Dion Money Management Blog   Money Management for Retirees and Their Families

Winners

iPath Dow Jones-UBS Sugar Total Return Subindex ETN (SGG) +7.2%
After tumbling hard through the first half of 2010, sugar prices have dramatically reversed their trajectory, pushing SGG to levels last seen in March.

Although its ascension has been dramatic, the longer term outlook for sugar is far from sweet. This week, Brazil’s Agriculture Ministry announced that they expect the price of the crop to fall over the next two years.

Investors looking for a more reliable way to play agriculture futures contracts should look to PowerShares DB Agriculture(DBA). This fund tracks a diverse basket of contracts which include wheat, corn, sugar and livestock. This week, DBA gained 3.3%.

United States Natural Gas Fund (UNG) +7.8%
Natural gas prices witnessed a nice jump this week as well thanks to an optimistic storage report from the Energy Information Administration. The best way for investors to play the natural gas industry is to skip UNG and opt for the equity backed First Trust ISE-Revere Natural Gas Index ETF(FCG).

The fund has recently gone through an interesting transformation which has left it heavily exposed to a number of integrated oil majors such as Exxon Mobil(XOM), Total(TOT) and Royal Dutch Shell(RDS.A). This week, a number of these firms reported stellar earnings.

FCG fell 1.5% this week.

iShares MSCI Austria Investable Market Index Fund (EWO) +4.1%
A number of European Union-focused ETFs were leaders among this week’s list of winners as fears regarding the region’s debt issues were abated. Topping the list was EWO, which is designed to track the Austrian market.

In the midst of the debt crisis, Austria was singled out as being particularly vulnerable to tension due to its heavy exposure to Eastern European debt.

ETFS Physical Palladium Shares (PALL) +7.0%
The industry linked platinum group of metals scored strong gains this week, led by palladium. The strength, however, did not extend to all members of the precious metals industry. Gold prices tumbled as investors shied away from protection in favor of more risky assets. In response, the Market Vectors Gold Miners ETF(GDX) suffered one of the sharpest drops of all ETFs this week.

Losers

SPDR S&P Semiconductor ETF (XSD) -4.8%
Tech was a big laggard this week with semiconductors feeling the brunt of the pain. Late in the week, tech took a big hit when outlooks were downgraded for both Nvidia(NVDA) and Symantec(SYMC).

Despite this week’s hiccup, I still believe that technology will be a strong region of the market to pay attention to going into the second half of 2010.

SPDR S&P Metal & Mining ETF (XME) -2.8%
The mining ETF saw a strong run up heading into this week but failed to capitalize, erasing a good portion of those gains.

The broad materials industry will continue to face pressure as investors remain uncertain about the strength of the global economic recovery.

SPDR S&P Homebuilder ETF (XHB) -2.3%
The market is still trying to come to terms with the fact that government-sponsored first-time homebuyer incentive program is no longer available to provide support to the real estate ndustry.  Investors looking to try their luck with XHB should remain prudent. The economic storms are still raging and real estate will remain a tricky sector to navigate.

Disclaimer

Although our policymakers and mixed economic data have set a mixed tone for the market, corporations are doing their part to turn the tide of this recovery. During the Federal Reserve’s semiannual testimony to Congress, Chairman Ben Bernanke painted the picture of an unusually uncertain economic environment, and his comments were followed up this week with a subdued Beige Book, which showed the potential for an economic slowdown even though manufacturers were expanding. Meanwhile, the initial second quarter reading of gross domestic product also showed a slight slowdown, declining 0.3 percent to a 2.4 percent annual rate.

While weak U.S. economic data points over the past two months have forced many economists to revise their 2010 growth projections, few were willing to cut their 2011 numbers as quickly, preferring to characterize recent results as a soft patch rather than foreshadowing a double-dip recession. Corporations are doing their part to post strong results and continue to show signs of recovery. The second quarter earnings season has been largely positive, with many sectors beating analysts’ estimates and aggregate earnings rising for the S&P 500. Industrials and technology have been among the strongest sectors and have provided the best guidance for the current quarter.

