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Best ETF Strategies To Survive Market Turmoil

This morning, US stocks are trending higher after indiscriminate and irrational selloff over the past few days. Even though things may calm down in the near term, investors are getting increasingly worried whether the 76 month long bull run is finally coming to an end. The selling was initially triggered by the surprise devaluation of the Chinese currency – which raised concerns that economic conditions in the world’s second-largest economy may be much worse than suggested by official numbers. Recent commodity rout and emerging markets slump have added to these concerns. Investors should remember that a healthy correction at times is a sign of a normal functioning market. This market had not seen a drop of 10% or more from a recent high in more than 46 months. While this sudden, steep selloff was driven more by fear than facts, it is possible that we may see more frequent declines as the Fed gets ready to raise rates for the first time in almost a decade while the economic recovery in most parts of the world remains fragile. At the same time, the US economy is growing steadily and stock valuations are not yet in the bubble territory. And while the rout started with worries over China’s economic malaise, exports to the emerging giant actually account for just 0.2% of US GDP. Amid wild rout that defies all logic, it is important for investors to stay focused on their long-term goals and not act rashly during times of panic. While it is difficult to predict whether the market has bottomed out, it is almost certain that we are likely to see more volatility ahead. Buy High Quality Assets for Longer Term Predicting stock market’s short-term moves accurately is almost impossible but stocks deliver superior returns over longer term. So, if you are an investor with a long-term horizon, then this selloff presents an excellent opportunity to buy some high-quality ETFs that are now available at deep discounts. While growth stocks outperformed till earlier this month, value stocks have delivered higher returns with lower volatility compared with growth stocks over the long term in almost all the markets studied. Ultra-cheap value ETFs like Schwab U.S. Large-Cap Value ETF (NYSEARCA: SCHV ) and Vanguard Value ETF (NYSEARCA: VTV ) are excellent choices for long-term focused portfolios. Also consider adding some low volatility ETFs – like SPDR S&P Low Volatility ETF (NYSEARCA: SPLV ) and iShares MSCI Minimum Volatility ETF (NYSEARCA: USMV ) – to the portfolio. These not only shine during highly volatile market environments but also deliver superior risk adjusted returns over longer term. Stay Diversified As stocks plunged, nervous investors piled into the so-called safe haven assets, particularly Treasury bonds, sending the yield on the benchmark 10-year Treasury note below 2% for the first time in about four months. Investors with well-diversified portfolios were obviously less impacted than those with all stocks holdings. Bonds still deserve a place in portfolios even as the Fed is on track to lift rates sometime in the coming months. Treasury bonds – in particular longer term – may continue to benefit from heavy buying by foreign investors, as long as interest rates remain ultra-low in Europe and Japan, the U.S. dollar continues to strengthen and long-term inflation expectations remain benign. Shorter-term yields may however rise in anticipation of Fed funds rate hike and thus the trend of yield curve flattening may continue this year. Take a look at iShares 10-20 Year Treasury Bond ETF (NYSEARCA: TLH ) or Vanguard Long-term Government Bond ETF (NASDAQ: VGLT ) or other cheap longer-term Treasury bond ETFs. Similarly, a mix of cyclical and defensive stocks is essential for a core portfolio. My favorite ETFs are low-cost sector ETFs – Vanguard Technology ETF [(NYSEARCA: VGT )- ETF report ] and iShares Healthcare Providers ETF (NYSEARCA: IHF ), among others. Things to Know before Investing in Inverse/Leveraged ETFs If your losses are making you very nervous during times of steep declines, then it may be a better idea to add some hedging to the portfolio rather than bailing out of stocks completely. Leveraged/Inverse ETFs-like ProShares Short S&P 500 ETF (NYSEARCA: SH ), ProShares UltraShort S&P500 ETF [(NYSEARCA: SDS ) – ETF report )] and ProShares UltraPro Short S&P500 [(NYSEARCA: SPXU ) – ETF report )] can be effectively used by investors for short-term market timing or hedging purpose during selloffs. However, investors should remember that “timing” the market is never easy and should be prepared to monitor their positions closely and exit their short positions in case the market goes up. Please note that these ETFs are typically designed to achieve their stated performance goal on a daily basis. The performance of leveraged ETFs, if held for longer than a day, is path dependent. That means not only the level of the index at the end of the holding period, but also how the index got there will determine the performance of these ETFs. In trending markets with low volatility, compounding works in investors’ favor and hence there should be no harm in holding these instruments for longer periods. However, if the underlying index sees high volatility, compounding will work against investors and eat into returns, producing high tracking errors. Further if the index tracks a limited number of entities and/or faces contango risks, then it is safer to hold these positions just for a few days. The Bottom Line Investors should remember that patience and diversification are keys to long-term investing success. And, while it is impossible to predict which way the market will turn in the next few days, the overall outlook for US-focused stocks remains favorable in the medium-term despite global concerns. It is important for investors to stay focused on their long-term goals rather than fixating over short-term market moves. Original Post

