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ETF Stats For November 2015: Fund-Of-Funds Count At 76

Twenty-one launches and two closures brought the quantity of U.S.-listed exchange traded products to 1,824 (1,623 ETFs and 201 ETNs) at the end of November. Overall assets climbed 1.0% for the month to $2.14 trillion, with actively managed funds garnering a 1.7% increase. Trading activity plunged 20.7% to $1.3 trillion, as fewer products changed hands in the holiday-shortened month. Fund-of-funds products accounted for nine of November’s launches, and their quantity now stands at 76. As their name implies, these are ETFs that own other ETFs (and ETNs) instead of directly owning the underlying stocks and bonds. Assets in fund-of-funds ETFs surpassed $13 billion in November. However, these assets are not included in the overall industry asset statistics, because doing so would amount to double counting. It is important to take note of the growth in this category, though, as their quantity has jumped from 43 to 76 this year, and assets have surged 191%. Although you don’t hear too much about these products, their asset levels are on a path to overtake ETNs next year and actively managed ETFs in 2017. The popularity of currency hedging is one of the reasons for the recent rapid growth in the fund-of-funds segment. Eight of the nine new fund-of-funds ETFs launched in November are currency-hedged versions of existing products. Rather than buying and holding the 356 stocks of iShares MSCI All Country World Minimum Volatility ETF (NYSEARCA: ACWV ), the new iShares Currency Hedged MSCI ACWI Minimum Volatility ETF (BATS: HACV ) just buys ACWV along with a currency overlay to hedge the currency exposure. Every dollar invested in HACV results in a one-dollar increase in ACWV’s reported assets. Industry-wide assets in the U.S. are now at $2.14 trillion, and represent a 7.1% increase for the year. Splitting out the two major groupings, ETFs have seen a 7.4% increase in 2015, while ETNs have experienced a 16.5% decline. Actively managed ETFs have jumped 28.7%, and, as mentioned previously, the fund-of-funds segment has seen a whopping 191% surge. The quantity of funds with more than $10 billion in assets held steady at 52, and they represent 60% of U.S. industry assets. The quantity of products with at least $1 billion in assets slipped by one to 254, and they account for 89.7% of the assets. The average product has $1.2 billion in assets, yet the median asset level is just $70.2 million, making for a very lopsided market. Trading activity remains concentrated in relatively few ETFs. Only seven averaged more than $1 billion a day in activity, but these seven grabbed a 47.5% market share. The quantity of ETFs and ETNs with more than $100 million in average daily dollar volume decreased from 94 to 90, and accounted for 86.5% of the action. A whopping 266 products (14.6%) did not trade on the last day of November, and 21 went the entire month without a trade. November 2015 Month End ETFs ETNs Total Currently Listed U.S. 1,623 201 1,824 Listed as of 12/31/2014 1,451 211 1,662 New Introductions for Month 21 0 21 Delistings/Closures for Month 2 0 2 Net Change for Month +19 0 +19 New Introductions 6 Months 160 8 168 New Introductions YTD 249 12 261 Delistings/Closures YTD 77 22 99 Net Change YTD +172 -10 +162 Assets Under Mgmt ($ billion) $2,119 $22.5 $2,141 % Change in Assets for Month +1.1% -4.8% +1.0% % Change in Assets YTD +7.4% -16.5% +7.1% Qty AUM > $10 Billion 52 0 52 Qty AUM > $1 Billion 249 5 254 Qty AUM > $100 Million 784 34 818 % with AUM > $100 Million 48.3% 16.9% 44.9% Monthly $ Volume ($ billion) $1,287 $52.3 $1,339 % Change in Monthly $ Volume -20.6% -22.9% -20.7% Avg. Daily $ Volume > $1 Billion 6 1 7 Avg. Daily $ Volume > $100 Million 85 5 90 Avg. Daily $ Volume > $10 Million 302 11 313 Actively Managed ETF Count (w/ change) 135 +2 mth. +10 ytd Actively Managed AUM ($ billion) $22.2 +1.7% mth. +28.7% ytd Data sources: Daily prices and volume of individual ETPs from Norgate Premium Data. Fund counts and all other information compiled by Invest With An Edge. New products launched in November (sorted by launch date): The iShares Currency Hedged MSCI ACWI Minimum Volatility ETF ( HACV ), launched on 11/2/15, is a fund-of-funds designed to track the investment results of a global index composed of developed and emerging market equities that have relatively low volatility characteristics, while mitigating exposure to fluctuations between the value of the component currencies and the U.S. dollar. The ETF holds the unhedged iShares MSCI All Country World Minimum Volatility ETF ( ACWV ), and then adds forwards to manage the currency risk. Twenty-four