Tag Archives: zacks funds

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

Goldman Raises Yellow Flag On 2016: ETFs To Buy

While the investing world is busy celebrating expected gains coming their way in the three months from November through January – known as the most successful session of the stock market – Goldman Sachs’ latest prediction of a weak market next year, might be jarring to their ears. The sought-after investment broker 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 2,088.87, meaning almost no change in gains in the coming 13 months. Considering dividends, Goldman estimates stocks to return merely 3% next year, which is a repetition of this year’s scenario. Notably, among the top ETFs, investors have seen the S&P 500-based SPY adding about 1.5%, Dow-based DIA being almost flat and Nasdaq-based QQQ advancing 10.6% so far this year (as of November 25, 2015). As per Goldman, higher interest rates post lift-off with their resultant strength in the greenback along with a soft profit outlook are behind this pessimism in the market. Plus, Goldman hints at the overvaluation of stocks at the current level. Added to this, Goldman indicated that P/E has a propensity to decline 10% in the six months after the first Fed lift-off, which is to take place in December, if macroeconomic conditions remain the same. While the tech sector has given a stellar performance lately, as per Goldman, ‘even tech sector profit margins have probably peaked at this point’. Finally, Goldman projects average EPS growth at around 10% in 2016 for the S&P 500 companies – perhaps with the help of stock buyback and not entirely through operating excellence. Still this expected increment indicates an improvement from this year. Goldman suggested investors to play the stocks of those companies which generate fewer revenues from outside of the U.S. border. This way investors can mitigate the negative currency fluctuations on a rising dollar. Goldman’s prescribed stocks are the likes of Amazon (NASDAQ: AMZN ), Chipotle Mexican Grill (NYSE: CMG ), and Wells Fargo (NYSE: WFC ). Though Goldman’s suggestions are for the worst case scenario, we also believe less exposure to the international market could be a way to win next year. We have profiled a few ETFs below to play Goldman’s stock pick in a basket manner as this is always a safer option than single stock selection. iShares U.S. Financial Services ETF (NYSEARCA: IYG ) Goldman’s favorite Wells Fargo takes the top spot of this $841-million financial ETF. After all, this is the right time to play the financial sector as this tends to outperformance in a rising rate environment. The fund charges 45 bps in fees and is up about 2.2% so far this year. It has a Zacks ETF Rank #2 (Buy). First Trust Dow Jones Internet Index (NYSEARCA: FDN ) Amazon gets the first place (11.7%) in this $4.78-billion Internet ETF. The fund charges 54 bps in fees per year. In total, the fund holds 41 stocks. The tech sector in any case is soaring now. From a sector look, Internet mobile applications account for 40% of the portfolio while Internet retail makes up for 22%. The ETF has a Zacks ETF Rank #2 and is up about 25%. The Restaurant ETF (NASDAQ: BITE ) U.S. restaurants are placed in the top 37% quartile of the Zacks Industry Rank system and are on the growth path as consumers are increasingly eating out. While the cost structure is low for these restaurateurs on falling agricultural commodity prices, many U.S. restaurants do not have much exposure to the foreign lands. This makes BITE a nice bet. No stock accounts for more than 3.09% weight in the 45-stock portfolio. Chipotle takes about 2.43% of the fund. BITE charges 75 bps in fees. Original Post