Many bearish investors have looked to the U.S. bond market for both a refuge from the correction, as well as confirmation that the economy is headed for a recession. Although the softer economic data and uncertainty over future policy were enough to fuel bond prices higher, the economy is far from static. In fact, private demand has been clearly stimulated via fiscal and monetary policy initiatives, but now the U.S. economic recovery must move from a government led affair to one that is driven by consumer spending and business investment. The fact that bonds have performed so well has likely more to do with an accommodating Federal Reserve, low inflation, and modest capital demands to date. Once any of these reverse, we are likely to see progressively higher interest rates.

Although swings in investor sentiment are unavoidable, I remain positive considering valuation levels, global earnings, and macroeconomic data. The European stress tests from last week were largely benign, China appears to be backing off its monetary tightening stance, and investors’ appetite for risk looks set to return once we break free from the recent trading range.

Disclaimer

Welcome to Don Dion’s Daily ETF Winners and Losers. Be sure to stop by each day to get a feel of who’s winning and who’s losing when it comes to ETFs.

Winners

iShares Silver Trust (SLV) 2.3%
Silver is leading the precious metals industry higher for the second day in a row ahead of the weekend. Following SLV is ETFS Physical Silver Shares (SIVR) and ETFS Physical Palladium Shares (PALL) .

Gold is also scoring gains today as well with iShares COMEX Gold Trust (IAU) climbing 1%.

iShares Barclays 20+ Year Treasury Bond Fund (TLT) 1.4%
Today’s tepid GDP numbers appear to have reminded investors that we remain in a soft patch. In response, the protection of long-term U.S. Treasuries is back in vogue.

ProShares UltraShort 20+ Year Treasury (TBT) , designed to inversely track double the performance of long- term Treasuries, is tumbling accordingly, down 2.7%.

iPath Dow Jones UBS Grains Total Return Subinex ETN (JJG) 2.1%
After struggling at the start of the week, the grains-backed ETN is continuing along the near vertical path it has carved out so far in July. The fund’s dramatic ascension has helped it erase nearly all of its 2010 losses.

While the fund’s rally has been something to watch, I would advise against jumping into this fund. Its concentrated exposure to the grain market makes it vulnerable to volatility.

Market Vectors Brazil Small Cap ETF (BRF) 1.5%
Brazil’s markets are jumping today, with the smallest members of the nation’s economy scoring the largest gains. Market Vectors Brazil Small Cap ETF (BRF) , like Claymore/AlphaShares China Small Cap ETF (HAO) , is a strong fund for investors interested in gaining exposure to the domestic economies of popular emerging nations while avoiding large international conglomerates.

Losers

Claymore/MAC Global Solar Energy Index ETF (TAN) -3.5%
The solar energy ETF is struggling today after shares of major holding MEMC Electronic Materials (WFR) tumbled in response to a poor earnings report. WFR accounts for nearly 5% of the TAN’s portfolio and was down over 15% in early afternoon trading.

Industry leader and top holding First Solar (FSLR) was not faring much better, dropping more than 7%.

As Europe and other regions of the globe struggle to tame their budget issues, solar and the rest of the alternative energy industry will face pressure. Use funds such as TAN cautiously.

iShares MSCI Spain Index Fund (EWP) -2.1%
The Spanish markets are taking a shot across the bow today as investors are reminded that the euro-zone debt crisis lingers on.

Today’s knock comes after the fund has enjoyed a few weeks of strength, leading EWP back up to its 200-day moving average, a level last seen prior to the fund’s breakdown in mid-April.

Disclaimer

Networking ETFs have outperformed the broader technology sector and investors can gain the most direct exposure through PowerShares Dynamic Networking (PXQ) .

Networking has been a strong force within the recovering economy, and ETF issuers iShares and PowerShares each offer a fund for those seeking exposure to the sector.

While the S&P North American Technology-Multimedia Networking Index Fund (IGN) places higher weight in its top holdings, and includes more commonly known telecom titans such as Motorola (MOT) , the PowerShares Dynamic Networking Portfolio Fund (PXQ) opts for a more even weighting distribution across its shares and a more traditional portfolio composition.

As IGN’s name implies, it holds some multimedia and communications companies not typically associated with networking, such as Research in Motion (RIMM) .

With smartphones and tablet computers increasing the demand for data services, network providers are forced to upgrade their systems, and the companies in the networking funds will benefit from the capital spending at these firms.

Networking firms are seeing demand for their products, while developing markets such as electric vehicles open new markets for connectivity software and hardware.

