Category Archives: etf

5 ETFs For Portfolio Safety, Stability And Diversification

Global stock market volatility, oil price collapse and economic slowdown in China continue to rattle investor confidence this year. Former high flying stocks have come back to earth in the past few weeks as investors worry about the impact of weak global demand on corporate earnings. Investors had poured a lot of money into these stocks despite their sky high valuations but “risk-off” sentiment is sending many to “safer” assets now. As the domestic economy continued to recover slowly but steadily over the past few years, US stocks remained one of the best asset classes in the world. But of late, domestic economic growth has been rather uneven. In the current uncertain market environment, it would be better for investors to focus on capital preservation. Below we have discussed some ETFs that will not only provide stability and diversification to your portfolio but also help in capital preservation. Long-Term Treasury Bonds The Federal Reserve spent the last year prepping the markets for a rate hike for the first time in almost a decade and ultimately raised rates by 25 bps in December and also penciled in four rate hikes this year. The market however expects not more than one rate increase this year. So, bond markets continue to frustrate bears again. Longer-term bonds are impacted more by inflationary expectations than by monetary actions and with expectations so muted, the bullish trend for these ETFs is likely to continue. Then while rates are low here in the US, they are much lower in the other parts of the developed world. In Europe and Japan, monetary authorities are expected to continue easing in order to fight deflationary risks. So, compared with those interest rates, US interest rates are still very attractive for foreign investors. 25+ Year Zero Coupon U.S. Treasury Index Fund (NYSEARCA: ZROZ ) ZROZ follows the BofA Merrill Lynch Long US Treasury Principal STRIPS Index, which focuses on Treasury principal STRIPS that have 25 years or more remaining to final maturity. It charges just 15 basis points in expenses while the 30-day SEC yield is 2.53% currently. iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ) TLT tracks the Barclays Capital U.S. 20+ Year Treasury Bond Index. It is the most popular and liquid ETF in the space with AUM of over $9.4 billion and excellent daily trading volumes. The fund charges 15 bps in expense ratio while the 30-day SEC yield is 2.34% currently. Both these ETFs have Zacks ETF Rank #2 (Buy). Gold On Monday, gold recorded its biggest daily gain in more than 14 months as a strong risk-off sentiment continues to force investors to pile into the safety of the precious metal. Additionally, a falling dollar (commodity prices generally move inversely to the dollar) and rising demand in China and India-the two biggest consumers of gold in the world-have also been helping gold’s ascent. Chinese investors in particular have been buying gold lately as the country’s stock market and currency continue to swoon. Negative interest rates in some of the major countries are also boosting gold prices. Gold critics often argue that the “barbarous relic” is an unproductive asset since it pays nothing to holders and that argument does make some sense when interest rates are high but not in the ultra-low/negative interest rate environment. iShares Gold Trust (NYSEARCA: IAU ) IAU provides a convenient and cost-effective access to physical gold. It is a physically backed ETF with more than $5.2 billion in assets. The fund has beta of -0.23 with the S&P 500 index and adds diversification benefits to an equity focused portfolio. SPDR Gold Trust ETF (NYSEARCA: GLD ) GLD is the most popular gold ETF with almost $29 billion in AUM and excellent trading volumes. It is a physically backed ETF that charges 40 basis points in annual expenses. While IAU has a lower fee, GLD’s excellent trading volumes make its trading very cheap. So, IAU is more suitable for buy and hold investors while GLD is better for trading portfolios. Municipal Bonds Municipal bonds were one of the best performing asset class in the US fixed income space last year. There are many factors that suggest that they may continue to outperform this year as well, including decreasing supply, rising tax rates and juicy income yields in the current ultra-low rate environment. Municipal bonds supply as of the end of last year was about $400 billion , boosted mainly by refunding issuances in anticipation of higher interest rates. Experts expect the supply to decrease by about 25% this year. iShares Muni Bond ETF (NYSEARCA: MUB ) MUB is the most popular ETF in the municipal bond space with more than $6.1 billion in AUM. It charges 25 bps in expenses and has a 12-month yield of 2.49%. The income is exempt from federal taxes and the Alternative Minimum Tax (AMT). The product provides a convenient access to more than 2000 investment grade municipal bonds. The Bottom-Line During times of turmoil, it is most important for investors to stay focused on their longer-term investing goals. Further, it is beneficial to stay diversified as history has shown us diversified portfolios always have better risk-adjusted returns over longer periods. Original post

