Tag Archives: feeds

Hedged And Inverse Bond ETFs To The Rescue If Rates Rise

The behavior of the fixed income market is different this week from the last. This is because a few hawkish comments from some Fed officials completely ruled out the dovish mood felt last week after the Fed announced no rate hike in its latest meeting and cut the number of projected rate hikes for this year (read: Buy Ranked Dividend Growth ETFs in Focus after Fed Meeting ). In any case, the recent data points corroborated sturdy U.S. economic growth. Plus, comments from Atlanta Fed president Dennis Lockhart, San Francisco Fed president John Williams and Richmond Fed president Jeffrey Lacker once again stirred up the rate hike talks, going by Reuters . As per these officials, the reduced rate hike projection mainly reflected the tantrums thrown by the global financial market, which are now showing signs of cooling off. The two important indicators to measure the timing of another rate hike – labor market and inflation – are both stabilizing. San Francisco Fed president even said that he would promote a hike as early as April. Against this backdrop, speculation of a sooner-than-expected hike in the Fed interest rates is rife again. As a result, U.S. treasury yields recorded the biggest single-day rise in over a week on March 21, 2016. On March 21, yields on 10-year Treasury notes jumped 4 bps to 1.92% while yields on two-year Treasury notes rose 3 bps to 0.87%. Investors should note that fixed-income investing has enjoyed a great show so far in 2016, especially in the longer part of the yield curve, as risk-off trade sentiments have brightened the appeal for safer assets. However, the prospect of rising rates and risks to capital gains of the bond holdings have left investors jittery about the safety of their portfolio. Given the situation, many investors may pull their money out of the bond market. At a time like this, investments in U.S. bonds with significant protection from potential rising rates can be good bets. Some opportunistic investors could capitalize on this backdrop in the form of inverse ETFs too. Market Vectors Treasury-Hedged High Yield Bond ETF (NYSEARCA: THHY ) The fund seeks to replicate the price and yield performance of the Market Vectors U.S. Treasury-Hedged High Yield Bond Index. THHY has a weighted average maturity of 9.83 years while its effective duration is at negative 0.50 years. The product is high yield in nature as evident from its 30-day SEC yield of 6.04% (as of March 21, 2016). THHY charges 0.50% of expense ratio. The fund added about 5.5% in the last one month (as of March 21, 2016) (see all the junk bond ETFs here ). ProShares High Yield Interest Rate Hedged ETF (BATS: HYHG ) HYHG is another ETF which has an interest rate hedge built into its strategy as it takes a duration-matched short position in U.S. Treasury futures. Like HYGH, it also has a pretty high yield (and a modest expense ratio of just 50 basis points) of 8.77% in 30 Day SEC terms (as of February 29, 2016), indicating that this could be a safer bond and yield play for investors anxious about rising rates. This $85.1 million ETF was up 8.1% in the last one-month frame (as of March 21, 2016). ProShares Investment Grade-Interest Rate Hedged ETF (BATS: IGHG ) This investment grade fund too offers interest-hedge benefit to investors. The fund looks to track the Citi Corporate Investment Grade (Treasury Rate-Hedged) Index which comprises long positions in USD-denominated investment grade corporate bonds issued by both U.S. & foreign domiciled companies while adopting short positions in US Treasury notes or bonds of approximate equivalent duration to the investment grade bonds. The index seeks to achieve an overall effective duration of zero. Its 30-Day SEC yield stands at 3.93% (as of February 29, 2016) while it charges 30 bps in annual fees. The $135.4-million fund was up 4.4% in the last one month (as of March 21, 2016). Barclays Inverse US Treasury Aggregate ETN (NASDAQ: TAPR ) 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 index would decrease or increase by 5% over the same period. The $15.5-million fund charges 43 bps in annual fees. It added about 4.4% in the last one month (as of March 21, 2016). Link to the original post on Zacks.com

Chart Of The Week – 2008 Or 2011?

By Joseph Y. Calhoun Credit spreads are a big input to our investment process. It was the widening of spreads that convinced us to reduce our equity allocation before the volatility of last year. But active asset allocation requires that you get two consecutive decisions correct and that isn’t an easy task. Right now, for instance, we are watching spreads intently trying to figure out whether the all clear has been sounded. Spreads have narrowed considerably over the last five weeks, and if they continue to do so, we will, in keeping with our process, be forced to raise our risk budget. When we did our monthly Global Asset Allocation review 11 days ago, the trend was still toward widening and the decision was obvious but spreads have continued to narrow. So, the big question facing us and all the other tactical allocators is this: Is it 2008 or 2011? If it’s the former, we have just been given a wonderful opportunity to get more defensive. If it is the latter, we need to figure out how to raise our risk allocation. Click to enlarge So which is it?

