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Fed To Hike In June? Expected ETF Moves

Taking most investors by surprise, minutes from the Fed April meeting pointed to interest rate hike possibilities in June. While this seemed unfeasible a few days back, a volley of upbeat economic data lately sparked off possibilities for further policy tightening. Also, plenty of positive vibes were felt in the market, including a healing labor market and the latest uptick in global sentiments buoyed by stabilization in China and oil. All these opened the door for a likely hike in June. Most Fed officials sought signs of economic improvement in the second quarter including a strong employment and inflation scenario. Inflation rose at the quickest clip in three years in April, as the consumer price index jumped a seasonally adjusted 0.4% (read: TIPS ETF (NYSEARCA: TIP ) Hits New 52-Week High). Upbeat Data Points Though April’s non-farm payroll reading of 160,000 was below the estimated 205,000 and the prior-month reading of 208,000, the unemployment rate was unchanged at 5%. Other key indicators including workweek and average hourly earnings showed increases. Hourly earnings in April rose 0.3% month over month and 2.5% year over year. Meanwhile, overall retail sales expanded 1.3% in April from March, representing the largest gain since March 2015. April retail sales beat economists’ forecast of a 0.8% rise . The University of Michigan indicated that its consumer sentiment index rose 6.8 points to 95.8 in early May, marking the strongest reading since June (read: Retail Sales Back to Health; ETFs to Watch ). Since consumer spending makes up about 70% of the U.S. GDP, April retail sales data indicates that the U.S. economy is progressing at a decent clip to end Q2 and is less likely to falter like it did in Q1. In the first quarter, the economy grew at an annual rate of just 0.5%, marking a two-year low. The housing market is also giving bullish signals. Lately, the economy was gifted with strong new home construction and building permits data. All these might encourage the Fed to take the next policy tightening decision sooner than expected. The last hike was seen in December 2015. Investors’ Perception Following the release of the minutes, investors’ bet over the possibility of a June hike shot up to 34% from 19% (according to CME Group) as indicated by the prices for futures contracts on the Fed’s benchmark overnight lending rate. And by late Wednesday, traders wagered on a 56% possibility of a hike by July, up from 20% on Tuesday. Possible ETF Moves Some subtle moves in various markets and asset classes are likely to be observed if the Fed goes hawkish in June or July. Below we discuss a few ETFs that were among the biggest movers and could remain in focus ahead. PowerShares DB USD Bull ETF (NYSEARCA: UUP ) As widely expected, the U.S. dollar will likely gain strength. The U.S. dollar ETF UUP was up about 0.7% on May 18. iShares 7-10 Year Treasury Bond ETF (NYSEARCA: IEF ) The yield on the 10-year U.S. Treasury jumped 11 bps to 1.87% on May 18, following the Fed minutes. The ultra-popular bond ETF IEF shed over 0.8%. But since global growth worries are still extensive with Brexit fears looming large, the intermediate and long-term U.S. Treasury bonds should be in fine fettle. SPDR S&P Regional Banking ETF (NYSEARCA: KRE ) Banking stocks should rally if the Fed hikes in June as these perform better in a rising rate environment. KRE added 4.24% on May 18, 2016. PowerShares FTSE RAFI Emerging Markets Portfolio ETF (NYSEARCA: PXH ) Emerging markets ETFs will likely be losers if the Fed goes ahead with a hike. Dearth of cheap money inflows would hit this space. PXH was down about 1.4% on May 18. iShares Select Dividend ETF (NYSEARCA: DVY ) The dividend ETFs, one of the biggest beneficiaries of subdued Treasury yields, might stall a bit if the Fed hikes sooner than expected. However, it all depends on how the global market shapes up and investors’ appetite for risk. Vanguard Total Stock Market ETF (NYSEARCA: VTI ) Normally, the initial reaction of a rate hike is a slide in stock prices. However, the reaction should vary across capitalization and the turbulence should settle down with time. Total stock market ETF was down 0.01% on May 18, and may be under pressure immediately after the tightening move. Link to the original post on Zacks.com

Looking To Play The Potential Risk-On Reversal? Consider DFND

