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ETFs For The Unquestioned ‘Wall Of Worry’

Wall Street stocks often climb in the face of negativity, pessimism and rational fears. With the Fed ending its electronic money printing in the U.S. while hinting at raising overnight lending rates, a continuation of the stock uptrend requires fuel from elsewhere. For now, the bond “wall of worry” and the “stock wall of worry” are not as important as the definitive uptrends for the assets. The crises of yesteryear almost seem quaint. Did investors really need to fret the possibility of the world’s 44th economy (Greece) exiting the euro-zone back in 2011? The stock market ultimately prevailed. Why did the fiscal cliff, sequestration and government shutdown concerns cause so much anxiety in 2012? U.S. stocks eventually powered ahead by roughly 14% that year. Discussion in 2013 of the Federal Reserve tapering its bond purchases in 2014? Please. Equities not only handled the notion of Fed stimulus ending, they knocked doubters on their backsides with two additional years of double-digit percentage gains. Indeed, Wall Street stocks often climb in the face of negativity, pessimism and rational fears. That is what bull markets are made of. On the other hand, when the investing community no longer worries – when the overwhelming majority of participants have no expectation of loss – dreams of risk-free wealth often turn to nightmares. Consider the chart below. The Investors Intelligence Survey’s percentage of self-described bears – those who believe the market will drop – has declined steadily over the last three years. It sits at the lowest level ever. And why not? U.S. stocks have rocketed ahead for three consecutive calendar cycles without so much as a 10% pullback. If every 4%-8% downward movement becomes a “buy-the-dip” opportunity – if people cannot recall the odious feelings associated with a correction of 10%-19% – they’re more likely to chalk up a bearish decline of 30%-plus as an aberration. Trillions in electronic currency creation, zero percent rate policy, corporate stock buybacks, margin debt, carry trade activity, a quest for yield as well as signs of domestic economic improvement have contributed to the amazing six-year performance for U.S. stocks. Of course, none of these things occurred independently. With the Fed ending its electronic money printing in the U.S. while hinting at raising overnight lending rates, a continuation of the stock uptrend requires fuel from elsewhere. Perhaps literally. Unfortunately, and yes, I do mean unfortunately, collapsing oil prices are not a windfall for the U.S. economy. Since 2009, employment in the oil industry has soared by as much as 50%. I have seen reports that energy jobs accounted for 40% of the national job growth since 2000. And these are high-paying careers that we are talking about, as opposed to the low-paying nature of retail, health service professionals and part-time work. The rapid descent in oil prices is a signal of a weakening global economy. Either we see the rest of the globe lose its fight against deflation, eventually dragging the U.S. down with it, or oil prices revert back to a spot price near $75 per barrel and stabilize the world order. I believe the latter is more probable. In fact, if oil fails to find a base that the world and the U.S. energy industry can live with, I believe the Fed will push off its rate normalization plans into the fall or wintertime. (More stimulus, more easy money… that will power stocks in 2015, right?) Indeed, I am long Exxon Mobil (NYSE: XOM ) as a dividend aristocrat that will benefit from greater oil price stability. And while client portfolios stopped out of a profitable position in UBS MLP Alerian Infrastructure (NYSEARCA: MLPI ) back in October, I may revisit the theme of energy infrastructure in the near future. If any sector could benefit from an unquestioned ascent on a “wall of worry,” it could be energy. Or, in contrast, energy could supplant the tech sector circa 2000-2002 and the financial sector circa 2007-2009. A great deal would depend on how Fed policy acts in the face of domestic and global economic deceleration. Will it be the dovish Fed that has maintained zero percent interest rates throughout the six-year bull market? Or will it be a more determined Fed that wants to give itself more breathing room by raising short-term rates, so that it does not need to sign on for QE4? Regardless, investors that have been suckered in by endless promises of rising interest rates need to recognize the unanimous refrain is almost always incorrect. Last year’s Bloomberg poll of the top 55 economists found that all 55 expect the 10-year yield to rise from 3.0%. The average forecast? 3.4%. Only a few folks like myself pointed to the relative value of U.S. treasuries compared with lesser quality sovereign debt abroad as well as the global economic slowdown. As we all know now, the 10-year fell to 2.2% from 3.0%. The economists are at it again. Nearly all of them say the 10-year yield will go higher, with an average forecast of 3.0% by 2015 year-end. I think the 10-year yield will probably be closer to 2%, especially with comparable German bunds below 1% and Japanese government 10-year bonds at 0.31%. Just like last year, I am quite content to keep utilizing longer-duration treasuries in funds like Vanguard Long Term Government Bond (NASDAQ: VGLT ) as well as iShares 10-20 Year Treasury (NYSEARCA: TLH ), as the yield curve continues to compress. Most of my clients have exposure to Vanguard Extend Duration (NYSEARCA: EDV ), though I would look for a bit of a shakedown before considering the longest end of the curve. Bottom line? Check your bond bearishness and stock bullishness at the door. Let the trendlines do the talking for both assets. For now, the bond “wall of worry” and the “stock wall of worry” are not as important as the definitive uptrends for the assets. One should let the uptrends in a stock stalwart like iShares USA Minimum Volatility (NYSEARCA: USMV ) as well as a bond winner like Vanguard Long Term Government ( VGLT ) speak for themselves. Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.

