Tag Archives: past

Rate Hike In The Cards: How Will Bond ETFs React?

With the U.S. economy gaining traction lately on a solid job market and moderate inflation, the chances of an interest rates hike is pretty high. The market is anticipating the first rate hike in nearly a decade at the December 15-16 policy meeting. If this happens and the Fed starts tightening, it will result in higher yields and lower bond prices as both yields and bond prices are inversely related to each other. How Bonds React to Higher Rates? The impact on prices is not the same for all bonds when rates rise. It primarily depends on duration and maturity. Duration is a measure of a fund’s sensitivity to a 1% change in interest rates. The longer the duration, the more sensitive the fund is to the changes in interest rates. This can be explained with the following example: consider a 10-year maturity investment grade corporate bond with duration of 8.4 years and coupon rate of 3.5%. If interest rates go up by 2%, then the bond will lose 15% of its market value. On the other hand, the same investment grade corporate bond with duration of 14.5 years, maturity of 30 years and coupon rate of 4.5% will lose 26% of its value if interest rates are raised by 2%. As a result, bonds having higher duration will experience significant losses when interest rates rise. Below, we have presented three ETFs that have a higher duration and are more vulnerable to an increase in interest rates. PIMCO 25+ Year Zero Coupon U.S. Treasury Index ETF (NYSEARCA: ZROZ ) This ETF follows the BofA Merrill Lynch Long US Treasury Principal STRIPS index and holds 20 securities in its basket. Both effective maturity and effective duration are 27.28 years. The fund has accumulated $162.3 million in its asset base and trades in average daily volume of 44,000 shares a day. It charges 15 bps in annual fees and lost 0.7% over the past one month. Vanguard Extended Duration Treasury ETF (NYSEARCA: EDV ) This fund seeks to match the performance of the Barclays U.S. Treasury STRIPS 20-30 Year Equal Par Bond Index. The fund holds 73 bonds in total with effective maturity of 25.0 years and average duration of 24.6 years. Expense ratio came in at 0.12%. The product has amassed $368.6 million in its asset base while sees moderate volume of 51,000 shares per day on average. It lost 0.7% over the past one month. iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ) This is one of the most popular and liquid ETFs in the long-dated bond space with AUM of over $6.1 billion and average daily volume of more than 8.8 million shares. It tracks the Barclays Capital U.S. 20+ Year Treasury Bond Index, holdings 31 securities in its basket. The fund has average maturity of 26.51 years and effective duration of 17.23 years. It charges 15 bps in annual fees and was down 1.3% over the past one month. Ultra-Short Bond ETFs We also highlight three ultra-short bond ETFs with lower duration and interest rates’ risk. These funds offer investors greater protection against interest rate risk compared to the mid- and long-term counterparts. SPDR Barclays 1-3 Month T-Bill ETF (NYSEARCA: BIL ) This product offers exposure to the short end of the yield curve by tacking the Barclays 1-3 Month U.S. Treasury Bill Index. It holds 10 securities in the basket with average maturity and effective duration of 0.09 years each. The fund has amassed $2.2 billion in its asset base while trades in solid volume of 1.5 million shares. It charges 14 bps in annual fees and delivered flat returns in the past one month. Guggenheim Enhanced Short Duration ETF (NYSEARCA: GSY ) This is an actively managed fund that seeks to maximize income by outperforming the Barclays Capital 1-3 Month U.S. Treasury Bill Index along with preservation of capital and daily liquidity. The fund charges 25 bps in annual fees and has amassed $504.6 million in its asset base. Volume is good as it exchanges about 152,000 shares a day on average. Holding 148 securities in its basket, the ETF has average duration of 0.17 years and average maturity of 1.03 years. GSY was relatively flat in last one-month period. iShares Short Maturity Bond ETF (BATS: NEAR ) This actively managed ETF looks to maximize current income through diversified exposure to short-term bonds such as Treasuries, corporate bonds, asset-backed debt, and commercial mortgage-backed securities. The effective duration of the fund is 0.37 years while average maturity is 0.95 years. The product has accumulated $1.9 billion in AUM and trades in solid volume of 356,000 shares a day. It charges investors 25 bps in fees a year and added 0.14% in the past one month. Conclusion Given that not all bonds behave similarly to the increase in interest rates, investors should understand the impact of higher rates on bonds before investing in them. Notably, short-term bond ETFs are less impacted by higher interest rates. Original Post

Coffee Prices Crumbling: What Is The ETF Impact?

