Tag Archives: financial

5 ETFs To Buy For Q2

After a terrible start to the year, the U.S. stock market made a stunning comeback in the last six weeks of the first quarter. This is especially true as the major U.S. bourses recouped all the losses after falling more than 14% (as of February 11) from their recent peak levels. Notably, both the S&P 500 and Dow Jones were in the green at the end of the quarter, having logged in 0.8% and 1.5% gains, respectively. The impressive rally was driven by a rebound in oil prices, a spate of upbeat U.S. economic data, extra easing policies in Europe and Japan, and stabilization in the Chinese economy. Additionally, the Fed’s dovish comments infused more optimism in the stock markets lately. The bullish trend is likely to continue at least in the second quarter given the substantial improvement in the economy, an accelerating job market, pick-up in inflation as well as increasing consumer confidence. Further, the Fed is not expected to raise interest rates anytime soon given the global growth concerns that should drive the U.S. stocks higher. Nevertheless, bouts of volatility will keep threatening the bulls. Some of the headwinds include relatively higher valuations, risk of earnings weakness like what we saw in the fourth quarter, and oil price instability. As the U.S. economy is leading the way amid global uncertainty, investors should focus on the domestic market. We have highlighted five picks for 2Q that should outperform and cost less than many other products. These funds have either a Zacks Rank of 1 (Strong Buy) or 2 (Buy). iShares MSCI USA Minimum Volatility ETF (NYSEARCA: USMV ) Low volatility products generate impressive returns or often outperform in an uncertain or a crumbling market while providing significant protection. This is because these funds include more stable stocks that have experienced the least price movement in their portfolio. As a result, low-volatility strategies appear safe in a turbulent market, and reduce losses in declining markets while generating decent returns when the markets rise. As such, USMV could be a great pick with an AUM of $11.3 billion and an expense ratio of 0.15%. It offers exposure to 168 U.S. stocks having lower volatility characteristics than the broader U.S. equity market by tracking the MSCI USA Minimum Volatility Index. The fund is well spread across a number of securities with none holding more than 1.71% of assets. From a sector look, financials, health care, information technology and consumer staples take the top four spots with a double-digit allocation each. The fund trades in solid volume of 3 million shares a day and has gained 6.4% in the year-to-date time frame. It has a Zacks ETF Rank of 2. SPDR S&P Dividend ETF (NYSEARCA: SDY ) Dividend-focused ETFs have been riding high this year on investors’ drive for income amid heightened uncertainty in the stock market. This is because dividend paying securities are the major sources of consistent income when returns from the equity market are at risk. Dividend-focused products offer safety in the form of payouts and stability in the form of mature companies that are less immune to the large swings in stock prices. Further, longer-than-expected interest rates have made this corner a hot investment area. As a result, SDY seems an interesting choice for the second quarter. This is one of the popular and liquid ETFs in the dividend space with AUM of $13.2 billion and average daily volume of about 940,000 shares. This fund provides exposure to the 109 U.S. stocks that have been consistently increasing their dividend every year for at least 25 years. This can be done by tracking the S&P High Yield Dividend Aristocrats Index. Though the fund is slightly skewed toward the financial sector with 22.7% share, industrials, utilities, consumer staples, and materials make up for a nice mix in the portfolio with a double-digit allocation each. The fund charges 35 bps in fees per year and yields 2.51% in annual dividend. It has added 9.9% so far this year and has a Zacks ETF Rank of 2. Consumer Discretionary Select Sector SPDR Fund (NYSEARCA: XLY ) With the U.S. economy on a modest growth path and the spring season underway, the consumer discretionary sector is expected to get a boost. The auto industry is booming, the manufacturing industry seems to be stabilizing having ended a five-month declining streak with accelerated production and rising new orders, and the housing market is geared up for the spring buying fervor. Further, cheap financing will continue to entice consumers to buy more homes and avail auto loans, thereby propelling the stocks of this sector higher. While there are several options to play the surge in the sector, the ultra-popular XLY having AUM of $10.7 billion and average daily volume of around 8.2 million shares looks attractive. It tracks the Consumer Discretionary Select Sector Index and holds 88 securities with