TrimTabs Plans 2 Free-Cash-Flow ETFs

TrimTabs ETF Trust has recently filed a post-effective amendment for two ETFs – one focusing on the domestic market and the other on international markets. The funds – TrimTabs International Free-Cash-Flow ETF and TrimTabs U.S. Free-Cash-Flow ETF – are expected to trade under the tickers FCFI and FCFD following their launch. Below, we have highlighted some of the details about the ETFs for investors seeking to know more about these in-registration funds: FCFI in Focus As per the SEC filing , the proposed passively managed ETF looks to provide exposure to international companies poised for rapid growth by tracking the performance of the TrimTabs International Free-Cash-Flow Index before fees and expenses. For this purpose, the index focuses on companies with high free cash flow yield, including REITs. Free cash flow here refers to the total cash generated by the company after spending the money required to maintain or expand its operations, while free cash flow yield is the ratio of a company’s free cash flow to its market capitalization. The index follows an equal weighted strategy which ensures a well-diversified portfolio. Moreover, the index seeks to provide exposure to 10 countries, including Australia, Canada, China, France, Germany, Japan, Korea, the Netherlands, Switzerland and the U.K. The fund will charge 69 basis points as fees. FCFD in Focus The proposed fund looks to track the performance of the TrimTabs U.S. Free-Cash-Flow Index, before fees and expenses. The passively managed fund focuses solely on U.S. companies, including REITs, having a high free cash flow yield. FCFD in short follows the same strategy as FCFI and also charges the same fees, but with a domestic focus. How Might it Fit in a Portfolio? Free cash flow is one of the important tools to measure the performance of a company. Usually most investors focus on fundamental indicators such as the price-to-earnings ratio (P/E), book value, price-to-book (P/B) and the PEG ratio to select companies with strong fundamentals. They often ignore free cash flow measures. However, the free cash flow yield offers a better representation of the company’s performance and in most cases give a fairer picture of the company than other fundamental measures. FCFI and FCFD, which focus on companies with high cash flow yield, are expected to hold some of the best performing international and domestic companies, respectively. ETF Competition Presently, there aren’t many funds focusing on this space. However, we have two funds from Cambria – one focused on the domestic space and the other on the international front – providing exposure to companies that generate high free cash flow and in turn look to return these to shareholders in the form of cash dividends, share repurchases, or by reducing their leverage. Cambria Shareholder Yield ETF (NYSEARCA: SYLD ) with an asset base of $218 million is based on the research that free cash flow is a key predictor of a company’s strength. This product invests in companies that show strong characteristics in returning free cash flow to their shareholders by way of cash dividends, share repurchases, or by reducing their leverage. The actively managed fund has a diversified portfolio of 104 stocks and charges 59 basis points as fees. Cambria Foreign Shareholder Yield ETF (NYSEARCA: FYLD ) on the other hand also works on the same proposition as SYLD, but focuses on stocks from foreign developed countries. The fund manages an asset base of $62.4 million and includes companies with the best combination of dividend payments and net stock buybacks. The fund charges the same fee as SYLD. Thus, FCFI and FCFD, if launched, have a fair chance of building assets for themselves, given the lack of competition in the space.

