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Trounce The Market With Less Risk

Over a lifetime, stocks trounce bonds more than 800-fold. Contrary to conventional thinking, LESS risk taking can lead to HIGHER returns. Active investing can significantly outperform balanced, buy-and-hold strategies. Most of us tend to think of investing in terms of the experiences of our lifetime, and in fact, of that limited span during which we were vaguely aware of economic events in the world at all. (Nope, you can’t count those teenage years…) But it is important to view things in a greater historical perspective. The chart below does that. (click to enlarge) Source: Stocks, Bonds, Treasury Bills and Inflation 1926-2010 If you zoom in on the graph, you’ll quickly grasp one salient fact: over the long run, if you can stand a bit of risk, you’ll certainly be richly rewarded for that risk. From 1926 to today, an investment in the lowest risk strategy, short term government bonds, grew your money 19-fold, but barely outpaced inflation which eroded the value of the dollar 12-fold over that same period. In stark contrast, investing in small caps grew your money 16000-fold. Yes, you read that right! Put another way, a $1000 investment grew to just over $16 million. Here are a couple of other important observations: If time is on your side, you are seriously shortchanging yourself by not investing in the stock market. A small increment in your yearly return makes a huge difference over time. Look at how a 4 percent difference between large cap stocks and long term bonds increases returns by more than 40 times over that period. Thanks to the incredible magic of compounding, the earlier you start the better off you’ll be. The more you depend on your investments for income today, the less you can (safely) earn, ironically enough. (The corresponding corollary to that in the banking sector is that the more you need a loan, the less likely you will get one. Oh well…) It may take you 20 years to recover from a market break! If you invested in the market in late 1928, you were not back to square one until 1946 !!! (If you think we have that problem solved, just talk to some Japanese investors. Or view this article on my blog.) Even government treasuries can be a poor investment. See the period from 1965 to 1970, when treasuries dropped, yet inflation was raging. Faced with the complexities of investing, sticking your head in the sand and your money under your pillow just ain’t the way to go! Just look at that inflation line. It means your $1.00 invested in 1928 buys you about 8 cents in 2015 prices. So you cannot afford to be on the sidelines. In fact, if you are not investing, you have almost a complete certainty of seeing your assets shrink. So given all of these conclusions, how should you invest your hard-earned money for the best results? Or if you’re among the fortunate few born with a silver spoon in your mouth, how should you protect your leisurely-inherited millions? The short answer is: it depends… For those of you not quite happy with that decidedly hedged answer (Ever wonder what the word hedge funds really means?), please read on. I promise to give you a more concrete response. A traditional approach would be to spread your assets widely among several groups of investments. Take a look at the following graph showing how several different categories of exchange traded funds performed in the last big stock market crash in 2008. (click to enlarge) As the graph makes clear, while the stock market was plunging, other market sectors (mortgage-backed securities, short and long term treasuries, corporate bonds and government backed securities) were rising. So by mixing your asset classes, you can significantly smooth out the volatility of your portfolio. This is particularly important for retirees, since you can choose to withdraw only from areas that have risen in value, as opposed to selling at the worst possible moment, when asset values are at all time lows. A number of mutual funds and ETF’s already subscribe to this strategy. The chart below shows the performance of the Janus Balanced Fund, plotted against the SPDR S&P 500 ETF Trust ETF (NYSEARCA: SPY ), which is a proxy for the S&P 500 index. This has averaged a 9.85% return over 20 years, with fewer big drawdowns than the S&P itself. (click to enlarge) (click to enlarge) If you pay close attention to the percentage comparison, you will note that the balanced approach actually beat the S&P 500 in overall return with less volatility along the way! Some people mistakenly assume that this “spread your marbles out evenly” strategy argues against an actively managed approach. Nothing can be further from the truth. The next two graphs show an active approach that picks the best stocks in the US stocks universe (according to our proprietary formula), times the buys according to certain technical criteria related to momentum, and rebalances the portfolio on a weekly basis. Here is a relatively low-beta (low volatility) approach, that still wallops the results of the JANUS fund shown above, as well as the S&P. (click to enlarge) And for those of you willing to sit tight through a little more volatility, how does a 16 fold return on your money over a 12 year period grab you? But don’t complain about the 50% drawdown… (click to enlarge) Source: quantopian.com Strategy back-testing based on universe of 8000 plus US stocks from 1993-2015. Graphed results are NOT based on historical performance. Real results may differ significantly from back-tested results. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (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. Additional disclosure: The author currently holds positions using some of these strategies. We do not currently hold position in the Janus fund. The active strategies mentioned require margin accounts and the ability to short stocks at certain times.

