Tag Archives: economy

3 Mid Cap Growth ETFs To Buy For Q4

Increasing uncertainty pertaining to the China turmoil, global growth worries, slumping commodities and timing of the interest rates hike in the U.S. are general concerns. In this backdrop that has lasted for quite some weeks now, the broader U.S. market has trapped itself in a nasty web of trading. While the U.S. economy is on a firmer footing, calling for a rates hike sometime later in the year, the fundamentals in other developed and developing markets are deteriorating. This is especially true given the slowdown in Japan, sluggishness in Europe, technical recession in Canada and weak growth in emerging markets. Additionally, investors are wary of third-quarter earnings, which are expected to drop 5.8% on 3.9% lower revenues for the S&P 500 index, as per the Zacks Earnings Trends . Moreover, the ongoing battle over the funding for Planned Parenthood between Republicans and Congress could lead to the possible shutdown of the federal government at the end of the month. All these conditions are increasing the volatility in the market, putting the stocks’ returns at risk. However, the bullish sentiment for U.S. stocks remains intact given the substantial improvement in the economy and a healing job market. In such a scenario, investors seeking to participate in the growing economy, but are worried about uncertainty, should consider mid-cap stocks in the basket form. Why Mid Caps? While large companies are normally known for stability and smaller ones for growth, mid caps offer the best of both the worlds, allowing growth and stability in portfolios simultaneously. These middle-of-road securities are arguably safer options and have the potential to move higher in turbulent times, especially if political issues or financial instability creeps into the picture. Further, honing in on growth securities in this capitalization level allows investors to earn more returns. This is because growth stocks refer to those high quality stocks that are likely to witness revenues and earnings increase at a faster rate than the industry average. These stocks harness their momentum in earnings to create a positive bias in the market, resulting in rocketing share prices. There are currently a number of ways to tackle this overlooked part of the market segment through ETFs, giving exposure to various styles including broad, value and growth. With such a large number of choices, it may be difficult to choose the right funds. After all, many of these products target the same securities though they have different tilts, weighting schemes or focus for their portfolios. How to Pick Right ETFs? One way to narrow down the list is to utilize the Zacks ETF Rank. This system looks to find the best ETFs in a given market segment based on a number of factors such as industry outlook and expert surveys; and then apply ETF-specific factors (like expense ratios and bid/ask spreads). And given the rise of the outlook for mid caps of late, it shouldn’t be too surprising that a few have moved to the top Zacks ETF Rank of 1 (Strong Buy) from Zacks ETF Rank 2 (Buy) or 3 (Hold) in the latest ratings’ update. Below, we have highlighted these three surging funds in brief detail for investors seeking a way to make a great play on the overlooked mid cap growth space in basket form: Vanguard Mid-Cap Growth ETF (NYSEARCA: VOT ) This fund follows the CRSP US Mid Cap Growth Index. Holding 177 securities in its basket, it is highly diversified across each component with none holding more than 1.5% share. In terms of sector exposure, industrials occupies the top position at 19.3%, followed by consumer services (19.2%), technology (14.7%), and consumer goods (14.2%). The product has managed nearly $3.4 billion in its asset base and trades in moderate volume of around 177,000 shares. Expense ratio came in at 0.09%. VOT has lost 1.6% in the year-to-date timeframe. iShares Morningstar Mid-Cap Growth ETF (NYSEARCA: JKH ) With AUM of $217.4 million, this product tracks the Morningstar Mid Growth Index. In total, it holds 204 mid cap securities with none accounting for more than 1.53% of assets. Information technology, industrials, consumer discretionary, health care and financials are the top five sectors with double-digit exposure each. The ETF charges 30 bps in annual fees and trades in a light volume of less than 5,000 shares a day. It has shed 2.2% so far this year. Vanguard S&P Mid-Cap 400 Growth ETF (NYSEARCA: IVOG ) This ETF tracks the S&P MidCap 400 Pure Growth Index, charging investors 20 bps in fees per year. It has amassed $379.3 million in its asset base while sees a light volume of less than 13,000 shares. The fund holds 229 stocks with a well-diversified portfolio as each firm holds no more than 1.4% of total assets. However, it is skewed toward financials with one-fourth share while information technology, consumer discretionary, industrials and health care round of the top five. The ETF has gained 1.6% in the year-to-date timeframe. Link to the original article on Zacks.com