countries or regions are represented, and most holdings are consumer staples, financials, and healthcare companies. Its expense ratio is 0.23%. The iShares Currency Hedged MSCI EAFE Minimum Volatility ETF (BATS: HEFV ), launched on 11/2/15, is a fund-of-funds investing in equities of all capitalizations from Europe, Australia, Asia, and the Far East that display low volatility compared to other equities in the regions, while reducing the impact of changes between the value of the underlying currencies and the U.S. dollar. The ETF holds the unhedged iShares MSCI EAFE Minimum Volatility ETF (NYSEARCA: EFAV ), and manages the currency risk with forwards. Japan and the U.K. combine to hold over 50% of the allocations, and the majority of holdings come the from consumer staples, financials, and healthcare sectors. Investors will pay 0.23% annually to own this fund. The iShares Currency Hedged MSCI EM Minimum Volatility ETF (BATS: HEMV ), launched on 11/2/15, is a fund-of-funds aiming to track the investment results of a global index of emerging market equities that have relatively low volatility characteristics, while mitigating exposure to fluctuations between the value of the component currencies and the U.S. dollar. The ETF holds the unhedged iShares MSCI Emerging Markets Minimum Volatility ETF (NYSEARCA: EEMV ) and adds forwards to manage the currency risk. China, Taiwan, and South Korea each have over a 10% allocation, and the financials sector represents about 28% of the portfolio. The ETF has an expense ratio of 0.28%. The iShares Currency Hedged MSCI Europe Minimum Volatility ETF (BATS: HEUV ), launched on 11/2/15, is a fund-of-funds investing in large- or mid-capitalization companies in developed European countries that display low volatility compared to other European equities, while reducing the impact of changes between the value of the underlying currencies and the U.S. dollar. The ETF holds the unhedged iShares MSCI Europe Minimum Volatility ETF (NYSEARCA: EUMV ), and then adds currency forwards to offset value changes in the relevant currencies. The U.K. leads the geographic allocation at 35%, and the majority of holdings come from the consumer staples, financials, and healthcare sectors. The ETF sports a 0.28% expense ratio. The iShares Currency Hedged MSCI Europe Small-Cap ETF (BATS: HEUS ), launched on 11/2/15, is a fund-of-funds holding small-capitalization companies in developed European countries, while mitigating exposure to fluctuations between the value of the component currencies and the U.S. dollar. The ETF holds the unhedged iShares MSCI Europe Small-Cap ETF (NASDAQ: IEUS ), and then adds forwards to manage the currency risk. The largest country representation goes to the U.K. at 36%. Financials and industrials lead the sector allocations at around 23% each. The ETF has a 0.43% expense ratio. The BlueStar TA-BIGTech Israel Technology ETF (NASDAQ: ITEQ ), launched on 11/3/15, provides exposure to Israeli technology companies listed on global stock exchanges. The companies are not required to be domiciled in Israel to be included, but they must have significant ties to the country, such as a domicile, a strong presence of research, development, primary management, tax status, source of revenue, or location of employees. The companies represent a wide range of technological areas, including information, biotechnology, sustainable agriculture, and defense technologies. The ETF holds 65 positions, with just three representing 30% of the fund. Investors will pay 0.75% annually to own this ETF. The First Trust SSI Strategic Convertible Securities ETF (NASDAQ: FCVT ), launched on 11/4/15, is an actively managed ETF investing in global convertible securities. Convertible securities are considered hybrid securities because they offer upside potential through participation in equity returns, but also have a degree of downside protection through their bond-like attributes. They usually consist of debt or preferred securities that may be exchanged into a certain amount stock or other equity security. No yield information is provided. FCVT’s expense ratio is 0.95%. The PowerShares FTSE International Low Beta Equal Weight Portfolio (NASDAQ: IDLB ), launched on 11/5/15, provides investors with exposure to large- and mid-capitalization companies from developed markets (except the U.S.) that show less price sensitivity (low beta) compared to the overall market of the country in which the company is based. IDLB currently has 783 holdings, which are equally weighted upon rebalancing. The ETF sports a 0.45% expense ratio. The PowerShares Russell 1000 Low Beta Equal Weight Portfolio (NASDAQ: USLB ), launched on 11/5/15, selects its