We certainly enjoy sipping a warm cup of coffee to start the day but when it comes to green unroasted coffee, traders and farmers have no reason to rejoice. This is because their prices are down about 36% in the past one year (as of October 26, 2015) and is currently trading near its two-year low. Meanwhile, the December coffee contract, on the Inter Continental Exchange (ICE) Futures U.S. exchange, is down 41.7% in the last one year. There are three factors that added to the long rout in the coffee market. First is the depreciation of the Brazilian real against the dollar. The real was already under pressure due to rising inflation, an investment-grade rating downgrade by Standard and Poor’s and fears of economic recession. After a short respite at the beginning of this month, the real started depreciating again against the greenback amid growing concerns of a budget deficit (excluding interest payments) and other political woes. A weak real encourages exports of the greenback priced coffee from Brazil – the world’s largest producer – as farmers try to capture higher profits. This will lead to an oversupply in the global market and hurt prices. The second factor is the forecast of excessive rainfall in Brazil’s top coffee-growing state, Minas Gerais. Weather forecasts indicated monsoon rains in fall and the winter and normal rains during the crucial stage of pod development from mid-December to early February. This has erased fears of drought in the region – a primary factor that had caused a surge in coffee prices in early 2014 – and increased the possibility of a longer-than-expected crop season. Lastly, the move by the Columbian government to lower the benchmark on the quality of beans deemed fit for exports could add to the supply glut in the global market. The threat of a surplus production looms large despite the possibility of dry weather due to El Niño in the coffee-growing regions. The battering in coffee prices had an adverse impact on the funds tracking the coffee market. Below we highlight two ETNs that experienced more than a 4% fall in the past five days and more than a 40% slide in the past one year (as of October 26, 2015). iPath Dow Jones-UBS Coffee ETN (NYSEARCA: JO ) This ETN tracks the Dow Jones-UBS Coffee Subindex Total Return, providing the returns that are available through an investment in the futures contracts on the commodity of coffee. The note has garnered nearly $108 million in assets and trades in a solid volume of 167,000 shares on average. The product is expensive with 75 bps in annual fees. The note was down nearly 5% in the last five days and about 48% in the past one year. It has a Zacks ETF Rank #3 (Hold) with a High risk outlook. iPath Pure Beta Coffee ETN (NYSEARCA: CAFE ) This ETN follows the Barclays Capital Coffee Pure Beta TR Index, providing returns that are available through an investment in the futures contracts in the coffee markets. The index consists of a single futures contract but it has a unique roll structure which selects contracts using the Pure Beta Series 2 Methodology. CAFE is quite overlooked as it has gathered only $5 million in AUM and is thinly traded with an average volume of roughly 7,000 shares. This note also charges 75 bps in annual fees and lost 4% in the past five days and 44% in the last one year. It also carries a Zacks ETF Rank #3 with a High risk outlook. Original Post

