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Title:The 3 Best ETFs to Buy for 2023
InvestorPlace - Stock Market News, Stock Advice & Trading Tips
It has been a very odd year for investors. Ironically, it doesn’t matter what one is invested in, as almost all asset classes have been on the move. Bonds, currencies, equities, cryptocurrencies — it doesn’t matter! That has us wondering what are the best assets, and thus the best ETFs, to buy for 2023.
The stock market has been decimated, with the S&P 500 suffering a peak-to-trough decline of 24.5%. Bonds have had one of their worst years on record, with the 10-year Treasury logging its worst decline (down 13%) since 1900. Previously, the worst one-year decline for the 10-year was an 8% loss in 1994.
So, what are we going to do about some of these dreadful performances?
The good news is, markets generally favor the upside. A recent study showed that over the last 80 years, the S&P 500 has produced a gain about 80% of the time. Whether that’s over the last 20, 30, 40, 50 or 80 years, that observation remains true.
Accordingly, let’s look for the best ETFs to play for a rebound next year.
VTI Vanguard Total Stock Market Index Fund ETF $199.90
TLT iShares 20 Plus Year Treasury Bond ETF $108.16
LQD iShares iBoxx Investment Grade Corporate Bond ETF $109.77
Vanguard Total Stock Market Index Fund ETF (VTI)
Source: kenary820 / Shutterstock
The 60/40 portfolio — which has 60% of its funds allocated to stocks and 40% to bonds — has become extremely popular in finance. It’s become a popular way for investors to still have exposure to equities, while also gaining stability from bonds.
However, this year bonds have been very unstable. As a result, the 60/40 portfolio has had one of its worst years on record. Since 1900, the worst 10 years for the portfolio have returns ranging from down 8% to down 31%.
Of those years, just one year — 1931 — generated a loss in the following year, when it fell another 31% after falling 14% in the year before. Keep in mind, this was during the great depression. For the other nine years, the following year generated a double-digit return all but once — rallying just 5% in 1932 — while generating an average and a median return of 13% and 17%, respectively.
With the 60/40 portfolio currently down 13% year to date, odds favor a rebound in 2023.
This portfolio style is more popular within the mutual fund picks, but for investors who want a simple way to play this using the best ETFs out there, they could simply allocate 60% of their desired funds to the Vanguard Total Stock Market Index Fund ETF (NYSEARCA:VTI), and allocate the other 40% to the Vanguard Total Bond Market Index Fund ETF (NYSEARCA:BND) or the iShares Core US Aggregate Bond ETF (NYSEARCA:AGG).
iShares 20 Plus Year Treasury Bond ETF (TLT)
Source: Maxx-Studio / Shutterstock
Earlier, I mentioned that the 10-year Treasury bond is set for its worst annual performance since 1900. This has been a bad year but…that bad?
Given the rapid rise of interest rates and the immense fluctuations in the US dollar, it’s no surprise that bonds haven’t been the typical safe-haven asset that investors have become accustomed too.
Investors seeking less volatility can look for different and more specific Treasury bond ETFs. However, the most popular, liquid and heavily-traded one is the iShares 20 Plus Year Treasury Bond ETF (NASDAQ:TLT).
The TLT is down “just” 27.5%, which would still make for its worst one-year performance ever. At this year’s low though, the TLT was down just over 38%.
Investors who do not feel comfortable with the TLT can always opt for a shorter-term ETF (like 7-10 year Treasuries). However, it seems like longer-dated Treasury bonds are set for a rebound next year. Thus, this exchange trade fund makes this list of best ETFs for long-term investors seeking an excellent entry point to a traditionally stable investment category.
iShares iBoxx Investment Grade Corporate Bond ETF (LQD)
Source: SWKStock / Shutterstock
The only year that’s been worse than 2022 for the iShares iBoxx Investment Grade Corporate Bond ETF (NYSEARCA:LQD) was 2008. But that’s only when we’re talking about peak-to-trough declines.
In 2008, the LQD ETF fell 27.5% at the year-to-date low vs. a fall of 25.75% in 2022. However, the ETF ended the year down just 3% in 2008. So far, shares are still down more than 17% for 2022. Also, let’s keep in mind just how bad 2008 was for the global economy.
Performance aside, the LQD is just another alternative to playing a rebound in bonds for 2023. While I do prefer Treasury bonds, corporate bonds can have their place in investor portfolios as well. The driving catalysts here are two-fold.
First, the Fed has been on a rate-hiking spree all year long, which is set to taper off quite a bit in 2023. Admittedly, that’s just a forecast and that can certainly change. But as it stands, the Fed is closer to the end of its rate-hiking cycle than the beginning.
Second, fears of a global recession are both palpable and realistic. Should a recession arrive, it’s going to force investors into safe-haven assets like bonds. While Treasuries are the safest of the safe, investment grade debt may also become attractive to investors.
On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.
The post The 3 Best ETFs to Buy for 2023 appeared first on InvestorPlace.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:3 ETFs That Are All You Need for Retirement
Diversification is essential to your success as an investor. You don't want your retirement to hinge on the fortunes of a single company or industry.
But you don't need to choose dozens of stocks to diversify your investment portfolio. Investing in exchange-traded funds (ETFs) allows you to automatically diversify, because ETFs invest your money across hundreds or even thousands of companies. If you're looking for investments that can bankroll your retirement, look no further than these three ETFs.
Image source: Getty Images.
1. Vanguard S&P 500 ETF
There are no guarantees in investing. But an S&P 500 index fund is about as close as you can get -- provided that you have the patience to ignore the short-term ups and downs of the stock market and keep your money invested for the long haul. Your money gets invested in 500 of the largest publicly traded companies in the U.S. Over a 20-year holding period, investing in the S&P 500 index has always produced positive returns.
The Vanguard S&P 500 ETF (NYSEMKT: VOO) is a smart choice because it has a super cheap expense ratio of 0.03%. That means just $3 of a $10,000 investment goes toward fees. Since its inception in 2010, the fund has averaged annual returns of 13.15% -- almost identical to the 13.19% produced by the S&P 500, its benchmark index.
2. Vanguard Total International Stock ETF
While an S&P 500 index fund is the ideal backbone for your retirement portfolio, it's also smart to diversify beyond U.S. stocks. Though U.S. stocks have outperformed international stocks in recent years, that hasn't always been the case. For example, the 2001-2010 decade is often referred to as a "lost decade" for domestic stocks, with U.S. stocks delivering average annualized returns of only 1.4%.
But during that same decade, international developed markets had average annualized returns of 3.5%, according to Charles Schwab research. And emerging market stocks were the star performers, with average annualized returns of 15.9%.
The Vanguard Total International Stock ETF (NASDAQ: VXUS) is a great option if you're seeking exposure to foreign markets. The fund tracks the FTSE Global All Cap ex US Index, an index of more than 7,000 stocks outside the U.S. About 75% of the fund's holdings are in developed markets, with its heaviest concentrations in Japan, the United Kingdom, and Canada. The remaining 25% of its holdings are in emerging markets, which are risky compared to developed markets. But they also offer the potential for high growth, given that about 85% of the world's population lives in emerging-market countries.
The fund has an expense ratio of 0.07%. That makes it a bargain, considering that similar funds have an average expense ratio of 0.91%.
3. iShares Core U.S. Aggregate Bond ETF
Rising interest rates have made 2022 a terrible year for the bond market. But in normal times, bonds provide stability compared to stocks, which is why you should have a small percentage of your portfolio invested in bonds.
The iShares Core U.S. Aggregate Bond ETF (NYSEMKT: AGG) offers broad exposure to U.S. bonds. Its benchmark index is the Bloomberg US Aggregate Bond Index, which represents the overwhelming majority of the investable U.S. bond market. With an expense ratio of just 0.04%, the fees are about as low as you can get.
This fund won't be a major driver of growth in your portfolio. But it can also reduce its long-term volatility while also providing regular income. That's especially true in years like 2022, since bond prices and yields are inversely related. As of Nov. 29, 2022, the fund had a 30-day Securities and Exchange Commission (SEC) yield of 4.08%.
How to invest in ETFs
Investing in ETFs is easy. You buy them and sell them on stock exchanges, just as you would with individual securities. Simply open and fund a brokerage account, and you can start investing in ETFs.
Building a retirement portfolio doesn't have to be complicated. A handful of ETFs is all you need to create a substantial nest egg.
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Charles Schwab is an advertising partner of The Ascent, a Motley Fool company. Robin Hartill, CFP® has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard Index Funds-Vanguard S&p 500 ETF and Vanguard Star Funds-Vanguard Total International Stock ETF. The Motley Fool recommends Charles Schwab. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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doc_00003
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Title:Todd Rosenbluth Gets Active on Yahoo Finance
VettaFi's head of research Todd Rosenbluth got active on Yahoo Finance to discuss tech's ongoing slide, leveraged and inverse ETFs, and the performance of active funds, particularly on the fixed income side of the ledger.
“This year, which we’ve had a down year for the equity markets [and] growth investing… investors are willing to take that risk on,” @Vetta_Fi Head of Research @ToddRosenbluth says on ETFs. Full comments: pic.twitter.com/X1qP2Wslsa
— Yahoo Finance (@YahooFinance) November 16, 2022
Tech's Fall Garnering Leveraged and Inverse Interest
With many traders betting against tech, valuations are starting to look attractive to some.
"We've seen a lot of money going in and a lot of interest in the short version of QQQ," Rosenbluth said, continuing, "there's a lot of pessimism about the technology and growth-orientated sectors." Though funds shorting QQQ, such as the ProShares UltraPro Short QQQ (SQQQ), have been popular of late, Rosenbluth pointed out that the ProShares UltraPro QQQ (TQQQ) is also gathering investor interest.
According to Rosenbluth, "on our VettaFi platform, there's interest in getting to know these products." It has been a down year for equities and growth investing, opening up long and short opportunities. Nodding to a previous segment covering semiconductors, Rosenbluth said, "a lot of people are willing to bet – and that's the key word here, 'bet,' on the short term price movements of the semiconductor industry both long and short this year."
Speaking to the risks in inverse and leveraged ETFs, Rosenbluth said, "these are intended for a short-term time horizon. The longer you are there, the greater risk."
Active's Rise
Active Management has been gaining traction all year. He noted that active funds such as the JPMorgan Equity Premium Income ETF (JEPI) allow investors to benefit from the stock-picking expertise of a management team instead of rolling the dice with a leveraged or inverse fund.
"JEPI has held up better than the current marketplace because of that income component," Rosenbluth noted in discussing how the fund works and gears itself toward income.
Asked about active and passive funds, Rosenbluth noted that active had had a big year in both equity and fixed income, with many active fixed income funds outperforming the broader iShares Core U.S. Aggregate Bond ETF (AGG). He noted strong interest in funds like the Fidelity Total Bond ETF (FBND) and the SPDR DoubleLine Total Return Tactical ETF (TOTL) are also attracting much attention. "You can make money through an actively managed fixed income ETF, get the benefits of security selection, without having to take on the same level of risk."
Spot Bitcoin ETF Shot Down Again
"The SEC continues to have concerns about risks related to bitcoin from a fraud perspective," Rosenbluth noted. He sees a spot bitcoin ETF as unlikely until next year or later but pointed out that the ProShares Bitcoin Strategy ETF (BITO) still presents investors with a futures-based option for Bitcoin exposure.
For more news, information, and strategy, visit VettaFi.
Read more on ETFtrends.com.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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doc_00004
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Title:Don’t Get AGG-ravated, Expand Your Fixed Income Toolset
While 2022 is not finished, two things are quite likely to be a fact in early 2023. We will have had the worst calendar year for the iShares Core Aggregate Bond ETF (AGG) in its 19-year history, and approximately one thousand financial advisors coming to the Exchange conference in early February 2023 in Miami, Florida, will be looking for an alternative to the index-based ETF.
The popular core bond strategy declined 16% as of November 7, due in part to the negative impact of a hawkish Federal Reserve's rate hikes that has pushed the yield on the 10-year Treasury bond sharply higher in 2022. Given AGG's average duration of 6.3 years, the fund has suffered.
However, advisors are expected to maintain a healthy stake in fixed income in hopes of providing ballast and income to offset equity exposure. They typically attend ETF conferences like Exchange to learn about other tools available to help clients navigate the challenging bond market. The following strategies are worthy of consideration either as core replacements or to complement a broad market, index-based ETF, even as they charge higher fees than the 0.03% for AGG.
Actively-Managed Core Fixed Income ETFs
The Fidelity Total Bond ETF (FBND) and SPDR DoubleLine Total Return Tactical ETF (TOTL) are examples of active ETFs that, as of November 7, had held up better than AGG. Actively managed ETFs can adjust duration to limit the impact of rising rates, to sort through the universe of new issuance to choose investment-grade bonds with strong risk-reward potential, and own speculative grade bonds that have low default risk. FBND and TOTL charge expense ratios of 0.36% and 0.55%, respectively.
Senior Loan ETFs
The Invesco Senior Loan ETF (BKLN) and SPDR Blackstone Senior Loan ETF (SRLN) invest in securities not found within the investment-grade focused AGG. Senior loans are the unsecured claims against an issuer that receive priority in the event of bankruptcy and are typically rated below-investment grade. However, senior loans can help protect against interest-rate risk as they have an extremely short average of approximately three months. While BKLN tracks an index, SRLN is actively managed. Both ETFs declined significantly less than AGG thus far in 2022, even as BKLN and SRLN charge expense ratios of 0.65% and 0.70%, respectively.
Low Duration Investment-Grade ETFs
The iShares 1-5 Year Investment Grade Corporate Bond ETF (IGSB) and the PIMCO Enhanced Low Duration Active ETF (LDUR) are more suitable alternatives for more risk-averse end clients than senior loan products. Both funds incur lower interest rate risk than AGG, with an average duration of under three years, but also hold investment-grade bonds. IGSB is index-based and concentrates on corporate bonds from issuers like Bank of America and CVS Health, while LDUR is actively managed and holds a mix of U.S government-related securities and credit. IGSB and LDUR charge fees of 0.06% and 0.53%, respectively.
The Federal Reserve may begin to shift its hawkish stance in early 2023 to let the U.S. economy attempt to reflect the successive rate hikes in the second half of 2022. While this would help AGG bounce back from the worst year, many investors will want something different in the fixed income sleeve of their portfolios for 2023. Advisors would be wise to learn more about the range of ETF products available with similar liquidity and ease of use. If they make it to the Exchange conference in February, there will be lots of smart people to learn from – maybe portfolio managers of these funds!
To receive more of Todd's research, reports, and commentary on a regular basis, please subscribe here.
For more news, information, and strategy, visit the ETF Education Channel.
Read more on ETFtrends.com.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:The 10-Year Treasury Yield Just Topped 4%: What It Means for You
The bear market in stocks has made portfolio values drop sharply so far in 2022. But for many investors, the bigger surprise this year has come from the terrible performance of the bond market, which has seen its worst losses in decades. Many had turned to bonds as a more conservative investment than stocks, and so the steep declines even in what are considered to be ultra-safe Treasury bonds have been especially painful.
Inflation has prompted the Federal Reserve to boost short-term interest rates aggressively, and that has had an impact on many longer-term bonds as well. On Wednesday morning, the yield on the 10-year Treasury briefly moved above 4% for the first time since 2008. That has significant implications for both stocks and bonds that investors need to consider in making investment decisions.
Image source: Getty Images.
The big rise in Treasury rates
The most difficult aspect of what's happened in the bond market is that the rise in rates has come so fast. Near the beginning of the COVID-19 pandemic in early 2020, the Fed sharply cut interest rates, sending 10-year Treasury yields down to around 0.5%. Even as the economy started to rebound, yields remained below 2% for a prolonged period of time. Just a year ago, the yield was at 1.5%.
^TNX data by YCharts. NOTE WELL: Index values represent the yield in percentage points multiplied by 10.
It was only once inflation reared up in early 2022 that bond investors started to lose their nerve, and the brief move above 4% represented yields that were 2.5 times where they started the year.
Rising yields mean falling prices for bonds, and the damage has been severe. Even ordinary bond index ETFs have seen massive losses, with the popular iShares Core U.S. Aggregate Bond (NYSEMKT: AGG) and Vanguard Total Bond Market (NASDAQ: BND) both down 15% year to date. Bond funds with a bias toward longer-maturity bonds have seen even bigger declines, with iShares 20+ Year Treasury (NASDAQ: TLT) down nearly 30%. Even bonds that were supposed to protect against inflationary pressures have seen price declines, with iShares TIPS Bond (NYSEMKT: TIP) down 18% from where it started 2022.
What consumers and investors should expect
Already, the impact of higher Treasury yields is working its way through the broader economy. Mortgage rates tend to correlate with 10-year yields, so rates on 30-year mortgages have also hit new highs above 6.5% recently. That is making homes less affordable for would-be homebuyers, as monthly payments on new mortgages for a given amount of debt are far higher than they were earlier this year.
Nor can stock investors entirely ignore the impact of yield increases. Many companies raised their debt levels when interest rates were lower, taking advantage of cheap financing to bolster their growth efforts. Those companies that can pay back that debt as it matures should be in good shape, but those that had hoped to refinance their debt to delay having to pay it back face the prospect of sharply higher interest payments in the future. Given that the companies most likely to want to refinance are also often the ones that are least able to afford higher financing costs, investors need to watch closely to ensure that the companies whose stocks they own aren't facing potential problems.
Higher rates do have a silver lining, though. For those with cash who want to lock in a certain return, buying individual Treasury bonds now will give them interest payments at a level they haven't been able to get in years. Admittedly, 4% isn't enough to make a wholesale shift out of stocks. But for those who have found that the stock market volatility of the past year has made them uncomfortable with their asset allocation strategy, higher yields make now a better opportunity to invest in bonds than investors have seen in a long time.
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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard Total Bond Market ETF. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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doc_00006
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Title:BND Just Became the Largest Bond ETF
The Vanguard Total Bond Market ETF (BND) became the largest individual bond ETF in the U.S. at the end of last week, nudging ahead of the long-time leader, the iShares Core Aggregate Bond ETF (AGG). As of August 5, BND had $83.710 billion in assets and AGG had $83.707 billion, according to FactSet data used by VettaFi. Despite BND’s success, iShares remains the largest ETF provider more than 20 years after launching the first products, and it manages the most fixed income ETF assets.
When we wrote about this likelihood on July 19, there was an approximately $400 million gap between the two broad market, investment-grade bond ETFs. While AGG has pulled in $838 million since then, BND was even more popular, gathering almost $1.3 billion of net inflows.
Year-to-date through August 5, BND’s $7.7 billion cash haul was impressive compared to AGG, which incurred $501 million of net redemptions.
The two core bond ETF heavyweights charge identical fees, with 0.03% expense ratios, though they have slightly different short-term performance records. For example, AGG’s 8.5% year-to-date loss was fractionally narrower than BND’s 8.7% decline.
The relative success for BND is likely tied to the growing usage of bond ETFs by retail investors and advisors that have historically preferred actively managed bond mutual funds, even as they shifted from active equity mutual funds to lower-cost, index-based equity ETFs.
For eight consecutive months dating back into December 2021, investors have redeemed money from bond mutual funds, according to the Investment Company Institute's data, with more than $340 billion exiting these products. Investors long showed loyalty to bond mutual funds with the asset category generating monthly inflows between April 2020 and November 2021. In 2022, we believe there’s been a trend to tax-loss harvest away from more expensive bond mutual funds as losses have persisted. Vanguard has been a greater beneficiary of this, given its strong brand with mutual fund investors and their advisors.
Meanwhile, AGG has been a popular choice for institutional investors that favor the firm’s broad suite of bond ETFs including the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) and the iShares 20+ Year Treasury Bond ETF (TLT) as well as AGG’s historically strong liquidity. Institutions are shifting away from owning individual bonds and replacing them with bond ETFs.
We believe there is significant room for growth of both BND and AGG in the years to come as more advisors turn to bond ETFs. These core bond ETFs can and do serve as building blocks in a broad asset allocation strategy, with more narrowly focused Treasury, investment-grade, and high yield ETFs providing satellite positions.
To see more of Todd’s research, reports, and commentary on a regular basis, please subscribe here.
For more news, information, and strategy, visit the Fixed Income Channel.
Read more on ETFtrends.com.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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doc_00007
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Title:A New Bond ETF King?
There’s about to be a new bond ETF king. Indeed, there might be a new one by the time you read this article. The Vanguard Total Bond Market ETF (BND) had $81.1 billion as of July 15, according Factset data used by VettaFi, a mere $400 million less than the current bond ETF leader, the iShares Core Aggregate Bond ETF (AGG). Despite this, iShares remains the industry leader across all ETFs, as well as fixed income ETFs, as of mid-July.
According to Athanasios Psarofagis, an ETF analyst with Bloomberg Intelligence, there was a $22 billion gap between the two core fixed income ETFs in March 2020. However, since then Vanguard’s offering has been the more popular ETF. Since the beginning of April, BND raked in $42.1 billion of new money, including $6.4 billion in 2022 alone, according to our data. In contrast, AGG gathered half the new money since April 2022 ($21.1 billion) and has suffered $1.3 billion of net redemptions.
The two core bond ETF heavyweights charge identical fees with 0.03% expense ratios, though they have slightly different short-term performance records. For example, AGG’s 9.8% year-to-date loss was fractionally narrower than BND’s 10.0% decline.
The relative success for BND is likely tied to the growing usage of bond ETFs by retail investors and advisors that have historically preferred actively managed bond mutual funds, even as they shifted from active equity mutual funds to lower-cost, index-based equity ETFs. In addition, unlike with AGG, Vanguard shareholders can shift from using a mutual fund share class to an ETF share class easily. We believe that some of BND's ETF inflows have stemmed from such activity.
For seven consecutive months dating back into December 2021, investors have redeemed money from bond mutual funds totaling $305 billion, according to the Investment Company Institute's data. This is in stark contrast to the monthly inflows for the asset category dating back to April 2020. In 2022, we believe there’s been a trend to tax-loss harvest away from more expensive bond mutual funds as losses have persisted. Vanguard has been a greater beneficiary of this due to its strong brand with mutual fund investors and their advisors.
However, we would expect AGG and BND to continue to grow larger as a wide range of investors take advantage of the liquidity and tax efficiency benefits of bond ETFs. Advisors are increasingly using such products to support asset allocation objectives, and institutional investors are tapping into the liquidity of bond ETFs instead of sourcing individual bonds.
To see more of Todd’s research, reports, and commentary on a regular basis, please subscribe here.
For more news, information, and strategy, visit the Fixed Income Channel.
Read more on ETFtrends.com.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:Advisors Turn to ETFs While Bond Mutual Funds Bleed Assets
It was a brutal first five months of 2022 for bond investments, with the Bloomberg Aggregate Bond Index down 9%. Advisors have long built asset allocation strategies with a healthy dose of fixed income exposure. Historically, bonds provided total return through income and stability even when equities decline in value. However, 2022 has been different due partly to recent and likely pending interest rate hikes by the Federal Reserve that caused many bonds to decline in value.
With the losses, there has been money in motion within the asset management space. Year-to-date through May 25 (latest available), bond mutual funds incurred significant redemptions, totaling an estimated $242 billion based on Investment Company Institute (ICI) data. While bond mutual fund outflows accelerated to more than $90 billion in May, bond ETFs pulled in $34 billion of new money over the whole month, more than the category gathered in the first four months of the year, according to FactSet data.
Indeed, while there are only two bond ETFs among the 10 most popular for the year, there were five bond ETFs among the 10 highest industry-wide net inflows in May. The iShares National Muni Bond ETF (MUB) led the charge last month with $3.9 billion of net inflows, followed by the Vanguard Short-Term Bond ETF (BSV) and the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL). While BSV and BIL incur minimal risk, investors also shifted $2 billion-plus in new money into the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and the iShares 20+ Year Treasury ETF (TLT), which sport higher yields in exchange for taking on more credit or interest rate risk.
Domestic equity mutual funds have been bleeding assets for years as advisors and end-investors moved toward equity ETFs, yet bond mutual fund investors traditionally were more loyal. There are likely several long-term drivers of this trend, including a generational shift, growing adoption of bond ETFs by advisors and institutional investors, tax-loss harvesting, and a preference to pay lower fees establishing when losses are being incurred.
According to Morningstar, the average intermediate core bond fund declined 9.0% in the first five months of 2022, essentially in line with the losses incurred by the iShares Core Aggregate Bond ETF (AGG) and the Vanguard Total Bond Index ETF (BND). Returns were similarly poor for bond mutual funds that incur additional credit risk; the average core plus bond fund fell 8.9%.
Although most bond mutual funds are actively managed and most bond ETFs track an index, in recent years asset managers have launched a variety of actively managed bond ETFs. In 2022, the Capital Group Core Plus Income ETF (CGCP), the Fidelity Total Bond ETF (FBND), and the JPMorgan Core Plus Bond ETF (JCPB) are some of the active core or core-plus with net inflows.
As losses are likely to pile up this year for bond mutual funds, we expect more advisors and end clients to shift allocations toward ETFs.
To receive more of Todd's research, reports, and commentary on a regular basis, please subscribe here.
For more news, information, and strategy, visit VettaFi.com.
Read more on ETFtrends.com.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:What the Hedge? How Are These Bond ETFs Holding Up So Well?
With the yield on the 10-year Treasury bond spiking approximately 150 basis points in 2022, advisors experienced double-digit declines in the value of some extremely popular fixed income ETFs.
For example, the $82 billion iShares Core Aggregate Bond ETF (AGG) dropped 10% year-to-date through May 9, while the $33 billion iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) fell 16%. While both ETFs own investment-grade bonds, the funds were hurt by the interest rate sensitivity of these securities. In particular, LQD’s average duration of 8.7 years provides elevated risk as the Federal Reserve is in the midst of its rate-hiking program. When interest rates rise, bond prices inside an ETF decline in value, particularly when the duration is high.
As we previously noted, some advisors looking for alternatives within the fixed income ETF universe in 2022 have turned to short-duration or floating-rate ETFs such as the WisdomTree Floating Rate Treasury Fund (USFR) and the SPDR Bloomberg Investment Grade Floating Rate ETF (FLRN). However, there are funds sporting more compelling yields alongside similar investment-grade credit exposure to AGG and LQD.
The WisdomTree Interest Rate Hedged U.S. Aggregate Bond Fund (AGZD) was down just 1.0% year-to-date through May 9, outperforming the unhedged AGG by 900 basis points. While AGZD has pulled in approximately $150 million in assets, the ETF still has less than $400 million in assets overall.
The iShares Interest Rate Hedged Corporate Bond ETF (LQDH) declined 4.4%, which was more than 1,200 basis points less than LQD. While LQDH is larger than some might realize, with $1.2 billion in assets, it has only pulled in $195 million so far this year.
These ETFs use futures contracts so the underlying portfolio shows a near-zero duration. By hedging away the interest rate risk, advisors can focus on the underlying bonds to maintain income generation and potentially benefit from tightening credit spreads. If the U.S. economy avoids a recession, corporate bond prices could climb higher in 2022.
There are also interest rate-hedged ETFs focused on the speculative-grade bond market, such as the iShares Interest Rate Hedged High Yield Bond ETF (HYGH) and the ProShares High Yield Interest-Rate Hedged ETF (HYHG). While high yield bonds tend to be less rate-sensitive than investment-grade-focused products, advisors can avoid the concern with such products.
Rather than forgoing yield or even shifting away from fixed income ETFs as the Fed continues to hike rates over the next 12 months, funds like AGZD and LQDH can support asset allocation strategies.
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For more news, information, and strategy, visit ETF Trends.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:These Bond ETFs Are Floating Around Rate Hike Risks
Even before the Federal Reserve hiked interest rates by 50 basis points last week and set the stage for more moves in the coming months, investors were looking to less rate-sensitive products.
In April, the WisdomTree Floating Rate Treasury Fund (USFR) pulled in $1.1 billion of new money, including $167 million on the last trading day of the month. The cash haul is impressive as this fixed income ETF only manages $4.4 billion in assets.
Meanwhile, the iShares Floating Rate Bond ETF (FLOT) and the SPDR Bloomberg Investment Grade Floating Rate ETF (FLRN) pulled in approximately $400 million and $350 million, respectively, last month.
Demand for floating-rate ETFs should remain high, with the Fed poised to continue raising rates throughout 2022. Unlike ETFs that invest in fixed-rate bonds, funds focused on floating rate bonds are less sensitive to increases in rates because they pay a variable coupon rate based on the prevailing short-term market rates plus a fixed spread.
As a result of the quarterly coupon resets, the duration profile is historically and structurally low compared to the broader Aggregate bond index. Indeed, FLOT, FLRN, and USFR have an average duration of less than 0.1 years, significantly less than the 6.6 years for the iShares Core Aggregate Bond ETF (AGG).
“This floating rate profile leads to a significantly more attractive yield-per-unit of duration versus other short-term exposures that could be considered to trim duration,“ wrote Matt Barolini, head of SPDR Americas Research, in his second quarter bond compass outlook.
FLOT and FLRN sport 30-day SEC yields of 0.78% and 0.73%, respectively, while USFR’s yield is 0.49%. Unlike USFR, which invests in relatively risk-free U.S. government securities, FLOT and FLRN invest in corporate bonds issued by investment-grade rated financial institutions such as Goldman Sachs and Morgan Stanley.
While senior loan ETFs, such as the SPDR Blackstone Senior Loan ETF (SRLN) and the Invesco Senior Loan ETF (BKLN), also benefit from floating rate attributes, these ETFs incur greater credit risk by owning loans from BB- and B- rated issuers.
Year-to-date through May 4, while AGG was down 9.1%, FLOT and FLRN were down less than 0.3%, and USFR was up 0.4%. For many advisors, fixed income ETFs are supposed to provide downside protection in client portfolios during times of uncertainty. These high-quality floating rate ETFs are doing that and then some.
“As the Fed hikes more, the yields on these bonds will increase,” noted Karen Veraa, Head of U.S. iShares Fixed Income Strategy at BlackRock. “Investors can use floating rate securities to shorten portfolio duration, put cash to work or as a tactical investment during a rising rate cycle.”
Other floating rate ETFs available include the iShares Treasury Floating Rate Bond ETF (TFLO) and the VanEck Investment Grade Floating Rate ETF (FLTR).
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:BlackRock Sets Stage for Own Active Senior Loan ETF
Demand for actively managed senior loan ETFs has skyrocketed in the past year, helping State Street Global Advisors and First Trust fill their coffers. Indeed, the two firms have pulled nearly $9 billion combined into these less interest rate-sensitive, yet higher-yielding fixed income securities. However, they may soon have to compete with BlackRock, the leading provider of fixed income ETFs, based on an analysis of recently published and favorable commentary on the investment merits for the fixed income subcategory.
Bank loans are typically issued to smaller companies with below investment-grade (or junk) credit ratings. Yet, unlike high-yield corporate bonds, bank loans offer floating rates that rise along with the Fed funds rate or related benchmarks like Libor (the London interbank offered rate). This attribute has historically helped bank loans outperform broad U.S. fixed income and investment-grade bonds in periods similar to today when interest rates are rising.
Seven years ago, BlackRock CEO Larry Fink told investors that the firm will not do a bank loan ETF. Soon after, the global head of iShares at the time, Mark Wiedman, told the Wall Street Journal that the company had decided not to offer a bank loan ETF, in large part because bank loans are illiquid and a stress to the credit market could lead to a different outcome than what investors expect. Furthermore, investors could unknowingly sell their ETFs at a massive discount to their underlying value.
While that might indeed occur, recent data suggests that ETF investors are buying or selling at a fair price. The SPDR Blackstone Senior Loan ETF (SRLN), which has $11 billion in assets thanks to $6.6 billion of net inflows in the past year, closed every day since the beginning of 2021 within 100 basis points of its net asset value (NAV). The widest gap was a discount of 80 basis points in mid-March 2022, but a mere three trading days later, the differential had turned into a slight premium.
The First Trust Senior Loan Fund (FTSL), which pulled in $2 billion in the past year to double in size to $3.8 billion, never closed at more than a 41 basis point discount in the last 15-plus months.
While these are currently favorable times for senior loan ETFs, as BlackRock now explains, the market is different than it used to be. James Keenan, CIO and global head of credit, and Carly Wison, portfolio manager for bank loans and global long/short credit strategies, write that the annual secondary trading volume of bank loans grew by roughly one-third over the past five years and hit a record $780 billion in 2021.
Keenan and Wilson further believe that high turnover of bank loans affords ETF managers, and others, more opportunities to move in and out of positions efficiently.
With BlackRock’s views on senior loans having evolved in response to the bond market, we expect that the firm will soon launch a related ETF product. While many of the firm’s largest fixed income ETFs track an index, like the iShares Core Aggregate Bond Index (AGG) and the iShares $iBoxx High Yield Corporate Bond ETF (HYG), the trend has been moving toward actively managed senior loan ETFs.
Indeed, while FTSL and SRLN have been raking in the cash in the past year, the index-based Invesco Senior Loan ETF (BKLN) has seen nearly $700 million of net outflows.
Meanwhile, FTSL and SRLN rose 2.2% and 2.0%, respectively in the past year, ahead of the 0.80% gain for BKLN, highlighting that active management can add value in this fixed income sub-category.
Indeed, Keenan and Wilson argue that actively managed strategies in the bank loan market can provide investors with both the skill of navigating risks in all market and liquidity conditions and the potential advantage of security selection.
Start the clock on when BlackRock has an active senior loan ETF trading under the ticker ISLN or something similar.
For more news, information, and strategy, visit ETF Trends.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:Don’t Give Up on High-Yield ETFs
Investors are selling out of high-yield bond ETFs in 2022, due in part to the combination of rising interest rates and the geopolitical concerns tied to Russia’s invasion of Ukraine shifting risk tolerance levels. In addition, some fear that if earnings from corporate issuers slow due to a weakening global economic environment, their ability to meet debt obligations could lessen.
Despite representing a small slice of the overall ETF asset base, three high-yield ETFs were among the 10 funds with the highest net outflows year-to-date through March 25 while others incurred meaningful redemptions.
The iShares iBoxx $High Yield Corporate Bond ETF (HYG) remains the largest of the funds in the fixed income sub-category with $14 billion in assets, but the ETF has incurred $5.8 billion of redemptions since the beginning of the year, equal to 27% of its year-end 2021 assets. HYG’s outflows in 2022 were second only industry-wide to the SPDR S&P 500 ETF (SPY), which shed $21 billion but still had $411 billion in assets.
Meanwhile, the SPDR Bloomberg High Yield Bond ETF (JNK) had $2.2 billion of net outflows, shrinking its asset base to $6.9 billion. But unlike SPY, which lost assets in part as advisors shifted to lower-cost alternatives like the Vanguard S&P 500 ETF (VOO) and the iShares Core S&P 500 ETF (IVV), the cheaper high-yield ETFs have also been out of favor in 2022.
The Xtrackers USD High Yield Corporate Bond ETF (HYLB) and the iShares Broad USD High Yield Corporate Bond ETF (USHY) also had a combined $3.1 billion in redemptions year-to-date. HYLB and USHY charge modest 0.15% expense ratios compared to 0.48% and 0.40% for HYG and JNK, respectively. Even the short-term-oriented iShares 0-5 Year High Yield Corporate Bond ETF (SHYG), which has a lower duration than HYG, had nearly $400 million of net outflows.
When building and maintaining asset allocation strategies, advisors often target a portion of their fixed income exposure to high-yield corporate bonds. The percentage allocated may depend on the risk tolerance of the investor and/or their age. For example, people in their 60s might have less exposure than their kids or grandkids. High-yield investments typically offer more reward potential but also incur more risk and volatility than investment-grade-rated corporate bonds and government securities.
To compensate for the credit risk, HYG currently sports a 5.4% 30-day SEC yield, more than 3.5% for the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), and 2.3% for the iShares Core Aggregate Bond ETF (AGG). AGG primarily has a mix of investment-grade corporate bonds and Treasuries.
Meanwhile, rather than directly owning individual bonds issued by American Airlines or Ford Motor, ETFs provide advisors and end clients diversification across sectors and credit ratings with bonds from hundreds of issuers. For example, HYG owns more than 1,300 positions and has 54% of assets in BB, 34% in B, and most of the small remainder in CCC-rated securities to limit the risk of issuers defaulting on their debt.
Even as the Federal Reserve hikes interest rates further in 2022, high-yield bond ETFs can continue to play a key role within a portfolio. Indeed, HYG’s effective duration of four years is less than half that of LQD, indicating that it should hold up better amid rising rates.
It is understandable why high-yield bond ETFs have declined to start 2022 and why some investors have rotated away in an effort to reduce risk profiles. However, before considering heading for the exits, understand what makes these funds different than other bond ETFs or owning bonds directly. In a well-diversified portfolio, high-yield bond ETFs provide attributes that ETFs tied to other investment styles cannot.
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For more news, information, and strategy, visit ETF Trends.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:Bond ETFs Suffer First Monthly Outflows in Years
Fixed income exchange traded funds experienced their first monthly outflows in more than five years over January, excluding a one-off instance at the start of the pandemic.
Investors dumped $1.5 billion in global fixed income ETFs over January, compared to the $27.3 billion in inflows over December, the Financial Times reports.
Bond investors are scrambling to reposition their fixed income portfolios ahead of a more hawkish Federal Reserve monetary policy outlook, with multiple interest rate hikes for 2022 amid a surge in inflation.
Beyond the outflows at the height of the COVID-19 pandemic-induced crash in March 2020 that was fully resolved a month later, January 2022 was the first monthly outflow since the $800 million in outflows over November 2016 after Donald Trump’s presidential election victory triggered a surge in U.S. Treasury yields on expectations of higher inflation in response to greater government spending and tax cuts.
The recent selling “is not completely unexpected because of the volatility we have seen with the repricing in the rates market in both the US and Europe,” Karim Chedid, head of investment strategy for BlackRock’s iShares arm in the EMEA region, told the Financial Times.
Most of the selling was from a record $7.6 billion in redemptions among U.S.-listed high-yield, speculative-grade bond ETFs.
Moreover, despite elevated inflationary pressures, inflation-linked bond ETFs also saw net outflows of $1.7 billion, with U.S.-listed ETFs taking the greater part of the hit. In comparison, Eurozone linkers saw a modest $200 million in net inflows.
“While they still look interesting from the point of view of inflation hedging, they still have duration exposure. Just as we have seen selling from duration in the nominal bonds market, we also see that in inflation-linked,” Chedid added.
Elisabeth Kashner, director of global fund analytics at FactSet, also argued that outflows from “narrow bond market segments” were “not surprising, as investors are using specialized bond ETFs to express short-term views.”
Kashner, though, was surprised that investors yanked $200 million from investment-grade bond ETFs.
“What’s more interesting is the slackening of the pace of inflows to the broad-based investment-grade bond funds that serve as core holdings,” Kashner said, highlighting the iShares Core US Aggregate Bond Fund (AGG) and the Vanguard Total Bond Market ETF (BND).
“Had core fixed income flows held steady, we might well have seen positive fixed income flows overall in January. The likeliest explanation is portfolio rebalancing, as the pullback in equities drove equity allocations below target for strategic portfolios,” Kashner added.
For more news, information, and strategy, visit the Fixed Income Channel.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:Why 2022 Could Be an Even Better Year for Fixed Income Active ETFs
Last year was a record year for ETFs, with net inflows of $910 billion into U.S.-listed ETFs, and it set a benchmark that will be hard to beat in 2022. Equity ETFs brought in the lion’s share of flows for the year at $692 billion, which is no surprise given the number of record closes for the major U.S. exchanges last year.
However, with the tide shifting in the latter half of the year, active ETFs saw an increase in flows, and the trend is expected to continue into 2022, particularly within the fixed income space, believes Todd Rosenbluth, head of ETF and mutual fund research at CFRA.
Fixed income ETFs garnered $207 billion in flows in 2021, nearly the same amount as 2020. Given the inflationary pressures in the latter half of the year and a Fed that turned very hawkish at the end of the year, inflows holding steady within a space experiencing a variety of pressures isn’t something to shrug at.
Despite losses within bond investment, actively managed fixed income ETFs were able to navigate the downturn with greater success than the broad indexed bond funds. Many of the major fixed income ETFs were able to hold losses at less than 1% for the entire year, while the major passive fixed income ETFs such as the iShares Core Aggregate Bond ETF (AGG) lost 1.93% in 2021, with others reflecting losses greater than 2%.
Active management fixed income ETFs also ended the year with 11% of the total assets within the fixed income ETF space but brought in 14% of the inflows. This is a reflection of an increasing pivot by investors to active management in inflationary times and with looming interest rate increases at the forefront of bond investors’ minds.
“We think investors will further embrace active ETFs in 2022 ahead of a more hawkish Federal Reserve,” Rosenbluth predicts in a communication to investors.
Active management firm T. Rowe Price offers several ETF options within the bond space, including the T. Rowe Price Total Return ETF (TOTR), the T. Rowe Price QM U.S. Bond ETF (TAGG), and the T. Rowe Price Ultra Short-Term Bond ETF (TBUX).
The firm brings a bevy of experience and research to its products, with portfolio managers averaging over 20 years in investing each, as well as over 400 investment professionals dedicated to researching companies within ETFs.
For more news, information, and strategy, visit the Active ETF Channel.
Read more on ETFtrends.com.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:Balancing Portfolio Risk And Reward: Asset Allocation for New Graduates
InvestorPlace - Stock Market News, Stock Advice & Trading Tips
Editor’s Note: This article is a part of a series on investing advice for recent college graduates, drawing on expertise from financial professionals, university faculty and of course, InvestorPlace’s very own analysts and writers. Read more “Money Moves for Recent Grads” here and check out Top Grad Stocks 2021 for our best stocks to buy for new graduates.
Source: f11photo/Shutterstock.com
New graduates just starting to invest probably have a lot of questions about the stock market. Where do you start? What should you invest in, and how much?
These are questions your parents probably asked themselves at the start of their careers. But in 2021, as the world begins to recover from the novel coronavirus pandemic, young investors are entering a market that feels more volatile than ever. The rush of Reddit-fueled short squeezes and 1,000% gains in cryptocurrencies this year has given investors young and old serious FOMO, and even tempted some into trying to “diamond hand” their way to wealth.
Certainly that has worked for some, but while it’s better to be lucky than smart, you can only control one of those things. Yet that doesn’t mean you need to be scared of risky investments. In fact, young investors have the potential to bank huge gains in their portfolios early on, with a little portfolio management and an eye on asset allocation.
8 Best Utility Stocks to Buy for Downside Protection
Time Is On Your Side
For 20-somethings, investing early in life is important. And if you’re reading this article, you know that leaving your money in a savings account isn’t the answer. Over time, inflation will outpace your savings’ interest rates, yielding a negative return on investment. Luckily, there’s good news to counter the bad.
The first piece of good news is that time is on your side. If you’re investing for more than 20 years, you can not only be more aggressive in your investment strategy, you can ride out the ups and downs of the stock market. The more you invest in now, the better off you’ll be later.
The second piece of good news is that you don’t need a financial advisor. Investing in your 20s is very different from saving for retirement. Because young investors have a longer time frame for investing, they can be more aggressive about how they allocate their investments. This difference is a good reason for taking a hands-on approach to asset allocation than a more balanced fund allows.
Young investors typically have a relatively small portfolio size, so they should focus more on increasing the rate at which they can save and invest, as opposed to choosing the best advisor or mutual fund. At this early age, increasing savings, making some good early long-term stock picks, and minimizing fees will take your money a lot further than a possible extra percent or two in return.
Of course, investing in any individual stock or bond leaves you vulnerable to the risk that the particular investment will decline in value, Diversifying your investments will reduce this risk and give you the opportunity to make money with one asset class while another declines.
Rising Inflation Means A More Aggressive Equity Portfolio
Inflation has been double the rate of general inflation over the past decade. Current yields tend to be a good indicator of future bond returns and the iShares Core U.S. Aggregate Bond ETF (NYSE:AGG), which serves as a broad bond market benchmark, is currently yielding 2.06%. At the same time, the April increase in The Consumer Price Index was the sharpest since September 2008. That means young investors looking to grow their wealth will have to adopt more aggressive asset allocations plans.
The first step is to define an asset allocation strategy to ensure your portfolio is both diversified and aggressive enough to meet your savings needs without unnecessary risk. Think of asset allocation as a grocery shopping basket: you’ll want to throw in a mix of various asset categories. These assets are index funds, mutual funds, bonds, cryptocurrency and of course, equities.
Not only are the categories important, so is the weighting. For young investors, this weighting will differ from older folks nearing retirement. The is to create an ideal mix of investments that gives you the greatest potential for long-term gains at a tolerable risk-level.
Source: InvestorPlace (Dream Stafford/Vivian Medithi)
Equities (50%): Focus on Technology, Growth and Innovation
As an aggressive investor, putting 50% of your investment into stocks (domestic AND international) is a good way to capitalize on economic and technology shifts at home while also investing in younger economies growing faster than the U.S. Investing directly in stocks gives you exposure to a growing economy, disruptive technologies/innovations and long term secular trends. The long-term returns on equities tend to be better than returns from cash or fixed-income investments. By diversifying your equity investment across different sectors, you’ll get exposure to both cyclical trends and secular long-term trends. Another benefit: you’ll lose less if a particular sector tanks.
Here are the important sectors to invest in, with weighting recommendations for your equity portfolio:
Technology (30%): Spanning both large-cap tech titans and small-cap growth stocks, young investors shouldn’t miss out on the chance to invest early on in secular long-term trends. Key themes include Cloud computing, software, semiconductors, IoT (Internet of Things), electric vehicles, solar technology and 5G. Some of our favorite ideas include Palo Alto Networks (NYSE:PANW) in 5G and cybersecurity, Splunk Software (NASDAQ:SPLK) in IoT, Li Auto (NASDAQ:LI) in electric vehicles, MP Materials (NYSE:MP) in battery technology, and Enphase Energy (NASDAQ:ENPH) in solar energy.
Healthcare (20%):The intersection of rising healthcare costs and an aging global population make for a potent combination that shouldn’t be overlooked by young investors. While healthcare stocks aren’t the first to take off when the economy charges higher, valuations are generally inexpensive right now. Investing here offers exposure to global growth and stocks with high dividend-yields. Key sub-segments to look at include pharmaceuticals, biotech, health technology companies, medical device manufacturers, health insurance companies and healthcare IT. Favorite names include AbbVie (NYSE:ABBV) and Zomedica (NASDAQ:ZOM) in biopharmaceuticals and Intuitive Surgical (NASDAQ:ISRG), a leader in robotic-assisted surgeries. Pharmaceuticals and companies focused on physician-administered therapies and vaccines are also good places to look.
Consumer Discretionary (10%): These stocks include durable goods, high-end apparel, entertainment and leisure activities. They tend to lead a stock market recovery, since consumers have more disposable income to spend when the economy is growing. Names to consider are those that track consumer spending trends, like e-commerce giants Ebay (NASDAQ:EBAY) and Etsy (NASDAQ:ETSY) and EV supplier Tesla (NASDAQ:TSLA). There are also some new trends to play here, like cannabis stock Cronos Group (NASDAQ:CRON) and video streaming supplier Roku (NASDAQ:ROKU).
Communications Services (10%): This sector, which comprises roughly 10% of the S&P 500, includes media, internet, satellite and phone services companies that span the range from stable dividend payers to more volatile growth names. With remote work, streaming, and gaming becoming a standard part of everyday life, the providers of this critical infrastructure are long-term growth investments. 5G technology is also a key catalyst for growth in the sector. Names to consider here include Verizon (NYSE:VZ), the largest wireless carrier in the U.S., American Tower (NYSE:AMT), the largest cell tower operator, and Comcast (NASDAQ:CMCSA), the largest pay-TV and home internet service provider.
Financials (8%): This segment includes investment banks and brokerage firms as well as emerging fintech stocks. The social investing movement has also opened up new business models in lending and online banking. Favorite names here are disruptive fintechs, including digital payment players Square (NYSE:SQ), Affirm (NASDAQ:AFRM), and Paypal (NASDAQ:PYPL). Also look at traditional credit card networks like Mastercard (NYSE:MA), which are poised for near-term recovery as international travel resumes.
Consumer Staples (5%): These non-cyclical stocks, which comprise roughly 70% of the GNP (Gross National Product), include food and beverages, household goods and hygiene products. They are also impervious to business cycles and offer a more defensive strategy in a contracting economy. As we look to a post-pandemic economy, the best names to choose short-term may not be these “stay at home” names that sell household necessities. But there are some good long term plays, like Costco Wholesale (NASDAQ:COST), whose bare-bones wholesaling approach has defied the retail downtrend. Other names to consider are those with strong brand portfolios, like Nestle (OTCMKTS:NSRGY), and Energizer Holdings (NYSE:ENR). Cosmetic companies like Estee Lauder (NYSE:EL) are also good long-term plays, benefiting from an increase in makeup sales.
REITs (5%): REITs (Real Estate Investment Trusts) own or manage income-producing commercial real estate. These provide diversification and lower risk as a counterbalance to other equity investments, as well as high-yield dividends, paying out 90% of taxable income to shareholders. With COVID-19 having impacted many of these landlords’ tenants, plenty of these names are currently trading at bargain prices. some good places to start include e-commerce warehouse REITs, healthcare REITs and telecom REITs. Some recession-proof REITs to consider include data center supplier Equinix (NASDAQ:EQIX), food industry REIT Americold Realty Trust (NASDAQ:COLD) and Life Storage (NYSE:LSI) in self-storage.
Industrials (5%): Machinery, manufacturing, construction, defense and aerospace are poised for growth as more industrial development is brought back into the U.S. Some of the fastest growers in this space include Ingersoll Rand (NYSE:IR), which manufactures flow control equipment, Amerco (NASDAQ:UHAL), a diversified holding company which owns U-Haul, and Middleby (NASDAQ:MIDD) in cooking and food prep equipment.
Energy (5%): Rising demand plus rising prices equals continued investment in transportation, exploration and production. Integrated oil and gas companies provide value and dividends, pipeline operators and MLPs (Master Limited Partnerships) offer steady income payments, and more disruptive oil and gas explorers can deliver big returns for those willing to take on the risk. Magellan Midstream Partners (NYSE:MMP) and Enviva Partners LP (NYSE:EVA) are trading at yields above 10%. Alternative energy and biofuels are also important growth areas. Examples here include Clean Energy Fuels (NASDAQ:CLNE), First Solar (NASDAQ:FSLR), and Enphase Energy.
Materials (2%): These cyclical stocks include precious metals, oil, wood and raw chemicals and offer broad-based exposure to a growing economy. Examples of recession-proof names with strong balance sheets and diversified portfolios include International Paper (NYSE:IP) in packaging, pulp and paper, and LyondellBasell (NYSE:LYB) in plastics and chemicals.
Index and Mutual Funds: Diversified exposure to ride out volatility
Mutual Funds (20%): Mutual funds are managed portfolios that give investors reduced-risk exposure to a diversified set of market sectors. Young investors should choose funds weighted toward small-cap growth stocks. At this early stage of investing, bond-based mutual funds are too defensive and low-growth in nature. Investors should be on the lookout for low costs (sales commissions) and low expense ratios. Some of the best performing mutual funds this year include Bridgeway Ultra-Small Company Market Fund (NASDAQ:BRSIX) and DFA US Small Cap Value I (NASDAQ:DFSVX).
Index Funds (5%): Early in their careers, new grads don’t need the safety of passive index funds when they have a long-time frame for investing. There are newer, more specific ETFs that track particular sectors that young investors may find attractive, such as electric vehicles, space, and alternative energy. Examples include the Global X Cloud Computing ETF (NASDAQ:CLOU), SPDR S&P Software & Services ETF (NYSE:XSW), Global X Cybersecurity ETF (NASDAQ:BUG) and iShares Global Clean Energy ETF (NASDAQ:ICLN).
Bonds (5%): A strong defense isn’t important right now
Bonds tend to be less volatile than stocks, and when held to maturity can offer more stable returns. For young investors, recommended exposure is low given a long time-frame for investing. That said, building a small early position offers some insulation against the volatility of the stock market. The corporate bond market is seeing a new wave of supply, with Amazon (NASDAQ:AMZN) and T-Mobile (NASDAQ:TMUS) recently issuing debt.
