Author Archives: Scalper1

ETF Tactics For A Rate-Proof Portfolio

With back-to-back months of solid jobs growth and moderate inflation, the era of tightened policy might kick in as early as in two weeks, as the chance of the first rate hike in almost a decade now looks more real. The Fed is slated to increase interest rates at its upcoming December 15-16 policy meeting, but at a gradual pace. The initial phase of increase will actually be good for stocks as it will reflect an improving economy and a lower risk of deflation. Plus, higher rates would attract more capital to the country, thereby boosting the U.S. dollar against the basket of other currencies. However, since a strong dollar should have a huge impact on commodity-linked investments, a rising rate environment will also hurt a number of segments. In particular, high-dividend-paying sectors such as utilities and real estate would be the worst hit given their higher sensitivity to rising interest rates. Further, securities in capital-intensive sectors like telecom would also be impacted by higher rates. In such a backdrop, investors should be well prepared to protect themselves from higher rates. Here are number of ways to create a rate-proof portfolio that could prove extremely beneficial for ETF investors in a rising rate environment: Bet On Rate-Friendly Sectors A rising rate environment is highly beneficial for cyclical sectors like financial, technology, industrials, and consumer discretionary. Investors seeking protection against rising rates could load up stocks in these sectors through diversified or niche ETFs. Some of the broad ETFs having double-digit exposure to these four sectors are the iShares Core S&P Total U.S. Stock Market ETF (NYSEARCA: ITOT ), the Schwab U.S. Broad Market ETF (NYSEARCA: SCHB ), and the iShares Russell 3000 ETF (NYSEARCA: IWV ). Other sectors make up for a smaller part of the portfolio of these funds. Investors seeking a concentrated exposure to the particular sector could find the iShares U.S. Financial Services ETF (NYSEARCA: IYG ), the Technology Select Sector SPDR ETF (NYSEARCA: XLK ), the First Trust Industrials AlphaDEX ETF (NYSEARCA: FXR ) and the Consumer Discretionary Select Sector SPDR ETF (NYSEARCA: XLY ) intriguing. All these funds have a Zacks ETF Rank of 2 or “Buy” rating, suggesting their outperformance in the coming months. Focus On Ex-Rate Sensitive ETF The timing of interest rates hike is resulting in higher market volatility. For protection against both, the PowerShares S&P 500 ex-Rate Sensitive Low Volatility Portfolio (NYSEARCA: XRLV ) could be an ideal bet. This fund provides exposure to 100 stocks of the S&P 500 that have both low volatility and low interest rate risk. This approach looks to exclude the stocks that tend to underperform in a rising interest rate environment, and is tilted toward financials (28.1%), industrials (21.5%) and consumer staples (15.2%). As such, XRLV is a compelling choice to play the rising rate trend. Follow Niche Bond ETF Strategies Though the fixed income world will be the worst hit by rising rates, a number of ETFs like the iShares Floating Rate Bond ETF (NYSEARCA: FLOT ) and the iPath U.S. Treasury Steepener ETN (NASDAQ: STPP ) that employ some niche strategies could see huge gains. This is because a floating-rate note ETF pays variable coupon rates that are often tied to an underlying index (such as LIBOR) plus a variable spread depending on the credit risk of the issuers. Since the coupons of these bonds are adjusted periodically, they are less sensitive to an increase in rates compared to traditional bonds. On the other hand, the Steepener ETN directly capitalizes on rising interest rates and performs better when the yield curve is rising. The ETN looks to follow the Barclays US Treasury 2Y/10Y Yield Curve Index, which delivers returns from the steepening of the yield curve through a notional rolling investment in the U.S. Treasury note futures contracts. Shorten Bond Duration Higher rates have been cruel to bond investors, especially the longer-term ones, as an increase in rates has always led to rising yields and lower bond prices. This is because price and yields are inversely related to each other and might lead to huge losses for investors who do not hold bonds until maturity. As a result, short-duration bonds are less vulnerable and a better hedge to rising rates. While there are several options in this space, the SPDR Barclays 1-3 Month T-Bill ETF (NYSEARCA: BIL ), the iShares Ultrashort Duration Bond ETF (BATS: NEAR ) and the Guggenheim Enhanced Short Duration ETF (NYSEARCA: GSY ) with durations of 0.16, 0.36 and 0.17 years, respectively, seem intriguing choices. Original post

Is The Time Ripe For 50% Currency Hedged ETFs?