Recently, IGN’s top holding, Juniper Networks (JNPR) , announced its selection by AT&T (T) as a domain supplier for the IP/MPLS/Ethernet/Evolved Packet Core domain. “As a supplier selected for this strategic domain, Juniper is looking forward to working closely with AT&T and our ecosystem partners to deliver the improved economics and user experience that is a priority for AT&T,” said Kevin Johnson, CEO of JNPR.

Similarly, Qualcomm (QCOM) , IGN’s third largest holding, and PXQ’s second largest holding, recently cut a deal with ECOtality (ECTY) .

The two companies entered into an agreement allowing ECTY to implement cellular connectivity into electric vehicle charging stations. This implementation will facilitate ECTY’s use of commercial cellular networks to manage its Blink brand charging station operations, transfer usage data, download firmware updates and publish availability to electric vehicle drivers in real time.

Meanwhile, IGN’s second largest holding, Motorola, announced their second quarter 2010 financial results yesterday. In addition to reported sales of $5.4 billion in the second quarter of 2010, the company’s GAAP earnings in the second quarter of 2010 were listed at $162 million, or 7 cents per share, as compared with GAAP earnings of $26 million, or 1 cent per share, in the second quarter of 2009.

Although the two funds have some overlap, IGN’s top holdings tend to carry slightly more weight within the fund. Additionally, IGN carries a substantially lower expense ratio (0.48%) than its PowerShares competitor (PXQ has a 0.68% expense ratio).

IGN’s top 10 holdings are Juniper Networks, 9.45%; Motorola, 9.38%; Qualcomm, 9.24%; Cisco Systems (CSCO) , 8.57%; Research in Motion (RIMM) , 6.89%; F5 Networks (FFIV) (FFIV) 5.57%; Harris, (HRS) , 4.36%; Tellabs (TLAB) , 4.15%; Polycom (PLCM) , 3.74%; and Commscope (CTV) , 3.58%.

Meanwhile, PXQ’s top 10 holdings are VMware (VMW) , 5.73%; Qualcomm, 5.40%; Broadcom (BRCM) , 5.38%; Citrix Systems (CTXS) , 5.38%; Amphenol (APH) , 5.25%; Juniper Networks, 5.18%; Symantec (SYMC) , 5.13%;
Cisco Systems, 5.01%; ADC Telecom (ADCT) , 4.15%; and
F5 Networks, 3.30%.

While IGN’s lower expense ratio may be initially appealing to prospective investors, keep in mind that the fund’s higher holding weightings make it more sensitive to the performance of individual companies.

Granted, the entire networking sector appears to be performing well, so this may not be a source of major concern for many. The two funds are neck-and-neck in terms of YTD returns, with PXQ leading with 63.15% growth over IGN’s 60.57%.

Still, with hefty exposure to smartphone manufacturers such as MOT and RIMM, I believe investors have a purer networking play in PXQ.

Disclaimer

WisdomTree India Earnings Fund (EPI) has been a leading emerging market ETF this year and some big name investors are starting to move assets into the country.

Representing the “I” in the popular BRIC acronym, India has been one of the most popular destinations for investors looking for access to hot emerging markets. Year to date, it is beating the ETFs covering other BRIC nations, as well as iShares Emerging Market (EEM) .

Now, popular names in finance are showing growing interest in the nation’s markets.

This week, a number of news sources reported that hedge fund legend George Soros is considering purchasing a stake in Asia’s oldest stock exchange, the Bombay Stock Exchange. According to the report, the 4% chunk of the exchange Soros Fund Management is interested in acquiring is currently held by Dubai Holding and is estimated to be worth $40 billion.

Soros is not the first, nor the only famous, Wall Street name to warm up to India’s markets. Prior to the news regarding George Soros’ plans, the Oracle of Omaha, Warren Buffett, had also shown interest in the Asian nation’s promising economy.

In late June, the investor hinted at his first foray into India, announcing plans to open a Berkshire Hathaway (BRK.A) subsidiary designed to sell auto insurance. In looking at the initial report, the business proposed appears similar to Berkshire’s GEICO division.

Retail investors looking to follow their favorite financiers into the increasingly popular Indian market can do so through a number of India-focused ETFs. Barring leveraged products such as Direxion Daily India Bull 2X Shares (INDL) and debt products such as iPath MSCI India Index ETN (INP) , the two most popular options for India bulls include the WisdomTree India Earnings Fund (EPI) and the PowerShares India Portfolio (PIN) .

