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Are Low-Yielding Bonds Still A Good Stock Market Hedge?

One thing that’s stood out during the most recent stock market turmoil is that bonds aren’t performing all that well either. US Treasury Bonds are up just 3.5% since stocks peaked and the aggregate bond index is up less than 1%. The concern here is that ultra-low yielding bonds can’t decline sustainably below 0% and are therefore unlikely to provide much downside protection in the future, whereas environments like the 2008 financial crisis and before offered investors far more protection because yields were higher. There’s some sad math behind the reality of falling bond yields [ insert sad trombone] . As yields approach the 0% mark they produce less and less potential upside. Here’s a general guideline for how much protection you’ll get from 10-year yields falling by 50% from 6% all the way down to 0.19%: As your yield gets cut in half so too does your upside protection. In other words, low yielding bonds become a worse and worse hedge as the yields decline. And herein lies the problem of a diversified portfolio. Investors who are used to a portfolio like the 60/40 of the 80s, 90s and 00s are in for a nasty surprise. Their 60% stock slice is now generating even more “permanent loss” risk than ever. And their bond slice is acting more and more like a true cash component. This puts the traditional 60/40 investor in a bind. They’re going to have to start deviating from 60/40 if they want to generate the same type of nominal and risk-adjusted returns because there is simply no way their bond component can protect them to the same degree that it once did. In fact, if rates become more positively skewed in the years ahead, the bond piece might contribute more “permanent loss” risk in the near term than many of these investors are hoping for. This doesn’t mean that bonds can’t still be a good hedge for stocks, but it does mean that diversified investors are likely to increasingly deviate from 60/40 as they realize that this allocation doesn’t offer the same types of returns that it did in a high and falling interest rate environment. Share this article with a colleague

Closed-End Fund IPO Review For 2014 And 2015

Reviews market price and NAV performance for closed-end fund IPOs in 2014 and 2105. Average market performance lagged NAV performance, but their were a few exceptions. Issuers are now offering incentives to encourage investors to buy closed-end fund IPOs. In the past, I have published several performance analyses of closed-end fund IPOs. Quite often, these IPOs provide a buying opportunity as they approach their one year anniversary. The reasons for this are: 1) Closed-end fund IPOs have generally been marketed at a 5% premium over NAV reflecting the sales commission and underwriting expenses. By the time the one year anniversary is reached, underwriters no longer support the price, and the funds often trade at a discount to NAV. 2) Closed-end funds are usually marketed when their underlying asset class is “hot” and in demand. Quite often these asset classes have cooled off a year later which leads to lower prices. 3) When a closed-end fund approaches its one year anniversary, it is quite common the case that most of the shareholder base holds it with an unrealized short term capital loss. There is a strong incentive to sell the fund before one year is up. After one year, it would turn into a long term capital loss which is less valuable for tax purposes. In 2015, there have only been three new closed-end fund IPOs. In many ways, closed-end funds are becoming an endangered species with many of them disappearing in the last year from fund mergers and fund liquidations. Because of this, I also included the 2014 closed-end fund IPOs in this article. Ticker Inception NAV Current NAV NAV Gain Inception Market Price Current Market Price MKT Gain Inception (NYSE: FPL ) 19.06 15.23 -20.1% 20 14.20 -29.0% Mar. 2014 (NYSE: JMLP ) 19.06 11.32 -40.6% 20 12.20 -39.0% Mar. 2014 (NYSE: DSE ) 19.06 9.90 -48.1% 20 10.20 -49.0% June 2014 (NYSE: THQ ) 19.06 20.03 +5.1% 20 18.22 -8.9% July 2014 (NYSE: GER ) 19.06 9.38 -50.8% 20 10.53 -47.4% Sep. 2014 (NYSE: ECC ) 19.93 18.65 -6.4% 20 20.21 +1.0% Oct. 2014 ( BST 19.06 18.33 -3.8% 20 16.62 -16.9% Oct. 2014 (NYSE: HIE ) 19.06 14.79 -22.4% 20 13.72 -31.4% Nov. 2014 (NASDAQ: CCD ) 23.83 21.91 -8.1% 25 19.31 -22.8% Mar. 2015 (NYSE: ACV ) 23.83 21.39 -10.2% 25 18.48 -26.1% May 2015 (JHY) 9.85 9.59 -2.6% 10 10.24 +2.4% July 2015 * NAV values are as of 9/04/2015 except for ECC. The NAV for ECC is as of 7/31/2015. Average NAV gain= -18.9% Average Mkt gain = -24.3% Market Price under performance= 5.4% Just like in previous years, the average market performance for the new IPO funds was worse than the average NAV performance. This generally occurs because the NAV premiums from underwriting fees are replaced by discounts below NAV within six months. Note that for a few of the new IPOs, the closed-end fund wrapper did outperform the NAV. For example, JMLP lost 39% (before dividends). But the NAV value of JMLP lost 40.6%. Something similar happened with GER, where the market price lost 47.4%, but the NAV dropped even more- a whopping 50.8%. Both of these funds are currently trading at a premium over NAV, probably because some investors who own them in taxable accounts may see some value in the large unrealized capital losses that are currently sitting in both funds. A research paper ” A Liquidity-Based Theory of Closed-End Funds ” tries to develop a rational liquidity-based model to explain why investors are willing to buy a closed-end fund at a premium at the IPO price when they know that it will soon fall to a discount. They reason that many closed-end funds hold illiquid, hard-to-trade underlying assets. Retail investors would find it very difficult to trade these assets directly, so they are willing to pay a premium to avoid the large illiquidity costs, especially if there are no equivalent no-load funds available for those assets. But more and more closed-end investors have learned that it usually pays to wait for six months before buying closed-end fund IPOs. In order to market new funds, some of the management companies are now offering special incentives like term limits or share buyback programs. For example, CCD has offered a term limit that allows shareholders to vote on a share liquidation after 15 years. Calamos, the fund manager, has committed to purchase up to $20 million in CCD common shares in the secondary market whenever the discount exceeds 2%. Starting in late July, they have been purchasing about 6,000 shares a day, but they have been unable to reduce the discount by much and it is currently -11.9%. ACV, recently issued by Allianz, has offered similar features with a 15-year limited term structure and a share buyback program of up to $125,000 a day for around 6 months, when the discount exceeds 2%. The buyback program for ACV should begin this week, and it will be interesting to see how much they can narrow the discount which is currently -13.6%. JHY offers a shorter term limit of only five years and marketed the fund for only $10 when the original NAV was $9.85. JHY is still pretty new, but so far it has retained its premium over NAV. It will be interesting to watch this one going forward. It looks like the closed-end fund industry may be waking up to the new reality and will be offering IPO investors somewhat better deals in the future. Later this year, there should be plenty of good opportunities in closed-end funds because of tax loss selling, not only in busted IPOs. Almost all of the MLP and commodity closed-end funds are greatly depressed, and there also many bargains in fixed income closed-end funds where discounts have widened out. Disclosure: I am/we are long CCD. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Should You Buy Canada ETFs On The Cheap?

