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5 Low-Risk ETFs To Protect Returns Amid Volatility

The global stock market has been on a wild ride over the past couple of weeks, with a wave of selling seen in recent sessions making matters worse. China played the role of the biggest culprit in roiling the market with the devaluation of its currency on August 11, and dovish Fed minutes last week did the rest of the damage. Worries about prolonged weakness in China accelerated on Friday on the country’s factory activity data, which contracted at the fastest pace in over six years in August. Additionally, Europe is struggling with slower growth, the Japanese economy has lost its momentum and many emerging economies are experiencing a slowdown despite rounds of monetary easing. Added to the woes is the slump in commodities, especially the resumption of the oil price slide, which is once again threatening global growth and deflationary pressure. Notably, U.S. crude has dropped to below $39 per barrel, its lowest price since the financial crisis six years ago. Such market gyrations have left investors nervous about the safety of their portfolios. However, the People’s Bank of China (PBOC), in a surprise move today, intervened to boost the sagging domestic economy. For the fifth time in nine months, it has cut its interest rates by 25 bps to 4.6%. The deposit rate has also been cut by 25 bps to 1.75%, while the reserve ratio has been slashed by 50 bps to 18%. Though the move has injected fresh optimism into the global markets, with most benchmarks in green, the gain seems a short-lived one. Most of the analysts believe that the country will continue to face a long period of uncertainty that would result in more volatility and hurt the global economy. Given the weak fundamentals, the outlook for stocks still appears cloudy, and the markets are expected to remain volatile in the coming days. As such, investors should consider low-volatility (risk) products in order to protect themselves from huge losses. Why Low Volatility? Low-volatility products generate impressive returns or often outperform in an uncertain or a crumbling market, while providing significant protection to one’s portfolio. This is because these funds include more stable stocks that have experienced the least price movement in their portfolio. Further, these funds contain stocks of defensive sectors, which usually have a higher distribution yield than the broader markets. Below, we have highlighted five low-volatility ETFs that investors should consider if the stock market continues to experience volatility. These funds appear safe in the current market turbulence and tend to reduce risk, while generating decent returns: iShares MSCI USA Minimum Volatility ETF (NYSEARCA: USMV ) This is the largest and most popular ETF in the low-volatility space, with AUM of $5.8 billion and average daily volume of 1.1 million shares. It offers exposure to 163 U.S. stocks having lower-volatility characteristics than the broader U.S. equity market by tracking the MSCI USA Minimum Volatility (USD) Index. The fund’s expense ratio came in at 0.15%. The fund is well spread across a number of components, with none holding more than 1.68% share. From a sector look, healthcare, financials, information technology, and consumer staples occupy the top positions, each with double-digit exposure. The ETF lost nearly 7% over the past 10 days. PowerShares S&P 500 Low Volatility Portfolio ETF (NYSEARCA: SPLV ) This ETF provides exposure to the stocks with the lowest realized volatility over the past 12 months. It tracks the S&P 500 Low Volatility Index, and holds 105 securities in its basket. Like USMV, the fund is widely spread across a number of securities, and none of these holds more than 1.25% of assets. However, the product is tilted toward financials at 35.1%, while consumer staples, industrials and healthcare round off the top five. SPLV has amassed $5 billion in its asset base and trades in heavy volume of around 1.3 million shares a day, on average. The fund charges 25 bps in annual fees and lost 7.6% in the past 10 days. iShares MSCI All Country World Minimum Volatility ETF (NYSEARCA: ACWV ) This fund tracks the MSCI All Country World Minimum Volatility Index. Though the ETF provides exposure to low-volatility stocks across the globe, the U.S. accounts for more than half of the asset base. Apart from this, Japan is the only country with a double-digit allocation. In total, the fund holds 359 stocks, with each accounting for no more than 1.41% of assets. Financials, healthcare, and consumer staples are the top three sectors, each with double-digit allocation. The product has a managed asset base of $2.2 billion, while it trades in good volume of more than 202,000 shares a day. It charges 20 bps in annual fees, and is down 8% in the same period. iShares MSCI EAFE Minimum Volatility ETF (NYSEARCA: EFAV ) This fund targets the low-volatility stocks of the developed equity markets, excluding the U.S. and Canada. It follows the MSCI EAFE Minimum Volatility (USD) Index, charging investors 20 bps in annual fees. Holding 206 securities, the fund is highly diversified, with none making for more than 1.66% share. However, it is slightly tilted toward financials at 21.1%, closely followed by healthcare (16.1), consumer staples (16.0%) and industrials (11.1%). In terms of country profile, Japan and United Kingdom take the top two spots at 28.7% and 22.6%, respectively, followed by Switzerland (11.2%). EFAV has AUM of $3 billion and trades in good volume of 372,000 shares a day, on average. The ETF was down about 9% over the past 10 days. iShares MSCI Emerging Markets Minimum Volatility ETF (NYSEARCA: EEMV ) For investors seeking exposure to the emerging markets, EEMV could be an intriguing pick. The fund follows the MSCI Emerging Markets Minimum Volatility Index and is one of the largest and popular ETFs in this space, with AUM of over $2.5 billion and average daily volume of around 441,000 shares. It charges 25 bps in annual fees and expenses. In total, the fund holds 258 stocks in its basket, with each accounting for less than 1.7% share. It provides exposure to a number of emerging countries, with China, Taiwan and South Korea as the top three holdings. However, the fund has a slight tilt toward financials with 28.5% share, while consumer staples, telecommunication services and information technology round off the next three spots. The fund shed 13.8% in the same period. Bottom Line Though these products have been on a downslide, the losses are much lower than those of the broader market funds. This is especially true given the losses of 9.8% for the U.S. fund (NYSEARCA: SPY ), 11.2% for the global fund (NASDAQ: ACWI ), 11.5% for the developed markets fund (NYSEARCA: EFA ) and 15.2% for the emerging markets fund (NYSEARCA: EEM ). As a result, investing in low-volatility ETFs seems a good strategy at present, given the China turmoil and global growth fears. Original Post