holdings by starting with the 1,000 U.S. companies that have the largest market capitalizations and then analyzing their price sensitivity. Those that show less price sensitivity (low beta) to market movements are eligible for inclusion. Currently, there are 418 equally weighted holdings, and the fund’s expense ratio is 0.35%. The AlphaClone International ETF (NYSEARCA: ALFI ), launched on 11/10/15, aims to provide value to investors by evaluating the performance of large hedge funds and institutional investors and purchasing select international companies via American Depository Receipts (ADRs) held by those entities. The strategy of the underlying index is to rank each manager’s performance by calculating the return of their publicly disclosed positions, such as from the Form 13F filings, and then select the 40-50 ADRs held by those with the highest rankings. The ETF can vary between being long-only and market-hedged based on a 200-day simple moving average of the S&P 500 Index. Investors will pay 0.95% annually to own this ETF. The FlexShares Currency Hedged Morningstar DM ex-US Factor Tilt Index Fund (NYSEARCA: TLDH ), launched on 11/10/15, is a fund-of-funds designed to provide broad exposure to developed equity markets outside the U.S. with enhanced weightings to small capitalization and value stocks, while mitigating the effects of currency fluctuations. The ETF holds the FlexShares Morningstar Developed Markets ex-US Factor Tilt Index Fund (NYSEARCA: TLTD ), and then uses forward contracts to hedge the currency exposure. The expense ratio will be capped at 0.47% until November 4, 2016. The FlexShares Currency Hedged Morningstar EM Factor Tilt Index Fund (NYSEARCA: TLEH ), launched on 11/10/15, is a fund-of-funds focusing on emerging markets, but adjusts standard market-cap weighting to provide additional weights to small-capitalization and value stocks. It then hedges against changes in value between the U.S. dollar and constituent currencies. Its main holding is the FlexShares Morningstar Emerging Markets Factor Tilt Index Fund (NYSEARCA: TLTE ), and the currency exposure is mitigated using forward contracts. The expense ratio will be capped at 0.70% until November 4, 2016. The Goldman Sachs ActiveBeta International Equity ETF (NYSEARCA: GSIE ), launched on 11/10/15, uses an index-based strategy that gives all constituents in the MSCI World ex-USA Index a score based on measures of value, momentum, quality, and low volatility. Security scores higher than a fixed “cut-off score” are overweighted, while securities with a score below are underweighted. The expense ratio will be capped at 0.35% until September 14, 2016. The First Trust Heitman Global Prime Real Estate ETF (NYSEARCA: PRME ), launched on 11/12/15, is an actively managed ETF investing globally in shares of public real estate companies that own top-tier properties in the world’s prime markets and cities. “Prime” is defined by the managers as those “that benefit from global physical and/or financial trade, have high barriers to entry, dominate their regions or countries, or provide high-value niche goods and services.” The U.S. has the largest geographic allocation at 31%, and Japan comes in second at 14%. PRME has an expense ratio of 0.95%. The iShares Core International Aggregate Bond Fund (NYSEARCA: IAGG ), launched on 11/12/15, selects global non-U.S. dollar denominated, investment-grade bonds and then uses currency forward contracts to hedge against fluctuations in the relative value of the component currencies to the U.S. dollar. There are currently 534 holdings in 55 countries. The ETF sports a 0.15% expense ratio. The WisdomTree Global SmallCap Dividend Fund (BATS: GSD ), launched on 11/12/15, provides exposure to small-capitalization companies in developed countries and emerging markets that pay dividends. The underlying index selects the largest 1,000 companies in the bottom 5% of the WisdomTree Global Dividend Index that have a market capitalization of at least $200 million and average daily dollar volume of at least $100,000. Holdings are weighted based on dividends. The expense ratio is 0.43%. The Etho Climate Leadership U.S. ETF (NYSEARCA: ETHO ), launched on 11/19/15, invests in a broad range of U.S. companies that display the smallest carbon footprints in their respective industries. The strategy takes into account items such as greenhouse gas emissions from operations, fuel use, supply chain, and performance on environmental issues. It holds about 400 securities, but none in the energy, tobacco, aerospace and defense, gambling, gold, or silver industries. Investors will pay 0.75% annually to own this ETF. The WisdomTree Global Hedged SmallCap Dividend Fund (BATS: HGSD ), launched on 11/19/15, is a fund-of-funds providing exposure to 1,000 dividend-paying, small-capitalization companies in the bottom 5% of the WisdomTree Global Dividend Index, while hedging against currency risk. The ETF holds WisdomTree Global SmallCap Dividend Fund ( GSD ) and then uses forward contracts to mitigate the effects of changes in the relative value of foreign currencies and the U.S. dollar. The expense ratio will be capped at 0.43% until July 31, 2018. The Deutsche X-trackers FTSE Developed ex US Enhanced Beta ETF (NYSE: DEEF ), launched on 11/24/15, selects securities in developed countries outside the U.S. based on five investment factors. The factors are valuation ratios (value), 11-month cumulative return (momentum), leverage and profitability (quality), standard deviation of returns (volatility), and market capitalization (size). There are currently 828 holdings, with 31.8% in Japan and 20% each in financials and industrials. DEEF has an expense ratio of 0.35%. The Deutsche X-trackers Russell 1000 Enhanced Beta ETF (NYSE: DEUS ), launched on 11/24/15, selects a diversified group of US securities based on quality, value, momentum, low volatility, and size factors. The underlying index currently holds nearly 850 companies that were chosen based on these factors. The expense ratio is 0.25%. The FlexShares Real Assets Allocation Index Fund (NASDAQ: ASET ), launched on 11/24/15, is a fund-of-funds offering access to physical or tangible assets (examples of which are commodities, precious metals, oil, and real estate) by investing in three other FlexShares ETFs. The underlying ETFs and current allocations are the FlexShares STOXX Global Broad Infrastructure Index ETF (NYSEARCA: NFRA ) 49.8%, the FlexShares Global Quality Real Estate Index ETF (NYSEARCA: GQRE ) 40.5%, and the FlexShares Global Upstream Natural Resources Index ETF (NYSEARCA: GUNR ) 9.8%. The expense ratio will be capped at 0.57% until November 8, 2016. Product closures in November and last day of listing: EGShares Blue Chip ETF (NYSEARCA: BCHP ) – 10/30/2015 EGShares Brazil Infrastructure ETF (NYSEARCA: BRXX ) – 10/30/2015 Note: These two ETFs had their last day of listed trading on October 30. However, since they were still officially listed at the end of that month, their assets are included in the October statistics and their closures are included in the November statistics. Product changes in November: The AdvisorShares Sunrise Global Multi-Strategy ETF (NASDAQ: MULT ) underwent an extreme makeover on November 4, becoming the AdvisorShares Market Adaptive Unconstrained Income ETF (MAUI), with a new manager and subadvisor. The ProShares 3x Leveraged and 3x Inverse Financial Sector ETFs ( FINU and FINZ ) changed their underlying indexes to S&P Select Sector Indexes effective November 4. ProShares executed forward splits on two ETFs ( BZQ and ZSL ) and reverse splits on five ETFs ( GDXX , GDJJ , UOP , UBR , and UBIO ) effective November 13 . Global X had reverse splits on five ETFs ( COPX , GLDX , LIT , SIL , and URA ) effective November 18. The SPDR Barclays Aggregate Bond ETF changed its ticker symbol from LAG to BNDS effective November 20. Announced product changes for coming months: Van Eck Global plans to acquire Yorkville MLP ETFs and hopes to close the transaction in the fourth quarter, but it’s running out of time. Both ETFs ( YMLP and YMLI ) have lost more than 35% of their value since the August 3 announcement. The Guggenheim BulletShares 2015 Corporate Bond ETF (NYSEARCA: BSCF ) and the Guggenheim BulletShares 2015 High Yield Corporate Bond ETF (NYSEARCA: BSJF ) are scheduled to mature and liquidate on December 31 , with December 30 being the last day of trading. The Guggenheim Russell 1000 Equal Weight ETF (NYSEARCA: EWRI ) will cease to exist on January 27, 2016. At that time, any remaining assets in the fund will be merged into the Guggenheim S&P 500 Equal Weight ETF (NYSEARCA: RSP ). Guggenheim will change the name and underlying indexes for three of its ETFs effective January 27, 2016. The Guggenheim Russell 2000 Equal Weight ETF (NYSEARCA: EWRS ) will become the Guggenheim S&P SmallCap 600 Equal Weight ETF (EWSC), the Guggenheim Russell MidCap Equal Weight ETF (NYSEARCA: EWRM ) will become the Guggenheim S&P MidCap 400 Equal Weight ETF (EWMC), and the Guggenheim Russell Top 50 Mega Cap ETF (NYSEARCA: XLG ) will become the Guggenheim S&P 500 Top 50 ETF ( XLG ). Previous monthly ETF statistics reports are available here . Disclosure: Author has no positions in any of the securities, companies, or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) is received from, or on behalf of, any of the companies or ETF sponsors mentioned.