We witnessed some interesting market trends through the first four months of this year. Energy and Materials, the two hardest hit sectors in 2015 (down 23.6% and 10.4%, respectively), have suddenly become the market “darlings.” Through April 29, 2016, Energy is up 12.0% for the year and has been the best performer among the 10 broad market sectors. The Materials sector is also up 8.0% for the year. Investors have made a major shift by taking a risk-on approach, as once-hot sectors like Health Care and Info Tech have fizzled. The unexpected role reversals are due in large part to disappointing first quarter results from big names in Info Tech and Health Care, whereas Energy and Materials stocks have outperformed analyst expectations, all while oil and precious metals have enjoyed significant price appreciation year-to-date. Source: Reality Shares Research. Past performance does not guarantee future results. If you believe a reversal of this risk-on trend will take place in the remainder of 2016 and are looking to take advantage of this potential reversal, the Reality Shares DIVCON Dividend Defender ETF (TICKER: DFND ) could be the solution for you. DFND invests 75% of its portfolio market value in the large-cap U.S. companies with the highest probability of increasing their dividends within a year, based on their DIVCON dividend health scores. The remaining 25% of the portfolio market value is used to short the large-cap U.S. companies with the highest probability of cutting their dividends within a year. As of April 29, 2016, nearly half of the Fund’s short portfolio (on a net exposure basis) was comprised of Energy and Materials names due to their low prospects for future dividend growth, potentially offering a solution for investors seeking to play the possible risk-on reversal. Click to enlarge Subject to change. Source: Reality Shares Research. Past performance does not guarantee future results. Fundamentally, many Energy and Materials stocks are exhibiting warning signs, but investors don’t seem to be concerned. Looking at the top 10 short holdings in DFND, a majority of these names are carrying high amounts of leverage on their balance sheets, especially within the Energy and Materials sectors. The average Altman Z-Score for the 10 stocks in the short portfolio is 1.0 – a score below 1.8 signals a high likelihood of default. According to just-released data from Reuters (in conjunction with Haynes & Boone and bankruptcydata.com), 59 U.S. oil and gas companies have already filed for bankruptcy, and Charles Gibbs of Akin Gump says the U.S. oil industry is not even halfway through its wave of bankruptcies (” U.S. oil industry bankruptcy wave nears size of telecom bust ,” Reuters, May 4, 2016). Furthermore, the average ratio of Levered Free Cash Flow-to-Dividends for these companies is -1,652%. This ratio represents the cash flow available to pay dividends once all obligations are met. Top 10 Short Holdings As of April 29, 2016. Subject to change. Source: Reality Shares Research. Past performance does not guarantee future results. On the flip side, DFND’s top 10 long holdings have an average Altman Z-Score of 8.1 – a score above 3.0 is considered to be healthy. The average ratio of Levered Free Cash Flow-to-Dividends for these companies is 321.9%, meaning these holdings are well-positioned to make their dividend payments once all obligations are met. The Fund’s short holdings are up an average of 35% year-to-date (through April 29, 2016), even outperforming their respective sector averages during this time. The Fund’s top 10 long holdings are up an average of 13% year-to-date (through April 29, 2016), as shown below. If you believe this performance trend may reverse, DFND could be a potential solution for you. Top 10 Long Holdings As of April 29, 2016. Subject to change. Source: Reality Shares Research. Past performance does not guarantee future results. Regardless of whether a trend reversal takes place in the near-term, DFND and its Benchmark Index are designed to capitalize on the theory that, over time, companies that consistently grow their dividends tend to have investment returns above the overall market and companies that cut their dividends tend to have investment returns below the overall market. In addition, the Fund’s hedged portfolio construction may provide more stable returns, with lower volatility and market correlation. For those of you who anticipate that the rally in Energy and Materials names will continue and are seeking to participate in this continued trend, avoiding or taking a short position in DFND could be potential solutions ( always consider the risks associated with short selling ). DFND is part of the suite of Reality Shares ETFs designed to create solutions to