Cryptocurrency (20%): Because it’s here to stay
With mainstream support for cryptocurrencies rapidly escalating, young investors shouldn’t overlook this space. Now totaling over 7,000 publicly traded cryptocurrencies with a consolidated market capitalization of around $1.9 trillion, crypto has the potential to become a scarce asset that increases in value as fiat currencies depreciate. It could also gain extensive use as a digital form of cash, with the potential to become the first truly global currency. Already, digital payment platforms Square and PayPal, which also owns transfer app Venmo, allow customers to use cryptos. Favorite names include the number one and two by market cap — Bitcoin (CCC:BTC-USD) and Ethereum (CCC:ETH-USD). But, considering the run-up in these names, investors should also consider other emerging names with strong retail support, including Dogecoin (CCC:DOGE-USD), Ripple (CCC:XRP-USD) and blockchain platform Cardano (CCC:ADA-USD). My InvestorPlace colleague Tezcan Gecgil believes Litecoin (CCC:LTC-USD) will be the big altcoin winner. Many of these cryptocurrencies are trading below $2. That means for $2,000 you can buy up to 1,000 coins or tokens.
Disclosure: On the date of publication, Joanna Makris held long positions in TSLA, DOGE-USD, AMZN, MMP, EQIX, MA, PANW, SPLK, BTC-USD, PYPL and ETSY. She did not have (either directly or indirectly) positions in any of the other securities mentioned in this article.
Joanna Makris is a Market Analyst at InvestorPlace.com. A strategic thinker and fundamental public equity investor, Joanna leverages over 20 years of experience on Wall Street covering various segments of the Technology, Media, and Telecom sectors at several global investment banks, including Mizuho Securities and Canaccord Genuity.
The post Balancing Portfolio Risk And Reward: Asset Allocation for New Graduates appeared first on InvestorPlace.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:Australia shares trade flat as tech slide offsets commodity gains
By Arpit Nayak
Feb 23 (Reuters) - Australian shares traded little changed on Tuesday as gains in miners and energy firms on stronger commodity prices countered losses in tech stocks following a weak lead from U.S. peers.
The S&P/ASX 200 index .AXJO was nearly unchanged at 6,779.5 by 0000 GMT, after swinging between positive and negative territory for much of the early part of the session.
Tech stocks .AXIJ were the biggest drags on the benchmark, tracking losses in U.S. peers that have come under pressure from an uptick in bond yields and concerns over higher inflation affecting valuations. .N
"Steadily rising real yields should reflect better growth prospects for equities but if they rise suddenly, pushed higher by flows from rapid repositioning, then we think the impact of a higher discount rate will pull equities lower," analysts at UBS said in a note.
Buy-now-pay-later giant Afterpay APT.AX shed 7.8% to lead losses among local tech companies which were set for their worst session since Jan. 28.
Investors will watch closely for any changes to the U.S. Federal Reserve's dovish outlook from Chairman Jerome Powell when he speaks before the Senate Banking Committee later in the day.
Energy stocks .AXEJ gained up to 4.1% and were on track to post their best session since Jan. 13, lifted by a jump in oil prices as investors anticipate a slow recovery in U.S. crude output following a cold snap in the state of Texas. Oil Search OSH.AX climbed 8.6% after posting a surprise underlying profit. O/R
Newcrest Mining NCM.AX and AngloGold Ashanti AGG.AX led gains among gold miners .AXGD, which climbed 5.6%, as worries over rising inflation and a weaker U.S. dollar pushed the metal higher. GOL/
Firmer bullion and copper prices supported a more than 1% rise in heavyweight miners .AXMM, which hit their highest since Jan. 8. Copper prices breached the $9,000 mark for the first time since 2011 on indications of tight supply. MET/L
New Zealand's benchmark S&P/NZX 50 index .NZ50 declined 0.6% to 12,356.68 and was on track for a fourth straight session of falls.
(Reporting by Arpit Nayak in Bengaluru; Editing by Subhranshu Sahu)
((Arpit.Nayak@thomsonreuters.com; Twitter: @arpit_nayak18;))
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:ETFGI Reaches New ETF Record of $5.52 Trillion In Invested Assets
On Tuesday, ETFGI, a leading independent research and consultancy firm covering trends in the global ETFs and ETPs ecosystem, reported that assets invested in ETFs and ETPs listed in the United States reached a new record of $5.52 trillion at the end of January.
$57.23 billion in net inflows was gathered in January, the second-largest net inflows, which is greater than the $41.90 billion in net inflows gathered in 2019 but less than the $75.96 billion gathered in January 2018. Assets increased by 1.1%, from $5.47 trillion at the end of December to $5.52 trillion at the end of January, according to ETFGI's January 2021 US ETFs and ETPs industry landscape insights report, the monthly report which is part of an annual paid-for research subscription service.
“The S&P 500 posted a loss of 1% for January due to the sell-off during the last week of the month. Small and mid-cap stocks outperformed in January, with the S&P Mid-Cap 400 and the S&P SmallCap 600 up 2% and 6%, respectively. Slower-than-expected COVID-19 vaccine distribution affected global impacted equities globally. The Developed markets ex- the U.S. ended the month down 1% while emerging markets were up 3% for the month," according to Deborah Fuhr, managing partner, founder, and owner of ETFGI.
Growth in US ETF and ETP assets as of the end of January 2021
The ETFs and ETPs industry in the United States had 2,439 products, assets of $5.52 Trillion, from 180 providers listed on 3 exchanges at the end of January.
In January 2021, ETFs/ETPs gathered net inflows of $57.23 Bn. Equity ETFs/ETPs listed in the US reported net inflows of $26.45 Bn in January, bringing YTD net inflows for 2021 to $26.45 billion, more than the $19.91 Bn in net inflows equity products attracted in January 2020. Fixed income ETFs/ETPs listed in US reported net inflows of $14.70 Bn during January, which is more than the $13.60 Bn in net inflows fixed income products attracted in January 2020. Commodity ETFs/ETPs accumulated net inflows of $461 Mn in January, which is less than the $1.88 Bn gathered in January 2020.
Active ETFs/ETPs saw net inflows of $15.13 Bn during January, significantly more than the net inflows of $5.01 Bn in January 2020.
Substantial inflows can be attributed to the top 20 ETFs by net new assets, which collectively gathered $41.96 Bn during January. The Financial Select Sector SPDR Fund (XLF US) gathered 4.15 Bn.
Top 20 ETFs by net new assets January 2021: US
Name
Ticker
Assets
(US$ Mn)
Jan-21
NNA
(US$ Mn)
YTD-21
NNA
(US$ Mn)
Jan-21
Financial Select Sector SPDR Fund
XLF US
28,331.47
4,149.58
4,149.58
iShares Core Total USD Bond Market ETF
IUSB US
9,692.85
3,713.58
3,713.58
iShares MSCI EAFE Value ETF
EFV US
10,300.21
3,272.99
3,272.99
iShares Core MSCI Emerging Markets ETF
IEMG US
73,723.65
3,156.00
3,156.00
ARK Innovation ETF
ARKK US
22,609.04
3,097.15
3,097.15
Vanguard Total Stock Market ETF
VTI US
202,732.92
2,824.17
2,824.17
Vanguard Total Bond Market ETF
BND US
70,221.98
2,745.86
2,745.86
ARK Genomic Revolution Multi-Sector ETF
ARKG US
10,699.23
2,435.05
2,435.05
iShares Global Clean Energy ETF
ICLN US
6,538.74
1,657.33
1,657.33
iShares Core U.S. Aggregate Bond ETF
AGG US
86,266.80
1,594.07
1,594.07
Vanguard Intermediate-Term Corporate Bond ETF
VCIT US
43,754.05
1,567.31
1,567.31
Vanguard S&P 500 ETF
VOO US
177,910.66
1,558.20
1,558.20
Vanguard Total International Bond ETF
BNDX US
38,400.91
1,404.03
1,404.03
JPMorgan BetaBuilders Developed Asia EX-Japan ETF
BBAX US
3,076.13
1,336.48
1,336.48
Vanguard Short-Term Bond ETF
BSV US
30,812.70
1,298.87
1,298.87
Vanguard Small-Cap ETF
VB US
39,541.92
1,291.66
1,291.66
JPMorgan BetaBuilders Japan ETF
BBJP US
7,456.86
1,282.46
1,282.46
Energy Select Sector SPDR Fund
XLE US
15,393.63
1,229.03
1,229.03
SPDR Dow Jones Industrial Average ETF
DIA US
24,986.09
1,173.08
1,173.08
Vanguard Value ETF
VTV US
62,137.88
1,171.41
1,171.41
The top 10 ETPs by net new assets collectively gathered $2.23 Bn during January. The iShares Silver Trust (SLV US) gathered $1.18 Bn.
Top 10 ETPs by net new assets January 2021: US
Name
Ticker
Assets
(US$ Mn)
Jan-21
NNA
(US$ Mn)
YTD-21
NNA
(US$ Mn)
Jan-21
iShares Silver Trust
SLV US
16,496.27
1,181.76
1,181.76
ProShares Ultra VIX Short-Term Futures
UVXY US
22,45.30
273.75
273.75
SPDR Gold MiniShares Trust
GLDM US
41,44.47
186.45
186.45
iPath Series B S&P 500 VIX Short-Term Futures ETN
VXX US
1,421.30
172.83
172.83
iShares Gold Trust
IAU US
31,561.48
117.32
117.32
ProShares VIX Short-Term Futures ETF
VIXY US
483.78
81.98
81.98
Aberdeen Standard Physical Silver Shares
SIVR US
975.87
74.67
74.67
iShares S&P GSCI Commodity-Indexed Trust
GSG US
922.35
55.32
55.32
iPath Shiller CAPE ETN
CAPE US
315.75
42.83
42.83
Invesco DB Agriculture Fund
DBA US
700.87
42.25
42.25
Investors have tended to invest in Equity ETFs/ETPs during January.
Register now for the ETFGI Global ETFs Global Summit on ESG and Active ETFs Trends, March 24th & 25th Register Here.
For more market trends, visit ETF Trends.
Read more on ETFtrends.com.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:This VanEck ETF Has Investors Seeing Green
Environmental, social, and governance (ESG) investing isn't just relegated to equities. Bond investors can get in on the ESG action with ETFs like the VanEck Vectors Green Bond ETF (GRNB).
GRNB seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the S&P Green Bond U.S. Dollar Select Index. The fund normally invests at least 80% of its total assets in securities that comprise the fund’s benchmark index.
The index is comprised of bonds issued for qualified 'green' purposes and seeks to measure the performance of U.S. dollar denominated 'green'-labeled bonds issued globally. GRNB is slightly ahead of the iShares Core US Aggregate Bond (AGG), a popular broad-based ETF.
Overall, GRNB gives investors:
Access to bonds issued to finance projects that have a positive impact on the environment
An ESG solution for a core bond portfolio
An index that includes only U.S. dollar-denominated bonds designated as 'green' by the Climate Bonds Initiative
Access to green bonds at a low 0.20% expense ratio, 21 basis points lower than its categorical average
Record Growth for Green Bonds in 2020
As Covid-19 racked the capital markets in 2020, a move to safe haven assets like government and investment-grade debt helped to fuel niche-based green bonds. Per a Reuters article, "global green bond issuance reached a record high of $269.5 billion by the end of last year and could reach $400-$450 billion this year, a report by the Climate Bonds Initiative (CBI)" said.
"Green bonds are a growing category of fixed-income securities that raise capital for projects with environmental benefits, such as renewable energy or low-carbon transport," the article said further. "Although issuance reached a new record in 2020, the figure was just above 2019’s total of $266.5 billion as issuance slowed in the second quarter due to the effects of the coronavirus crisis before rebounding in the third quarter."
“The impact of COVID-19 in 2020 proved a huge economic and social negative. In that context, the resilience of green finance markets led to a record year of issuance,” the report said.
With a new year underway, look for green bonds to continue to gain popularity in 2021. U.S. President Joe Biden's support for clean energy policy could also help fuel an interest in green bonds.
For more news and information, visit the Tactical Allocation Channel.
Read more on ETFtrends.com.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:3 iShares ETFs Flexing Safe Haven Bond Strength
A flight to safe haven assets and a backstop from the Federal Reserve saw bonds rise to new heights in 2020. That doesn't mean bonds are no longer in play, as they still have their place in a portfolio today. Investors can start with ETF provider BlackRock.
At the top is a tried-and-true fund that's been the go-to for broad bond exposure: the iShares Core U.S. Aggregate Bond ETF (AGG). The fund offers broad-based exposure to investment grade U.S. bonds, making AGG a building block for any investor constructing a balanced long-term portfolio, as well as a potentially attractive safe haven for investors pulling money out of equity markets. While AGG can potentially be a one stop shop for fixed income exposure, a close look at the composition of this fund is advised.
Another fund with broad exposure to U.S. bonds is the iShares Core Total US Bond Market ETF (IUSB). IUSB seeks to track the investment results of the Bloomberg Barclays U.S. Universal Index.
The fund generally will invest most of its assets in the component securities of the index and may also invest in certain futures, options and swap contracts, cash and cash equivalents, including shares of money market funds advised by BFA or its affiliates, as well as in securities not included in the underlying index, but which BFA believes will help the fund track the underlying index.
Is inflation on the rise in 2021? If so, bond investors may want to look at the iShares TIPS Bond ETF (TIP), which seeks to track the investment results of Bloomberg Barclays U.S. Treasury Inflation Protected Securities (TIPS) Index (Series-L) which composed of inflation-protected U.S. Treasury bonds.
The fund generally invests at least 90% of its assets in the bonds of the underlying index and at least 95% of its assets in U.S. government bonds. It may invest up to 10% of its assets in U.S. government bonds not included in the underlying index, but which BFA believes will help the fund track the underlying index, and may also invest up to 5% of its assets in repurchase agreements collateralized by U.S. government obligations and in cash and cash equivalents.
TIP gives investors:
Exposure to U.S. TIPS, which are government bonds whose face value rises with inflation.
Access to the domestic TIPS market in a single fund.
Protection against intermediate-term inflation.
For more news and information, visit the Equity ETF Channel.
Read more on ETFtrends.com.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:5 iShares ETFs Starting Strong in 2021
Small cap equities, emerging markets, and bonds are a few themes that are grabbing attention to start the new year. iShares offers an impressive suite of ETFs to check all these boxes and more.
iShares Russell 2000 ETF (IWM): IWM seeks to track the investment results of the Russell 2000® Index, which measures the performance of the small-capitalization sector of the U.S. equity market. The fund generally invests at least 90% of its assets in securities of the underlying index and in depositary receipts representing securities of the underlying index. It may invest the remainder of its assets in certain futures, options and swap contracts, cash and cash equivalents, as well as in securities not included in the underlying index, but which the advisor believes will help the fund track the underlying index. IWM has a relatively low 0.19% expense ratio.
iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG): IEMG seeks to track the investment results of the MSCI Emerging Markets Investable Market Index. The index is designed to measure large-, mid- and small-cap equity market performance in the global emerging markets.
iShares Global Clean Energy ETF (ICLN): seeks to track the S&P Global Clean Energy Index. The index is designed to track the performance of approximately 30 clean energy-related companies.
iShares Core U.S. Aggregate Bond ETF (NYSEArca: AGG): AGG seeks to track the investment results of the Bloomberg Barclays U.S. Aggregate Bond Index. The index measures the performance of the total U.S. investment-grade bond market. The fund generally invests at least 90% of its net assets in component securities of its underlying index and in investments that have economic characteristics that are substantially identical to the economic characteristics of the component securities of its underlying index.
iShares TIPS Bond ETF (TIP): seeks to track the investment results of Bloomberg Barclays U.S. Treasury Inflation Protected Securities (TIPS) Index (Series-L), which is composed of inflation-protected U.S. Treasury bonds. While the Federal Reserve appears unflinching when it comes to its stance to keep interest rates low, what will it do if inflation starts to rise? With the increased flows into TIPS to start 2021, investors and traders alike might be sensing that a healing economy will translate into higher inflation in the new year.
For more news and information, visit the Equity ETF Channel.
Read more on ETFtrends.com.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:3 ETFs to Build a Diversified Core Investment Portfolio
As the new year approaches, investors can look to cheap index-based exchange traded fund strategies to create a well-rounded, diversified investment portfolio for 2021.
"Diversification helps investors to navigate fast-changing markets and stay the course to pursue their financial goals. This year offered a masterclass in how diversification through index-based ETFs could have helped the average investor avoid losing in a winning, albeit volatile, market," Daniel Prince, Head of iShares product consulting for BlackRock’s U.S. Wealth Advisory Business and U.S. Head of iShares Core ETFs, said in a research note.
Prince argued that index funds can help all investors diversify at the single-stock and portfolio level.
"The point is that successfully timing the market with individual securities — buying and selling at just the right times — is difficult even for the most experienced investor. Some index ETFs can hold the whole market, a strategy which helps shield investors from sharp declines of a few stocks," Prince said.
As investors look to rebalance their portfolios, Prince highlighted a number of iShares Core ETFs to build a low-cost, diversified portfolio in pursuit of one's long-term investing goals. For starters, the iShares Core S&P Total U.S. Stock Market ETF (ITOT), which tracks the S&P Total Market Index, provides low-cost and convenient access to the total U.S. stock market in a single fund, ranging from some of the smallest to largest companies.
The iShares Core U.S. Aggregate Bond ETF (NYSEArca: AGG), which tracks the Bloomberg Barclays U.S. Aggregate Bond Index, provides broad exposure to U.S. investment-grade bonds and is a low-cost easy way to diversify a portfolio using fixed income.
Additionally, the iShares Core Growth Allocation ETF (AOR), which tracks the S&P Target Risk Growth Index, is a simple way to build a diversified core portfolio focused on growth using one low-cost fund. The fund is composed of a portfolio of underlying equity and fixed income funds intended to represent a growth allocation target risk strategy. Investors can use AOR to establish a long-term, balanced portfolio and combine it with other funds for particular needs like income.
For more market trends, visit ETF Trends.
Read more on ETFtrends.com.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:The ETF Industry Continues to Thrive Despite Pandemic
It's been a memorable year for exchange-traded funds (ETFs) in 2020, but despite the pandemic, certain sectors within the industry will continue to thrive. A CNBC report discussed three themes that were going on in the ETF space--namely fixed income, ESG, and risk-based strategies, according to Armando Senra, head of iShares Americas at BlackRock, during an interview on CNBC’s “ETF Edge.”
As the report noted, the "first is the flight to fixed income ETFs, on which BlackRock has been capitalizing for several years. The second is sustainable investing, which Senra said now represents 20% of iShares’ flows and has seen 'very strong growth.'"
As far as ETFs go, the iShares Core U.S. Aggregate Bond ETF (NYSEArca: AGG) has been the go-to fund for investors who want that core bond exposure since 2003. AGG seeks to track the investment results of the Bloomberg Barclays U.S. Aggregate Bond Index, which measures the performance of the total U.S. investment-grade bond market.
Additionally, fixed income investors may want to get exposure to debt with a twist via funds like the VanEck Vectors Fallen Angel High Yield Bond ETF (BATS: ANGL). ANGL seeks to replicate as closely as possible the price and yield performance of the ICE BofAML US Fallen Angel High Yield Index, which is comprised of below investment grade corporate bonds denominated in U.S. dollars that were rated investment grade at the time of issuance.
ANGL essentially focuses on debt that has fallen out of investment-grade favor and is now repurposed for high yield returns with the downgraded-to-junk status. Buying household corporate bond ETFs was to be expected by the Fed when they implemented their bond purchasing program earlier this year, but they mixed up their moves nicely with high yield debt purchases like ANGL.
ANGL data by YCharts
As for other trends, the article also noted that "investors have been making calculations on risk for the better part of 2020, Senra said." Specifically, playing commodities and the movement of inflation.
“We’ve seen investors becoming more aware and concerned about inflation, and you’ve seen flows into commodity ETFs” and Treasury inflation-protected securities (TIPS) noted Senra.
Senra also pointed out that more investors are heading to opportunities overseas.
“Now, with the weaker dollar and also the underweight positions that most investors have to international, you’re beginning to see flows back into international,” Senra said. “So, I would say those are the main themes: fixed income ETFs, the growth of sustainable investing, and what you’ve seen this year in terms of risk-on and risk-off and how investors have played that out.”
For more market trends, visit ETF Trends.
Read more on ETFtrends.com.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:12 Bond Mutual Funds and ETFs to Buy for Protection
As the stock market continues to take a beating, nervous investors look to bond mutual funds and exchange-traded funds (ETFs) for protection and sanity. After all, fixed income typically provides regular cash and lower volatility when markets hit turbulence.
And the markets are absolutely hitting turbulence. For instance, between Feb. 19 and March 10, not only did the S&P 500 experience a historically rapid loss of 14.8% - it experienced a dramatic rise in volatility, too, hitting its highest level on that front since 2011, says Jodie Gunzberg, chief investment strategist at New York-based Graystone Consulting, a Morgan Stanley business. The index's losses and volatility have escalated even more since then.
Bonds offer ballast - "not only downside protection but also moderate upside potential as investors tend to seek out the safety of U.S. government and investment-grade corporate bonds amid stock market uncertainty" - says Todd Rosenbluth, senior director of ETF and mutual fund research at CFRA, a New York-basedinvestment researchcompany.
Bond prices often are uncorrelated to equities. Stocks typically do well in periods of economic growth, whereas bonds typically do well in periods of declining economic activity, Gunzberg says.
"Even though the current 30-day correlation has risen between stocks and bonds, the correlation between the S&P 500 and the S&P U.S. Aggregate Bond Index is still negative," she says. "Bonds are strong diversifiers, with the exception of high yield (junk), when added to a portfolio of equities throughout different economic scenarios." Indeed, junk debt has been punished severely of late.
Here are 12 bond mutual funds and bond ETFs to buy. These funds offer diversified portfolios of hundreds if not thousands of bonds, and most primarily rely on debt such as Treasuries and other investment-grade bonds. Just remember: This is an unprecedented environment, and even the bond market is acting unusually in some areas, so be especially mindful of your own risk tolerance.
SEE ALSO: The 25 Best Low-Fee Mutual Funds to Buy in 2020
iShares Core U.S. Aggregate Bond ETF
Assets under management: $71.0 billion
SEC yield: 1.8%
Expenses: 0.05%
Just like S&P 500 trackers such as the iShares Core S&P 500 ETF (IVV) are how you invest in "the market," the iShares Core U.S. Aggregate Bond ETF (AGG, $110.79) is effectively the way to invest in "the bond market."
AGG is an index fund that tracks the Bloomberg Barclays U.S. Aggregate Bond Index, or the "Agg," which is the standard benchmark for most bond funds. This portfolio of more than 7,600 bonds is heaviest in Treasuries, at a 42% weight, but also has significant exposure to mortgage-backed securities (MBSes, 28%) and corporate debt (24%), as well as sprinklings of agency, sovereign, local authority and other bonds.
This is an extremely high-credit-quality portfolio that has nearly 75% of its assets in AAA debt, the highest rating possible. The rest is invested in other levels of investment-grade bonds. That makes AGG one of the best bond ETFs if you're looking for something simple, cheap and relatively stable compared to stocks.
Learn more about AGG at the iShares provider site.
SEE ALSO: The 12 Best ETFs to Battle a Bear Market
Vanguard Total Bond Market ETF
Assets under management: $50.7 billion
SEC yield: 1.9%
Expenses: 0.035%
The Vanguard Total Bond Market ETF (BND, $82.85) is another name in broad-exposure bond funds. It targets U.S. investment-grade bonds and is geared for investors with medium- or long-term goals.
"Total" bond ETFs like BND incorporate a wide spectrum of fixed-income investments in a passively managed vehicle, says Mike Loewengart, managing director of investment strategy at online brokerage firm E*Trade Financial.
"Fixed-income investments can add ballast to your portfolio, especially during wild market swings," he says. "Investors leverage bonds because they are more predictable than equity investments, albeit a bit more boring, which turns off some investors."
BND holds roughly 9,200 bonds, with about 44% of those holdings in Treasury and other agency debt, 27% in investment-grade corporates, 24% in MBSes and the rest sprinkled across bonds such as sovereign debt and asset-backed securities (ABSes). It's also available as a mutual fund (VBTLX).
Learn more about BND at the Vanguard provider site.
SEE ALSO: The 10 Best Vanguard Funds for 2020
iShares Core Total USD Bond Market ETF
Assets under management: $4.6 billion
SEC yield: 2.1%
Expenses: 0.06%, or $6 on a $10,000 investment*
The iShares Core Total USD Bond Market ETF (IUSB, $50.56) is a another strong core bond fund that provides a blend of primarily investment-grade debt, but it also has some exposure to higher-yield bonds that AGG doesn't.
IUSB's portfolio, which includes more than 9,300 bonds, is most heavily weighted in Treasuries, at nearly 36% of the fund's assets. Another quarter of IUSB's assets are invested in investment-grade corporate debt from the likes of AT&T (T) and JPMorgan Chase (JPM), and another quarter is in mortgage-backed securities (MBSes). The rest is sprinkled among agency bonds, international sovereign debt and other types of bonds.
This indexed ETF does have a "slight exposure to high-yield bonds, which tend to do better in a risk-on environment," CFRA's Rosenbluth says. But otherwise, nearly 93% of this bond ETF's holdings are investment-grade, including a 63% slug in AAA-rated bonds.
The yield, at 2%, is about on par with the S&P 500 right now. But IUSB has been far, far less volatile than the blue-chip stock index, losing 4.5% over the past month versus the S&P's 25%.
* Includes a 1-basis-point fee waiver. (A basis point is one one-hundredth of a percent.)
Learn more about IUSB at the iShares provider site.
SEE ALSO: 9 Municipal Bond Funds for Tax-Free Income
iShares U.S. Treasury Bond ETF
Assets under management: $16.5 billion
SEC yield: 0.9%
Expenses: 0.15%
If you're looking to focus more on stability than potential for returns or high yield, one place to look is U.S. Treasuries, which are among the highest-rated bonds on the planet and have weathered the downturn beautifully so far.
Bond ETFs like the iShares U.S. Treasury Bond ETF (GOVT, $27.25) give investors direct exposure to U.S. Treasuries. GOVT's holdings range from less than one year to maturity to more than 20 years. Roughly half of the fund is invested in bonds with one to five years left to maturity, another 28% is in bonds with five to 10 years left, and most of the rest is in Treasuries with 20 or more years remaining.
Over the past month, GOVT has actually produced a 3% gain as investors hunker down in safety plays. Just note that an already low yield, as well as little room for yields to go further south, really limit the upside price potential in this bond ETF. But it still might be an ideal place for investors looking for stability and just a little bit of income.
Learn more about GOVT at the iShares provider site.
SEE ALSO: 5 Dividend Mutual Funds Yielding 3% or More
SPDR Bloomberg Barclays 1-3 Month T-Bill ETF
Assets under management: $15.3 billion
SEC yield: 1.2%
Expenses: 0.136%
This is a tricky time to be buying bonds since "yields are in a race toward zero," says Charles Sizemore, a portfolio manager for Interactive Advisors, an RIA based in Boston.
"Buying longer-term bonds at these prices exposes you to interest-rate risk. If yields bounce off of these historic lows, bond prices will fall," he says. "Given that yields are modest across the bond universe, it makes sense to focus on safety rather than reach for a slightly higher yield that won't really move the needle that much anyway."
In an environment like this, Sizemore believes it makes sense to stay in bonds with shorter-term maturity. The SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL, $91.63) is a liquid way to get access to the short end of the yield curve. It invests in an extremely tight portfolio of just 15 bond issues with thin maturities of between one and three months - good for the truly risk-averse. BIL hardly moves in good markets and in bad. Over the past month, for instance, BIL has gained 0.2%, with a chart that looks like a straight line compared to most major bond and stock market indices alike.
"The yield is a moving target and may approach zero soon due the Federal Reserve slashing rates," Sizemore says. "But you have essentially no interest-rate risk and you're parked in the safest corner of the bond market."
Learn more about BIL at the SPDR provider site.
SEE ALSO: 11 Defensive Dividend Stocks for Riding Out the Storm
PIMCO Enhanced Short Maturity Active ETF
Assets under management: $13.9 billion
SEC yield: 1.9%
Expenses: 0.36%
If you prefer to have a human overseeing your short-term bond investments, you can look to actively managed ETFs such as PIMCO Enhanced Short Maturity Active ETF (MINT, $100.10).
Like BIL, MINT is among the more conservative bond ETFs you can buy. The fund currently has more than 840 holdings, with a stated goal of "capital preservation, liquidity and stronger return potential relative to traditional cash investments."
The trade-off? A little bit more risk than, say, a savings account or money-market fund - but far less risk than most other bond funds. The ETF's 840-plus holdings are 93% invested in bonds with less than a year to maturity, with the remaining 7% invested in debt with no more than three years left. More than 75% of the fund's bonds have investment-grade credit ratings - the majority of that is investment-grade corporate debt, though it also includes Treasuries and other bonds.
MINT offers a "relatively attractive yield given its minimal interest-rate risk and can be a stronger alternative to sitting on the sidelines," CFRA's Rosenbluth says.
Learn more about MINT at the PIMCO provider site.
SEE ALSO: 10 Low-Volatility ETFs for This Roller-Coaster Market
Vanguard Short-Term Corporate Bond Index Fund ETF
Assets under management: $23.2 billion
SEC yield: 1.9%
Expenses: 0.05%
Another way to invest in short-term debt is the Vanguard Short-Term Corporate Bond Index Fund ETF Shares (VCSH, $76.77).
Given the financial damage happening to even good publicly traded companies, corporate bond funds - even ones that hold investment-grade debt - are hardly bulletproof. Thus, it's worth pointing out that 90% of the bonds in VCSH are in the A or BBB range, the lower of the four investment-grade tiers.
"But given that the holdings are investment grade bonds with only five years or less to maturity, your risk is tolerably low," Sizemore says. Indeed, the average maturity of bonds in the fund is just under three years.
The yield of 1.9% is decent, albeit unspectacular. However, relative stability and an uber-cheap expense ratio make VCSH a decent place to wait out the volatility. If you prefer mutual funds, Vanguard offers an Admiral-class version (VSCSX).
Learn more about VCSH at the Vanguard provider site.
SEE ALSO: 8 Great Vanguard ETFs for a Low-Cost Core
Vanguard Intermediate-Term Bond ETF
Assets under management: $12.7 billion
SEC yield: 1.6%
Expenses: 0.07%
The Vanguard Intermediate-Term Bond ETF (BIV, $87.25) is an "in the middle fund" that invests exclusively in intermediate-term, investment-grade debt.
It's another index fund, this time investing in bonds with maturities between five and 10 years. More than half the fund is invested in Treasuries and other U.S. government bonds, with another 40% in investment-grade corporates, and most of the rest in foreign sovereigns.
The idea here is to provide more yield than in similarly constructed funds, though at the moment, BIV's yield is actually lower than many shorter-term funds. Year-to-date, however, it's essentially trading flat versus a 1%-plus decline for the "Agg" benchmark. It also has a mutual fund version (VBILX).
Learn more about BIV at the Vanguard provider site.
SEE ALSO: 11 Best Stocks to Ride Out the Coronavirus Outbreak
Vanguard Long-Term Bond ETF
Assets under management: $5.1 billion
SEC yield: 2.6%
Expenses: 0.07%
If you do want to roll the dice on longer-term investments for a little more yield, bond ETFs such as the Vanguard Long-Term Bond ETF (BLV, $100.44) can get the job done.
The roughly 2,500-bond portfolio is heaviest in investment-grade corporate debt (48%), followed by Treasury/agency bonds (44%). Almost all of the rest of BLV's assets are used to hold investment-grade international sovereign debt.
The added risk comes in the form of longer maturity. Three-quarters of the fund is invested in bonds maturing in 20 to 30 years, 22% is in the 10-to-20 range, 3% is in bonds with 30-plus years remaining, and the rest is in the five-to-10 range. Because there's more of a chance these bonds won't get paid off than bonds that expire, say, a year from now, that means this fund can rise and fall a lot more than funds like MINT that deal in short-term debt.
But the higher yield might be tempting to some investors.
"With interest rates compressing and the 10-year Treasury at an all-time low, investors might consider adding a long-term bond fund to their portfolio like Vanguard's Long-Term Bond Fund," says Daren Blonski, managing principal of Sonoma Wealth Advisors in California. "Unless you see interest rates rising in the near future, owning a long-term bond fund can provide substantially more income to your portfolio. If interest rates do rise, a long term bond fund would underperform."
Like many other Vanguard bond ETFs, BLV trades as a mutual fund, too (VBLAX).
Learn more about BLV at the Vanguard provider site.
SEE ALSO: Every Warren Buffett Stock Ranked: The Berkshire Hathaway Portfolio
DoubleLine Total Return Bond Fund Class N
Assets under management: $55.3 billion
SEC yield: 2.99%
Expenses: 0.73%
Managed by well-known bond portfolio manager Jeffrey Gundlach, the DoubleLine Total Return Bond Fund Class N (DLTNX, $10.71) acts as a "nice diversifier to core fixed income while providing current income without overstretching in quality for higher yield and strong risk-adjusted returns in varying market and interest-rate environments," says Nicole Tanenbaum, partner and chief investment strategist at Chequers Financial Management, a San Francisco-based financial planning firm.
While DLTNX is a "total return" fund, its primary vehicle is mortgage-backed securities. More than 80% of the bond mutual fund's assets are invested in these right now, with the rest sprinkled among debt such as Treasuries and other asset-backed securities, as well as cash.
"In today's persistent low-yield environment, many investors had been drifting away from safer core bond holdings toward riskier, high-yield credit given the more attractive yields they offer," Tanenbaum says. "While it may be tempting to reach for these higher yields to generate more income, it is critical for investors to fully understand the underlying credit quality of the bonds they are choosing to receive that higher yield."
The retail-class N shares we list here require a $2,000 minimum investment in normal accounts or $500 in an IRA. You can invest in the lower-expense institutional-class shares (DBLTX, 0.48% annual fees) with a $100,000 minimum investment in normal accounts, or a $5,000 minimum investment in an IRA.
Learn more about DLTNX at the DoubleLine provider site.
SEE ALSO: Kip ETF 20: The Best Cheap ETFs You Can Buy
BlackRock Strategic Income Opportunities Investor A
Assets under management: $31 billion
SEC yield: 2.4%
Expenses: 1.10%
The BlackRock Strategic Income Opportunities Investor A (BASIX, $9.45) is an actively managed bond mutual fund that should complement core bond exposure to increase your risk-adjusted returns. Managers Rick Reider, Bob Miller and David Rogal have been with the fund for varying amounts of time, with Reider boasting the longest tenure in BASIX at roughly a decade.
This isn't your garden-variety bond fund. A little more than 20% of BASIX's assets are invested in "interest-rate derivatives" - hedges that institutional investors use against movements in interest rates. Another 19% is invested in emerging-market bonds, and the rest is split among debt such as junk bonds, Treasuries, collateralized loan obligations and more.
Performance is a mixed bag against the "Agg" bond index, though it's far less volatile than both the market and even the Nontraditional Bond category. But one thing weighing down its performance is high costs - not just a 1.1% expense ratio, but also a 4% maximum sales charge. But you can get around this if you have access to the Institutional shares (BSIIX), which have no sales charge and a 0.62% annual fee.
While an individual using a regular account would need to scrape together a whopping $2 million minimum initial investment, investors whose assets are managed by independent financial advisors might be able to access this share class for a far more reasonable minimum investment. You also might be able to access BSIIX via your 401(k) or other employer-sponsored retirement plan.
SEE ALSO: Why Did the Fed Cut Rates to Near Zero?
AlphaCentric Income Opportunities Fund A
Assets under management: $3.6 billion
SEC yield: 4.4%
Expenses: 1.74%
Investors who are looking for a bond fund with a bit more income, but are willing to take on more risk, should consider the AlphaCentric Income Opportunities Fund A (IOFAX, $12.32). This fund consists of non-agency residential mortgage-backed securities.
Bond mutual funds can help balance out volatile equity investments, Sonoma Wealth Advisors' Blonski says. IOFAX currently yields more than 4%, but this higher yield "doesn't come without risk as it specializes in trading in thinly traded residential mortgages."
Like BASIX, this is another specialized fund that's more suited for experienced investors who are willing to take on more risk. Also like BASIX, this is a fund best bought through a different grade of shares, given a high 1.74% expense ratio and a maximum 4.75% sales charge. Investors who have independent financial advisors manage their assets might be able to access the I shares (IOFIX), which have no sales charge and a slightly cheaper 1.49% expense ratio - at a $2,500 minimum investment, no less. Also check to see if IOFIX is available via your 401(k), 403(b) or other plans.
Learn more about IOFAX at the AlphaCentric provider site.
SEE ALSO: 64 Dividend Stocks You Can Count On in 2020
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:Investors Pour $51B Into ETFs In January
Cinthia Murphy, Managing Editor, ETF.com
The ETF market is starting 2020 strong, attracting $51 billion in net creations in January—the strongest start to the year since $68 billion found its way into U.S.-listed ETFs two years ago. The number also stands in stark contrast to asset flows this time last year, when U.S.-listed ETFs actually bled assets to start 2019.
January saw several elements spook markets across the board: coronavirus headlines, concerns about geopolitical risk, and uncertainty linked to a presidential election year in the U.S. Still, U.S. equity ETFs gathered a net of $17.4 billion last month, while international equity ETFs saw net inflows of nearly $12 billion. Spooked or not, investors have continued to put their money to work in the ETF space.
The Vanguard Total Stock Market ETF (VTI) and the iShares Core MSCI EAFE ETF (IEFA) led the month’s list of top gainers—both well-established, highly liquid and broadly diversified portfolios.
Out of favor, however, were small cap stocks. The iShares Russell 2000 ETF (IWM)—the largest and most liquid ETF in this segment—saw the month’s biggest net outflows: $2.6 billion. That amounts to redemptions totaling about 6% of IWM’s total assets under management.
U.S. fixed income ETFs also saw strong demand as yields slid during the month—the 10-year Treasury dropped 41 basis points to 1.51% during January. The Vanguard Total Bond Market ETF (BND) and the iShares Core U.S. Aggregate Bond ETF (AGG) were among the month’s most popular bond ETFs, attracting more than $2 billion each. In all, the asset class took in some $15 billion in fresh net assets in January.
More on ETF.com
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The Month In ETFs: January 2020
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:ETF Asset Growth Beats 2018 Pace
Cinthia Murphy, Managing Editor, ETF.com
As we enter the last month of the 2019 calendar, the ETF market is on pace to see its strongest growth in about a decade.
So far this year, investors have poured $264 billion into U.S.-listed ETFs, a pace of creations that now exceeds 2018’s totals for this time of year. Net inflows and market performance have pushed total U.S.-listed ETF assets up more than 23% this year, to $4.284 trillion.
A look at the numbers shows that one of the biggest themes in the ETF space in 2019 continues to be record-breaking demand for fixed income vehicles, which have now taken in $138 billion this year. That’s more than half of the year’s total net inflows.
Asset Classes (Year-to-Date)
In the past week alone, ETFs attracted $13.8 billion in net inflows, and several fixed income funds were found among the week’s biggest creations, including the iShares Core U.S. Aggregate Bond ETF (AGG), the iShares iBoxx USD High Yield Corporate Bond ETF (HYG), the iShares Core International Aggregate Bond ETF (IAGG) and the Vanguard Total Bond Market ETF (BND).
Top 10 Creations (All ETFs)
More on ETF.com
Coming Soon: New Twist To Active ETFs
Schwab/TDA Deal: Honey Badger Don’t Care
The Ever-Changing ETF Globe
Live Chat: 5 Key Trends For 2020
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:The 7 Best Bond Funds to Buy for a Shift in Interest Rates
InvestorPlace - Stock Market News, Stock Advice & Trading Tips
Now that the Federal Reserve is moderating its monetary policy, and the yield curve has turned negative for the first time since 2007, the best bond funds to buy are also beginning to shift.
As recently as the third quarter of 2018, it appeared as if the Fed would hike interest rates two or three times in 2019. By the beginning of 2019, the Fed's tone and outlook began to signal that one or two interest rate bumps during the year were the best bet. As of a few days ago, the Fed indicated it may not raise rates at all in 2019 but may possibly hike rates just once in 2020.
What this means for bonds is that yields will moderate along with the Fed's policy. Moderating yields will in turn provide support, or even a lift, to bond prices. Translation: Now may be a good time to increase your exposure to bond funds.
7 Reasons to Buy Housing Stocks in 2019
With that backdrop in mind, here are the best bond funds to buy for a shifting interest rate environment:
Best Bond Funds to Buy: iShares Core U.S. Aggregate Bond (AGG)
Expenses: 0.05%, or $5 for every $10,000 invested
Smart investors know, especially after the past year, that the interest rate environment is difficult to predict. This uncertainty makes a broadly diversified bond fund like iShares Core U.S. Aggregate Bond (NYSEARCA: AGG ) a wise choice.
AGG tracks the Bloomberg Barclays U.S. Aggregate Bond index, which covers the entire U.S. bond market of more than 7,000 bonds. Although the portfolio has a broad range of maturities and credit quality, the average weighted maturity is just under eight years and the average ratings are investment grade.
This means that investors can reap the benefits of reduced market risk through diversification but also the potential price gains coming for a moderating rate environment.
Vanguard Intermediate-Term Corporate Bond (VCIT)
Source: Shutterstock
Expenses: 0.07%
As bonds come back into favor, corporate bonds typically outperform Treasury bonds and municipal bonds. This makes Vanguard Intermediate-Term Corporate Bond (NYSE: VCIT ) a smart choice now.
Treasury bonds and municipal bonds typically have lower yields than corporate bonds. They also generally have lower annualized returns, especially when investing for longer than one year.
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Unless you are investing in a taxable brokerage account and need tax-free income, a low-cost corporate bond fund like VCIT is a great fund to hold now and in the long run.
SPDR Nuveen Barclays Municipal Bond Index (TFI)
Expenses: 0.23%
Investors needing tax-free income at the Federal level should consider a low-cost, diversified bond fund like SPDR Nuveen Barclays Municipal Bond Index (NYSE: TFI ).
If you want to increase your exposure to bond funds to take advantage of moderating or falling interest rates, you'll need to be cautious about the tax implications. If you're investing in a taxable account and your top Federal tax rate is 32% or higher, a municipal bond fund like TFI can be a smart idea.
Although municipal bonds typically have lower yields than corporate bonds, the tax-equivalent yield of municipal bonds (the yield a taxable fund would need in order to equal the tax-free yield of a municipal bond fund) can make sense.
The SEC yield for TFI is a solid 2.1% and the tax-equivalent yield is 3.5%.
PIMCO 25+ Year Zero Coupon U.S. Treasury Index (ZROZ)
Expenses: 0.15%
If you're not afraid of taking extra risk, a highly interest-rate-sensitive bond fund like PIMCO 25+ Year Zero Coupon U.S. Treasury Index (NYSEARCA: ZROZ ) may be your best bet for out-sized returns.
When interest rates are flattening and expected to fall, the bonds and bond funds with the greatest interest rate sensitivity typically see the biggest price gains. Bonds with long maturities will see bigger price gains than those with shorter maturities. Also zero-coupon bonds have greater interest rate sensitivity because they pay the investor zero interest until maturity.
7 Beaten-Up Stocks to Buy as They Reverse Course
Enter ZROZ. This ETF holds long-term zero-coupon bonds and will likely see the biggest jumps in price, assuming the interest rates remain flat and begin to decline in 2020 (or sooner).
Vanguard Total Bond Market Index Admiral Shares (VBTLX)
Source: Shutterstock
Expenses: 0.05%
Minimum Investment: $3,000
For a low-cost, diversified bond mutual fund, it's tough to beat Vanguard Total Bond Market Index Admiral Shares (MUTF: VBTLX ).
Vanguard recently closed most of their Investor Shares mutual funds and made their lower-cost Admiral Shares available to investors with the same $3,000 minimum initial investment. This makes many of their mutual funds as cheap as the cheapest ETFs on the market.
To get broad exposure to bonds without taking on too much interest-rate risk, VBTLX is an outstanding choice. The portfolio tracks the Bloomberg Barclays U.S. Aggregate Bond index, which consists of over 7,000 bonds, providing exposure to the entire U.S. bond market.
Vanguard Long-Term Bond Index (VBLTX)
Source: Shutterstock
Expenses: 0.15%
Minimum Investment: $3,000
The best low-cost long-term bond mutual fund is arguably Vanguard Long-Term Bond Index (MUTF: VBLTX ).
As the Fed puts a hold on rate hikes, and the potential increases for rate cuts, long-term bond funds like VBLTX can be a smart move. This is because long-term bonds tend to have greater price increases than short- and intermediate-term bonds as interest rates begin to fall.
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VBLTX tracks the Bloomberg Barclays U.S. Long Government/Credit Float Adjusted Index, which consists of more than 2,000 U.S. long-term bonds. In addition to potential for greater gain potential, the 3.8% trailing-12-month yield may be attractive to investors looking for income.
Loomis Sayles Bond Retail (LSBRX)
Source: Shutterstock
Expenses: 0.91%
If you're looking for a well-managed go-anywhere bond fund to compliment your core bond funds, Loomis Sayles Bond Retail (MUTF: LSBRX ) can be a fine choice.
The bond market is arguably more complex and more difficult to forecast than the stock market. This makes a solid case for investing in either a passively managed index fund or an actively managed fund with an outstanding manager at the helm. Some investors may choose to have the best of both and use a total market index fund for a core holding and a fund like LSBRX as a compliment.
Diversification is especially important in uncertain interest rate environments, as is the case in 2019.
LSBRX is managed by Dan Fuss, who has been at the helm of the fund for nearly 30 years and has been managing fixed income portfolios for over 50 years. The LSBRX portfolio consists of a wide range of maturities and credit quality. About two-thirds of the bonds are U.S. and the other one-third is non-U.S. bonds.
As of this writing, Kent Thune did not personally hold a position in any of the aforementioned securities, although he held AGG and VBTLX in some client accounts. Under no circumstances does this information represent a recommendation to buy or sell securities.
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The post The 7 Best Bond Funds to Buy for a Shift in Interest Rates appeared first on InvestorPlace .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:Are Your Bonds Doing Their Job for Your Nest Egg?
Now that the dust has settled on the fourth-quarter 2018 market mayhem, it's time for fixed-income investors to review the instant replay. Did your core bond funds hold their ground, or even advance a little, as stocks stumbled? Or did they retreat, leaving you with red ink in every part of your portfolio?
SEE ALSO: 5 Tips to Deal With Market Volatility
If your answer is the former, you're likely on the right track with your bond holdings. If it's the latter, it's time to rethink your selection of core bond funds and the role that bonds play in your portfolio.
For retirees, bond funds should generally act as ballast, helping you withstand market volatility and giving you stable assets to tap when your stock holdings are down. But all too often, investors accept a lot of extra risk in exchange for slightly higher-yielding bond holdings, choosing funds that dabble in lower-quality debt and behave too much like stocks, says Allan Roth, a financial planner at Wealth Logic , in Colorado Springs, Colo. "Take your risks with equities," he says. "Have your bonds be the most boring part of your portfolio."
The reasons become all too clear when markets go into a tailspin. In 2008, the average intermediate-term bond fund lost about 5%. That doesn't sound bad compared with stocks' 37% decline, but it was painful for retirees who didn't have any solid ground in their portfolios and were forced to sell holdings at a loss to cover living expenses. Some high-quality, plain-vanilla bond funds, however, were standouts in an otherwise abysmal year. The iShares Core U.S. Aggregate Bond exchange-traded fund (symbol AGG ), for example, which tracks the Bloomberg Barclays U.S. Aggregate Bond Index, gained nearly 6%.
Fast-forward to the fourth quarter of 2018, when Standard & Poor's 500-stock index fell 13.5%. The average intermediate-term bond fund gained about 0.9%, and straightforward index-trackers again stood out: The iShares ETF gained 1.6%. But not all intermediate-term bond funds avoided losses. Invesco Core Plus Bond Fund, which has a significant stake in lower-quality "junk" bonds, lost nearly 1% in the fourth quarter and finished the year down nearly 3%. Loomis Sayles Investment Grade Bond, which can invest up to 15% of assets in below-investment-grade bonds, lost 0.7% in the fourth quarter and 0.6% for the year.
Those aren't massive losses, but investors should take note when their bond funds are "moving in the same direction as what you're seeing in the equity and risk markets, and not providing a lot of ballast," says Sarah Bush, director of the manager research team for fixed-income strategies at Morningstar .
Look at Bond Funds' Credit Quality
Investors looking for core bond funds that will help them stay afloat when stocks sink should pay attention to the credit quality of fund holdings. A junk-bond stake above the low single digits could be a red flag, Bush says. And steer clear of the highest-yielding funds, which are venturing into riskier territory to boost their income.
Solid options include Vanguard Total Bond Market Index ( VBTLX ). This fund tracks a version of the Bloomberg Barclays Aggregate Index, which excludes junk bonds, and charges fees of just 0.05%. American Funds Bond Fund of America ( BFAFX ) has a minimal junk bond stake and gained 1.5% during the fourth-quarter market slide. Buy the fund's commission-free F-1 share class through online broker ages such as Fidelity and Schwab.
While such higher-quality funds should hold up well during times of stock-market stress, they won't necessarily protect you from rising interest rates. (When rates rise, bond prices fall.) One option: Consider high-quality bond funds that keep interest-rate risk well below the category norm, such as Fidelity Intermediate Bond ( FTHRX ). Its duration is 3.8 years, versus 5.5 for the average intermediate-term bond fund, according to Morningstar. Funds with longer duration will fluctuate more when rates change.
SEE ALSO: The 7 Best Bond Funds for Retirement Savers in 2019
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:The Best Bond Funds for 2019 and Beyond
Most investors give the bulk of their attention to the stock market, because that's where the big growth is. However, stocks can be extremely volatile, and most investors need other types of investment assets in their portfolios to balance their exposure to the financial markets and to meet shorter-term needs. For those investors, adding bonds to their holdings can act as a counterbalance to their stock exposure.
Individual bonds are available to buy and sell through most brokers, but most investors choose to invest in bond funds, rather than picking individual bonds. With hundreds of different bond funds to choose from, it can be challenging to decide which one is best for you. Below, we'll give you all the information you need to understand what a bond fund is and how you can identify the funds that will best serve your financial goals.
What is a bond?
A bond is an investment that's tied to a loan between the bond's issuer and the purchaser. Under the terms of the bond, the initial bond purchaser pays a set amount of money -- usually $1,000 or $5,000 per bond -- to the issuing entity. The issuer gets to keep that money for its own use. In exchange, the issuer agrees to pay interest to the bondholder at set intervals, commonly every six months, until the bond "matures." Once the bond reaches maturity, the issuer pays the bondholder the principal amount back. A bond's maturity date is set before the bond is issued, so investors know up front when they can expect to get their principal back.
There are many different types of bonds, and they are generally sorted into a few different categories. These categories include:
Treasury, municipal, and corporate bonds, depending on whether the issuer is the federal government, a state or local government entity, or a private business.
Short-, intermediate-, and long-term bonds, depending on the length of time between when the bond is issued and when it matures.
Investment-grade and high-yield bonds, depending on whether the issuer's financial condition makes it more likely or less likely to repay the bond at maturity. Generally, the greater the risk that an issuer will fail to repay its bondholders, the higher the yield on its bonds, so most investment-grade bonds have lower yields than most high-yield bonds.
Inflation-adjusted bonds, whose issuers pay an amount at maturity that accounts for changes in the purchasing power of money since the bond was issued, rather than a fixed amount.
Bonds typically fall into more than one of these categories. For instance, Treasuries, municipal bonds, and corporate bonds can all be short-, intermediate-, or long-term. Some Treasury bonds are inflation-adjusted, and you can find municipal and corporate bonds that are either investment-grade or high-yield.
The most important feature of a bond is that the stream of payments investors receive when they own the bond is scheduled in advance. For instance, with a 10-year Treasury bond worth $1,000 paying 3%, you know that you'll receive $15 every six months for the next 10 years, and then get your $1,000 back. So long as you hold on to the bond until it matures, there's no possibility of getting more than that, but unless something goes dramatically wrong with the issuer, there's little risk of getting less than that, either.
What's a bond fund?
Bond funds are pools of investments in which large numbers of investors can contribute money toward a commonly held portfolio of bonds. Typically, the bond funds that are available to most investors are either mutual funds or exchange-traded funds .
