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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.

5 Low-Risk ETFs To Protect Returns Amid Volatility

The global stock market has been on a wild ride over the past couple of weeks, with a wave of selling seen in recent sessions making matters worse. China played the role of the biggest culprit in roiling the market with the devaluation of its currency on August 11, and dovish Fed minutes last week did the rest of the damage. Worries about prolonged weakness in China accelerated on Friday on the country’s factory activity data, which contracted at the fastest pace in over six years in August. Additionally, Europe is struggling with slower growth, the Japanese economy has lost its momentum and many emerging economies are experiencing a slowdown despite rounds of monetary easing. Added to the woes is the slump in commodities, especially the resumption of the oil price slide, which is once again threatening global growth and deflationary pressure. Notably, U.S. crude has dropped to below $39 per barrel, its lowest price since the financial crisis six years ago. Such market gyrations have left investors nervous about the safety of their portfolios. However, the People’s Bank of China (PBOC), in a surprise move today, intervened to boost the sagging domestic economy. For the fifth time in nine months, it has cut its interest rates by 25 bps to 4.6%. The deposit rate has also been cut by 25 bps to 1.75%, while the reserve ratio has been slashed by 50 bps to 18%. Though the move has injected fresh optimism into the global markets, with most benchmarks in green, the gain seems a short-lived one. Most of the analysts believe that the country will continue to face a long period of uncertainty that would result in more volatility and hurt the global economy. Given the weak fundamentals, the outlook for stocks still appears cloudy, and the markets are expected to remain volatile in the coming days. As such, investors should consider low-volatility (risk) products in order to protect themselves from huge losses. Why Low Volatility? Low-volatility products generate impressive returns or often outperform in an uncertain or a crumbling market, while providing significant protection to one’s portfolio. This is because these funds include more stable stocks that have experienced the least price movement in their portfolio. Further, these funds contain stocks of defensive sectors, which usually have a higher distribution yield than the broader markets. Below, we have highlighted five low-volatility ETFs that investors should consider if the stock market continues to experience volatility. These funds appear safe in the current market turbulence and tend to reduce risk, while generating decent returns: iShares MSCI USA Minimum Volatility ETF (NYSEARCA: USMV ) This is the largest and most popular ETF in the low-volatility space, with AUM of $5.8 billion and average daily volume of 1.1 million shares. It offers exposure to 163 U.S. stocks having lower-volatility characteristics than the broader U.S. equity market by tracking the MSCI USA Minimum Volatility (USD) Index. The fund’s expense ratio came in at 0.15%. The fund is well spread across a number of components, with none holding more than 1.68% share. From a sector look, healthcare, financials, information technology, and consumer staples occupy the top positions, each with double-digit exposure. The ETF lost nearly 7% over the past 10 days. PowerShares S&P 500 Low Volatility Portfolio ETF (NYSEARCA: SPLV ) This ETF provides exposure to the stocks with the lowest realized volatility over the past 12 months. It tracks the S&P 500 Low Volatility Index, and holds 105 securities in its basket. Like USMV, the fund is widely spread across a number of securities, and none of these holds more than 1.25% of assets. However, the product is tilted toward financials at 35.1%, while consumer staples, industrials and healthcare round off the top five. SPLV has amassed $5 billion in its asset base and trades in heavy volume of around 1.3 million shares a day, on average. The fund charges 25 bps in annual fees and lost 7.6% in the past 10 days. iShares MSCI All Country World Minimum Volatility ETF (NYSEARCA: ACWV ) This fund tracks the MSCI All Country World Minimum Volatility Index. Though the ETF provides exposure to low-volatility stocks across the globe, the U.S. accounts for more than half of the asset base. Apart from this, Japan is the only country with a double-digit allocation. In total, the fund holds 359 stocks, with each accounting for no more than 1.41% of assets. Financials, healthcare, and consumer staples are the top three sectors, each with double-digit allocation. The product has a managed asset base of $2.2 billion, while it trades in good volume of more than 202,000 shares a day. It charges 20 bps in annual fees, and is down 8% in the same period. iShares MSCI EAFE Minimum Volatility ETF (NYSEARCA: EFAV ) This fund targets the low-volatility stocks of the developed equity markets, excluding the U.S. and Canada. It follows the MSCI EAFE Minimum Volatility (USD) Index, charging investors 20 bps in annual fees. Holding 206 securities, the fund is highly diversified, with none making for more than 1.66% share. However, it is slightly tilted toward financials at 21.1%, closely followed by healthcare (16.1), consumer staples (16.0%) and industrials (11.1%). In terms of country profile, Japan and United Kingdom take the