Everyone Is Starting To Get It (Finally)

China is rocking worldwide markets. Some investors are getting caught off guard by the volatility. The volatility could lead to meaningful declines by year-end. On Monday morning, many investors woke up to see Dow futures down 500 points and the S&P (NYSEARCA: SPY ) futures down 3%. CNBC and Bloomberg have finally gotten the memo that the drop in the Chinese equity markets is serious. Forget Greece, forget interest rates, forget oil and forget the dollar. Those issues do not matter at the moment. The Chinese markets are in free fall and it will bring the international markets to their knees for the rest of the year. Wall street needs to come back from the Hamptons and start preparing for a serious correction. Understanding why the correction in China is not just a temporary issue requires an understanding of what pushed the market up over the past year. From June 2014 to June 2015, the Shanghai increased from 2000 to nearly 5200, a 160% increase. A large part of the run-up was funded by retail traders. Source: C alculatedRisk The Chinese markets have been largely bolstered by non-professional investors. These individuals own 85% of equities in that country. China, today, is akin to the US in 2000, when retail investors were pumping up stocks, despite truly understanding those investments. Chinese equities are rife with frauds and over-hyped companies with no tangible models of growth. These are major issues in that country and a large part of the sell-off. As those firms lose the confidence of investors, their stocks will continue to drag down the indices. With the vast majority of those involved being everyday middle-class investors, the dramatic declines will hit their consumption behavior. The Chinese economy, unlike the US, is not entirely reliant on consumer spending. Consumer spending is just ⅓ of the Chinese economy. That represents about $1.8 trillion. A large percentage of that is directed towards American products available to the Chinese people. A market decline may not cause significant GDP contraction, but will cause headaches for foreign companies in China. Source: McKinsey North American consumer discretionary companies, over the past several years, have relied heavily on growth in China to offset sluggish demand for their products in Europe and the America’s. Autos, technology manufacturers, and retailers have grown the top line, in large part, by expanding in China. If middle-class families, which represent 75% of consumer spending in that country, are seeing their wealth decline as the markets wipe out gains, they will reduce buying of American discretionary products, as the wealth effect would suggest. This is what turns this correction into a full-blown downturn for the American markets. US firms can no longer rely on China to bolster the often limited growth worldwide. Yum! Brands (NYSE: YUM ) relies on China for over half of its revenues. General Motors (NYSE: GM ), Wal-Mart (NYSE: WMT ) and just about a quarter of S&P firms are deriving the majority of their expected growth from China. Once spending in that market slows, these firms will be hard pressed in reaching their respective growth targets. The impact of the market meltdown and its effect on consumption should start to materialize in Q3 earnings and become very apparent in Q4. Investors should expect significant revisions to year-end estimates. The lowering of estimates and the eventual decline in EPS should keep the US markets lower for the remainder of 2015 and into early 2016. Markets in North America have traditionally lagged during a correction. The Asian markets began collapsing in June and the US markets are just now (as of last week) starting to fall in a serious manner. The good news, well somewhat good, is that the S&P does not tend to fall as significantly as the Shenzhen or Shanghai. While the downturn here may not be as severe, it will still cause major issues for the rest of 2015. Wall Street has gotten a pass over the past three years as the markets broadly went up. Money managers did not need to do much for returns to materialize. That is not the case going forward. Investors and professional managers need to prepare for a slow growth environment in China. A decline in the indices does not mean investors cannot make money. In July, I suggested three ETFs that trade alongside Chinese volatility. (NYSEARCA: YANG ), (NYSEARCA: YXI ), and (NYSEARCA: FXP ) are all short the Asian equity markets. Each have exploded in the past three months. If the declines persist, as I suspect, these ETFs could still have room to run. Additionally, Shorting American firms which rely heavily on China could be a great move. In June, I suggested a short on NHTC (NASDAQ: NHTC ) because that company obtains 93% of their revenue from China. That has paid off with the stock dropping by 47%. Herbalife (NYSE: HLF ) is another play here. Unlike NHTC, Herbalife has not seen a material decline in its stock, yet the company relies on China as its only growth market. If Herbalife loses growth from China, the company will massively miss the already declining revenue estimates. China is entering a downturn that will continue to wipe out trillions of wealth held by their middle class. This will turn into less consumption of American products and, therefore, lower revenue figures in the coming quarters. While the ETFs that track volatility are spiking, and may seem too risky now, there are still ample ways to make money in this market by looking at firms which disproportionately rely on China for their growth projections. Keep your eyes open and this downturn can be positive for your portfolio. 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.

