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Fed Rate Hike On The Table Again: 5 Finance Mutual Fund Picks

The Federal Reserve had raised interest rates for the first time in almost a decade in December and assured that it would hike rates four times this year, provided there are signs of a strengthening labor market, inflation rises to the target level of 2% and the financial markets remain strong. However, the continuous slump in oil prices, weak global economy and volatile financial markets since the beginning of the year raised doubts as to whether the Fed will be able to fulfill its commitment. Nevertheless, Friday’s upbeat jobs report reinforced the notion that the labor market is firming, which puts Fed rate hikes in play. An uptick in inflation data and rise in consumer spending levels also kept rate hikes in the cards. Additionally, the broader markets regained momentum in the last three weeks after a rebound in oil prices from its 12-year low ebbed deflationary concerns. China’s stimulus measures, on the other hand, raised hopes of a much stable global economy, which would, in turn, contain the volatility in the broader markets. While these encouraging facts aren’t probably enough to push the central bank to raise rates this month, it could bolster the case for a rate hike in the upcoming meetings this year. A large number of economists and some Fed officials also expect the central bank to continue hiking rates this year. Given these positive vibes, it is profitable to invest in financial mutual funds that are positioned to benefit from subsequent lift-offs. These funds also boast strong fundamentals and solid returns. Upbeat Jobs Data The jobs data painted a solid picture of the labor market. The U.S. economy added 242,000 jobs in February, handily beating the consensus estimate of 194,000, according to the Bureau of Labor Statistics (BLS). The tally was also considerably higher than January’s upwardly revised job number of 172,000. Meanwhile, the unemployment rate in February remained unchanged at 4.9%. Further, the unsparing U-6 rate that includes the unemployed, the underemployed and the discouraged dipped to 9.7% in February from 9.9% in January, its lowest level since May 2008. The labor force participation rate also increased to 62.9% last month, the highest level in almost a year. Moreover, the report found that wages went up 2.2% in the past 12 months. Even though it increased at a slower pace compared to the previous month, it is still consistent with a tightening labor market that is viewed by the Fed as one of the major criteria for a rate hike. Underlying Inflation Picks Up, Spending Rises This surge in hiring followed the Commerce Department’s report that showed a rise in inflation. The Fed’s preferred gauge, the personal consumption expenditures index (PCE), increased 1.3% in January from year-ago levels. The so-called “core” inflation that excludes food and energy prices came in at a solid 1.7%, much closer to the Fed’s desired target. Moreover, consumer spending levels increased at the fastest pace in eight months this January. Retail sales are also off to a good start this year, indicating strength in consumer spending, which accounts for more than two-thirds of U.S. economic activity. These reports increase the likelihood of a rate hike soon. Broader Markets Rally The markets have also showed signs of stability in recent times. Oil prices bounced back from their record low in mid-February, which eventually boosted the broader markets. Signs of decline in U.S. production and continuous talk about freezing output by the major oil producers were cited to be the reasons behind the oil price surge. Positive developments in China also fueled investor sentiment. The recent stimulus measures by the People’s Bank of China (“PBOC”) to address concerns over the country’s recent economic slowdown boosted investor sentiment. The PBOC reduced the reserve requirement ratio by 0.5% to 17%. 5 Finance Mutual Funds to Invest In If the broader markets continue their winning streak, the Fed will have to raise rates this year. Additionally, a pick-up in the inflation rate, rise in consumer spending levels and encouraging nonfarm payroll reports are also paving the way for a rate hike as early as possible. Fed Vice Chairman Stanley Fischer had already told the National Association for Business Economics on Monday that inflation may be “stirring,” which suggests that he might want rates to increase in the near future. Richmond Fed President Jeffrey Lacker had also said that ongoing strength in the labor market warrants rate hikes this year. A survey by the National Association for Business Economics on Monday showed that almost 80% of economists expect a Fed rate hike this year at least once. The CME Group’s FedWatch tool expects that there is a solid 53% chance a hike could come as soon as November, while it projects that there is almost a 50% chance of a rate hike in September. Separately, the Bank of America Merrill Lynch Global Research stated last Friday that Americans can witness two interest rate hikes this year and three more next year. Given that there is a fair chance of a rate hike this year, it will be prudent to invest in finance mutual funds. Financial companies, including banks, insurers and brokerage firms, are likely to be among the biggest beneficiaries of the rate hike. Here, we have selected five such finance funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy), have positive 3-year and 5-year annualized returns, offer minimum initial investment within $5000 and carry a low expense ratio. John Hancock Regional Bank Fund A (MUTF: FRBAX ) invests a large portion of its assets in equity securities of regional banks. The fund’s 3-year and 5-year annualized returns are 12.1% and 10.1%, respectively. Its annual expense ratio of 1.26% is lower than the category average of 1.54%. FRBAX has a Zacks Mutual Fund Rank #1. Fidelity Select Banking Portfolio No Load (MUTF: FSRBX ) invests a major portion of its assets in securities of companies principally engaged in banking. Its 3-year and 5-year annualized returns are 8.7% and 7.9%, respectively. The annual expense ratio of 0.79% is lower than the category average of 1.54%. FSRBX has a Zacks Mutual Fund Rank #2. Schwab Financial Services Fund No Load (MUTF: SWFFX ) invests the majority of its assets in equity securities issued by companies in the financial services sector, which includes commercial banks, insurance and brokerage companies. The fund’s 3-year and 5-year annualized returns are 7.8% and 7.1%, respectively. Its annual expense ratio of 0.9% is lower than the category average of 1.54%. SWFFX has a Zacks Mutual Fund Rank #1. Fidelity Select Insurance Portfolio No Load (MUTF: FSPCX ) invests a large portion of its assets in securities of companies principally engaged in property, life or health insurance. Its 3-year and 5-year annualized returns are 12.8% and 11.4%, respectively. The annual expense ratio of 0.81% is lower than the category average of 1.54%. FSPCX has a Zacks Mutual Fund Rank #1. Franklin Mutual Financial Services Fund A (MUTF: TFSIX ) invests a major portion of its assets in securities of financial services companies. The fund’s 3-year and 5-year annualized returns are 8.9% and 7.4%, respectively. Its annual expense ratio of 1.44% is lower than the category average of 1.54%. TFSIX has a Zacks Mutual Fund Rank #1. Original Post