Bearing testimony to global growth worries, the developed economy of Canada slipped into a technical recession in the first half of this year. It was not entirely unexpected, though, given the prolonged pain in oil prices. But the drop-off was the steepest since the Great Recession which rings a panic alarm for those interested in Canada investing. Canada’s economy shrank 0.5% in Q2 (annually) hit by lower energy prices and business investment. Prior to this, the economy had retreated 0.8% in Q1. Canada is among the world’s top 10 oil producers. This data is self-explanatory of the economic underperformance. Is It All Dark About the Economy? All is not unwell with the Canadian economy as GDP growth in June, or the last month of the second quarter, was 0.5% which was the largest monthly advance in the Canadian economy in over a year. Notably, June saw a considerable rise in almost each sector. A subtle bounce in oil prices was basically the savior. Apart from the energy sector lull, the Canadian economy expanded in the second quarter, bolstered by increased consumer spending. A few economists expect a sharp snap-back in the second half of the year and forecast growth of 2.5% by the end of 2015 (per the economist Brian DePratto). Investors should note that though the fresh round of global growth worries induced by China weigh more heavily on oil prices, several analysts projected a recovery, though choppy, in oil prices in recent times. Many are of the opinion that oil prices are close to hitting the bottom and may be due for some way up in the coming days. Plus, the nation’s job picture is quite stable and the inflation rate touched a seven-month high in July. Housing market too is no less than decently growing. Stronger export competitiveness due to the falling Canadian currency relative to the greenback and the increasing purchasing power of the U.S. consumers are other upsides for the Canadian economy. So, things are tied between possibilities and perils with oil prices playing a crucial role in deciding the fate of the Canadian economy going forward. Due to the above-mentioned bullish attributes, several investors can take advantage of the cheaper valuation of the Canadian stocks and the related ETFs. ETF Options The largest ETF on Canada is the iShares MSCI Canada ETF (NYSEARCA: EWC ), which is off 18.4% so far this year. The fund has a Zacks ETF Rank #3 (Hold) and might open up intriguing opportunities for the future, if analysts’ affirmative predictions come true. The Guggenheim Canadian Energy Income ETF (NYSEARCA: ENY ), being an energy-oriented ETF, shed the most this year. ENY was down over 32% in the year-to-date frame but added over 3% in the last five days (as of September 2, 2015) on the August-end global oil price recovery. Small-caps are other interesting options to play any rebound in the Canadian economy. Small-cap ETF, the IQ Canada Small Cap ETF (NYSEARCA: CNDA ), is down about 27% this year. However, CNDA has a Zacks ETF Rank #4 (Sell). Original Post