higher concentration on the top four firms at 30%. Other firms hold less than 4.9% share each. In terms of industrial exposure, media takes one-fourth share while specialty retail, internet retail, and hotels, restaurants & leisure round off the next three spots with a double-digit exposure each. The fund charges 14 bps in fees per year and has added 2% so far this year. It has a Zacks ETF Rank of 1. SPDR S&P Homebuilders ETF (NYSEARCA: XHB ) A solid labor market along with affordable mortgage rates will continue to fuel growth in a recovering homebuilding sector, creating a buying opportunity in homebuilders and housing-related stocks. In addition, slower and gradual rate hikes will not impede the growth prospect of the sector, at least in the second quarter. The most popular choice in the homebuilding space, XHB, follows the S&P Homebuilders Select Industry Index. In total, the fund holds about 37 securities in its basket with none accounting for more than 5.73% share. The product focuses on mid-cap securities with 65% share, followed by 27% in small caps. The fund has amassed about $1.5 billion in its asset base and trades in heavy volume of about 3.6 million shares. Expense ratio comes in at 0.35%. XHB has lost modestly 0.1% in the year-to-date timeframe and has a Zacks ETF Rank of 2. iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ) Treasury bonds, in particular the long-term ones, are the biggest beneficiaries of lower interest rates. The longer the duration, the more sensitive the fund is to the changes in interest rates. As such, bonds having a higher duration will experience significant gains for as long as interest rates remain low. Additionally, long-term bonds will continue to get an impetus from the negative interest rates in the other developed world like Europe and Japan that made the U.S. bonds attractive to foreign investors. Given this, the ultra-popular long-term Treasury ETF – TLT – looks exciting for the second quarter. It tracks the Barclays Capital U.S. 20+ Year Treasury Bond Index, holding 32 securities in its basket. The fund focuses on the top credit rating bonds with average maturity of 26.61 years and effective duration of 17.77 years. It charges 15 bps in annual fees and exchanges about 8.7 million shares in hand per day. With AUM of $8.1 billion, TLT has gained 8.6% so far this year and has a Zacks ETF Rank of 2. Original Post

How Long Should I Give An Investment Plan?

Even the most brilliantly crafted investment plan has to be given time to work. The markets are inherently volatile but also inherently profitable. And when you start investing in the markets, you are very likely to see many highs and lows as the market gyrates before you see permanent gains. And since asset allocation involves crafting a portfolio out of many sectors which have low correlation, one component of your portfolio certainly will experience an early loss. Diversification means you will always have something to complain about. Perhaps the most important part of implementing an investment plan is the wisdom to know when one category doing poorly means you should do something and when it means nothing. We know from behavioral finance that many people give up on a brilliant investment philosophy too soon. They chase returns rather than rebalancing. And we know from studies on mutual fund flows that investors underperform the very mutual funds they are invested in because they buy funds after they have gone up and they sell funds after they have gone down. We don’t want to be the foolish investor who sells at the bottom only to reinvest at the top of the next bubble. Here is the primary question to help you discriminate between a brilliant investing strategy and a mistake: Do you have sufficient data to justify the long-term mean returns you want? It is a mistake to select an investment sector based on recent returns. In order to get meaningful statistics, you need to use the longest time horizon possible. Even 30 years is not long enough to judge which investment will have a higher mean return for the next 30 years. For example, we recently had a 30-year time period where long-term bond returns beat the return for stocks . Periodically, it is wise to reevaluate your investment selection to see if you made a mistake. You may have been enamored by the ability of a fund manager to select stocks . You may have thought a fund was worth higher fees and expenses. You may not even have understood what you were investing in. You may have invested in something that has a low or even negative mean return. Or you may have invested in an illiquid asset. If you do find a mistake, it is always a good time to sell a bad investment. There is no reason to “wait for a rebound,” because a better investment will on average rebound better for you. During the portfolio construction process, look for sectors with a high expected return, a low volatility, and a low correlation