The way bond funds operate depends on what type of fund is involved. With a bond mutual fund, the fund company accepts orders to buy or sell shares on a daily basis, with all transactions occurring after the end of the trading day. The mutual fund can issue new shares or redeem existing shares at will, and you're always guaranteed to get the net asset value of all of the investments held by the fund when you buy or sell shares.
With bond exchange-traded funds , the mechanisms for trading are a bit different. You can buy or sell bond ETFs at any point when stock exchanges are open for trading, and the price at any given point is determined not by the value of the underlying assets in the ETF, but rather by the market price determined by how much buyers are willing to pay and how much sellers are willing to accept for shares.
Regardless of the type, though, bond funds allow you to invest in a diversified portfolio of hundreds or even thousands of different bonds, even if you have only a modest amount of money to invest. By grouping together a vast array of investors, bond funds are able to invest in a wide swath of bonds efficiently and economically.
Why would I want to invest in bonds?
Investing at least some of your savings in bonds makes sense for most investors. Even for those with long time horizons, the risks of an all-stock portfolio can make some investors uncomfortable. It's true that with stocks, there's theoretically no limit to how much money you can make from a successful investment. If you're one of the first to identify a small upstart that turns out to be the leader of a fast-growing industry, for example, you can earn life-changing wealth. Pick wrong, though, and you can lose everything.
Bonds don't typically have that all-or-nothing nature. Most of the time, the bond will work out exactly the way you expect, with the bondholder receiving interest payments as scheduled and then receiving the agreed-upon payoff at maturity. Although the interest rates that most bonds pay don't match up to the long-term historical returns of the stock market, the relative stability that they offer provides a solid foundation for an investment portfolio.
What are the pros and cons of bond funds?
Bond funds are useful for investors because the minimum investments required to invest directly in individual bonds are usually sizable. For instance, putting together a relatively diversified portfolio of 20 different municipal bonds would likely cost you $100,000 or more. Bond funds, by contrast, often let their shareholders start investing with as little as $100, and you can still get the same diversification.
In addition, the bond market is a lot different from the stock market when it comes to individual investor participation. With stocks, all you have to do is get an online broker age account, and you can typically buy or sell shares at extremely low commissions. With direct access to exchanges, your stock trade executes in a fraction of a second, and beforehand, you can easily tell what the prevailing market price is and predict quite well what your final trade price will end up being.
However, the bond market is geared much more toward professional traders, with financial institutions maintaining tight control over the market. It's hard for ordinary investors even to get up-to-date bond prices, let alone find resources and tools similar to the ones that so many brokers provide to their stock-trading clients to help them with their investing. By investing through a bond fund, you turn over the responsibility for finding and buying actual bonds to the manager of the fund, and the trading and pricing of the fund shares is much simpler and more transparent.
However, bond funds do have some downsides. The most important is that bond funds charge fees for their management and investment services. All bond funds pass through their expenses to fund shareholders through what's known as the expense ratio , taking a small percentage of shareholders' assets to cover costs. Expense ratios can run from 0.05% to 1% or more on an annualized basis. The greater the ratio, the more money you'll lose to fees. However, because the expense ratio is typically taken from the income produced by the bonds in the fund's portfolio, you won't actually see the amount you're paying on your financial statement; you'll just get a slightly smaller income distribution from the fund, because the fees have been deducted from the payout. Some bond mutual funds also charge up-front sales fees that can amount to several percent of your initial investment. These sales loads aren't worth paying, as the money goes straight to the investment professional selling you the mutual fund shares, and none of it goes to the fund itself.
Another risk to be aware of is that bond fund prices can fluctuate dramatically over time, and unlike individual bonds, bond funds offer no guarantee that you'll eventually be able to cash out at a fixed price. Remember that new bonds are continuously coming to market, and the prices of existing individual bonds tend to move when prevailing interest rates in the market change. When rates on new bonds go up, the value of previously issued individual bonds falls, because the older bonds' lower rates mean they pay investors less interest than newer bonds. When prevailing interest rates fall, conversely, an individual bond's price typically rises, because the interest rate on the existing bond now looks more attractive than what newer bonds are offering. However, none of those rate changes affect the bond's terms, and no matter what happens to the market price of a bond, you can always hold on until maturity and receive the predefined payout.
Bond funds generally don't have a maturity date. Instead, they continually buy and sell bonds to serve their investment objective. For example, a long-term bond fund usually concentrates on bonds that mature in 10 years or more. When the maturity date of a given bond hits the eight- or nine-year mark, the bond fund will usually sell it, taking the proceeds and purchasing a new long-term bond to replace it. As a result, if rising rates cause the total value of a bond fund's portfolio to drop, the fact that the fund won't hold its bonds to maturity means that investors might never see the bond fund's price recover. Of course, that can work the other way as well: Rate decreases offer permanent benefits to bond fund shareholders that individual bondholders won't get.
How can I tell which bond funds are the best?
In a universe of hundreds of bond funds, it's important to separate the best from the rest. The top bond funds have the following characteristics:
Low expense ratios that minimize the amount of bond income lost to pay for fund management.
Large amounts of assets under management. This will spread the fund's costs across a broader set of investors and give the fund more clout within the bond market to purchase attractive bonds at the best possible price.
For ETFs, high levels of daily trading volume, which makes it easier for investors to buy or sell shares at any time the market is open.
Higher income yields than other bond funds in the same category . That last distinction is crucial, because yields tend to be higher in some bond fund categories than in others, therefore it's important to look at funds with similar investment objectives and portfolios when comparing yields.
An investment objective that matches up with your needs. For instance, some investors choose only investment-grade bonds, because they want to minimize the risk that the issuer won't be able to pay them back. However, others like high-yield bonds, because the greater amount of income they generate can more than compensate for the potential losses -- if you're willing to take on the risk of the issuer's default.
Special features that appeal to you. For example, income from all municipal bonds is exempt from federal taxes, and if you purchase a municipal bond issued in your state of residence, then your interest payments will be exempt from both federal and state taxes. Meanwhile, inflation-adjusted bonds offer protection against the loss of purchasing power involved with traditional bonds. However, both of these benefits usually come at a cost -- namely, a lower yield -- so the trade-off may or may not be worth it to you depending on your goals.
The top bond funds for 2019 and beyond
Data source: Fund providers. *Inflation-adjusted yield.
Why these bond funds are the best
With so many different types of bond funds available, it would be impractical to assemble a list that covered every possible combination of characteristics a bond investor might want. However, these five bond funds give investors broad-based exposure to popular types of bonds, and that's a big reason why they have attracted such huge sums of investor money.
The first two funds on the list, iShares Core U.S. Aggregate Bond and Vanguard Total Bond Market, have very similar investment objectives: to provide exposure to the entire universe of U.S. investment-grade bonds. As you can see in the table above, both have low expense ratios of just 0.05%, and both have attractive yields. Their average bond maturities are around 8 years. Both have roughly 40% to 45% of their assets invested in Treasury bonds and securities issued by federal government agencies. Mortgage-backed securities make up another 20% to 30% of their holdings, while about 25% is invested in corporate bonds, and about 5% goes toward specialized types of bonds from foreign issuers.
However, the funds aren't identical. The iShares fund has a bias toward mortgage-backed securities that the Vanguard fund lacks, especially on the government-issued side of the market. Vanguard has a slight preference for Treasury and federal government agency debt, making up for the smaller allocation to mortgage-backed securities. In addition, the Vanguard fund has a slightly smaller percentage of its assets invested in top-rated bonds, which explains its slightly higher current yield. Regardless, for those seeking broad-based exposure to the bond market, either of these funds is a good start.
More specialized exposure
The other three bond funds on the list have features that distinguish them from the most broad-based bond funds. As its name suggests, the iShares iBoxx Investment Grade Corporate Bond ETF invests exclusively in bonds issued by corporate issuers . There's plenty of diversification within the fund, though, as issuers in the banking sector make up just over a quarter of fund holdings, while consumer companies make up another 25%, and communications, energy, and technology companies each account for roughly 10%. That results in average credit quality that's considerably lower than any other fund on this list: 90% of the fund's holdings are in the two weakest categories of investment-grade bonds. Nevertheless, that greater risk comes with a yield that's more than a percentage point higher than its broader-based peers, appealing to those seeking maximum income.
Vanguard Short-Term Bond is a more conservative choice that's geared toward those with a shorter time horizon for their bond investing. The average maturity is less than three years, and the credit quality is comparable to the broader-based bond funds on this list, with roughly two-thirds of the portfolio invested in Treasury and agency securities and the remainder in corporates. The bond fund's price isn't as sensitive to interest rate changes as that of the other funds on the list, but investors must accept a slightly lower yield as a result. Currently, that difference in yield is relatively small, but there have been times when the disparity has been wider due to conditions in the bond market.
Finally, iShares TIPS Bond invests entirely in Treasury Inflation-Protected Securities , known as TIPS for short. The value of TIPS is adjusted for inflation over time. Because TIPS provide protection against the erosion of purchasing power that inflation causes, investors are willing to accept a lower interest rate on them. Yet from a total return standpoint, you have to add the inflation rate back in to get a true sense of how they compare with other bond funds. For instance, with consumer prices rising roughly 2% per year, adding that inflation rate to the 1.3% yield on iShares TIPS Bond gives a total of 3.3% -- very close to what you see from the broader-based funds above.
Be smart about your bond funds
Bond funds can play an extremely useful role in helping you put together an investment portfolio that balances the growth potential of stocks with the lower volatility and clearer risk-reward balance of bonds. If you think bonds deserve a place in your portfolio, then the five bond ETFs above will do a good job of giving you broad exposure to the bond market and the many advantages of investing in bonds.
10 stocks we like better than iShares Barclays Aggregate Bond Fund
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*Stock Advisor returns as of November 14, 2018
Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:How to Pick the Best ETFs and Mutual Funds
(1: 10 ) - What Factors Are Important When Picking An ETF or Mutual Fund?
(6: 45 ) - How To Choose Between An ETF and Mutual Fund?
(11: 10 ) - Do Actively Managed ETFs or Mutual Funds Perform More Consistently?
(14: 30 ) - How Can Smart Beta ETFs Benefit Your Portfolio?
(17: 00 ) - Top Picks When Building Your Core Portfolio
On this episode of ETF Spotlight, I talk with Todd Rosenbluth, senior director of ETF and mutual fund research at CFRA. CFRA had acquired S&P Global's equity and fund research business in 2016.
First off, we discuss fund fee wars that have been heating up of late. Fidelity recently launched four zero fee index funds. As investors become more cost-conscious, major providers have been slashing their fees.
How important are expense ratios in evaluating ETFs and mutual funds? How should investors choose the right fund for their portfolio? Which other factors should they consider?
Todd pointed out what's inside the portfolio is also very important. For example, the Vanguard FTSE Emerging Markets ETF ( VWO ) and the iShares Core MSCI Emerging Markets ETF ( IEMG ) have the same expense ratio but their exposure is different, resulting in difference in performance, as VWO does not include South Korea.
We discuss other factors that investors should consider when evaluating funds. Further, in case of mutual funds, the track record of the manager is also important.
ETFs have been gaining in popularity against mutual funds over the past few years. While ETFs are not a lot different from passively managed index funds, they do offer better transparency, intra-day tradability and tax efficiency. When should investors pick an ETF over a similar mutual fund? Find out on the podcast.
While most of the new money is flowing into the cheapest funds, we still see a lot of money invested in traditional active funds. Todd explained that many investors are just comfortable with what they own or they are not aware of cheaper or better alternatives available. At times, there are tax implications too.
Actively managed bond ETFs have been punching above their weight this year. We discuss whether active management produces better results in fixed income. Todd pointed out that in recent years, many actively managed bond funds have beaten the Bloomberg Barclays US Aggregate Bond index, in part by taking on more credit risk.
Smart beta ETFs that lie at the intersection of active and passive management, are gaining in popularity. How should these strategies be used in a portfolio?
As ETFs provide access to a diversified basket of hundreds and sometimes thousands of securities in a single trade, they are frequently being used as building blocks of a low-cost portfolio. ETFs like the iShares Core S&P Total U.S. Stock Market ETF ( ITOT ), the Vanguard Total Stock Market ETF ( VTI ), the SPDR Portfolio Total Stock Market ETF ( SPTM ) and the Schwab U.S. Broad Market ETF ( SCHB ) provide comprehensive exposure to the US stock market and have expense ratios of just 3-4 basis points.
The IShares Core U.S. Aggregate Bond ETF ( AGG ), the Vanguard Total Bond Market ETF ( BND ), the SPDR Portfolio Aggregate Bond ETF ( SPAB ) and the Schwab U.S. Aggregate Bond ETF ( SCHZ ) are among the cheapest ETFs that provide exposure to the entire US investment-grade bond market.
Todd recommends that for broad asset allocation, investors should try to stay within the same fund family as firms usually follow different approaches in defining asset classes.
You can follow Todd on Twitter @ToddCFRA and also visit CFRA website to learn more about their research.
Make sure to be on the lookout for the next edition of the ETF Spotlight and remember to subscribe! If you have any comments or questions, please email podcast@zacks.com .
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SCHWAB-US BR MK (SCHB): ETF Research Reports
VANGD-FTSE EM (VWO): ETF Research Reports
ISHARS-CR US AG (AGG): ETF Research Reports
VIPERS-TOT STK (VTI): ETF Research Reports
ISHARS-1500 IDX (ITOT): ETF Research Reports
SCHWAB-US AG BD (SCHZ): ETF Research Reports
VANGD-TOT BOND (BND): ETF Research Reports
SPDR-PRT AGG (SPAB): ETF Research Reports
ISHARS-CR MS EM (IEMG): ETF Research Reports
SPDR-PRT TSM (SPTM): ETF Research Reports
To read this article on Zacks.com click here.
Zacks Investment Research
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:Sizing Up Demand For ETFs From Assets To Launches
Cinthia Murphy, Managing Editor, ETF.com
The latest tally of investor demand for ETFs show that so far in 2018 investors have poured almost $150 billion of fresh net money into various pockets of the ETF market.
Even though market pundits are now busy pointing out that the U.S. stock market is about to break a record for longest running bull market, investors continue to buy into U.S. equity ETFs—the segment is the year’s most popular, raking in about $52.8 billion in net assets.
In July alone, U.S. equity ETFs led the month’s asset flows to total $27 billion. Funds like the Vanguard Value ETF (VTV), the SPDR S&P Dividend ETF (SDY) and the Health Care Select Sector SPDR Fund (XLV) were among the month’s most in-demand strategies.
Not far behind is the appetite for U.S. fixed income, which, as a segment, has now seen net creations near $50 billion year-to-date. Funds like iShares Short Treasury Bond ETF (SHV) and the massive $55 billion iShares Core U.S. Aggregate Bond ETF (AGG) are among the year’s most popular, with net inflows totaling $7 billion and $4.5 billion, respectively.
In all, the U.S. ETF market now has $3.628 trillion in total assets.
Top Gainers (Year-to-Date)
Asset Classes (Year-to-Date)
Another interesting tally of U.S.-listed ETFs shows that the market could be about to set new records this year for both new ETF launches as well as ETF closures.
Through the end of July, 2018 ETF closures and launches are outpacing levels seen in 2017 levels, which was an impressive year to begin with.
We’ve already seen 97 exchange-traded products close so far in 2018, a number that includes the unusual closure of 50 Barclays iPath ETNs in April.
On the flip side, issuers have brought to market 143 new ETFs this year—up from 127 year-earlier figures. A new record is in sight for 2018 launches if this pace continues. The most successful ETF launch of the year has been the JPMorgan BetaBuilders Japan ETF (BBJP), which is nearing $1.8 billion in total assets in just over a month.
More on ETF.com
Wall St. Whale Makes ETF Splash
Facebook & The Perils Of Market Cap ETFs
Fixed Income ETFs Lead Weekly Inflows
ETF Week: FANG, Income Products Debut
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:Buffett Backs Great Rotation: 4 Value Stocks & ETFs to Buy
The Oracle of Omaha recently reaffirmed his liking for the concept of great rotation - a shift to equities from bonds. Warren Buffett believes long-term investors should go for stocks over bonds as in most cases the former is likely to outperform the latter.
The arguments hold good in today's environment. Treasury yields have been on an uptrend since the start of the year, thanks to inflationary pressures and prospects of rising bond supply to fund Donald Trump's tax overhaul plan. This has pushed the benchmark bond yields to a four-year high (read: Short These Sector ETFs on Rising Rate Concerns ).
Buffett Said "as an investor's investment horizon lengthens, however, a diversified portfolio of U.S. equities becomes progressively less risky than bonds , assuming that the stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates."
Buffett believes that investing in stable companies whose products are strong sales-generating are better long-term bets than a " get-rich-quick approach." Buffett is known to follow the Benjamin Graham school of value investing . Buffett doesn't seek capital gains but ownership in quality companies that are able to generate earnings.
This leads us to believe that choosing a value investment is a great idea over the long term. Below we highlight three value ETFs and stocks that produced at least 50% returns in the last five years (as of Feb 26, 2018).
This is in stark contrast to iShares 20+ Year Treasury Bond ETFTLT that yields around 2.61% and generated about 3% in the last five years (as of Feb 26, 2018). Total bond market iShares Core US Aggregate Bond ETFAGG , which yields about 2.40% annually, lost about 2.8% in the last five years (as of Feb 26, 2018).
ETF Picks
Below we highlight three value ETFs that generated more than 60% returns in the last five years.
Guggenheim S&P 500 Pure ValueRPV - Up 69.9%
The fund holds about 114 stocks and charges 35 bps in fees. No stock accounts for more than 2.58% of the fund (read: Value ETFs & Stocks to Enrich Your Portfolio Amid Volatility ).
First Trust Large Cap Value AlphaDEX FundFTA - Up 64.3%
The 188-stock fund has double-digit weights in Financials, Consumer Discretionary and Utilities. The fund charges 62 bps in fees.
PowerShares Russell Top 200 Pure Value Portfolio ETFPXLV - Up 61%
The 69-stock fund is heavy on Financials, followed by Utilities and Energy.
Stock Picks
Below we highlight three stocks that have a Zacks Rank #1 (Strong Buy) and a Value Score of A. These stocks generated solid returns over the last five-year frame (as of Feb 26, 2018).
HCA Holdings, Inc. HCA - Up 172.9%
This non-governmental hospital in the U.S. providing health care and related services belongs to a top-ranked industry (top 12%). It has a VGM Score of A.
United States Steel Corporation X - Up 123.8%
This integrated steel producer too comes from a top-ranked Zacks industry (top 29%) and has a VGM Score of A.
Super Micro Computer Inc. SMCI - Up 63.1%
It manufactures and sells energy-efficient, application optimized server solutions based on the x86 architecture. It belongs to a top-ranked industry (top 34%) and has a VGM Score of A.
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Zacks' free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>
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Super Micro Computer, Inc. (SMCI): Free Stock Analysis Report
ISHARS-20+YTB (TLT): ETF Research Reports
PWRSH-FP LG VL (PXLV): ETF Research Reports
ISHARS-CR US AG (AGG): ETF Research Reports
GUGG-SP 500 PV (RPV): ETF Research Reports
FT-LRG CAP VAL (FTA): ETF Research Reports
HCA Holdings, Inc. (HCA): Free Stock Analysis Report
United States Steel Corporation (X): Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:After Monday’s Bloodbath, It’s Time to Think About Risk
InvestorPlace - Stock Market News, Stock Advice & Trading Tips
I've been writing for months to be careful about this market and to carefully consider your risk profile, as sooner or later we would have a stock market correction. The past few days have probably felt more like a market crash, especially if you listen to the financial media.
Hopefully, you also have learned something about risk, because risk is everything . Most investors take far too much risk, and on days like Monday, they suddenly realized it and made rash emotional decisions.
So if this was your first real mini market crash, I hope you understand a bit more about why I preach about having a long-term diversified portfolio with a sizable position in non-correlated investments. The Liberty Portfolio , my stock advisory newsletter, which takes this exact approach was down only 2% on Monday versus the market's 4.1%.
10 High-Risk, High-Reward Stocks to Buy as the Market Shudders
So how did you feel on Monday during this quasi crash? Did you just go about your day and shrug at the stock market correction? Chances are your risk profile is about right, and you understand the importance of investing for the long term.
Were you panicked? Concerned? Glued to CNBC? Did you fear a true market crash was about to happen? Then chances are you do not have the risk profile you thought you did and are probably overinvested in short-term stocks.
So here's what you need to do, and it's what The Liberty Portfolio is built to do.
First, you must have at least a ten-year time horizon if you are investing money in the markets. There is only one ten-year-rolling period where the Dow Jones Industrial Average lost ground, and that was during The Great Depression. If you look at rolling 20- and 30-year periods, the Dow has always delivered positive returns.
If your horizon isn't that long, the markets are not for you.
If you do have that time horizon, the next move is to realize that everything you've been told about the rate of inflation is wrong. It is not 3%. It is closer to 10%. That means, in order to maintain your standard of living, your portfolio must return 10% annually. But that means nothing in a vacuum, if there is no factoring in risk.
The next move is to realize that everything you've been told about market risk is wrong. Investing in the market with some arbitrary allocation of X% stocks and Y% bonds means nothing. For starters, it's arbitrary. Investing isn't one-size-fits-all. Most of all, it tells you nothing specific about risk.
Risk is evaluated by determining the standard deviation of an investment. That data is available for some securities, like ETFs, but not all. I won't bore you with details, but your portfolio should aim to have an average annual return of 10%, and standard deviation of no more than 8. That's what The Liberty Portfolio aims for, and I accomplish it using non-correlated investments - investments that do not move in lock-step with the overall market.
Here's how a portfolio of 50% stocks invested in the S&P 500 via the SPDR S&P 500 ETF (NYESARCA: SPY ) and 50% invested in the iShares Core US Aggregate Bond ETF (NYSEARCA: AGG ) has performed over the past ten years. The SPY has had an average annual return of 9.7% … but a standard deviation of 15. The AGG has an average annual return of 3.6% with a standard deviation of 3.3.
What this means is that, in any given year, that "model portfolio" has a 95% certainty of returning between -18% and 25%-plus.
Do you consider that portfolio to be "safe"? Look at the huge range it could have? And this is just the probability. What if your portfolio lost 18% two years in a row? You'd be down 36% and very unhappy.
However, a portfolio like what The Liberty Portfolio aims for has a 95% certainty of returning between -6% and 26%-plus. Which portfolio would you prefer?
Let's parse it out further. Let's suppose you have a million dollars, and each portfolio falls by the maximum amount two years in a row. The "model portfolio" would be down to $672,000 after two years. How would you feel about that?
The other portfolio would be down to $884,000. How would you feel about that?
Then we get two years of maximum upside for each. The "model" portfolio ends at $1.24 million. The other portfolio ends at $1.4 million. Now how do you feel?
3 Stocks to Watch on Tuesday: Cirrus Logic, Inc. (CRUS), Lululemon Athletica inc. (LULU) and Skyworks Solutions Inc (SWKS)
Hopefully, this gives you food for thought as we ride a suddenly volatile market that may or may not end with a true market crash.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years' experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
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The post After Monday's Bloodbath, It's Time to Think About Risk appeared first on InvestorPlace .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:3 BDCs Yielding 6%-12%: 1 Buy, 1 Wait, 1 RUN!
By Brett Owens
Business development companies (BDCs) are one of the market's top sources of yield. Unfortunately for income hunters, in 2017, this industry also was one of Wall Street's greatest sources of disappointment.
I don't say that to condemn the BDC space. I say that as a warning: While these financiers of small and midsize businesses can occasionally be excellent long-term holdings, there are plenty of landmines to avoid. That's why today, I want to highlight three such funds that have mouthwatering yields of up to 12% - each of which might look attractive at first glance, but only one of which looks like a safe buy right now.
So, how bad was 2017 for BDCs?
2017: You Were Better Off in Bonds Than BDCs
The main exchange-traded fund in the space, the VanEck Vectors BDC Income ETF ( BIZD ) , barely broke even last year, and that's after factoring in more than 8 percentage points' worth of returns from dividends! Forget the broader stock market, which crushed the industry - even investors who ducked for cover in a boring, blended basket of bonds like the iShares Core U.S. Aggregate Bond ETF ( AGG ) came out smelling better than those holding BDC funds.
Some of the problems have been industry-wide, such as an increasingly competitive market more making loans. Some have been more on a case-by-case basis, such as BDCs stretching to provide financing to lower-quality companies than normal.
Whatever the case may be, BDCs aren't a set-it-and-forget-it industry. Investors that want to lasso the magnificent fields in this space have to be discerning, as even some 8%-10% yields haven't been enough to cover losses. So, let's take a look at three BDCs doling out up to 12% in dividends, and separate the traps from the treasures.
BlackRock Capital Investment Corporation ( BKCC )
Dividend Yield: 11.8%
I visited BlackRock Capital Investment Corporation ( BKCC ) just a couple of months ago, but it's worth highlighting once again just because of how alluring this dividend trap looks right now.
BlackRock Capital Investment Corporation is the old BlackRock Kelso Capital Corporation (hence the BKCC ticker), which was founded in 2005 to provide financing to middle-market companies. It typically makes investments of between $10 million and $50 million, primarily via senior secured debt (~60% of portfolio), though it also offers solutions via subordinated/unsecured debt, preferred equity, common equity and "other."
And while BKCC is a diversified operator unafraid of any sector, it does lean heaviest toward financial companies, which comprise 26% of the portfolio. Still, the rest of its holdings run the gamut, from chemicals to defense to healthcare.
It sounds good from 10,000 feet, but BlackRock Capital has been an operational mess that's been in decline for the past four years. In fact, since we panned it in November , it has lost another 10% compared to (and contributing to) a 5% drop for the BIZD.
This isn't a change in sentiment or the market just not realizing BKCC's potential. The company's top line has declined by 21% since 2012, and net investment income has fared even worse, off 27%. That has forced BKCC into a pair of dividend cuts over the past half-decade, including one announced early in 2017.
Yes, the nearly 12% yield is simply mouth-watering, but it's only a byproduct of perpetual decline.
BlackRock Capital Investment Corporation ( BKCC ) Isn't Living Up to the Family Name
TPG Specialty Lending ( TSLX )
Dividend Yield:
TPG Specialty Lending ( TSLX ) is a relatively new BDC that got its start in July 2011 and hit the markets with an initial public offering in 2014, and has been a pleasant surprise ever since.
Like many other BDCs, TPG provides financing to middle-market companies. TPG has a fairly wide target range of $50 million to $1 billion-plus in enterprise value for its portfolio companies, with EBTDA ranging from $10 million to $250 million, in transactions ranging from $15 million to $350 million.
Meanwhile, it operates in a number of industries, from manufacturing to healthcare to business services, with a couple smaller specialties including education and royalty-related businesses. And while TPG has a number of up-and-coming smaller companies in its investment portfolio, it also has provided financing to some well-known companies, such as Eddie Bauer, Sears ( SHLD ), 99 Cent Only Stores and Tangoe.
Net investment income has exploded since 2012, with just a brief hiccup in 2015. Still, NII of $107.3 million last year was several times better than 2012's $28 million, and the company was on pace to crack that ceiling yet again in 2017. Moreover, TPG's nearly 8% yield is fairly safe, with its 39-cent payout representing 82% of NII.
The icing on the cake of this BDC? It introduced a formulaic variable supplemental dividend in 2017, and through three quarters, it had doled out 19 cents per share in these additional payouts. That translates into an additional percentage point of yield, meaning that if the company acts similarly in the future, investors should enjoy a total yield of north of 9%!
Main Street Capital (MAIN)
Dividend Yield: 5.8%
Main Street Capital (MAIN) is a Houston-based operator that provides capital solutions to lower middle market companies, as well as debt financing to middle market companies. And it has, simply put, been one of the best BDCs on the market for some time. Over the past five years, MAIN shares have delivered an 82% total return - roughly four times better than the BIZD.
Main Street Capital (MAIN) Is a Wall Street Darling
Credit an outstanding growth ramp that has seen net investment income just explode in the past half-decade, from $59 million in 2012 to nearly $116 million last year. That has come from a keen eye for success stories throughout MAIN's history, including investments in Quanta Services (PWR) and US Concrete (USCR) during the BDC's nascent years.
However, if there were ever a time to hit the pause button on Main Street Capital, it might be now.
The company announced Jan. 3 that Vince Foster will be stepping down as CEO to executive chairman while COO and President Dwayne L. Hyzak takes over the chief's role - a transition that's expected to take place in Q4 2018. The news sent the stock down by more than 4% in a week, which doesn't sound drastic, but is one of the company's worst such quick moves in the past couple years.
While Hyzak clearly knows Main Street through and through, and Foster still will be providing some input from his executive chairman position, the BDC very well could end up missing Foster in the daily operation of the company.
Caution should be exercised amid any such switch involving such a long-tenured executive, but that goes doubly for Main Street, which has built exceedingly high expectations ... and a gaudy valuation as a result. At 166% of NAV, MAIN's price is the steepest in the BDC space.
The call on MAIN right now is "hold." Main Street itself hasn't shown any signs of slipping, and Foster will be on for a few more quarters. But new money has no business paying a sky-high premium for an executive transition.
Safer 8% Yields Than BDCs: How to Retire on Dividends Alone
Big, fat dividends certainly are part of the formula for a winning retirement portfolio, but if you invest looking at nothing but headline yield, you could end up watching your holdings crumple under the weight of unsustainable payouts and massive capital losses.
That's what happens when you go for broke blindly chasing yield. You go broke.
However, with the right set of holdings, you can build yourself an elite portfolio that will allow you to live comfortably throughout your retirement - and without ever cracking your nest egg. But it takes more than dividend traps like BKCC. It takes the "triple threat" stocks in my 8%-yielding "No Withdrawal" retirement portfolio sure can!
The problem with a 12% yield like BKCC's is that it's not the only number in the equation. You also have to consider the capital losses it keeps suffering because it can't keep its act together. But say you're still netting out 4% gains each year - that sounds nice, but 4% returns on a nest egg of a half a million dollars will only generate $20,000 in annual income.
Do you really think you'll be kicking back and enjoying retirement on $20,00 a year?
My "No Withdrawal" portfolio ensures that you won't have to settle during the most important years of your life. I've put together an all-star portfolio that allows you to collect an 8% yield, whilegrowing your nest egg - an important aspect of retirement investing that most other strategies leave out.
This "ultimate" dividend portfolio provides the three things you need most as you plan out life after work:
No-doubt 6%, 7% even 8% yields - and in a couple of cases, double-digit dividends!
The potential for 7% to 15% in annual capital gains
Robust dividend growth that will keep up with (and beat) inflation
This all-star cluster of stocks features the very best of several high-income assets, from preferred stocks to REITs to closed-end funds and more, that combine for a yield of more than 8%. That means you won't have to scrape by on meager blue-chip returns and Social Security checks.
Live off dividend alone without ever touching your nest egg. I can show you how. Click here and I'll provide you with THREE special reports that show you how to build this "No Withdrawal" portfolio. You'll get the names, tickers, buy prices and full analysis of their wealth-building potential - and it's absolutely FREE!
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:Best ETFs for 2018: The Energy Select Sector SPDR (ETF) Will Power Ahead
InvestorPlace - Stock Market News, Stock Advice & Trading Tips
This article is a part of InvestorPlace's Best ETFs for 2018 contest. Kent Thune's pick for the contest is the Energy Select Sector SPDR (NYSEARCA: XLE ).
The process of narrowing down the best exchange-traded funds for 2018 to just a few picks can be challenging, to say the least, but picking just one ETF to dominate the year is much more difficult (and potentially dangerous).
Source: Shutterstock
Smart investors will have a diversified portfolio of funds that will consist of what some investment advisers label as a core and satellite structure, which is just as it sounds - one or two core holdings that will receive the highest allocation in the portfolio and a handful of satellite holdings to complete a diverse mix.
So, a solid portfolio of ETFs would likely include a broad market S&P 500 index fund, such as iShares Core S&P 500 ETF (NYSEARCA: IVV ) and iShares Core U.S. Aggregate Bond ETF (NYSEARCA: AGG ), along with funds from other diverse categories, such as small-cap stock, international stock and a few choice sector funds.
In this core and satellite structure, the core holdings are solid long-term holdings, whereas the satellites are higher in relative market risk, which will make them either the best or worst performers in your portfolio during any given year.
For this reason, the best ETFs in 2018 will likely be sector bets that concentrate holdings on one market segment.
The energy sector was a big laggard in 2017 but it stands a good shot at being a leader in 2018, which makes the Energy Select Sector SPDR (NYSEARCA: XLE ) one of the best ETFs to hold during the year. Its expense ratio is a low 0.14%, or $14 for every $10,000 invested.
XLE tracks the Energy Select Sector Index, which consists of 25 stocks of companies in the oil and gas industries, as well as energy equipment and services.
This means shareholders of XLE get a healthy dose of high-quality energy sector stocks like Exxon Mobil Corporation (NYSE: XOM ), Chevron Corporation (NYSE: CVX ) and Schlumberger Limited. (NYSE: SLB ).
Here's how XLE can be the best ETF for 2018:
Prices for energy stocks hit two-year lows in 2017 but now appear to be in full recovery mode.
OPEC's recent decision to maintain production cuts means oil supplies will remain on the low side, while demand looks positive for 2018.
Should unforeseen circumstances bring downward pressure on energy stocks, XLE is full of large-cap names that can maintain better price stability than the riskier small- and mid-cap energy stocks.
In summary, XLE has a strong combination of contrarian bet and momentum play that often makes for the best ETFs during a calendar year.
New Vanguard ETFs Could Mark Paradigm Shift for Indexing Strategy
Just remember that sector funds like XLE can be wisely used as satellite holdings in a diversified portfolio of funds.
As of this writing, Kent Thune did not personally hold a position in any of the aforementioned securities. However, he holds XLE, IVV, and AGG in some client accounts. Under no circumstances does this information represent a recommendation to buy or sell securities.
More From InvestorPlace
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7 Best Healthcare ETFs for 2018
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Compare Brokers
The post Best ETFs for 2018: The Energy Select Sector SPDR (ETF) Will Power Ahead appeared first on InvestorPlace .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:ETF Investors Seem Apprehensive About Stock Market Rally
U.S. equities have pushed to new heights in the New Year, with the Dow Jones Industrial Average now trading above 25,000 for the first time. However, despite the record-setting rally, investors are pulling money out of stock exchange traded funds.
Over the past week, the SPDR S&P 500 ETF (NYSEArca: SPY) experienced $2.1 billion in net redemptions, PowerShares QQQ (NasdaqGM: QQQ) saw $1.5 billion in outflows and iShares Russell 2000 ETF (NYSEArca: IWM) lost $1.4 billion, according to XTF data.
On the other hand, the most popular ETF play over the past week was a broad fixed-income related option, the iShares Core U.S. Aggregate Bond ETF (NYSEArca: AGG), which saw $862 million in net inflows.
The disconnect between equity market enthusiasm and the ongoing rally is not anything new as many have described the multi-year move as the most unloved stock rally. With the U.S. stock market extending, more investors may be growing antsy over their equity exposure and could be trimming allocations in anticipation of a potential turn.
According to the Wall Street Journal, survey data has indicated that American stock ownership is on the decline. About 54% of investors on average hold stocks for the current bull market from 2009 to 2017. In contrast, 62% of Americans reported equity investments between the dot-com bubble and the prelude to the global financial downturn.
Nevertheless, if investors are concerned about valuations in a extended bull market environment, one can shift their focus away from high-flying, growth-oriented stocks and look to the value style instead.
Value stocks usually trade at lower prices relative to fundamental measures of value, like earnings and the book value of assets. On the other hand, growth-oriented stocks tend to run at higher valuations since investors expect the rapid growth in those company measures, but more are growing wary of high valuations.
For example, the iShares MSCI USA Value Factor ETF (CBOE: VLUE) has recently become a popular avenue for accessing value stocks while the Vanguard Value ETF (NYSEArca: VTV) is one of the largest smart beta ETFs of any stripe. In fact, several of the largest smart beta ETFs are value funds.
VLUE seeks to track the performance of an index that measures the performance of U.S. large- and mid-capitalization stocks with value characteristics and relatively lower valuations.
VTV follows the CRSP US Large Cap Value Index and is one of the most widely followed value ETFs. CRSP includes sales/price and historical earnings/price ratio as well as 12-month forward earnings/price ratio and dividend yield to form its value indexes.
The iShares Russell 1000 Value ETF (NYSEArca: IWD) is the biggest U.S. large-cap ETF on the market, providing exposure to value stocks taken from the widely observed Russell 1000 Index.
This article was provided courtesy of our partners at etftrends.com.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
This article was provided by our partner Tom Lydon of etftrends.com.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:Last Year Broke Closures, Flows Records
Heather Bell, Managing Editor ETF.com
2017 was a remarkable year for the ETF industry in many ways, not the least of which was the number of funds that either made their debuts or exited quietly from the stage.
Last year saw a total of 275 ETF launches. While that’s definitely a large number, it’s not a record-breaker. It’s more than last year’s 247 launches and less than the 284 ETFs that rolled out in 2015. However, more than 300 ETFs launched in 2011, which is still the record year for new ETFs.
Closures definitely that represent the more interesting story, with the number hitting yet another record for the second year in a row. The prior year, 2016, saw 128 closures. In 2017, 136 funds shut down or delisted, which ultimately is a sign of health in a corner of the investment industry that is still rapidly expanding in terms of products and assets under management.
Interestingly, at least 20 of the funds that shut down this year were currency-hedged vehicles.
Flows Neared $500 Billion
However, ETF flows really blew away previous records. Flows into exchange-traded funds were going full blast throughout the year and finished on a particularly strong note. A whopping $51 billion in new money came into U.S.-listed ETFs during December, pushing inflows for the year to $476.1 billion. Total assets now top $3.4 trillion.
The data, which comes from FactSet, includes flows for every trading day of 2017. The $476.1 billion figure was far and away a record for annual inflows, blowing past the previous all-time high from last year of $287.5 billion.
US Equity ETFs Led Flows Pack
U.S. equities were the most popular asset class among ETF investors during December. The segment collected $180.2 billion in fresh money during the year, thanks to steady gains in the stock market―the S&P 500 ended the year up by 21.8%―with record low volatility. The passage of the Republican tax bill in December raised hopes the rally could continue in 2018.
The top asset gainer of the year was the iShares Core S&P 500 ETF (IVV), which had inflows of $30.2 billion, bringing its total assets under management to $142.2 billion. IVV is the second ETF in history to surpass the $100 billion AUM mark.
The Vanguard S&P 500 ETF (VOO) and the SPDR S&P 500 ETF Trust (SPY) were the only two other U.S. equity ETFs to make the top 10 inflows list for the year.
Looking Abroad
International equities pulled in $161.6 billion, making it the second-most-popular asset class among ETF investors. In many cases, international equities performed better than their U.S. counterparts.
For example, the iShares Core MSCI Emerging Markets ETF (IEMG) and the Vanguard FTSE Emerging Markets ETF (VWO) both increased by more than 30%. They were also popular among investors, with 2017 inflows of $16.6 billion and $9.3 billion, respectively.
But it was the iShares Core MSCI EAFE ETF (IEFA) that led the inflows for international equities, with creations of $20.9 billion.
Also Of Note
Other funds on the top inflows list include two fixed-income ETFs. The iShares Core U.S. Aggregate Bond ETF (AGG) and the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) were in the Nos. 7 and 8 spots, taking in $11 billion each.
Meanwhile, the VanEck Vectors Gold Miners ETF (GDX), the WisdomTree Europe Hedged Equity Fund (HEDJ) and the Xtrackers MSCI EAFE Hedged Equity ETF (DBEF) led the outflows for the year, losing between $1.8 billion and $3 billion apiece.
For a full list of the top inflows and outflows for the year, see the tables below:
More on ETF.com
Big Market Predictions For 2018
Swedroe: Don’t Demonize Buybacks
Tax Reform ETF Is Real & Ready To Roll
First Pot ETF In US Starts Trading
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:Confluence Wealth Management LLC Buys iShares Intermediate Government/Credit Bond, Schwab ...
Confluence Wealth Management LLC
New Purchases: GVI , VGK , MCN , MCN, MRK,
Added Positions:SCHE, AAPL, VTI, KMB, HD, SCHW, SO, T, VZ, PXD,
Reduced Positions:MDY, IWR, IVV, IWM, EFA, AGG, MUB, EEM, BSV, IJJ,
Sold Out:BSCH, OMC, IWS, EMB, CPB, IBM, VNQ, BND, BHF,
For the details of Confluence Wealth Management LLC's stock buys and sells, go to http://www.gurufocus.com/StockBuy.php?GuruName=Confluence+Wealth+Management+LLC
These are the top 5 holdings of Confluence Wealth Management LLC
iShares Core S&P 500 ( IVV ) - 71,942 shares, 9.6% of the total portfolio. Shares reduced by 5.54%
SPDR MidCap Trust Series I ( MDY ) - 52,261 shares, 9% of the total portfolio. Shares reduced by 10.23%
iShares MSCI EAFE ( EFA ) - 163,583 shares, 5.91% of the total portfolio. Shares reduced by 7.54%
iShares Core U.S. Aggregate Bond ( AGG ) - 101,847 shares, 5.89% of the total portfolio. Shares reduced by 5.05%
SPDR S&P 500 ( SPY ) - 32,611 shares, 4.32% of the total portfolio. Shares reduced by 0.67%
New Purchase: iShares Intermediate Government/Credit Bond (GVI)
Confluence Wealth Management LLC initiated holdings in iShares Intermediate Government/Credit Bond. The purchase prices were between $110.35 and $111.7, with an estimated average price of $111.06. The stock is now traded at around $111.22. The impact to the portfolio due to this purchase was 1.81%. The holdings were 30,854 shares as of 2017-09-30.
New Purchase: Vanguard FTSEEuropean (VGK)
Confluence Wealth Management LLC initiated holdings in Vanguard FTSEEuropean. The purchase prices were between $54.93 and $58.43, with an estimated average price of $56.72. The stock is now traded at around $57.57. The impact to the portfolio due to this purchase was 0.37%. The holdings were 11,949 shares as of 2017-09-30.
New Purchase: Madison Covered Call & Equity Strategy Fund (MCN)
Confluence Wealth Management LLC initiated holdings in Madison Covered Call & Equity Strategy Fund. The purchase prices were between $0 and $7.78, with an estimated average price of $0.74. The stock is now traded at around $7.48. The impact to the portfolio due to this purchase was 0.11%. The holdings were 25,542 shares as of 2017-09-30.
New Purchase: Merck & Co Inc (MRK)
Confluence Wealth Management LLC initiated holdings in Merck & Co Inc. The purchase prices were between $61.49 and $66.16, with an estimated average price of $63.55. The stock is now traded at around $54.99. The impact to the portfolio due to this purchase was 0.11%. The holdings were 3,214 shares as of 2017-09-30.
New Purchase: Madison Covered Call & Equity Strategy Fund (MCN)
Confluence Wealth Management LLC initiated holdings in Madison Covered Call & Equity Strategy Fund. The purchase prices were between $0 and $7.78, with an estimated average price of $0.74. The stock is now traded at around $7.48. The impact to the portfolio due to this purchase was 0.11%. The holdings were 25,542 shares as of 2017-09-30.
Added: Schwab Emerging Markets Equity (SCHE)
Confluence Wealth Management LLC added to the holdings in Schwab Emerging Markets Equity by 177.11%. The purchase prices were between $24.73 and $27.51, with an estimated average price of $26.46. The stock is now traded at around $27.31. The impact to the portfolio due to this purchase was 0.4%. The holdings were 44,645 shares as of 2017-09-30.
Sold Out: Guggenheim BulletShares 2017 Corporate Bond (BSCH)
Confluence Wealth Management LLC sold out the holdings in Guggenheim BulletShares 2017 Corporate Bond. The sale prices were between $22.59 and $22.64, with an estimated average price of $22.61.
Sold Out: iShares Russell Mid-cap Value (IWS)
Confluence Wealth Management LLC sold out the holdings in iShares Russell Mid-cap Value. The sale prices were between $81.79 and $85.31, with an estimated average price of $83.81.
Sold Out: Omnicom Group Inc (OMC)
Confluence Wealth Management LLC sold out the holdings in Omnicom Group Inc. The sale prices were between $71.73 and $83.24, with an estimated average price of $77.21.
Sold Out: iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB)
Confluence Wealth Management LLC sold out the holdings in iShares J.P. Morgan USD Emerging Markets Bond ETF. The sale prices were between $112.83 and $117.26, with an estimated average price of $115.53.
Sold Out: Campbell Soup Co (CPB)
Confluence Wealth Management LLC sold out the holdings in Campbell Soup Co. The sale prices were between $45.13 and $54.19, with an estimated average price of $50.74.
Sold Out: Vanguard Total Bond Market (BND)
Confluence Wealth Management LLC sold out the holdings in Vanguard Total Bond Market. The sale prices were between $81.34 and $82.67, with an estimated average price of $82.03.
Reduced: iShares National Muni Bond (MUB)
Confluence Wealth Management LLC reduced to the holdings in iShares National Muni Bond by 28.87%. The sale prices were between $109.85 and $111.66, with an estimated average price of $110.93. The stock is now traded at around $110.68. The impact to the portfolio due to this sale was -0.29%. Confluence Wealth Management LLC still held 12,623 shares as of 2017-09-30.
Reduced: Walgreens Boots Alliance Inc (WBA)
Confluence Wealth Management LLC reduced to the holdings in Walgreens Boots Alliance Inc by 28.44%. The sale prices were between $77.16 and $82.74, with an estimated average price of $80.15. The stock is now traded at around $70.59. The impact to the portfolio due to this sale was -0.08%. Confluence Wealth Management LLC still held 4,728 shares as of 2017-09-30.
Reduced: General Electric Co (GE)
Confluence Wealth Management LLC reduced to the holdings in General Electric Co by 21.35%. The sale prices were between $23.72 and $27.45, with an estimated average price of $25.26. The stock is now traded at around $17.90. The impact to the portfolio due to this sale was -0.04%. Confluence Wealth Management LLC still held 10,191 shares as of 2017-09-30.
SCHE 15-Year Financial Data
The intrinsic value of SCHE
Peter Lynch Chart of SCHE
Premium Members
This article first appeared on GuruFocus .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:Shocked! Shocked! FOMC Leaves Rates Unchanged
To the surprise of absolutely nobody, by a unanimous vote the Federal Open Market Committee left its federal funds rate unchanged while keeping an increase on the table at the panel's December meeting.
Bloomberg News
The FOMC emphasized the economy's strength "despite hurricane-related disruptions" that caused a drop in nonfarm payrolls in September and boosted gasoline prices. Notwithstanding the spike in energy prices, inflation remains below the Fed's 2% target.
Of course, the Fed is widely expected to have new leadership by 2018 with Fed Chair Janet Yellen likely to be replaced by Fed. Gov. Jerome Powell with numerous vacancies also to be filled by President Donald Trump. But at the Dec. 12-13 confab, the futures market has placed an 87.5% probability for a quarter-point hike from the current federal-funds target range of 15-1.25%.
For the Treasury market, the FOMC announcement was a snoozer with the two- and 10-year notes virtually unchanged at 1.61% and 2.36% respectively. The iShares Core U.S. Aggregate Bond exchange-traded fund (AGG), which tracks the U.S. taxable-bond market, was up less than 0.1% at 2:22 PM EDT, while the iShares 20+ Year Treasury Bond ETF (TLT) has risen 0.4% to $124.70. The Dow Jones Industrial Average has risen 43.16 points, or 0.2%, to 23,420.40.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:World's Biggest ETF (SPY) Tops $250 Billion In Assets
Drew Voros
ETF.com Editor-in-Chief
More than $15 billion entered ETFs during the week ending Thursday, Oct. 19. The bulk of that―$9.5 billion―went into U.S. equity ETFs, including $4.1 billion into one fund alone: the SPDR S&P 500 ETF Trust (SPY).
SPY’s latest inflows, along with the market's ascent, pushed SPY's total assets under management to $250 billion. That's the highest asset total ever for the world's largest ETF.
But even as assets for the fund reach new milestones, SPY curiously still has net outflows for the year as a whole, totaling $6.7 billion. Intense competition from lower-cost rivals such as the iShares Core S&P 500 ETF (IVV) has taken a toll on the behemoth.
Net ETF inflows for all ETFs in 2017 now stand at $369 billion, a new annual record. Total assets in U.S.-listed ETFs are now more than $3.26 trillion.
Top Inflows & Outflows
Taking a look at flows for individual products, SPY easily took the top spot on this week's list, with inflows of $4.1 billion. A distant Nos. 2 and 3 on the weekly inflows list were the iShares Core U.S. Aggregate Bond ETF (AGG) and the iShares Core MSCI Emerging Markets ETF (IEMG), with creations of around $600 million each.
On the outflows side, the iShares 3-7 Year Treasury Bond ETF (IEI), the iShares NASDAQ Biotechnology ETF (IBB) and the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) were a few notable names to fall out of favor during the week.
Fee War Reignites
State Street Global Advisors made a dramatic move this week in the race to the bottom of ETF fees. It debuted the SPDR Portfolio ETFs, a lineup of 15 existing ETFs repackaged at much lower cost, some the lowest in their class.
These funds—three of which also had their underlying benchmarks replaced by in-house indices, and all of which got new tickers—are now some of the cheapest in their respective segments. They are also all offered commission-free at TD Ameritrade. They are:
Drew Voros can be reached at dvoros@etf.com.
More On ETF.com
Earnings Not Sole Driver Of Stock ETFs Rally
World’s Lowest Cost Portfolio Hits 0.05% Fee
TD Ameritrade Drops Major No-Fee ETFs
Why Do Hedge Funds Exist?
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:FC Advisory LLC Buys iShares Core Dividend Growth, Schwab U.S. ...
FC Advisory LLC
New Purchases: DGRO , SCHH , BSCJ ,
Added Positions:SCHP, VCIT, VBK, MUB, VUG, VOT, IJR, FSIC,
Reduced Positions:AGG, VMBS, BND, IWD, RWO, VTV, IJH, JNK, QQQ,
For the details of FC Advisory LLC's stock buys and sells, go to http://www.gurufocus.com/StockBuy.php?GuruName=FC+Advisory+LLC
These are the top 5 holdings of FC Advisory LLC
iShares Core U.S. Aggregate Bond ( AGG ) - 159,373 shares, 13.67% of the total portfolio. Shares reduced by 1.97%
Vanguard Mega Cap Growth ( MGK ) - 144,401 shares, 11.84% of the total portfolio. Shares added by 0.81%
Vanguard FTSE All World Ex US ( VEU ) - 270,469 shares, 11.16% of the total portfolio. Shares added by 0.89%
Vanguard Extended Market ( VXF ) - 123,252 shares, 10.34% of the total portfolio. Shares added by 0.78%
Vanguard Intermediate-Term Bond ( BIV ) - 128,032 shares, 8.49% of the total portfolio. Shares added by 0.93%
New Purchase: iShares Core Dividend Growth (DGRO)
FC Advisory LLC initiated holdings in iShares Core Dividend Growth. The purchase prices were between $31.2 and $32.53, with an estimated average price of $31.8. The stock is now traded at around $32.95. The impact to the portfolio due to this purchase was 3.59%. The holdings were 141,341 shares as of 2017-09-30.
New Purchase: Schwab U.S. REIT (SCHH)
FC Advisory LLC initiated holdings in Schwab U.S. REIT. The purchase prices were between $40.12 and $42.09, with an estimated average price of $41.21. The stock is now traded at around $41.78. The impact to the portfolio due to this purchase was 0.17%. The holdings were 5,243 shares as of 2017-09-30.
New Purchase: Guggenheim BulletShares 2019 Corporate Bond (BSCJ)
FC Advisory LLC initiated holdings in Guggenheim BulletShares 2019 Corporate Bond. The purchase prices were between $21.2 and $21.29, with an estimated average price of $21.26. The stock is now traded at around $0.00. The impact to the portfolio due to this purchase was 0.16%. The holdings were 9,417 shares as of 2017-09-30.
