Tag Archives: etfs

Rate Hike Fears Rise, Time For Taper ETF?

The moment the China-induced stock market gyrations cooled a bit, the U.S. market started gaining ground. Meanwhile, the U.S. economy grew at 3.7% in Q2, which breezed past the initial reading of 2.3% growth and 0.6% expansion recorded in the seasonally weak Q1. Other data points including housing and job came on the stronger side at the home front. As a result, the bet on a September timeline of the Fed lift-off – which took a backseat in mid-August as global market rout took an upper hand – is back on the table on now. If this was not enough, Stanley Fischer who happens to be the Fed’s vice-Chairman flared up the rising rate worries even more. So, inflation was the main hindrance en route to Fed policy tightening as inflation is short of the Fed’s longer-term target on extremely muted energy prices. Also, the emerging Chinese market volatility prompted some to hope for a later-than-expected hike in rates. But, the Fed’s vice chairman expects inflation to inch up eventually. So waiting for a 2% inflation goal could be a pricey option. Though he added “we’ve got time to wait and see the incoming data and see what is going on now in the economy” before deciding on hiking rates, the jittery nerves ignited the rate hike bet all over again. There will be a set of data to be released and looked at before this historic decision is taken after nine long years, but the September lift-off timeline is now a possible option. This sent the yield on 10-year Treasury note to 2.20% (on September 2, 2015) from 2.01% recorded on August 24. In such a situation, the U.S. market will likely see a slump in the bond bull market next year and investors can make the most of it by shorting treasuries. Though the inverse U.S. Treasury space has only a handful of products, Barclays Inverse US Treasury Aggregate ETN (NASDAQ: TAPR ) could be an intriguing play for investors already preparing for the impending rate hike. TAPR in Focus The note provides investors a unique strategy to hedge against or benefit from the rising U.S. dollar interest rates by tracking the Barclays Inverse US Treasury Futures Aggregate Index. This benchmark employs a strategy, which follows the sum of the returns of the periodically rebalanced short positions in equal face values of each of the 2-year, 5-year, 10-year, long-bond and ultra-long U.S. Treasury futures contracts. If the price of each Treasury futures contract increases or decreases by 1% of its face value, the value of the index would decrease or increase by 5% over the same period. The ETN has about $22 million in net assets. It charges 43 bps in annual fees and trades in a light volume of about 5,000 shares per day on average, ensuring additional cost in the form of a wide bid/ask spread. The note added about 5.3% in last one month (as of September 2, 2015) thanks to the ascent of the benchmark treasury yield. Bottom Line TAPR offers investors positions against all five tenures on the U.S. Treasury futures curve and provides an interesting hedging strategy between short-term, intermediate-term and the long-term bonds. Investors should note that short-term bonds are less interest-rate sensitive and low yield in nature while long-term bonds act differently. Thus, focus on every part of the yield curve makes this product worthwhile. Original Post

6 ETFs To Watch In September

After a worldwide brutal stretch in August, the investing cohort must be keenly following the market movement in September. In any case, September is a seasonally cursed month having underperformed historically especially when it comes to stocks. According to the Stock Trader’s Almanac , September ended in red 55% of the time while S&P Dow Jones Indices indicated an average fall of 1.03% return over the last 87 years in September. Prelude to September There is no end to hurdles in the global market, with China being the main culprit. The world’s second-largest economy completely derailed the market in August by devaluing its currency yen by 2%, to presumably maintain export competitiveness and by revealing six-and-a-half-year low manufacturing data for August. Even repeated attempts and intervention by the Chinese policy makers in its economy and stock markets did not help and the bloodbath in global risky assets continued. The U.S. and Asian stocks had experienced a three -year low monthly performance in August. Europe saw the most horrible month since the 2011 debt debacle. Commodities crumbled to multi-year lows on demand issues and hit hard all commodity-rich nations. All three key U.S. indices met with correction in the month, though these managed to score gains in the end. In short, August got on investors’ nerves. Weak Start to September Some might have hoped for relief and rebound in this dull scenario, defying the seasonal weakness of September. But much to their shock, September unfolded on a grave note, with U.S. stocks in red on global growth issues. The contagion rooted in China’s factory sector slowdown, the end to stock purchases by Chinese government-backed funds and lack of certainty in the upcoming Fed policy ravaged the global market all over again. Most importantly, oil prices that recently impressed investors with the largest three-day oil price gain in 25 years , resumed their decline on China-led growth fears. Among the top U.S. ETFs, investors saw SPY lose about 3%; DIA shed about 2.9% while QQQ moved lower by about 3.1% on the first day of September. This makes it more important to pinpoint the ETFs that could hop or drop in September as volatility in various markets could make for some interesting near-term outlook. Vanguard Extended Duration Treasury ETF (NYSEARCA: EDV ) As September is the most speculated month in recent times for the rate lift-off, all eyes will be on the Fed meeting scheduled mid-month. A yes or no from the Fed would drag down or drive higher this long-term U.S. Treasury bond ETF. Not only this ETF, several other bond ETFs would be impacted by the Fed move. Market Vectors ChinaAMC SME-ChiNext ETF (NYSEARCA: CNXT ) China, the epicenter of the latest global chaos, should be a high-alert territory throughout September. If no further rotting news emanates from the nation, the stocks and funds might snap back on bargain hunt as they say no news is good news. But if anything wrong happens on the economic front, the ETF could be due for a wilder ride, though the chance of the latter appears less. Vanguard Total Stock Market ETF (NYSEARCA: VTI ) This all-cap U.S. equity ETF could be in watch in September. The fund was off over 2.9% to start the month and could be used as a representative of the total stock market performance in the ill-fated month. Any new China-driven sell-off or stronger Fed rate hike bet could thwart the fund and vice versa. S&P Small-Cap Consumer Staples Portfolio (NASDAQ: PSCC ) Since the consumer staples sector is known to act in investors’ defense in a rough market, this fund might come to one’s rescue in the troubled month. A small-cap exposure will help the fund mitigate the currency-translation woes, and at the same time enable it to capture the improving U.S. consumer sentiment. PSCC was down 4.4% in the last one month and up over 1.7% in the last five days (as of September 1). This was one of the best performances in the consumer staples’ segment. In fact, the consumer staples sector outdid another safe sector utility in recent times. SPDR S&P Metals & Mining ETF (NYSEARCA: XME ) The metal and mining industry has been a dreadful area as commodities were smashed on China-related worries (one of the major consumers of metals in the world) and the strength in the greenback. However, the product gained about 9% in the last five trading sessions (as of September 1, 2015) as price of some precious metals like gold brightened on their safe-haven status and the greenback lost some its strength on Fed ambiguity. So, let’s see whether further pain or gain is in store for this stressed but cheap space. United States Oil Fund (NYSEARCA: USO ) Who can forget oil? It hit September on a bearish note and will keep investors busy in assessing how it will finish the month especially given the flow of news (both good and bad) from the space. USO was down 6.8% on the first day of September and shed just 1.9% in the last one month (as of September 1, 2015). Original Post