A Market Neutral Strategy To Profit From High Yield Bonds

Summary KKR Income Opportunities is a closed end fund that invests in high yield bonds and senior loans. While the 10.6% yield and the 14% discount to NAV may look tempting, some investors are worried about a continuation of the weak trend in this space. In this article I will present a market neutral strategy that can benefit from a compression in NAV discount while hedging a significant portion of the market risk. In a recent post I talked about the KKR Income Opportunities Fund (NYSE: KIO ) and how I found it attractive for income seeking investors. The biggest concern I have on that fund is the risk that weakness in high yield and leveraged loans may persist in 2016. In that case the 10% yield may be partially eroded by a declining NAV or a widening of the discount to NAV. For this reason I decided to dig further into this space and tried to devise a strategy that reduces the market risk while allowing investors to benefit from a reduction in the NAV discount. This strategy may be interesting for sophisticated investors that have access to and are familiar with the pros and cons of shorting. The strategy The strategy I have in mind involves going long KIO and at the same time hedging the position by shorting a combination of two related ETFs: the iShares iBoxx High Yield Corporate Bond ETF (NYSEARCA: HYG ) and the SPDR Blackstone/GSO Senior Loan ETF (NYSEARCA: SRLN ). For more details on KIO I encourage you to read my previous post . Here I am going to give you a quick snapshot on HYG and SRLN before detailing the reason why I believe this strategy could deliver superior risk adjusted returns. HYG is an ETF that gives you exposure to US high yield bonds. It is very well diversified, with more than a thousand securities in the portfolio and a concentration of 4.7% of NAV in the top 10 names. The effective duration of the fund is 4.3 years while the total expense ratio is 0.5%. According to the latest fact sheet the credit rating breakdown is the following: SRLN is an ETF that gives you exposure to leveraged loans. It is less diversified than HYG with a total of 192 securities and has a concentration of 15% of NAV in the top 10 names. The average maturity is a bit less than 5 years but interest rate risk is minimal as loans are generally indexed to Libor. The total expense ratio is 0.7% and the most recent credit breakdown is the following: Analysis of the trade Considering that KIO is a fund that invests in high yield bonds and loans and is trading at approximately 15% discount to NAV I believe one could effectively short a combination of HYG and SRLN at prices close to NAV and go long KIO to take advantage of the mispricing. I would go short $1,500 of HYG + SRLN for each $1,000 in KIO to take into consideration the level of leverage in the KKR fund (a third of the assets are financed through a credit facility). The following analysis shows the NAV performance of $1,000 invested in KIO since the beginning of the year and compares it with the NAV performance of $1,500 invested in HYG +SRLN. The analysis includes the dividends distributed by all the funds. What you can see from the analysis above is that KIO outperformed both HYG and SRLN on a distribution adjusted basis in terms of NAV. I attribute a good part of that outperformance to the significant underweight in the energy sector of the KIO fund. Despite that, the stock performed poorly, down 12% for the year due to an increase in the NAV discount or down 4% after taking into consideration the distributions received. What to expect from the trade As you are short $1.5 for each $1 invested in KIO you are expected to “pay” a dividend cost of approximately 7.5% for your short: 5% is the average yield on HYG and SRLN and that needs to be multiplied by 1.5. This outflow will be more than compensated by a 10.6% dividend in KIO. All things staying the same and excluding tax considerations you net 3% and you are likely left with some spare cash given that you are shorting more than your long investment. In a positive scenario you can expect the NAV discount to reduce over time providing an additional source of profits. In terms of NAV performance you can expect a very similar development for your long and your short: KIO is a bit weaker in terms of average rating but has a lower exposure to the tricky energy sector. Some of you may ask a question: is this a pure arbitrage trade? I want to stress that this is not an arbitrage trade. Underlying securities in the two portfolios are different, sector weightings are different and portfolio concentration is different. However overall performance of the different assets should show a very strong correlation, with the main difference being that you buy a portfolio at a 15% discount and you sell a similar (but not identical) portfolio at par. Your biggest risk exposure lies in the possibility that the discount to NAV widens further in KIO. That should happen only in case of a new sharp drop in the value of the assets. I believe that would represent a great opportunity to cover my short at a profit and double down on KIO at an even cheaper valuation relative to the market value of its underlying assets and I would be more than willing to take that risk.