Playing The Oil Trend With UWTI

The best way to cash in on a trend in crude oil is not by buying and selling the contracts but watching ETFs that track their prices. Over the past two years, these exchange traded funds have become very popular as oil prices plunged to sub-$30 levels. In a MarketWatch article , the VelocityShares 3x Long Crude Oil ETN (NYSEARCA: UWTI ) was cited as being the fifth most traded security by millennials. UWTI is hardly a tool for hedging against the risk of volatile oil prices. Instead, traders use the derivative as way to bet on different oil trends hoping to cash in on the accelerated payout it offers. This ETF generates a whopping 119 million shares of average volume despite year-to-date losses of over 38%. Its popularity trumps both the iPath S&P Crude Oil Total Return Index ETN ( OIL) and the United States Oil ETF ( USO), which average about 5 million and 51 million shares with YTD losses below 25%. There’s no doubt that UWTI provides traders the opportunity to cash out on an accurate projection of oil prices, but its high leverage and volatility can translate to large, sudden losses if a trend reverses. The best way to reduce risk created by unexpected, short-term fluctuations is to buy at the very bottom of the trend and hold until it tops off in the long run. With the market beginning to tame, investors should start to consider this trade before it’s too late. During the week ending March 12th, the price of West Texas Intermediate contracts rose from the low $30’s as investors finally saw production slow down. Baker Hughes reported earlier that week that rig counts fell to an all-time record low of 480 instigating pent up bullish sentiment. Recent evidence showing a decline in production has caused gains of just over 20% in the past month of trading sessions. While analysts are looking forward to a smaller supply in the future, traders can’t ignore the risks of the current fundamental situation which is still oversupplied by the extra oil still sitting idle in storage. Given how volatile oil trading has been over the past year and a half, skeptics have reason to doubt the rebound and may even see another plunge coming. That would mean complications for those waiting to bet on a bottom. I’m here to tell you not to worry. It’s time to bet on that bottom. Introducing the Deviation Moving Average first published and constantly updated on my blog here . This indicator is similar to a trend line with an adjustment that accounts for a constant deviation in price. The blue line follows WTI price, and is coupled with the orange line, a 50-day moving average plus the 10-day moving average of the actual price’s deviation from its 50-day moving average. With this enhancement, traders can track actual price movements against a deviation that the group has determined is acceptable. Because of intraday trading, the actual price will move either above or below its trend line. Crossover points show a reversal in short-term sentiment. The gap (length of time over or under the orange line) between each point is usually the same size and the variance (absolute value of the difference between the two lines) peaks at about the same height. This idea can be better visualized by the difference chart which is plotted over the past year. In the very volatile 2015, the gaps of smaller sentiment trends lasted just under a month with variance peaking at about $4.00. Using these observations, investors can predict where a small reversal may take place and where the momentum of those reversals are pushing the overall trend. Looking back at the first chart, one can see a curious trend that has developed over the past month. The actual price has not crossed over its deviation moving average line since February 12th, 2015. In fact, the variance has continued to stay constant despite reaching a difference of over $5.00. If the volatile trend of 2015 were to continue, WTI price would have started to fluctuate back downward about a week ago. So why has this not happened? Why has the gap been sustained? The chart shows a change in trend that occurred because of the shift in expectations from oil and gas investors. With the lower rig utilization and the hope of OPEC members freezing output, the buzz saw trend has softened with stability in the long-term price a reality. The new, smaller price channel that emerges might not reach above $50, but it will ease the uncertainty that has plagued oil corporations and oil exporting countries. Because UWTI is a derivative based on the price of oil, volatility there will begin to soften like it has in the WTI spot price trend. As the danger of a sudden plunge in price wanes, it will be safer to establish a long position consisting of UWTI or other energy ETFs. From there, one can ride a long-term trend upward without having to worry about a replay of the bearish tsunamis that drowned out the first month of 2016. Even if WTI were to crossover its deviation moving average in the near future, that point would be linger around the low- to mid-$30 range which is far from the bottoms established in January. With the deepest valley in the past, a smooth, upward climb for the price of oil will allow investors to cash out using the accelerated UWTI exchange traded fund. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.