Staying Level-Headed In The Face Of Fed Uncertainty

By John P. Calamos, Sr. As we know, uncertainty about the Fed’s plans for raising short-term rates remains a key driver of market volatility. It’s understandable that investors are afraid to be in the markets and at the same time, afraid to be out. Whenever rates do rise (probably before the end of the year), there’s every reason to expect continued heightened equity market volatility. Even so, I view a more normal interest-rate environment as long-term positive – for the economy and for the equity market. Here are some points to keep in mind. Higher short-term rates should be viewed as an affirmation of U.S. economic health. The Fed has consistently expressed its commitment to a patient, globally-informed, data-driven approach. It will raise rates when it believes the U.S. economy is strong enough to continue growing without artificially low rates. The “path” of short-term rate increases is likely to be slow and shallow. In other words, I don’t believe we’ll see the Fed move to raise rates significantly and many times, provided that the overall economic landscape remains consistent with what we’ve seen over recent years – slow growth, low inflation. A more normal interest rate environment can support continued economic growth, particularly among smaller businesses. When interest rates are higher, lenders can earn more from borrowing activities. This should provide an increased incentive to lend to small businesses, especially against the supportive backdrop of continued economic growth. With increased access to capital, small businesses can grow and hire more people, contributing to better overall economic growth. Higher short-term rates don’t signal that we’ve entered a bear market. Earlier, I noted that markets are likely to remain volatile when rates rise, but that doesn’t mean there won’t be opportunities, especially for long-term investors who take an active approach. Historically, stocks tend to perform well during periods of economic growth (see point #1). Stocks have continued to advance after the onset of an interest rate increase, as Figure 1 shows. Moreover, as our Co-CIO David Kalis explained in his recent video interview , the prospects for U.S. growth stocks look especially attractive. (click to enlarge) Past performance is no guarantee of future results. Source: Cornerstone Macro. “Positioning For A Fed Tightening Cycle,” September 16, 2015. Convertible allocations may be particularly effective in this sort of environment. Because they have fixed income characteristics, convertibles may be able to mitigate the impact of short-term equity downside. And because they have equity characteristics, convertible securities generally demonstrate less vulnerability to interest rate increases than investment grade bonds. That means that when rates do rise, allocations to convertibles may prove more resilient. (Co-CIO Eli Pars outlines more of these potential benefits in this video interview .) It’s been observed time and again that markets hate uncertainty. That’s not likely to change. More importantly, what’s also not likely to change is this: volatility creates opportunity for those who can tune out the short-term noise and take a long-term view. Share this article with a colleague

Are You Afraid Of Rising Interest Rates? Here’s A Possible Solution

Summary The yield curve is an important graph that offers key information about the economy. Given that investors in a bull market are afraid of rising interest rates, other opportunities are being looked at. The Steepener and Flattener ETNs offer opportunities to take advantage of an increase in interest rates. The Fed recently decided to keep interest rates flat. But I believe interest rates will not remain flat forever. Therefore, it is worth taking a look at how someone could protect themselves against the rise of interest rates in the future. This article will focus on the characteristics of the yield curve with an emphasis on the Steepener ETN (NASDAQ: STPP ) and the Flattener ETN (NASDAQ: FLAT ). ETNs are structured products that are issued as senior debt notes, while ETFs represent a stake in an underlying commodity. These two ETNs are perfect opportunities to protect any investor against rising interest rates, as this surge will have an adverse effect on the stock market (NASDAQ: QQQ ). The Yield Curve The yield curve is a graph in which the yield of fixed-interest securities is plotted against the length of time they have to run to maturity. Here’s the current U.S. yield curve: (click to enlarge) Source: Treasury.gov . The short-term interest rates are administrated by the FOMC , while the long-term interest rates are created by the forces in the stock market. The Yield Curve Spread The yield curve spread is the yield differential between two different maturities of a fixed instrument. For example, the difference in yield between a two-year Treasury note and a 10-year Treasury note would create another line, a so-called spread. The later-maturity leg is considered a back leg and the leg that matures first is called the front leg . The spread between the two- and 10-year Treasury instruments has shown significant patterns over the last few decades, as seen here: Source: Forbes . The spread increases during bubbles, such as the tech bubble (1999-2001) and the mortgage crash (2007-09). This indicates that this strategy (taking advantage of the difference between the two- and 10-year yields) can be played out from time to time when equity markets might be under threat and heading toward a bear or bull market. This pattern is perfectly described below: (click to enlarge) Current times make things interesting, as interest rates are expected to increase in the future. This is a situation that has happened over and over again the last few decades: (click to enlarge) Source: Fed . As the graph above depicts, interest rates cycled upward and downward during the bull and bear periods of the economy. Yield Curve Strategies – Steepener and Flattener Source: Created by author. Flattener Strategy A flattening curve is a situation where the yields on the short-term and long-term dated treasuries are converging. In other words, they are coming closer together. From a bank perspective, this is not always considered favorable as banks borrow money at short-term rates while lending it out at long-term rates. When the yield curve converges, the short- and long-term yields come closer to each other and thus diminishing the profit for the bank. Yet, the steeper the yield curve gets, the higher the differential between long-term yields and short-term yields. That means more profit for a bank. When the yield curve becomes more flat, the iPath U.S Treasury Flattener ETN comes into play as it tracks the spread between the two-year and 10-year yields. One should not forget that these ETNs are leveraged, as a 0.1% move in the spread will indicate a 2% price change for FLAT . The flatter the yield curve gets, the better for the Flattener ETN. Steepener Strategy When the differences in yield in the short and long term are diverging (i.e., getting more steep), the iPath U.S. Treasury Steepener ETN is another option. The objective of this product is to hold a weighted long position in the two-year Treasury future and a weighted short position in the 10-year future, in contrast to the flattener. With a steepener you buy the spread, while with the flattener you sell the spread. They are opposites: Negative Rates As this article assumes rates will eventually go up, a potential scenario with negative rates — even though it has been deemed unlikely by Janet Yellen — should not be ignored. That’s because some economists believe the economy is still not growing as expected, and negative rates would basically indicate that anyone who wanted to borrow money would get paid. This would act as a potential strong stimulus to the economy. Even though it might appear to be an unlikely scenario at first, there are places in Europe that currently have negative rates in place, such as Switzerland. In the Fed’s projections, a negative Fed Funds rate was deemed plausible: Source : Fed . Summary Investors do not have to worry about a potential increase in interest rates as there are good investment vehicles to protect themselves against these potential rate hikes. As the yield curve has shown many predictable signs of explaining the economy , it’s important to keep an eye on how the yield curve develops over time. I currently do not hold positions in either ETN. However, both are on my watch list as I consider them splendid investment opportunities for when the equity markets dwindle lower or when the Fed finally decides to start increasing the Fed rate. Liquidity is a minor issue with both ETNs, but when interest rates eventually increase I expect liquidity to increase as well. 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.