Mixed Views On Emerging Markets: Funds To Buy And Sell

There are mixed views on emerging markets now. According to a report from Bank of America Merrill Lynch, fund managers have mostly been pessimistic about emerging-market equities since 2001. On the other hand, some strategists at leading banks and financial companies believe that securities from emerging markets may have hit their lowest point. Amid the contradictory opinions, certain market experts are of the view that investors often invest in emerging market funds too late or they stay invested for too long. So, while buying certain favourably ranked emerging market funds at a discount now should be a prudent move, investors may also dump certain Sell-rated funds that their portfolio will not miss. The Pessimism According to Bank of America Merrill Lynch’s monthly survey, fund managers are the most underweight on emerging-market equities against developed-market equities since the survey began in 2001. While post 2009, fund managers’ relative positioning had jumped and stayed mostly in the green till 2013, the sentiment soured after that. In 2014, the sentiment dropped to a new low before rebounding in late 2014 and early 2015. However, the sentiment is the most pessimistic now. The bearish outlook is concentrated mostly on Asia. Investors are apprehensive about the slowdown in China’s economy while the U.S. central bank may hike rates. The International Monetary Fund (IMF) meeting on Nov 30 is also crucial. Investors fear further devaluation in the Chinese currency but not before IMF adds the yuan to its Special Drawing Rights basket of currencies. And if this happens, Bank of America strategists fear that the markets will move even lower. Goldman Sachs projects that yuan traded at offshore rate may weaken by 2.5% to 3% against the dollar in the next 2 months. Eventually, the devaluation of yuan may impact other emerging-market currencies, as they are often influenced by the monetary policies in the world’s second-largest economy, China. The Contrarian View Meanwhile, market watchers at a number of leading banks and financial institutions have said that they believe asset values for emerging markets have hit a rock bottom. In fact, the views come from the likes of Bank of America, Goldman Sachs and Barclays PLC. Following three continuous years of losses, markets and assets from developing nations are poised for a rebound. According to Morningstar, in the 12 months ended October, emerging-market stock funds traded in the US dropped an average 13.4%. A major indicator of valuations for emerging markets is the MSCI Emerging Markets Index, which is down 30% from the high achieved in 2011. The index is currently trading at approximately 12x its earnings estimates. Additionally, the index’s valuation is nearly three times lower than the S&P 500’s current figure. This is why analysts at Barclays believe that prices of emerging market securities are significantly lower than their intrinsic value. Over the six-month period since the last three American market tightening cycles began, global markets have gained an average 15%. Strategists are also hopeful that emerging markets might rebound in 2016. They say that it might not mirror the “roaring”2000s, but 2016 might be the year the emerging markets “find their feet”. 2 Emerging Market Funds to Buy As mentioned earlier, investors should not miss the buying opportunity. An uptrend in emerging economies brings good tidings for investment instruments from these countries. Many of them currently have reasonable valuations compared to their historical averages. Below we present 2 International Bond – Emerging Market mutual funds that carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or Zacks Mutual Fund Rank #2 (Buy). Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund. Fidelity New Markets Income (MUTF: FNMIX ) fund invests the lion’s share of its assets in emerging markets or makes other investments that are economically linked to emerging markets that have stock markets as defined by MSCI. These emerging market countries also may also be the ones with low- to middle-income as classified by the World Bank. FNMIX currently carries a Zacks Mutual Fund Rank #1. FSRPX has gained respectively 3.7% and 0.2% in the year-to-date and 1-year periods. The 3- and 5-year annualized returns are 1.2% and 5.4%, respectively. Annual expense ratio of 0.84% is lower than the category average of 1.16%. Goldman Sachs Emerging Market Debt A (MUTF: GSDAX ) predominantly invests in emerging market debt securities. These instruments may be issued by governments as well as corporate entities. To gain exposure to certain emerging economies, GSDAX may use structured securities or derivatives among others. GSDAX currently carries a Zacks Mutual Fund Rank #2. GSDAX has gained respectively 2.8% and 0.5% in the year-to-date and 1-year periods. The 3- and 5-year annualized returns are 1.5% and 5.1%, respectively. Annual expense ratio of 1.24% is higher than the category average of 1.16%. 2 Emerging Market Funds to Sell It is also important to not stay invested in certain underperforming funds. For investors not ready to bet on the emerging markets now or for investors who have lost plenty staying invested in some emerging market funds, below we present 2 funds that either carry a Zacks Mutual Fund Rank #4 (Sell) or Zacks Mutual Fund Rank #5 (Strong Sell). Eaton Vance Emerging Markets Local Income A (MUTF: EEIAX ) gains exposure to the emerging economies by investing in securities and derivatives among other instruments. Bulk of EEIAX’s assets are invested in securities denominated in currencies of emerging market countries, fixed income instruments that are issued by emerging market entities, and in emerging-market denominated derivative instruments. EEIAX currently carries a Zacks Mutual Fund Rank #5. EEIAX has lost respectively 10.6% and 16.5% in the year-to-date and 1-year periods. The 3- and 5-year annualized returns are negative 7.2% and negative 2.5%, respectively. Annual expense ratio of 1.25% is higher than the category average of 1.16%. PIMCO Emerging Markets Currency A (MUTF: PLMAX ) invests most of its assets in currencies of emerging market countries or in fixed income instruments denominated by these currencies. PLMAX currently carries a Zacks Mutual Fund Rank #4. PLMAX has lost respectively 5.2% and 9.7% in the year-to-date and 1-year periods. The 3- and 5-year annualized returns are negative 4.7% and negative 2.4%, respectively. Annual expense ratio of 1.25% is lower than the category average of 1.58%. Original post