top two spots at 28.7% and 22.6%, respectively, followed by Switzerland (11.2%). EFAV has AUM of $3 billion and trades in good volume of 372,000 shares a day, on average. The ETF was down about 9% over the past 10 days. iShares MSCI Emerging Markets Minimum Volatility ETF (NYSEARCA: EEMV ) For investors seeking exposure to the emerging markets, EEMV could be an intriguing pick. The fund follows the MSCI Emerging Markets Minimum Volatility Index and is one of the largest and popular ETFs in this space, with AUM of over $2.5 billion and average daily volume of around 441,000 shares. It charges 25 bps in annual fees and expenses. In total, the fund holds 258 stocks in its basket, with each accounting for less than 1.7% share. It provides exposure to a number of emerging countries, with China, Taiwan and South Korea as the top three holdings. However, the fund has a slight tilt toward financials with 28.5% share, while consumer staples, telecommunication services and information technology round off the next three spots. The fund shed 13.8% in the same period. Bottom Line Though these products have been on a downslide, the losses are much lower than those of the broader market funds. This is especially true given the losses of 9.8% for the U.S. fund (NYSEARCA: SPY ), 11.2% for the global fund (NASDAQ: ACWI ), 11.5% for the developed markets fund (NYSEARCA: EFA ) and 15.2% for the emerging markets fund (NYSEARCA: EEM ). As a result, investing in low-volatility ETFs seems a good strategy at present, given the China turmoil and global growth fears. Original Post

401(k) Fund Spotlight: Templeton Global Bond

Summary Lead manager Michael Hasenstab is a contrarian who is not afraid to take concentrated positions in securities where he has a high degree of conviction. Templeton Global Bond has outperformed 99% of its global bond peers over the last 10 years. The fund is wisely avoiding the most dangerous areas out there for global bond investors – sharply higher yields and sovereign debt of Japan, Western Europe, and Southern Europe. Background I select funds on behalf of my investment advisory clients in many different defined contribution plans , namely 401(k)s and 403(b)s. I have looked at a lot of different funds over the years. 401(k) Spotlight is an article series that focuses on one particular fund at a time that is widely offered to Americans in their 401(k) plans. 401(k)s are now the foundational retirement savings vehicle for many Americans. They should be maximized to the fullest extent. A detailed understanding of fund options is a worthwhile endeavor. To get the most of this article is important to understand my approach to investing in 401(k)s. Here are my key principles: 1. I do not buy ‘index hugging’ active funds if a similar index is available. Index hugging funds are those that are overly diversified and their performance never strays far from the index. Index funds almost always have a lower fee so I prefer to just own the index and let the fee savings provide a performance tailwind over time. Lastly, index hugging active funds are generally managed by people who don’t really know how to invest. This may sound harsh, but it is true. They are institutional herd products. 2. When buying actively managed funds, I look for those who are willing to go against the institutional herd and follow their own independent investment approach. I do not mind the higher fee if they have an established track record and it is not necessary that they always beat the index. Sometimes investment positions take a bit longer to pan out than investors would like to see on their quarterly statements. I take comfort in putting money with a manager(s) who is not afraid to stray from the herd. 3. I do not care what Morningstar says. Templeton Global Bond Fund Templeton Global Bond has five different share classes: A (MUTF: TPINX ), Advisor (MUTF: TGBAX ), C (MUTF: TEGBX ), R (MUTF: FGBRX ), and R6 (MUTF: FBNRX ). The class A shares are often found in 401(k)s with the load waived (i.e., no up front sales charge) and a net expense ratio of .90%. This is a reasonable fee given all that this fund offers. With $65 billion of assets it is one of the largest global bond funds out there (in fact, it was the largest in a screen I ran on Fidelity’s website). Templeton Global Bond is relatively free to roam in the bond world wherever it wants. The fund typically invests the majority of its assets in investment grade government bonds from anywhere in the world. It also regularly invests in various currency instruments and derivatives. The fund tends to focus on sovereign debt and not corporate debt. It may invest up to 25% of its assets in below investment grade debt and all of its assets in developing (or emerging) market debt. The fund’s lead manager, Michael Hasenstab, is well known within the investment industry, appearing regularly in publications such as Barrons . He has gained a reputation as a contrarian with a willingness to take concentrated positions on specific bonds that he has a high degree of conviction in. This has generally worked out well, except for a large position in Ukraine government debt that has cost the fund several billion dollars. (About 2% of the fund is currently invested in Ukraine.) In a January 2013 interview with the Financial Times , he warned that it was time to get out of “safe” government debt. His call was right on. The 10-Year Treasury Yield subsequently soared a few months later during the so-called “taper tantrum,” as shown on the following chart (note: bond prices fall when interest rates rise): ^TNX data by YCharts Excellent Performance Track Record Over the last 3-Year, 5-Year, and 10-Year periods (as of December 31, 2014), Templeton Global Bond has crushed both the benchmark and its peer group. The following table shows this: 3-Year Return 5-Year Return 10-Year Return Templeton Global Bond – Class A (without sales charge) 6.3% 5.8% 7.4% Citigroup World Government Bond Index -1.0% 1.7% 3.1% Lipper International Income Funds Average 2.1% 2.9% 4.0% As far as performance goes, there is little to complain about. The fund has consistently shown is value relative to its peers. Portfolio Positioning The makeup of the current portfolio is always the most important thing I look at when evaluating a fund. Currently, given the dynamics of my forecast , my general view on the global bond market is as follows: Completely avoid the sovereign bonds of Japan and Western Europe denominated in Yen and Euro. Completely avoid local currency emerging market bonds (non-U.S. dollar denominated) except for Russia (I expect oil prices to spike soon). U.S. and Pound Sterling government debt with very short maturities is okay. Selective U.S. dollar denominated emerging market bonds are okay, especially debt of corporations with U.S. dollar revenues and local currency expenses. Duration should be short though. Cash positions should be sizeable to take advantage of potential price dislocations created by a lack of market liquidity. (Fund cash positions should also be high to meet shareholder redemptions without having to sell quality bonds at low prices.) How does Templeton Global Bond stack up in light of my outlook? Notably, as of July 31, 2015, the fund has an average duration of only .07 years and an average weighted maturity of only 2.49 years. With a duration of .07, rates could theoretically rise 300% and the fund would only fall by .21%. (Duration measures the exposure of a fund to interest rate fluctuations.) Hasenstab clearly has the fund positioned exceptionally well for a rising rate environment. However, the trade-off here is a low yield. The fund’s 30-day standardized yield is only 2.18%. The distribution yield is higher at 3.04% (calculated by taking the standard monthly distribution of .03 x 12 divided by the current NAV price). Given the near-term danger of a sharp rate rise, I think the low yield is worth accepting. I like the fact that 79% of the fund’s currency exposure is in the U.S. dollar (as of June 30, 2015), which is more than twice that of the comparable index. I especially like the fact that, through derivative exposure, the fund has a 24% net short position in the Japanese Yen and a 36% net short position in the Euro. I am expecting the Yen to outright crash and this fund is well positioned for it. As of June 30, 2015, the fund’s largest sovereign debt holdings are as follows: South Korea – 14% Mexico – 9% Malaysia – 7% Poland – 7% Hungary – 7% Brazil – 5% Singapore – 4% Indonesia – 4% Currently, the fund also holds some smaller positions in the debt of the Philippines, India, Sri Lanka, Serbia, and Slovenia. These 13 countries are pretty much it. Sovereign wise, there is nothing here that is overly concerning to me given that the duration of the fund is so low. I like the fact that the managers have taken highly concentrated positions in the countries they feel have the strongest economic fundamentals. Hasenstab is clearly an investor and not an index hugger. This fund is by-and-large safe from the disaster awaiting holders of Japanese, Western European, and Southern European government debt. In fact, countries with strong fundamentals could see an influx of capital seeking safety as it flees these developed markets. Lastly, the fund is 28% in cash. This gives it ample room to meet client redemptions during a crisis and the flexibility to pounce on higher yielding debt when rates rise. Conclusion I think now is a good time to hold this fund if it is available in an employer-provided 401(k) plan. The hits to the fund from holding Ukraine government debt are behind it. Most notably, the fund is clearing avoiding the most dangerous risks to global bond investors. When it comes to the potential for a fixed income fund to deliver decent returns in the current market environment, Templeton Global Bond is an oasis in the midst of a desert. Investing Disclosure 401(k) Spotlight articles focus on the specific attributes of mutual funds that are widely available to American’s within employer provided defined contribution plans. Fund recommendations are general in nature and not geared towards any specific reader. Fund positioning should be considered as part of a comprehensive asset allocation strategy, based upon the financial situation, investment objectives, and particular needs of the investor. Readers are encouraged to obtain experienced, professional advice. Important Regulatory Disclosures I am a Registered Investment Advisor in the State of Pennsylvania. I screen electronic communications from prospective clients in other states to ensure that I do not communicate directly with any prospect in another state where I have not met the registration requirements or do not have an applicable exemption. Positive comments made regarding this article should not be construed by readers to be an endorsement of my abilities to act as an investment adviser. 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.