with other components of your portfolio. Then, when you experience the volatility, ask yourself if it behaved as you expected. Imagine that you have invested in a fund tracking the S&P 500 Index and it quickly experienced over two years a -19% annualized loss. Wondering if you made a mistake, you ask yourself, did your experience fit what your data expected? To answer this question, you look at the range of returns experienced by the S&P 500 Index since 1928 (all the data we have). The mean return (not including dividends) is about 7%. In the graph below, you can see this as the graph funnels around a 7% return the longer the number of years. The thick bars are 1-standard deviation from that mean; the thin bars are two standard deviations. Click to enlarge Returns within one or two standard deviations are commonplace returns. The data doesn’t just expect these, it predicts them. Within one standard deviation of the mean are approximately two out of every three returns experienced. Meanwhile, approximately 22 out of every 23 returns are within two standard deviations. As you can see, it depends on the number of years how wide the range of predicted annualized returns. Over a one-year time period, one standard deviation from the mean is from -13.00% to 28.07%. Meanwhile, over a thirty-year time period, one standard deviation from the mean is 5.45% to 8.53%. Two standard deviations for one-year time periods is -33.53% to 48.06%, and for thirty-year time periods, it is 3.91% to 10.08%. When you look at two-year time periods, the two-standard-deviation set of returns is from -21.81% to 34.56%. The return you experienced, -19%, falls in this time period, making it commonplace. Your data not only expected it, your data predicted it. Despite one-, two-, and three-year time periods all having moderate annualized losses within one-standard deviation, for the S&P 500 Index at a 7-year holding period, the bottom of the one-standard deviation range (2 out of every 3 returns experienced) rises above zero to a positive 0.02%. The bottom of the two-standard deviation range (22 out of every 23 returns) rises above zero after a 19-year period. Even good indexes which are part of a carefully crafted portfolio on the efficient frontier have a bad decade. Get rid of them at the low and you are liable to miss the recovery as the index returns revert to the mean and have some greater than average growth. And while individual stocks can go to zero, broad indexes cannot. To ensure this fact, your funds should be comprised of a large number of holdings. There is no such thing as over diversification. A large number of holdings helps ensure that the category is worth a place in your asset allocation for the long term even when returns are below average for a period of time. There are reasons to remove a sector from your asset allocation, but not simply for returns that are below average. The opposite is true, however. When a category experiences rapid appreciation, investors piling in may cause the price to rise faster than the expected earnings. A higher than normal forward P/E ratio can be an indicator of lower than expected future returns. Dynamic asset allocation would suggest trimming the allocation to sectors with a higher forward P/E ratio so that when the sector reverts to the mean, you have less experiencing the fall. Sometimes even a good investment can drop precipitously. Approximately 1 out of every 23 times the stock market will experience returns greater than two standard deviations from the mean. The markets are more abnormal than a normal Gaussian bell curve. This non-Gaussian mathematics is called Power Laws and forms the basis for fractals. Stock returns experience 4 or more standard deviations greater than normal statistics would predict. Gaussian statistics experience greater than 3 standard deviations approximately 0.2% of the time whereas the stock market experiences greater than 3 standard deviations approximately 0.56% of the time . When returns are outside of two standard deviations, the same analysis applies, but the hype from the financial news media is terrifying. The worst 12-month return for the S&P 500 was -70.13% (a 4-standard deviation loss) and ended June 30, 1932. The best 12-month return ended just 12 months later and was 146.28% (a 7-standard deviation gain). I take comfort in the fact that unusually large drops are often followed by unusually large gains. A similar pairing happened during the crash of 2008. The 12 months prior to 2/28/2009 experienced a -44.76% drop (a 3-standard deviation loss). The next 12 months appreciated 50.25% (a 3-standard deviation gain). For the most part, short-term returns should not ruin a brilliant long-term investment strategy. Normally, it is best to rebalance your portfolio selling what has gone up and buying what has gone down. If you can’t stomach rebalancing your portfolio, at least don’t lose heart and abandon the plan.