs have shown stellar returns in 2012. 

As for size by way of assets, that's another argument that <a href="http://www.benzinga.com/trading-ideas/long-ideas/11/12/2198258/bigger-isnt-always-better-with-etfs-part-iv">has been discredited</a> as there are plenty of "me too" ETFs that have outpaced their larger rivals. in other words, the proof is in the pudding that popularity is great in high school - but not so much with ETFs. 

With that, here are a few ETFs that some investors probably haven't heard about. These obscure funds are outdoing their more heralded counterparts.

PowerShares Dynamic Energy Exploration &amp; Production Portfolio (NYSE: <a class="ticker" href="/stock/pxe#NYSE">PXE</a>):

The energy sector is one of the ideal places to find unheralded ETFs that are delivering better returns than their more popular equivalents. There's no denying that the Energy Select Sector SPDR (NYSE: <a class="ticker" href="/stock/xle#NYSE">XLE</a>) and the Vanguard Energy ETF (NYSE: <a class="ticker" href="/stock/vde#NYSE">VDE</a>) make for decent choices for investors looking for exposure to integrated oil stocks. Both ETFs are large, highly liquid, and feature expense ratios of just 0.18% and 0.19% respectively.

Those factors don't change the fact that the PowerShares Energy Exploration &amp; Production Portfolio, which holds many of the same stocks as XLE and VDE, is the better performer over almost all relevant time horizons. PXE is more expensive at 0.63% per year, but paying another 45 basis points in fees, investors get an ETF that has outperformed XLE and VDE year-to-date, over the past year and over the past five years. And yes, PXE outperforms its rivals by more than enough to make up for its higher fees.

PowerShares NASDAQ Internet Portfolio (NASDAQ: <a class="ticker" href="/stock/pnqi#NASDAQ">PNQI</a>):

When it comes to ETFs that are devoted exclusively to high momentum Internet stocks such as Amazon (NASDAQ: <a class="ticker" href="/stock/amzn#NASDAQ">AMZN</a>) and Priceline (NASDAQ: <a class="ticker" href="/stock/pcln#NASDAQ">PCLN</a>), investors have two choices: the larger, more widely-followed First Trust Dow Jones Internet Index Fund (NYSE: <a class="ticker" href="/stock/fdn#NYSE">FDN</a>) and the PowerShares Nasdaq Internet Portfolio. 

The two ETFs make for a compelling, if undiscovered <a href="http://www.benzinga.com/trading-ideas/long-ideas/12/04/2478435/etf-showdown-log-on-for-an-internet-battle-pcln-goog-fdn">ETF rivalry</a>, but how intense is debatable. With $427 million in AUM, FDN is more than eight times larger than PNQI. 

That's not what's important. What's important is the fact that both ETFs charge 0.6% annually, but year-to-date, over the past year and over the past five years, PNQI is the winner in terms of performance - by noteworthy margins, we should add.

First Trust Financials AlphaDEX Fund (NYSE: <a class="ticker" href="/stock/fxo#NYSE">FXO</a>):
It's a daunting task for an ETF tracking bank stocks to stand out in what is a heavily crowded field, but FXO does have its perks. The five-year-old ETF has almost $172 million in AUM and its average daily volume is strong at over 473,000 shares. Still, FXO is overshadowed by the likes of the Financial Select Sector SPDR (NYSE: <a class="ticker" href="/stock/xlf#NYSE">XLF</a>) and the Vanguard Financials ETF (NYSE: <a class="ticker" href="/stock/vfh#NYSE">VFH</a>).

Year-to-date, FXO has slightly lagged XLF and VFH. Over the past 90 days, the First Trust fund is in the middle of this three-fund pack. Stretch things out over a year, or five years, and FXO's dominance becomes apparent. XLF and VFH are nowhere close to FXO over those time horizons.

First Trust Materials AlphaDEX Fund (NYSE: <a class="ticker" href="/stock/fxz#NYSE">FXZ</a>):

As is the case with the financial services sector, it's hard for some materials ETFs to really standout in the face of intense competition from the dominant funds such as the Materials Select Sector SPDR (NYSE: <a class="ticker" href="/stock/xlb#NYSE">XLB</a>) and the iShares Dow Jones US Basic Materials Index Fund (NYSE: <a class="ticker" href="/stock/iym#NYSE">IYM</a>).

FXZ warrants consideration for the same reasons that PXE and FXO do: different index and weighting methodologies have lead to superior returns. FXZ's constituents are ranked by factors including three, six and 12-month price appreciation; sales to price and one year sales growth - and, separately, on value factors including book value to price, cash flow to price and return on assets, according to First Trust. 

In other words, market cap isn't the sole factor in determining a stock's weight in this ETF. The combined diversity of factors delivers an ETF that has outperformed IYM and XLB over the past six months, year-to-date and over the past year. Over the past five years, FXZ is the only member of this trio to sport positive returns.

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