Who Will Win And Who Will Lose When The Fed Raises Rates In December

Summary Analysis of the jobs report. Explains why bonds and other interest rate sensitive investments will suffer. Explains why stock picking through logic and common sense is back. Today, we had great news as the US jobs report finally showed signs that the economy may be improving as 271,000 jobs were created, beating economists’ estimates of 180,000, while the unemployment rate fell to 5% for the first time since 2008. This is where the jobs were created: (click to enlarge) But the most important thing about the report is that the average hourly wage finally spiked up for the first time in a long time. Janet Yellen and her gang at the Fed are going to party this weekend, as the release valve from the tremendous bone crushing stress that the Fed officials have been under has just opened, and this report is all the evidence the Fed will need to raise interest rates (for the first time since 2004) when it meets in December. That means that the party of free money at zero interest rates will finally come to an end. The Fed will start raising rates in December and then will probably start raising rates at about .75% per year for the next 5 to 7 years, bringing interest rates eventually in line with the historical average rates. Who will suffer and who will benefit? Well, those who will suffer are: 1) Anyone owning commodities like gold, silver, oil, etc., as the US dollar (NYSEARCA: UUP ) will continue to rise, and since many of these commodities are priced in US dollars, they will fall. You can see evidence of that in the price of gold (NYSEARCA: GLD ), which just hit a 5-year low today on the news. (click to enlarge) So anyone owning commodities or the companies that mine them (NYSEARCA: GDX ) is in for some serious pain going forward. Now, the only thing that can save commodity producers and miners is if inflation starts its way back up. The Fed has to move quickly as the last time we had such low interest rates was in 1973, and from 1974 to 1980 inflation erupted and interest rates went from 3% to 19% in six years. We are currently in a deflationary period and there is little threat of inflation right now, but the Fed needs to get ahead of the curve and move because hyperinflation is serious business, and if one ever lets that genie out of the bottle, it is almost impossible to curtail it. 2) Bond holders (NYSEARCA: TBT ), insurance companies, dividend investors, car manufacturers and dealers, home builders, realtors, furniture/appliance manufacturers, utilities and companies doing buybacks will start feeling the pain coming up. Since investors will start getting higher interest rates on new bonds issued and with savings deposits at banks, with every quarter-point rate increase by the Fed, those holding older bonds will probably sell them to buy the new ones issued at a higher rate. So, what you will see is the opposite of how refinancing your house works, for example. When you refinance your home, you pay off your old mortgage and get a new lower rate. But when you refinance your bonds, you are looking for a higher rate of interest and thus will sell them to buy the new ones. So those holding older bonds will see investors in those bonds sell them, chasing the higher rate and buying new ones. When they sell, the principal of those older bonds goes down as the yield that each one pays has to match the new bonds. So, if rates keep rising, then more and more people will be selling their bond holdings. The biggest holders of bonds are insurance companies (NYSEARCA: IAK ), so insurers will feel the pain as the products each offers, like annuities, will need to pay higher rates of interest to stay competitive, while the principal value of each companies’ bond holdings will slowly decline. So for insurers, it’s a double-edged sword. Dividend investors will suffer as the army of investors chasing dividends will have another safer option to invest in to get interest (like CDs at banks) so companies such as utilities, master limited partnerships (NYSEARCA: AMLP ), REITs (NYSEARCA: IYR ), etc., will have to raise dividend rates, which means each will have to borrow more at the new higher rates to pay them. As each borrows more, the underlying business suffers as costs increase, but revenues and profits stay the same. In my opinion, interest rates will constantly rise at about .75% per year, thus those companies currently borrowing at zero interest rates will no longer be able to do so and thus will curtail buyback plans and stop raising dividend payouts. Management will actually have to grow their companies’ bottom lines and invest in growth. This action will be a paradigm shift and will spur capital expenditures, which will grow the manufacturing base, and those companies that make industrial equipment (NYSEARCA: IYJ ) may benefit. As interest rates rise, home prices will stop rising and demand will slow as mortgage rates will go up and that will hurt home builders and realtors (NYSEARCA: ITB ) as there will be fewer buyers and a lot more