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Is Now The Time To Look At Floating Rate Bonds?

Summary Now that the Fed has begun raising rates, investors should refocus on risk minimization over yield maximization. Investors reaching for yield in securities like MLPs and high yield bonds have been hurt badly since the beginning of 2014. The iShares Floating Rate Bond ETF focuses on short term investment grade floating rate notes and carries an effective duration of just 0.14 years. In light of the Federal Reserve’s persistent zero interest rate policy, many investors have traveled further down the risk/return spectrum in order to improve yields on their portfolios. Anybody that’s dabbled in MLPs or high yield bonds over the past two years probably knows very well the risks that come with reaching for yields. The ALPS Alerian MLP ETF (NYSEARCA: AMLP ) is 40% off of its recent high while the high yield bond index is down over 20%. AMLP Total Return Price data by YCharts Now that the Federal Reserve has finally begun moving away from its zero interest rate policy and rates are slowly on their way back up, it might be time to focus more on principal preservation instead of yield maximization. Staying on the short end of the yield curve can certainly help accomplish that task but floating rate bonds should also be a consideration. The iShares Floating Rate Bond ETF (NYSEARCA: FLOT ) is the biggest floating rate note ETF out there at nearly $3.5B in assets. Its current yield of 0.5% won’t necessarily get income investors excited right now but its risk mitigation characteristics will once rates begin moving significantly higher. This ETF is benchmarked to the Barclays US Floating Rate Note

Market Neutral Funds: Best And Worst Of November

By DailyAlts Staff (click to enlarge) Market-neutral funds balance long and short holdings, generally in pursuit of something close to a 0% net-long exposure. This allows investment managers to neutralize beta and focus on generating alpha – or at least, that’s the idea. In November, the top three market-neutral mutual funds generated returns ranging from +0.94% to +3.52%, while the category’s three laggards returned between -2.53% and -3.19%. In this month’s review, we look beyond November’s performance and also consider the composition of each of the featured funds’ three-year standard deviation and Sharpe ratio. (click to enlarge) November’s Top Performers The top performing market-neutral mutual funds in November were: (click to enlarge) The QuantShares US Market Neutral Momentum ETF fund led the pack last month with its decidedly strong returns of +3.52%. Year to date through November 30, the fund had spectacular gains of 20.43%, but its annualized three-year return through that date stood at a lower +3.80%! Overall, the QuantShares US Market Neutral Momentum Fund’s three-year Sharpe ratio stood at 0.31. The Hussman Strategic International Fund’s +1.37% returns in November weren’t quite as impressive, but were still strongly positive for the month. However, the fund’s three-year return of -1.91% through November 30 is less impressive. On a risk-adjusted basis, the Hussman fund’s three-year Sharpe ratio stood at a dismal -0.28, as of November 30. Perhaps the best looking of the three funds was November’s third-best performer, the Turner Titan II Fund, which posted a 0.94% gain for the month. Its three-year annualized return of 4.69% is much stronger than its peers’, and the three-year Sharpe ratio of 0.82 is by far the best of any market-neutral fund reviewed this month. November’s Worst Performers The worst performing market-neutral mutual funds in November included: (click to enlarge) The Whitebox fund was the month’s worst, at -3.19%. For the first eleven months of 2015, the fund lost 6.56%, but its three-year annualized returns were in the black at +1.44%. What’s more, the fund’s Sharpe ratio of 0.27 was not only better than either of November’s other worst performing market-neutral funds, but among the top three of the six funds covered this month. The QuantShares US Market Neutral Value Fund lost 2.98% in November, bringing its year-to-date losses to 10.03% as of November 30. The fact that QuantShares has found itself on both the Best and the Worst lists for the month is a clear indication that momentum exposure worked in November (and the year), and value did not. On a three-year basis, the fund was in the black, with annualized returns of +0.30%. Finally, the Hussman Strategic Growth Fund was November’s third-worst performer, also earning Hussman the distinction of being in both the penthouse and the doghouse for the month. Of the three biggest losers from last month, the Hussman fund has the worst looking long-term results: a three-year annualized return of -8.88%. Its three-year Sharpe ratio of -1.38 was also easily the worst of the bunch. Past Performance does not necessarily predict future results. Meili Zeng and Jason Seagraves contributed to this article.

