Monday Mailbag: Cyber War, Portfolio Hedges, Crude’s Swoon… and More
To understand the link between making money and your letters to the Investing Daily Mailbag, I now turn not to finance but to human biology.
Emails and texts stimulate the brain’s dopamine, a neurotransmitter that compels you to desire and search. Dopamine increases your goal-directed behavior — for food, sex, drugs, money, whatever. Once you actually attain the object of your desire, the brain’s opioid system rewards you with a feeling of pleasure. That’s why you get a small thrill from the “ping” of a received text or email on your device: it’s all part of the dopamine-opioid loop.
Another chemical kick, of course, is when you make a profit on an investment. I’m just as addicted to the joy of making money as you are, so let’s get to it.
The growing army of trolls…
“Further to your XAR recommendation, given the tremendous emphasis by Congress (see recent Capitol Hill hearings) on cyber warfare and cyber security capabilities, what companies do you see benefiting from the potential expansion/upgrading of the U.S. cyber command?” — Kenneth H.
Ken is referring to my June 23 issue, in which I recommended the SPDR S&P Aerospace & Defense ETF (NYSE: XAR) as a play on the Trump administration’s massive defense build-up.
It’s not just the vagaries of conventional warfare that you should monitor. The perpetual fight against cyber warfare is the sort of accelerating trend on which long-term investors should focus. In addition to breaches of valuable corporate data, hacking also is engulfing the public sector on a global scale, affecting political parties and national leaders of all types.
Russian President Vladimir Putin’s online espionage against the 2016 U.S. presidential election is just one manifestation of the rising stakes in cyber warfare. The Kremlin’s army of Internet trolls was a prominent topic in talks last week between President Trump and Putin.
Even more troubling, reports surfaced on July 7 that hackers had penetrated the computer systems of nuclear power plants around the world.
In previous issues, I’ve recommended several individual cyber security stocks (most recently in my May 18 issue). However, these tech stocks now hover at rich valuations, as investors jump aboard to leverage the trend. If you’re concerned about market volatility in 2017, there’s one investment that allows you to profit from the growing problem of cyber crime, without exposure to the ups-and-downs of individual stocks: PureFunds ISE Cyber Security ETF (NYSE: HACK).
Founded in November 2014, this exchange-traded fund is the world’s first cyber security ETF. The index tracks the performance of companies around the world that are direct service providers for cyber security. It seeks performance that generally mimics the price and yield performance of the ISE Cyber Security Index. More than 78% of the fund’s companies are based in the world’s top technology producer, the U.S. The fund’s year-to-date return is roughly 15%. The expense ratio is a reasonable 0.75%.
Rainy day protection…
“What do you mean by hedges? Gold and silver? Gold and silver funds? REITs? Commodities? Some discussion about what we’re hedging against (inflation? market risk? other?) would be welcome. What might constitute that 30% you’re suggesting?” — Richard G.
Richard is referring to the portfolio allocation recommendations in Personal Finance: 35% stocks, 30% hedges, 25% cash, and 10% bonds.
Yes, we define “hedges” as precious metals, real estate investment trusts, and commodities, among other investment classes. Your choices depend on your investment profile and how much risk you’re willing to shoulder. We’ve increased our weighting to hedges as protection against a probable stock market correction this year, as well as rising inflation and a looming economic downturn.
Here’s another question along similar lines:
“You recommend a 30% allocation to hedges, i.e. assets to what I have seen referred to as ‘traditional alternative classes’ such as gold, commodities, REITs, BDCs, and MLPs. However, there are hundreds of mutual funds and ETFs now that have newer non-traditional strategies such as Long/Short Equity, Managed Futures, M&A Arbitrage, and Global Macro. I am wondering what the pros and cons are to these newer strategies and why you don’t currently appear to recommend any of them.” — Kenneth S.
I’ll let Jim Pearce, chief investment strategist of Personal Finance, answer the question:
“You make a good point and one that we will explore in the future. At the moment, my single biggest concern is a collapse of the bond bubble in which case traditional inflation hedges should perform well if interest rates spike as a result (and the economy continues growing).
However, there are other possible scenarios which would favor some of the strategies you mention, especially if a ‘stagflation’ type of scenario unfolds. I don’t see signs of that yet, but if I do then we will adjust our holdings accordingly.”
And finally, there’s this question about hedging:
“In your current PF allocation, I note that you’re recommending readers hold 30% in hedges. Do you have a list of recommended hedges that would typically be suitable for holding in a 401(k) account?” — Darrell B.
The majority of 401(k) plans and other retirement accounts are invested in mutual funds. Most 401(k) plan administrators have chosen for you the basic groups of funds and cherry-picked the quality offerings among those groups. Some plans have woefully insufficient investment options, while others offer a broad variety of mutual funds to suit varying needs. The funds you choose for hedging purposes will depend on what’s available to you.
Some 401(k) administrators offer a brokerage option, whereby you can invest in individual securities other than the mutual funds offered in the plan. For example, to hedge their portfolios by gaining exposure to gold, investors could use the brokerage option in their 401(k) to invest in our recommended gold fund SPDR Gold Shares (NYSE: GLD).
Carnage in the energy patch…
“Oil prices are dropping again, just when I thought they had finally rebounded. What’s your projection for the energy sector in 2017?” — Norman S.
For insights let’s consult Robert Rapier, chief investment strategist of The Energy Strategist. That’s Robert pictured to your left, visiting an oilfield in Oklahoma. (Robert gets restless in the office; to speak with him I often have to chase him down in the field.)
Robert sums up the carnage in the energy patch that occurred in the first half of 2017:
“This worst first-half performance for crude oil since 1998 is in the books. The price of West Texas Intermediate and Brent crude both fell 14% in the first half of the year. Coal and natural gas also declined by more than 10% in the first half. On the bright side, the half closed out with seven straight winning sessions for crude oil, a sign that perhaps better days are ahead.”
Investors must face facts: Oil’s “go-go” days are over and we’ll never see $110 per barrel oil again.
Oil prices have fallen below the $50 per barrel threshold, clobbering energy stocks as a whole. Beleaguered energy investors were further discouraged on July 5, when reports surfaced that Russia would oppose any efforts to deepen the oil production curtailment currently in effect among OPEC members and 11 other oil producers. Russia also has indicated that it would fight any further extension of the agreement.
The benchmark Energy Select Sector SPDR ETF (NYSE: XLE) declined by 14.8% during the first half of 2017. Consequently, it’s more imperative than ever for energy investors to pick their spots wisely. Heavily indebted oilfield drilling companies are particularly vulnerable and they’re trying to buy time by cleaning up their ugly balance sheets. In successive issues, we’ll pinpoint the best energy stocks with reasonable debt burdens and robust earnings growth momentum.
Got any questions or comments? I’d love to hear from you: firstname.lastname@example.org — John Persinos
At sand’s end…
As I’ve just made clear in the above section about hedges, you need to take proactive steps to protect your portfolio. Accordingly, we’ve found an investment that’s not only correction-resistant but also a long-term growth play on a persistent need.
And that need is for… sand.
Yep, you read that correctly. Consider America’s beaches, to which millions of summer vacationers are now flocking. Maybe you’re sitting on one right now.
Those beaches aren’t naturally occurring; human intervention in the form of dump trucks and bulldozers must frequently enhance and protect them. Indeed, every fresh infusion of new sand could be earning you cash. As much as $320 for every $1 invested in sand-related trades.