Category Archives: etf

Time For Investment Grade Corporate Bond ETFs?

Treasury bond yields are now at extremely low levels as investors are thronging this safe haven to beat global growth worries. Plus, monetary stimulus in various corners of the world and a still-dovish Fed have kept the yield low. The benchmark 10-year note yield was 1.71% as of May 13, 2016. Uncertainties are expected to remain in the marketplace for some more time because neither has oil recovered fully nor has any concrete solution been found yet for China, Japan and Eurozone. Yes, these economies are striving to boost growth, but sustained recovery is unlikely in the near term. In fact, the upheaval in global financial markets has forced the Fed to stay put so far this year even after raising the key interest rate for the first time after almost a decade. Many market watchers now expect the Fed to hike rates again in September and not in its next meeting in June. All these definitely point to lower Treasury yields, which is why Goldman Sachs cut its projection for 10-year US Treasury bond yields over the next few years. Many other banks also believe the same. Goldman Sachs now expects its year-end 10-year yield to be 2.4%, down from the 2.75% it projected in the first quarter. Bank of America Merrill Lynch pared down its forecast for the year-end 10-year yield to 2% from 2.65% at the beginning of the year. Morgan Stanley projects a lower 10-year yield at 1.75%, down from 2.7% when the year started. In short, yield-hungry investors intending to restrict their plays within the U.S. boundaries but not trying to expose themselves to the stock market uncertainties, would find investment grade corporate bonds compelling options. The investment grade U.S. corporate bond market has been on a decent path lately as these normally yield more than their Treasury cousins, with only a little rise in risk. Since corporate leverage is presently at its peak level in a decade (as per Goldman Sachs ), investors need to be aware of default risks. Now, default risk remains low if investors put their money into investment-grade bonds of some well-established companies. Further, if the global economic situation deteriorates and risk-off trade starts to prevail, high yield bonds will be hit harder than the investment grade bonds. Investors thus can take a look at below-mentioned investment-grade bond ETFs which offer solid yields and scope for decent capital gains. Investors should note that the below-mentioned ETFs yield higher than iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ) (as 30-day SEC yield of TLT was 2.44% as of May 11, 2016) and returned slightly better than it in the last one-month period (as of May 13, 2016). TLT was up about 1.4% in the last one month (as of May 13, 2016). SPDR Barclays Long Term Corp Bond ETF (NYSEARCA: LWC ) This fund intends to mainly measure the performance of U.S. corporate bonds that have a maturity of greater than or equal to 10 years. The corporate bonds have a high investment grade rating as well. The ETF has a weighted average maturity of 23.84 years and a weighted average duration of 14.03 years. The ETF is an appropriate choice for investors seeking high yield. The ETF’s yield-to-maturity hovers around 4.46% (as of May 12, 2016). The fund returned about 2.8% in the last one month (as of May 13, 2016). It has a Zacks ETF Rank #3 (Hold) with a High risk outlook. iShares 10+ Year Credit Bond ETF (NYSEARCA: CLY ) The fund holds a basket of 1,710 investment grade long-term bonds having a 30-day SEC yield of 4.20% (as of May 11, 2016). The fund does a good job by spreading its assets well among various sectors. Consumer Non-Cyclical tops the list with 13.90% allocation, followed by 12.30% to Communications and 9.8% to Electric. CLY has a weighted average maturity of 23.29 years and an effective duration of 13.11 years. The fund charges 20 basis points as fees. The fund was up about 1.6% in the last one month (as of May 13, 2016) and has a Zacks ETF Rank #3 with a High risk outlook. Vanguard Long-Term Corporate Bond ETF (NASDAQ: VCLT ) The fund holds a basket of 1,661 high-quality corporate bonds having a yield-to-maturity of 4.4%. The fund puts 69% weight in the industrials sector followed by 17.9% in finance. VCLT has a weighted average maturity of 23.9 years and an effective duration of 14.0 years. The fund charges 10 basis points as fees. The fund gained about 2.3% in the last one month (as of May 13, 2016) and has a Zacks ETF Rank #3 with a High risk outlook. Original Post