No High-Yield Relief For MLP ETFs Post Fed

The Fed went ahead and hiked the short-term interest rates after almost a decade and investors are probably looking for high-yield but stable investing tools to weather the prospective bounce in the U.S. Treasury yields, but this search will not be easy now. Investors need to be very careful while picking high-yields securities in the present market condition. This is because of the fact that the Fed hike is not the only threat to the market, a below-$40 oil price seems to be the main culprit now. As a result, conventionally high-yield securities MLPs, which are normally stable in nature too, are now having a bloodbath. MLPs are involved in the business of transportation and storage of oil and gas, and they are suffering even more than the oil producers from the downturn in the market. MLPs primarily benefit from an uptick in oil production. Oil Price Slump Hurts Now oil prices are in a freefall and hovering around a seven-year low following the prospect of more production from OPEC nations amid supply glut and falling demand. So energy MLPs are being crushed. Now, Russia’s deputy finance minister expects oil price to range between $40 and $60 per barrel in the next seven years. So one can easily expect how prolonged the pain could be for the MLPs. As you may know, MLPs often operate pipelines or similar energy infrastructures that make it an interest-rate sensitive sector. This group catches investor eye as the players in it do not pay taxes at the entity level and hence must pay out most of their income (more than 90%) in the form of dividends. Investors looking for higher income levels outside the traditional bond sources generally bet on these products. Rising Rate Scenario: A Pain A rising interest rate environment would also adversely impact the performance of MLPs for a number of reasons. First, higher interest rates lower the appeal of high-yielding stocks such as MLPs, which have historically offered around 5% in yields and hence have attracted investors’ attention due to ultra-low interest rates. Secondly, MLPs heavily depend on external financing to run their operations as they distribute most of their income as dividends. As a result, a rise in interest rates would increase their financing costs, which in turn would diminish their ability to keep distribution payments at the existing level. Dividend Cuts Also, thanks to the oil rout, the cash position of MLPs is weakening. Upstream exploration MLP companies earn from every barrel of oil and are being thrashed by the endless weakness in oil prices. U.S. oil producers are resorting to a cutback in oil production in response to falling prices. Since pipeline operators are heavily dependent on them, a blow to the MLP balance sheet is inevitable. The situation is so acute that Street.com indicated a few MLPs which may cut dividend – the sole lure of the MLP investing – in the near term. Already the largest energy infrastructure company in North America – Kinder Morgan, Inc. (NYSE: KMI ) – cut its dividend by 75% on December 8. The author in the Street.com believes that Targa Resources Partners (NYSE: NGLS ) and Vanguard Natural Resources (NASDAQ: VNR ), which yield about 20% and as high as 55%, respectively, may resort to a cutback in the coming days. Crestwood Equity Partners (NYSE: CEQP ) is yet another mid-stream MLP which yields about 38.52% annually in dividend, but is in the danger list. Others are NGL Energy Partners (NYSE: NGL ) presently yielding 26.42% and NuStar Energy (NYSE: NS ) with a dividend yield of 13.05% at present that may not be able to sustain the same payout in the coming months due to financing issues. ETF Impact All these have kept the MLP ETFs space depressed, each losing in the range 15% to 30% in the last one-month frame (as of December 14, 2015). Year to date, these products have lost in the range of 22% to 55%. InfraCap MLP ETF (NYSEARCA: AMZA ), Yorkville High Income MLP ETF (NYSEARCA: YMLP ) and Cushing MLP High Income Index ETN (NYSEARCA: MLPY ) were the worst hit during the last one-month frame. Original Post