High Yield Dividend Stocks in Gurus' Portfolio
Top dividend stocks of Warren Buffett
Top dividend stocks of George Soros
Premium Members
This article first appeared on GuruFocus .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:Active vs Passive: The Hidden Dangers of Fixed Income Indexing
James West, Nasdaq Dorsey Wright, Senior Analyst
“The man who will use his skill and constructive imagination to see how much he can give for a dollar, instead of how little he can give for a dollar, is bound to succeed.” – Henry Ford
As anyone with any proximity to the investment industry can tell you, passive investing has become increasingly popular over the last several years. Whenever you hear a radio or TV personality talk about passive investing, the discussion invariably focuses on the availability of low-cost funds that track widely-known U.S. large cap equity indices. They then typically say something akin to “Less than X% of ‘stock-pickers’ have outperformed the S&P 500 on a net-of-fee basis over the previous 10 years.” On this count they’re often correct. It has been incredibly difficult for active U.S. large cap funds to outperform their indices over the last decade. However, based on this, they typically jump to an unjustified conclusion, telling the audience that low-cost indexing is superior to active management. Full stop.
An analysis that stops here is at best insufficient and at worst disingenuous. As any investment professional knows, asset classes and markets are not created equal – U.S. large cap equity is widely accepted to be the most efficient market, and thus most suitable to being passively managed. Certainly there is value to be added by the advisor in managing risk within this market and taking advantage of sector trends that can drive alpha over time. But for the sake of this discussion we will put that aside and accept that the recent five year period for the S&P 500 Index SPX benchmark (illustrated above) has contributed to the increased appetite for “low-cost indexing,” and that is the environment we face in the here-and-now. Historically, this benchmark doesn’t often outperform 90% of active managers over a five year period, but it has before and it has recently. And so we pivot to the observation that the vast majority of investors also have a significant portion of their assets invested in other asset classes and subclasses. Therefore, any serious discussion along the lines of “active vs. passive” management should extend to those areas as well.
The most basic retirement portfolio model includes two asset classes – equity and fixed income – often in a 60/40 split. Retail investors are told that fixed income is the “safe” portion of their portfolio. And while in some sense this is true – the volatility of (most) fixed income investments is lower than that of equities – this does not mean that a “passive” fixed income investment strategy is a no-brainer. First of all, unlike large cap U.S. equity managers, active fixed income managers have regularly outperformed their benchmark on a net-of-fee basis. Take a look at some rolling five-year rankings of the core fixed income universe and you’ll see the U.S. Aggregate Index regularly finishing below the 50th percentile. Aside from active managers’ ability to generate alpha, there are a few other problems with traditional low-cost indexing within fixed income.
Your Exposure Can Materially Change Without You Doing Anything.
Unlike the major equity indices, which often have fairly stable constituencies from year to year, the composition of bond indices changes much more frequently. Where the S&P 500 Index and the Russell 1000 Index are updated quarterly and annually, respectively, the composition of the Bloomberg Barclays US Aggregate Index changes monthly. The iShares Core U.S. Aggregate Bond ETF (AGG), for instance, had turnover of 242% for the 12-month period ending February 28, 2017; meanwhile the Vanguard S&P 500 ETF (VOO) had turnover of just 4.10% last year.
Why should the average investor care about the more frequent rebalances and higher turnover of fixed income indices? With approximately 20% of the holdings in the Aggregate Bond ETF changing every month, the exposure in the fixed income portion of a portfolio can change fairly quickly and it can happen under the surface, i.e. without an advisor or client “seeing” any trades in the portfolio. While this is often viewed as a primary benefit of the ETF product structure, it may not be as advantageous if you don’t understand what the impact of those changes are over time. Unless the client is looking at the exposure breakdown of the index every month (which they aren’t, and don’t intend to), an investor could find that the exposure in the indexed bond ETF they bought six months ago looks very different than the exposure it brings to the portfolio today.
The table from Wells Fargo below shows how dramatically the composition of a broad-based fixed income product like AGG can change. The US Treasury exposure has increased 15% and the duration has increased 62% within the ETF! Does this strike you or your clients as “passive”?
The “Bums” Problem
The fast-changing nature of fixed income indices we discussed above also contributes to the “bums” problem. As with equity indices, many fixed income indices are essentially market cap weighted. In equity indices, market cap weighting means that the most historically successful companies (at least in terms of increasing their market value) become the most heavily weighted. In a market cap weighted fixed income index, the most heavily weighted entities are those that have issued the most debt. This presents a problem for the buyer of a cap weighted fixed income index, as they will be most heavily exposed to the most debt-laden and not necessarily the most creditworthy of issuers. Apple (AAPL) maintained an enviable credit rating for many years, but only had its first bond issuance in 2013. As such, AAPL couldn’t have been included within Investment Grade Bond Funds or Aggregate Bond Funds before that time.
Furthermore, unlike equity indices which typically include only corporations, issuers within fixed income indices can include corporations, states and municipalities, and sovereign governments. Heavily-indebted sovereigns present a unique challenge, as they can (and at various points have) simply decide to cease payments on their notes, leaving debt-holders with limited recourse.
The “bums” problem can be mitigated through the use of other weighting schema, e.g. equal weighting, but this can introduce new problems, such as more heavily weighting toward thinly-traded, illiquid issues. And so, many bond funds employ some form of market cap weighting, and the impacts of this are quite different than we find within the US equity category.
Fixed Income Indices Can Become More Risky at the Worst Time.
You’re probably aware that we’ve been in an ultra-low interest rate environment for many years and a declining rate environment for far longer still. That trend has recently begun to change, but among the effects of these historically low yields may be that the bond market itself has become more risky.
As discussed within the aforementioned study from Wells Fargo, from 2008 through 2016, the modified duration of the U.S. Aggregate Bond Index increased by 62%; or approximately two and a half years. For the bond aficionados out there, this suggests that a 1% move higher in the yield curve today would cause a corresponding decline in bond valuations of about 2.5% more than a similar rate move back in 2008. This is caused, again, by passive bond portfolios investing in a market that hasn’t itself remained “passive.” Debt issuers, corporations, and municipalities alike, have taken advantage of the low-rate environment by issuing longer-dated debt where possible. If long-dated bonds make up a bigger chunk of the bond market, they often make up a bigger part of your “passively” indexed bond fund.
And there is another, less obvious, reason for the increase in duration – lower coupons. All else equal, a bond with a higher coupon will have a lower duration than an otherwise equivalent bond with a lower coupon. As rates fell following the financial crisis, coupons also decreased, thereby extending the duration of bond indices and increasing interest rate risk.
While it is well understood that the market values of traditional fixed income instruments have an inverse relationship with interest rates (i.e. as interest rates rise, the value of a fixed income portfolio decreases), illustrating the current risk environment within this asset class is often more nuanced. Interest rates remain far below their historic averages, which is one concern, but many investment products have quietly increased in risk as well, which should factor into the “active vs passive” discussion you may be having with clients more regularly today. Our goal is to provide you with as much useful information as possible to support those conversations. The illustration below might be helpful in summarizing the discussion to this point, as it displays a very general rise in duration alongside the converse pattern of declining yields across the US bond market. This lends itself to a discussion of risk vs reward, and why “active” risk management should be a part of any major bond allocation going forward.
Developing a Strategy
The commonly presented “evidence” demonstrating the superiority of low-cost passive investing is often incomplete, and especially so when it comes to bond markets. You may well be able to provide cost savings for your clients through prudent use of passive products in certain areas, but you can also add substantial value for your clients by utilizing strategies that actively manage both market trends and market risk. If you use your skill to determine where you feel you can add value with active strategies and utilize passive products to save your clients money where you feel you can’t, you’ll be doing more to earn your fee than the advisor who isn’t. To paraphrase Henry Ford, you’re displaying how much you can provide for a client’s dollar in return, versus how little you can deliver for that same dollar.
Within the fixed income space, Dorsey Wright offers a number of relative strength-based solutions, available in a variety of investment product wrappers. For more information on Dorsey Wright strategies, please visit Nasdaq Dorsey Wright.
Dorsey, Wright & Associates, a Nasdaq Company, is a registered investment advisory firm.
The information contained herein has been prepared without regard to any particular investor’s investment objectives, financial situation, and needs. Accordingly, investors should not act on any recommendation (express or implied) or information in this material without obtaining specific advice from their financial advisors and should not rely on information herein as the primary basis for their investment decisions. Information contained herein is based on data obtained from recognized statistical services, issuer reports or communications, or other sources believed to be reliable (“information providers”). However, such information has not been verified by Dorsey, Wright & Associates, LLC (DWA) or the information provider and DWA and the information providers make no representations or warranties or take any responsibility as to the accuracy or completeness of any recommendation or information contained herein. DWA and the information provider accept no liability to the recipient whatsoever whether in contract, in tort, for negligence, or otherwise for any direct, indirect, consequential, or special loss of any kind arising out of the use of this document or its contents or of the recipient relying on any such recommendation or information (except insofar as any statutory liability cannot be excluded). Any statements nonfactual in nature constitute only current opinions, which are subject to change without notice. Neither the information nor any opinion expressed shall constitute an offer to sell or a solicitation or an offer to buy any securities, commodities or exchange traded products. This document does not purport to be complete description of the securities or commodities, markets or developments to which reference is made.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:Investing in Dividend Growth for Uncorrelated Returns
In uncertain markets like today's, investors are always on the hunt for uncorrelated returns.
This search generally leads investors to a variety of 'alternative' products that either utilize a long/short methodology, consider volatility, or invest in a variety of swaps or futures in order to provide a lower risk return that moves independently of the overall market.
Some examples of these strategies include a hedge fund replication with QAI or managed futures with WDTI , though there are dozens in the overall market. And while there are plenty of choices available in this market today, one that is especially intriguing-and one you might not be too familiar with-- is the Reality Shares DIVS ETF ( DIVY ).
What's So Special?
This ETF is one of the more unique funds on the market today, and it is one that I think most investors don't really understand at first glance. Unlike most funds which utilize a long-short strategy or buy up securities in a variety of asset classes, DIVY actually invests in dividend swaps.
A dividend swap looks to isolate the dividend from the rest of the security (also known as 'isolated dividend growth'), whereby Reality Shares is only betting on the dividend increasing in value, and not the underlying stock. Dividend growth has been pretty stable-besides a few recessionary years-and it moves pretty independently of the actual stock market too.
Think of it as a way to bet that SPY or GE stock pays $1.00/share in dividends this year, and then $1.05/share the following year. In this scenario, the underlying fluctuations of the S&P 500 or General Electric stock don't really matter to you; your return is derived from only the growth in dividends.
I like to think of it as analogous to a coupon stripping system which we see in the bond world with Treasury STRIPS. In that system, the bond trades independently of the various coupon payments, much like how in the dividend swap world we see the dividend's growth isolated from the underlying equity.
Additional Info
While the strategy may be something you aren't really used to, the technique has provided very uncorrelated returns. According to Reality Shares, it has a correlation below 0.3 with the S&P 500, and a max drawdown lower than, not only the S&P 500, but a bond index that would be the basis for a fund like AGG too. And when comparing it to AGG, you'll note that DIVY definitely holds its own from a performance perspective as well…
Eric Dutram: What is 'isolated dividend growth' and why should investors know about this concept?
Eric Ervin and the team at Reality Shares: As interest rates dropped to historic lows, investors could no longer rely on bonds, and there was a need for alternative strategies delivering absolute return. This is where 'isolated dividend growth' came into the picture.
Isolated dividend growth involves investing in the dividend growth rate of the market while avoiding stock market price exposure/volatility. As an example, an investor could capture the dividend growth rate of all the companies in the S&P 500 at an aggregate level without worrying about whether the individual stock prices go up or down; they are only concerned with whether or not dividends are rising, as that is the primary driver of returns.
The average annual dividend growth rate of the S&P 500 has been approximately 6.5% for the last 44 years (as of 2016), and there have only been three years where dividends were negative during that time. This unique strategy has historically offered low volatility and low correlation to both equity and fixed income strategies.
Eric: This is a pretty unique way of looking at the market, how did you come up with the idea?
Reality Shares: Institutional investors have used isolated dividend growth for years as a non-correlated, low volatility alternative asset class, but it wasn't available to individual investors. We wanted to package this investment opportunity in a transparent, liquid and cost-effective ETF wrapper for the masses, and that's why we introduced DIVY.
This is the only fund that tracks the index-level dividend growth rate. There are a lot of other dividend-focused ETFs out there, but they tend to have a lot of volatility because they are equity-based. With DIVY, you get bond-like standard deviations but historically, better than average returns. There's a lot of uncertainty with current economic policies. Dividends tend to be undervalued in the market and DIVY takes advantage of that fact.
Eric: What is DIVY actually investing in? The product doesn't pay dividends, correct?
Reality Shares: DIVY is investing in Dividend Swaps on the S&P 500. The reason for this is that the objective of the fund is to track and deliver the expected growth rate of dividends in the S&P 500 at an aggregate level. Dividend Swaps are used as a proxy for this.
And the fund does not pay out any dividends, that is correct. It is investing in dividend growth only, and isn't an income destination.
Eric: What are the risks for this strategy?
Reality Shares: Every investment strategy has risks, and DIVY is no different. The primary risk associated with DIVY's underlying strategy stems from potential dividend cuts. In the historically unlikely event where companies in the S&P 500 cut dividends more than they increase dividends (at an aggregate level), DIVY's return would be negatively impacted.
Other than this, isolated dividend growth has historically weathered most types of interest rate and market environments. To reiterate, while past performance is no guarantee of future results, there have only been three years in the last 44 (as of 2016) where S&P 500 dividends were negative on a net basis. One other risk would be if the market expectation for dividend growth were higher than actual dividends.
Eric: How does this fit in a portfolio?
Reality Shares: While DIVY could be a suitable equity allocation alternative, we believe DIVY is a fixed income strategy alternative because it offers low volatility and low correlation to equities and bonds. Think of DIVY as a diversifier for bonds - it can be included in a portfolio for the same reason bonds used to be considered, to reduce risk and to be a safety net. Not only has isolated dividend growth historically delivered low correlation and low drawdowns across a variety of market environments, but the strategy has exhibited a standard deviation similar to fixed income benchmarks.
Since DIVY's inception (12/18/2014), the S&P 500 has moved 1% or more 125 times (more than 1 out of every 5 days), while isolated dividend growth has moved 1% or more only 15 times. And the current market environment presents the opportunity for DIVY to shine, with both equity and bond markets carrying higher-than-average risk. We believe many of the liquid alternatives out there are really just high-priced T-bills, and for those who feel hedge funds are the traditional diversifier, they have become a lot more correlated to stocks and they are hiding a lot of equity market risk.
Finally, the primary driver of DIVY's return is growing dividends. If the current administration does enact corporate tax cuts and the proposed one-time repatriation, more cash would ultimately be available for companies to potentially distribute to shareholders in the form of increased dividends.
Want to learn more about this topic?
Make sure to listen to our recent podcast with the CEO of Reality Shares where we dive deep into their process and how to find companies that might be growing dividends in the near future. Check out the link below for additional information!
How to Find Stocks Poised to Grow Dividends Now
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General Electric Company (GE): Free Stock Analysis Report
SPDR-SP 500 TR (SPY): ETF Research Reports
REALITY SHRS ET (DIVY): ETF Research Reports
IQ-HEDGE MUL-ST (QAI): ETF Research Reports
ISHARS-CR US AG (AGG): ETF Research Reports
WISDMTR-MF SF (WDTI): ETF Research Reports
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Zacks Investment Research
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:Barclays U.S. Aggregate Bond Index ETFs -- 3 Ways to Make Investing in Bonds Easier
For proper asset allocation, it's important to maintain an age-appropriate portfolio of stocks and bonds. Unlike stocks, which can be quite volatile, bonds can add a conservative element to your investment strategy. The Barclays U.S. Aggregate Bond index can help you do this rather easily, by purchasing a fund that tracks the index.
Three ETFs that track the index include the iShares Core U.S. Aggregate Bond ETF (NYSEMKT: AGG) , the Vanguard Total Bond Market ETF (NYSEMKT: BND) , and the Schwab U.S. Aggregate ETF (NYSEMKT: SCHZ)
Data Source: ETFdb.com. Fund assets, expense ratios, and recent share prices obtained on 6/5/17.
It's important to note that the Vanguard ETF tracks a float-adjusted version of the index, which simply adjusts for the fact that not all of the bonds that qualify for the index trade on the open market. Although this is a slightly different index composition, the idea is the same, and the underlying investment performance has been and should continue to be virtually identical. To illustrate this, consider that the five-year annualized performance of the Vanguard and iShares funds has been 2.26% and 2.27%, respectively. Over one- and three-year periods, the returns have also been very close.
What is Barclays U.S. Aggregate Bond Index?
In a nutshell, the Barclays U.S. Aggregate Bond Index is a broad bond index that is designed to measure the performance of the U.S. investment grade, taxable bond market. This includes U.S. Treasuries and other government bonds, mortgage-backed securities, as well as corporate bonds that are of sufficiently high credit quality. It excludes bonds such as tax-free municipals, as well as bonds that are not of investment-grade credit quality (junk bonds).
Why invest in these ETFs, and which is best for you?
As I mentioned in the introduction, all properly diversified investment portfolios should have some allocation of bonds, also known as fixed-income investments. Younger investors should generally have less money allocated to bonds, while older investors should have more bond-heavy portfolios, but all investors should have some exposure to fixed-income investments, regardless of age.
Having said that, the main reason to use one of these ETFs in your portfolio is to make your bond investing as easy as possible. The bond market can be rather complicated, and unlike stocks, many bonds aren't the most liquid investments. So, using a fund like one of the three discussed here can make this portion of your portfolio easier, and take the guesswork out of bond investing.
As an example, the iShares fund has 6,202 different bond holdings as of June 2, 2017. The benefit of this much diversification is that if one of the fund's investments were to default, investors would barely feel the impact.
Since all three funds track the same index, it's tough to say that one is better than the others. The Schwab fund does have a slightly lower expense ratio, but all three are remarkably cheap. The difference between 0.05% and 0.04% expense ratios is the difference of $1 for every $10,000 you have invested -- in other words, it's not likely to have a major long-term impact on your performance.
The Foolish bottom line
Just like with stocks, if you have the time, knowledge, and desire to research and buy individual bonds, there's nothing wrong with doing so. However, for the majority of investors, a bond fund like one of these that track a broad index is the smartest way to go. Any of the three ETFs mentioned here could be a great fit in a properly allocated investment portfolio.
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Matthew Frankel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:Are These Bond ETFs the 'Next Generation' in Fixed Income Investing?
(0: 45 ) - BulletShares Lineup
(3: 05 ) - Use The BulletShares Approach In Your Own Personal Portfolio
(6: 10 ) - What Happens When a Fund Closes Down?
(9: 35 ) - How Much Does Sector Breakdown Change From Year to Year?
(11: 45 ) - What's Next For BulletShares
(14: 05 ) - Why The Name BulletShares?
(15: 10 ) - Episode Roundup: Podcast@Zacks.com
Though bond ETFs usually play second fiddle to their equity counterparts, they have become extremely popular in their own right too. It is easy to see why this is the case, as the fixed income world is notoriously difficult for the average investor to access in a cheap and efficient manner, while diversification is next to impossible without large amounts of capital.
Bond ETFs solve these problems with ease, allowing investors to access dozens or hundreds of different fixed income securities in a single ticker. We have seen funds like AGG , BND , and LQD amass over $30 billion each as investors have flocked to ETFs in order to obtain their fixed income exposure.
But the main criticism of these products is that they don't really give you the full 'bond experience'. By that I mean, a 'normal' bond investment eventually matures and pays out the principal, while most bond ETFs on the market today do not. Instead, they usually focus on a given year to maturity range-such as with a product like CSJ -or they simply remove securities before they reach maturity.
This is obviously different than if you had just bought a bunch of bonds in a portfolio, and it could put you through more interest rate risk than simply holding to maturity and cashing out then would have.
A Different Way?
Fortunately, one company-Guggenheim-recognized this problem and developed a suite of bond ETFs called 'BulletShares' to address the issue. These funds all have a defined maturity date and allow investors to pick a given year and hold a number of bonds that mature in that time. Then, once everything has matured, the product pays out back to investors and the ETF is dissolved, just like you would experience in a 'regular' bond.
To get some insights on this product type, I spoke with Bill Belden, the Managing Director and Head of ETF Business Development at Guggenheim, for a look at how these products work for the latest edition of the Dutram Report .
BulletShares in Focus
In the podcast, we talk about how this idea for defined year bond funds came into being, and the kind of hurdles and issues that come into play when you only focus on a single calendar year for bonds. I also ask if each year might offer up investors a different type of exposure-since BulletShares stretch out into the mid 2020s-and what (if any) differences there are between the years.
We also discuss what happens to funds that mature this year, namely their high yield corporate fund BSJH or the 2017 Corporate Bond ETF BSCH , and what investors need to know about this process. In addition, we also take a closer look at how this approach might offer up a different experience in a rising rate environment, and how these bonds are impacted by shifting interest levels.
We also discuss some of the top uses for this style of investing in the bond world, be it with products that are close to maturity-such as their billion-dollar asset under management products BSJI and BSCI -but also how investors may be able to use the longer-dated products to match their assets with upcoming liabilities or big planned purchases in the years ahead.
Finally, we also talk about what is next for this concept in terms of other products in the future, and I also try to get out of Bill why the name 'BulletShares' was chosen in the first place.
Bottom Line
Bill and I dive deep into the world of 'BulletShares' and discuss what makes these products tick. If you have ever been curious about these products, or wanted to learn more about bond investing, definitely give this podcast a listen.
But what do you think about BulletShares and my interview with Bill? Make sure to write us in at podcast @ zacks.com or find me on Twitter @EricDutram to give us your thoughts on this topic, or anything else in the ETF market.
But for more news and discussion regarding the world of ETFs, make sure to be on the lookout for the next edition of the Dutram Report (each and every Thursday!) and check out the many other great Zacks podcasts as well!
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ISHARS-IBX IG (LQD): ETF Research Reports
ISHARS-CR US AG (AGG): ETF Research Reports
VANGD-TOT BOND (BND): ETF Research Reports
GUGG-BS2017 HYC (BSJH): ETF Research Reports
GUGG-BS2018 HYC (BSJI): ETF Research Reports
GUGG-BS2017 CB (BSCH): ETF Research Reports
GUGG-BS2018 CB (BSCI): ETF Research Reports
To read this article on Zacks.com click here.
Zacks Investment Research
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:Best Performing ETFs Of The Year
Drew Voros
ETF.com Editor-in-Chief
So far 2017 has been a banner year for ETFs in terms of asset gathering. Some $135 billion in new assets flowed into U.S.-listed ETFs, building on the previous quarterly record register in the fourth quarter of 2016 of more than $100 billion.
But as demand for ETFs surge, there is of course winners and losers when it comes to performance. The following is a list of the best performing ETFs do far in 2017 as we conclude the first quarter. Next week we will look at the worst performers
Equity ETFs Shine
Out of the nearly 2,000 ETFs listed on U.S. exchanges, more than 80% were up on a year-to-date basis through March 28. Gainers have come from all segments of the market, but equity ETFs have done the best.
U.S. stocks, as measured by the SPDR S&P 500 (SPY), returned 5.7% during Q1. Many analysts called the move a "Trump rally" due to the promise of business-friendly economic policies from the new administration, including tax cuts, deregulation and infrastructure spending.
But the good fortune during the quarter wasn't limited to just U.S. stocks. International developed-market equities, as measured by the Vanguard FTSE Developed Markets ETF (VEA), climbed 8.4%; and emerging markets, as measured by the Vanguard FTSE Emerging Markets ETF (VWO), rallied 12.5%, thanks to an improving global economic backdrop.
Even fixed-income ETFs participated in this year's gains, despite an early rate hike from the Federal Reserve in March. The iShares 20+ Year Treasury Bond ETF (TLT) added 1.7%; the iShares JP Morgan USD Emerging Markets Bond ETF (EMB) gained 4%; the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) returned 1.7%; the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) rose by 1%; and the iShares Core U.S. Aggregate Bond ETF (AGG) edged up by 0.7%.
On the other hand, commodity ETFs were notable laggards during the first quarter, losing 5.4% in the period, based on the PowerShares DB Commodity Index Tracking Fund (DBC). Gold prices performed well―the SPDR Gold Trust (GLD) jumped 8.6% in the year-to-date period―but that wasn't enough to offset the 9.7% drop in crude oil, which has the greatest weighting in most broad commodity indices.
Inverse VIX Products Surge
As well as they've performed, none of the ETFs mentioned thus far are among the highest-returning ETFs this year. For the 15 ETFs on the list, gains ranged from 22% to 63%. That's especially impressive considering that leveraged exchange-traded products were excluded.
At the top of the heap were inverse VIX products―volatility ETFs that rise when the CBOE Volatility Index declines. There were a total of five such products in the top 15.
The irony is that, heading into 2017, investors were bracing for high volatility given the uncertainty that a Trump presidency brought.
The VIX dropped from 14 at the end of last year to 11.5 currently. That's been a boon for ETFs like the REX VolMaxx Short VIX Weekly Futures Strategy ETF (VMIN), up 62.8% year-to-date, and the VelocityShares Daily Inverse VIX Short-Term ETN (XIV), up 59.1% year-to-date.
Single-Country Emerging Market Winners
Indian stocks got a shot in the arm after a landslide win for Indian Prime Minister Modi's political party in state elections earlier in March raised expectations that the business-friendly leader will have an easier time enacting his economic reforms.
Small-cap India stock ETFs were among Q1's best performers. Gains for the Columbia India Small Cap ETF (SCIN), the VanEck Vectors India Small-Cap Index ETF (SCIF) and the iShares MSCI India Small Cap ETF (SMIN) ranged from 26% to 30%.
Meanwhile in Brazil, another reform-minded leader, President Michel Temer, also helped fuel sizzling gains in the stock market. The VanEck Vectors Brazil Small-Cap ETF (BRF) and the iShares MSCI Brazil Small-Cap ETF (EWZS) rose more than 22% apiece on the back of hopes that Temer can revive growth in Brazil's battered economy following the worst recession in the country's history.
Drew Voros can be reached at dvoros@etf.com.
And The 2016 ETF.com Awards Winners Are …
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:ETFs See First Weekly Outflows Since Election
The Week In ETFs 3-27-17
By Drew Voros
ETF.com Editor-in-Chief
For the first week since the November elections, investors took money out of exchange-traded funds―but just barely. Outflows from U.S.-listed ETFs totaled $415 million in the week ending Thursday, March 23. That snapped a 19-week win streak for ETFs, and pushed the year-to-date inflows total down to $124.9 billion. There is now a total of $2.78 trillion in U.S.-listed ETFs.
The S&P 500 dropped almost 2% during the week, and saw its first 1% down day since October on Tuesday. In turn, U.S. equity ETFs saw the largest outflows, to the tune of $9.3 billion.
On the other hand, international equity ETFs picked up the slack, taking in $4.4 billion. U.S. fixed-income and international fixed-income ETFs also garnered favor amid safe-haven buying, with inflows of $3.9 billion and $800 million, respectively.
Since after President Trump was elected in November, there has been a steady stream of new assets flowing into ETFs as the Trump rally capped 2016 and carried on into this year. That rally and ETF inflows met head winds this past week, further fanned by the failure of Congress and Trump to pass an Obamacare replacement bill in the House of Representatives. Friday’s non-vote raised concerns that it will be more difficult to enact the pro-growth policies that President Trump promised, such as tax cuts and deregulation.
Top-Performing Fixed Income ETF May Surprise You
The best-performing fixed-income ETF so far in 2017 is, actually, an equity fund—a preferred stock fund. The iShares International Preferred Stock ETF (IPFF) has delivered the strongest returns among fixed-income ETFs year-to-date.
Preferred stocks are equities that behave like a bond. They typically deliver income in the form of fixed dividends, and they carry less risk than other equity securities due to their ranking in the corporate ladder. These traits are the reason many investors include preferreds in their fixed-income allocation.
One of the drivers of IPFF’s outperformance is strong income. IPFF currently has a 12-month trailing yield of 4.7%, according to iShares data. The higher the income relative to common stocks, the better the results. Also, IPFF is heavily allocated to Canada—78% of the portfolio—and, in particular, Canadian banks.
The fund has delivered roughly twice the gains of its U.S.-focused counterpart, the iShares U.S. Preferred Stock ETF (PFF)—albeit with greater volatility—and significantly higher returns than both a broad fixed-income allocation, as measured by the iShares Core U.S. Aggregate Bond ETF (AGG), and an equity allocation, as measured by the SPDR S&P 500 (SPY).
Trading Outage Impacts $150B Worth Of ETFs
The NYSE Arca—the stock exchange with more than 1,500 ETFs listed on its board—faced a technical glitch late Monday that prevented several ETFs from trading and settling properly at closing.
These ETFs, which included the SPDR Gold Trust (GLD), the SPDR Dow Jones Industrial Average ETF Trust (DIA), the SPDR S&P Midcap 400 ETF (MDY), the Energy Select Sector SPDR Fund (XLE), the Financial Select Sector SPDR (XLF) and the iShares Russell 2000 ETF (IWM), had a market value of more than $150 billion.
ETFs can trade anywhere throughout the day, but that trading reverts to their listing exchange at closing auction to determine the settlement price for the day. The NYSE said that the issue was caused by a software glitch, and that the exchange had to revert to a previous version of the software until the issue was solved.
The average retail investor was most likely largely unaffected by the problem unless they were executing a trade at the exact moment of the glitch. Still, Joe Saluzzi, a partner at Themis Trading in Chatham, New Jersey, told the WSJ that these settlement prices are crucial to market makers and traders, and a lack of a proper settlement could impact various trades and hedges.
Drew Voros can be reached at dvoros@etf.com.
More on ETF.com
Gundlach On Why Interest Rates Are Falling
Emerging Market Local Debt ETFs Shine
A Response To Jim Cramer’s ‘Why I’m Against ETFs’
ETFs With The Largest Premiums & Discounts
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:The Best Way to Invest in Index Funds
Investors' passion for indexing these days reminds us of a classic Cole Porter lyric: "Birds do it, bees do it, even educated fleas do it." Yep, everybody, it seems, is falling in love--with index funds. Since 2010, investors have withdrawn a net sum of $500 billion from actively managed U.S. stock funds and invested that amount and more in index-tracking mutual funds and exchange-traded funds. But one of the cardinal rules of investing is that whenever everyone agrees on something, chances are high that just the opposite will occur. So could indexing be the wrong way to go?
See Also: 6 Vanguard Index Funds to Buy and Hold Forever
The answer: yes and no. The benefits of indexing are indisputable--the strategy is cheap, it's transparent, and it's no-fuss (once you've decided which benchmarks you want to track). And in recent years, indexing has worked particularly well with the world's most widely mimicked benchmark, Standard & Poor's 500-stock index. Over the past five years, the S&P 500 generated a cumulative gain of 98% (14.7% annualized). During that period, only 14% of actively managed, large-company mutual funds beat the index. (All returns are through December 31.)
But indexing has its shortcomings, too. It's not as effective in some categories as it is for large-capitalization U.S. stocks. If you index, you cannot beat the market; actively run funds at least give you the chance to outpace a benchmark. Plus, says Daniel Wiener, editor of the Independent Adviser for Vanguard Investors newsletter, "good timing" is required even in indexing. In particular, this may not be the best time to hitch your wagon to the S&P 500, which is what many people think about when they consider indexing. Indexing's defenders may scoff, but there have been times--long stretches, even--when active managers dominated their benchmarks.
In the end, your best strategy may be to own a combination of index and actively managed funds. Choosing good active funds is key, of course. The other trick is knowing which markets or market segments are best suited to indexing, and in which slices active funds stand a better chance of winning. Below, we tell you where to index and where to go active.
The indexing advantage
The price is right. Index funds buy and sell securities less frequently than actively managed funds, so they incur fewer trading costs. More important, index funds charge substantially lower fees. The expense ratio for the typical actively managed large-company stock mutual fund is 1.13%. But mutual funds and ETFs that track large-cap U.S. stock indexes cost 0.49%, on average, and many charge far less.
A fee differential that typically exceeds one percentage point per year "is a high bar for active managers to overcome," says Todd Rosenbluth, at CFRA, a stock and fund research firm. And over time, the cost advantage adds up. "Albert Einstein called compound interest the eighth wonder of the world," says Daniel Wallick, a portfolio strategist at the Vanguard Group, the firm that invented index funds for individual investors. "But costs compound, too."
Fees aren't the only obstacle for active managers. For one thing, the growing speed with which information is disseminated and the sheer number of talented active managers makes it hard for any of them to stand out. Last year, for instance, 1,117 actively run funds, most run by "highly skilled managers," in the words of Morningstar analyst Ben Johnson, jockeyed for position in the domestic large-cap category.
Recent market conditions haven't helped. Tepid economic growth combined with persistently low interest rates created a "weird" market, says Rob Sharps, co-head of global stocks at T. Rowe Price. Narrow slices of the market often drove returns: In 2014 and 2015, shares of large companies trounced those of small companies as investors sought shelter in what they presumed to be sturdier firms. Active large-cap managers who dared to invest in smaller companies were, more often than not, penalized for straying.
Making matters worse for human stock pickers (as opposed to the computers that essentially run index funds), narrow segments drove the market's performance. That was most obvious in 2015, when a small group of fast-growing technology companies--namely, Facebook, Amazon.com, Netflix and Alphabet (then called Google)--made the difference between a fund beating the S&P 500 or lagging it. "That's a tough environment for active managers," says Sharps.
Some strategists say active managers have struggled of late because the difference between the returns of stocks within the S&P 500 and that of the index--the so-called dispersion rate--has been historically low since 2010. In other words, the gap between the best and the worst performers in the index has narrowed. But rising interest rates, a growing belief that inflation is heading higher and a maturing economic cycle could mean higher dispersion levels in the coming year, giving active managers a better chance to beat the S&P 500. Against this backdrop, "2017 could be the year of the active investor," says Candace Browning, head of Bank of America Merrill Lynch Global Research.
Whether or not Browning is right, 2017 wouldn't be the first time that active managers beat their benchmarks. The bulk of active large-cap U.S. stock fund managers also beat the S&P 500 in 2007, 2009 and 2013. Active investing has even prevailed over long stretches. From 2000 through 2009, the S&P 500 surrendered 1.0% annualized. During this so-called lost decade, 63% of actively run large-cap stock funds beat the index, with an average annualized return of 2.4%.
Because traditional benchmarks weight their holdings by market value--the bigger the capitalization, the bigger its spot in the bogey--index investors are vulnerable to bubbles. A classic example came in the late 1990s and early 2000, when investors pushed up tech stocks to absurd levels. When the bubble burst, investors in S&P 500 index funds got crushed even as funds that focused on undervalued stocks and small-cap funds made money. The "Achilles heel of market-cap-weighted index funds," says Johnson, is that you're fully exposed to market manias.
The best places to index
Of course, there is more to indexing than the S&P 500. Among other well-known benchmarks are the Russell 2000, which tracks small-company stocks; the MSCI EAFE, which is synonymous with large-cap stocks in developed foreign lands; and the Bloomberg Barclays US Aggregate Bond (AGG), which is the standard index for investment-grade U.S. bonds.
To assess which areas are better-suited for indexing and which are more amenable to active management, we pored over data from Morningstar and S&P Dow Jones Indices that pit actively managed funds in stock and bond categories against their index-fund counterparts or against indexes themselves. With help from Morningstar, we also ran our own screens to study assorted stock and bond categories over various time frames.
Our findings? Some fell in line with what most market watchers say about indexing: In efficient markets--those classes of stocks or bonds that are closely watched and easy to trade--go with index funds. In less-efficient markets, choose actively managed funds. So, within the U.S. market, indexing works best with large-company stocks. But go active with funds that focus on stocks of small or midsize companies. Morningstar has found that low-cost, actively managed small-cap stock funds, in particular, have done a good job of beating their index-fund peers.
The same has been true on the foreign stock side. Most active funds that invest in small and midsize foreign stocks have outpaced their respective indexes over 10 years. Their large-cap brethren have not.
Finally, investment style has mattered, too. Morningstar and S&P data show that over the long haul, active value-oriented funds that invest in large-, midsize- or small-company stocks had better success in outpacing their benchmarks than their counterparts that invest in fast-growing companies or whose holdings exhibit a blend of growth and value attributes.
Bonds are trickier. Conventional wisdom holds that bonds are horribly suited to indexing. The Bloomberg Barclays AGG index contains thousands of securities, and not all of them trade daily, making them hard to price accurately. Moreover, bond index funds tend to hold a representative portfolio, using a technique known as sampling, that attempts to mimic the benchmarks they track. This can sometimes lead to differences in performance between bond index funds and their benchmarks.
Active bond fund managers can attempt to add value by investing outside of the benchmark's restriction to investment-grade debt. But what separates them from bond indexers is their ability to adjust their portfolio's sensitivity to swings in interest rates. That's critical because as rates fall, bond prices generally rise, and as rates increase, bond prices generally decline.
These days, with rates on the rise, the AGG looks especially vulnerable. Its duration, a measure of rate sensitivity, is 5.9 years. That implies that if interest rates rise by one percentage point, the index will lose 5.9% of its value. If you hold a US Aggregate Bond index fund, you're stuck with that. But an active intermediate-term bond fund manager can soften the blow of rising rates by buying shorter-maturity debt, among other moves.
As it turns out, investors have been better served by going active with funds that focus on medium-term, high-grade bonds. Active intermediate-term bond funds had the highest 10-year success rate of all the fund categories that Morningstar scrutinized.
In other areas of the bond market, the results for active fund managers have been mixed, says Aye Soe, senior director of global stocks at S&P Dow Jones Indices. "It's all over the map, depending on whether managers get the interest-rate call right or not."
See Also: Best Ways to Invest in Bonds Now
A little bit of both
The smart way to invest is to own a combination of index funds and low-fee, actively managed funds. In fact, that's how most Americans invest their money, says Johnson, of Morningstar.
On the stock side, the best way to assemble a portfolio is to establish a core that consists of an index fund that tracks the S&P 500 or one that copies a total-market benchmark. The Kiplinger ETF 20 includes both options: iShares Core S&P 500 (symbol IVV ) and Vanguard Total Stock Market ( VTI ).
Then complement your index funds with a couple of actively managed large-company-oriented stock funds. Two stalwarts of the Kiplinger 25 , the list of our favorite mutual funds, are Dodge & Cox Stock ( DODGX ), which seeks bargain-priced stocks and charges just 0.52% annually, and Mairs & Power Growth ( MPGFX ), which focuses more on growth-oriented companies and charges 0.65% a year.
Fill out the small- and mid-cap portion of your portfolio with actively run funds. Standouts include Kiplinger 25 members T. Rowe Price Small-Cap Value ( PRSVX ) and Parnassus Mid Cap ( PARMX ).
For foreign stocks, start with a diversified index fund. A solid choice is Vanguard Total International Stock ( VXUS ), a member of the Kip ETF 20. Then add two members of the Kiplinger 25, FMI International ( FMIJX ) and Fidelity International Growth ( FIGFX ). Their expense ratios--0.94% and 0.96%, respectively--are below-average for actively run overseas funds. If you believe in the long-term case for emerging-markets stocks (admittedly, their mediocre performance in recent years has made it harder to do so), split your money between iShares Core MSCI Emerging Markets ETF ( IEMG ) and Kip 25 member Baron Emerging Markets ( BEXFX ). Although the ETF charges just 0.14% annually, Baron's expense ratio of 1.45% is on the high side.
For bonds, build a core of good active funds, such as DoubleLine Total Return Bond ( DLNTX ), Metropolitan West Total Return Bond ( MWTRX ), Pimco Income ( PONDX ) and Vanguard Short-Term Investment-Grade ( VFSTX ). If you can tolerate more risk, add Vanguard High-Yield Corporate Fund ( VWEHX ), which takes a conservative approach to investing in junk bonds.
See Also: Why Good Funds Turn Bad[/Link]
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:WSJ: Federal Reserve Won’t Raise Rates Today
That's the overriding message after reading the tea leaves of the Fed's recent actions. From the WSJ :
Yellen has said the cabal would seek to boost rates "a few times a year" through 2019, should the economy progress as expected. However, given the changing administration and so much uncertainty about how Trump's initiatives will play out, it may be more prudent to keep rates as is for the rest of the year.
That course would be in-line with the Fed's last two raises, which came in December 2015 and 2016, respectively.
Other potential talking points stemming from the two-day meeting could include reducing the Fed's massive $4.5 trillion balance sheet, inflation concerns based on new Trump policies, and some mention of the Fed's new voters, which are set to take a seat at the table later this year.
The iShares Barclays Aggregate Bond Fund ( NYSE:AGG ) was trading at $107.81 per share on Wednesday morning, down $0.26 (-0.24%). Year-to-date, AGG has declined -0.23%, versus a 2.20% rise in the benchmark S&P 500 index during the same period.
AGG currently has an ETF Daily News SMART Grade of B (Buy) , and is ranked #13 of 28 ETFs in the Intermediate-Term Bond ETFs category.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:Inside ETFs: Spotlight On Millennials, Fintech And Income Investing
Yes, more than a trillion dollars moved out of traditional active mutual funds and into exchange traded funds since the financial crisis. Yes, behind that shift lies the inescapable fact that most active managers underperform and cost too much.
But Dave Nadig, CEO of ETF.com, is ready to move on from that well-known story.
"In many ways, ETF 1.0 is done - the battle has been won," said Nadig, who has monitored this industry almost since its inception. ""When I look forward to 2017, I think we see the industry really preparing for the huge intergenerational wealth transfer that's about to happen."
The industry vet was interviewed by IBD ahead of the Inside ETFs conference in Hollywood, Fla. The 10th annual jamboree is set to begin Sunday, attracting an estimated 2,200 investors and financial advisors, as well as ETF issuers, fintech sponsors, media partners and more. More than 160 speakers are on the agenda.
Nadig noted that millennials are a driving force behind the growth of robo-advisors as well as many of the new ETFs being brought to market, including a crop of environmental, social and governance ( ESG ) oriented products.
Indeed, younger investors are the biggest adopters of ETFs, with 1 in 3 millennials using these products vs. 1 in 4 American investors overall, according to a new report from BlackRock iShares, the No. 1 ETF sponsor.
That's good news for the ETF industry. Millennials, generally in their 20s and early 30s, are the nation's biggest living generation. They represent the future for hundreds of financial services firms with ties to the stock market .
The ETF industry has other reasons for cheer. Assets in U.S. ETFs grew to $2.5 trillion in 2016 - a record-breaking year for ETF inflow, with $284 billion pouring in, according to State Street Global Advisors.
Of note, fixed income ETFs gathered more than $90 billion in new money last year, surpassing the 2015 record.
Matt Hougan, CEO of Inside ETFs, believes fixed income is at a defining moment.
"As people re-evaluate their fixed-income portfolios in a new era of rising rates, I think you'll see an interesting battle play out between traditional index products like iShares Core U.S. Aggregate Bond ( AGG ), new-wave smart beta products like NuShares Enhanced Yield U.S. Aggregate Bond ( NUAG ) and straight-up active products like Pimco Total Return Active ( BOND ) and Fidelity Total Bond ( FBND )," Hougan told IBD.
Several sessions at Inside ETFs will address the topic of fixed income ETF investing.
Other workshops, sessions and panel discussions, spread over four days at a scenic oceanside venue, will focus on the future of ETF investing , trading ETFs effectively, strategies for volatile markets, the outlook for emerging markets, and more.
Looking ahead, Hougan expects the industry focus to shift away from driving down costs in core ETFs and toward improving investor behavior.
"After all, the data suggest the average investor loses 2% to 4% per year by buying high and selling low," he said. "Who cares about a 0.01% decrease in expenses when you're burning 4% a year on bad behavior?"
The topic of improving client behavior will be addressed at the Inside ETFs conference in the new "Advisor Accelerator Workshop" on Sunday, Hougan said.
RELATED:
High-Yield Strategy Uses 10 ETFs To Deliver All-Weather Income With Low Risk
7 Best ETFs For Your Growth And Income Needs As Trump Takes The Wheel
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:3 Bond Funds That Are the Cream of the Crop Right Now
InvestorPlaceInvestorPlace - Stock Market News, Stock Advice & Trading Tips
A reader recently sent me a question asking why you would own bond funds when interest rates are on the move higher. This type of sentiment is more than likely on the minds of many investors as they prepare for 2017 and evaluate adjustments to their asset allocation .
Source: United States Treasury, Bureau of Public Debt via Wikimedia
The short answer is that every diversified portfolio should have bond exposure to balance out the risk of other asset classes (e.g., stocks and commodities). Bonds have historically provided a shock absorber for the equity side of the portfolio and have not shown any signs of relinquishing that trait. Simply letting go of all your bond exposure will unnecessarily tilt your risks and returns towards a single outcome.
It's like driving without a seat belt on. Everything will be fine … until it's not .
Furthermore, bonds provide a much-needed stream of income for those what rely on dividends. A rising-rate environment will depress bond prices, but it will also stimulate higher yields across virtually every sector of the bond market.
The benchmark that most investors will base their bond performance against is the Barclays U.S. Aggregate Bond Index. This is the same index that the two largest bond ETFs in the world are based on. Those being the iShares Core U.S. Aggregate Bond ETF (NYSEARCA: AGG ) and Vanguard Total Bond Market ETF (NYSEARCA: BND ).
These bond funds share a combined $73 billion in passively managed assets. They are also susceptible to more interest-rate risk due to high concentrations of Treasuries, investment-grade corporate bonds and mortgage-backed securities.
The 12 Best Fidelity 401k Funds to Own
Fortunately, there are several core bond ETFs that have managed to successfully mitigate the risk of rising rates through security selection and duration positioning.
Cream-of-the-Crop Bond Funds: Vanguard Short-Term Bond Index Fund (BSV)
Expenses: 0.09%
SEC Yield: 1.69%
If your goal is low cost and index-like returns, you can't go wrong with a fund like Vanguard Short-Term Bond Index Fund (NYSEARCA: BSV ).
This Vanguard ETF takes the approach of significantly shortening the duration of its holdings versus a traditional intermediate-term benchmark; BSV has an effective duration of 2.8 years versus 5.9 years in BND. (Remember: Effective duration is essentially the measure of a fund's sensitivity to interest rate fluctuations.)
BSV charges an ultra-low expense ratio, has exposure to 2,400 underlying holdings and boasts nearly $20 billion in assets under management. The portfolio is allocated using similar sector exposure to the Barclays Aggregate index, with the majority of holdings rated as high credit quality.
The downside to BSV is going to be its meager income stream. The fund currently sports a 30-day SEC yield of just 1.69% and income is paid monthly to shareholders. Such is the trade-off of lowering price volatility at the expense of the dividend payments.
Cream-of-the-Crop Bond Funds: SPDR Doubleline Total Return Tactical ETF (TOTL)
Expenses: 0.55%
SEC Yield: 3.01%
SPDR Doubleline Total Return Tactical ETF (NYSEARCA: TOTL ) is an excellent selection for those that want an active approach to fixed-income. This fund is managed by Jeffrey Gundlach of DoubleLine Capital using a multi-sector approach to its asset allocation. It's a fund that I currently own for myself and clients of my wealth management firm.
The advantage of an active fund like TOTL is that it has more flexibility in security selection and risk management capabilities than an index. The fund manager can increase or decrease the effective duration, as well as shift assets towards areas of the bond market they feel offer greater value. There are also limits (or guidelines) on sector exposure that make this fund suitable as a diversified core holding .
Right now, TOTL yields 3.02% and has an effective duration of 5.02 years. It also carries exposure to bank loans, emerging market debt, and other asset backed securities that you won't find in many benchmarks.
The 10 Best Vanguard Funds for 2017
It's worth pointing out that TOTL charges an expense ratio of 0.55%, which is significantly higher than a passive ETF. As an active fund, it is also susceptible to underperform its benchmark if its positioning doesn't blend well with the fixed-income environment. Nevertheless, this bond fund has weathered the recent jump in interest rates in a much smoother fashion than its peer group.
Cream-of-the-Crop Bond Funds: Pimco Total Return Exchange-Traded Fund (BOND)
Expenses: 0.55%
SEC Yield: 2.7%
Pimco
The most interesting thing about PIMCO Total Return Exchange-Traded Fund (NYSEARCA: BOND ) is its use of futures and currency swaps to manage risk. The portfolio is currently balanced between conventional U.S. fixed-income exposure paired with interest-rate hedges, inflation protected bonds and emerging-market debt.
Over the past six months, this has led to diminished price volatility versus the Barclays benchmark.
Pimco takes a team approach to its credit and security selection criteria within the BOND portfolio as well. The effective duration is currently 5.71 years with a 30-day SEC yield of 2.7%. Its objective has always been one of a core holding for investors to utilize in lieu of a diversified index. Furthermore, the fund charges the same expenses as TOTL.
For full disclosure, we currently recommend BOND for subscribers to the Flexible Growth and Income Report .
David Fabian is Managing Partner and Chief Operations Officer of FMD Capital Management. As of this writing, Fabian was long TOTL, and FMD Capital Management has recommendations on both BOND and TOTL. To get more investor insights from FMD Capital, visit their blog.
The post 3 Bond Funds That Are the Cream of the Crop Right Now appeared first on InvestorPlace .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:Gold ETF Continues To Rally Off Its December Low: Is A Bottom In?
The major stock ETFs rose Wednesday, as investors digested news that the Fed backed a gradual pace of rate hikes at its most recent meeting.
SPDR S&P 500 ( SPY ) added 0.6% on the stock market today . This large-cap ETF, a proxy for the broad U.S. market, is holding near its December high of 228.34.
Small-cap ETFs led the day's advance among diversified equity funds, advancing nearly 2%. Biotechnology ETFs topped peers investing in industry sectors, posting gains of nearly 5%.
[ibdchart symbol="gld" type="daily" size="quarter" position="leftchart" ]
SPDR Gold Shares ( GLD ) popped 0.4% to build on its recent rally.
"The first week of 2017 is seeing renewed speculator and investor demand for gold and silver after both markets in late December notched multimonth lows," Jim Wyckoff, a Kitco senior technical analyst, wrote on Wednesday.
He added: "More price gains in gold and silver markets to end this week would begin to suggest market bottoms are in place and that prices can trend at least sideways, if not sideways to higher, in the coming weeks."
A softer dollar also helped gold prices on Wednesday. The dollar index notched a 14-year high the previous session.
Gold beat a sharp retreat in the final quarter of 2016 after the Nov. 8 election outcome sharpened investors' appetite for risk assets and the Federal Reserve hiked a key interest rate for only the second time in a decade.
Higher rates put downward pressure on gold, a nonyielding haven asset.
IShares Core U.S. Aggregate Bond ( AGG ), a fixed income ETF , also plunged in the fourth quarter as investors piled into equities.
On Wednesday, AGG ended flat after four consecutive days of gains, coming off a December low of 107.06.
The newly released minutes from the Fed meeting of Dec. 13-14 also showed that uncertainty over future fiscal policies weighed heavily in policy makers' discussions.
IBD'S TAKE: The SDPR Gold ETF Gold rose 8% in 2016, its first year up since 2012 . Gold, a key portfolio diversifier, may benefit from uncertainty over the policies of President-elect Donald Trump.
12 Bellwether ETFs
Here's a look at the performance of major exchange traded funds across key asset classes on the stock market today.
The Relative Price Strength ( RS ) Rating measures a stock's price performance over the last 12 months vs. all stocks and ETFs, on a scale of 1 to a best-possible 99.
SPDR S&P 500 ( SPY ), +0.6%, RS 55
PowerShares QQQ ( QQQ ), +0.5%, RS 50
SPDR Dow Jones Industrial Average (DIA), +0.4%, RS 63
IShares Core S&P Mid-Cap (IJH), +1.6%, RS 67
IShares Russell 2000 (IWM), +1.7%, RS 71
IShares MSCI EAFE (EFA), +1.1%, RS 41
Vanguard FTSE Emerging Markets (VWO), +0.9%, RS 46
SPDR Gold Shares ( GLD ), +0.4%, RS 21
United States Oil (USO), +1.2%, RS 55
IShares Core U.S. Aggregate Bond ( AGG ), 0%, RS 28
PowerShares DB U.S.$ Bullish (UUP), -0.7%, RS 53
IPath S&P 500 VIX Short-Term Futures (VXX), -5.1%, RS 1
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:Ten Predictions for the ETF Industry in 2017
After a wild 2016, what's in store for the markets this year?
I am betting that things will calm down a bit, though some surprises are definitely in store once again. After all, a new administration coupled with political uncertainty will definitely introduce volatility into the market at some point, while the Fed and numerous geopolitical problems loom large on the horizon too.
