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5 ETF Ways To Keep Volatility At Bay

The Fed is poised to hike the benchmark interest rate in two weeks after almost a decade, oil prices are hitting fresh lows on supply glut and overvaluation concerns over the U.S. market are doing the rounds. Together, these aren’t creating the best backdrop to invest in the equity markets. Moreover, the slowdown in China and the eurozone, the recession in several emerging markets and a technical recession in the Japanese economy continue to cast a shadow over global growth. Plus, broader commodities are slouching, putting mining companies at risk. The sought-after investment broker Goldman Sachs expects weakness in the market next year, with the S&P 500 predicted to close out 2016 at 2,100. The U.S. index presently trades at 2,088, implying almost no change in gains in the coming 13 months. Among the top ETFs, investors have seen the S&P 500-based fund SPY adding about 1.4% and the Dow-based fund DIA losing about 0.3%. Only the tech-laden Nasdaq-based fund QQQ has advanced 11% so far this year (as of December 7, 2015). Higher interest rates post lift-off will result in a stronger greenback, which, in turn, curtailed the profit outlook of the companies. In Q3, earnings from the S&P 500 were down 2.4%, while revenues declined 3.9%. As per Zacks Earnings Trends , earnings for Q4 are projected to be down 6.5% on 3.4% lower revenues. Though the majority of the Fed’s lift-off move is priced in at the current level and the investing world is expecting a slow and small rate hike trajectory, as the U.S. economy is yet to attain the central bank’s inflation goal, a certain level of initial shocks are inevitable once the step is taken. This might lead many investors to seek refuge in low-risk products rather than sticking to highly volatile options and enduring the economic data and Fed-infused storm. In such a scenario, the low-volatility products could be intriguing choices for those who want to stay invested in domestic equities, but like the idea of focusing on minimum volatility. Low-volatility ETFs generally tend to offer positive risk-adjusted gains, though not huge. Investors should note that in down years like 2015, low-volatility products outperform the traditional benchmark. Over the long term as well, low-risk products are seen to surpass the high-risk securities. Below, we highlight five low-volatility ETFs and offer the key features of each so that you can find out which of them is best suited to look after your portfolio . PowerShares S&P 500 Low Volatility Portfolio ETF (NYSEARCA: SPLV ) This $67.1 million low-volatility ETF consists of the 100 stocks from the S&P 500 Index with the lowest realized volatility over the last one year. The fund is heavy on Financials (28.2%), followed by Consumer Staples (21.3%), Industrials (16.7%) and Healthcare (12.4%). It charges 25 bps in fees. SPLV is up over 2.2% so far this year (as of December 7, 2015), and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook. PowerShares S&P MidCap Low Volatility ETF (NYSEARCA: XMLV ) This overlooked ETF looks to follow the S&P MidCap 400 Low Volatility Index. The product invests about $118.4 million in assets in 80 stocks. From a sector look, Financials make up half of the portfolio, followed by about 11.26% of assets invested in Industrials and 10.54% in Utilities. The portfolio has minimal company-specific concentration risk, with no company accounting for more than 1.71%. The product charges about 25 bps in fees. It is up 5.4% so far this year. iShares MSCI USA Minimum Volatility ETF (NYSEARCA: USMV ) USMV measures the performance of equity securities in the top 85% by market capitalization of U.S. equities that have lower absolute volatility. It has garnered an asset base of $6.85 billion. This fund is home to 171 securities in total, and assigns double-digit allocation to the Financials (21.2%), Healthcare (19.6%), Information Technology (15.71%) and Consumer Staples (14.43%) sectors. The product also has an edge over its peers when it comes to expenses, as it charges a fee of just 15 basis points annually, while it yields about 1.89%. It has delivered a return of over 4% so far this year. PowerShares S&P 500 ex-Rate Sensitive Low Volatility Portfolio ETF (NYSEARCA: XRLV ) This ETF has already amassed over $113 million in assets. It offers investors dual benefits. First, it is targeted at low-risk stocks, and second, it is insulated from the impending Fed rate hike, as it considers stocks which are less rate-sensitive. Holding 100 stocks in its basket, the fund dose not put more than 1.29% of the total in a single security. It is heavy on Financials (28.2%) and Industrials (21.5%). It charges 25 bps in fees. This product has returned 3.2% in the year-to-date frame (as of December 7, 2015). SPDR Russell 1000 Low Volatility Focus ETF (NYSEARCA: ONEV ) This brand-new ETF gives exposure to low-volatility investing in large cap equity securities. The 424-stock fund is heavy on Financial Services (20.2%), trailed by Consumer Discretionary (16.62%), Producer Durables (15.98%) and Consumer Staples (12.2%). It charges 20 bps in fees. Original Post