4 Energy ETFs Outperforming On Oil Rebound

Energy investors have long been waiting for oil prices to soar and energy stocks and ETFs to join the party. Though the start of 2016 was not at all joyous for oil, the commodity finally bucked the trend as evident by the 17% one-month gain and an 11.3% five-day uptick in the WTI crude ETF, the United States Oil ETF (NYSEARCA: USO ) . The picture is equally rosy for Brent crude with the United States Brent Oil (NYSEARCA: BNO ) rising 11.1% in the last five days and adding 21.1% in the last one month. Brent crude is hovering around $40 while WTI crude is around $37 at the time of writing. Though the commodity was stressed lately by soft Chinese data , the underlying momentum remained strong. Several investors turned bullish on the product. Also, the number of rigs fell to the lowest level since December 2009 (as per Baker Hughes (NYSE: BHI )) pointing to a likely fall in U.S. output. The U.S. rig count slipped to below 500 for the week ending March 4. Of these, there were 392 active oil rigs and the rest were drilling natural gas. If this was not enough, the biggest oil producing countries – Saudi Arabia and Russia – along with Qatar and Venezuela had agreed to freeze oil output at the January level. Needless to say, the move brought a fresh lease of life in the energy sector. In short, efforts from both U.S. and OPEC to shore up the oil market signal that producers are now really serious about reining in the oil rout. As far as demand is concerned, China’s crude imports surged 19.1% between January and February despite a soft economy, per Reuters. Speculation is rife that oil can reach the $50 level by the end of this year. While buoyancy was noticed in the entire energy sector, below, we highlight four energy ETFs that cashed in the most on the recent rally. First Trust ISE-Revere Natural Gas Index ETF (NYSEARCA: FCG ) This product offers exposure to the U.S. stocks that derive a substantial portion of their revenues from the exploration and production of natural gas. It follows ISE-REVERE Natural Gas Index and holds 30 stocks in its basket that are well spread out across components. The product has amassed $186.9 million in its asset base while it sees solid volume of nearly 896,000 shares per day. It charges 60 bps in annual fees from investors. The fund added 27.8% in the last one month (as of March 7, 2016). It has a Zacks ETF Rank of 3 or ‘Hold’ with ‘High’ risk outlook. PowerShares S&P SmallCap Energy Portfolio ETF (NASDAQ: PSCE ) This fund provides exposure to 33 firms by tracking the S&P SmallCap 600 Capped Energy Index. The fund has garnered about $30.9 million in its asset base while it sees a moderate volume of around 21,000 shares a day. The product is largely concentrated on the top 10 firms that collectively make up for about 60% share of the basket. About 58% of its assets is allocated to energy, equipment and services while oil, gas and consumable fuels account for the remainder. The ETF charges a fee of 29 bps annually and added 25.3% in the last one month (as of March 7, 2016). The fund has a Zacks ETF Rank #5 (Strong Sell) with a ‘High’ risk outlook. SPDR S&P Oil & Gas Equipment & Services ETF (NYSEARCA: XES ) This fund provides equal weight exposure across 42 securities by tracking the S&P Oil & Gas Equipment & Services Select Industry Index. None of the firms account for more than 3.95% of total assets. The fund has amassed $189.1 million in its asset base. The ETF has an expense ratio of 0.35% and gained 26.9% in the last one month. XES has a Zacks ETF Rank #5 with a ‘High’ risk outlook. SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA: XOP ) This fund follows the S&P Oil & Gas Exploration & Production Select Industry Index, holding 63 stocks in its portfolio. It is well diversified across its holdings with none of the companies accounting for more than 2.96% of total assets. The ETF has been able to manage $2.01 billion in its asset base. It charges 35 bps in annual fees and expenses. The product gained 17.5% in the last one month and has a Zacks ETF Rank #4 (Sell) with a ‘High’ risk outlook. Original Post

