After a shockingly mild winter across most of the U.S., many were hoping for a similarly mild summer too. However, this has definitely not come to pass as temperatures above 100 degrees Fahrenheit (roughly 37.8 Celsius) were pretty much the norm in cities around the Great Lakes and Mid-Atlantic regions of the United States.
Although it has cooled off a bit in recent days, much of the country is still facing the lingering effects of the heat wave. This burst of extremely warm weather set records across much of the nation and could be back as early as next week in both the Midwest and the South (see The Five Best ETFs over the Past Five Years).
While the hot weather hasn’t really impacted many stocks or ETFs, there are a few that have been, or could be, big winners thanks to the unseasonable temperatures across much of the country. Below, we profile three funds that investors may want to watch in the coming days should the oppressive weather continue:
iPath DJ-UBS Grains TR Sub-Index ETN (JJG - ETF report)
Thanks to the record heat in much of the Midwest, many key grain growing states have seen their crops shrink in size. In fact, some are speculating that the USDA may cut its production forecast for corn by about 8.5%, the biggest July reduction since 1988.
Similar issues are also impacting the wheat and soybeans markets as well, as expected yields continue to plunge for these important crops. Furthermore, due to the downturn in the corn supply market, many are expected to switch to wheat or other crops for animal feed, adding to the bullish outlook for the grains sector (read Buy American with these Three Commodity ETFs).
Should this hot weather continue, or if rains fail to fall on the ‘corn belt’ it could continue to be great news for JJG. This ETN holds three commodity futures in its basket, allocating roughly half of its portfolio to soybeans, and then 30% to wheat and 24% to corn.
Currently, the product charges investors a somewhat high 75 basis points a year in fees while AUM comes in at about $170 million. Volume has also been pretty good for the note, usually around 70,000 shares in a normal session.
Over the past month, JJG has been a star performer, largely due to the incredible heat. The product has added more than 21% over the past month after being more or less flat for the first five months of the year.
PowerShares Water Resources ETF (PHO - ETF report)
The intense weather also looks to put companies engaged in the water segment of the industrial sector in focus as well. These firms could see higher demand for their products and services if the heat remains at oppressive levels or if the drought-like conditions continue.
This could especially be true for the companies in the water utility segment and those that perform treatments on water supplies. As water demand rises there will be a greater focus on companies that can make water clean or recover supplies of the vital resource for a thirsty population.
In order to play this trend with a U.S. focus, investors should probably look to PHO instead of some of the other water ETFs in the market. The PowerShares fund is the most concentrated in U.S. securities and thus is probably most likely to be impacted by domestic events (read Buy the Ultimate Commodity with These Water ETFs).
Furthermore, the product has a heavy tilt towards smaller securities as large caps are nowhere to be found in the ETF. Instead, micro caps make up over a quarter of all the exposure while more than 57% goes towards mid cap companies.
From a sector perspective, industrial companies make up almost 60% of assets while utilities account for another quarter of the total as well. Investors should also note that there are only about 30 firms in the product and that top holdings include Flowserve (FLS - Analyst Report), American Water Works (AWK - Snapshot Report), and Waters Corp (WAT - Analyst Report).
In terms of performance, PHO has added about 3.3% over the past month, easily beating out broad benchmarks in the same time frame. Interestingly, PHO has underperformed over longer-time periods suggesting that recent events have certainly helped this market segment.
PowerShares Dynamic Leisure and Entertainment ETF (PEJ - ETF report)
Another way to play the heat with more of a consumer tilt could be by looking at the leisure and entertainment segment of the consumer discretionary sector. Firms in this segment that are focused on indoor activities—like movies, casinos, or television—stand to benefit as consumers avoid the heat at all costs.
Additionally, the companies in the hotel/leisure segment could be winners if more people decide to travel to escape the temperatures. This could be easier this year as opposed to years past as gasoline prices have been tumbling making it that much easier for consumers to take a vacation this year (read Play a Consumer Recovery with These Discretionary ETFs).
Thanks to these trends, and the fact that consumers might have more cash in their pockets due to (generally) lower energy commodity prices, investors may want to consider taking a closer look at PEJ. This product tracks the Dynamic Leisure and Entertainment Intellidex Index which looks to give investors exposure to a basket of stocks based on four fundamental factors.
In total, PEJ holds 31 securities in its portfolio and it does a pretty good job of spreading assets throughout the fund. Top segments include the restaurant sector at 28%, while hotels (25%), and movies/entertainment (21%) round out the top three from this perspective.
Over the past month, PEJ has added about 2.6%, once again, beating out the S&P 500 in the same time period. However, unlike PHO, PEJ has been a solid performer all year, largely thanks to the slightly improved economic outlook and the weakness in gas prices. Since the start of 2012, PEJ has added about 16%, more than doubling the S&P 500 benchmark.
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