5 ETFs To Profit From The Oil Collapse

Oil prices continues their sharp decline Monday as mild weather forecasts added to the commodity’s woes after Organization of the Petroleum Exporting Countries (OPEC) failed to arrive at any agreement to cut production, on Friday. The commodity slumped to its lowest levels in almost seven years, dragging down shares of oil & gas companies and also weighing on the broader market. In the absence of any agreement on production cuts, OPEC as well as non-OPEC members such as Russia, will continue to produce oil in record volume despite weak global demand. In fact, production is going to rise now with Iran set to start exporting oil next year when international sanctions are lifted. Iran was OPEC’s second-largest producer before sanctions and will battle now to regain that position. Further, despite price plunge, US production has not fallen as much as analysts expected earlier. With no end in sight for this supply overhang, the outlook for oil remains negative. Further, even if OPEC somehow agrees to cut production in its next meeting in June, the resulting rally in oil prices would likely bring many smaller producers back into the market and add to supply woes. Now, as the Fed looks all set to raise rates next week and the ECB expected to step up stimulus measures in the coming months, the US dollar may continue to strengthen and pose more headwinds for oil. I believe that oil prices are going to stay “lower for longer”. Looking at the longer-term picture, the rise in climate change awareness would also deter investments in this space. Investors looking for ways to profit from the very challenging outlook for oil should consider investing in the following ETFs. US Global JETS ETF (NYSEARCA: JETS ) Airlines are big beneficiaries of cheap oil and a brightening economy. Fuel accounts for a large portion of airlines’ operating expenses and “lower for longer” oil will further boost airlines’ profitability. This product provides investors access to the global airline industry, including airline operators and manufacturers. It uses a smart beta approach in selecting and weighting its holdings and thus charges a slightly higher fee of 60 bps. JETS is up more than 9% since inception, despite recent headwinds related to worries regarding impact on terrorist attacks on tourism and earlier investigation by the Justice department regarding collusion in pricing practices. First Trust NASDAQ Global Auto ETF (NASDAQ: CARZ ) Ultra-low interest rates and plunging gas prices have been fueling demand for new vehicles in the US. With strong sales for the month of November, auto sales this year appear to be on track to beat the earlier record set in 2000. While higher rates would definitely be negative for the industry, the Fed is likely to move very slowly on rate hikes, and thus the auto industry is expected to continue to do well in the months to come. This product provides investors exposure to automobile manufacturers across the globe. About 80% of assets are invested in stocks of automakers based in the US, Germany and Japan. In view of higher expenses and trading costs, this product is more suitable as shorter-term tactical holding. PowerShares Dynamic Leisure and Entertainment Portfolio (NYSEARCA: PEJ ) While low prices have helped US consumers a lot, they have so far been rather cautious in spending. But now with the labor market firming up, consumers are expected to step up their spending finally, particularly during the holidays. Per Fitch Ratings “U.S. leisure companies will continue to benefit from consumer spending growth in 2016, aided by the trend towards more experiential, rather than material, purchases.” PEJ is a smart beta ETF that uses a variety of investment merit criteria to select the best stocks from airlines, restaurants, movies & entertainment, casino & gambling and other leisure related industries. WisdomTree India Earnings Fund (NYSEARCA: EPI ) India is a huge importer of oil and tumbling energy prices bode well for the country. In addition to narrowing trade, current account and fiscal deficits, lower oil prices have resulted in a drop in inflation. Lower inflation helps the country’s central bank to cut rates, boosting growth. Further, the government has successfully used this opportunity to abolish diesel subsidies and raise taxes on petroleum, which will go a long way in improving the country’s fiscal health. India’s growth is fueled mainly by domestic consumption, largely insulating the economy from global headwinds EPI tracks profitable companies in India using an earnings-weighted methodology. Investors should consider adding this ETF to their portfolio. It is one of the largest, broadest and most liquid India equity ETFs. Market Vectors Oil Refiners ETF (NYSEARCA: CRAK ) Refiners seem to be the only bright spot in the energy space as they are a differentiated segment of the energy sector. Crack spread – the difference between the price of crude oil and its refined products – is an indicator of the profitability of the refining industry and lower oil prices could result in higher margins for refiners. This is the first and the only US-listed ETF to provide pure-play exposure to global oil refiners. However, with more than half of its assets invested in non-US companies, the product has foreign exchange risk and also a higher fee of 59 basis points. Original Post