The global currency world has been on a tumultuous ride on central banks’ comments. The basic perception has been that the currency-hedged developed market ETFs will be on a roller-coaster ride since the second half of 2015 and in 2016 on divergent economic policies between the U.S. and others. So far, the investing trend has paralleled the belief as the greenback peaked to multi-year highs on looming policy tightening and currencies like euro and yen plunged on the ongoing QE measures. However, the trend was volatile at the start of December. While the Fed repeatedly put stress on a slower rate hike trajectory once the action is taken, the European Central Bank (ECB) – widely viewed as stepping up its QE measure – fell short of expectations. The ECB maintained the amount of monthly government bonds purchase at €60 billion. Additionally, the cut in deposit rates (by 10 bps) was also below the expected 0.15-0.20%. Thanks to a less dovish ECB, the common currency euro surged and logged its largest one-day gain against the greenback in over six years. The CurrencyShares Euro Trust ETF (NYSEARCA: FXE ) was up 3.2% on December 3. Across the pond, the Fed is preparing for a rate hike this month but is expected to apply a petite and slow hike which in turn can cut some strength from the greenback. Now that the oil price is due for more pain ahead with OPEC members agreeing on pumping up more oil, global inflation will remain for a few more months. This leaves the Fed with no option other than taking the policy tightening issue easy. After all, the U.S. economy is yet to meet a key Fed agenda of 2% inflation. Plus, the greenback has advanced over 7% so far this year (as of December 7, 2015). The U.S. dollar ETF, the PowerShares DB US Dollar Bull ETF (NYSEARCA: UUP ), is now just 3.2% down from the 52-week high price, indicating less upside potential from the current level. All in all, though the greenback is likely to remain strong ahead and euro is likely to weaken, volatility is likely to crop up now and then. In the last five sessions (as of December 7, 2015), UUP lost over 1.3% while FXE gained about 2.4%. This might put the currency hedging global investing at risk. Notably, currency hedging is a beneficial technique when the USD is strengthening relative to the concerned foreign currency. But investors would incur losses on repatriating their foreign income while the USD is falling. In this backdrop, a 50% hedged ETF can be an intriguing option to minimize risks and sail through all kind of market dynamics. Below we highlight three ETFs that could be on watch in the coming days, if the U.S. dollar slips and other currencies strengthen on central bank policies and economic developments. These funds may guard your portfolio from extreme situations and will likely deliver moderate returns. IQ 50 Percent Hedged FTSE International ETF (NYSEARCA: HFXI ) The fund follows the FTSE Developed ex North America 50% Hedged to USD Index and has amassed about $41.6 million in assets after debuting in July. The fund charges 35 bps in fees. The fund added over 2.1% in the last three months (as of December 7, 2015) (see all broad developed world ETFs here). IQ 50 Percent Hedged FTSE Europe ETF (NYSEARCA: HFXE ) The $37.6-million fund tracks the FTSE Developed Europe 50% Hedged to USD Index. The fund charges 45 bps in fees and was up about 1% in the last three months (as of December 7, 2015). IQ 50 Percent Hedged FTSE Japan ETF (NYSEARCA: HFXJ ) The $26.6-million fund looks to follow the FTSE Japan 50% Hedged to USD Index. The fund charges 45 bps in fees and gained over 7% in the last three months. Original Post

Euro ETFs On Volatile Ride: What Next?

Last week, the European Central Bank (ECB) hit headlines by extending its asset buying program by six more months to March 2017. The bank cut its deposit rate by 10 bps, shoving it deeper into the negative territory to -0.3%. ECB’s aim is to wipe out deflationary threats and boost economic growth in the common currency bloc. The markets did not appreciate the decision wholeheartedly as they expected an outsized expansion in the QE policy. To their utter disappointment, the ECB maintained the amount of monthly government bonds purchase at €60 billion. Additionally, the cut in deposit rates was also below the expected 0.15-0.20%. As a result, the common currency euro surged and logged its largest one-day gain against the greenback in over six years. The CurrencyShares Euro Trust ETF (NYSEARCA: FXE ) was up 3.2% on December 3. But since October, the euro has dropped over 5% against the greenback in anticipation of a very dovish act from the ECB. Several analysts are betting on the euro-dollar parity as the euro gained strength and the Fed is putting stress on a slower rate hike trail once it pulls the trigger. We expect the latest strength in the euro to be short-lived. After all, a recovering U.S. economy and a soft Eurozone economic backdrop will keep the monetary policy divergent for long. The Fed may apply a petite measure of hike now, but will likely speed up policy normalization once the economy gathers steam. Across the pond, the ECB might act more benignly if the present quantum and duration of the QE measure fails to pull up the sagging economy. Possibilities of further monetary easing by the ECB and euro’s thinning status as a reserve currency might result in a further slide in euro. Notably, after yuan’s inclusion in IMF’s SDR currency basket, euro lost its weight from 37.4% to 30.93 %. The move will take effect from October 2016. Investors should note that FXE is down 10.6% so far this year (as of December 4, 2015). Although, it is presently exhibiting a volatile trend on the double whammy of the ECB shock and the confusion over how fast the Fed will proceed on the rate hike path. Fortunately, ETFs offer several options to investors to accomplish this task. Below, we highlight a few choices in the inverse ETF space. These ETFs profit when the euro declines and may be suitable for hedging purposes against the fall in the currency (see all inverse currency ETFs here). ProShares Ultra Short Euro ETF (NYSEARCA: EUO ) This leveraged ETF looks to provide twice the inverse exposure to the performance of euro versus the U.S. dollar on a daily basis. The product has amassed over $500 million in AUM while it trades at a volume of 800,000 shares daily. However, given its active management style, the ETF charges a hefty annual expense ratio of 95 basis points. Though EUO lost 6.3% on December 3, the day ECB delivered a less-than-expected action, the fund crawled up over 1.5% on the day next as euro started paring gains. The product has enjoyed a gain of 18.2% on a year-to-date basis on a weak euro. Investors could book more profits off this fund should the euro continue to struggle. Market Vectors Double Short Euro ETN (NYSEARCA: DRR ) This is an exchange-traded note issued by Morgan Stanley. The product seeks to track the performance of the Double Short Euro Index. For every 1% weakening of the euro relative to the greenback, the index normally gains 2%. The choice is an overlooked one with just $54.8 million in AUM. The product charges an expense ratio of 0.65% a year. On a year-to-date basis, the product has advanced about 21% (as on December 4, 2015). It rose 1.84% on December 4, the day after the ECB action. Original Post