Still, it is always fun to make predictions on how the year will come to pass, and especially if you had a solid run last year. For the 2016 edition, I offered up several predictions for how the ETF industry might fare over the year, and I've got to say, most of them were pretty spot on. Sure, there were some wrong decisions, like the rise of ex-sector funds, but a few looked to be pretty good calls for 2016 including the launch of WEAR (barely squeaked by with this one!) as well as calls regarding XLRE and RSP for the year (you can see the full list in the 16 ETF predictions for 2016 ).
I am hoping for a similar prediction performance this year and have outlined 10 predictions for what I see happening in the ETF industry over the course of 2017. Most are industry related, but performance definitely plays a role in most of the predictions too. Check them out below and make sure to stay up-to-date on the world of ETFs with our free fund newsletter which I pen each week!
People finally understand the perils of ESG ETFs/Someone does it right
Kind of a head-scratcher for me in 2016 was the widespread proliferation of Environmental, Social, Governance (or ESG for short) funds on the year. While I don't think there is anything wrong with the approach, the execution has been pretty poor and people seem to be blind to what is actually in these funds.
For example, a recent ESG fund launched from iShares, ESGU , includes companies like Exxon Mobil (not exactly an environmentalist favorite), Goldman Sachs (probably not a model of ethical behavior according to some), and Raytheon (world's largest maker of cruise missiles) in their holdings. Are those the kind of companies investors are looking for when they are trying to invest with a conscience?
I think investors will wake up to this at some point in 2017 and someone will do it right. By that I mean we will get a much more concentrated fund that levels out many of the questionable picks that I have highlighted above, and it get some market recognition for this too.
SNSR Hits $50 million in assets under management
Niche ETFs have had mixed success in the ETF world, as some have managed to take off and post solid levels of assets-such as the cybersecurity ETF ( HACK )-while others-such as some of the generational-focused funds that recently made their debuts-have faltered. But I think Global X's Internet of Things ETF ( SNSR ) will fall into the first category, as this looks to be one of the hottest and most in-focus segments of the year.
The space really started to take off to close out 2016, and it really is just scratching the surface of its potential. And as more people buy smart home products (the Amazon Alexa was sold out briefly for Amazon this holiday season online) the sector will only grow all the more, and especially as the industrial side takes off too.
I'd look for this ETF to see a huge asset increase before 2017 is over, and reach the critical $50 million mark as more investors embrace this industry for quality exposure this year. Check out the recent podcast we did on this topic for additional information on the Internet of Things world:
'Smart Beta' trend goes to bond world
One of the biggest trends over the last few years in the equity ETF world has been the concept of 'smart beta'. This idea looks to weight securities by a factor other than market cap, usually a fundamental factor of some sort such as book value, revenues, dividends, or the like.
This approach has proven to be extremely popular in the equity world, but it really hasn't transferred over to bonds just yet. I think this is the year that changes, and especially as bond managers look to gain a new edge in this corner of the market, so look for at least a few bond ETFs to feature some 'smart beta' theming launching this year.
Rise Back to Fame for TTAC
TTFS was a popular ETF and a personal favorite and portfolio holding of mine for several years. I really liked the methodology, but a shocking development happened in 2016, the management team was thrown out a slightly different approach was put in instead.
The folks at TrimTabs-who were behind the original TTFS-- were forced to go out on their own and apply their Float Shrink methodology to a new fund. This product is cheaper than its former iteration, but it still employs the same strategy. I think investors will 'come back home' to this fund in 2017 and TTAC will make a big comeback in assets. For more on this topic, check out my recent podcast below:
Bond ETFs fall out of top 10 in assets under management
As interest rates continue to rise or at least stay at these 'elevated' levels, I think investors will begin to see losses on their bond portions of their statements, and I think many will either move to equities, or dump bonds and go to bank holdings and CDs.
Many are likely to wonder why the risk of bonds is worth it in a rising rate world, and especially after a nice multi-decade run. Due to this, I think the sole bond ETF in the top ten biggest fund list, AGG , will drop out of the top tier before 2016 is over to be replaced with a different asset class-focused fund instead.
Low duration/negative duration ETFs finally take off
I thought that 2016 was going to be the year for low and negative duration funds, but I am going to repeat that call again this year. Now that we actually have higher rates, the usefulness of these products is being seen by many in the finance world, making these potentially solid choices for investors seeking to retain some level of bond exposure in a rising rate environment.
So, I'd look for a breakout from this group in 2017, and especially if recent trends continue, potentially putting several in this space on the road to $100 million in assets under management. For more on this concept, check out the recent podcast I did with the leadership for the SIT Rising Rate ETF ( RISE ) below:
AIRR hits $250 million in assets under management
With the election of Donald Trump, a number of once-forgotten sectors received a big boost. One that is at the top of the list, and appears to be on the radar for Trump to start 2017 too, is the world of manufacturing.
This segment could benefit from plans to bring back production to the U.S., while a strong dollar will likely help small and mid-cap companies (which tend to do more business domestically) more than most. That is why I am looking for the First Trust RBA American Industrial Renaissance ETF ( AIRR ) to not only have a solid year, but to become a market darling as well.
Its focus on companies which make goods here in the U.S., as well as community banks in areas which are home to manufacturing centers, makes it one of the best possible ETFs to benefit if Trump has any luck enacting some of his trade policies. I am calling it the 'Make America Great Again' ETF and I think this is its year to shine and become a much more well-known ETF.
IBB falls from second in list of most popular healthcare ETFs
One area that could definitely be hurt by Trump is the world of biotechnology. I think most investors are discounting this possibility, but just wait until one of these companies moves to raise prices and feels the full weight of the 'Bully Tweetdeck' upon them.
But there are warning signs for the biotech world beyond Trump, as the number of drug discoveries is on the decline once again. With fewer blockbuster drugs and higher regulatory risk, I don't think there is a lot to like about this market from a broad-based look. I think that this is going to be a space where more specialized areas pick up some steam, and investors look beyond IBB for their exposure in the healthcare/biotech market. One that appears promising is CNCR , which focuses on the world of immunotherapy. Check out my podcast with the creator of the Loncar Cancer Immunotherapy Index for some insights into this market segment:
Specialized financial ETFs make a run
Those of you in the ETF investor service know that we made an excellent run in the financial ETF space, largely thanks to bet on the regional bank ETF ( KRE ). This space looks to be among the biggest winners from a higher rate environment, and stocks in this area of the financial world took off as a result.
I don't think this is a one-off situation either, as investors will start to gravitate towards the more differentiated financial ETFs in order to achieve exposure that is more in-line with their goals. And with some of the solid performances over the past few months in this market, it is going to be an easy sell in 2017.
In particular, I have my eye on the community bank ETF of QABA and the broker dealer fund IAI . Both of these should do well this year if the current rate environment continues, and at least move up the charts and gain some ground on the gold standard in the market, XLF.
USCF Launches a 3x Crude Oil ETF hits $250 million in assets in six months after launching
One of the biggest surprises of the end of 2016 was the shuttering of UWTI and DWTI, two oil ETNs which offered 3x and -3x exposure, respectively, to crude oil. The duo were pretty popular products, but it looks as if the issuer wanted to get these debt instruments off of its balance sheet, shuttering them despite being solid performers.
This left investors and issuers scrambling, but I think it is just a matter of time until we see a replacement. Already, USCF is planning on launching a 3x Crude Oil ETF, and I think it will prove to be extremely popular, and particularly if the volatility in the oil market continues.
Happy New Year, let's hope 2017 is another great year for the world of ETFs!
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:Broad Commodity ETF, A 2016 Winner, Looks To End Year On A High Note
ETFs tracking major stock indexes struggled for gains on Friday, the final trading day of the year, but commodities seem poised to ring out an outstanding year on a bullish note.
SPDR S&P 500 ( SPY ) nudged 0.2% lower on the stock market today in morning trade. This exchange traded fund, a proxy for the broad U.S. market, set an all-time high of 228.34 on Dec. 13.
[ibdchart symbol="dbc" type="weekly" size="quarter" position="leftchart" ]
Amid higher prices in precious and industrial metals, as well as corn, wheat and cotton, PowerShares DB Commodity Tracking ( DBC ) added 0.2% in morning trade as it rose for a fifth consecutive day.
It set a 52-week high of 15.89 the previous session.
This $2.55 billion, broadly diversified commodity ETF has a 18.34% gain so far in 2016, a period over which crude oil, silver, gold, and copper staged impressive rallies at various times.
By comparison, SPY posted a 12.4% gain this year through Dec. 29 and iShares Core U.S. Aggregate Bond ( AGG ) scored a 2.2% gain.
DBC follows a rules-based index composed of futures contracts on 14 of the most heavily traded and important physical commodities in the world. They include gasoline, heating oil, Brent crude oil, WTI crude oil, gold, wheat, corn, soybeans, sugar, natural gas, zinc, copper, aluminum and silver.
"Commodities have been an area of strength in 2016, and should continue to be so in 2017 with real assets in general likely to benefit from Trump's proposed infrastructure program," Nitesh Shah, director and commodity strategist at ETF Securities, wrote recently.
He added: "Despite varied fundamental drivers, demand from emerging markets, particularly China, is likely to be a continued source of commodities consumption. Alongside the grind higher in global demand, substantial cutbacks to capital expenditure budgets will restrain supply. The resulting fundamental tightening in underlying conditions should keep the commodity complex well supported in coming years."
IBD'S TAKE:ETF investors have a wealth of choices when it comes to investing in gold for different market conditions.
12 Bellwether ETFs
Here's a look at the performance of major exchange traded funds across key asset classes on the stock market today.
The Relative Price Strength ( RS ) Rating measures a stock's price performance over the last 12 months vs. all stocks and ETFs, on a scale of 1 to a best-possible 99.
SPDR S&P 500 ( SPY ), -0.2%, RS 56
PowerShares QQQ ( QQQ ), -0.8%, RS 53
SPDR Dow Jones Industrial Average (DIA), -0.1%, RS 64
IShares Core S&P Mid-Cap (IJH), -0.2%, RS 66
IShares Russell 2000 (IWM), -0.2%, RS 72
IShares MSCI EAFE (EFA), +0.7%, RS 39
Vanguard FTSE Emerging Markets (VWO), -0.3%, RS 44
SPDR Gold Shares (GLD), 0%, RS 22
United States Oil (USO), -0.4%, RS 60
IShares Core U.S. Aggregate Bond ( AGG ), +0.1%, RS 30
PowerShares DB U.S.$ Bullish (UUP), -0.6%, RS 56
IPath S&P 500 VIX Short-Term Futures (VXX), +1.1%, RS 2
RELATED:
Flagship Gold ETF Eyes First Week Up After 7, First Year Up Since 2012
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:ETF Flows Set New Annual Record
Drew Voros
ETF.com Editor-in-Chief
With two weeks to go in the year, total net inflows for U.S.-listed ETFs now stand at a record $252.8 billion, above the previous annual record of $244 billion set in 2014.
What’s remarkable is that more than $90 billion of those new assets have come in since Election Day. Nearly all of those flows have gone into equity ETFs as fixed-income ETFs have lost assets, a reversal of fortunes from the trend in the first half of the year in which 80% of new assets went into fixed-income ETFs.
Of course, the new annual record could fall if outflows accelerate. Total assets for U.S. ETFs are now $2.55 trillion.
The new annual milestone was reached on the heels of last week’s $22.1 billion of news assets that again most went into some of the biggest and broadest equity ETFs.
In terms of individual ETFs, the biggest winners this week were ETF heavyweights such as the SPDR S&P 500 ETF (SPY) and the PowerShares QQQ Trust (QQQ), with inflows of $7.4 billion and $2.6 billion, respectively. In fact, every fund on this week's top 10 flows list has assets of more than $10 billion―except one. The iShares MSCI EAFE Value ETF (EFV) is the smallest fund on the list. It had inflows of $522 million during the period, pushing its total assets under management to $4.3 billion.
Outflows For Bond, Gold & Sector Funds
On the other side of the ledger, the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) was the biggest ETF loser of the week, with outflows of $790 million. Like Treasurys, U.S. investment-grade corporate bonds were hammered since the election. LQD last had a year-to-date return of 4.6%, compared with nearly 11% at its 2016 highs.
Another fixed-income loser this week was the iShares 20+ Year Treasury ETF (TLT), with outflows of almost $250 million. Year-to-date, TLT is now down about 3%, compared with a gain of 20% at its highs. That's a perfect illustration of the roller-coaster ride fixed-income ETFs have seen this year.
Best & Worse Fixed-Income ETFs Of The Year
Like flows for fixed-income ETFs, performance of fixed-income ETFs this year has been the tale of two different returns.
For the first six months of the year, it was straight up for bonds―and straight down for interest rates, which move inversely with bond prices. Those first six months were characterized by a host of concerns: about China, Brexit and low oil prices.
But just when everyone began to think interest rates could only go down, the bond market reversed.
Starting in July, interest rates started to tick higher slowly. Then in November, they exploded to the upside following the surprise victory of Donald Trump in the U.S. presidential election. Trump's policies of lower taxes and billions of dollars in infrastructure spending may translate into higher economic growth and higher inflation, two factors that tend to drive up interest rates. And then the Fed raised interest rates last week, to add fuel to the fire.
Fixed-income ETF investors have been on a roller-coaster ride—first with the big rally in bond prices (and decline in yields) and then the big plunge in bond prices (and rise in yields).
Junk Bonds' Big Comeback
All that said, it hasn't been all bad for fixed income this year. While the big gains in many fixed-income ETFs have evaporated, the majority of products are still in the green for 2016. For example, the largest ETF in the space, the iShares Core U.S. Aggregate Bond ETF (AGG), was still up 1.5%.
Another bright spot is junk bond ETFs. In fact, 18 of the top 20 fixed-income ETFs of 2016 are U.S. high-yield corporate bond funds. This is a segment of the fixed-income market that's been on a roller coaster of its own.
In January and February, junk bonds tanked amid fears that defaults by energy companies would spike as oil plunged as low as $26/barrel. But when oil prices recovered in the following months, so too did junk bonds. The largest junk bond ETF, the iShares iBoxx $ High Yield Corporate Bond ETF (HYG), swung from a loss of almost 6% in February to a current gain of 12.2%.
ANGL Investing
However, the best-performing fixed-income ETF of the year was the VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL), which surged 25.1% in the year-to-date period.
ANGL targets "fallen angels"—bonds that were recently downgraded from investment-grade to junk status. The hope is that the issuing company has merely fallen on temporary tough times, and that the bonds may be upgraded back into investment-grade status down the line. That strategy paid off handsomely in 2016.
You can reach Drew Voros @ dvoros@etf.com.
More on ETF.com
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4 Views On The Fed’s Hike & What’s Next
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Thinking Can Hurt Your Investments
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:As Bond ETFs Deepen Slide, Pros Offer Advice To Protect Portfolios
ETFs tracking major stock indexes were mixed on Friday amid data showing that groundbreaking on new homes fell sharply in November as the pace of construction slowed.
SPDR S&P 500 ( SPY ) gave up 0.5% on the stock market today . This exchange traded fund, a proxy for the broad U.S. market, sits 1% below its 52-week high of 228.34, set on Monday. It is eyeing a mild loss this week.
The real estate sector of the S&P 500 was flat in morning trade. All other sectors were lower, with materials leading the decline.
The 10-year Treasury yield was higher at around 2.584%, pushing ETFs holding long government bonds such as iShares 7-10 Year Treasury Bond ( IEF ) and iShares 20+ Year Treasury Bond ( TLT ) lower.
Investors have fled bond ETFs in droves after the Fed hiked interest rates for the first time in 2016 on Wednesday and added a third hike to its forecast for 2017.
Fixed income investors were already hurting as the postelection rally saw stocks surge to their best level in years and bond yields spike, driving bond prices down.
"This is no ordinary interest rate cycle," strategists at BlackRock, the firm behind iShares ETFs, wrote recently. "After Donald Trump's surprise win in the presidential election, and the Republicans maintained their majority in Congress, bonds sold off on expectations that higher growth and inflation are ahead."
IShares Core U.S. Aggregate Bond ( AGG ) tested support at around 107 on Friday. This ETF too is poised for a weekly loss, which would be its sixth in a row. It sits 5% below its early July high of 113.27.
BlackRock iShares strategists offered some tips to bond investors grappling with rising interest rates:
Shorten duration to reduce potential for losses when rates. ETFs such as iShares Short Maturity Bond ( NEAR ) and Vanguard Short-Term Bond (BSV) are among the choices.
Tilt credit exposure toward corporate bonds, which typically provide higher yield than Treasuries and may benefit from a more business-friendly postelection environment. ETFs such as iShares 1-3 Year CSJ Credit Bond (CSJ), Vanguard Short Duration Corporate Bond (VCSH) and SPDR Barclays Capital Short Term Corporate Bond (SCPB) fit the bill.
Some ETF investing pros also offered their best bond ETF investing ideas in a recent interview with IBD.
IBD'S TAKE:Low, rising rates could reprise the 1950s bull market.
12 Bellwether ETFs
Here's a look at the performance of major exchange traded funds across key asset classes on the stock market today.
The Relative Price Strength (RS) Rating measures a stock's price performance over the last 12 months vs. all stocks and ETFs, on a scale of 1 to a best-possible 99.
SPDR S&P 500 ( SPY ), 0%, RS 56
PowerShares QQQ (QQQ), -0.5%, RS 54
SPDR Dow Jones Industrial Average (DIA), +0.2%, RS 62
IShares Core S&P Mid-Cap (IJH), +0.6%, RS 67
IShares Russell 2000 (IWM), +0.6%, RS 73
IShares MSCI EAFE (EFA), 0%, RS 39
Vanguard FTSE Emerging Markets (VWO), -0.3%, RS 44
SPDR Gold Shares (GLD), +0.5%, RS 18
United States Oil (USO), +1.2%, RS 56
IShares Core U.S. Aggregate Bond ( AGG ), 0%, RS 28
PowerShares DB U.S.$ Bullish (UUP), -0.2%, RS 54
IPath S&P 500 VIX Short-Term Futures (VXX), -2.6%, RS 1
RELATED:
Best ETF Retirement Income Ideas To Meet Your Needs
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:The Big ETFs Keep Getting Bigger
Drew Voros
ETF.com Editor-in-Chief
The biggest funds by assets typically attract the largest flows each year. In that regard, 2016 was no exception.
The top 10 ETFs measured by asset growth took in $87.1 billion of fresh investor money in the year-to-date period ending Dec. 6. To put that in context, total flows into all ETFs so far this year have been $225 billion.
If there's any conclusion to be reached from these numbers, it's that investors still favor plain-vanilla index ETFs over their more complex counterparts―whether it be smart-beta ETFs, actively managed ETFs or otherwise.
In particular, when it comes to U.S. equities, investors plowed billions into S&P 500 ETFs. Three out of the top four funds on the flows list track the venerable large-cap index, including the SPDR S&P 500 ETF (SPY), the iShares Core S&P 500 ETF (IVV) and the Vanguard S&P 500 Index Fund (VOO)―all with inflows of more than $10.7 billion.
Emerging Market Comeback
In a year that featured concerns about China and "Brexit," it's no wonder investors preferred U.S. equities. Even so, a trio of international equity ETFs also showed up in the top 10.
The Vanguard FTSE Developed Markets ETF (VEA), which tracks developed-market stocks outside the U.S., had inflows of $8.8 billion in the year-to-date period.
At the same time, two low-cost emerging market ETFs—the Vanguard FTSE Emerging Markets ETF (VWO) and the iShares Core MSCI Emerging Markets ETF (IEMG)—made an appearance on the list, with inflows of $8.8 billion, and $6.5 billion, respectively.
Gold ETF GLD losing Luster
Meanwhile, three nonequity ETFs found themselves on the list. The iShares Core U.S. Aggregate Bond ETF (AGG) took in $10.9 billion so far this year. AGG provides exposure to the market of U.S. investment-grade bonds, weighted by market value.
The iShares TIPS Bond ETF (TIP) was another popular bond fund, with inflows of $6.6 billion. TIP holds Treasury inflation-protected securities, a type of U.S. government bond that protects investors in a rising-rate environment.
The SPDR Gold Trust (GLD) is another inflation-hedge in the top 10. The physically backed gold ETF was at the top of the flows leader board for much of the year, but fell down the ranks rapidly in the weeks following Donald Trump's victory at the polls. A post-election spike in interest rates and the U.S. dollar led GLD to lose some of its luster.
Incidentally, GLD is the most expensive ETF on the top inflows list, with an expense ratio of 0.40%. All the other funds in the top 10 have an expense ratio of 0.20% or less.
Top ETF Issuer Growth
The top three providers—iShares, Vanguard and State Street Global Advisors—each saw asset growth and maintained their lead; no surprises here.
The firm with the most impressive asset growth in 2016 was Van Eck, which saw a 50% jump in assets under management in under 12 months.
The issuer behind 58 ETFs in the market today started the year as the 11th-largest ETF provider in the country, with roughly $18.9 billion in total assets. Today Van Eck ETF assets are nearing $30 billion—up more than $9 billion since Dec. 30, 2015. The asset gains, which reflect net creations and performance, bumped Van Eck up two spots in our ETF League Table, to No. 9.
Leading the firm’s rise were inflows into the VanEck Vectors Gold Miners ETF (GDX) totaling $3.5 billion year-to-date. GDX was, in fact, the most popular ETF in 2016 not offered by one of the top three issuers, coming in at No. 23 in the ranking of biggest net creations year-to-date.
Here are the top ETF issuers ranked by assets, as of Dec. 7, 2016, and some of the trends seen in the space:
Drew Voros can be reached at dvoros@etf.com.
More on ETF.com
The Oil Bet Of UWTI(F): A Fool And His Money
What Investors Got Wrong In 2016
How A White Label ETF Provider Works
The Investor’s Carnival Game: Market Timing
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:Dealing With Challenging Return Expectations In Bond ETFs
The nature of investing is one that we are constantly looking in the rear-view mirror to anticipate what our expectations are for the future. This often leads to considerable hopes that existing trends will extend indefinitely or that we will be able to easily spot any rough spots on the road ahead.
Bond investors have likely felt a sense of building confidence over the years as low volatility and global risk aversion have buoyed fixed-income prices. The relative consistency of capital growth, coupled with the “lower for longer” outlook of interest rates, has created a complacent atmosphere overall.
However, the unintended consequence of steadily rising bond prices is the depression of interest rates to historic lows. This in turn deteriorates future return expectations to some of their lowest levels in decades.
The latest data from Research Affiliates 10-Year return calculations puts core U.S. bond indexes at a real expected return of just 0.20%. This essentially means highly diversified funds such as the Vanguard Total Bond Market ETF (BND) and iShares Core U.S. Bond Market ETF (AGG) will experience very little growth over the next decade.
Those same expectations can be extrapolated to individual sectors of the bond market as well. Investment grade corporate bonds, municipal bonds, and even mortgage bonds are typically sensitive to changes in interest rates.
Additionally, long-term Treasury bond funds like the iShares 20+ Year Treasury Bond ETF (TLT) are expected to experience heightened volatility and net losses overall. If the previous five years is any indication of interest rate volatility, then certainly this type of ultra-sensitive fund is in for a wild ride.
The specter of sideways or rising interest rates is a challenge that many fixed-income investors haven’t had to deal with during their tenure in the markets. Bonds have always been a reliable moderator of risk and have experienced very few negative years over the last several decades.
The most recent bout of anxiety was experienced during the taper tantrum of 2013, when the 10-Year Treasury Note Yield rose from 1.6% to 3% in a period of nine months. In hindsight, that event was relatively short-lived, orderly in its path, and setup an excellent buying opportunity.
We have already started to see a notable uptick in interest rates from the 2016 lows as well. It’s far too early to tell if this is the start of a new trend or just a blip on the radar. However, there are some strategic ways to consider adjusting your portfolio or mindset accordingly.
Keep a rational perspective - Remember that data-driven assumptions are just that – assumptions. They are not guaranteed to come to fruition and are based on varying historical regressions that can change over time. The actual results may be better, worse, or even spot on from where we stand today. If you do decide to make a change to your portfolio, make sure it’s carefully planned and executed with these perceptions in mind.
Set your expectations low. Bonds don’t trade in a vacuum and are susceptible to changing dynamics that may play out over several years or even decades. Even if you don’t make any changes to your portfolio, you are likely better off if you moderate your long-term return expectations for this asset class. That way you won’t be disappointed if fixed-income doesn’t make much headway in the intermediate-term. Ultimately, bonds can still provide a solid stream of income and may play an important role in reducing the volatility of other assets with a historical penchant for higher risk.
Enhancing your diversification – One way to mitigate interest rate risk in your core or high-quality bond funds is to consider other avenues of diversification. This means placing a portion of that money in other sectors or asset classes with varying risk characteristics. If your expectation is for continued growth in the economy, then stocks or credit sensitive bonds may be appealing. Some investors may find alternative investments or active management to be an attractive option versus a passive bond index as well.
The bottom line is that investors can make subtle adjustments to their fixed-income exposure to reduce their interest rate risk without abandoning the asset class altogether. Furthermore, preparing in advance for below-average returns can help broaden your outlook to other investment opportunities or simply adapt to a new environment.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:Zacks Podcast Highlights: Higher Interest Rates Are Coming, How Do Investors Prepare?
For Immediate Release
Chicago, IL - Interest rates are on the rise and this could be a rough period for bond investors. If you are concerned about how to prepare your portfolio in this environment, make sure to listen to this podcast. In this edition of the Dutram Report, Eric Dutram talks with Bryce Doty of Minneapolis-based SIT Funds to find out what is in store in the months ahead. Bryce discusses some strategies for investors in this difficult time, as well as key issues that need to be your focus in order to hedge your bets in this rising rate world. To listen to the podcast, click here: ( https://www.zacks.com/stock/news/233635/higher-interest-rates-are-coming-how-do-investors-prepare )
In this edition of the Dutram Report, we take a closer look at the fixed income market and the looming storm clouds on the horizon for investors.
With interest rates finally starting to rise, bond investors are beginning to feel the pain. Investors in broad bond market products like the iShares Core US Aggregate Bond ETF (AGG), the Vanguard Intermediate-Term Bond ETF (BIV), and the iShares 7-10 Year Treasury Bond ETF (IEF) are all seeing red over the past month, with the prospect of more losses on the horizon if the Fed raises rates this year.
What is an investor to do in this environment?
For a great discussion of what investors can do, we managed to speak with Bryce Doty of Minneapolis-based SIT Funds for some insights. Bryce is a senior portfolio manager at the firm, overseeing roughly $7 billion in fixed income investments, so he definitely knows a thing or two about the bond world.
In our discussion, Bryce talks about his outlook for the Fed, possible changes to interest rates in the near term, and his expectations for how this will impact bond investors. Bryce also talks about the likelihood of a bond bull market being over and what that might mean to us to close out 2016.
Additionally, Bryce talks about his company's Sit Rising Rate ETF (RISE) and how this product can be used to hedge investors' risks in the bond world, as well as the strategies that the product uses to accomplish this task. Much of this discussion centers on the product's target of a negative 10-year duration bond portfolio, and how this can be used to balance out what is likely to be a poor return for unhedged fixed income investors should the Fed follow through and hike rates to close out 2016.
And for more insights from Bryce and a broader discussion of the bond world, check out this edition of the Dutram Report !
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SIT-RISING RATE (RISE): ETF Research Reports
ISHARS-CR US AG (AGG): ETF Research Reports
ISHARS-7-10YTB (IEF): ETF Research Reports
VANGD-INT TRM B (BIV): ETF Research Reports
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Zacks Investment Research
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:Higher Interest Rates Are Coming, How Do Investors Prepare?
With interest rates finally starting to rise, bond investors are starting to feel the pain. Investors in broad bond market products like the iShares Core US Aggregate Bond ETF (AGG), the Vanguard Intermediate-Term Bond ETF (BIV), and the iShares 7-10 Year Treasury Bond ETF (IEF) are all seeing red over the past month, with the prospect of more losses on the horizon if the Fed raises rates this year.
What is an investor to do in this environment?
Fortunately, for this edition of the Dutram Report , I managed to speak with Bryce Doty of Minneapolis-based SIT Funds for some insights. Bryce is a senior portfolio manager at the firm, overseeing roughly $7 billion in fixed income investments, so he definitely knows a thing or two about the bond world.
In our discussion, Bryce talks about his outlook for the Fed, possible changes to interest rates in the near term, and his expectations for how this will impact bond investors. Bryce also talks about the likelihood of a bond bull market being over and what that might mean to us to close out 2016.
Additionally, Bryce talks about his company's Sit Rising Rate ETF (RISE) and how this product can be used to hedge investors' risks in the bond world, as well as the strategies that the product uses to accomplish this task. Much of this discussion centers on the product's target of a negative 10-year duration bond portfolio, and how this can be used to balance out what is likely to be a poor return for unhedged fixed income investors should the Fed follow through and hike rates to close out 2016.
You should also feel free to check out their site for a great interest rate defense calculator which can show you what the impact of higher rates will be on your fixed income instruments, as well as the current duration of your bond portfolio. And for more insights from Bryce and a broader discussion of the bond world, make sure to listen to this edition of the Dutram Report !
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ISHARS-7-10YTB (IEF): ETF Research Reports
VANGD-INT TRM B (BIV): ETF Research Reports
ISHARS-CR US AG (AGG): ETF Research Reports
SIT-RISING RATE (RISE): ETF Research Reports
To read this article on Zacks.com click here.
Zacks Investment Research
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:iShares ETF: Top Choices for Your Portfolio
Image source: Getty Images.
Chances are that you have seen an iShares ETF among the many choices in your retirement plan. BlackRock , which owns the iShares brand, manages about $925 billlion of ETF assets, making it by far the largest sponsor of exchange-traded funds and index funds for stocks and bonds alike.
Here's how you could build a diversified portfolio of stocks and bonds with just seven iShares ETFs.
iShares ETF choices for domestic stocks
Some of iShares most competitive funds are those that track domestic U.S. stocks. Investors can assemble a mix of small, mid-, and large-cap stocks with just three iShares ETFs that track common market-cap based indexes.
Data source: iShares.
These three funds span virtually all of the stocks listed on the market, from the very largest of large-cap stocks ( S&P 500 ) to the very smallest ( Russell 2000 ).
The iShares Core S&P 500 ETF (NYSEMKT: IVV) simply seeks to track the performance of the S&P 500 index. Companies included in the S&P 500 account for a disproportionate share of total U.S. stock market value, collectively making up about 81% of the total value of U.S. stocks in 2016. What you see is what you get -- this fund hopes to simply provide a return equal to the S&P 500 index minus fees. Penny-pinching investors might consider Vanguard 500 Index ETF (NYSEMKT: VOO) as a less-expensive alternative, as it carries an annual expense ratio of just 0.05% of assets, but the difference is relatively marginal.
iShares Core S&P Mid-Cap ETF (NYSEMKT: IJH) is one of the very best, carrying the lowest expense ratio of any fund that tracks the S&P 400 Mid-Cap Index . The 400 companies that make up the portfolio had a market capitalization of $1.4 to $5.9 billion, and account for roughly 7.6% of the entire U.S. stock market value, making this fund a great way to get very focused exposure to medium-sized companies listed on American markets.
iShares Russell 2000 ETF (NYSEMKT: IWM) tracks the Russell 2000 index of small-cap stocks, which is made up of the 2,000 smallest stocks of the Russell 3000 index. Companies in the Russell 2000 make up about 8% of the total value of U.S. stocks, and many regard the index as the U.S. small-cap index. Though the fund isn't a leader on fees -- Vanguard Russell 2000 Index Fund ETF Shares charges 0.15% per year -- the iShares fund has been the better-performing of the two. An interesting quirk in the world of small caps has led to ETFs that have outperformed the indexes they are supposed to underperform after fees and expenses are included.
iShares ETF choices for foreign stock
Investing in foreign stocks with iShares ETFs is as easy as looking to two of the fund company's largest ETFs.
Data source: iShares.
The iShares Core MSCI EAFE ETF (NYSEMKT: IEFA) tracks the MSCI EAFE IMI , which includes small, medium, and large stocks in 21 different countries in Europe, Australia, and Asia, purposefully excluding stocks listed in North America (you won't find U.S. or Canadian-listed companies in this fund). Companies listed in Japan, the U.K., and France made up the largest share of assets at the time of writing, accounting for approximately 52% of assets. This fund is one of the least-expensive developed market funds that holds companies of all sizes, from small caps to large caps.
Where the iShares Core MSCI EAFE ETF avoids emerging markets, the iShares MSCI Emerging Markets ETF (NYSEMKT: IEMG) invests only in emerging market stocks. This fund invests in companies of all sizes in 23 different emerging markets around the globe, with China-, Korea-, and Taiwan-listed companies making up more than half the fund's assets at the time of writing. Consider it something like a total stock market index for emerging market stocks, given that the fund seeks to invest in 99% of emerging market stocks by market cap. Its diversification is best exemplified by the fact it currently holds more than 1900 individual investments.
iShares ETF choices for bonds
Any diversified portfolio should hold stocks and bonds. iShares has some particularly attractive options in the world of bonds, with one fund that's heavy on U.S. government bonds and a top corporate bond ETF that takes a little more risk for higher returns.
Data source: iShares.
Think of the iShares Core U.S. Aggregate Bond ETF (NYSEMKT: AGG) as a catch-all fund for bond investors who want one simple fund to rule them all. Though the fund has a bias toward low-yielding government bonds (about 65% of assets are held in U.S. Treasury and government-backed mortgage-backed securities), its average holding yields about 1.9% due to the fact the average bond has more than seven years to maturity.
Investors who want a little higher returns might prefer the iShares iBoxx $Investment Grade Corporate Bond ETF (NYSEMKT: LQD) , which avoids government securities altogether. But don't get the idea that it takes undue risk for higher returns: This fund invests only in investment-grade rated bonds, holding about 55% of its assets in bonds rated A or better. A little incremental risk results in higher yields, as its underlying bonds have an average yield of 2.97% at the time of writing.
A one-stop shop
You could theoretically create a very diversified portfolio with iShares ETFs. Its domestic stock ETFs allow you to allocate your investments to small-, medium-, and large-cap stocks, and its foreign ETFs offer broad diversification across stocks in developed and emerging markets. Its bond ETFs allow you to take a little risk off the table by buying a broad basket of U.S. government and high-rated corporate grade bonds in the United States.
All in all, with just seven ETFs listed in this article, you could have a very diversified portfolio of thousands of different stocks and bonds, and pay less than 0.20% of assets in fund fees and expenses each year. You'd be hard pressed to do much better than that.
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Jordan Wathen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:Dividends & Income Digest: These Aren't Your Grandpa's Investments - Adam Aloisi On Bonds
By SA Editor Robyn Conti :
After a bit of a hiatus in August, the High Yield Income Ideas series is back. This time, Adam Aloisi gives us the lowdown on bonds. He's written extensively on income investing for Seeking Alpha, focusing most recently on broad dividend equity strategies, REITs, closed-end funds and market sentiment relative to dividend growth investing.
With bonds, Adam says, no matter how "safe" they may seem, you still need to know what you're doing. In other words, these aren't your granddad's bonds - you need to have a pretty sophisticated knowledge level before taking the plunge into these so-called conservative instruments. Not to worry, though. Adam provides plenty of food for thought here, and some useful questions investors can ask themselves to help make sure they understand what they're getting into, and why.
Seeking Alpha: What is your perspective on bonds in general right now?
Adam Aloisi: Given the multi-dimensional properties of bonds, it's a bit difficult to say anything one-dimensional about them. One must remember that there is always huge difference regarding the risk attributes of a bond with 1-2 year maturity versus one with 10-20 year maturity. Similarly, there is huge difference between the principal risk of a AAA investment grade bond and a bond with CCC "junk" credit. Critics tend to use a very wide brush over a space where something much more fine-tuned must be utilized.
Still, with yields continuing to hover near historic lows, there has clearly been little in the way of real income value here since we entered ZIRP, particularly in the investment grade space. However, on a total return level, if one timed the rather dramatic rate swings to a profitable tune over the past several years, they have done quite well.
Either way, individual bonds still retain diversification and capital preservation purpose element in investor portfolios. But, given the lack of income return and the prospect for higher rates, it's understandable why some investors who might otherwise overweight an income portfolio with bonds have skewed more towards dividend equity.
I usually note that the real value of bonds probably won't be realized during a bull market. It usually takes a bear to understand true appeal outside of income realization.
SA: What is the current range and average yield for bonds? What are the potential risks directly related to the sustainability of these yields?
AA: As always, one can find a huge range of bond yield. Today, in the Treasury space, you can buy a 6-month piece for about 50bps (0.50%) or 30-year paper for 2.4 percent. On the other side of the credit risk spectrum, you can find HY (junk) bonds with yields in the teens or even higher.
Day to day yield fluctuation in the bond market is a result of combined action between general bond market sentiment, bond duration sensitivity, and security specific supply/demand. Longer-term price and yields may be also be impacted by credit agency action and general sector appeal/disdain, amongst other things.
SA: How do the yields compare with historical yields, say, over the past 30 years? What are the reasons for where these yields are today? Where is the sector headed in terms of yield, in your opinion, and why?
AA: If we turn the clock back to the Reagan years, investment grade yields today are puny to say the least. The slow but steady decline is probably attributable to a number of factors. Low inflation through the years, restrained growth, and two severe economic bubbles over the past 20 years would seem to top the list. Many see a credit bubble today, with indeterminate outcome.
My personal view is that bond yields will remain suppressed. While the Fed has been leaning hawkish for several years now, the bond market clearly has, of late, been in disagreement with that assessment. While there may be some signs of improvement, we continuing to see stagnation in middle America, which I find most concerning. Growing social disdain, probably overly tightened lending standards, deep unfunded public pension liability, and government gridlock aren't creating a robust baseline for growth, in my view.
As we saw in 2013, however, this does not mean that we won't see isolated yield rises in the bond market from time to time. And whether they stick or not, being long (duration wise) in the bond market could present plenty of opportunity cost. Investors should consider whether the next stop for the 10-year Treasury will be 1% or 2.5%. Frankly, I'd be inclined to straddle that position.
SA: Beyond investor yield appetite, what are the potential trends/risks/pitfalls to bonds from macroeconomic issues, regulations, and rising interest rates? How big, for example, is Fed uncertainty with regard to bonds right now? Not to wax too political, but how does the uncertainty of an election year, especially one as contentious as that we are seeing play out between Hillary Clinton and Donald Trump, impact bonds?
AA: As I noted above, bond yields are majorly impacted by discounted macroeconomic perception. In terms of the Fed, I'd argue that they've become somewhat irrelevant near term given the indecision and lack of conviction that seems to predominate the group, although clearly, just like EF Hutton, people tend to listen and place knee-jerk trades based on whenever Janet Yellen and crew have something to say.
As for our choice of president, which I personally consider somewhat "unfortunate," again, while there are obvious concerns swirling, presidents can't unilaterally alter pharmaceutical capitalism or build insulating walls without Congressional and/or judicial consent. So, I'd probably opine that Oval Office concern has probably entered into bond market thinking to an extent, but probably not to a very material level.
SA: What opportunities do you see in terms of specific bonds? Are there any you'd recommend steering clear of right now, and why? Are there other sectors you prefer over bonds, and why?
AA: As I noted above, given the multi-dimensional nature of the group, it's tough to offer blanket recommendations. In general, I've looked at the lower end of investment grade out no more than a decade over the past several years as somewhat of a "sweet spot." Since the Brexit vote, I've actually reduced exposure and duration a bit, seeing panic buying for the first time since 2013. In terms of specific bonds, I'd probably look to buy issues on days where companies issue bad news. However, I can't support being an aggressive buyer of anything right now. Energy bonds have high yields, but that's clearly a high-risk proposition, as the world continues to move toward alternative energy sources. For aggressive types, I wouldn't avoid exposure, but even for them, I'd probably advise limiting it.
As far as allocation preference, the case for a cash build has become fairly strong, from my perspective. We have had this odd phenomenon in the market where both stocks and bonds both rally some days, and both get hit some days. There appears some view that investors are now viewing dividend stocks as a primary income vehicle and bonds as a primary capital growth trade vehicle. Caveat emptor has taken on new meaning in my book.
SA: What are the primary differentiators of quality bond investments? What processes/considerations do you implement when evaluating potential "buys"? Conversely, what are your considerations for selling, or "when to get out"?
AA: Again, what constitutes a "quality" bond investment is going to vary from investor to investor. Some may never want to gravitate out of the relative safety of upper-end investment grade bonds. Total return investors will want to identify the "sweet spot" of yield that I noted above - i.e., what credit and what duration range offer the most bang for your buck in terms of yield to maturity.
Going really long on the yield curve or taking a bet on something teetering on bankruptcy probably won't be part of that repertoire. Traders will see quality opportunity when near-term volatility and sentiment reach extremes, either in terms of credit or duration. If I'm looking for a bond, I'll do screens to identify value. As a total return investor, I'll generally not buy a bond with the intent of necessarily selling it. However, if I get in at a good price, and something good happens while I'm holding (credit upgrade, a dramatic drop in rates), I'll certainly consider selling positions and either rotating into something I perceive with more value or holding as cash until something I really like comes along. A disciplined approach, as in all other areas of investing, is critical.
SA: Similarly, what types of due diligence do you think are critical for investors before investing in bonds? What are your best resources (i.e., websites) you use to accomplish this?
AA: You'll need some level of sophistication if you are going to buy individual bonds. This isn't something where you wake up one morning with no background and go at it. There is a multitude of information on the Internet for newbies and more sophisticated types alike. The first piece of the puzzle is to consider why you are investing in bonds in the first place. Income? Tax sheltering? Total return? Capital preservation? From there you can make allocation decisions - how much should of my portfolio should be in bonds? What credit level am I comfortable with? How much duration risk can I shoulder? Do I need capital to mature at specific points? Can I consider tax-free munis or zero-coupon bonds? Do you understand the concept of a bond ladder and the somewhat rate agnosticism associated with it?
Even if you are risk intolerant and opt for high grade bonds, you need to understand the concept of opportunity cost relative to buying a long-term bond today and what happens to it when rates skyrocket. And despite the relatively low rate of high yield default in recent years, do you understand the potential risks of ultra-low credit, should a crisis unfurl?
Once you have good baseline understanding of the asset in general terms, you are in a better position to start crafting a portfolio of individual bonds, or buying pooled products (ETFs, CEFs) for perhaps some targeted exposure. The CEF, in particular, is a complicated animal of its own that will once again take time to understand.
Finally, even if you think bonds are a waste of time or not appropriate for your portfolio today, there may come a time where they will become more appropriate. And you'll want to be ready.
Now it's your turn to weigh in. Do you agree with Adam's take on bonds? What bonds are you buying, if any? What percentage of your portfolio, if any, is allocated to bonds, and why?
And now, on to the week's Dividends & Income news and analysis:
VEREIT: This Was Bad News and The Dividend Investor's White Lie: All I Care About Are Dividends by Reuben Gregg Brewer
One Of The Most Predictable REITs On My Buy List by Brad Thomas
Wells Fargo Takes A Hit: What Now For Dividend Investors? by Simply Safe Dividends
Costamare Inc.: Another Preferred Dividend Opportunity Revisited - An Update by Norman Roberts
Finding The Growth In DGI: Dividend Champions by Eric Landis
The 3 Most Important Things Dividend Investors Need To Know About Wells Fargo's Fake Account Scandal by Dividend Sensei
Dividend Growth Investors, Wake Up! by Brian Grosso
Why I Sold Wells Fargo by September on the Henry's Fork
The Mindset Of A Dividend Growth Investor by The Part-Time Investor
Dialing Up The Phone Company Yield by Crunching Numbers
See also Buy Sanderson Farms Before It Pays A Special Dividend on seekingalpha.com
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:6 Best ETF Picks For Q4 And Beyond: Seizing Global Growth
Bid the lovely summer calm adieu. Most ETF investors watched their portfolios coast along for roughly two months until the financial markets pulled back and volatility spiked, all over again.
Stocks, bonds and even traditional safe havens came under selling pressure from an enigmatic Fed in recent trading sessions. As the Federal Reserve kept the market guessing about its next move on interest rates, portfolios hit a squall.
SPDR S&P 500 ( SPY ), a proxy for the broad U.S. market, ended 2.4% lower in the month ended Sept. 13 while setting fresh all-time highs along the way. The largest ETFs that invest in foreign-developed and emerging markets posted losses of 1.7% and 3.6% over the same period, respectively.
IShares Core U.S. Aggregate Bond ( AGG ) gave up 0.8%. SPDR Gold Shares ( GLD ), a commodity ETF, lost 1.3%.
And the shine came right off PureFunds ISE Junior Silver ( SILJ ), whose 210.7% gain year to date is unrivaled among nonleveraged exchange traded funds. It crumbled 17.9% in the past month, a laggard among ETFs.
A tough month held a few ETF market winners too. Among them were bank, energy and internet-focused funds, which advanced as much as 4%.
SPDR S&P Bank ( KBE ) pulled off a 3.4% gain in the month through Sept. 13, rising and sinking along with policymakers' back-and forth remarks on a hike in short-term interest rates.
Among international ETFs, KraneShares CSI China Internet (KWEB) stood out, rising 3.7% as stocks like Alibaba (BABA) and Tencent (TCHEY) flew to their best levels in years .
In this environment, managing risk is key, writes Richard Turnill, BlackRock's global chief investment strategist. He sees certain crowded trades sending short-term danger signals.
"We advocate reducing popular positions where prices have moved beyond fundamentals," he cautioned, naming gilts, or U.K. government bonds, and bond proxies, such as utility stocks, as examples. He likes dividend growers and quality stocks - found in ETFs such as iShares Core Dividend Growth (DGRO) and Vanguard Dividend Appreciation (VIG) -- in a shaky market.
The specter of volatility looms, too, in the minds of two money managers who spoke to IBD about their best ideas for successfully investing in ETFs in the final quarter. While braced for more potential pain, they are focused on finding pockets of growth in tomorrow's markets. Here's what they had to say:
Rob Lutts is chief investment officer at Cabot Wealth Management in Salem, Mass. As fee-only financial advisors, the Cabot team provides investment management services to typically high-net-worth individuals, as well as institutions. The firm focuses on growth-oriented investments and uses ETFs extensively in its strategies. Assets under management: about $565 million.
We expect generally favorable but volatile stock market performance in the fourth quarter. Low interest rates and a stronger economy will generate real earnings growth in the S&P 500 for first time in many quarters. We believe the S&P 500 could trade at 2,350 by year-end.
VanEck Vectors Gold Miners (GDX) invests in global companies involved in gold mining activity. The price of gold had a nearly 50% corrective phase over the past five years. Central banks globally have created more than $12 trillion in fiat money over the last six years that will eventually stimulate a new phase of currency debasement and inflation. Gold is the only currency that cannot be debased by central bankers. Gold prices should rise as demand rises due to currency debasement. Mining companies will have high profits under this scenario.
WisdomTree India Earnings Fund (EPI) offers exposure to a country we like. The Indian stock market, as measured by the Sensex index, has appreciated an average of 17% annually from 1981 to 2015, including 1.5% in dividends. This is 50% better than the 11.4% annual growth seen in the S&P 500 index over the same time period, including dividends.
Prime Minister Narendra Modi has instituted structural changes to the country's legal and regulatory environment that should allow a higher level of growth. We expect annual India GDP growth to increase to 8% or even 9% in the coming years. And we like this fund's focus on earnings and sector exposure (oil and gas is 16%, banks 13% and diversified financial services 13%). We favor financial services, which may be the top sector in India. This fund has the highest weighting in this area.
KraneShares CSI China Internet Fund (KWEB) invests in the expansion of the Chinese middle class via companies in the online technology sector, like Alibaba (BABA), Tencent Holdings (TCEHY), NetEase (NTES) and Ctrip.com (CTRP). The 1.3 billion people of China love to use the internet, and these companies are making it happen. Ignore much of the negative hype around China - this fund holds some great growth companies. We don't see the fund's high concentration of assets in the top stock holdings as a big issue - these are top companies in the internet sector.
Michael Venuto is chief investment officer of Toroso Investments in New York City. The firm describes ETFs as the specialty of its three core business units - wealth advisory, asset management and consulting. AUM: $86.8 million.
We have maintained the position that without further monetary stimulus, U.S. markets are likely to be volatile and provide flat-to-negative returns. That said, we do see opportunities for returns in specific characteristics and unique market niches.
QuantShares U.S. Market Neutral Anti-Beta Fund (BTAL) provides a form of portfolio insurance without the decay and cost associated with many inverse and/or VIX futures-based products. The index behind BTAL is short the high-beta names in the S&P 500, while being long low-beta names. The position provided substantial protection during market downturns, and we continue to build the allocation, as further insurance is needed.
Direxion All Cap Insider Sentiment Shares (KNOW) combines a defensive screen with an alpha-producing characteristic. The index that this ETF tracks screens the S&P 1500 for aggressive accounting and other governance-based metrics in order to avoid future permanent losses of capital like Lehman Brothers or Fannie Mae. Then, it seeks potential alpha through concentrated overweights to securities with substantial insider buying. The ETF has a high active share vs. the S&P 500 and has provided stellar performance.
Emerging Markets Internet & Ecommerce (EMQQ) invests in companies that represent one the greatest growth stories of our generation, at over 35% annualized return on equity. Despite our general negative outlook on U.S. markets, one area where we see potential growth is the emerging market consumer. The beauty of this ETF is that it focuses on the Amazon s (AMZN) (e-commerce) of the emerging markets rather than the Wal-Mart s (WMT) (brick-and-mortars). The ETF has provided positive returns since inception while the broad-based MSCI Emerging Markets index has been negative.
RELATED:
7 Best Picks: Gearing For Inflation
6 Best Picks: Balancing Risk and Returns
6 Best Picks: Investing For Safety And Excitement
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:5 Popular Bond Funds To Sell Now
InvestorPlace InvestorPlace - Stock Market News, Stock Advice & Trading Tips
With all this talk of rising rates, it's surprising that bond funds are doing so well. The largest bond ETF, the iShares Core Total US Bond Market ( AGG ), is up over 4% in 2016 and hasn't paused its bull run throughout the year:
Investors are Hungry for Bonds
Tax-exempt bonds aren't doing as well, but they're still strong. The USAA Tax Exempt Intermediate-Term Bond mutual fund ( USATX ) is up 2% for 2016, and has not pulled back year-to-date, even during February's market meltdown:
Tax-Free Bonds Hold Their Value
When we look at the yields of these funds, their steady performance is even more surprising. At 3.1%, AGG has a better yield than USATX, which pays just 2.3%. Both, however, are meager returns when we consider inflation averages about 3% per year historically:
Stubbornly Low Yields
This has led many investors to seek yields elsewhere, especially in municipal bonds. But that is becoming a crowded trade.
The 10 Best ETFs on the Planet
For example the Fidelity Michigan Municipal Income mutual fund ( FMHTX ) has seen its yield fall below 3% over the year as its price has risen over 2%:
Price Goes Up, Income Goes Down
Again, we're not getting an income stream that can beat inflation - so are we really being compensated for the risk of lending our money to the state of Michigan?
Some investors think this just isn't worth the effort, so they look elsewhere for income. That's led some to corporate bonds. iShares has the biggest investment-grade corporate bond ETF, the iBoxx Investment Grade Corporate Bond fund ( LQD ), which some find attractive because of its incredibly low expense ratio (just 0.15%, versus 0.48% for FMHTX and 0.54% for USATX).
But LQD has problems, too. Its 3.2% dividend yield sits handily above USATX, yet its dividends are taxable income-which means much of the extra yield is taken by Uncle Sam. And that's not the only problem with the fund.