identify, avoid, mitigate, or even capitalize on inflection points in the markets. * DFND Inception Date: January 14, 2016. As of April 29, 2016. Source: Reality Shares Research. Performance data quoted represents past performance. Past performance is no guarantee of future results and investment return, and principal value of the Fund will fluctuate so that shares when sold may be worth more or less than their original cost. Current performance may be higher or lower than the performance quoted. Market price returns are based on the midpoint of the bid/ask spread at 4 pm ET and do not represent the returns an investor would receive if shares were traded at other times. ETF shares are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Visit realityshares.com for performance data current to the most recent month end. DFND Expense Ratio: 0.95%. Disclaimer Cons Disc: Consumer Discretionary. Cons Stap: Consumer Staples. Info Tech: Information Technology. Telecom Svcs: Telecommunication Services. Altman Z-Score: The output of a credit-strength test that gauges a publicly traded company’s likelihood of bankruptcy. DIVCON: DIVCON is a dividend health rating system which assesses the likelihood that companies will grow or cut their dividends in the next 12 months. DIVCON 5 indicates the highest probability for a dividend increase and DIVCON 1 the highest probability for a dividend cut. This material is prepared by Reality Shares, Inc. (“Reality Shares”) and is presented for information purposes only. This material does not constitute investment advice and should not be considered a solicitation to buy or an offer to sell securities. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment time horizon. Investors should carefully consider the investment objectives, risks, charges and expenses before investing in Reality Shares ETFs. This and other information can be found in the Fund’s prospectus, which may be obtained by calling 855-595-0240 or by downloading the file from realityshares.com. Please read the prospectus carefully before investing. A Fund’s performance for very short time periods may not be indicative of future performance. The recent growth in the stock market has helped to produce short-term returns for some asset classes that are not typical and may not continue in the future. DFND’s investment objective is to seek long-term capital appreciation by tracking the performance, before fees and expenses, of the Reality Shares DIVCON Dividend Defender Index (the “Benchmark Index”). There are risks involved with investing including the possible loss of principal. The Fund’s emphasis on dividend-paying stocks involves the risk that a company may cut or eliminate its dividend which may affect the Fund’s returns. Investments in swaps, options, and futures and forward contracts are subject to a number of risks, including correlation risk, market risk, leverage risk and liquidity risk, which may negatively impact the Fund’s investment strategy and could cause the Fund to lose money. Securities sold short create special risks which may result in increased volatility of returns. As losses on short sales occur from increases in the value of the security sold short, such losses are theoretically unlimited. Investments in short sales may also incur expenses related to borrowing securities. Short sales within the portfolio may result in the fund being less tax-efficient. Please review the prospectus for important risks regarding the Fund, as each of these factors could cause the value of an investment in the Fund to decline over short- or long-term periods. The Fund is new and has a limited operating history. There is no guarantee or assurance the methodology used to create the Benchmark Index will result in the Fund achieving positive returns. The Fund may be more susceptible to a single adverse economic or other occurrence and may therefore be more volatile than a more diversified fund. The Benchmark Index is constructed using a rules-based methodology based on quantitative models developed by Reality Shares. These quantitative models may be incomplete, flawed or based on inaccurate assumptions and, therefore, may lead to the selection of assets for inclusion in the Benchmark Index that produce inferior investment returns or provide exposure to greater risk of loss. Copyright © 2016 Reality Shares, Inc. All rights reserved. RLT000410 Exp. 12/31/2016. Disclosure: I am/we are long TSN, FAST, CHRW, SYK, WM, TJX, EL, EMR, TSCO, EXPD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: The DFND ETF is also short MRO, PXD, GAS, ETR, EQT, CTL, FCX, EXC, FE, and NEM.