4 REIT ETFs To Buy After The Weak Jobs Report

Real estate investment trusts or REITs certainly have reasons to cheer. The disappointing U.S. jobs data for September has pushed the possibility of a rate hike in the near term further into the dark. Headline job gains for September came in at 142,000 versus estimates of 200,000. Further, average hourly earnings in the month moved south. According to the CME FedWatch Tool , there is now a negligible 6% possibility of a rate hike at the October 28 meeting and a 39% probability at the December 16 meeting, down from 44% before the release of the weak jobs data. This means that REITs will continue to draw leverage from the near zero interest rate in nearly a decade for refinancing their debts. Lower interest rates lead to a lower borrowing cost for the REITs on which they are highly dependent for acquisitions, development and redevelopment activities. Till September this year, REITs raised $49 billion in initial capital, debt and equity capital offerings (IPOs – $1.4 billion, Secondary Common – $20.3 billion, Secondary Preferred – $2.1 billion and Secondary Debt – $25.3 billion). Apart from ultra low interest rates, the capability to generate higher dividend yields makes the investment case for REITs very strong. This is especially true when treasury yields are hovering near its lowest level since April and is down from its peak of 2.5% in June. The U.S. law requires REITs to distribute 90% of their annual taxable income in the form of dividends. This has been one of the biggest enticements for investment in REITs amid global uncertainties, both in the money and commodities markets. In fact, dividend yield of REITs came in better than the market. As of September 30, 2015, the dividend yield of the FTSE NAREIT All REITs Index was 4.44% while the yield of the FTSE NAREIT All Equity REITs Index was 3.97%. With this, REITs outstripped the 2.28% dividend yield offered by the S&P 500 (read: REIT ETFs for Income and Diversification ). ETFs in Focus In the backdrop of weak jobs report, it looks like it’s the right time to bet on the sector through ETFs, so as to reap the benefits in a safer way. We have picked four ETFs that have posted handsome gains in the past five days as well as in the past one month (see all Real Estate ETFs here). iShares U.S. Real Estate ETF (NYSEARCA: IYR ) Launched in 2000, IYR follows the Dow Jones U.S. Real Estate Index that measures the performance of the real estate industry of the U.S. equity market. The fund comprises 119 stocks with Simon Property Group Inc. (NYSE: SPG ), American Tower Corporation (NYSE: AMT ) and Public Storage (NYSE: PSA ) as the top holdings. IYR has garnered more than $4 billion assets and trades in a solid volume of nearly 10 million shares per day. The fund charges 43 bps in fees and has a dividend yield of 3.4%. It has returned 4.2% in the past five days and 5.8% over the last one month (as of October 7, 2015). It has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook. SPDR Dow Jones REIT ETF (NYSEARCA: RWR ) Functioning since 2001, RWR seeks investment results of the Dow Jones U.S. Select REIT Index. The fund consists of 98 stocks that have equity ownership and operate commercial real estate, with the top holdings being Simon Property Group Inc., Public Storage and Equity Residential (NYSE: EQR ). The ETF has amassed nearly $3 billion in assets and trades in a volume of 334,000 shares each day. It charges 25 bps in fees from investors per year and has a dividend yield of 3.3%. RWR gained 4% in the past five days and 7.8% in the past one month. It carries a Zacks ETF Rank #3 with a Medium risk outlook. Schwab U.S. REIT ETF (NYSEARCA: SCHH ) This fund debuted in 2011 and tracks the total return of the Dow Jones U.S. Select REIT Index. The fund consists of 99 stocks that own and operate commercial real estates. The top three holdings are Simon Property Group Inc., Public Storage and Equity Residential. SCHH has gathered $1.6 billion in assets and trades in an average volume of 386,000 shares. It charges a meager 7 bps in fees and has a distribution yield of 2.4%. The fund gained 4.1% in the past five days and 8.2% in the past one month. It holds a Zacks ETF Rank #3 with a Medium risk outlook. PowerShares KBW Premium Yield Equity REIT Portfolio ETF (NYSEARCA: KBWY ) Introduced in 2010, the fund follows the BW Nasdaq Premium Yield Equity REIT Index that measures the performance of 24 to 40 small- and mid-cap equity REITs in the U.S. It consists of 30 stocks with Government Properties Income Trust (NYSE: GOV ), Senior Housing Properties Trust (NYSE: SNH ) and STAG Industrial Inc. (NYSE: STAG ) being the top three holdings. The fund has roughly $107 million in AUM and trades in a volume of 21,000 shares per day. It charges 35 bps in annual fees and offers a robust dividend yield of 5.6%. KBWY returned 4.5% in the last five days and 7.6% in the past one month. It carries a Zacks ETF Rank #3 with a Medium risk outlook. Link to the original post on Zacks.com