3 Must Consider Funds To Boost Your Portfolio During Crises

Summary Markets cratered this morning with the Dow dropping almost 1,000 points. The fact is the economy is the global economy is not strong and the weakness and China and Europe is taking its toll in the States. I discuss 3 funds you should consider holding short-term to quell losses in your portfolio. Panic. Fear. Dow down 1,000 points at the open. Despite a massive bull run, many professionals and analysts that I talk to still believe earnings estimates are too high for this quarter and next. Thus far, companies reporting earnings have delivered average results. We have a Fed that has done everything it can to inflate stock prices and keep the economy running. It is essentially our of tricks. Now, while the markets are rebounding off of the lows today, the worst may bot be over. Fear has skyrocketed and while some may buy quality companies at a fair price on the way down, this is likely the beginning of an overdue correction. Image source: UK telegraph The fact is the economy is not strong. The weakness and China and Europe is taking its toll in the States. These events will likely exert pressure on markets that have essentially been propped up by central bank actions. Thus, traders may want to consider taking some bearish action should market panic ensue. Those who are bearish could consider selling stock, selling covered calls on their positions, shorting stocks, buying puts or investing in a bear fund. While each of these approaches has its respective benefits and risks, in this article I want to highlight three ETFs that could provide great returns in the event of a market sell-off on fear of uncertainty, disappointing earnings or continued international news that spooks markets. Direxion Daily Small Cap Bear 3X Shares (NYSEARCA: TZA ): This is my favorite way to invest in a bear market short term. TZA seeks : Daily investment results of 300% of the inverse of the price performance of the Russell 2000 Index (also known as the small cap index). The Russell 2000 measures the performance of the small-cap segment of the United States equity universe and consists of the smallest 2,000 companies in the Russell 3000 Index, representing approximately 10% of the total market capitalization of the Russell 3000 Index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. TZA actually does not invest in equity securities or stocks. What TZA does is creates short positions by investing at least 80% of its net assets in financial instruments to provide leveraged and unleveraged exposure to the Small Cap Index and the remainder in money market instruments. TZA currently trades at $13.00 a share on average daily volume of 14.1 million shares. In the last five days TZA is up 27.1% compared with the ETF that tracks the Russell 2000 index, which is down 8.3%. TZA has a 52-week range of $8.81-$19.59. ProShares Short S&P 500 ETF (NYSEARCA: SH ): This ETF seeks : Daily investment results that correspond to the inverse of the daily performance of the S&P 500 index. The S&P 500 index is a measure of large cap United States stock performance. It is a capitalization weighted index of 500 United States operating companies and selected real estate investment trusts. SH attempts to invest: At least 80% of its net assets, including any borrowings for investment purposes, to investments that, in combination, have economic characteristics that are inverse to those of the index. It intends to invest assets not invested in financial instruments, in debt instruments and/or money market instruments. The Fund intends to concentrate its investments in a particular industry or group of industries to approximately the same extent as the index is so concentrated. SH currently trades at $22.80 on approximately 3.6 million shares exchanging hands daily. SH is up 9.0% in the last five days, while the S&P 500, as measured by the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) is down 8.8%. SH has a 52-week range of $20.58-$24.86. Direxion Daily S&P 500 Bear 3x ETF ( SPXS ): SPXS, formerly the Direxion Daily Large Cap Bear 3X fund, seeks : Daily investment results before fees and expenses of 300% of the inverse of the price performance of the S&P 500 Index. As with other funds there is no guarantee the fund will meet its stated investment objective. The fund has a 0.95% annual expense ratio. Under normal circumstances SPXS management creates short positions by investing at least 80% of its net assets in: futures contracts; options on securities, indices and futures contracts; equity caps, collars and floors; swap agreements; forward contracts; short positions; reverse repurchase agreements; ETFs; and other financial instruments that, in combination, provide leveraged and unleveraged exposure to the S&P 500. SPXS currently trades at $22.60 a share. SPXS has average daily volume of 3.8 million shares exchanging hands. In the last five days SPXS is up 29.4% while the SPY is down 8.8%. SPXS has a 52-week trading range of $16.98-$30.83. Image source: memegenerator.net Take home message: There are lots of ways to prepare for a potential short-term bear market including selling covered calls, buying puts, shorting stocks and stock indices, or just plain old selling equities to raise cash. While central bank action has bolstered markets for years, I believe earnings reports as well as turmoil in Europe and China will dictate the direction of the market. The aforementioned funds perform very well in the events of market sell-offs. Disclosure: I am/we are long TZA. (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: I have call options in TZA