Politics Cranks Up The Volume On Volatility

All bets are off this election season Last week, the long and rancorous 2016 GOP presidential primary season came to an abrupt end as two of the three remaining candidates dropped out of the race. In a development that has astounded political pundits, Donald Trump is now the presumptive Republican nominee for President of the United States. Ironically, Hillary Clinton – who has long been viewed as the likely Democratic nominee – is still ensconced in primary season, slugging it out with her resilient challenger, Bernie Sanders. It remains to be seen whether Clinton can win key states such as California and finally capture the nomination. And every day that she must fight within her party weakens her, as she is being criticized from both the left and the right, which negatively impacts her ability to win in the general election. It seems that nothing thus far in this race has been going according to plan. Early on, pundits had predicted Donald Trump had no chance of winning the nomination, dismissing his bid as quixotic; similarly, they minimized the potential appeal that a candidate such as Bernie Sanders could engender and predicted an easy primary season for Hillary Clinton. Both assumptions have obviously been proven wrong. And although all Republican candidates for president signed an agreement that they would support the nominee, some are now reneging on the pledge. For his part, Trump has warned that his supporters may riot at the Republican National Convention this July if he does not get the nomination, although that now seems moot given all challengers for the nomination have fallen away. Meanwhile, candidate Sanders has suggested he will remain a candidate through the end of primary season and force a contested convention. What’s more, some prominent Republicans are already announcing they will not support Trump as their nominee in his bid for president. When House Speaker Paul Ryan announced last week that he is “just not ready” to endorse Trump, former vice presidential candidate Sarah Palin said she would campaign to unseat Ryan in the primary. And there are questions about whether, if Clinton is able to secure the Democratic nomination, Sanders supporters would stay home rather than vote for her in the general election. All bets seem to be off this election season, with some conservative Republicans even calling for a third-party candidate. Politics outside the proverbial box Adding to the disorder is that candidate Trump has a controversial platform that is not traditionally Republican in some important regards. For example, Trump’s suggestion last week that the US could renegotiate bond obligations to pay less than face value on US Treasuries to its debt holders, as Greece has done, could roil capital markets. In addition, Trump’s protectionist stance is of concern to many businesspeople because they fear a curtailment of free trade. Another area of concern is the US income tax code. Earlier this week, Donald Trump said he was open to raising taxes on the wealthiest Americans, a reversal of his original platform of decreasing taxes for those in all income tax brackets. This new position flies in the face of a key tenet of the Republican Party for two decades – and makes it more difficult to differentiate him from Democratic candidates. Perhaps even more controversial than Trump’s stance on certain issues is that of candidate Sanders, whose platform includes a protectionist approach to trade and a dramatic increase in income taxes on higher-income Americans. It seems that the candidates with the most fervent supporters are the ones whose platforms exist outside the proverbial box of their respective parties, which makes sense given American’s growing distrust of the “establishment.” Stock market uncertainty Pundits, of course, are saying that 1) Trump’s campaign platform will become more moderate now that he has to appeal to the general populace; and 2) it doesn’t matter anyway because he has a snowball’s chance in hell of winning the election in November. While the former may be true, any material changes in platform create uncertainty and ultimately reduce credibility – which is not typically met with approval by the stock market. But more importantly, the pundits have been terribly wrong about the candidacy of Donald Trump since the start, which suggests they could continue to be terribly wrong. After all, some of Donald Trump’s positions – such as maintaining Social Security at its current level – are likely to be more appealing to the general populace than to fiscally conservative Republicans. In other words, Trump may prove more popular in the general election than many expect – perhaps more popular than he has been in Republican primaries. Some even go so far as to argue that there is a significant cohort of dissatisfied voters that could support either Trump or Sanders. What’s more, if Clinton were to become the Democratic nominee, she may have difficulty winning over many Republican voters reluctant to support Trump, particularly given that she continues to be tugged to the left by the powerful primary challenge from Sanders. A pivot to the center, if and when she has secured the nomination, could similarly suffer from a lack of credibility, causing voters to wonder what they will actually get come January. Volatility up ahead This commentary is not intended to be an endorsement or indictment of any of the presidential candidates. What we’re concerned with is the stock market’s reaction to this year’s ongoing election developments. For example, a surge in the polls for Hillary Clinton could result in a sell-off of the healthcare sector on the assumption, rightly or wrongly, that her administration would have a negative impact on the health care industry. It’s no surprise, then, that some financial advisors I talk with are becoming increasingly worried about the presidential election and the potential for a substantial sell-off. In this “all bets are off” election, investors need to be prepared to be surprised – which means to be prepared for more volatility. Given not just this election but a potential Brexit, growing discontent in Europe and ongoing problems in the Middle East, it seems political developments around the globe could be the biggest source of volatility for investors this year. In this environment, investors will be well served by being tactical asset and sector allocators – and by focusing on downside protection in their respective portfolios.