Buying The Dip With Japan ETFs

Ex-U.S. developed markets, including Japan, have provided no shelter from the recent storm that was ravaged global equity markets. Before leaving Japanese stocks and the aforementioned ETFs for dead, investors might want to consider the view that Asia’s second-largest economy could lead a rebound in developed markets stocks. Recently slowing momentum for currency hedged ETFs does not mean investors should abandon the asset class altogether. By Todd Shriber, ETF Professor Ex-U.S. developed markets, including Japan, have provided no shelter from the recent storm that was ravaged global equity markets. With the CurrencyShares Japanese Yen Trust (NYSEARCA: FXY ) up 2.8 percent over the past month on the back of safe-haven buying of the Japanese currency, the U.S. Dollar Index is off 1.5 percent, a decline that has plagued popular currency hedged ETFs. Over the same period, the WisdomTree Japan Hedged Equity Fund (NYSEARCA: DXJ ) and the Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSEARCA: DBJP ) are off an average of 8.3 percent, a decline that is 260 basis points worse than that of the MSCI EAFE Index. Before leaving Japanese stocks and the aforementioned ETFs for dead, investors might want to consider the view that Asia’s second-largest economy could lead a rebound in developed markets stocks. Looking Into Japan On the surface, many investors might criticize the lack of inflation, weak macro data and Japan’s corporate exposure to EM as good reasons why Japan’s equity market should have played catch up. However, investors are ignoring a really significant divorce between Japanese earnings revisions and a number of macro indicators. “This ought to mean that Japanese equities ‘bounce’ further than its peer group as sentiment rebounds,” according to a Jefferies note out Wednesday. Jefferies has Buy ratings on 13 big-name Japanese stocks, including familiar names such as Bridgestone ( OTCPK:BRDCY ) , Nintendo ( OTCPK:NTDOY ) and Yamaha Motor ( OTCPK:YAMHF ) . Two of those 13 stocks are top 10 holdings in DXJ, an ETF that is among the top 10 asset-gathering funds this year. Of those 13 stocks, four are among the $1.2 billion DBJP’s top 10 holdings. Recently slowing momentum for currency hedged ETFs does not mean investors should abandon the asset class altogether. In fact, some market observers see opportunity with some of these funds, even as some professional investors get skittish about the dollar rally . Best Positioned? Jefferies sees Japan as better positioned than two of its primary Asian export rivals, South Korea and Taiwan. Markets seem to agree as DBJP and DXJ are each positive year-to-date, while the comparable South Korea and Taiwan ETFs are sporting losses in excess of 15 percent . “The bottom line is that Japanese earnings have surprised in their strength relative to macro indicators. The fact that companies have been able to maintain pricing power and keep inventories-to-shipments in-line has meant that they have not entered a pricing battle. Equally, it seems that there is some evidence that capacity tightness is leading to some fresh capital investment helped by steady profit growth,” adds Jefferies. An alternative way to play a rebound in Japanese stocks is with the newly-minted Deutsche X-trackers Japan JPX-Nikkei 400 Hedged Equity ETF (NYSEARCA: JPNH ) , which debuted last week, follows the JPX-Nikkei 400 Index, a benchmark that gives investors a fundamental approach to Japanese stocks. “The JPX-Nikkei 400 Index employs a rigorous screening process based on return on equity, cumulative operating profit and market capitalization to select high-quality, capital-efficient Japanese companies,” according to a statement issued by Deutsche AWM. Four of JPNH’s top 20 holdings are among the 13 Japanese stocks earning buy ratings from Jefferies. Disclaimer: Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) 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.

Are You Selling The Drama Or Buying The Rally?