The elder of these two funds, EPI, tracks the WisdomTree India Earnings Index. This index is comprised of 127 India-based companies weighted according to their respective fiscal earnings.

As a result of this indexing strategy, top holdings Reliance Industries, Infosys Technology (INFY) and Oil & Natural Gas Corp, represent more than a quarter of the fund’s total portfolio. The seven other firms listed among EPI’s top 10 positions together account for an additional 18% of the fund’s assets.

From a sector perspective, EPI is heavily related on India’s financial and energy industry, which represent 23% and 19% slices of the fund respectively.

PowerShares’ PIN follows the performance of the Indus India Index. Although it is designed to be a catch-all for India’s equity markets, this index is more concentrated than EPI, with only 50 firms listed.

Once again, Reliance Industries, INFY, and Oil & Natural Gas Corp represent the largest individual slices and together make up close to 30% of the fund’s index. One noticeable difference, however, is the fund’s sector breakdown, which shows the Indian energy industry making up the largest slice of the fund, representing nearly 26% of its index.

PIN is a slightly cheaper alternative to EPI, charging investors 0.78% versus 0.88%.

Although they share a number of similarities, my choice for playing the nation is EPI. Throughout the past month and 2010 as a whole, the WisdomTree fund has managed to outperform its PowerShares competitor. The same can be said comparing their performance over one- and two-year periods. This trend looks to continue as more investors catch onto the potential within this nation’s economy.

Disclaimer

Investment uncertainty is widespread these days, perhaps nowhere more so than in China’s economy.

In China’s property market alone, forecasts range from “definitely not a bubble” to “imminent collapse.” Luckily, investors seeking coverage of China can employ ETFs to gain exposure to specific sectors they deem lucrative.

China’s GDP grew 11.1% in the first half of the year, as compared to the year ago period. However, the growth slowed from 11.9% in the first quarter to 10.3% in the second quarter.

One Chinese think tank estimates that the economy will grow 9.5% for the year, which suggests a further slowdown in the third and fourth quarters. Overall, 9.5% growth is strong, but the change in acceleration is likely to affect some sectors more than others.

The property market receives the most attention due to ongoing debate over whether there is a bubble or not. The ETF play here is Claymore/AlphaShares China Real Estate (TAO) , which has gone nowhere in the past year and nowhere this year, although it’s been a bumpy ride. TAO first tumbled in August 2009 when the mainland China stock market topped, then fell in January along with global markets, and again in May.

Meanwhile, Chinese property prices continued to climb, as double-digit annualized price increases became the norm. It appears the government’s efforts to cool the market had a greater effect on stock investors up until this point.

Potential warnings signs cropped up this month. Chinese home prices in 70 cities fell 0.1% in June from May, the first slide in over a year. In Beijing, developers are cutting prices to move new homes. Next year, it is expected that some localities will introduce property taxes as part of a national effort at tax reform and that could be another factor slowing price appreciation.

TAO would need to rally about 12% to hit a new 52-week high, but only about 4% to hit a new high in 2010. It has outpaced other China ETFs over the past six months, but is roughly in line with the group year to date.

TAO’s more volatile nature means it’s usually leading or lagging the group. Given the recent outperformance and a potentially broader economic deceleration, I expect the fund to lag behind other China ETFs over the next few months.

A weak property market would be bad news for the financial sector and the funds with the largest exposure, iShares FTSE/Xinhua China 25 (FXI) and Global X China Financials (CHIX) . FXI has nearly 50% of assets in financials, mainly insurance and banks, while CHIX’s portfolio largely consists of banks, insurers and property developers.

The banks already need to replenish their capital after loaning $1.4 trillion in 2009. They also have $1.1 trillion in outstanding infrastructure loans to local governments, 23% of which may be difficult to collect, according to regulators.

Regardless of the overall economy’s performance, these banks are going to dilute shares, at the very least. CHIX is down only about 7% since inception in November, while up 20% from May lows. The sector is not overpriced at this point, but prices are still not fully accounting for the risk in the system. Earlier today, for instance, Industrial and Commercial Bank of China announced plans to raise $6.6 billion dollars through equity sales, increasing the share total by about 6%.