sellers. Those who have been successfully flipping houses will finally find an urgent need to dump their entire portfolios of homes in a hurry. Back in 2009, hedge funds bought millions of homes in foreclosure and have since seen those homes rise in value. I would assume these hedge funds will start flooding the markets by putting those homes all up for sale ASAP. So, if you were thinking of selling your home, you better move it. Utilities (NYSEARCA: IDU ) will start to tank as the only reason investors really buy them is for the dividend yield. Since maintenance CapEx charges on utilities have always been very high, utilities, in order to pay out a dividend, have always borrowed money to do so. Thus, each will suffer as interest rates rise and borrowing costs do so as well. The party for car manufacturers and dealers will soon be over as each will no longer be able to offer zero interest rate financing. I went and bought a new Toyota (NYSE: TM ) Tundra truck recently as I wanted to lock in the rate but will not be buying anything again for ten years. So if you are in the market for a car, go buy it soon. The same goes for furniture and home appliances; lock the rates in because you will not see these sweetheart deals anytime soon. Those who will benefit from rising interest rates are: 1) Stock pickers will benefit as investors start to rebalance their portfolios, removing those industries mentioned above and go for more growth and value investments based on each company’s Main Street operations instead of dividend payouts and buy backs. I have not been in a rush to buy anything as I knew this scenario and major paradigm shift was coming and that the markets would be effected as a rebalancing of portfolios will start soon. The companies I have bought have extremely high free cash flow and thus are not going to be much affected by rising interest rates. Most of them are duopolies like Lockheed Martin (NYSE: LMT ), Boeing (NYSE: BA ), Visa (NYSE: V ) and MasterCard (NYSE: MA ), while others operate with very little, if any, debt at all like FactSet (NYSE: FDS ) Biogen (NASDAQ: BIIB ), Michael Kors (NYSE: KORS ), Gilead Sciences (NASDAQ: GILD ) and Accenture (NYSE: ACN ) and have FROICs of 30% or higher. For those interested in more information on how I picked those stocks, you can find out more by going HERE . I also own Apple (NASDAQ: AAPL ) and here is my Friedrich Research on it that shows you why I bought it: (click to enlarge) Multinational firms may suffer due to the strong US dollar, so the smart investor may want to concentrate on those companies that buy supplies or have products manufactured outside (like Apple does) of the US, as the stronger dollar will buy more bang for the buck while those who export will suffer as customers overseas will be buying less as their currencies weaken. Going forward, what is coming up will be a stock pickers’ dream market, where those who should outperform are those who actually do the research and due diligence to get the story right. Investors will no longer be able to buy anything and watch it go up automatically, as the rising tide will now just be calm water and will no longer lift all boats. Investors will need to buy the right stocks and get the story right. The free ride of markets backed up by the Federal Reserve’s zero interest rates will be officially over when the Fed raises rates in December. The next few months will be a rebalancing of portfolios toward growth and value investing instead of index/dividend/buyback investing. Analysts, portfolio managers and stock brokers are now going have to actually work for a living as the free ride of just putting their clients’ money in index funds, bonds and ETFs and watching them go up every day automatically (as more and more people pile in) will no longer be profitable as the party there is over. As a result, more and more people will become confused at this paradigm shift, as most of them were not investors prior to 2004 and don’t know what a rising interest rate cycle is like. Once the Fed starts raising rates, it usually raises for 5 to 7 years, but the Fed will be raising for at least that much this time around, as it is starting from zero and that’s a long way away from the historical average rate. So, in conclusion, the tide will now start rolling out and you will finally see those who are naked and without a clue on how to invest, as they can no longer rely on the Fed Tide lifting all boats. Momentum investors will get crushed as those companies that buy other companies with zero debt will finally not be able to do so anymore, so mergers and acquisitions will come to a screeching halt as will IPOs. As for me, I am very excited as I will be using my Friedrich algorithm and slowly building a strong portfolio of growth/value investments that I can hold for a while as the Fed begins its moves in December. Those who will benefit are those who use logic and common sense, and more importantly, who know what they own and why. With the Fed out of the picture, as of December, logic and common sense should rule the day.