The weighted average maturity of LQD's holdings is over 12 years. This means that the average bond in the fund's portfolio will mature in over a decade, which means LQD is extremely sensitive to interest rate hikes. If Yellen and the Fed raise rates, LQD's bonds will decline in value-and so will the ETF's stock price. That's what we saw last year, when the fund fell nearly 5% as the Fed chattered about rates and finally raised them in December:
Think Bonds are Safe? Think Again
While government bond and total bond funds were a better performer, 2015 wasn't exactly great for them either:
Want Growth? It Ain't Here
In December when the Fed raised rates, the bond market was ready. 2015 was a steady decline in bond funds as traders geared up for the inevitable. But even then, November and December were a shock. U.S. Treasury Yields rose steadily in 2015, until they skyrocketed at the end of the year as investors prepared for the Fed's eventual decision to raise interest rates last December:
Traders Prepare for the Federal Reserve
Unfortunately, traders are not preparing themselves in 2016 as they did last year. Instead, U.S. Treasuries have swung wildly between extremes as the financial markets try to figure out the increasingly cryptic and confusing statements coming out of the Federal Reserve. Add on top of that the uncertainty of Brexit and the upcoming U.S. election, and this year's erratic activity makes a lot of sense:
Market Confusion on Bond Rates
Bond funds should be pricing in this uncertainty, but they are not. The desperate reach for yield has just made these bond funds pricier and pricier, even as the risks get larger and larger.
Total bond market funds demonstrate this issue more than anything. If we look at the Vanguard Total Bond Market ETF ( BND ), we see just how hungry the market is for bonds-despite the risks:
Bond Prices Just Keep Soaring
The market's love for BND is understandable. It's one of the cheapest funds in the world, with an expense ratio of just 0.06%. That's so tiny it's hardly worth thinking about, and is a third cheaper than its bigger competitor, AGG.
But investors need to think about more than just expense ratios. Because of the disconnect between bond fund performance and the real risks to bond funds in the market right now, one needs to be more cautious about buying bonds. You can't just blindly buy the market and wait for it to go up right now-if any of the major risks from the Fed, the U.S. Government, the European Union, or elsewhere show up, bonds will crash.
This doesn't mean we should give up on bonds. But it does mean we need to be selective about our bond purchases. We need to buy bond funds that are trading at a significant discount to the value of their holdings. That way, no matter what happens to the bond market, we are not paying full retail price for our holdings.
3 Best Vanguard Funds to Hold Through 2020
The other thing we want is a higher yield. Sorry, but 3% just isn't going to cut it in a world of rising food prices. Oil prices have shot up 26% in 2016-which means gas prices will go up. So will delivery costs, food, consumer goods, and just about everything else.
Everything is Set to Get More Expensive
In such a world, I don't want a 3% income stream. I want 8%. Sound impossible? It isn't. In fact, there is a group of bond funds that are yielding 8% and are trading at a significant discount to the value of their holdings. That's why one fund manager nicknamed the "Bond God" has been aggressively recommending these funds over the last few months. But you don't have to be a billionaire like him to get your hands on these discounted assets paying dividends of 8% or more .
How do you do it?
My new report reveals where to find these funds, how to understand their inner workings, and why they are trading at a discount. I'll also show you how to manage the risk by choosing which funds to buy and when. If you're interested in these bond funds, and want to learn why most retail investors don't know they exist, click here for my top three plays right now, including recommended buy prices.
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The post 5 Popular Bond Funds To Sell Now appeared first on InvestorPlace .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:The Zacks Analyst Blog Highlights: iSharesMSCI Emerging Markets ETF, ETF PowerShares QQQ Trust, iShares iBoxx $ Investment Grade Corporate Bond, iShares Core U.S. Aggregate Bond and Industrial Select Sector SPDR Fund
For Immediate Release
Chicago, IL - September 01, 2016 - Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include iSharesMSCI Emerging Markets ETF ( EEM ), ETF PowerShares QQQ Trust ( QQQ) , iShares iBoxx $ Investment Grade Corporate Bond ( LQD ), iShares Core U.S. Aggregate Bond ( AGG ) and Industrial Select Sector SPDR Fund ( XLI ) .
Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free .
Here are highlights from Wednesday's Analyst Blog:
Following an outstanding July, August has been moderate for U.S. equities. Still-low Treasury yields despite an improving U.S. economy seem to have dominated investor sentiment. However, strengthening Fed rate hike bets has left a last-minute impact on the ETF monthly asset report and could prove to be game changers in the days ahead.
Let's find out the top gainers and losers in terms of asset growth in August (as of August 29, 2016) (source: etf.com ).
Emerging Markets Earns Attention
The emerging markets (EM) equities have been at the helm in August with the ultra-popular emerging market ETF iSharesMSCI Emerging Markets ETF ( EEM ) taking the top spot. EEM has attracted about $2.19 billion in assets in August while iShares Core MSCI Emerging Markets ETF (IEMG) has garnered over $1.15 billion in assets in the month (as of August 29, 2016), taking the fifth spot. Yet another EM ETF Vanguard FTSE Emerging Markets ETF(VWO) has pulled in close to $1.15 billion in assets in the month.
Better growth prospects, signs of stabilization in China, comparatively higher yield and more resilience to the Fed rate hike bets than what we saw in 2013 has made this segment a winner.
Tech-Laden Nasdaq: A Bright Spot
Tech-heavy Nasdaq-100-based ETF PowerShares QQQ Trust ( QQQ) has gathered about $1.61 billion in assets in August. A slew of positive earnings releases and the return of risk-on sentiments to the market (after the Brexit induced sell-off) on a flurry of upbeat U.S. economic data favored this growth-oriented fund. The fund has about 57% exposure to the IT sector (read: Time to Buy These Tech ETFs? ).
Corporate Bond ETFs in Favor
Since yields on the 10-year U.S. Treasury bonds remained at very low levels, the lure for higher-yielding corporate bond ETFs returned. Thus, iShares iBoxx $ Investment Grade Corporate Bond ( LQD ) has attracted about $1.23 billion in net assets in the month.
Also, the aggregate bond ETF iShares Core U.S. Aggregate Bond ( AGG ) has accumulated about $933.0 million in assets. Notably, AGG puts about 38% of its assets in U.S. Treasuries while corporate bonds also grab a major share of it. Its credit quality is high with about 71% bonds being AAA-rated.
Industrial Sector is Back
Industrial Select Sector SPDR Fund ( XLI ) has added about $767.6 million in assets in August as the sector is on a recovery mode. Impressive data for new orders for U.S. manufactured capital goods lately boosted investor sentiment (read: Time to Play These Industrial ETFs? ).
Preferred Stock ETF: Another Winner
As bets over a sooner-than-expected rate hike strengthened at the end of the month, investors rushed to high-yielding preferred stock equities ETFs like iShares U.S. Preferred Stock ETF(PFF) . The fund has amassed about $753.7 million in assets in August (read: ETF Winners & Losers Post Jackson Hole Meet ).
SPY: A Surprise Loser
SPDR S&P 500 ETF (SPY) has lost about $1.25 billion in assets in the month. Investors probably have shown more interest in Vanguard S&P 500 Index Fund(VOO) which gathered about $1.59 billion in the month till August 29, 2016. Investors should note that VOO charges about 5 bps in fees while SPY charges about 9 bps (net expense ratio). A lower expense ratio could be an advantage of VOO over SPY as both products have the same theme.
Hedged Japan: A Spoiler
WisdomTree Japan Hedged Equity Fund( DXJ) shed about $1.08 billion in assets as Japan's economy grew less than expected in Q2. A stronger yen was also a dampener.
Europe Peters Out
WisdomTree Europe Hedged Equity Fund(HEDJ) , iShares MSCI Eurozone ETF (EZU) and Deutsche X-trackers MSCI Europe Hedged Equity ETF( DBEU) shed about $551.4 million, $543.7 million and $396.7 million in assets. Slower growth was probably an overhang for this region.
Low Volatility ETFs Fizzle
Two low volatility ETFs, namely iShares Edge MSCI Min Volatility USA ETF(USMV) and PowerShares S&P 500 High Dividend Low Volatility Portfolio(SPHD) have shed about $412.1 million and $386.2 million in assets in August. Since the broader markets are relatively steady since the start of Q3, low volatility ETFs have lagged slightly.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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ISHARS-EMG MKT (EEM): ETF Research Reports
NASDAQ-100 SHRS (QQQ): ETF Research Reports
ISHARS-IBX IG (LQD): ETF Research Reports
ISHARS-CR US AG (AGG): ETF Research Reports
SPDR-INDU SELS (XLI): ETF Research Reports
To read this article on Zacks.com click here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:ETF Asset Growth On Pace With 2015
Drew Voros
ETF.com Editor-in-Chief
In terms of asset growth, U.S.-listed ETFs are keeping pace with last year, the difference though this year is where those assets are going.
Year-over-year, assets in ETFs are up nearly 14%, but the growth has not been uniform across every asset class, even if every asset class has made gains. In terms of annual growth, this year is on par with 2015, which saw assets grow 13.7% from Aug. 18, 2014, to Aug. 17, 2015.
U.S. fixed income, the third-largest asset class, has seen some of the strongest growth, up by almost $100 billion to $400 billion, an increase of more than 31%. In contrast, U.S. fixed income saw only a 16.4% increase for the 12-month period ended Aug. 17, 2015, meaning growth in U.S. fixed-income ETF assets has nearly doubled.
U.S. equity ETF assets, while representing more than half of the total $2.4 trillion in ETF assets, are up just 13% over the past 12 months. Assets in this category were up almost 17% over the one-year period ended Aug. 17, 2015.
International equity assets have remained essentially flat, at $513 billion in assets under management, despite representing the majority of launches over the past 12 months. The asset class’ growth has decelerated from the 12-month period prior to that, when its assets under management were up 13%.
Int'l Fixed Income Growth Leader
International fixed income, however, has seen almost 60% asset growth, jumping from $26 billion in AUM to nearly $41 billion. That’s up significantly from the 12 months ended Aug. 17, 2015, when international fixed income saw growth of only 5.2%.
Commodities, too, have had an excellent 12 months, with assets rising approximately 50% to $76 billion, mainly driven by strong performance in the precious metals space. That’s a huge change from the 12 months ended Aug. 17, 2015, when assets were down 23%.
Alternatives, although a fairly tiny asset class at $4.3 billion in assets, is still up some 32% year-over-year, while currency assets are up some 13% to $1.4 billion. And asset allocation is up 11% to $6.4 billion in total assets. Alternatives assets climbed just 10% during the 12-month period ended Aug. 17, 2015, but at the same time, currency ETF assets were down 20%. Asset-allocation ETF assets grew 14% during that period.
The leveraged and inverse fund categories saw the smallest degrees of growth, with leveraged ETF assets up 7% over the 12 months to $25.6 billion. Inverse ETF assets were up just 6% at $19.4 billion.
Leveraged ETF asset growth is almost flat with the category’s growth for the 12 months ended Aug. 17, 2015, but inverse ETF assets were down nearly 14% during the same period.
"While ETF growth was lackluster at the beginning of the year, with generally weak growth or just plain outflows in many classic 'risk' assets, the second half of the year is coming on strong. July in particular was incredibly strong, and as the market rallied, investors used ETFs to express their bullish opinions in every large asset class and most corners of the market. It's pretty rare you see so many segments gaining assets at the same time," said FactSet Director of ETFs Dave Nadig.
Below are snapshots of the total assets in each asset class at 12-month intervals.
The Year’s Hottest Emerging Market Bond ETF
One force powering the growth of international bond ETFs is a single ETF, the iShares JP Morgan USD Emerging Markets Bond ETF (EMB).
So far in 2016, EMB has raked in $4.35 billion in net assets—huge inflows for a fund that has $9.7 billion in total assets today. EMB was the fifth-most-popular ETF in July based on creations, and is ranked among the 10 biggest creations we’ve seen year-to-date.
The fund’s performance has a lot to do with its popularity. Compared to the U.S. stock market and an aggregate bond strategy such as the iShares Core U.S. Aggregate Bond ETF (AGG), EMB has seen impressive gains after being stuck in a sideways rut for most of 2014 and 2015.
The fund’s current distribution yield is upward of 5%—more than double the yield of AGG, at 2.1%—and with an equity beta that’s only 0.29—far less volatile than the equity market.
EMB’s biggest country exposures are Mexico, Indonesia and Russia in a portfolio that allocates to more than 30 countries.
Vanguard Files For Active ETFs
Vanguard has filed for exemptive relief to offer transparent actively managed ETFs that are not share classes of existing mutual funds. It’s an interesting distinction given that all of Vanguard’s 70 index-based ETFs are share classes of its passively managed mutual funds.
The firm is known for its index-based funds, both mutual funds and ETFs. However, the latest exemptive relief filing suggests the firm is looking to branch further into active management.
Vanguard is bucking the trend by filing for actively managed transparent ETFs. Most active managers don’t like the idea of daily disclosure for fear of front-running.
To get the latest ETF news in your inbox, subscribe to our daily ETF newsletter!
Drew Voros can be reached at dvoros@etf.com.
More On ETF.com
Smart Beta 2.0: Multifactor ETFs, Here's How They Work
What The New Real Estate Sector Means For ETFs
5 Most Popular New ETFs Of 2016
Chinese Investors Flock To Robo Advisors
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:Reading Market Tea Leaves With a Big Biotech ETF
The iShares Nasdaq Biotechnology ETF (NasdaqGS: IBB ) , which tracks the Nasdaq Biotechnology Index, and rival biotechnology exchange traded funds, have recently been on the mend. Continued good fortune for this previously struggling set of ETFs could be telling regarding investors' risk appetite heading into 2016's latter stages.
IBB, the largest biotech ETF by assets, is heavily allocated to the largest biotech names. For example, Amgen (NasdaqGS: AMGN), Gilead Sciences (NasdaqGS: GILD) and Celgene (NasdaqGS: CELG) combine for about a quarter of IBB's weight.
Investors who are closely watching the presidential race will want to keep an eye on Democratic nominee Hillary Clinton in the coming months. If Clinton makes her way to the Oval Office and implements more regulation on pharmaceutical drug pricing, biotech companies may underperform the broader market.
SEE MORE: BBP - An Outperforming Biotechnology ETF
That said, Republican nominee Donald Trump has also spoken out against high pharmaceuticals prices, indicating that investors need to assess whether or not biotech ETFs have put political concerns to rest before jumping into the group.
Investors should be mindful of IBB's technical status.
Trending on ETF Trends
Political Volatility Could Weigh on South Africa ETF
Calls For Biotech ETF Rally Gain Steam
Mexico ETF: Another Central Bank Play
Equal-Weight Works For These Sector ETFs
Let the Good Times Roll for Gold Miners ETFs
"During the past 9 years, IBB has been inside rising channel, until it managed to break out in 2013 when it embarked on a 2-year rally. It peaked last July, when it came back down to test old channel resistance as new support at several different times," according to Investing.com.
Rare are the occasions that biotechnology stocks and exchange traded funds are seen as offering value. In fact, the sector historically trades at multiples that are elevated relative to broader benchmarks, but in a year of struggles for biotechnology names, some analysts see value with some big-name biotech stocks.
SEE MORE: Resisting the Temptation of Biotech ETFs
IBB, which holds nearly 190 stocks and is a cap-weighted ETF, has a price-to-earnings ratio of just over 21 and a price-to-book ratio of 4.92. The ETF's three-year standard deviation is just over 25 percent.
"What IBB does in the next few weeks - can it breakout? - should tell us a good deal about this leader. If it continues higher, it will send a positive price message to the risk-on trade," according to Investing.com.
For more information on the biotech sector, visit ourbiotechnology category .
iShares Nasdaq Biotechnology ETF
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
This article was provided by our partner Tom Lydon of etftrends.com.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:Is a Competitor to Ultra Popular Bond ETF AGG in the Cards?
Bond ETFs are getting a lot of attention amid renewed concerns over global economic growth, fears related to the impact of Brexit from the European Union and a rollercoaster ride of oil prices . Given the turmoil in the global markets, investors' craving for a steady current income is not surprising, driving yields to multi-year lows.
Yields on both 10-year treasury and 30-year treasury have touched record lows on July 1, 2016. This phenomenon was not just limited to the U.S. Ten-year yields fell to all-time lows in Australia and Taiwan as well while Bank of Japan and European Central Bank are continuing with negative interest rates to spur their economies. Meanwhile, last month, the Fed announced its decision not to raise interest rates and hinted that further increases would most likely occur at a slower pace than expected previously. In fact, the Fed lowered the number of potential hikes in each of 2017 and 2018 from four to three. Fed Chair Yellen even stated that a Brexit vote was one of the factors behind the Fed holding rates constant apart from mixed readings on the labor market and economic growth (read: Dovish Fed Trims U.S. Outlook: ETFs to Buy ).
New Bond Index
This trend did not go unnoticed by Wilshire Associates Inc., which has introduced a new U.S. bond index - The Wilshire Bond Index. The index measures the performance of the U.S. taxable fixed income market based on actual holdings of U.S. institutional investors.
Thus, the index tracks the investable U.S. fixed income market in contrast to the popular Barclays US Aggregate Bond Index, which is calculated based on the universe of outstanding debt.
New Index = New ETF?
The global ETF market has been growing by leaps and bounds with assets invested under global ETFs/ETPs touching an all-time high of $3.138 trillion earlier this year. ETFs often track indexes and their performance becomes the measure for fund managers to beat or match (read: What's Driving the Global ETF Industry? ).
One such ultra-popular fund is iShares Core U.S. Aggregate Bond ETFAGG which tracks the Barclays US Aggregate Bond Index. The fund invests about $38.8 billion of assets in 5,528 securities. The fund trades in impressive volume of almost 2.9 million shares on an average. The fund has a very low expense ratio of 8 bps. It hauled in $6.8 billion in the first half of the year itself (read: 1H ETF Asset Report: Gold Glows; Equities Fade ).
With a number of new ETFs being launched every week, it won't be surprising to see a new ETF tracking the Wilshire Bond Index. Additionally, current market conditions look favorable for a new bond ETF.
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ISHARS-CR US AG (AGG): ETF Research Reports
To read this article on Zacks.com click here.
Zacks Investment Research
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:Mid-Year ETF Roundup: Defense Wins Championships
The mid-point of 2016 is an excellent occasion to review the exchange-traded fund (ETF) landscape. The native transparency of ETFs allows us to visualize where investors are placing their hopes and where fund companies believe the next important trends will emerge.
Often times we see these big picture themes continue to develop for months and years as gathering momentum takes hold. Furthermore,global marketforces can have a significant impact on portfolio positioning and investor sentiment to further embellish winners or burden out-of-favor sectors.
Fund Flows
Through the first six months of the year, it’s clear that many ETF investors are placing their bets on the defensive side of the ledger. Data from ETF.com illustrates the top three funds for net inflows were the following:
SPDR Gold Shares ETF (GLD) + $12.157 billion
iShares Core U.S. Aggregate Bond ETF (AGG) + $6.849 billion
iShares MSCI U.S. Minimum Volatility ETF (USMV) + $6.215 billion
Three additional treasury or investment grade bond funds made the top 10 list, as well as an international low volatility stock index. The global collapse in sovereign bond yields combined with persistent stability in defensive sectors like utility and consumer staples stocks has been a key driver of this shift.
Investors have had to contend with a contentiously volatile stock market that has created a rush for traditional safe haven assets since the beginning of the year. Gold bullion has risen more than 25% from the lows after a half decade of underperformance that eviscerated confidence in the yellow metal. It appears that investors are willing to return to speculating on the continued strength in precious metals as a hedge against currency devaluation and political skirmishes.
One the flip side of the ledger are outflows in traditional risk assets like the Powershares QQQ (QQQ) and iShares Russell 2000 ETF (IWM). The SPDR S&P 500 ETF (SPY) dominated the top seller list with -$10.25 billion in net redemptions. However, most fund flow advocates would dismiss SPY floating to the top based on its overwhelming size and trading volume.
Currency-hedged ETFs also experienced significant signs of selling pressure. The WisdomTree Europe Hedged Equity Fund (HEDJ) and WisdomTree Japan Hedged Equity Fund (DXJ) each lost just over $5 billion in total assets through the midpoint of 2016.
New Entrants
The first half also saw the release of 124 new ETFs, which brings the total count of all U.S.-listed exchange-traded products to 1,931. The range of new options spans the gamut between thematic, factor, smart beta, currency-hedged and other esoteric offerings.
One fund that is off to a swift start is the SPDR SSGA Gender Diversity Index ETF (SHE). This ETF has already accumulated $270 million since its March 7, 2016 debut. SHE is based on an index of 130+ large-cap companies that exhibit characteristics of gender diversity among their senior leadership roles.
Two new funds based on unique social sentiment indicators are the CrowdInvest Wisdom (WIZE) and Sprott Buzz Social Media Insights (BUZ). These innovative funds take a fresh approach by mining social media or other crowd-based outlets to construct their portfolio and rank companies accordingly.
Another strategy when introducing new funds is to offer a slightly different variant from an already successful product. Examples include: First Trust Dorsey Wright Dynamic Focus 5 ETF (FVC), WisdomTree Dynamic Currency Hedged International Equity Fund (DDWM), and SPDR DoubleLine Short Duration Total Return Tactical (STOT).
It will be interesting to note how these new funds work to stand out in such a crowded field over the course of the next several years. The industry trend has been leaning towards lower cost, passively managed funds from the likes of Vanguard, Barclays, and State Street. However, that momentum can temporarily be disrupted by strategies offering unique positioning or that simply benefit from being in the right place at the right time.
The Bottom Line
The first half of the year was all about traditional defensive plays and investors were rewarded in these areas. However, that doesn’t mean the story will stay the same over the next six months. Performance chasing in hot sectors or asset classes can often lead to symptoms of regret as momentum moves on to other areas of the market. The beauty of ETFs is that there are always fresh themes that are developing and easy to access in virtually every corner of the globe.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:Demand For Safe Haven ETFs Continues In June
Drew Voros
ETF.com Editor-in-Chief
Despite the “Brexit” victory and what seems to be growing global economic slowdown, June shaped up to be one of the best months of the year so far when it came to inflows for U.S.-listed ETFs. More than $17 billion in new assets flowed into ETFs for the month, bringing the year-to-date total to $65 billion.
However, at the current annual pace, 2016 will struggle to get even half the new ETF assets the industry saw in 2015.
And unlike 2015, safe-haven ETFs continue to dominate investor demand, with gold ETF SPDR Gold Trust (GLD) gain the single-most-popular ETF in the month, raking in $3.3 billion in assets. Thus far this year, the fund has seen asset gains of more than $12 billion—a 30% asset-under-management growth in six months, and the year’s largest net creations thus far.
The second-most-popular ETF of June was also a safe-haven fund, the iShares Core U.S. Aggregate Bond ETF (AGG), which attracted $1.4 billion in assets in the month. AGG is holding on to the No. 2 ETF spot in the ranking of 2016’s biggest creations, with net inflows of $6.7 billion year-to-date.
International ETFs Gain Favor
While U.S. equity ETFs lost assets in June during the risk-off trading trend, the battered international equity ETF space rebounded, as investor hunt for value in flat stocks markets with emerging markets saw renewed investor interest.
Among the most in-demand strategies were none other than emerging market ETFs such as the iShares Core MSCI Emerging Market ETF (IEMG) and the Vanguard FTSE Emerging Market ETF (VWO). Each gathered $1.3 billion in the month. For IEMG, the asset gains represented a 10% jump in total assets under management, which now sit around $12.5 billion.
As mentioned, broad U.S. large-cap equity funds saw the most outflows, with the SPDR S&P 500 (SPY) and the PowerShares QQQ Trust (QQQ) seeing the greatest amount.
GLD & AGG Also Outperforming
In addition to their popularity, physically backed gold ETFs such as GLD, and boring old bond funds such as AGG, are rewarding investors this year, with returns of 26.6% and nearly 6%, respectively, outperforming SPY’s 3% return as we hit the year’s halfway point.
Chart courtesy of StockCharts.com
Financial ETFs Get Support
With the Federal Reserve’s banking stress-test results that the major U.S. banks passed, those same institutions received the go-ahead to raised dividends and issue stock buybacks, potentially offering the worst-performing sector in the S&P 500 a boost.
Late last week, financial ETFs such as the Financial Select Sector SPDR Fund (XLF)—the largest financial sector ETF, with $14.7 billion in assets, and a fund that holds several of these large banks among its top holdings—was rallying, posting gains of more than 1%.
XLF is still down roughly 4% year-to-date, and going back 12 months, those losses now exceed 7%. In times when investors are worried about the health of the global economy, financials tend to fall out of favor. However, Monday the fund was down 1.5% as global yields continue to fall in the wake of the “Brexit” victory. Low rates cut into lending profit margins.
iShares Closing 10 Funds
iShares announced that 10 of its funds would cease to trade after the close of business on Aug. 23. The closures were announced almost exactly a year after iShares announced the August closures of 18 funds.
Together, the 18 ETFs have $227.4 million in assets, or well under 1% of iShares' $829 billion in U.S.-listed ETF assets. iShares itself commands about 38% of the $2.168 trillion in U.S.-listed ETF assets, according to data compiled by ETF.com.
Following is a list of the funds that iShares plans to close:
Fidelity Cuts Fees
Fidelity has announced that it is reducing the fees on 27 of its index mutual funds and ETFs. The changes are effective July 1.
The 11 Fidelity sector ETFs will each see their expense ratios fall from 0.12% to 0.084%. The Vanguard sector ETFs cost 0.10%. Meanwhile, the 16 index mutual funds will see their expense ratios fall anywhere from 0.5 to 0.16%.
According to Fidelity, the changes are projected to save investors up to $20 million per year.
The affected ETFs include:
Fidelity MSCI Consumer Discretionary Index ETF (FDIS)
Fidelity MSCI Consumer Staples Index ETF (FSTA)
Fidelity MSCI Energy Index ETF (FENY)
Fidelity MSCI Financials Index ETF (FNCL)
Fidelity MSCI Health Care Index ETF (FHLC)
Fidelity MSCI Industrials Index ETF (FIDU)
Fidelity MSCI Information Technology Index ETF (FTEC)
Fidelity MSCI Materials Index ETF (FMAT)
Fidelity MSCI Telecommunications Index ETF (FCOM)
Fidelity MSCI Utilities Index ETF (FUTY)
Fidelity MSCI Real Estate Index ETF (FREL)
Drew Voros can be reached at dvoros@etf.com.
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Why Oil Prices Haven’t Peaked Yet This Year
Vanguard’s King Sees No Future For ETFs In 401(k)s
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:U.S. Bond ETFs Benefit From Global Yield Shortage
The Federal Reserve has been threating to raise interest rates for a number of months now and ETF investors have opted to call their bluff. After being burned by the chase for high yield through risky and esoteric asset classes, the focus has now turned towards enthusiasm for plain-vanilla bond funds.
A check of the year-to-date fund flow tracker at ETF.com shows a willingness to gobble up diversified U.S.-focused bond indexes such as the iShares Core U.S. Aggregate Bond ETF (AGG), iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), and Vanguard Total Bond Market ETF (BND). Together these three funds have accumulated over $12.5 billion in new inflows since the beginning of 2016 and have easily distanced themselves as the top bond ETFs in terms of total size.
Furthermore, previously beaten down sectors of the fixed-income marketplace such as Treasury Inflation Protected Securities (or TIPs) have garnered greater attention as well. The iShares TIPS ETF (TIP) has added $2.7 billion in 2016 and become an increasingly popular way to hedge inflation expectations.
Much of this enthusiasm for historically conservative bond funds can be attributed to one consistent trend: falling interest rates. Since the beginning of 2016, the CBOE 10-Year Treasury Note Yield (TNX) has tumbled nearly 40% from a starting point of 2.67% to a recent low of 1.61%.
Part of the fervor exacerbating this movement is the insatiable foreign demand for U.S. Treasury bonds. A recent Wall Street Journal article cites negative yields and record low interest rates in Japan and Europe as a tremendous catalyst for fixed-income investors seeking better returns. In fact, a fresh 10-Year U.S. Treasury auction last week recorded record buyers from outside the United States.
The inverse relationship between interest rates and bond prices means that this chase for safety has now turned into a gathering momentum trade. Rather than face the noticeably greater volatility in stocks, commodities, or even currencies, ETF investors are simply turning to the one asset class that continues to hit new dividend-adjusted highs with little variance in its path.
In fact, AGG has managed to outstrip the performance of broad stock market indices such as the SPDR S&P 500 ETF (SPY) by a noticeable margin this year. AGG has gained 4.36% through June 13 versus just 2.77% for SPY.
The growing question then is just what do investors own in a vehicle like AGG that is taking a more prominent role in many portfolios?
This ETF is comprised of over 5,500 individual fixed-income securities in a passively managed index. The Barclays Aggregate Bond Index measures the performance of the U.S. investment grade bond market, which includes Treasury bonds, corporate bonds, mortgage debt, and other asset-backed securities. The asset allocation is structured with a market capitalization weighted focus, which gives prominent positions sizing to Treasury and mortgage-related bonds.
According to iShares.com, AGG has an effective duration of 5.26 years, 30-day SEC yield of 1.91%, and charges a net expense ratio of just 0.08%. The overall consequence is one that emphasizes safety and quality above yield or specific sector positioning. Ultimately, this vehicle is one that investors can rely on as a diversified, low-cost, and liquid way to access a broad pool of U.S. bonds.
However, these same features that make AGG attractive in a falling interest rate environment are also its Achilles heel as interest rates rise. The assumption for new money into these funds are that the current trend of outperformance and low volatility will continue indefinitely into the future. This may be a much harder feat to accomplish with Treasury yields now extended to some of their lowest levels in the last decade.
The Bottom Line
Bond funds make up and important role in diversification, risk mitigation, and proper portfolio positioning. However, just like stocks, they are susceptible to investor sentiment, market psychology, and volatility that can catch many unwary investors off guard.
Before jumping headlong into this asset class as a presumed measure of safety and income, make sure that the underlying portfolio and interest rate environment aligns with your goals.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:Nothing Changes Sentiment Like Price
InvestorPlace InvestorPlace - Stock Market News, Stock Advice & Trading Tips
Coming back from a week-long vacation has its advantages. I was lucky enough to be able to unplug from the day-to-day operations of the business and markets, which allowed me to return with fresh eyes and outlook. I recommend that anyone who spends their day's head down in their profession take the time to do this every now and then to gain some perspective on work, life, and family.
As I think back over the last six months of this journey through the markets, these are some of my top of mind observations:
Sentiment Drives Decision Making
The number one dynamic of this market that you simply can't predict in advance is how sentiment affects your decision making process. I can't tell you how many articles I read in February forecasting the certainty of a bear market and/or recession. Fast forward just four months and we are now back within spitting distance of all-time highs.
It's not only stocks that are surging here. Commodities and bonds are hitting new year-to-date highs as well. Check out the performance chart below of the SPDR S&P 500 ETF ( SPY ), iShares Core U.S. Bond ETF ( AGG ), and iPath Barclays Commodity Total Return ETN ( DJP ) so far in 2016.
DJP and SPY have seen a big recovery over the last several months that now has everyone feeling giddy about the prospects for a breakout. Bonds have simply continued the path of least resistance as interest rates stair-step lower and continue to bring global buyers to the table. When the majority of the world is staring at negative interest rates, suddenly that 1.7% 10-Year U.S. Treasury bond looks pretty attractive.
In my opinion, we are going to see a break in one of these asset classes over the next few months. I don't know if we can escape the typically hostile summer months without some ramp up in volatility.
7 Stocks to Sell and Take Profits on Now!
That may come as a result of the Federal Reserve hiking rates again, a hiccup in oil prices , or simply just a mild-mannered 5-7% dip as a result of the market needing a breather.
Fund Flows Say It All
Fund flows have been an interesting story and confirmation of the bearish sentiment patterns in stocks. Investors have been exiting stock-focused ETFs and mutual funds at a big clip as the market gets closer and closer to its prior highs. Check out this table of the last five weeks of combined fund flows from ICI. The numbers say it all - investors are exiting stocks and buying bonds at a pretty consistent clip.
There are very few times in history when you can count on investors exiting stocks perfectly near a market top . Usually we see this level of outflows closer to a bottom rather than at a potential peak. However, these statistics aren't necessarily something you can trade, they are simply food for thought.
Time to Set Strategy
It's tough to fault investors for becoming excited about the next six to twelve months in stocks considering the building base of momentum and technical signals. However, I would be cautious about adding new money to the market in large position sizes if you have been stoically sitting on the sidelines for some time. I would rather see you implement a multi-step trading plan to add positions over time or look to buy on some level of weakness.
In my opinion, the greater mistake this year was getting overly bearish at the lows rather than getting overly bullish at the highs. I have spoken with so many investors who were scared out of the market on all of the extreme negativity, only to regret the mistake just a few months later. Their problem is that they were overly aggressive from the outset and couldn't handle a 10-15% drop in stocks.
My advice: don't take an outsized level of risk to begin with!
Keep your stock allocation as such that you are comfortable riding out a similar correction in the future or take swifter action to preserve capital with a tighter risk management plan. There is nothing worse than getting shaken out near the lows and having to play catch up as the global markets rip higher. Then you've experienced the double sin of lost money AND lost opportunity.
Similarly, I am also watchful about the price action in bonds. Both credit (high yield, emerging market) and safety (treasury, investment grade, mortgages) have rallied in a big way over the last several months and are likely due for a short-term breather.
Something is going to eventually give. I would prefer to have a little cash on the sidelines to take advantage of a dislocation in the fixed-income markets rather than gobbling up debt at these levels. Remember that bonds will ebb and flow just like stocks. There is a similar psychological pattern of fear and greed that takes place in this market as well.
The Bottom Line: Caution Ahead
If you have been enjoying the ride higher over the last few months, then continue to do what has been working for you. However, if you have been sweating nervously in cash and are thinking about just throwing caution to the wind up here, I would be a little more careful.
7 Monthly Dividend Stocks to Pay Your Bills
The market loves to make fools out of us and being patient will likely serve you better than trying to play catch up in a hurry.
This is a long ride and there will be plenty of opportunity for those with a disciplined mindset.
Looking for new ETF ideas? Check out our library of free special reports on growth and income investing
The post Nothing Changes Sentiment Like Price appeared first on FMD Capital Management .
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The post Nothing Changes Sentiment Like Price appeared first on InvestorPlace .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:How To Choose An ETF From Exploding Menu Without Losing Your Sanity
ETF firms continue to spit out new products like popped corn. Nearly 100 launches so far in 2016 have taken the total number of exchange traded products listed in the U.S. to roughly 1,900.
Ben Johnson, director of global ETF research for Morningstar, points out that there are far more exchange traded funds than investors can possibly use well. They ballooned in numbers from 204 in 2005 to 923 in 2010 to 1,594 in 2015, according to the Investment Company Institute.
"The utility of your average, newly launched exchange traded fund is decreasing with time," Johnson told IBD, because "most of the broadly useful, reasonably priced exposures have long since been launched."
That's not keeping new players from entering the space. Investors' appetite for low-cost, liquid and transparent ETFs continues to grow, after all.
With the most common ETF needs met, however, Johnson considers many of the new launches to be "faddish" at best. In a May report, he named Sprott Buzz Social Media Insights ( BUZ ) and Global X Millennials Thematic ( MILN ) as examples of this trend.
Making a selection from an ever-expanding menu can daunt new users of ETFs especially. Johnson offers this advice to avoid biting into an unpopped kernel: Keep it simple and low-cost.
First and foremost, know what you own. Even two ETFs tracking the same index may perform differently. So understand the indexing method and whether it will deliver the desired exposure. Then, focus on fees. Morningstar's research shows that the higher a fund's expense ratio, the lower an investor's odds of success tend to be -- and that's especially true for passive, index-tracking funds.
A handful of the 100 largest ETFs should meet the needs of most investors, Johnson said. They offer exposures that are both easily understood and extremely cheap.
The $61.57 billion Vanguard Total Stock Market ( VTI ) holds a portfolio of 3,663 U.S. stocks for a wafer-thin 0.05% expense ratio, or a $5 fee per year for every $10,000 invested. Throw in iShares Core U.S. Aggregate Bond ( AGG ) and/or iShares MSCI EAFE ( EFA ), and the portfolio is less vulnerable to market risks. The additional costs for that benefit are still modest.
Despite their low-cost and simple virtues, the largest ETFs may start to feel deadly dull when used exclusively. So how to choose among the more exotic-flavored ETFs to spice up a portfolio?
San Francisco-based FundX Investment Group shared some insights into their 3-step selection process. First, they screen ETFs based on strategy, diversification, liquidity, historical volatility, underlying holdings and trading patterns.
"We are very selective about the universe of ETFs we are willing to invest in -- even when they are performing well," said chief investment officer Jason Browne.
Next, the acceptable ETFs are sorted into risk groups based on their level of diversification and historical downside record.
Finally, the ETFs within each risk group are ranked based on recent performance. The ones that rank highly make the final cut.
Browne likes to see a minimum 1-year record in an ETF. He describes liquidity as key to avoid "a bad fill when other ETFs are just as good and trade more freely."
Most important, he added, is "strong recent performance vs. other ETFs with similar risk."
Two ETFs that recently earned a nod from FundX include the relatively young PowerShares High Yield Equity Dividend Achievers (PEY) and iShares Edge MSCI USA Quality Factor (QUAL).
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:May ETF Asset Flow: Gold Wins, EM Loses
The month of May is characterized by the age-old adage "sell in May and go away." The proverb actually cautions investors to discard stock holdings in May and return to the market in November , so that they can stay away from seasonal volatility.
Not that this theory bears fruit every year, but this year it seems to hold well. After all, ETFs' fund flows point to that trend. In the asset redemption section, equities ETFs across the globe were prevalent. On the other hand, safe haven securities and bond ETFs gained assets. Below we highlight the ETF winners and losers in terms of asset flows during the timeframe of May 1 to May 26 (as per etf.com ).
Gold Glitters Surprisingly
A flight to safety following a spike in volatility at the start of 2016 brightened the appeal for the safe-haven asset gold (despite the metal's not-so-great fundamentals). But the hawkish Fed minutes, released in mid May, hinted at the possibility of a June hike, leading to "the longest slump in more than two months" for gold on a stronger U.S. dollar (read: Gold Rally Fades: Buy ETFs on the Dip or Short? ).
Interestingly, despite these downbeat fundamentals, gold bullion ETF SPDR Gold Shares ( GLD ) added the highest assets worth about $2.66 billion in May. Probably, China's decision to "buy its second gold storage vault in London" in May was behind this asset surge.
Bond ETFs Garner Attention
Be it aggregate bonds, corporate bonds or TIPS bonds, fixed income products ruled the market in May. The lure for regular current income along with relative safety made this segment a winner.
iShares Core U.S. Aggregate Bond ETF (AGG) hauled in $952.5 million, while Vanguard Intermediate-Term Corporate Bond Index Fund (VCIT) gathered about $664.4 million in assets. Due to the improved outlook on inflation, TIPS ETF iShares TIPS Bond ETF (TIP) collected $665.4 million in assets (read: Time for Investment Grade Corporate Bond ETFs? ).
Value ETFs Got Noticed
As the possibility of a sooner-than-expected Fed hike surged, the odds of an upheaval in the market also crept up and investors prepared to position accordingly. Probably thanks to these slightly defensive sentiments, Vanguard Value Index Fund ( VTV ) reaped about $789.9 million in assets (read: 5 Mid Cap Value ETFs Are Top Picks Now--Here is Why ).
Emerging Markets − Expected Loser
Fed rate hike bets took some air out of emerging market investing on the possibility of gradual ceases in cheap dollar inflows. Emerging market equity ETF iShares MSCI Emerging Markets (EEM) shed about $3.12 billion.
U.S. Also a Laggard
The U.S market also looked unsteady with the Fed hike talks. This hit big U.S. equities ETFs like SPDR S&P 500 ETF Trust (SPY) , PowerShares QQQ Trust (QQQ) and SPDR Dow Jones Industrial Average ETF Trust (DIA) , which lost about $3.12 billion, $1.49 billion and $797.4 million, respectively.
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SPDR-GOLD TRUST (GLD): ETF Research Reports
ISHARS-CR US AG (AGG): ETF Research Reports
VANGD-IT CRP BD (VCIT): ETF Research Reports
ISHARS-TIPS BD (TIP): ETF Research Reports
SPDR-SP 500 TR (SPY): ETF Research Reports
SPDR-DJ IND AVG (DIA): ETF Research Reports
NASDAQ-100 SHRS (QQQ): ETF Research Reports
ISHARS-EMG MKT (EEM): ETF Research Reports
VIPERS-VALUE (VTV): ETF Research Reports
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:Fixed Income ETFs Dominating Inflows This Year
By Drew Voros
ETF.com Editor-in-Chief
While the growth of new ETF assets this year has been as slow as the country’s economic growth and stock market returns, fixed-income ETFs have completely dominated inflows of new assets in the space.
More than $8 out of every $10 flowing into ETFs this year have gone to fixed-income ETFs, or 83% of the $41 billion—$34 billion—have landed in bond funds, which is shaping up to be a record annual pace. In comparison, equity ETFs have seen a paltry $2 billion in new assets
Investor demand reflects a generally defensive mood among investors, who have preferred less risky assets in recent months amid concerns about slowing global growth. Flat equity returns are also cooling demand in stock funds.
In addition, much of the fixed-income demand is coming from institutional investors, according to a study from Greenwich Associates.
“Over the past 12 months, institutions’ need for liquidity has been a primary driver of fixed-income ETF demand,” the study said. “More than half the institutions in the study that have experienced liquidity problems say these issues have had a direct impact on their investment processes. While institutions of all types have struggled with reduced liquidity in bond markets, ETFs have not suffered the same fate. Since 2008, bond ETF liquidity has grown more than four and a half times or at an annual growth rate of 33%.”
Top Asset Gatherers
The most popular fixed-income ETF this year has been the iShares Core U.S. Aggregate Bond ETF (AGG), which has seen net inflows of $4.30 billion year-to-date. The fund is this year’s most popular bond strategy. AGG serves up broad exposure to U.S. investment-grade bonds. The market-weighted index includes Treasurys, agencies, CMBs, ABSs and investment-grade corporates.
Also seeing strong demand has been the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), with net inflows of $3.30 billion year-to-date. LQD is another investment-grade bond ETF that’s raking in assets at a fast pace this year. The fund tracks a market-weighted index of U.S. corporate investment-grade bonds across the maturity spectrum.
Following LQD is the SPDR Barclays High Yield Bond ETF (JNK), which has seen net inflows of $2.63 billion year-to-date. JNK is a junk bond fund tracking a market-weighted index of highly liquid, high-yield U.S.-dollar-denominated corporate bonds, the bulk of which are in the industrial sector.
Top-Performing Commodity ETFs
While equities have been flat to barely up, commodities and related ETFs have been quietly outperforming, the first time that has happened in five years. However, the dispersion in returns can be significant, as is usually the case with commodities.
The top-performing nonleveraged/noninverse commodities fund is the ETFS Physical Silver Shares (SIVR), which is up 24.9% year-to-date, while the worst performer, the United States Natural Gas Fund (UNG), is down 22.8%.
SIVR, the cheapest silver ETF on the market, benefited from the surge in the gray metal. Like gold, silver rallied this year amid concerns about the economy, low-to-negative interest rates and the depreciation of the U.S. dollar.
UNG has suffered due to plunging natural gas prices, which hit a 17-year low in March. Record production and a mild winter hit the heating fuel from both the supply and demand side.
Another top performer in the commodity space has been iPath Bloomberg Tin Subindex Total Return ETN (JJT), with a gain of 22.2%. Tin doesn't garner many headlines, even when it's rising notably. And while JJT is the only product that tracks tin futures, it has paltry assets under management—about $2 million, which is difficult to trade.
Also showing shining returns this year has been gold, both in returns and inflows. The iShares Gold Trust (IAU), the lowest-cost fund in the gold segment, has climbed 20% so far in 2016, and has garnered inflows of $1.5 billion in the period, according to FactSet. That's second only to the $6.9 billion that flowed into the giant in the space, the SPDR Gold Trust (GLD).
Launches
Global X launched a first-of-its-kind ETF that targets the consumption habits of the millennial generation. The Global X Millennials Thematic ETF (MILN) will list on the Nasdaq stock market and comes with an expense ratio of 0.68%. The fund’s underlying index, provided by INDXX, selects its stocks based on consumer spending data, consumer behavior, technology and demographics relating to the generation born between 1980 and 2000.
Also, REX Shares launched two volatility-focused funds. The REX VolMAXX Long VIX Weekly Futures Strategy ETF (VMAX) and the REX VolMAXX Inverse VIX Weekly Futures Strategy ETF (VMIN) are both actively managed funds that invest primarily in near-month VIX futures. VMAX charges 1.25% in expense ratio and VMIN charges 1.45%. Both are listed on Bats, which owns ETF.com.
Closures
Horizons ETF Trust announced last month that it was delisting the Horizons Korea KOSPI ETF (HKOR). The fund’s last day of trading was April 29. HKOR launched in March 2014.
Direxion also announced the closure of two of its currency-hedged leveraged ETFs. The Direxion Daily MSCI Europe Currency Hedged Bull 2X Shares (HEGE) and the Direxion Daily MSCI Japan Currency Hedged Bull 2X Shares (HEGJ) are set to have their last day of trading on May 20. Both funds have less than $2 million in assets under management.
Drew Voros can be reached at dvoros@etf.com.
More from ETF.com
5 Most Popular Fixed Income ETFs
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Using Bond ETFs To Hedge Against Fed Hikes
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:Meet DoubleLine’s Newest ETFs: STOT, EMTL
InvestorPlace InvestorPlace - Stock Market News, Stock Advice & Trading Tips
It's difficult to dispute the success of the first ETF offering from DoubleLine , which has managed to acquire more than $2.3 billion in assets during its short 14-month tenure. The SPDR DoubleLine Total Return Tactical ETF ( TOTL ) is a hybrid strategy that is sourced from two prominent fixed-income mutual funds that are run by Jeffrey Gundlach.
I have long been a fan of Gundlach's approach and have owned his flagship DoubleLine Total Return Bond Fund ( DBLTX ) for myself and clients for some time now. I have also recommended the TOTL strategy for those who are seeking a core fixed-income fund with a lower average duration than the Barclays U.S. Aggregate Bond Index.
Looking at a chart of TOTL versus its benchmark over the last year, the active fund has aggressively lagged the passive index. This has primarily been a result of the strength in treasuries and investment grade corporates in addition to differences in duration exposure.
TOTL isn't designed to kill the benchmark in a falling interest rate environment that favors longer duration. It's designed to offer a more competitive yield with moderated interest rate risk. That's its true value for those who are seeking a differentiated approach to their fixed-income allocation. Note that TOTL currently sports a 30-day SEC yield of 2.90% versus 1.90% for the iShares Core U.S. Aggregate Bond ETF ( AGG ).
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Recently, Gundlach and State Street released two new actively managed ETFs that are also aimed at setting themselves apart from the pack. These include the SPDR DoubleLine Short Duration Total Return Tactical ETF ( STOT ) and SPDR DoubleLine Emerging Markets Fixed Income ETF ( EMTL ).
STOT is aimed at an even more conservative mix of bonds with a similar multi-sector approach as TOTL. The fund sports a modified adjusted duration of 2.40 years compared to TOTL's 3.73 years. Think less price volatility and also a concomitant step down in yield.
The new fund hasn't paid a dividend yet, so we don't know exactly what the difference in yield will be. However, suffice it to say that this type of fund will be deemed more of a place holder for those who want to focus on capital preservation with a small income stream.
Bear in mind, you will have to pay a 0.45% expense ratio to access the STOT conservative strategy. That sounds on the high side for a short duration bond fund, but may still be acceptable for those who are stepping out of an even more expensive mutual fund alternative . There are also several other active low duration competitors in the ETF space by the likes of PIMCO, Guggenheim, Fidelity, and others.
The more interesting fund from my perspective is EMTL. Prior to the launch of this ETF, there were only four other actively managed bond funds in the emerging market category. That makes for a very enticing opportunity to exercise their expertise in country screening, security selection, risk management, and duration positioning. The EMTL portfolio will be managed by Luz Padilla, who runs the emerging market strategies for the open ended DoubleLine mutual funds as well.
One of the advantages of the looser active management restrictions in EMTL is that the fund manager can select both corporate and sovereign debt in the portfolio. Most passively managed indexes and even some of their active counterparts are relegated to one or the other. The comingling of these two emerging market bond classes can potentially unlock greater value and allow for superior differentiation from its peers.
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At the outset, EMTL has heavy exposure to bonds in Latin America via Mexico, Peru, Colombia, and Chile. It currently sports a modified adjusted duration of 5.34 years and will likely offer a competitive yield to other funds in this category. This type of fund may offer investors a way to add a tactical emerging market bond allocation in tandem with core fixed-income or other strategic yield enhancing plays.
Furthermore, this fund only sports a modestly higher expense ratio than traditional options as well. EMTL carries a net expense ratio of 0.65% versus 0.50% in the PowerShares Emerging Market Sovereign Debt Portfolio ( PCY ) and 0.40% in the iShares JP Morgan Emerging Market Bond Fund ( EMB ).
The Bottom Line on DoubleLine's Newest ETFs
It will be interesting to watch how both these new offerings evolve over time and whether the active management underpinnings add value for shareholders over a passive benchmark. DoubleLine has been known to make some bold calls with their global bond exposure and these funds will likely stand out from the pack in their overall positioning.
Need more yield? Download our free Ultimate ETF Income Guide to unlock the secrets of the top funds in each sector.
The post Digging Into 2 New DoubleLine ETFs appeared first on FMD Capital Management .
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The post Meet DoubleLine's Newest ETFs: STOT, EMTL appeared first on InvestorPlace .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:Corporate Bond ETFs Are Back In High Demand
Exchange-traded funds that track corporate bond benchmarks are back in high demand this year after a lackluster performance in 2015 threatened to undermine confidence in the credit markets. Fixed-income investors have seemingly shrugged off the threat of rising interest rates and weakening credit fundamentals to pounce on sectors demonstrating relative value to high-flying Treasury and municipal bonds.
The iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) is a prime example of this trend. This ETF tracks 1,564 corporate bonds of companies with high quality credit ratings such as Verizon Communications (VZ) and Apple Inc (AAPL).
LQD has nearly $27 billion in assets under management and is the third largest fixed-income ETF by total size. This fund charges a very reasonable expense ratio of 0.15% and has a 30-day SEC yield of 3.39%. That yield may not seem impressive at the outset. However, it’s a significant spread versus the meager 2.08% comparative yield of the broad benchmark iShares Core U.S. Aggregate Bond ETF (AGG).
As you can see in the chart below, LQD experienced perhaps an unjust burden last year as investors fretted over the mounting losses in high yield bonds and other credit-sensitive holdings. That trend has now changed to one of a sharp rebound as falling interest rates, accommodative Fed-speak, and an uncertain stock market outlook help boost this fixed-income sector.
LQD has now gained over 5% to start 2016 and is sitting quite close to its prior all-time peak when adjusted for dividends.
According to data from ETF.com, LQD experienced $1.854 billion in new inflows during the first quarter of 2016. This allowed the fund to grace the top ten list of exchange-traded funds that garnered net new money over the last three months. That list also includes many defensive-minded sectors such as Treasury bonds, gold, and low volatility stocks.
Another corporate bond index showing significant improvement during the first quarter is the SPDR Barclays High Yield Bond ETF (JNK). This ETF tracks a group of 800 below-investment grade quality bonds of U.S.-listed companies. As a result of the credit risk, JNK sports a 30-day SEC yield of 7.14%, which is more than double its investment grade counterpart.
Fueled by fears of defaults and contraction in the energy sector, junk bonds fell over 20% from their 2015 highs to the February 2016 lows. A subsequent rebound in the stock market helped stabilize this index and regain a significant portion of those losses.
This diversified index of high yield bonds is now back in positive territory year-to-date. JNK also made the top ten list of ETF inflows with a net gain of $2.195 billion last quarter. This was likely due to value-seeking bond investors taking advantage of the huge spread in yield as well as those looking to capitalize on a swift rebound.
Moving forward, the continued bullish case for corporate debt will likely have to be driven by two important factors:
Low to sideways trending interest rates that help fuel additional thirst for yield above nominal fixed-coupon Treasury bonds.
Further strengthening or a period of low volatility in the stock market that acts as a tailwind for corporate debt.
ETF investors considering these fixed-income sectors for new allocations should likely be wary of the sharp moves they have experienced year-to-date. Bonds will often experience cycles of exuberance and fear similar to stocks. That is why having a counterintuitive and patient mindset may be your best ally when striving to establish new positions in any asset class.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:Equity ETFs Fall Back Into Favor
By Drew Voros
ETF.com Editor-in-Chief
Investor sentiment turned this past week from risk-off to risk-on, as the European Central Bank expanded its monetary stimulus program by increasing its monthly bond purchases and cutting interest rates further into negative territory.