Investors can reduce exposure to financials with a broad ETF such as Claymore/AlphaShares China Small Cap (HAO) , which only has 12% in the sector. The financial holdings also skew away from the large banks.

There are also sector ETFs such as Global X China Consumer (CHIQ) and Claymore China Technology (CQQQ) that completely avoid the financial sectors.

One area seeing rapid growth in China is wages, and part of the reason for tax reform is to help create a middle class. This reform will take a decade or more to complete, but these policies are starting to be implemented on a small scale.

Technology companies are more likely to be privately run and have a greater focus on creating value for their shareholders than the government-owned firms. Many of the technology companies are also involved in create goods and services sold to consumers.

Disclaimer

First Trust ISE-Revere Natural Gas (FCG) shook up its portfolio in the latest rebalancing, but it remains well positioned in the natural gas industry.

The growth and evolution of the ETF industry is a story of investor demand. In the past, investors have been satisfied having access to products that have the ability to mimic the performance of benchmark indexes, but many are increasingly seeking out funds that try to beat the performance of their benchmarks. In order to meet this demand, a number of top providers have taken to launching active and pseudo-active ETF products.

Unlike traditional, passive ETFs which employ market-cap weighted indexing strategies, pseudo-active ETFs determine individual holdings based on a collection of criteria or a formula.

One popular of the more popular ETFs which makes use of an alterative indexing strategy is FCG.

In the past I have looked to this fund as an adequate proxy for playing the popular natural gas arena. Rather than using the United States Natural Gas Fund (UNG) , a futures backed product plagued contango and targeted by regulators, FCG tracks a basket of companies dedicated to the exploration and production of this fuel.

FCG is designed to track the ISE-Revere Natural Gas Index. Unlike a market cap weighted index, this basket of companies is equal weighted. According to the First Trust website, constituents chosen for the index are determined based on a number of metrics including price/earnings ratio, price/book ratio, return on equity and correlation to natural gas future prices. In the end, a total of 30 companies are chosen to represent the index.

FCG’s make-up is not permanent. Each quarter, First Trust evaluates the natural gas industry based on the stated criteria and makes any needed changes. While some of these are minor tweaks, as shown by the fund’s current state, dramatic changes can and do occur.

Comparing the fund’s current index to that of May 31, 2010 (a month after and a month before the rebalancing), one can see a number of significant alterations.

Before the rebalancing, FCG’s top five holdings included firms such as Mariner Energy (ME) , Pioneer Natural Resources (PXD) , Cimarex Energy (XEC) EOG, and Questar (STR) .

Today, FCG’s top holdings have shifted to include XOM, Anadarko (APC) , STR, Royal Dutch Shell (RDS.A) , and Noble Energy (NBL) . Other notable holdings not present in the past include Total (TOT) and Hess .

The top holdings highlight a shift in the fund towards large, integrated energy conglomerates that occurred after its June rebalancing. Furthermore, XOM is twice as large as the rest of the holdings due to its merger with XTO Energy (XTO) , which was also a holding in FCG.

Shifting towards integrated oil companies may pose an issue to diehards who have relied on FCG for exposure to companies solely dedicated to natural gas production. However, personally I still see FCG as a reliable alternative to playing the natural gas industry than other options like UNG. In fact, looking at the fund’s current breakdown, the fund may hold more promise than ever.

Thanks to the recent bout of economic turmoil and BP’s continued struggle to clean up the Gulf of Mexico, many of these successful, high yielding, integrated oil companies have gotten battered, despite seeing stable oil prices and a rebounding natural gas picture.

Their low valuations have helped them fit the criteria for inclusion in the portfolio of FCG and when they at last rebound, FCG will be well suited to take advantage.

FCG’s shift highlights the transparent nature of the ETF industry. Although the portfolios of non-traditional indexing strategies can sometimes change, investors can visit a fund’s Website and keep tabs on their ETFs’ underlying holdings to ensure that they continue to coincide with their personal investing goals.

Disclaimer

Welcome to Don Dion’s Daily ETF Winners and Losers. Be sure to stop by each day to get a feel of who’s winning and who’s losing when it comes to ETFs.

Winners

iPath Dow Jones-UBS Grains Total Return Subindex ETN (JJG) 2.9%
The grain-focused ETN is rallying today as well thanks to a strong jump in wheat prices. This crop’s gain stems supply fears in Russia, where drought conditions are threatening to constrict farmers’ yields.