New ETF Offers Investors A High-Yield Haven

By Alan Gula In early 1998, Russia was hemorrhaging foreign exchange reserves. A number of factors were feeding into worries about Russia’s debt sustainability, including the Asian financial crisis in 1997, a decline in the price of crude oil, political instability, and widening fiscal deficits. Emergency loans from the International Monetary Fund (IMF) and the World Bank did little to stem the tide. On August 17, 1998, Russia devalued its currency (the ruble) and chose to default on its debt. The Russian crisis serves as a warning: Even government bonds can be very risky. Is the Risk Worth the Reward? Today, Russia’s five-year government bonds yield around 9%. In fact, Russia’s sovereign bonds are among the highest yielding of any country, as you can see in the following table: In a world seemingly starved for yield, these rates are all rather high. Indeed, very few investors like the sovereign debt in the table above, because the perceived risks are significant. Several countries’ economies on this list have suffered damage from the plunge in commodity prices, and many are in the throes of political turmoil or nasty recessions. There’s a lot to be worried about. Hence, these bonds are unpopular. But if popular investments should usually be avoided, then could these unloved bonds actually be attractive investments? High-Yield Sovereigns Typically, “high-yield” refers to sub-investment grade corporate bonds, or junk bonds. In ” Finding Yield in a 2% World ,” Mebane Faber, Chief Investment Officer at Cambria Investment Management, back-tested a high-yield government bond strategy. The universe comprised 30 countries from the Global Financial Data database and is sorted based on nominal yield. The top one-third of the bonds are bought, with periodic reconstitution. The results were fairly surprising. From 1950 to 2012, the high-yield strategy actually outperformed an equal weighting of all countries in the universe by around 2% per annum. The outperformance was also consistent across decades, including both rising and falling interest rate environments. The returns were U.S. dollar-based, but over the very long term, local real returns should be similar. The high-yield bond portfolio also seems to have outstanding diversification benefits. The table below compares the performance metrics for a traditional 60/40 portfolio with those of portfolios having 20% and 40% allocations to sovereign high-yield bonds. As the allocation to high-yield government bonds increases, returns rise, volatility decreases, and maximum drawdowns (peak-to-trough declines) are reduced. The more favorable risk/reward relationship is also shown by the rising Sharpe Ratio. Miraculously, adding unpopular, high-yielding sovereign bonds to a traditional portfolio can actually reduce risk, while increasing returns. Now, for most retail investors, buying sovereign bonds issued by Indonesia would prove challenging, to say the least. But there’s now a viable option… ETF to the Rescue Luckily, Faber’s firm launched the Cambria Sovereign High Yield Bond ETF (NYSEARCA: SOVB ) earlier this year. SOVB is one of the many new exchange-traded funds (ETFs) that gives investors convenient and cheap access to promising strategies. The ETF systematically buys the highest-yielding sovereign and quasi-sovereign bonds with sufficient liquidity. SOVB’s annual expenses are 0.59%, which is reasonable for an ETF that has exposure to smaller bond markets. For example, the WisdomTree Emerging Market Local Debt ETF (NYSEARCA: ELD ) has an expense ratio of 0.55%. Clearly, the data show that high-yielding government bonds are attractive long-term investments. Far more often than not, the worst-case scenario – such as a default or currency crisis – doesn’t materialize. Thus, investors wind up more than fairly compensated for risk exposures via the higher yields. And now that there’s a high-yield government bond ETF, I don’t want to hear any more complaints about the dearth of yield in this environment. Original Post

Gamable EPS And Share Buybacks

EPS (Earnings per Share) is a corporate metric that is often pursued by the corporate managers and executives to increase their own payouts, and confused by investors for a signal of company health. As is well known (and we show this in our Risk & Resilience course), EPS is a “gamable” metric – in other words, it can be easily manipulated by companies, often at the expense of actual balance sheet quality. And I have written about this problem here on the blog for ages now. So, here is a fresh chart from the Deutsche Bank Research (via @bySamRo) detailing share buybacks’ (repurchases) contribution to EPS growth: In basic terms, there is no organic EPS growth (from net income) over the last 7 quarters, on average, and there is negative EPS growth from organic sources over the last 4 consecutive quarters. As noted in my lecture on the subject of “EPS gaming”, there are some market-structure reasons for this development (basically, rise of tech-based services in the economy): Click to enlarge Source of Data: McKinsey Click to enlarge Source: McKinsey However, as the chart above shows, share buybacks simply do not add any value to the total returns to shareholders (TRS), and that is before we consider a shift in current buybacks trends toward debt-funded repurchases. So, in a sense, current buybacks are rising leverage risks without increasing TRS. Which is brutally ugly for companies’ balance sheets, and given debt covenants, is also bad news for future capex funding capacity.