ETF Tactics For A Rate-Proof Portfolio

With back-to-back months of solid jobs growth and moderate inflation, the era of tightened policy might kick in as early as in two weeks, as the chance of the first rate hike in almost a decade now looks more real. The Fed is slated to increase interest rates at its upcoming December 15-16 policy meeting, but at a gradual pace. The initial phase of increase will actually be good for stocks as it will reflect an improving economy and a lower risk of deflation. Plus, higher rates would attract more capital to the country, thereby boosting the U.S. dollar against the basket of other currencies. However, since a strong dollar should have a huge impact on commodity-linked investments, a rising rate environment will also hurt a number of segments. In particular, high-dividend-paying sectors such as utilities and real estate would be the worst hit given their higher sensitivity to rising interest rates. Further, securities in capital-intensive sectors like telecom would also be impacted by higher rates. In such a backdrop, investors should be well prepared to protect themselves from higher rates. Here are number of ways to create a rate-proof portfolio that could prove extremely beneficial for ETF investors in a rising rate environment: Bet On Rate-Friendly Sectors A rising rate environment is highly beneficial for cyclical sectors like financial, technology, industrials, and consumer discretionary. Investors seeking protection against rising rates could load up stocks in these sectors through diversified or niche ETFs. Some of the broad ETFs having double-digit exposure to these four sectors are the iShares Core S&P Total U.S. Stock Market ETF (NYSEARCA: ITOT ), the Schwab U.S. Broad Market ETF (NYSEARCA: SCHB ), and the iShares Russell 3000 ETF (NYSEARCA: IWV ). Other sectors make up for a smaller part of the portfolio of these funds. Investors seeking a concentrated exposure to the particular sector could find the iShares U.S. Financial Services ETF (NYSEARCA: IYG ), the Technology Select Sector SPDR ETF (NYSEARCA: XLK ), the First Trust Industrials AlphaDEX ETF (NYSEARCA: FXR ) and the Consumer Discretionary Select Sector SPDR ETF (NYSEARCA: XLY ) intriguing. All these funds have a Zacks ETF Rank of 2 or “Buy” rating, suggesting their outperformance in the coming months. Focus On Ex-Rate Sensitive ETF The timing of interest rates hike is resulting in higher market volatility. For protection against both, the PowerShares S&P 500 ex-Rate Sensitive Low Volatility Portfolio (NYSEARCA: XRLV ) could be an ideal bet. This fund provides exposure to 100 stocks of the S&P 500 that have both low volatility and low interest rate risk. This approach looks to exclude the stocks that tend to underperform in a rising interest rate environment, and is tilted toward financials (28.1%), industrials (21.5%) and consumer staples (15.2%). As such, XRLV is a compelling choice to play the rising rate trend. Follow Niche Bond ETF Strategies Though the fixed income world will be the worst hit by rising rates, a number of ETFs like the iShares Floating Rate Bond ETF (NYSEARCA: FLOT ) and the iPath U.S. Treasury Steepener ETN (NASDAQ: STPP ) that employ some niche strategies could see huge gains. This is because a floating-rate note ETF pays variable coupon rates that are often tied to an underlying index (such as LIBOR) plus a variable spread depending on the credit risk of the issuers. Since the coupons of these bonds are adjusted periodically, they are less sensitive to an increase in rates compared to traditional bonds. On the other hand, the Steepener ETN directly capitalizes on rising interest rates and performs better when the yield curve is rising. The ETN looks to follow the Barclays US Treasury 2Y/10Y Yield Curve Index, which delivers returns from the steepening of the yield curve through a notional rolling investment in the U.S. Treasury note futures contracts. Shorten Bond Duration Higher rates have been cruel to bond investors, especially the longer-term ones, as an increase in rates has always led to rising yields and lower bond prices. This is because price and yields are inversely related to each other and might lead to huge losses for investors who do not hold bonds until maturity. As a result, short-duration bonds are less vulnerable and a better hedge to rising rates. While there are several options in this space, the SPDR Barclays 1-3 Month T-Bill ETF (NYSEARCA: BIL ), the iShares Ultrashort Duration Bond ETF (BATS: NEAR ) and the Guggenheim Enhanced Short Duration ETF (NYSEARCA: GSY ) with durations of 0.16, 0.36 and 0.17 years, respectively, seem intriguing choices. Original post