More than $5.5 billion flowed into equity ETFs listed in the U.S., with more than $4 billion targeting U.S. equity ETFs. However, the top fund for inflows was an emerging market fund, the iShares MSCI Emerging Markets (EEM), with $862 million.
Fixed-income ETFs were overshadowed but not forgotten, as $1.7 billion flowed into the space, with the iShares Core U.S. Aggregate Bond ETF (AGG) collecting the most fixed-income assets—$459 million.
As for outflows, there are no real trends, as a mixed bag of funds lost assets, led by the Health Care Select SPDR (XLV), with $637 million in redemptions.
Best Bull Run Equity ETFs
As the U.S. stock markets marked the seventh anniversary for the bull market this past week, ETF.com looked at which equity ETFs have performed the best during this current bull run. The top three performers came from Guggenheim—a firm known for its pure-style and equal-weight methodologies.
The Guggenheim S&P 500 Pure Value (RPV) took the top spot, with an appreciation of 537% during the seven-year stretch, followed by the Guggenheim S&P SmallCap 600 Pure Value (RZV), up 476% and the Guggenheim S&P Equal Weight Consumer Discretionary (RCD), which rose 471%.
Top Country ETF Performers
We also looked at what single-country ETFs were giving investors the most bang for their buck: The iShares MSCI Brazil Capped ETF (EWZ) registered a 25.6% year-to-date appreciation to take it to the No. 1 spot.
The iShares MSCI All Peru Capped ETF (EPU) trailed EWZ with a gain of 22.5%, and the iShares MSCI Thailand Capped ETF (THD) took the third-top-performer spot, with a 13.2% return.
Launches
The SPDR SSgA Gender Diversity Index ETF (SHE) launched during the week, marking State Street’s first self-indexing fund and adding a second choice to exchange-traded products targeting gender diversity.
SHE tracks companies that fall into the top 1,000 U.S.-listed stocks in terms of market capitalization and that have significant gender diversity in the ranks of their senior leadership. This is similar to the Barclays Women in Leadership ETN (WIL), which launched in 2014, and has $28 million in assets. SHE, however, has a 0.20% expense ratio compared with WIL’s 0.45% expense ratio.
Also launching were two niche tech funds, the PureFunds Drone Economy Strategy ETF (IFLY) and the PureFunds Video Game Tech ETF (GAMR), which are both first-to-market products. The PowerShares DWA Tactical Multi-Asset Income Portfolio (DWIN) also came to market, tracking an index from Dorsey Wright, and coming in with an expense ratio of 0.69%.
Closures
The large-cap Japan equity ETF, the Maxis Nikkei 225 ETF (NYK), closed on Friday after failing to attract much traction despite the ongoing popularity of Japan equity ETFs tied to Japan’s ongoing reforms under Prime Minister Shinzo Abe’s rule.
Energy Funds Reverse-Split
Among energy ETFs, the VelocityShares 3X Long Crude Oil ETN (UWTI) and the VelocityShares 3X Long Natural Gas ETN (UGAZ) announced reverse stock splits that take effect this week. Holders of UWTI will receive one share for every 10 they currently have, while holders of UGAZ will receive one share for every 25 they currently have. The move will keep the underperforming exchange-traded notes in compliance with NYSE exchange requirements that call for a minimum share price of $1.
More from ETF.com
ETF.com Commodities Channel
Energy ETFs Reverse Split To Survive
ETF.com Education Center
Daily ETF Watch: Gender Diversity Targeted
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:Portfolio Report Card: A $1.58 Million Portfolio with No Captain
InvestorPlace InvestorPlace - Stock Market News, Stock Advice & Trading Tips
Has your financial advisor contacted you lately? Although global stock markets ( VT ) have recovered from their earlier in the year losses, it could've revealed flaws with your investment portfolio's design. Often, flaws that are camouflaged by rising markets are exposed and exploited in rocky markets.
(Audio) Why Robo "Advisors" are Hazardous to Your Wealth
Ultimately, advisors should take responsibility for the investment recommendations they make and the advice given should always conform to a person's age, risk tolerance, and life circumstances. Sadly, some financial professionals - even those with years of experience and a handsome looking resume - don't operate this way.
My latest Portfolio Report Card is for BR, a 79-year old widow from New Jersey, with a $1,585,000 investment account divided across an inherited IRA, family trust, and taxable brokerage account. She became concerned about her investments when her financial advisor abruptly resigned from her account and left her hanging.
After requesting a Report Card, BR informed me that generating income from her portfolio is the most crucial aspect of her investment plan. Nevertheless, she still described her investment strategy as the following: "Honestly, I leave it up to the advisor. I just need to pay off my mortgage, bills and my goal is to enjoy life without touching the principal."
What kind of grade does BR's investment portfolio get?
Cost Analysis
Cutting investment cost, commissions, and ongoing asset fees should be a priority for all investors. Why? Because the less you spend, the more you keep. How does BR do?
BR's portfolio holds 17 ETFs, 6 individual stocks, and cash. Annual fund expenses on the ETFs range from 0.12% (low end) to 0.95% (high end) and the advisory fee of 0.95% pushes up the cost of this portfolio to just over $22,000 annually (including both fund and advisory fees).
The 10 Best Index Funds for 2016 … And Beyond!
The cost of BR's portfolio is seven-times higher versus a blended benchmark of index ETFs matching her same asset mix.
Portfolio Diversification
Investment portfolios missing broad market exposure to the five major asset classes - stocks ( SCHB ), bonds ( AGG ), commodities ( DBC ), real estate ( RWO ), and cash - do not pass the diversification grade.
It's nice to see that BR's portfolio has exposure to US and international stocks ( EFA ), US real estate, bonds, commodities, and cash. However, most of the ETFs being used for exposure to these areas within her portfolio are narrowly focused or speculative funds that use leverage with long/short exposure.
A closer look at BR's top 10 portfolio holdings also reveals that only one fund - the Vanguard REIT ETF ( VNQ ) - is really a core building block with broad exposure, while the remaining holdings are concentrated in non-core funds with a tactical flair. Her advisor has erringly built the core of BR's portfolio using non-core assets. It's faulty construction that's akin to building a summer beach house in the Rocky Mountains.
Portfolio Risk
BR's overall asset mix is the following: 45.5% stocks, 7% bonds, 18% US real estate, 4.7% gold, and 24.8% cash. Although income and preserving capital is her main goal, her advisor has purchased ETFs that short stocks, bonds, and currencies and made them among her top holdings.
Another way to view BR's portfolio is to ask, how would it perform during a bear market? A 20% to 40% market decline would subject her combined portfolios to significant potential market losses of $237,000 to $474,000. In other words, even with almost one-quarter of her portfolio in cash, she still wouldn't be shielded from a severe setback.
Taxes
The bulk of BR's assets are held in a tax-deferred IRA ($1.3 million), however the remaining portion is invested in taxable accounts with dividend paying REITs like Annaly Capital Management and W.P. Carey as the main holdings. Why didn't her advisor taken deliberate steps to minimize her tax liabilities by holding REITs inside her tax-deferred IRA?
BR's portfolio could definitely use some smarter asset location and her advisor clearly never earned the 0.95% fee he's been siphoning from her account.
Performance
Regardless of whether the stock market is up or down, your investment performance will either confirm or deny the architectural soundness of your portfolio's design. Additionally, the attention you give - or fail to give - to cost, risk, diversification, and taxes has a direct influence on your bottom line results.
Over the past year, BR's portfolio fell 2.9% (-$51,641) compared to a gain of +1.72% for the index benchmark matching this same asset mix. Put another way, she underperformed the benchmark by significant margin of 4.62%.
The Portfolio Final Grade
BR's final Portfolio Report Card grade is "D" (poor). This means her portfolio scored poorly in all five grading categories and has major structural flaws.
A 20% to 40% market decline would inflict serious damage to her net worth and could force her to make uncomfortable lifestyle changes. Diversification is sloppy and omits core holdings with broad and low cost exposure to the major asset classes.
Moreover, her advisor incorrectly used non-core assets like long/short ETFs and sector commodities funds for her portfolio's core instead of using broadly diversified building blocks. And now that he's bailed on her, his mistakes have been compounded by a portfolio without a captain. Putting a 79-year old widow into fast moving tactical funds when her goal is simply to generate safe income is downright negligent.
Ron DeLegge is the Founder and Chief Portfolio Strategist at ETFguide. He's inventor of the Portfolio Report Card which helps people to identify the strengths and weaknesses of their investment account, IRA, and 401(k) plan.
More From InvestorPlace
5 Stocks to Buy for March7 A-Rated Tech Stocks to Buy Now9 Monthly Dividend Stocks to Help Pay Monthly Bills
The post Portfolio Report Card: A $1.58 Million Portfolio with No Captain appeared first on InvestorPlace .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:One Clear ETF Trend Emerging for 2016
By Drew Voros
ETF.com Editor-in-Chief
Investors Pour Money into Risk-Aversion ETFs
With February ending and giving us two months in the books for the year, flows from the month are giving investors a clear trend for the year: Investors are embracing risk-aversion ETFs.
Most prominently is that investors are developing an aversion to risk, instead gravitating to gold ETFs, a complete reversion of sentiment from the last few years. In addition, long-dated Treasury funds are falling into favor in what was supposed to be a rising-rate environment, bearish for these ETFs.
The SPDR Gold Trust (GLD) and the iShares Gold Trust (IAU) saw combined inflows of $4.5 billion in the month as the yellow metal has been rallying into bullish territory. Gold has climbed 21% since mid-December, breaking the 20% threshold defining a bull rally.
Long-dated Treasury bond ETFs saw more than twice the flows of the gold funds, as investors poured nearly $9 billion into bond ETFs such as the iShares 20+ Year Treasury Bond (TLT), the iShares 3-7 Year Treasury Bond (IEI) and the iShares Core U.S. Aggregate Bond (AGG).
Following the same risk-aversion theme, demand for defensive-type ETFs such as the minimum-volatility strategy, the iShares MSCI USA Minimum Volatility (USMV), as well as for a utilities fund, the First Trust Utilities AlphaDex (FXU), was strong.
For February, equity funds as a group saw $12 billion in outflows last month. For ETFs overall, February saw net inflows of $2.7 billion, but equity funds registered $12 billion in outflows. There is now more than $2.03 trillion in assets for U.S.-listed ETFs. Oddly, despite the selling of equity ETFs, the Vanguard Total Stock Market (VTI) proved to be the exception, with nearly $800 million of inflows.
iShares suspends shares Of IAU
The demand for gold proved to have a material impact on a particular gold ETF last week. The issuer of the iShares Gold Trust (IAU), iShares, said Friday it had suspended creations of the ETF because strong demand in the fund had led to "temporary exhaustion of IAU shares." After February saw the strongest inflows in 10 years into the fund, iShares suspended creations as it works to register new shares with the Securities and Exchange Commission.
Because IAU is an exchange-traded commodity registered under the '33 Act as a grantor trust, it must register with the SEC when it wants a new subscription of shares. However, rival ETF SPDR Gold Trust (GLD) saw four times as much inflows, and despite also being the same structure, has been functioning as normal.
"We actively monitor our creations and redemptions to see that GLD’s registered shares are not exhausted," said Peter Tulupman, head of U.S. Communications for the World Gold Council.
Notable ETF Launches
Vanguard and Goldman Sachs add to smart beta ETFs
In 2015, Vanguard launched only one new ETF. This past week, the issuer launched two new funds that delve deeper into the “smart beta” space. The Vanguard International Dividend Appreciation ETF (VIGI) and the Vanguard International High Dividend Yield ETF (VYMI) target an area Vanguard has not ventured in before: international dividend-paying equities. VIGI has a 0.25% expense ratio while VYMI will charge 0.30%
Goldman Sachs added to its new and growing suite of smart-beta ETFs, or what it called ActiveBeta, with the Goldman Sachs ActiveBeta Europe Equity ETF (GSEU) and the Goldman Sachs ActiveBeta Japan Equity ETF (GSJY). They will join three other funds that are based on the same methodology targeting value, momentum, quality and low-volatility factors. The funds are: the Goldman Sachs ActiveBeta Emerging Markets Equity ETF (GEM); the Goldman Sachs ActiveBeta International Equity ETF (GSIE); and the Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF (GSLC).
More from ETF.com:
Gold Fund’s Much Ado About Nothing
Gold ETFs Help Boost Gold Prices
ETF.com Guide to ETFs
ETF screener with over 1,600 rated ETFs
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:ETF Trends For 2016: Part 1, Currency-Hedged Products
By SA Editor Carolyn Pairitz :
2015: A Quick Look Back
Constant talk of interest rate hikes, the China market correction in August and the start of 'chip' credit cards in the U.S. - these are the things I believe will stand out in my mind if asked 10 years from now what happened in the world of finance in 2015. However, for Exchange Traded Funds (ETFs) 2015 was all about the continuing growth of Smart Beta strategies, the potential for Non-Transparent Exchange Traded Mutual Funds and new niche funds (like the iShares Exponential Technologies ETF ( XT ) or the Restaurant ETF ( BITE )).
According to ETF.com :
(click to enlarge)
As shown by the above image from the ICI 2015 Investment Company Fact Book , ETFs continue to grow in assets under management ((AUM)) and the number of fund offerings for investors. However, ETFs have yet to overtake mutual funds. But at current growth rates, ETFs will see parity soon enough.
According to an article from Camilla de Villiers of Thomson Reuters:
Earlier this year, Schwab commissioned an online study to gauge U.S. investor interest in ETFs (pdf download linked here ). The full report is a great read and full of useful data, but one key point especially stood out. As ETF interest continues to grow, we also see that the most avid users are the tech savvy first adaptors, millennials.
(click to enlarge)
As of publication, we can see (using ETF.com's Fund Flows tool ) investors in 2015 were not just interested in plain vanilla market cap-weighted funds, but their interest in specialized tools to conquer the market has continued to grow. However, old standbys like the Vanguard S&P 500 ETF ( VOO ), the iShares Core U.S. Aggregate Bond ETF ( AGG ) and the Vanguard Total Stock Market ( VTI ) do continue to see investor appreciation.
But the continuing impressive growth of ETF assets is to some extent old news in the investing world. What we'd like to focus on in the rest of this brief report are 3 key industry trends and their implications for the continued success of ETFs in the future. In this first part, we are going to cover currency-hedged products, while parts 2 and 3 will be on robo investors and expense ratios respectively.
Currency-Hedged Products & Iterations On A Theme
WisdomTree (WETF) launched its first currency-hedged fund in 2006, the Japan Hedged Equity Fund (DXJ), and it took three-and-a-half years for them to launch a second, the Europe Hedged Equity Fund (HEDJ). Clearly the idea didn't catch fire right away, but it is growing rapidly now. There are now over 50 ETFs with a mandate to not only invest in equities from a region, but also neutralize exposure to fluctuations between that region's currency and another (often the U.S. dollar). HEDJ and the Deutsche X-trackers MSCI EAFE Hedged Equity ETF (DBEF) even led fund creations for 2015, with $15.77 and $12.67 billion respectively, as concerns around a weakening euro hit investors.
This slight change in mandate from your average international-focused index fund can have a dramatic effect on returns. For example, see DXJ and HEDJ's 5-year returns against two popular non-hedged funds tracking Japan and Europe as well, the iShares MSCI Japan ETF (EWJ) and the Vanguard FTSE Europe ETF (VGK).
(click to enlarge)
To be fair, a currency hedge can be a negative thing for investors as well. When the dollar starts to fall against a foreign currency, currency-hedged investors lose out on the gain from this relationship. As stated by Chris Dieterich of Barron's :
When wondering where the push for these funds came from finally and where they will go from here, we turn to a quote from Greg McFarlane of Investopedia :
Deutsche Bank (DB), iShares and WisdomTree lead the fund creation march now, but IndexIQ is the first to look outside the standard currency-hedged product box in the quest for differentiation and further investor assets. Its recently launched lineup of 50% currency-hedged ETFs each hedge approximately 50% of its foreign currency exposure to mitigate the effect of currency fluctuation on USD index returns rather than the traditional 100% hedge. These kinds of iterations on a theme will only offer investors further options when considering a currency-hedged strategy.
Stay tuned for part 2 next week, which will focus on the rise of robo investors and how this industry will affect ETF investors and continue to grow in 2016.
See also The Investability Of Stocks And Market Contagion on seekingalpha.com
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:Municipal Bond ETFs Ignore Rising Rate Concerns
The investment community is holding its breath this week as the Federal Reserve meets to decide the fate of interest rates. Expectations are now centered on a small quarter point increase in the federal funds rate, which has the potential to jolt both the stock and bond markets. Many sectors tied to interest rate or credit sensitivity have seen a recent uptick in volatility in anticipation of this event.
In spite of those concerns, one arena that has continued on a steady upward trend has been municipal bond funds. These tax-conscious vehicles have been rock solid during a relatively choppy interest rate environment and now stand as the top fixed-income sector in 2015.
The largest exchange-traded fund in this category is the iShares National AMT-Free Muni Bond ETF (MUB), which has over $5.7 billion in total assets. This index is made up of a diverse array of 2,900 municipal debt securities spread around the country and charges an expense ratio of just 0.25%.
MUB has a 30-day SEC yield of 1.66% and dividends are paid monthly to shareholders. Investors in the top tax brackets favor municipal bond funds such as MUB for the federally tax-free income that they provide. This can be a big advantage for reducing the impact of a sizeable tax burden on non-retirement accounts for those that need the stability and low volatility of fixed-income.
This ETF has managed to generate a total return (with dividends) of 2.38% so far in 2015. That is significantly better than the 0.45% gain in the iShares Barclays U.S. Aggregate Bond ETF (AGG) over the same period. This meaningful divergence has been the result of strong demand in the municipal sector versus weakness in corporates and treasuries over the last two months.
This trend has not gone unnoticed by income investors either. On a year-to-date basis, MUB has added $1.6 billion in new inflows as a consistent trend of strength prevails. This steady stream of fresh investor capital, with little net selling, has likely been a driver of outperformance in the fourth quarter versus other fixed-income options.
For those with a more conservative nature or looking to insulate themselves from interest rate risk, the SPDR Nuveen Barclays Short Term Municipal Bond (SHM) is another top option. SHM has $2.7 billion dedicated to a national index of nearly 600 quality municipal bonds. The average maturity of the bonds in this ETF is just 3.09 years compared to 5.48 years in MUB. The tradeoff is that SHM comes with a far lower yield of just 0.84% along with compact volatility in the daily price fluctuations of the fund.
On the flip side, the top performing municipal ETF this year has a much more aggressive slant. The Market Vectors CEF Municipal Income ETF (XMPT) has jumped over 5% in 2015 as its underlying portfolio of 84 tax-free closed-end funds rocketed higher. This “fund of funds” strategy is designed to capitalize on the unique characteristics that closed-end funds have to offer such as active management and the use of leverage.
XMPT has a 30-day SEC yield of 5.45% and income is paid monthly. According to the Market Vectors website, that translates into a taxable equivalent yield of 9.02% for tax payers in the top 39.6% federal tax bracket. Of course, that higher yield comes with a much greater risk to price volatility for principal invested.
The Bottom Line
The recent trend in municipal bond leadership shows a sense of conviction by investors that the Fed ultimately will not raise rates or a comfort with the risk of their tax-focused investments. The ETFs mentioned above can be beneficial for those who are seeking tax-advantaged income from a diversified pool of national entities.
Nevertheless, keep in mind that these funds often come under fire during recessionary periods as state and local governments see revenues fall. They are also susceptible to a sustained period of inflationary pressures and cyclical interest rate fluctuations.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:5 Must-See Economic Charts Show Why Stocks May Stumble In 2016
By Gary Gordon :
Everyone has a guilty pleasure or three. Mine? I am addicted to Seth MacFarlane's "Family Guy." I cannot get enough of outrageously random references on everything from a pizza place's version of a salad to writers plying their trade at Starbucks. Underneath it all are characters whose comments are outlandish and whose behaviors are impetuous or harebrained.
This morning, a particular exchange in a Family Guy episode is stuck in my head. Peter Griffin is blackmailing his father-in-law about an extra-marital affair. As part of the extortion, Peter requires the father-in-law to produce a list of exceptional catch-phrases. (Peter wants his own catch-phrase attributable to him.) One of the catch-phrases that he admires is as inane as it is nonsensical. "On your mark. Get set. Terrible."
Why is this scene playing on a loop in my head right now? Perhaps it has to do with the Federal Reserve's imminent directional shift with respect to borrowing costs. Or maybe it has to do with the current state of the economy. Or even more likely, the catch-phrase aptly describes what is likely to happen to risk assets when the Fed is hiking overnight lending rates into a decelerating economy.
How do we know the economy is slowing down rather than picking up? The treasury yield curve is flattening. Key credit spreads are widening. The manufacturing segment is contracting. Labor market conditions are moderating. And the consumer is spending less.
Let me start with the all-important yield curve. A steepening curve is indicative of a healthier economic backdrop whereas a flattening curve is indicative of weakness in an economy. Granted, a flattening curve by itself is not a death blow for an expansion. On the other hand, the less the difference between long maturities (e.g. 25 years, 30 years, etc.) and short maturities (e.g., 1 year, 2 years, 3 years, etc.), the less confidence the financial world has in the well-being of an expansion. Right now? Investors have less confidence in the well-being of the current expansion than they did when the Fed put plans in motion for its awe-inspiring QE3 stimulus back in 2012.
Beyond the yield curve's warning about the economy as well as riskier assets like stocks, we have the widening of 10-year treasuries and comparable corporate bonds. For example, six months ago, the Composite Corporate Bond Rate (CCBR) was at 3.85% and the 10-year Treasury was at 2.4%. Today, the spread has widened with the CCBR at 4.32% and the 10-year treasury at 2.22%. The jump in this credit spread from 1.45% to 2.10% - 65 basis points - is significant for just 6 months.
There's more. One can investigate the risk preferences of investors by comparing the lowest end of the investment grade corporate bond (Baa) spectrum as it compares with a comparable 10-year treasury. Not only has the spread moved nearly 100 basis points in the last year - from 2.2 percent to 3.2 percent - but the same move from 2% to above 3% in this spread preceded the last two recessions.
Still not persuaded? Let's take a look at one of the most consistent economic forecasting tools: The Institute For Supply Management's Purchasing Managers' Index (PMI).
Economists tend to interpret PMI in two ways - on a single reading as well as over a time horizon. In essence, a percentage over 50 expresses manufacturing health and a percentage under 50 expresses a manufacturing recession.
On an absolute basis, November PMI came in at 49.8. We are already in pretty bad shape. More troubling, however, is the persistent downtrend over the last 12 months. Keep in mind, the same type of downtrend preceded the real estate inspired Great Recession. What's more, when the Fed acted to stimulate the U.S. economy in 2009 as well as 2012, PMI expanded handsomely. Based on what the manufacturing sector is telling us, does it make sense that the Fed is hell-bent on hiking overnight lending rates now? Wouldn't it have been more "opportune" to do so immediately after QE3 ended in 2014?
From my vantage point, the timing of the Fed's directional shift is on the wrong side of history. Contraction in the manufacturing segment, the flattening of the treasury curve and the widening of credit spreads are signs of economic deceleration. Is it wishful thinking to place all of our hopes in the service sector basket? Probably not.
Take a look at the state of retail sales. The last time that year-over-year retail sales looked this anemic, the Federal Reserve shocked and awed the country with its boldest ever stimulus program. In complete contrast, the Fed is gearing up to set a course for gradual tightening. If risk assets like stocks are going to power ahead to new 52-week record highs, they're going to need that course to be as gradual as a snail crossing a 5-lane highway. (And the snail better hope it does not get crushed by a car as it attempts to cross!)
Still not convinced that the economy is on shaky ground? Still think the Fed is invincible with respect to its policy wisdom? Then take a look at the Fed's own Labor Market Conditions Index (LMCI). The model incorporates labor market conditions across 19 underlying indicators. Just this month, November's reading came in at a less-than-promising 0.5. That was revised down from 2.2 in October. Equally troubling, there have been 12 negative revisions with only 6 positive revisions over the last year and a half.
When the LMCI drops below zero, it is meant to be a warning to economists that labor market conditions are contracting. The current reading of 0.5, then, doesn't exactly promote warm and fuzzy feelings with regard to claims that labor market is healthy. What's more, each of the last five recessions were preceded by an LMCI reading below zero. With the current reading of 0.5, is the Fed is genuinely confident about the well-being of the labor market? Is the chatter about "nearing full employment" more of a smoke screen to distract others from discussing the Labor Market Conditions Index (LMCI) in greater detail? Why are voting members of the Fed's Open Market Committee (FOMC) downplaying the fact that the percentage of working-aged individuals (25-54) in the labor force continues to evaporate? Millions of working-aged Americans (25-54) are not counted as part of the headline unemployment rate such that prospects for the prime working-aged demographic (25-54) haven't been this grim since the early 1980s.
The economy is fragile. If the economy were humming along, the treasury yield curve would be steepening, not flattening; if the backdrop were rosy, key credit spreads would be coming together, not widening. If the economy were firing on all cylinders, manufacturers would be growing their businesses, not making less stuff; households would be spending more each year, not increasing their savings and holding back on holiday purchases. Additionally, the percentage of working-aged individuals in the labor force (25-54) would be growing, not disappearing; labor market conditions via the LMCI would be vibrant, not wobbly.
Now, if someone wants to make a case that the economy's shakiness is irrelevant to the near-term or intermediate-term direction of stock prices, he/she might be able to argue it. However, history suggests otherwise. For one thing, a contraction in earnings (a.k.a. "earnings recession") is already in effect. Earnings contraction typically portends weaker economic output as well as inferior total returns in the stock market. In fact, corporate earnings on the S&P 500 have declined 14% year-over-year - from $106 to $91. Even the Wall Street Journal/Birinyi Associates Forward P/E Ratio of 17.4 - a ratio that is 25% higher than the 35-year average Forward P/E of 13 - would require 33% earnings growth over the coming 12 months. Is this economy going to witness an industrial/energy revival as well as extraordinary demand for U.S exports to support 33% earnings growth over the next year? Not likely. Stocks will only be moving from overvalued to insanely overvalued.
Second, there's a remarkably strong link between profit margins and recessions. Not that long ago, Jonathan Glionna at Barclays' noted the relationship between shrinking profit margins and recessions for the last seven business cycles, going back to 1973. He wrote:
Already, profit margins have declined 60 basis points. Will stocks and the U.S. economy be more like 1985, then? Or will they be more like 1973-1974, 1981-1982, 1987, 1990, 2000-2002 and 2007-2009?
For my moderate clients, I am maintaining an asset allocation that is less "risky" than normal. Whereas it might be appropriate for a moderate client to have 70% equity exposure across all stock types (e.g., large, small, foreign, emerging, etc.), we have 60% primarily dedicated to the large company space. Some of the ETFs that we own include theSPDR S&P 500 Trust ETF ( SPY ), the iShares Russell 1000 Growth ETF ( IWF ) and theTechnology Select Sector SPDR ETF ( XLK ).
Similarly, it might typically be appropriate for a moderate client to own 30% across all income assets (e.g., investment grade bonds, convertibles, higher-yield, master limited partnerships, short maturity, long maturity, etc.). However, we have 25% primarily dedicated to investment grade bonds with intermediate maturities. Some of the ETFs that we own include theSPDR Nuveen Barclays Municipal Bond ETF ( TFI ), theiShares Core Total U.S. Bond Market ETF ( AGG ) andiShares 7-10 Year Treasury Bond ETF (IEF).
The remaining 15%? Cash and cash equivalents. In addition, if the economy worsens and market internals degenerate and stock valuations become obscene, I would make a tactical decision to raise cash levels. There's only one way to acquire assets at lower prices. You've got to have the cash on hand to take advantage when the world seems to be falling apart.
Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.
See also CEFL: A Year In Review, And A Prediction Of What's Ahead on seekingalpha.com
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:Reviewing The Hottest New ETFs of 2015
2015 has been an outstanding year for growth in the ETF industry if you measure success by the number of new funds that were created. Over 260 exchange-traded products have debuted so far this year, and with a full month still to go, that number is expected to increase even further.
This new crop of freshman funds span a wide spectrum of investment strategies and are all vying to attract significant investment dollars from the rapidly saturating field. Nevertheless, only a small cadre of unique ETFs have been able to attract noteworthy inflows.
The Billion Dollar Club
The fastest growing ETF has been the SPDR Doubleline Total Return Tactical ETF (TOTL), which is the only fund to debut this year that has surpassed the billion-dollar mark. This ETF has amassed over $1.4 billion in assets since its February entrance. That month I noted TOTL has a worthy candidate for fixed-income mavens to watch and it has not disappointed with its rapid progress.
This fund was conceived as a joint venture between State Street’s well-known ETF platform and the investing prowess of bond guru Jeffrey Gundlach. The concept behind the TOTL strategy is to use Gundalch’s research and investment methodology in order to create an actively managed portfolio of global bonds that seeks superior returns versus the aggregate U.S. fixed-income benchmark.
A comparison of TOTL versus the iShares Core U.S. Aggregate Bond ETF (AGG) demonstrates that the active strategy has been able to make slight gains over its benchmark since its debut. Yet more importantly, the chart below denotes how TOTL has been able to minimize peaks and valley associated with lower interest rate sensitivity.
TOTL is also regularly compared against the PIMCO Total Return Bond ETF (BOND), which is nearing its fourth year of existence as one of the largest actively managed ETFs in the world.
Exponential Potential
Companies that have proven to be leaders in technology innovation represent the underlying theme of the iShares Exponential Technologies ETF (XT). This ETF is based on an index created by Morningstar to screen a basket of 200 global stocks with developing or pioneering advancements in their field of expertise. Top holdings include well-known names such as Amazon.com Inc (AMZN) and Netflix Inc (NFLX).
XT debuted in March and has managed to grow its asset base to over $686 million so far. This was helped by an early infusion of capital from the investment arm of well-known advisor Ric Edelman, who spearheaded the initiative with Blackrock and Morningstar.
XT takes a unique approach in that its underlying stocks are spread amongst nearly every sector of the market. This enhances diversification versus a typical sector ETF that only owns technology stocks. In addition, one-third of the holdings are made up of companies outside the United States, which makes this a truly global offering.
The Trend Is Your Friend
The third largest ETF debut this year is geared towards investors that believe in a trend-following strategy. The Pacer Trendpilot 750 ETF (PTLC) made its entrance in June as a diversified portfolio of large-cap U.S. stocks that reduces its exposure and moves to cash when the market falls below its long-term trend line. PTLC has amassed nearly $300 million in just a few short months and found its strategy quickly tested during the late-summer volatility.
As you can see on the chart below, this rules-based ETF moved to cash as the market experienced a pernicious drop and has now begun to re-enter its stock positions. The goal of PTLC is to reduce the impact of bear markets and other extreme drops that can quickly erase multiple years of gains.
An ETF of this nature may be suitable for investors that want an automatic sell plan in place that also resumes its normal stock exposure according to a strict set of guidelines.
The Bottom Line
With over 1,800 exchange-traded products, it’s becoming more difficult for new funds to attract assets away from well-established indexes or favored investment vehicles. To underscore this point, over 60% of the new ETFs created in 2015 have yet to gain more than $10 million in new assets.
Nevertheless, ETF investors will stand up and take notice when a distinctive strategy comes along with a value-added approach. That is the lightning in a bottle that every ETF issuer hopes to capture.
Disclosure: At the time this article was published, the author and some clients of FMD Capital Management LLC owned shares of TOTL.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:Doing The Math On Liquid Alts' Five-Year Track Record
By Brad Zigler :
This article originally appeared in theSeptember issue of REP. magazine and online atWealthmanagement.com
If you've been reading these pages for very long, you've likely learned that there are a lot of choices in the alternative investment space.
In July, we published a review of alternative investment funds (" Tough Choices: Alternative Funds in 2015 ") that tracked the year-to-date performance of 68 seasoned "alts" over a dozen categories ranging from risk parity through commodities.
July's appraisal provided a sort of telescopic view of the alts space. By that, I mean we zoomed in for a close-up of each individual category's performance, on a stand-alone basis, rather than in combination with other assets that might be in an investor's portfolio.
But that got me wondering: Could we get a different perspective on alts if we put them in harness with stock and bond exposures in a real world simulation? In other words, what kind of alternative investment would have been most useful as a portfolio diversifier over the past five years?
I used market-weighted performance in the July analysis to better reflect investor behavior. So, in keeping with that notion, I'll use each category's largest fund as an exposure proxy in this study. The premise here will be simple: How will a modest (15 percent) allocation to an alternative strategy impact a balanced stock-and-bond portfolio?
A balanced portfolio is classically defined as 60 percent stocks and 40 percent bonds. If we steal an equal amount of space from each allocation for alts, we end up with a 51 percent dollop of stocks and 34 percent for bonds. And, if we plot efficient frontiers based on the daily returns for each asset over the past five years, we end up with the prospective portfolios depicted in Table 1.
What's an Efficient Frontier?
What's an efficient frontier? It's a set of portfolios mixing prescribed assets in such a way as to offer the highest expected return for a given level of risk. The set, based on the assets' realized returns, standard deviations and cross-correlations, is plotted as a line on a graph. A portfolio lying below the efficient frontier would be considered sub-optimal because it wouldn't be expected to generate sufficient returns for the level of risk assumed.
A classically balanced portfolio of stocks and bonds, modeled with the SPDR S&P 500 Trust ETF ( SPY ) and the iShares Core US Aggregate Bond ETF ( AGG ), would be expected to generate an annualized return of 14.1 percent at an 8.6 percent volatility, based on the assets' performance over the past five years. You can see the 60/40 portfolio highlighted in the dead center of the efficient frontier.
An investor seeking less risk would ratchet down the SPY exposure and amp up the AGG allocation. Optimizing for the lowest standard deviation, for example, yields a portfolio comprised of 90 percent AGG and 10 percent SPY (marked in green with a 5.2 percent expected return and a 3 percent standard deviation). At the other extreme, the portfolio that produces the maximum return isn't really a portfolio at all-it's just a 100 percent exposure to SPY (marked in purple with a 21.3 percent expected return and a 14.9 percent standard deviation).
So, what kind of frontier is seen when a third asset is added? Let's use our star diversifier from the July survey, the PIMCO Unconstrained Bond Fund ( PUBAX ). Over five years, PUBAX has averaged a 2.1 percent annual return with a 2.5 percent standard deviation-definitely a low-risk, low return play. As you might expect, making room for an allocation to PUBAX lowers portfolio returns. But, as an offset, it also lowers overall risk.
Chart 2 lays out the efficient frontier for a three-asset portfolio containing various levels of SPY, AGG and PUBAX. A portfolio mix including a 15 percent allocation to PUBAX sits just above the efficient frontier, suggesting the carve-out pays off, if only slightly, with a superior reward-to-risk ratio.
Portfolio efficiency can be boiled down through the Sharpe ratio, a classic measure of risk-adjusted returns. You can see that a dose of PUBAX yields a better risk-adjusted return than the traditional two-asset portfolio. And so it is, too, for a portfolio augmented with a 15 percent allocation to the JPMorgan Strategic Income Opportunities Fund ( JSOAX ).
Adding managed futures exposure through the A-class futures fund Equinox MutualHedge Futures Strategy A ( MHFAX ) seems to be a push: a 15 percent allocation doesn't improve the risk-adjusted return of a two-asset portfolio, but it doesn't worsen matters either.
Less Efficient Add-ons
Other alternative exposures, however, are less efficient add-ons. At the very bottom of the efficiency scale are real assets. And no wonder. Commodities have taken a beating since their 2011 peak. That's dragged down the PIMCO Commodity Real Return Strategy FundInstitutional (PCRIX), thePowerShares DB Commodity Index Tracking ETF ( DBC) and theSPDR Gold Trust ETF ( GLD).
Global macro exposure through the Ivy Asset Strategy Fund (WASAX) isn't providing a diversification benefit, either. That may, in fact, be due to the fund's exposure to precious metals and foreign currencies which have been slammed lately by a resurgent U.S. greenback.
The oft-touted contention that diversification reduces risk seems only partially true if you look at the data in Table 1. Only two alternative investment add-ons produced better risk-adjusted gains than the two-asset portfolio, one carve-out was a wash and nine actually seem to drag down portfolio performance. So, why is that?
Two reasons, really. Perhaps the exemplars of each exposure aren't the "best" funds. They were picked in July on the bases of size and track record length. There's a good chance that smaller or younger funds could be better portfolio diversifiers over a five-year stretch.
More significant, though, is the outsized performance of domestic equities in the wake of the 2008 financial crisis. Stocks have been in an unrelenting bull market over the past five years, leaving other asset classes pretty much breathing their exhaust fumes. Tossing virtually any asset class into a portfolio with stocks is going to seem dilutive.
But let's not be too hasty to dismiss alternative investments. If you consider the funds' ability to contain downside risk, they've actually been fairly successful. While only two alt-enhanced portfolios outdid the two-asset portfolio's Sharpe ratio, six yield better Sortino ratios (see Table 2). Like the Sharpe metric, the Sortino ratio measures risk-adjusted returns but uses only downside deviation, not upside volatility, in its calculation. A high Sortino ratio means the add-on helped the portfolio hold on to gains earned in bull moves.
Another measure of downside protection, the percentage of days under par, depicts the amount of time a portfolio spends under water, i.e., below its starting value. On average, portfolios with alts exposure were in the red 1.4 percent of the time, compared to 1.6 percent for the classic stock and bond mix.
Portfolio optimization with alternative investments will be a different game when stock returns normalize. The compound annual growth rate of the S&P 500, counting dividends, has been 9.6 percent since 1928, less than half the index's growth rate in the past half-decade.
"If you rank the top 50 one-day moves in the S&P 500," says MIT economist Andrew Lo, "a fair number of those happened within the last five or 10 years. That tells you that we're in a different, riskier market now."
Only time will tell, but with mean reversion probable in coming years, the utility of alternative investments is likely to be more fully realized.
See also Singapore Government Securities Yields: A Multi-Factor Heath, Jarrow And Morton Model on seekingalpha.com
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:Alternative Alternative Income
By Brad Zigler :
This article originally appeared in the August issue of REP. magazine and online atWealthmanagement.com
With interest rates at floor level asset managers have ratcheted up their search for yield with alternative income funds. Which ones are best?
Question time: When's the last time you saw a 13-week T-bill yield with a handle that wasn't a zero? Need a clue? Think of the current occupant of the White House. Remember when he earned the lease? Yup, November 2008.
It's been seven miles of bad road for cash returns ever since.
Income fund manufacturers have (excuse the expression) "cashed in" on the lousy yield environment. In the wake of the rate plunge, these asset managers have launched a raft of new funds aimed at yield-hungry investors. Among them are alternative fixed income portfolios that invest in coupon securities from nontraditional issuers. Others are known, for lack of a better term, simply as alternative income funds, and buy noncoupon paper such as floating-rate notes (FRNs) and master limited partnerships (MLPs).
Each fund category produces a unique income stream and offers an idiosyncratic diversification benefit. The distinction is palpable, as you can see in the recent REP. mid-year review of alternative funds. Seasoned alternative income funds comprised the only segment out of a dozen that produced positive alpha in early 2015.
With rising interest rates on the horizon, investors and advisors are pondering the ability of alternative income funds to keep producing better-than-average yields with less-than-average risk. Of course, that depends on the investments made by each fund.
Among 21 alternative income funds with one-year track records, 10 invest in FRNs or bank loans, and four limit their buying to MLPs. The balance pursue absolute returns, employing a variety of securities and strategies. On a market-weighted basis, half of the money invested in alternative income funds is committed to absolute return strategies, though one particular fund-taking nearly all the segment's assets-crowds the field. The other half of alternative income capital is pretty evenly split between MLP funds, and portfolios invested in FRNs.
MLPFunds
If you're yield-hungry, nothing quells your craving better than funds that invest in master limited partnerships in the energy sector. Energy MLPs and MLP funds were the rage during the fracking boom, but a precipitous slump in oil prices last year has given investors a bit of indigestion.
The ALPS Alerian MLP ETF ( AMLP ) , an $8.4 billion index tracker comprised of 23 publicly traded midstream partnerships, dominates the segment with an 81 percent market share. Midstream deals develop, own and operate infrastructure assets such as pipelines, processing plants and storage facilities.
AMLP offers a best-of-class 7 ½ percent yield at a cost. The reported annual carrying expense is an eye-popping 5.43 percent. Only 85 basis points of that is the ETF's management fee, though. The balance is deferred income tax expense.
Partnerships offer a more-or-less direct flow-through of income and tax liability, but because AMLP is structured as a C corporation, the fund takes care of the partnership tax issues and passes through tax-deferred distributions as dividends to investors. The fund adjusts its net asset value to reflect the deferred tax liability.
As an income alternative, MLP funds deliver handsome yields. Market-weighted returns are treble that of the iShares Core Total U.S. Bond Market ETF ( AGG ), so it's easy to see the allure. These aren't capital preservation vehicles, however. High yields couldn't overcome severe capital depreciation over the past year.
Going forward, you have to be confident of rising oil prices for MLP funds to make sense, especially for conservative portfolios.
FRNFunds
The appeal of floating rate notes and funds has soared as investors anticipate the withdrawal of accommodation by the Fed. The interest paid on FRNs adjust periodically, typically every 30 to 90 days, based on a reference rate. For corporate FRNs, resets are usually based on the London Interbank Offered Rate (Libor) plus a predetermined credit spread. A note, for example, carrying an "L+150" legend would reset to the current Libor rate plus 150 basis points (1.5 percent). The size of the credit spread reflects the creditworthiness of the borrower, and the quality of the collateral and the nature of the loan covenants.
Corporate FRNs are often referred to as "senior debt" because the lender typically has a claim on corporate assets superior to those of bondholders and stockholders.
Last year, the U.S. Treasury began issuing its own FRNs with rate resets based on the discounts at 13-week Treasury bill auctions.
The wide dispersion in returns seen in FRN funds is attributable to the type of notes held in portfolio. Not surprisingly, the payouts on Treasury FRN funds are quite low, reflecting their low risk. Two funds, the iShares Treasury Floating Rate Bond ETF ( TFLO ) and the WisdomTree Bloomberg Floating Rate Treasury ETF ( USFR ), launched on the same day in 2014, compete head-to-head for very small market shares. TFLO has an edge, though: It owes its positive yield to a management fee waiver. For now, TFLO is free to hold.
The behemoth among the corporate FRN funds is the $5.4 billion PowerShares Senior Loan Portfolio ETF ( BKLN ) which has sucked up 81 percent of the segment's assets. BKLN tracks the 100 largest bank loan facilities, all of which have a credit spread of at least 125 basis points. About 90 percent of its portfolio is below investment grade, making credit risk a concern going forward. If interest rates were to spike upwards, borrowers could have trouble servicing their debt.
BKLN competes directly with the Highland/iBoxx Senior Loan ETF (SNLN), the SPDR Black-stone/GSO Senior Loan ETF (SRLN), the First Trust Senior Loan ETF (FTSL) and the Highland Floating Rate Opportunities Fund (HFRAX).
Higher-quality credits, and consequently lower yields, can be found in the investment grade FRN funds, the Market Vectors Investment Grade Floating Rate Bond ETF (FLTR), the iShares Floating Rate Bond ETF (FLOT) and the SPDR Barclays Capital Investment Grade Floating Rate ETF (FLRN).
While the yields on FRN funds lag behind those of the MLP portfolios, the floaters have managed to eke out a smidgen of positive alpha, due mostly to their modest volatility. Generally speaking, the shorter the average duration, the lower the volatility and, in turn, the lower the risk.
OtherFunds
Funds pursuing absolute return strategies are led by the $20.3 billion JPMorgan Strategic Income Opportunities Fund (JSOAX). The fund, true to its name, is opportunistic. Fund runners invest in a broad array of fixed income securities, and employ a number of diverse strategies including the use of derivatives.
Like JSOAX, the Virtus Alternative Total Solution Fund (VATCX) and the Highland Opportunistic Credit Fund (HNRAX) take a multisecurity/multistrategy approach to very disparate results.
The Crystal Strategy Absolute Income Fund (CSTFX) plies a long/short strategy, while the LoCorr Spectrum Income Fund (LSPAX) utilizes a two-pronged investment strategy to boost yields.
Two funds take very narrow paths in search of yields. The PowerShares VRDO Tax-Free Weekly Portfolio ETF (PVI) invests solely in variable-rate demand obligations, municipal bonds with weekly interest rate resets. A stablemate, the PowerShares Variable Rate Preferred Portfolio ETF (VRP) focuses on variable- and floating-rate preferred stocks and hybrid securities.
Among seven funds in the segment, only the $266 million VRP portfolio has produced positive alpha over the past year. That, combined with the fund's positive total return, high yield and low duration risk, make it a good prospect for a rising rate environment.
British scientist Richard Dawkins once opined, "People believe the only alternative to randomness is intelligent design." Clearly, some alternative income funds seem better designed to deal with market vagaries. The best bets are those portfolios attuned and adjustable to current interest rates. But, as we've seen, there are alternatives within alternatives. Selection of the "right" fund remains a very personal decision.
See also Daily State Of The Markets: Can You Say Neutral? on seekingalpha.com
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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doc_00086
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Title:Can REITs Sustain Their Gains?
By Brad Zigler :
Since the so-called Taper Tantrum of 2013, real estate investment trusts (REITs) have been taking their cues from the Federal Reserve Board. Recall, the tantrum was when the market got spooked about the prospects of an abrupt withdrawal of Fed accommodation. Rates on the benchmark 10-year Treasury note shot up 135 basis points (82 percent) in just four months. (See Chart 2.)
The tantrum kicked off a big sell-off in bonds and bond-like investments such as REITs. And now, with the recent spike in interest rates, real estate investors are again worried that trust prices will tumble. By and large, those fears are justified. Four of the five top-performing REIT exchange traded funds swooned as Treasury rates ticked upward in April. One, however, actually gained ground. What accounted for the disparate performance? In two words: Global exposure.
S&P 500 IndexBarclays Aggregate Bond Index
iShares Residential Real Estate Capped ETF ( REZ ) - This smallish fund has been the standout performer over the past 12 months. Perhaps the reason is its diversification. The fund tracks the FTSE NAREIT All Residential Capped Index, which-despite its name-only devotes about half of its asset weight to residential REITs. An equal part of the index portfolio is given over to a combination of self-storage, health care and hotel trusts. Of the top five funds, REZ is the least influenced by the broad stock market represented by the SPDR S&P 500 Trust ETF (SPY ) and is the most closely correlated to the fixed income market tracked by the iSharesCore Total U.S. Bond Market ETF ( AGG ).
Masters Portfolio
iShares Cohen & Steers REIT ETF ( ICF ) - This fund used to be known as the Cohen & Steers Realty Masters portfolio. "Masters," in that context, meant "majors" or big players. The fund's underlying index is a narrow compendium of committee-selected trusts. ICF is definitely a large-cap portfolio, devoting 6o percent of its exposure to its top 10 names. Commercial REITs comprise half of the asset base, with the balance more or less split between residential and specialized trusts.
Schwab U.S. REIT ETF ( SCHH ) - SCHH tracks the Dow Jones U.S. Select REIT Index , but at a fraction of the holding cost of its direct competitor. Boasting the lowest expense ratio in the segment, the fund invests in a diverse array of more than 80 domestic REITs. Still, the portfolio leans heavily toward commercial properties. SCHH has attracted a large asset base in the four years since its launch, aided by a fee which severely undercuts the 14-year-old SPDR/SSgA RWR portfolio tracking the same benchmark.
SPDR Dow Jones REIT ETF ( RWR ) - One of the oldest real estate ETFs on the market, RWR offers investors deep liquidity. RWR's trading volume and bid/ask spreads outshine its SCHH doppelgänger. RWR, like SCHH, overweights commercial REITs, with specialized trusts such as health care and self-storage taking second billing. Traditional residential REITs make up a fifth of the portfolio.
WisdomTree Global Ex-U.S. Real Estate ETF (DRW) - DRW is the outlier of the top five portfolios in a couple of ways. First, its purview is strictly offshore. A quarter of DRW's holdings are concentrated in Hong Kong; another quarter is split between Australian and French property trusts. A second distinction is its focus on dividend yield: DRW pays out 40 percent more than the next-best REZ fund. DRW, in fact, offers the highest yield in the REIT ETF segment.
Stark Contrasts
All told, the past 12 months have put two REIT ETFs in stark contrast to one other. On the basis of total return, the iShares REZ portfolio is far and away ahead of the pack. Still, since REZ is a portfolio that focuses on domestic property trusts, it moves more or less in lockstep with ICF and the RWR / SCHH twins. (See Chart 1.) DRW marches to a very different drumbeat. Sometimes DRW's tempo causes the fund to trudge ahead of the domestic troops, sometimes to lag.
History May Provide Clues
The question foremost in investors' minds now is how future Fed actions (or the anticipation of action) will impact REIT values. History may provide some clues. Chart 2 highlights the effect of the 2013 Taper Tantrum on REZ's share price. Over that year's summer, REZ lost 18 percent, lending yet more credence to the "Sell in May, go away" axiom. At the same time, DRW dropped 16 percent. (See Chart 3.) So, should REIT investors take a cue to close out their REIT positions this summer?
Before Pushing Sell
Before pushing the "sell" button, investors should look at the performance of the two funds relative to 10-year note yields. Can you tell that that DRW had once been more closely correlated to domestic interest rates than REZ? Recently, that condition's been reversed. As Fed accommodation has been withdrawn, the domestically focused iShares portfolio's correlation has flipped and now outstrips that of DRW. (See Chart 4.)
The implication? If REZ is a bellwether, it seems domestic real estate portfolios are becoming more sensitized to potential Fed action. In addition, the recent weakening of the U.S. dollar has given a boost to foreign-focused investments like DRW, magnifying the performance disparity.
That said, there seems little to be gained by fighting the Fed. But consider this: History shows that domestic REITs can actually hold up in a rising rate environment.
No doubt, rates will rise in the future. They can't, after all, get much lower. What's unknown is the timing and pace of the increase.
The Taper Tantrum-an event that anticipated a rate hike rather than reacted to one-was followed by substantial gains in REIT values. That's not atypical. REITs, in fact, often gain ground after actual hikes in the federal funds rate. On average, REITs appreciated at an 11 percent annual rate over six tightening cycles dating back to 1979.
Driven by Capitalization
REITs tend to be driven more by capitalization ("cap") rates than Fed-controlled tariffs. A cap rate reflects the yield earned from a property-essentially its net income divided by its market value. Economic growth rates and scarcity, rather than federal funds or Treasury yields, influence local investment returns. Rising Treasury yields and tighter monetary policy coincide with a recovering economy and heightened inflationary expectations. Historically, real estate values tend to appreciate, and cap rates decline, during such periods. Real estate investors typically accept lower cap rates with the expectation that price appreciation (read: inflation) leads to better cash flows from increasing occupancies and rents.
Let's not forget that REITs, unlike fixed income securities, are inflation hedges-at least the well-run REITs with the pricing power to pass on rising costs to tenants. Time has shown that REIT cash flows and rents outpace inflation measured by the Consumer Price Index ((CPI)). Precursors of inflation-rising commodity prices and TIPS spreads-are already infiltrating the market. TIPS spreads goosed up 26 percent in April as commodity prices, measured by the Thomson Reuters/CoreCommodity CRB Index, climbed 9 percent.
The bottom line? There still appears to be room for REITs in investors' portfolios. The safest route, though, seems a split strategy that divvies up the real estate allocation between domestic and foreign assets.
This article first appeared in the June issue of REP. Magazine and online at WealthManagement.com.
See also Price Drops While High-Grade GOES Faces A Supply Shortage, Anti-Dumping Duties on seekingalpha.com
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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doc_00087
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Title:How To Use ETFs To Reduce The Tax Bite In Your Portfolio
Now that the 2014 tax season is in the rear view mirror, it is a perfect time to start analyzing and strategizing your game plan for 2015. With two-thirds of the year still to go, there are a number of smart moves you can make to reduce the impact of future taxes that will have to be paid on any non-retirement accounts.
One of the easiest ways to do that is by reviewing your exiting positions and trading history to determine if there are reasonable adjustments or substitutions that can be made. Often legacy mutual funds, inefficient income assets, or over trading within a taxable account can create a significant tax burden. Fortunately, there are a variety of ways you can enhance your tax efficiency using exchange-traded funds.
