Tag Archives: alternative

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

First Trust To Launch Second Actively Managed Commodity ETF

In 2013, First Trust launched the actively managed First Trust Global Tactical Commodity Strategy ETF (NASDAQ: FTGC ), a fund that takes long positions in commodity futures. The time since has been difficult for commodities markets, and as a result, FTGC’s performance has suffered along with other funds in the category: For the year ending January 31, for instance, the ETF has returned -20.52%. However, these returns ranked in the top quintile of funds in its category. Long and Short Positions Perhaps in response, First Trust’s second actively managed commodity ETF – for which it filed paperwork with the Securities and Exchange Commission (“SEC”) on January 28 – will pursue an absolute returns strategy . This means the fund will take both long and short positions in pursuit of positive returns, irrespective of benchmarks, while aiming for lower volatility than traditional funds. The ability to take short positions will obviously help the fund produce positive returns, should commodities remain in a bear market. A long/short approach in the commodity sector has been very effective for the LoCorr Long/Short Commodity Strategy Fund (MUTF: LCSAX ), one of the few long/short commodity fund competitors in the mutual fund and ETF space. That fund has bucked the downdraft in the commodities markets and has generated annualized returns of 12.79% over the past 3-years through January 31. Offshore Subsidiary Like FTGC (and many other funds that use commodity futures), the new fund will invest up to a quarter of its assets in a subsidiary based in the Cayman Islands. This subsidiary will invest in commodity-based futures contracts, with certain tax advantages, while the remainder of the fund’s assets will be invested in cash and short-term debt. Commodities markets have been struggling, largely due to the extreme bear market in crude oil, but this has actually led to increased interest in actively managed commodity funds. As pointed out by ETF.com, Elkhorn and Van Eck have both filed for such funds over the past few months, but First Trust’s new fund is the first to include a short component. This, combined with the firm’s pedigree as the first to launch an actively managed commodities ETF of any kind lends gravitas to the new fund, which will be known as the First Trust Alternative Absolute Return Strategy ETF. Jason Seagraves contributed to this article.

Best And Worst Q1’16: Industrials ETFs, Mutual Funds And Key Holdings

The Industrials sector ranks second out of the ten sectors as detailed in our Q1’16 Sector Ratings for ETFs and Mutual Funds report. Last quarter , the Industrials sector ranked third. It gets our Neutral rating, which is based on aggregation of ratings of 20 ETFs and 23 mutual funds in the Industrials sector. See a recap of our Q4’15 Sector Ratings here . Figures 1 and 2 show the five best and worst-rated ETFs and mutual funds in the sector. Not all Industrials sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 20 to 348). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Industrials sector should buy one of the Attractive-or-better rated ETFs or mutual funds from Figures 1 and 2. Figure 1: ETFs with the Best & Worst Ratings – Top 5 Click to enlarge * Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings The U.S. Global Jets ETF (NYSEARCA: JETS ), the Guggenheim S&P 500 Equal Weight Industrials ETF (NYSEARCA: RGI ), and the Huntington EcoLogical Strategy ETF (NYSEARCA: HECO ) are excluded from Figure 1 because their total net assets are below $100 million and do not meet our liquidity minimums. Figure 2: Mutual Funds with the Best & Worst Ratings – Top 5 Click to enlarge * Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings The Fidelity Select Environment and Alternative Energy Portfolio (MUTF: FSLEX ) is excluded from Figure 2 because its total net assets are below $100 million and do not meet our liquidity minimums. The iShares Transportation Average ETF (NYSEARCA: IYT ) is the top-rated Industrials ETF and the Fidelity Select Transportation Portfolio (MUTF: FSRFX ) is the top-rated Industrials mutual fund. Both earn a Very Attractive rating. The PowerShares Dynamic Building & Construction Portfolio ETF (NYSEARCA: PKB ) is the worst-rated Industrials ETF and the ICON Industrials Fund (MUTF: ICIAX ) is the worst-rated Industrials mutual fund. PKB earns a Neutral rating and ICIAX earns a Dangerous rating. 409 stocks of the 3000+ we cover are classified as Industrials stocks. Landstar System (NASDAQ: LSTR ) is one of our favorite stocks held by IYT and earns an Attractive rating. Over the past decade, Landstar has grown after-tax profit ( NOPAT ) by 7% compounded annually. LSTR improved its already high 18% return on invested capital ( ROIC ) in 2004 to a top-quintile 22% ROIC on a trailing twelve months basis. Despite the consistent strength in its business, LSTR is undervalued. At its current price of $59/share, LSTR has a price to economic book value ( PEBV ) ratio of 1.1. This ratio means that the market expects Landstar to grow NOPAT by only 10% over its remaining corporate life. If Landstar can continue to grow NOPAT by just 7% compounded annually over the next decade , the stock is worth $72/share today – a 22% upside. Celadon Group (NYSE: CGI ) is one of our least favorite stocks held by Industrials ETFs and mutual funds. Celadon was placed in the Danger Zone in November 2015 and is a competitor to Landstar. Since 2009, Celadon’s reported earnings have been extremely misleading. Despite net income growing from $2 million in 2009 to $37 million in 2015, Celadon’s economic earnings have declined from -$16 million to -$25 million over the same timeframe. The disconnect comes from Celadon’s failed acquisitions, which have helped grow EPS while destroying shareholder value, something known as the high-low fallacy. Even though CGI is down 50% since our initial Danger Zone report, it still remains overvalued. To justify its current price of $9/share, Celadon must grow NOPAT by 8% compounded annually for the next 11 years . While this may not seem like a high rate of profit growth, keep in mind that over the past decade, CGI has only grown NOPAT by 3% compounded annually. Figures 3 and 4 show the rating landscape of all Industrials ETFs and mutual funds. Figure 3: Separating the Best ETFs From the Worst ETFs Click to enlarge Sources: New Constructs, LLC and company filings Figure 4: Separating the Best Mutual Funds From the Worst Mutual Funds Click to enlarge Sources: New Constructs, LLC and company filings D isclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, sector or theme. 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.