A Shopping List For Bargain Hunters

The old saying that “things can always get worse” seems to be an apt description for markets so far this year. A poor start to the year has snowballed into an environment in which investors are being paid to “sell the rallies.” Year-to-date global equity markets are down roughly 10 percent in dollar terms, as measured by Bloomberg performance data for the MSCI ACWI Index (NASDAQ: ACWI ). While a few markets, notably Canada and Mexico, are flat to nominally higher, several market segments, including U.S. biotech, China and Italy are down more than 20 percent since the start of the year, according to Bloomberg data for the Nasdaq Biotechnology index and the respective MSCI country indices. Against this backdrop, bargain-hunting investors are asking whether there may be opportunities. My take: Given that the sell-off is occurring in the aftermath of a multi-year bull market, stocks overall still aren’t cheap. That said, it’s not too early to begin compiling a shopping list of potential bargains that may be worth considering . While the selling has returned some value to equities, the best that can be said is that most markets now look reasonable. According to a BlackRock analysis using Bloomberg data, a global benchmark ( ACWI ) is trading at around 16.5x trailing earnings , down around 7.5 percent from last summer’s peak but roughly in-line with the 10-year valuation average. Global stocks look cheaper on a price-to-book ( P/B ) basis, but with the exception of emerging markets equities, they are only trading at a small discount to their 10-year average. If valuation is unlikely to put a floor under markets, there are two other scenarios that could help establish a bottom: signs of economic stabilization or a more aggressive, coordinated response from central banks. As I don’t view either as imminent , markets are likely to remain volatile in the near term. There’s value to be found if you know where to look However, for investors looking to bargain hunt, there are certain segments of the market that are trading at a significant discount. While it may still be too early to pull the purchase trigger, these two segments in particular are worth a closer look. 1. Emerging Markets. After underperforming for the better part of the past five years, emerging market stocks, as measured by the MSCI Emerging Markets Index, are one of the few, genuinely cheap asset classes. At roughly 1.25x trailing book value, emerging market equities are trading at a level last seen at their trough in early 2009. On a relative basis, using the MSCI World Index as a proxy for developed markets, EM stocks trade at nearly a 35 percent discount to developed markets, the largest such discount since the market bottom in 2003, according to an analysis of data accessible via Bloomberg. 2. Energy stocks . The other universally unloved asset class is energy. While assessing ” fair value ” is always an elusive exercise when discussing commodities, the recent plunge in oil prices seems to have created value in energy-related companies . With energy firms’ earnings still plunging, their price-to-earnings ( P/E ) ratios don’t look very appealing. However, based on P/B measurements, the sector, as represented by the S&P 500 GIC Energy Sector, is trading at the lowest level of the past twenty years and at about a 45 percent discount to the broader U.S. equity market. Even assuming future write-downs, the current discount looks large. Emerging markets and energy have another argument in their favor: Over the past several months, rising volatility has begun to chip away at the momentum trade. Long positions in biotech and tech darlings have already been hit. Downside momentum plays continue to work, but being underweight, or short, energy or emerging market stocks have become very crowded trades. Similar to what has happened to long-side momentum plays , such downside momentum trades are likely to violently reverse at some point. When that occurs, these two segments appear well positioned to benefit. This post originally appeared on the BlackRock Blog.

Income Investors In Risky, Energy-Related Products Get Creamed

Brokers who pitched energy based structured products during the recent oil boom to conservative clients will be flooded with phone calls from angry clients. As the price of oil has crashed from $100 a barrel less than two years ago to below $30 on Thursday, investors who bought structured products looking to generate income have been crushed. The pain felt by investors in the futures market, energy partnerships, high-yield corporate bonds and the shares of oil and gas companies is well known, noted Wall Street Journal columnist Jason Zweig last weekend. But the plummeting price of oil is also “wreaking havoc” on opaque and complex structured products tied to the price of oil, Zweig reported. In 2015, the biggest names on Wall Street, including Bank of America (NYSE: BAC ), Morgan Stanley (NYSE: MS ) and Goldman Sachs (NYSE: GS ), issued at least 300 so-called “structured notes,” which are short-term borrowings with returns linked to the price of oil or other energy-related assets. Remember those heady days, just a year ago? It was a perfect time for Wall Street to pump out high-risk products and sell them to Mom and Pop investors. The stock market had gone up in almost a straight line since March 2009, the depths of the credit crisis. The demand for commodities seemed vast, and the U.S. energy industry, with the boom in fracking, looked invincible even though oil prices had started to slide. Those structured securities issued last year total at least $1.3 billion, with most maturing later this year. Investors have a bit of time for oil to bounce back, however, if that bounce doesn’t happen, expect a flood of investor complaints to be filed against the brokers and broker-dealers who sold the structured notes. The allure of the notes and structured products is that investors can make a lot of money if oil goes up just a smidge, with some notes tripling gains at a capped rate. But in some cases there is no protection on the downside, so investors will see “dollar for dollar losses, without limit,” if the fund goes down, noted Zweig. But getting back to even will not be easy, noted one analyst cited by Zweig. “They vast majority of them are underwater,” said the analyst. “And a lot are materially underwater. On many of them, you’d need a 50% to 100% jump in the price of oil from today’s levels to get to break-even.” “This is not really an investment strategy so much as a wager on which way oil prices are going,” another analyst told Zweig. “And some of the risks and costs of that wager are masked by the complexity of it.” Hidden risks and costs, a complicated investment structure based on derivatives – readers, these are red flags in any market. “Many people who thought they were buying black gold on the cheap appear to own a black hole instead, with limited means of escape,” concludes Zweig. We couldn’t agree more. Zamansky LLC are securities and investment fraud attorneys representing investors in federal and state litigation against financial institutions. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.