Reducing Impact Of Capital Gains
ETFs make excellent long-term holding vehicles because the majority of them track a passive index. This creates very little real-world turnover of the underlying holdings, which in turn generates very few if any capital gains.
This can be a significant benefit over traditional actively managed mutual funds with high turnover rates that generate annual capital gains taxes. The pooled investment structure dictates that capital gains are passed through to shareholders in proportional amounts. Short term capital gains are taxed at ordinary income rates, while long-term gains are typically capped at 20% (or less) for most taxpayers.
It may make sense to consider switching out any legacy actively managed mutual funds with excessive capital gains histories to more streamlined ETFs in your taxable accounts. This may also reduce your underlying expenses and create a more consistent return that you can benchmark against well-known indexes.
Qualified vs. Non-Qualified Income
Another way to reduce the tax impact of your non-retirement assets is to seek out qualified dividends, which are taxed at a maximum rate of 15%. These are generally dividends that are paid from a domestic corporation and certain qualified foreign corporations. Additional explanation and rules on qualified versus non-qualified dividends can be found here.
The Vanguard High Dividend Yield ETF (VYM) invests in a basket of well-known dividend paying stocks such as Exxon Mobil Corp (XOM) and Microsoft Corp (MSFT). The current yield of VYM is 3.03% and quarterly distributions are considered qualified based on the underlying makeup of the companies in this ETF.
Beware that income from real estate investment trusts (REITs) and master limited partnerships (MLPs) are generally considered non-qualified and may be taxed at a higher rate.
Tax-Free Income
Everyone loves the allure of tax-free income and one of the easiest ways to add this to your portfolio is through municipal bond funds. The iShares National AMT-Free Muni Bond ETF (MUB) and SPDR Nuveen Short-Term Municipal Bond ETF (SHM) are the two largest ETFs in this space. Both funds focus on a diversified portfolio of high quality municipal bonds with varying state exposure. The income derived from these ETFs will be federal tax-free with the potential for some additional state-specific benefits as well.
For taxable accounts, it may be an advantage to substitute traditional government or aggregate bond funds with tax-free municipal indexes. Because of the similar exposure to interest-rate sensitive securities, a fund such as MUB has tracked closely with the iShares Core U.S. Aggregate Bond ETF (AGG) over the last 3 and 5-year time frames.
Nevertheless, there are unique risks in selecting muni bond exposure that must be considered with respect to underlying credit fundamentals of the issuing municipalities.
The Bottom Line
Reducing the amount of money you pay to Uncle Sam every year will allow your taxable investment accounts to compound at a much faster rate. With some modest adjustments and analysis, ETFs can provide similar exposure with greater flexibility and tax efficiency.
Often times it may make sense to relegate certain high yield or active capital gains activity to retirement accounts in order to achieve your investment goals. That may include splitting asset classes into different categories and achieving a desirable outcome through account-specific investment strategies.
Disclosure: At the time this article was published, clients of FMD Capital Management owned shares in VYM.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:ETF Investors Are Still Hungry For Corporate Bonds
Interest rates experienced a volatile first quarter that included the CBOE 10 Year Treasury Note Yield (INDEX: TNX) trading as low as 1.65 percent and as high as 2.25 percent.
Much of this bifurcated price action can be tied to economists and market watchers' uncertainty over the timing of a Federal Reserve rate hike.
Nevertheless, this volatility did not stop ETF investors from pouring into corporate bonds at a breakneck pace over the last three months.
The two largest corporate bond ETFs - the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSE: LQD ) and iShares iBoxx $ High Yield Corporate Bond ETF (NYSE: HYG ) experienced over $4.8 billion in combined inflows since the beginning of the year.
LQD has now amassed a considerable $22 billion in total assets, while HYG harbors $16.7 billion.
A look at a chart below shows just how confident fixed-income investors have become in the low volatility and steady price trend of investment grade corporate bonds.
LQD notched a total return of 2.48 percent in the first quarter with dividends included.
This significantly bested the iShares Core U.S. Aggregate Bond ETF (NYSE: AGG ) return of 1.52 percent. AGG invests in a broad mix of treasury, corporate, mortgage, and agency securities.
Related Link: China A-Share ETFs Dominate First Quarter Returns
The healthy capital appreciation in LQD has now pushed the 30-day SEC yield on this exchange traded fund down to just 3.02 percent.
Rather than be concerned about interest rate risk, investors in this ETF are betting that rates remain stable for an extended period of time alongside corporate credit fundamentals.
The concomitant rush to own higher yielding junk bonds associated with HYG certainly underscore the outlook for corporate credit has stabilized after a brief scare in December.
HYG carries a fund rating score by Standard & Poors of B-f, which is meant to gauge the credit quality of the underlying holdings.
High yields bonds are known to be more sensitive to stock market fluctuations rather than focusing heavily on interest rates.
HYG sports a 30-day SEC yield of 5.23 percent, which is approximately 42 percent higher than LQD as recompense for the higher credit risk.
In the first three months of the year, this high yield benchmark gained 1.97 percent in total return.
© 2015 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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doc_00089
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Title:Enjoy Gundlach's Skill in SPDR's New Active Bond ETF - ETF News And Commentary
Bond investments, especially the long-dated ones, saw stellar gains in 2014 thanks to the dominance of risk-off trade sentiments in the wake of global growth concerns. However, the trend might shift this year as the Fed plans on ending the prolonged low-interest rate era, sooner-or-later, depending on the progress of the economy.
All these have propelled investors to reshuffle their portfolio in advance and take a stance to fight to the likely rise in interest rates. Issuers are also not sitting idle as every now then they are coming up with novel bond ETF ideas which can successfully allay rising rate concerns plus offer high yield and decent return to the investors.
In this pursuit, State Street launched a new actively managed bond ETF in late February in association with bond master Jeffrey Gundlach's DoubleLine Capital. The fund is called SPDR DoubleLine Total Return Tactical ETF ( TOTL ) (read: 5 Very Successful ETF Launches of 2014 ).
TOTL in Focus
TOTL, an actively managed fund, has its foundation based on the principles of the DoubleLine's sought-after investment research. The product seeks total return, while emphasizing income by investing in a global portfolio of fixed income securities of various maturities and ratings, though only 10% of the portfolio goes to the international arena.
The fund looks to utilize various investment strategies in a broad array of fixed income sectors. It puts about 52% of assets in mortgage-backed securities followed by 13.5% invested in bank loans and 10% in emerging markets. High-yield corporate bonds and investment grade corporate bonds also account for about less than 10% weight in it. The fund charges 55 bps in fees.
The fund has a modified adjusted duration of 3.65 years while its current yield stands at 4.86% (as of February 27, 2015). The fund has about 155 bonds in its portfolio (read: Time for Junk Bond ETFs? ).
How Does it Fit in a Portfolio?
The product could be an interesting choice for investors seeking exposure to the fixed income market while limiting interest rate risk and offering considerable fixed income. With no more than four years of effective duration, the product appears less interest-rate sensitive in a rising rate environment.
Its heavy tilt on mortgage-backed securities (MBS) offers investors higher yields than the Treasury bonds with similar credit rating. Moreover, as the demand for residential and commercial real estate rises, mortgage financing companies are bound to see an increase in their asset books in the near future (read: Guide To MBS ETF Investing ).
The ETF aims to provide income potential by every possible means of MBS, senior loans, high-yield corporate and emerging market bonds. Since the historical correlation between high-yield securities and traditional fixed-income instruments is low, the addition of high-yield securities to a well-diversified portfolio has the potential to improve returns and reduce overall portfolio volatility due to diversification benefits (read: Senior Loan ETFs: The Best Bet for Rising Rates? ).
ETF Competition
At present, the total bond market ETF space is teeming with options with Vanguard Total Bond Market ETF ( BND ) leading. BND rules the space with an AUM size of $26 billion and an average trading volume of more than 3,000,000 shares a day. Next is Core Total U.S. Bond Market ETF ( AGG ) which oversees an asset base of $24 billion and tracks the Barclays Capital U.S. Aggregate Bond Index.
All these ETFs do not emerge as direct peers to TOTL. Per the issuer, TOTL joins conventional fixed income investment sectors of the Barclays US Aggregate Bond Index and fixed income asset classes outside the index through an active approach. However, an active RiverFront Strategic Income Fund ( RIGS ) might pose threat to TOTL.
RIGS is also composed of U.S. and foreign government and corporate debt, high yield bonds, emerging market debt, MBS, muni bonds and preferred securities and intends to offer a higher yield. The fund charges 22 bps in fees.
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SPDRR-DBLN TR T (TOTL): ETF Research Reports
VANGD-TOT BOND (BND): ETF Research Reports
ISHARS-CR US AG (AGG): ETF Research Reports
RIVR-STRAT INCM (RIGS): ETF Research Reports
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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doc_00090
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Title:Are Risk Parity Funds Worth The Cost?
By Brad Zigler :
This article originally appeared in the March edition of REP. magazine and online atWealthManagement.com.
A while back, risk parity was all the rage among institutional investors. And now, thanks to a raft of mutual funds floated over the past five years, retail investors are able to tap into the strategy.
What's risk parity? Put simply, it's a portfolio allocation tactic designed to limit risk by overweighting lower-volatility assets. You can see the appeal of this approach to endowments and foundations. These institutions have to conserve capital in perpetuity. Volatility, especially the kind seen in the wake of the Great Recession, can be crippling.
But only one kind of volatility is really bad-the downside kind. Upside volatility, you'd think, ought to be welcomed. And therein lies the problem with risk parity: An asset that is falling lower in price, as long as it exhibits low volatility, is likely to be deemed safer than a more volatile investment persistently trending upward. In essence, the model-with its exclusive focus on risk-ignores returns. At least in the near term.
For most risk-parity models, allocation decisions are based on comparisons of portfolio assets' standard deviations. Since stocks typically are more volatile than bonds, allotments to equities in a risk-parity portfolio tend to be smaller than fixed income-the exact opposite of the classic 60-40 asset mix (a portfolio made up of 60 percent stocks and 40 percent bonds). Over the past five years, that approach has proven costly.
Here's why: The "parity" in the model means the allocation of the low-volatility asset is raised to equal the effective risk of the high-volatility asset. Suppose, for example, we want to build a simple two-asset portfolio consisting of the SPDR S&P 500 ETF ( SPY ) and the iShares Core US Aggregate Bond ETF ( AGG ) representing broad market exposure to domestic equity and fixed-income securities. If recent history shows SPY's standard deviation at 18 percent and AGG's at 4 percent (much as it was five years ago), we'd make our initial equity allocation thus:
W s = σ a /( σ s + σ a )
where, W s = weight of SPY allocation;
σ a = standard deviation of AGG;
and σ s = standard deviation of SPY.
AGG's weight can then be determined simply by subtracting W s from 100 percent. By this method, a risk-balanced portfolio could have been constructed five years ago with an 18 percent allocation to SPY and an 82 percent commitment to AGG.
So where's the cost in this? It becomes apparent if you compare the portfolio's value over the ensuing five years to a classic 60-40 portfolio. When rebalanced annually (the classic portfolio to its 60-40 norm and the risk-parity portfolio to an allocation based on each preceding year's standard deviations), the risk-parity portfolio's cumulative gain falls far short of the profit made by classic reallocation. Chart 1 illustrates how a $100,000 investment might have grown utilizing each rebalancing approach. Over five years, risk parity produced a 38 percent gain while a 60-40 allocation generated a 67 percent profit.
The Role of An Allocation Strategy
The cost of allocating our two-asset portfolio by a risk-parity formula was nearly 29 percent over five years or, on average, 6 percent per year. Given this, you may well ask what's so smart about risk-parity investing. That's the very question posed-and answered-by UBS Global Research strategists Stephane Deo and Ramin Nakisa in a recent white paper entitled "Weight Watcher."
The role of an allocation strategy, according to Deo and Nakisa, should be to maximize returns, not just to minimize risk. They don't dismiss risk management out of hand, though. Instead, they propose basing allocation decisions on risk-adjusted returns measured by the Sharpe ratio.
Named for its creator, Nobel laureate William Sharpe, the ratio divides an asset's gain or loss (above or below the risk-free rate of return) by its standard deviation. Using the Sharpe ratio as an allocation determinant places more emphasis on assets with the potential for greater returns.
By substituting Sharpe ratios for standard deviations in our weighting formulae, we could have initiated our two-asset portfolio with a 53 percent allocation to SPY, offset with a 47 percent weighting in AGG. Rebalancing the portfolio annually with the current Sharpe ratio yields a five-year cumulative gain of 41 percent, incrementally better than the risk-parity model but far short of the gain realized with the classic 60-40 apportionment.
We can take Deo's and Nakisa's notion of risk management a step further by using Sortino ratios instead of Sharpe ratios to balance our portfolio allocations. The Sortino metric uses downside deviation rather than standard deviation to score risk-adjusted returns. In essence, the Sortino ratio penalizes an investment for bad volatility, not good volatility. For a given asset, Sharpe and Sortino ratios will be fairly close to one another when return distributions are symmetrical. As distributions skew to one side or the other (positively or negatively), the ratios will diverge.
For example, the initial Sharpe ratio for SPY was 1.82 while the ETF's Sortino ratio was 1.13. (Higher or more positive values for both metrics represent greater returns per unit of risk.) AGG's ratios were far more disparate, with a Sharpe value of 1.70 and a 3.92 Sortino reading. The difference can be explained by AGG's consistent uptrend: There was much less downside deviation in the bond fund's track record compared to SPY's.
Plugging Sortino ratios into our equation yields initial weightings of 86 percent for SPY and 14 percent for AGG. Through annual rebalancing, our portfolio would have grown 66 percent over five years, far more than the Sharpe parity model and on par with the classic 60-40 paradigm.(See Chart 2.)
A Fair Degree of Variability
These four allocation schemes present distinct management challenges. For sheer simplicity, of course, the classic 60-40 model can't be beat. No advanced math is required to rebalance the portfolio, and the allocation sizes are easily remembered.
In contrast, you'll need some algebra and some statistical savvy to come up with parity-based allocations. There's a fair degree of variability, too, in the size of those allocations from year to year.
The Sharpe parity model seemingly produced the most even-handed allocations (see Table 1), but there's a lot of variance embedded in the average number. In 2013, for example, the model called for a 100 percent allocation to bonds, a setup that offset a 96 percent allocation to stocks in 2011.
The opposite tack was seen in the Sortino-based portfolio. In every year but one (2013), stocks were overweighted. Yearly returns swung between 18 and 3 percent.
The most consistent model was the risk-parity scheme. Its allocation to bonds was unswervingly large every year. However, the price for such constancy was a mediocre, albeit relatively stable, yearly return.
From this admittedly simple study with a relatively short time frame, we see it's possible for investors and their advisors, depending on their mathematical sophistication, to build parity-based portfolios of their own. A number of pathways are open to manage risk at a modest cost. The expense for holding the two-asset mix is just 9 basis points (0.09 percent) annually. That's vastly cheaper than risk-parity mutual funds, which sport an average expense ratio of 105 basis points.
You can only get risk parity out of these mutual funds, too. To date, no Sharpe- or Sortino-based portfolios have been launched. That goes a long way, perhaps, in explaining their recent track records. Only one fund, the Salient Risk Parity Fund ( SRPFX ) bettered the return of a 60-40 portfolio over the past year. (See Table 2.)
See also Summit Strikes Gold With Its IPO on seekingalpha.com
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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doc_00091
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Title:2 New Must-Watch Bond ETFs For 2015
Bond ETFs have become a hot topic once again as fixed-income investors are set to contend with a myriad of risks and opportunities through the remainder of 2015. While bond yields are now off their lows for the year and many funds now offering a more attractive entry point, there are still important criteria to consider in the areas of credit quality, duration, and sector exposure. This becomes even more critical when the prospect of a Fed rate hike has the potential to significantly alter the landscape that everyone has become accustomed to over the last five years.
There is now over $50 billion in total combined assets invested in the iShares Core U.S. Aggregate Bond ETF (AGG) and Vanguard Total Bond Market ETF (BND). Passive indexes of this nature, which are designed to encompass a wide swath of U.S. denominated bonds, are highly susceptible to interest rate fluctuations based on their overexposure to Treasury and investment grade corporate debt. In addition, while very high in underlying credit quality, these ETFs have seen their yields fall well below 2% as bond prices rose significantly last year.
To address these concerns, two new ETFs are coming to market that may offer unique ways to balance these risks while still remaining highly diversified.
BlackRock is set to debut the iShares Fixed Income Balanced Risk ETF (INC), which is designed to use a smart beta approach in its underlying index construction methodology. Rather than the traditional model of market capitalization weightings, INC will incorporate a 50/50 balance of credit and interest rate risk through higher allocations to corporate bonds. This new offering will also feature positions in U.S. Treasury futures to balance the interest rate risk of the total portfolio according to the underlying holdings.
While it’s still too early to know how INC will perform under various interest rate and credit events, it appears this fund will be far more balanced in its primary risk categories. This should in turn create a lower volatility position with the potential for higher yield than an aggregate index.
Another highly coveted debut this week will be the SPDR DoubleLine Total Return Tactical ETF (TOTL). This is the first actively managed ETF that is sub-advised by Jeffrey Gundlach, one of the top fixed-income mutual fund managers of the last decade.
The TOTL strategy will be a mix of assets that include government issues, high yield, investment grade corporate, and foreign debt from around the globe. The active designation gives the fund manager more flexibility to select areas of the market that they feel will outperform rather than follow a traditional asset allocation course.
The debut of the renowned PIMCO Total Return ETF (BOND) in 2012 was one of the most successful active ETF launches in recent years and TOTL will likely be compared to this established brand. However, Gundlach has been known to depart from conventional views on interest rates and credit metrics, which is why this ETF may find its own niche that evolves over time.
Both new ETFs will give investors an additional tool in their arsenal that may prove to be worthy of consideration given the likelihood of changing dynamics in the bond market over the next several years. While there are also a variety of interest-rate hedged ETFs and other exotic strategies, these funds will still strive to relay a balanced and appropriate mix of assets for income investors to savor.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:Rising Interest Rates Are Great News for These Bond ETFs - ETF News And Commentary
With an improved economy and better employment prospects, a rate hike by the Fed is back on the table for 2015. We have already started to see rates move higher in recent weeks in anticipation of this, as benchmark 10-year debt is now around 2%, a sharp and sudden increase from levels which were in the 1.65% range earlier in the month.
If rates continue in this direction, bond investors will likely see something that they haven't experienced in a while, losses. With rising rates bond prices will fall, hitting the returns for investors who have big holdings in the fixed income world (see Play Rising Rates with These ETFs ).
What's a Fixed Income Investor to Do?
This puts fixed income investors in quite the quandary, as many still desire the stability that comes with bonds, but with the writing on the wall for rates, it is hard to be too optimistic about the space in the near term. However, should we see a burst in market volatility, investors will likely clamor for more bond holdings, putting many investors in a difficult spot.
Fortunately, thanks to some relatively new bond ETFs, fixed income investors might have a solution on their hands. These new products are 'negative duration' bonds and they actually look to rise in price when rates rise and thus are basically built for a rising rate environment (see 3 Sector ETFs to Profit from Rising Rates ).
Currently, there are two such funds both coming to us from WisdomTree. First up we have the Aggregate Bond Negative Duration Fund ( AGND ) which has a -5 year duration, and then the High Yield Bond Fund ( HYND ) which has a -7 year duration for those who focus on the junk bond market.
More Information
These types of funds could be interesting stand alone picks, or ones to pair with other bond holdings as well. For example, an AGG investor could use AGND in order to bring down their overall duration, while a similar strategy can be used by HYG or JNK investors who are looking to ratchet down their interest rate risk levels with HYND.
For more on these funds and how they can be used in a portfolio, watch our short video on the topic below!
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WISDMTR-B USABN (AGND): ETF Research Reports
WISDMTR-MLHYBN (HYND): ETF Research Reports
ISHARS-CR US AG (AGG): ETF Research Reports
ISHARS-IBX HYCB (HYG): ETF Research Reports
SPDR-BC HY BD (JNK): ETF Research Reports
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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doc_00093
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Title:State Street Lowers ETF Fees -- Investors Win
ETF sponsors such as Vanguard, Charles Schwab and even Fidelity Investments have led the way in paving new lower expense ratios for market-leading investment products. However, the competition for ETF assets has prompted many prominent brands such as State Street Global Advisors to review its pricing versus these low cost mavens.
This week, State Street announced it would be lowering its gross expense ratios for 41 funds in its ETF lineup. The full press release and complete list of funds can be viewed here .
While none of the fee breaks will extend to State Street's largest and most established offerings such as the SPDR S&P 500 ETF (NYSE: SPY ) or SPDR Gold Shares ETF (NYSE: GLD ), these changes do offer a significant reduction in total costs for end investors.
For example, the SPDR S&P 1500 Momentum Tilt ETF(NYSE: MMTM ) and SPDR S&P 1500 Value Tilt ETF (NYSE: VLU ) will both have their underlying management fee cut by as much as 66 percent from 0.35 to 0.12 percent annually. The SPDR Barclays Aggregate Bond ETF (NYSE: LAG ) will experience a 52 percent reduction in expenses from 0.21 to 0.10 percent.
Related Link: Energy, TIPs And Biotechnology ETFs To Watch This Week
The reduction in fees for so called "smart beta" offerings such as MMTM represent a significant step forward for the ETF universe. Historically, indexes of this nature would command a higher fee as more frequent sorting and rebalancing of the underlying holdings is required.
However, ETF sponsors are realizing that passing on cost savings to consumers can help attract assets as they compete with high-fee actively managed mutual funds, hedge funds and other diversified alternatives.
State Street's changes will bring many of these funds closer in line with top competitors in each category. LAG, for instance, will now sport a 0.10 percent gross expense ratio compared to 0.09 percent for the well-known iShares Core U.S. Aggregate Bond ETF (NYSE: AGG ). This allows for these funds to participate on a more level playing field and give investors more attractive options to choose from.
It should be noted that the underlying expense ratio of an ETF is just one component to the total cost of ownership. Transaction costs, bid/ask spread and tracking error can also play a factor in both the ETF trading process as well as holding the funds for extended periods of time.
The funds with the lowest expense ratios, highest daily liquidity, and best overall tracking to their index will ultimately prove to be the cheapest to own.
© 2015 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:Where Is The Hedge?
By Brad Zigler :
This article originally appeared in the February issue of REP. magazine and online atWealthManagement.com.
It hasn't been a great year for alternative investments. To put it simply, vanilla trumped spice. Only one alternative class-real estate-beat the S&P 500 Index in 2014. Of course, alternatives, or "alts," aren't meant to replace core holdings, only to augment them.
And unless you're adding new money to your portfolio, you can't just drop in a slug of alts. You typically make room for such investments by reducing other allocations. Yes, a dollop of real estate might have boosted your returns over the past year, but at what cost?
Let's put this in real-world terms. The one-year return of the PowerShares Active U.S. Real Estate ETF ( PSR ) is nearly three times that of the SPDR S&P 500 Trust ETF ( SPY ). Better still, PSR earned its outsized gain with less volatility than the blue chip portfolio. Did that make real estate your best alternative bet last year? Well, maybe. It really depends on your definition of "best."
To see what I mean, let's look at an array of liquid alts-exchange-traded funds pursuing hedge fund or non-traditional strategies. In addition to the PSR portfolio, the other tactics are exemplified by:
Let's now gauge these alt funds against two core holdings: the SPY fund mentioned above and the iShares Core Total U.S. Bond Market ETF ( AGG ), a compendium of debt securities that includes U.S. Treasury and agency notes, corporate bonds, and mortgage-backed and other asset-backed paper.
Four funds in Table 1 stand out for their negative correlations to SPY. One, AGG, is a core holding. Seemingly only three of our alt funds provided the much-vaunted "hedge" against domestic cap-weighted equities. One is a perennial-the SPDR Gold Trust ETF ( GLD ), representing gold bullion. The other two are equity funds. The ProShares RAFI Long/Short ETF ( RALS) earns its mildly negative coefficient because of its long/short admixture of stock exposures. The most significantly uncorrelated asset was the short-only the AdvisorShares Ranger Equity Bear ETF ( HDGE ) portfolio.
The Sharpe Ratio
Going a step further, we can analyze the universe in terms of risk. One conventional measure is the Sharpe ratio-the quotient of a fund's excess return over its volatility. A more positive ratio denotes a better risk-adjusted return. Last year, the hefty return of the PSR fund raised its Sharpe ratio to the top of the heap.
The notion of risk embodied in the Sharpe ratio, however, is vexing. Measuring volatility as the standard deviation of returns deems all price excursions from the mean-negative and positive-to be risky. Intuitively, though, you'd likely welcome upside volatility if you held a long position.
Another metric, the Sortino ratio, gauges an investment's risk solely on the basis of its downside deviance. Like the Sharpe ratio, a higher Sortino value denotes a "better" gamble.
Table 2 points out the decided advantage enjoyed by bond investors last year. The AGG fund's combination of modest downside volatility and positive return shot its Sortino ratio to an atmospheric height. Among the alternatives, PSR's Sortino ratio comes out on top.
So it seems like a slam dunk. Real estate would have done you proud last year. But there's one more test. How would the addition of PSR have actually impacted a core portfolio? Would PSR have been the best adjunct to stock and bond exposures?
To find out, we start with the classic "60/40" portfolio: 60 percent domestic equities, represented by SPY, and 40 percent broad-based bonds, proxied by AGG. That's our control portfolio. We'll test the utility of our hedge funds with a 10 percent carve-out from the equity side. That'll make our experimental portfolios 50 percent SPY, 40 percent AGG and 10 percent alternative investment fund.
When added to a core portfolio, PSR did, indeed, enhance returns. Not only that, a portfolio augmented with real estate cranked out better Sharpe and Sortino ratios than those of a vanilla mix.
But from a hedge standpoint, you could argue that HDGE, the dedicated short-bias portfolio, actually played its role best. Take a look at the Sortino ratio of the HDGE-enhanced portfolio. At 5.08, it's well above that of the PSR mix, even though the portfolio return was fully two percentage points below that of the core holdings. Given HDGE's strongly negative correlation to SPY, there's no surprise in that.
Investors with perpetual investment horizons, such as endowments and foundations, are more likely to focus on Sortino ratios as metrics of success. After all, their money must last forever; drawdowns are anathema. Still, portfolio runners do need to justify their efforts with better-than-market returns over the long run.
We've only looked at short-term performance here. As some of the younger funds become seasoned, it'll be worth a revisit to see how they fare over future market cycles.
See also Replacing The Fed With A Computer on seekingalpha.com
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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doc_00095
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Title:5 Best Bond ETFs for Today's Market
Exchange-traded funds have long been a popular, low-cost way to invest in a wide variety of stocks. Bond ETFs have been slower to catch on, but that is starting to change.
One reason may have to do with today's low yields. Although bond ETFs charge an average of 0.32% in annual fees--slightly more than the average of 0.20% for a no-load bond index mutual fund--ETFs are still markedly cheaper than actively managed bond funds. On average, a no-load actively managed bond fund costs 0.68% per year. "When interest rates are low, looking at cost becomes very important because it eats up a big chunk of your yield," says Thomas Boccellari, an ETF analyst at Morningstar. But even though bond ETFs are cheap, you must be careful about which funds you invest in today. Like most index funds, bond ETFs passively track a benchmark. But the makeup of that benchmark may not always be favorable. For example, low-yielding U.S. Treasury bonds now account for more than one-third of the Barclays U.S. Aggregate Bond index, which is considered to be the benchmark for the investment-grade, taxable segment of the domestic bond market. That's nearly double the average holding of Treasury bonds in intermediate-term U.S. bond funds. Once bond yields begin to climb from today's microscopic levels, losses among ETFs that mimic the Barclays index, often referred to as the AGG, are likely to be significant (bond prices move in the opposite direction of yields).
If you invest in a bond ETF, you'll want to focus on a few key things. First, continue to look at cost. The lower the fee, the more income you will pocket. That's particularly important today. And although ETFs generally are cheap, some charge less than others. For example, annual expenses for iShares Core U.S. Aggregate Bond ( AGG )--which, not surprisingly, tracks the AGG--are only 0.08%. What's more, you can buy this ETF at Fidelity and TD Ameritrade without having to pay a brokerage commission.
The fund's average duration, a measure of interest-rate sensitivity, is 5.1 years. That suggests that if bond yields were to rise by one percentage point, the fund's net asset value per share would drop by roughly 5%. The fund, which yields 1.9%, delivered a total return of 5.8% over the past year and 4.0% annualized over the past five years. (Returns and yields are as of December 19.)
To get a bit more yield--at the expense of slightly more interest-rate risk--consider adding an ETF that invests in high-quality corporate bonds. A solid choice is Vanguard Intermediate-Term Corporate Bond ( VCIT ). It has a 3.1% yield and an average duration of 6.4 years, suggesting that it would lose 6.4% if rates rose by one percentage point. Over the past year, the ETF returned 7.2%, and over the past five years 6.7% annualized. Expenses are just 0.12% per year.
If you're worried about losses from rising interest rates, Boccellari recommends putting a portion of your bond portfolio in iShares Floating Rate Bond ( FLOT ). The ETF owns variable-rate, investment-grade bonds that banks issue to companies; the interest rates adjust every quarter. Unlike most "bank loan" funds, though, Floating Rate holds only bonds that have been extended to high-quality companies, so it has less credit risk than a typical bank-loan fund does. Floating Rate Bond yields just 0.4%. But if the Federal Reserve begins to raise short-term interest rates in 2015, as seems likely, you'll get the full benefit of fatter yields with little risk to your principal. The fund, which launched in 2011, returned a minuscule 0.3% over the past year and 1.8% annualized over the past three. Annual fees are 0.20%.
For more income, tread carefully. Energy companies make up 16% of the high-yield, or "junk," bond market, according to brokerage LPL Financial. And the precipitous drop in oil prices has raised concerns that some of those firms will eventually default on their debt. As a result, the Bank of America Merrill Lynch U.S. High Yield Master II index, a broad measure of junk bonds, has fallen 3.4% over the past six months. Yields in turn have climbed from a low of 5.2% in June to nearly 7% today. Marilyn Cohen, founder of Envision Capital Management, which specializes in bonds, says high-yield investors should brace for more rough patches. Should losses become too large for you to stomach, you'll be better off with a large, heavily traded junk bond ETF, which you'll be able to sell more easily than a small ETF. Our pick: iShares iBoxx $ High Yield Corporate Bond ( HYG ), the largest junk ETF. The ETF keeps 13% in oil and gas companies--slightly less than the high yield market--and has less exposure than some of its peers to the lowest-rated junk debt, which reduces the risk of losses from defaults. Annual expenses are 0.50%. The fund returned 2.5% over the past year and 7.8% annualized over the past five. It yields 5.6%.
Finally, if you want to diversify your fixed-income holdings by heading overseas, beware the strong dollar. Most foreign-bond ETFs are denominated in local currencies, Boccellari says. And a robust dollar can eat into those funds' returns because gains abroad get translated into fewer greenbacks at home. To get around this, consider Vanguard Total International Bond ( BNDX ). The ETF tracks a broad index of foreign bonds, including a small dose of emerging-markets debt, but uses hedging techniques to minimize the impact of currency swings. Over the past year, International Bond returned 8.3%, better than 95% of global bond ETFs, according to Morningstar. The fund, which started in 2013, yields 1.0% and has an average duration of 7.1 years. Annual fees are 0.20%.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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doc_00096
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Title:What a Difference A Year Makes For Bond ETFs
The bond markets are now entering a new era of price and yield discovery that will be driven by traditional supply and demand forces rather than government stimulus. The end of the third round of quantitative easing by the Federal Reserve is seen by many to be a positive sign of economic stability. However, others wonder if it will mark a turning point in equity and fixed-income dynamics until the next interest rate tightening phase takes center stage.
No matter what the eventual outcome, it’s safe to say that 2014 has marked a significant change in investor appetite for risk in the bond market. Last year, the hot places to be were high yield, convertible bonds, and senior floating rate notes as these credit-sensitive areas were considered attractive in a rising interest rate environment. Now the balance of power has shifted to treasury, investment grade, and high quality mortgage debt as the primary leaders in each category.
The following table illustrates the returns for each category using ETFs for both 2013 and 2014 YTD:
*Data as of 11/3/14, source: stockcharts.com
The most lackluster returns this year have from senior loans, which are typically most coveted when bond yields are rising. The PowerShares Senior Loan Portfolio (BKLN) was considered a strong candidate to replace traditional fixed-income allocations in 2013 because of its ability to side step interest rate risk. However, the lack of demand for high yield credit has stifled gains in floating rate bank loans this year as investors have sought to capitalize on intermediate and long-term fixed-income.
Another sector that has seen a marked shift in volatility has been junk bonds. The iShares High Yield Corporate Bond ETF (HYG) has slowed its ascent in recent months and provided some cause for concern over uncertain price action. Many experts believe that high yield bonds have shown signs of over exuberance in recent years as investors have sought lower credit quality holdings to keep pace with yield expectations.
Not surprisingly, this shift has coincided with a marked retracement in bond yields as a result of investors rebalancing their risk exposure to include safe haven assets. On a year-to-date basis the CBOE 10-Year Treasury Note Yield (TNX) has fallen from a high of 3.00% to a current level of 2.4%. This 22% decline speaks volumes about the shift in sentiment and trends to reduce exposure to credit-focused sectors in favor of interest rate driven assets.
A beneficiary of this falling interest rate environment has been ultra-long duration treasuries as evidenced in the 31% return of the Vanguard Extended Duration Treasury ETF (EDV) in 2014. This ETF tracks an index of extended-duration zero-coupon U.S. Treasury securities with an average effective maturity of 25.3 years. EDV and similar exchange-traded funds in this category provide a true directional bet on interest rates, which can be a double edged sword.
The strength in investment grade corporate bonds such as the iShares Investment Grade Corporate Bond ETF (LQD) and Vanguard Long Term Corporate Bond ETF (VCLT) serve as a confirming indicator that quality debt is still in high demand.
How long this current trend will last is a topic that is certainly up for debate and will likely be driven by economic data and further guidance from the Federal Reserve on interest rate policy. In addition, don’t underestimate the dynamics of fear and greed cycles in the stock market that can have a spillover effect to bonds. The return of volatility and distress in October marked an extreme for bonds this year that will be a closely watched price level moving forward.
For the moment, fixed-income investors appear to be betting on interest rates staying low for a prolonged time frame. However, it pays to be nimble and mindful of the risks that conditions can change rapidly at the intersection of duration and credit quality.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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doc_00097
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Title:Bond Alternatives For Investors Rattled By Pimco News
It's the behemoth flagship fund with a 17-year track record from a manager dubbed the bond king. But Pimco Total Return enters the final quarter of 2014 under a cloud of uncertainty.
For investors in the bond mutual fund , it means coming to grips with the abrupt Sept. 26 resignation of Pimco co-founder Bill Gross. And the significant outflow from PTTAX after his departure. And the three new faces at the helm, managing $221.6 billion in assets. And a ratings downgrade for the fund from a prominent investment research firm.
An investor may be tempted to bail out, but not so fast, say some experts. Despite recent stumbles, PTTAX's longer-term returns and its new managers rank among the industry's best, they note. Though new at the fund's helm, they are not new to the fund or its investment process.
"It is well-positioned to weather a pretty large storm," Eric Jacobson, a senior analyst at Morningstar Inc., wrote in a recent research note. At the same time, the firm lowered PTTAX to a bronze rank Monday citing the billions in outflow and management changes within the past week.
For jittery PTTAX-owning investors, alternatives abound. The most obvious involves its Core Bond peers such as $29 billion Dodge & Cox Income Fund or $18 billion Vanguard Intermediate Term Investment Grade .
Both funds have multisector allocations, similar to PTTAX. DODIX and VFICX are each up 4.5% year to date vs. PTTAX's 3% gain. Their expense ratios are far lower than the Pimco bond fund's 0.85%.
Look At Holdings
But when comparing options, investors should scrutinize the underlying holdings. The similar-sounding DoubleLine Total Return , while an "excellent fund," offers greater exposure to the mortgage subsector than PTTAX, which allocates 20% to mortgages, said Todd Rosenbluth, director of fund research at S&P Capital IQ.
"Make sure you're looking at the funds in a largely apples-to-apples comparison" to get the sought-after diversification, he advised.
Another straightforward alternative: a comparable ETF such as iShares Core U.S.Aggregate Bond ( AGG ). It tracks the same index as PTTAX, but offers greater transparency, tradability and a far lower expense ratio -- 0.08%. AGG has risen 4% so far in 2014.
Still, as a passively managed vehicle, it won't outperform the market. That's something that investors exiting the actively managed PTTAX and its ETF versionPimco Total Return ETF ( BOND ) are likely looking for, noted Rosenbluth.
To possibly achieve market-beating returns, he suggests using a bucket of ETFs to replicate the strategy of PTTAX, which has 41% in government securities, 20% in mortgages, 13% in U.S. credit, 13% in foreign developed markets and 9% in emerging markets.
The Weights
For government exposure, an option would be iShares 3-7Year Treasury ( IEI ); for mortgages,Vanguard Mortgage Backed Securities Index ( VMBS ); and for U.S. corporates, iShares iBoxxInvestment Grade Corporate ( LQD ).
"You could take the top-down views that come out of Pimco and re-create some of it yourself," he said, adding this is a "harder" option requiring some investing expertise.
Investors considering a fund switch would do well to consult with their financial adviser, said Margo Cook, head of investment services for Nuveen Investments, which manages $231 billion in assets. Go to the ETFs page at investors.com to see Cook's three points to consider before jumping ship.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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doc_00098
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Title:Bill Gross' Impact On the ETF World And Janus Opportunities
The fund community was shocked on Friday to hear about the departure of Bill Gross from PIMCO, the fixed-income giant he co-founded over 40 years ago. Mr. Gross announced that he would be joining Janus Capital Group (JNS) to assist in managing their suite of fixed-income portfolios.
News accounts have been pointing towards an increasingly toxic relationship between Gross and PIMCO since last year. His popular PIMCO Total Return Fund (PTTDX) has been hemorrhaging assets amid sharply rising interest rates and poor performance. This has put even the most stalwart PIMCO fans on edge as worries about managing the next interest rate move become paramount to reestablishing credibility.
Despite the recent hit to his reputation, Bill Gross has left an indelible stamp on managing risk-adjusted returns in fixed-income along with one of the most successful actively managed ETF launches in history.
The PIMCO Total Return Bond ETF (BOND) was launched in 2012 and quickly accumulated multiple billions under management as a result of the managers’ track record and demand for an active alternative. This became one of the most successful ETF launches of the year and ultimately the largest actively managed ETF in the world. BOND currently has over $3.1 billion in total assets; however there are expectations that PIMCO funds will see additional future outflows as a result of this manager shakeup.
About six months after the launch of BOND, I was fortunate enough to attend an index conference where Bill Gross as a keynote speaker. He went into great detail about how he took a special affinity to this new ETF vehicle and was closely involved in the security selection, trading, and asset allocation aspects of the fund. He even went on to state how passionately he was tracking its performance versus a passive benchmark such as the iShares Core U.S. Aggregate Bond ETF (AGG).
At the time, he was proud of the alpha they were able to generate by positioning the portfolio away from treasuries and into corporate and mortgage backed securities. A look at a comparison of the two portfolios shows BOND has outperformed AGG by over 10% since inception.
That’s a significant margin of additional returns despite the higher expense ratio that comes with the actively managed fund. In addition, this was accomplished without any derivative exposure that PIMCO is often derided for using in its mutual fund portfolios.
The exuberance I witnessed as part of the presentation on BOND is one reason I think Bill Gross will thrive outside of running a multi-trillion dollar asset management firm. By returning to his roots to focus primarily on investment decisions, he has the ability to cement his own legacy and retake control of his destiny as a pure portfolio manager.
This of course opens up the window for his influence and experience with ETFs to make an impact at Janus as well. With an existing base of over $170 billion in total assets under management, this mutual fund company has the potential to cross over to the ETF world in a seamless transition. The veteran leadership that Gross has accumulated in starting and managing a successful ETF will certainly be an asset for Janus in this capacity if they choose to tap that resource.
Ultimately the road ahead for any fixed-income portfolio manager will be primarily how they deal with credit exposure, sector opportunities, duration adjustments, and interest rate risks. Navigating these areas of the bond market will be tricky given current valuations in high yield securities along with uncertainty over the impact of the Federal Reserve in the coming years. Gross will have to prove that he still has the foresight to take calculated risks while maintaining an eye on top competitors such as Jeff Gundlach (Double Line), Dan Fuss (Loomis Sayles), and Dan Ivacsyn (PIMCO).
Many think that Gross has come to the end of his reign as the ‘Bond King’, but this new opportunity may be a chance for him to demonstrate that he isn’t ready to give up the crown quite yet.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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doc_00099
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Title:Can We Count On Absolute Returns?
By Brad Zigler :
This article originally appeared in the September issue of REP. magazine and online atWealthmanagement.com .
"True faith," said William Ralph Inge, the one-time dean of London's St. Paul's Cathedral, "is belief in the reality of absolute values." Apparently, American exchange-traded fund (( ETF )) investors can be counted among the faithful. Why? Because they've committed nearly $1.7 billion into so-called "absolute return" products.
These funds aim to consistently produce positive returns, regardless of market conditions, through non-traditional management, i.e. by employing short sales, derivatives, leverage and/or investing in unconventional assets. Rather than being benchmarked against the more common metrics such as the S&P 500 or the Barclays Capital Aggregate Bond Index, the hurdles for absolute return ETFs are typically the Consumer Price Index (( CPI )), the London Interbank Offered Rate (Libor) or Treasury Bills. Essentially, absolute return ETFs are publicly traded analogs of hedge funds and, as such, should exhibit relatively low volatility as well as small correlations to common benchmarks.
Five exchange-traded funds (ETFs) own more than three-quarters of the category's assets. At the top of the heap, with a 48 percent market share is the IQ Hedge Multi-Strategy Tracker ETF ( QAI ), an ETF-of-ETFs that employs the full spectrum of hedge fund strategies, including long/short equity, market neutral, event-driven, fixed-income arbitrage, global macro and emerging markets. Despite the fund's heavy weighting on the long side of fixed-income, its correlation to the iShares Core U.S. Aggregate Bond Index ETF ( AGG ), is pretty low (17 percent). QAI's returns more closely correlate - at 76 percent - to the SPDR S&P 500 ETF ( SPY ), however. So it's not exactly a hedge.
click to enlarge
Despite the high correlation, QAI's volatility is half that of the S&P 500 fund though the multi-strategy tracker's Sharpe ratio is lower. Named for its creator, Nobel laureate William Sharpe, the ratio measures risk-adjusted returns as the dividend of an investment's excess returns (the gain or loss above/below the risk-free rate) and the investment's volatility. The higher the ratio, the better meaning a greater return per unit of risk.
Does this mean blue chip stocks are better than hedge strategies? Well, no, not necessarily. Stocks have been on a tear over the last 12 months, to be sure. But that 25 percent gain, especially in the current low-yield environment, isn't typical. More important, though is this notion of volatility. The Sharpe ratio views the standard deviation of returns - both ups and downs - as volatility. Clearly, a string of negative returns represents "bad" volatility, but "good" volatility? That's also considered a risk in Sharpe's world.
The Sortino ratio, a more recent modification of the Sharpe ratio, on the other hand, penalizes only downside volatility. When you run a Sortino comparison for QAI against the S&P fund, QAI comes out on top (like the Sharpe ratio, the larger the number, the better). The 12-month track record of QAI versus SPY (Figure 2) really paints the picture. As QAI climbed, admittedly at a slower rate than SPY, the absolute return fund experienced fewer and milder drawdowns. QAI earns a not-so-insignificant .38 beta coefficient - a measure of systematic risk with 1.00 representing the same volatility as the market's. QAI's alpha, or beta-adjusted excess return, comes in at .00 - not good, but not so bad, either.
And the other ETFs?
The self-avowed objective of the SPDR SSgA Multi-Asset Real Return ETF (RLY), the second-biggest product in the category, is hedging against inflation. RLY, an actively managed ETF-of-ETFs, has done that in spades. Over the past 12 months, in fact, RLY beat the CPI by nearly 12 percent. The fund's returns were generated by a basket of a dozen commodity, real estate and natural resource ETFs. While RLY is highly correlated to equities, its Sortino ratio is slightly better than SPY's. RLY's 12-month beta versus SPY is .60 with a -.01 alpha coefficient.
In third place is the Wisdom Tree Managed Future Strategy Fund (WDTI), an ETF that takes its cues from the Diversified Trend Index, a momentum-based algorithm that trades currency, commodity and Treasury futures. WDTI is the only top-tier product that's failed to beat inflation in the past year. Not surprisingly, WDTI posts a -.02 alpha coefficient on the back of a .04 beta.
The fourth slot belongs to the PowerShares DB G10 Currency Harvest (DBV). DBV was recently profiled in " The Case for Currencies ." Suffice it to say that this long/short portfolio pits high- versus low-yielding currencies in emulation of a "carry trade." DBV grosses a .32 beta and a -.05 alpha.
Rounding out the top five is the ProShares RAFI Long/Short ETF (RALS), a portfolio that uses the Research Affiliates Fundamental Index approach to select component stocks on the basis of their sales revenue, dividends, book value and cash flow. RALS is the only top-tier ETF to snag positive alpha (.02) on a .04 beta over the past 12 months.
So, what's the takeaway from all this? Well, first of all, absolute return investors are herd animals. The overlarge market share of the QAI portfolio imbues the space with the fund's character. The 29 ETFs in the category produced 12-month real returns ranging from RLY's 11.93 percent to the -10.89 percent cranked out by the QuantShares U.S. Market Neutral Anti-Beta ETF (BTAL). Despite the fact that more than a third of the products failed to post positive numbers, absolute return investors earned an average real return of 5.32 percent over the past 12 months on a market-weighted basis. And the cost? An average of 1.02 percent per annum.
Compare that with the 23.17 percent real return and the .09 percent expense ratio of the SPY fund and you may well ask if absolute return investors are getting what they pay for. That's, in fact, exactly what the authors of a study published in the Winter 2013 issue of The Journal of Investing pondered. Christopher Clifford, Bradford Jordan and Timothy Brandon Riley pored over the track records of absolute return mutual funds between 2000 and 2010 and found that, despite their lower volatility, the portfolios charged higher fees and exhibited higher turnover compared to conventional stock funds. On top of that, the alternative funds failed to produce positive alpha for their investors. The researchers also found that larger absolute return funds underperformed the smaller portfolios.
We've seen, in the past year at least, that some of those conclusions are applicable to absolute return ETFs as well. Some, but not all. Most notably, the larger ETFs actuallyoutperformed their smaller brethren and one at the top tier did, in fact, produce positive alpha.
There isn't a ten-year track record for absolute return ETFs. The average ETF is only three years old. The granddaddy, the DBV portfolio, is only eight years old. Launched in 2009, the weightier QAI fund is the category's second oldest.
Hedge funds, on the other hand, are much longer in the tooth. For example, there's a 20-year history of the Credit Suisse Multi-Strategy Hedge Fund Index (CSMSHFI) which can be laid next to that of the S&P 500 to better visualize (see Figure 3) the long-term utility of absolute return investing.
Over two decades, multi-strategy funds have outperformed the S&P 500, earning an average annual return of 19.02 percent versus 16.71 percent for the blue chip index. As you can readily see, however, there were times when hedge funds lagged stocks and other times when the alternative investments shone brighter. It's all about the volatility. Plainly, hedge fund values don't wobble as much as stocks. Most particularly, hedge funds haven't suffered as many drawdowns as the equity market. Witness the Sortino ratios: for the hedge fund index, it's 1.06; for the S&P, just .17. And alpha? Over 244 months, hedge funds produced a .11 alpha coefficient. That's a positive number, mind you.
So is this the fate of multi-strategy absolute return ETFs like QAI? We can't say with certainty. We can say it's possible. Perhaps Canadian author and essayist John Ralston Saul said it best: "Nothing is absolute, with the debatable exceptions of this statement and death."
Disclosure: None
See also Why Footnotes Matter on seekingalpha.com
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Title:Top-ranked Corporate Bond ETF in Focus: VCLT - ETF News And Commentary
The year 2014 seems favorable for bond investing. Global shocks, high-beta pain, momentum sell-offs and meager economic growth have pushed investors to safe havens so far this year thereby raising the appeal for bond investing. Yields, especially the long-terms ones, have sharply fallen this year (read: 3 Bond ETFs Kick Off 2014 with Strong Inflows ).
The bullish trend was truer in corporate and long-term bond segments. Thanks to the slow-but-steady wrap up of QE, the market is expecting the Fed to raise its short-term rates sometime in 2015 thus indicating volatility in the short-end of the curve even if rates rise at some point of time. This leaves long-term bonds as safer fixed-income bets as far as the rate hike issue is concerned.
On the other hand, corporate bond securities have been on tear this year, as these offer a nice mix between yield and safety which could be ideal in this environment. With minimal defaults especially those with high credit ratings and little prospect for an interest rate increase in the near term, these lower volatility securities could be an interesting way to put up with equity market volatility.
The entire set of corporate bond ETFs has returned smartly this year approaching almost double-digit gains while the S&P 500 Index has returned about 3.0% thus far. Thus, a look at the top-ranked ETF in the Corporate Bond space would be the best way to capture the uptrend and cater to investors seeking higher yields without too much extra risk.
About the Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box or asset class (Read: Zacks ETF Rank Guide ). Our proprietary methodology also takes into account the risk preferences of investors. ETFs are ranked on a scale of 1 (Strong Buy) to 5 (Strong Sell) while these also receive one of three risk ratings, namely Low, Medium or High.
The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of the five ranks within each risk bucket. Thus, the Zacks ETF Rank reflects the expected return of an ETF relative to other products with a similar level of risk.
For investors seeking to apply this methodology to their portfolio in the corporate bond space, we have taken a closer look at the top-ranked VCLT. This ETF has a Zacks ETF Rank of 2 or 'Buy' rating with a high risk outlook (see the full list of top ranked ETFs ) and is detailed below:
Long-Term Corporate Bond Index Fund ( VCLT )
This fund looks to track the Barclays US 10+ Year Corporate Index. This Index intends to measure mainly the performance of U.S. corporate bonds that have a maturity of 10 to 25 years. The corporate bonds have high investment grade rating as well. The fund charges an expense ratio of 12% which makes it a dirt cheap choice in the corporate bonds ETF space.
The ETF has managed as asset base of about $800 million which is invested in 1,267 bonds. Industrial bonds take the top spot in the portfolio with about 62.8% of focus followed by finance and Utilities. Maturity wise, more than 75% of the fund is targeted at bonds having 20-30 years of maturity.
The ETF targets the longer end on the yield curve with a weighted average maturity of 24.1 years. It is subject to high levels of interest rate risk primarily due to its long-term focus as indicated by a weighted average duration of 13.6 years. Also, in terms of credit risk, the ETF seems decently placed with investment grade bonds occupying 80% of the portfolio.
However, the ETF is an appropriate choice for investors seeking high yield. The ETF's yield-to-maturity hovers around 4.7% (as of May 19, 2014). Year-to-date, VCLT has returned investors 9.15%. The fund has outperformed the return of total bond market funds like Core Total U.S. Bond Market ETF(AGG) and PIMCO Total Return ETF (BOND) . We currently give VCLT a Zacks ETF Rank of 2 or 'Buy' rating along with a High risk outlook (see all investment grade corporate ETFs ).
Bottom Line
In short, with corporate America definitely approaching brighter days, corporate bonds can outdo several investment options this year. Especially corporate bonds like VCLT which have top-notch investment grades should not look behind, if the currently turmoil in the market stays for longer. We at Zacks have plenty of Buy-rated corporate bonds while no government bonds are presently top rated (read: Forget Treasury Bonds, Try This Top Corporate Bond ETF Instead ).
From a technical perspective too, VCLT is poised for further surge in the coming months. Its short-term moving average (9-Day SMA) is still comfortably above the mid and long terms (50 and 200-Day SMA), suggesting continued bullishness for this ETF.
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VANGD-LT CRP B (VCLT): ETF Research Reports
PIMCO-TOT RETRN (BOND): ETF Research Reports
ISHARS-BR AG BD (AGG): ETF Research Reports
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Zacks Investment Research
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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