Throughout July, the grains have seen an impressive rally, pulling broader agriculture funds such as PowerShares DB Agriculture ETF (DBA) along for the ride.

United States Natural Gas Fund (UNG) 1.6%
Warm weather forecasts are helping to lift natural gas prices on Wednesday, powering UNG higher.

In the near future, natural gas will be in the limelight as Washington Democrats and Republicans gear up to do battle over energy and oil reform.

According to the Senate bill’s current text, natural gas is expected to be a major beneficiary as lawmakers look to provide incentives for natural gas vehicles.

While attractive on paper, UNG will face strong headwinds in the near future as regulators crack down on futures trading. Investors should look to First Trust ISE-Revere Natural Gas Index ETF (FCG) to play the fuel.

PowerShares DB Base Metals Portfolio (DBB) 1.4%
After yesterday’s hiccup, base metals appear to have returned to their upward path, testing levels seen right before its early June breakdown.

Copper is doing its part to keep this fund up. iPath Dow Jones-UBS Copper Total Return Subindex ETN (JJC) is up 1.4% today.

Losers

iShares Dow Jones U.S. Home Construction Index Fund (ITB) -2.5%
Home construction firms are tumbling for the second day in a row on Wednesday.

After the bell today, investors will look to top 10 holding Ryland Group (RYL) for its second-quarter earnings report. Investors do not appear overly optimistic however, as shares of RYL are currently down more than 5%.

SPDR S&P Biotech ETF (XBI) -1.8%
The biotech industry began this week on a high note, with XBI powering through its 200-day moving average for the first time since mid June. However, the past two days have been rocky for the fund.

Leading the industry lower today are Cephalon (CEPH) and United Therapeutics (UTHR) . Both firms are down more than 6%.

iShares Dow Jones U.S. Healthcare Providers Index Fund (IHF) -1.4%
The healthcare provider ETF has been bashed around over the past week, carving out new 2010 lows on Wednesday.

One of the biggest drags on this fund’s performance today is Wellpoint (WLP) , which is struggling to stabilize after reporting its second-quarter earnings report. The stock is getting knocked despite beating analyst expectations and raising its outlook.

Market Vectors Vietnam ETF (VNM) -1.1%
Throughout July and much of June, the Vietnam ETF has traded in a sideways manner, indicating little direction.

Southeast Asian country ETFs are some of the best performing ETFs this year, but VNM has yet to join them.

Disclaimer

The coal sector is coming under the spotlight with the reporting of key earnings this week.

Investors seeking exposure to the sector may seek coverage through the Market Vectors Coal ETF (KOL) .

However, after Massey (MEE) reported dismal earnings at the market close Tuesday, investors may question coal as a stable choice.

The company reported a net second-quarter loss of $88.7 million and a loss of $55.1 million for the first half. The net loss for the quarter included associated costs in connection with a deadly mining accident in April.

The company’s operations further slowed in the second quarter after a sluggish first quarter. Likewise, KOL saw a similar slowdown in the second quarter, as 2010 has been much more sluggish than 2009 when the fund was a leader in the market rally.

While the S&P 500 is essentially flat for the year, KOL is down by roughly 5% year to date. By contrast, the S&P 500 gained 20% and KOL more than doubled, up about 120%, for the same time period in 2009.

In the second quarter, KOL stock fell by 23%, whereas the S&P 500 lost 12%. By contrast, the fund and the S&P 500 both grew by about 5% in the first quarter.

The fund’s sluggishness can be attributed to concerns of a slowdown or stall in the global economic recovery. Sentiment in the industry is increasingly dependent on the economic outlook of China and other developing economies. In particular, the world is increasingly looking to East Asian demand as a source of support for coal prices.

Earlier this year, China’s efforts to damper a potentially overheating economy took the wind out of KOL’s sails. Although China’s economy is expected to perform well, second-quarter growth for the Chinese economy is already slower than that of the first quarter.

While only 21.9% of KOL’s total holdings are in Chinese companies, other companies in the sector will also be affected by the impact the Chinese economy has on coal markets.

Of course, the recovery in the U.S. and elsewhere in the world are also still very important and KOL remains a play on economic recovery in important economies. For instance, fear of European underperformance and poor expectations for the United States could both reflect negatively on KOL.