3 Worst Global ETF Investments Of 2014

2014 was a relatively sluggish year for international markets. While the U.S. indices were setting new all-time highs seemingly year round, most international economies were reeling under global pressures. Per MSCI, the World ex-USA index is down 5.9% so far this year, while countries within the European Monetary Union ( EMU ) have turned out to be one of the most beaten down markets, having shed about 8.7% in the time frame. Emerging nations were also no better having retreated about 4.4% YTD. These were in stark contrast to the 11.9% gain seen in North America. Deflationary worries in Europe, apparent failure of Abenomics in Japan, prolonged slowdown in the world’s second largest economy China, massive crash in crude and the ensuing currency woes (as well as the broader commodity market rout) rattled investors’ faith over international investing in 2014. As the year is drawing to a close, we handpick 3 global ETFs which have severely underperformed in 2014. These ETFs should be closely watched if the macroeconomic backdrop takes longer to turn around in the New Year. AdvisorShares Accuvest Global Opportunities ETF (NYSEARCA: ACCU ) The ETF is a good choice for long-term investors seeking a broad global exposure. The fund doesn’t track any particular index and instead looks to identify countries that may outperform other equity markets on the world stage based a top-down method that considers 40 different factors. The product is structured as a fund-of-funds and holds other ETFs in its basket in order to give investors global exposure. This AdvisorShares fund is unpopular and illiquid with just $4.2 million of assets and about 20,000 shares of average daily trading volume. While low trading volume can result in higher trading costs, the use of the fund-of-funds technique and the active management strategy render the fund quite expensive with an expense ratio of 1.25%. Presently, the iShares MSCI China ETF (NYSEARCA: MCHI ) (19.69%), the iShares MSCI Sweden ETF (NYSEARCA: EWD ) (17.90%) and the iShares MSCI Thailand Capped ETF (NYSEARCA: THD ) (14.78%) occupy the top three spots. The fund is heavy on emerging Asia (33%), Developed Europe (28%) and North America (25%). Sector-wise, financials takes the top spot with a 33.8% allocation, followed by 15.7% exposure to information technology and a 10.1% allocation to industrials. The fund lost the most in the global equities space in 2014, slumping about 15.3%. AdvisorShares Athena International Bear ETF (NYSEARCA: HDGI ) This one too is an active ETF from the same issuer, AdvisorShares. The ETF seeks to generate capital appreciation through short sales of international equities. Stocks are selected using the portfolio manager’s patented behavioral research, which measures manager behavior, strategy consistency and conviction. The research also evaluates stocks to be placed in top and bottom relative weight positions within the equity universe. Additionally, the portfolio manager also utilizes equity manager and investor behavior factors to determine the most attractive markets and capitalization ranges for their short choices. Once this is done, the stocks that rank the lowest from the conviction holdings list receive allocations in the fund, based on market cap. This intensive investigation results in a higher annual fee of 1.50%. The product is fairly overlooked by investors as depicted by its AUM of only $1 million and average daily volume of about 5,000 shares. The ETF was down 15% in the 2014 time frame. WisdomTree Commodity Country Equity ETF (NYSEARCA: CCXE ) Commodities had a rough stretch this year due to a stronger dollar, favorable weather and soft demand owing to a patchy global recovery. The product is a high-yield option looking to track the stock market performances of dividend-paying companies hailing from commodity-rich nations. The product tracks the WisdomTree Commodity Country Equity Index and results in a portfolio of 161 securities with an expense ratio of 58 basis points a year. This ETF assigns 26.3% of its asset base to financial stocks followed by 20.3% in energy, 15.9% in telecom and 11.9% in material. As the name suggests, the fund looks to invest in resource-dominant nations, including New Zealand, Canada, Norway, Australia, Chile, Brazil and Russia. Regional weights vary in the range of 10.95-14.76%. The fund appears to be spread out among companies, as no firm accounts for more than 4.97% in the fund. StatoilHydro ASA (NYSE: STO ), Telecom Corp of New Zealand Ltd, and Ambev S.A. (NYSE: ABEV ) take the top three positions in the fund with asset investment of 4.97%, 3.68% and 2.73%, respectively. The fund was down 11.2% on the year.