The Statistical Support For Long-Term Return Regimes Is Compelling

By Rob Bennett The last three columns examined a recent article by Michael Kitces (“Should Equity Return Assumptions in Retirement Projections Be Reduced for Today’s High Shiller CAPE Valuation?”) that advances the highly counter-intuitive and yet entirely accurate claim that, “The ideal way to adjust return assumptions… [may be] to do projections with a ‘regime-based approach to return assumptions. This would entail projecting a period of much lower returns, followed by a subsequent period of higher returns.” This changes everything that we once thought we knew about how the stock market works. The old (and still dominant) belief was that stock prices fall in the pattern of a random walk because price changes are caused by economic developments. If what Kitces is saying is so (I strongly believe that it is), prices do not fall in a random walk at all. They play out according to a highly predictable long-term pattern. For about 20 years, valuations rise (with short-term drops mixed in). Then, for about 15 years, valuations drop (with short-term rises mixed in). It is investor emotion that is the primary determinant of stock price changes. Investors can reduce risk dramatically, while also increasing return dramatically by adjusting their stock allocations in response to big valuation shifts, and thereby keeping their risk profile roughly constant as one “regime” is replaced with another. This is hard to accept. We are always living through either a high-return regime or a low-return regime. The regimes continue long enough to convince us that they are rooted in something solid and real and permanent, not in something as loosey-goosey and vague and seemingly ephemeral as investor psychology. When sky-high returns were being reflected on our portfolio statements in the late 1990s, we adjusted our understanding of our net worth. But improperly so! A large portion of the oversized returns were the result of the regime we were living through. Those returns were fated to disappear in the following regime. And the poor returns of today’s regime (which began in 2000) will also disappear when we enter the next return-boosting regime. The strategic implications are far-reaching. If there really are high-return regimes and low-return regimes, it makes no sense to stick with the same stock allocation at all times. If there are two types of return regimes that last for 15 or 20 years, there are two types of stock markets that last for 15 or 20 years. Decisions that make sense for one of the two types of regimes cannot possibly make sense for the other type of regime. Buy-and-hold is a mistake. We should be going with higher stock allocations in high-return regimes and with lower stock allocations in low-return regimes. There’s a rub. What if the data that Kitces is taking into consideration in forming his conclusions is the product of coincidence? Can we really be sure that the two-regime world will remain in place? If it doesn’t, and if we invest on the belief that it will, we will be underinvested in stocks while waiting for today’s low-return regime to play out (the historical reality is that no low-return regime has ever ended until the P/E10 level dropped to 8 or lower, a big drop from where it stands today). Negative consequences follow for an investor who abandons buy-and-hold for valuation-informed indexing in the event that Kitces’ regime concept turns out to be an illusion. The most convincing case that I have seen that it is not an illusion is the case put forward in a book by Michael Alexander, titled Stock Cycles: Why Stocks Won’t Beat Money Markets Over the Next Twenty Years . Please note that the claim made in the subtitle was widely perceived as crazy at the time it was made (the book was published in 2000), and yet, has proven prophetic – stock returns over the past 16 years have been far smaller than the returns that were available in 2000 through the purchase of super-safe asset classes like Treasury Inflation-Protected Securities and iBonds. Buy-and-holders would have said at the time that a prediction of 16 years of poor returns was exceedingly unlikely to prove valid. And yet, Alexander knew something (or at least thought he knew something) compelling enough to persuade him to put his name to that claim in a very public way. Alexander engaged in extensive statistical analysis to determine whether stock price changes really do play out differently in different long-term regimes. He concluded that: “The effect of holding time on stock returns in overvalued markets is the opposite of what it is for all markets. Normally, holding stocks for longer amounts of time increases the probability that they will beat other types of investments such as money markets… In the case of overvalued markets (like today), holding for longer times, up to twenty years, does not increase your odds of success.” We don’t today know everything there is to know about how stock investing works. We are in the early years of coming to a sound understanding of even the fundamentals. We need to be careful not to jump to hasty conclusions based on limited research. That’s what I believe the buy-and-holders did. Many of their insights were genuine and important, and have stood the test of time. But the claim that it is safe for investors to ignore price when buying stocks has not stood the test of time. The Kitces article is pointing us in a new direction. I hope it generates lots of debate. My guess is that we will not see that debate immediately, but that many will be giving the Kitces article a second look following the next price crash, when we will all be seeking to come to terms with what we have done to ourselves by too easily buying into the idea that the stock market is the one exception to the general rule that price discipline is what makes markets work. Disclosure: None.