Investors looking for more direction within the industry will gain new perspective on the coal sector when Arch Coal (ACI) , yet another holding of KOL, reports earnings before the market opens on Friday.

However, investors should understand that for now, KOL is be more sensitive to broad economic outlooks as opposed to the earnings of individual companies.

Disclaimer

Energy ETFs such as Energy Select Sector SPDR (XLE) and WisdomTree International Energy (DKA) offer low valuations and solid yields after trailing the broader market for most of the past 18 months.

The story of energy underperformance is perhaps best exemplified by the performance of Exxon Mobil (XOM) .

In early July, shares of the oil giant fell below their 2009 lows, hurt by the stock market selloff and a sharp drop in oil prices in the preceding weeks. While other oil firms slid during this period, XOM underperformed other majors such as Chevron (CVX) and ConocoPhillips (COP) . Even some of the companies involved in the BP disaster, most notably Anadarko Petroleum (APC) , did not fall below their 2009 lows.

Earnings estimates for the current quarter have been trending up for Exxon, but the full year and next year estimates have been declining. CVX and COP have also seen a decline in estimates for next year’s earnings, though their shares have performed much better.

Investors appear to be pricing in a very negative outlook for these companies, with lower energy prices and very slow global economic growth, but oil prices are close to $80 a barrel and natural gas prices have rebounded from their lows, while growth in emerging markets remains robust and is offsetting the slow recovery in developed markets.

The BP disaster has helped overshadow the positive news over the past two months. Negative news from the Gulf and the deepwater drilling ban has weighed on shares in this sector. Meanwhile, positive economic data from Asia has gotten little attention.

China continues to grow at near 10%, with the pessimistic forecasts from the country calling for 9.5% growth. Although China disputed recent analysis that declared it the world’s largest energy consumer; but at these growth rates, it won’t be long before China takes the crown.

India has had a very quiet economic recovery. The country raised interest rates again yesterday as growth remains strong and inflation is above 10%. With almost 2.5 billion people in these two countries, global energy demand can only increase in the long-run.

In terms of valuation, XOM, COP and CVX trade for roughly 10 times this year’s earnings, while yielding between 3 and 4%. They’re even cheaper using next year’s anticipated earnings, which I think are too low.

The ETFs that offer the most exposure to these domestic players are XLE and iShares Dow Jones U.S. Energy (IYE) .

Exxon is the largest holding in these energy ETFs by a large margin, which has contributed to the general underperformance of these funds relative to the broader market.

XLE is the more balanced of the two, but it still holds 18.4% in XOM, 13.5% in CVX and 5.3% in COP, for a combined 37.2%. Other familiar energy names round out the portfolio, but the allocations quickly drop to 2.6% by number 10 holding APC and down to less than 0.5% for the smallest holdings in this fund.

IYE is even more concentrated, despite having more than twice as many holdings at 88. XOM, CVX and COP make up 43.5% of IYE and allocations similarly slide rapidly by the time on reaches the number 10 holding, also APC, with 2.3% of assets.

Much of the rest of the portfolio includes companies with small or no dividends at all, so XLE and IYE sport yields of 1.9% and 1.6%, respectively. In addition to having half as many holdings, XLE also has half the expenses, at 0.21% versus 0.47%.

For a larger yield, investors can use WisdomTree International Energy. The fund yields 3%, and its fees and holdings are midway between XLE and IYE, at 0.58% and 61.

DKA is also a little more balanced, with Total (TOT) its single largest holding, at 8.3% of assets. However, it does hold two classes of Royal Dutch Shell ( RDS-A ) and ( RDS-B ) , which combine for 12.8% of assets.

Country exposure is led by the U.K. and Australia, at 20.8% and 18.2% of assets. France, Norway and Italy each account for 10-12% of assets. Spain, China, Japan, Netherlands, Austria and Portugal make up the bulk of the remaining exposure.

Over the past year, SPDR S&P 500 (SPY) gained 16%, while XLE, IYE and DKA returned 7.9%, 3.4% and negative 2.0%.

Major oil companies including XOM, CVX, COP and TOT start to report earnings this week. Short-term investors looking for a trade may want to wait to see if those earnings prove to be a catalyst, but long-term investors can add shares and get paid while they wait for the sector to rally.

Disclaimer