Reaves Utility Income Fund: It’s Been A Tough Year

UTG is a well-regarded utility CEF. But that won’t protect you or it from losses in difficult markets. However, that doesn’t mean it isn’t a good fund. Reaves Utility Income Fund’s (NYSEMKT: UTG ) net asset value is down roughly 11.5% so far this year. That’s a rough showing, and investors have clearly been spooked, sending the market price of UTG down nearly 13% over the same span. That’s increased the discount of this well-respected fund, but not enough to scream buy… yet. What it does UTG is a utility fund, but takes a broad look at the space, including everything from the typical electric utility to telecom to oil to railroads. While utilities do make up around half the portfolio, the broader exposure means that UTG has more to offer on the diversification front. That can be a good thing, but also a bad thing — for example, owning oil and gas companies hasn’t been the best thing since the middle of 2014 when oil prices began to crumble. Still, Reaves has a long history of successfully navigating the various markets in which it invests. For example, over the trailing ten years through August, UTG’s annualized net asset value, or NAV, return is roughly 9%. That compares favorably to Vanguard Utilities ETF (NYSEARCA: VPU ), where the return was around 6.7%. Both numbers include reinvested distributions. And to UTG’s credit, its dividend has never included return of capital. It has always been made up of either income or capital gains. That said, capital gains have been a big piece of the puzzle in recent years, so a market downturn could make it harder for the CEF to maintain that streak. But if history is a guide, it will do whatever it can to keep return of capital to a minimum. The fund’s fees are a little high, with the expense ratio historically floating between around 1.5% and 2%. However that includes the interest costs associated with UTG’s use of leverage (it’s about 25% levered). The actual management fee has normally trended in the 1.2% area. That’s still high compared to an exchange traded fund like VPU, but not unreasonable for a closed-end fund. And for many investors, the added return will be more than worth the added expense. Yield is another place where UTG shines. While it’s nice that the fund has never dipped into capital to pay a distribution, the bigger number is that the yield is around 6.5%, paid monthly. That compares to VPU’s far less impressive yield of around 3.5%. Again, for the right investor, the added cost may be worth the added income benefit. And at 6.5% the yield isn’t so high that you have to fear a divided cut, which is a real risk for funds that yield 10% or more during a market downturn. So what’s going on now? But this year hasn’t been a good one for UTG. To be fair, that’s more a function of the market than the managers. UTG’s around 11.5% year-to-date NAV decline is roughly in line with the drop shareholders of VPU have experienced. In other words, Reaves Utility Income Fund is doing okay in a tough environment. However, spooked investors don’t usually care about things like that. They get scared and sell. So investor sentiment has been worse than performance, as shown by the nearly 13% drop in UTG’s market price. Which has left the fund’s discount to around 3%. That said, UTG isn’t a screaming buy. True, it is a good fund and anyone looking at the space should clearly be considering it. But the average discount over the past six months is around 4.7%, and the average over the past three years is around 4.7%. Based on its history, the discount is clearly still within a reasonable range. However, looking at the fund’s history a little closer, a discount in the 7% to 8% range is possible and would be a much better opportunity. This, however, doesn’t happen often. In fact, there are times when Reaves Utility Income Fund traded at a premium to its NAV. That’s not the norm for a closed-end fund. But Reaves has a great history, increasing the disbursement eight times since the fund started paying dividends in 2004 without a single distribution cut. And, as noted above, the distribution has never included return of capital. Add in the solid total returns and you can see that there’s a good reason why investors like the fund. Watch this one If you are looking for a diversified utility fund right now, you should consider UTG. It is truly a good fund that you should be comfortable owning for a long time. That said, if you are looking for a bargain, I don’t think UTG is there just yet. But with market volatility kicking up, keep a close eye on UTG, because fickle investors may just give you the opportunity to buy in on the “cheap.” 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.