Seeking Diversification – Top 3 ETFs

Summary Most efficient diversifiers tend to have a ‘spin’ to traditional funds. They also demonstrate low correlation and beta with S&P 500. Volatility can be a positive factor in portfolio diversification context. In 1952 Noble Prize winner Harry Markowitz described diversification as the only ‘free lunch’ when seeking investment returns. Most investors are well familiar with the concept of diversification but it is not always easy to find securities that would fit your portfolio well from the risk perspective. Ever since I launched a freely available investor tool InvestSpy almost a couple of years ago, I have tested countless portfolios and individual securities searching for efficient diversifiers. In this article I would like to share top 3 equity ETFs that make the most frequent appearances on my results table. No. 3 – ALPS Alerian MLP ETF (NYSEARCA: AMLP ) AMLP provides exposure to the overall performance of the U.S. energy infrastructure Master Limited Partnership (MLP) asset class. MLPs are publicly traded partnerships engaged in pipeline transportation, storage and processing of energy commodities. Other closely related products: JPMorgan Alerian MLP Index ETN (NYSEARCA: AMJ ), UBS ETRACS Alerian MLP Infrastructure Index ETN (NYSEARCA: MLPI ) No. 2 – PowerShares Preferred Portfolio ETF (NYSEARCA: PGX ) PGX invests in fixed rate preferred stocks issued in the U.S. domestic market. Preferred stockholders are generally entitled to a fixed dividend rate that is subordinate to debt but senior to dividends on common stock. Other closely related products: iShares U.S. Preferred Stock ETF (NYSEARCA: PFF ), PowerShares Financial Preferred Portfolio ETF (NYSEARCA: PGF ) No. 1 – Market Vectors Gold Miners ETF (NYSEARCA: GDX ) GDX offers exposure to publicly traded companies worldwide involved primarily in gold mining, representing a diversified blend of small-, mid- and large- capitalization stocks. Other closely related products: Market Vectors Junior Gold Miners ETF (NYSEARCA: GDXJ ) It is important to note that all of these three funds have a ‘spin’ to more traditional equity ETFs. GDX acts a combination of stocks and gold, PGX sits somewhere between stocks and bonds, whilst AMLP is linked to all three major asset classes. Two common risk characteristics that all three above-mentioned funds share are low correlation and low beta vs S&P 500. Coefficient values are amongst the lowest of all available equity ETFs and can be compared here . Therefore, GDX, PGX and AMLP will almost certainly have risk contribution below their dollar weighting given that most traditional portfolios are dominated by the risk arising from the equities component as outlined in one of my previous articles . Although GDX is clear leader in terms of correlation and beta, this is not the only reason that takes it to the No. 1 spot. Whilst AMLP and PGX demonstrate relatively subdued volatility, GDX is a beast in this respect. And volatility can be a good thing in this context as demonstrated by Salient Partners in the whitepaper where they argue that higher volatility diversifiers are amongst the most powerful tools an investor has. By no means am I saying that an investor should blindfoldedly invest in these ETFs purely because they look attractive from the portfolio diversification standpoint – after all, GDX and AMLP are currently both on a terrible run. The investment decision should be made in conjunction with other factors that are part of your analytical process, for instance incorporating trend following indicators or fundamental ratios. However, these are definitely the funds that one should at least keep an eye on. If risk can be reduced without sacrificing return, this is what free lunch in the markets is. Bon appetite! Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in PFF over the next 72 hours. (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.

6 Reasons Why JETS ETF Could Fly Higher

Gone are the days when aviation companies were ill-famed for their bankruptcy protection status. During 2005 and 2008 , over half of the U.S. carriers functioned under Chapter 11 of bankruptcy protection. But things have changed in the last seven years. Since last year, the U.S. aviation industry has been soaring with oil price going into a tailspin. Moreover, a pickup in the domestic economy, rising cargo demand and a boost to tourism bode well for the sector and the pure play airline ETF U.S. Global Jets ETF (NYSEARCA: JETS ) . The fund was up 6.5% in the last one month though it lost slightly in the first quarter, resulting in a muted year-to-date return of 2.3% (as of August 19, 2015). Since the fund is new in the industry and debuted on April 30, 2015, let’s take a look at the drivers that can take the fund higher in the coming days. To analyze this, we have considered the details provided by U.S. Global Investors in its JETS presentation. Higher Margin & Lower Debt: The U.S. airline industry saw the 10-year best margin performance in 2014. Not only this, U.S. airlines are projected to see huge free cash flows (in the range of $15,000 to $20,000 million) in the coming three years including 2015. These figures represent a remarkable jump from less than $5,000 million of FCF earned in 2014. The debt-ridden airlines are also paying down borrowings over the years. Total debt in proportion of operating revenues came down to 41.4% at the end of 2014 from around 65% at the end of 2010. Surge in Ancillary Revenues: Apart from the key business, supplementary revenues including hotel accommodation, car rentals, onboard food, and travel insurance are all performing well. Restructuring: Modifications in operations and carrier structure are on in full swing. While slimmer seats and the addition of more rows resulted in about a 16 percentage point increase in passenger load factor in 10 years (till Q2 of 2014), fuel-efficient aircraft contributed to energy savings. Limited Capacity Growth: Most airlines recently acknowledged plans of adding lesser fleet in the coming days. While several factors are responsible for this decision, a shortage of pilots is the primary reason. As per U.S. Global Investors’ report, as much as 34% of present pilots will retire by 2021. Solid Earnings: The positive factors led to an immense improvement in the companies’ earnings. The airline stocks gained altitude post Q2. In any case, cheap fuel has been a windfall and will likely remain so in the quarters to come. The mounting middle-income population in emerging markets is benefitting worldwide customer growth. Strong Zacks Metrics: At the time of writing, the sector resides in the top 16% of the Zacks Industry Rank. Most of the industry players have a top Zacks Style Score of ‘A’ for their Growth and Value metrics, suggesting a bullish outlook for the space. By now, one must have realized that the underlying trend is solid in the airlines industry. So, investors might play it via the basket approach to tap the entire potential of the space. And to do so, what could be the best option other than the JETS ETF? The fund holds 33 stocks in its portfolio and is concentrated on a few individual securities, as it allocates about 70% to the top 10 holdings. Southwest (NYSE: LUV ) (12.75%), Delta Air Lines (NYSE: DAL ) (12.49%), United Continental (NYSE: UAL ) (11.9%) and American Airlines (NASDAQ: AAL ) (11.34%) are the top four elements in the basket, with a combined share of about 45%. Other firms mentioned above also get places in the top 10 chart, each with over 4% weight. The product charges 60 bps in fees. Original Post