The critical concern at this juncture is to address whether or not new information genuinely makes risk taking more desirable. Have prospects for the global economy truly improved? If history teaches us that benchmarks tend to retrace half of their losses before retesting their lows – if you feel like you’ve been here before and you don’t choose to be scarred like that again – perhaps you might anticipate better buying opportunities in the weeks ahead. Mini-crash for equities ignites panic selling? Check. The commodity super-slump, ever-widening credit spreads, corporate sales recession and rapid deterioration in market internals throughout June and July assured a reassessment of risk. The brutality and swiftness of that risk reassessment was less destructive for those who respected the dozens of warning signs and acted proactively. Extremely oversold conditions and short covering spark panic buying? Check. As I explained on Tuesday after six days of relentless price depreciation, the S&P 500 had only closed on the lowest end of its 3-standard-deviation range (0.13% probability) on two other occasions – at the tail end of the eurozone sell-off (10/3/2011) and on Tuesday, 8/25/2015. That’s why I wrote in Tuesday’s article, ” Yes, you’re going to see higher prices in the immediate term. Relief rallies happen . ” On the other hand, corrections in other key historical periods (e.g., 1987, 1998, 2010, 2011, etc.) suggest that relief rallies are likely to be short-lived. Typically, stock prices bounce significantly off potential lows, then retest those lows a few weeks later. The S&P 500 SPDR Trust ETF (NYSEARCA: SPY ) plunged 16% in late July-early August of 2011. The exchange-traded index tracker went on to recover one-half (nearly 8%) in late August and September, but ultimately broke to new lows in early October. Similarly, the current correction for SPY came close to 12%. Should anyone be surprised in the vehicle’s ability to reclaim one-half (approximately 6%) of the erosion in price? If history teaches us that benchmarks tend to retrace half of their losses before retesting their lows – if you feel like you’ve been here before and you don’t choose to be scarred like that again – perhaps you might anticipate better buying opportunities in the weeks ahead . The critical concern at this juncture, however, is to address whether or not new information genuinely makes risk taking more desirable. For instance, have prospects for the global economy truly improved? Are corporations actually going to post top-line revenue increases in the 3rd quarter or blockbuster profitability in the 3rd quarter? Will the Federal Reserve’s timeline for tighter borrowing costs be compatible with real prospects for the U.S. economy? If the answers to these questions are “affirmative,” then stocks may be off to the races. Let’s start with the macro-economic backdrop. Is it possible that the seasonally adjusted, revised-and-re-revised GDP of 3.7% for the U.S. in Q2 is a game changer? Probably not. For one thing, the economic growth for the year is at 2.2% – the same low annualized rate that it has been throughout the six-year recovery. Second, the most respected forecasting arm of the Federal Reserve, the Atlanta Fed, anticipates 1.4% 3rd quarter GDP, which means decelerating activity. Last, but hardly least, the global economy is reeling, from debt-slammed Europe to commodity dependent Latin America to recession-wracked China. It follows that prospects for the global economy do not look substantially better, other than the hope and faith that investors may place in China’s multi-faceted stimulus efforts. Perhaps there is new data to suggest that corporations are growing their bottom line earnings per share that would justify a sustainable bullish stock uptrend. This does not look to be the case. According to S&P data compiled by the web log, Political Calculations, trailing 12-month earnings per share for the S&P 500 have declined from S&P analyst projections throughout 2015 from the projections analyst made three months ago (May 20, 2015), six months prior (February 15, 2015) and nine months earlier (November 13, 2014). Top-line revenue? The revenue recession began at the start of 2015 as the Dow Industrials posted sales declines in Q1 (-0.8%) and Q2 (-3.5%); analyst projections for sales declines are coming in at -4.0% for Q3. So new information on the global economic expansion is not particularly compelling. Meanwhile, companies do not appear to be enhancing their top or bottom lines, which does not help price-to-sales (P/S) or price-to-earnings (P/E) valuations. Why, then, would stock investors become enchanted by anything that has taken place in the last few days? Granted, President of the New York Fed, Bill Dudley, helped send stocks rocketing on Wednesday (8/26) with commentary that hiking the Fed’s overnight lending rate in September is looking “less compelling.” Anything that pushes off the possibility of higher debt servicing costs or higher financing costs excites stock bulls. Keep in mind, of course, nobody at the Fed has suggested that they would not raise interest rates here in 2015. It follows that the hope for a continuation of Fed accommodation – hope for a rate hike delay, a slower pace for rate hikes (e.g., every other meeting), and/or smaller increments (one-eighth of a point) – remains the best bet for stock bullishness. We are still proceeding with caution. Most of our clients have 50% exposure to domestic equity ETFs such as the iShares S&P 100 ETF (NYSEARCA: OEF ), the Health Care Select Sect SPDR ETF (NYSEARCA: XLV ), the iShares MSCI USA Minimum Volatility ETF (NYSEARCA: USMV ), the Vanguard Mid-Cap Value ETF (NYSEARCA: VOE ) and the Vanguard High Dividend Yield ETF (NYSEARCA: VYM ). In some instances, we have bought the dips on accidental high yielding dividend aristocrats like Wal-Mart (NYSE: WMT ). Investment grade bonds make up 25% of most portfolios with funds like the iShares 3-7 Year Treasury Bond ETF (NYSEARCA: IEI ) and the Vanguard Total Bond Market ETF (NYSEARCA: BND ). Most importantly, in May and June, when the S&P 500 regularly sat near the 2100 level, we raised our money market cash account levels . Those cash levels are still at 25%. The purpose? Cash reduces portfolio volatility during periods of market stress, limits the downside loss during sell-offs and provides opportunity to buy quality assets at lower prices. Even if I am wrong about the S&P 500 retesting its lows, we are unlikely to miss the bull train as we await a definitive confirmation of improving market internals . 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.