Scalper1 News
Global stocks were in a mess in 2015, stymied by the sudden currency devaluation in China, spiraling Chinese economic slowdown and the resultant shockwaves across the world. Also, the return of deflationary threats in Eurozone despite the QE measure, a sagging Japanese economy, the oil price rout and a slouching broader market complicated the scenario. Back home, putting an end to prolonged speculation, the Fed finally hiked the key interest rate by 25 bps at the tail end of the year. All these put the New Year in a critical juncture. The investing world may be at a loss of ideas on where to park money for smart gains. For them, below we detail possible asset class movements in 2016 and the likely smart ETF bets. Bull or Bear in 2016? The million-dollar question now is whether U.S. stocks will buoy up or drown in 2016. While policy tightening and overvaluation concerns give cues of an end to the bull run, a dubious performance in 2015 raises hopes that the stocks will rebound soon. After all, the Fed is not hiking rates to rein in inflation. The tightening is reflective of U.S. economic growth and lower risk of deflation, both of which are encouraging for stocks. Thus, stocks should offer decent, if not spectacular, returns next year. Investors can capitalize on a steady U.S. economy via the momentum ETF iShares MSCI USA Momentum Factor (NYSEARCA: MTUM ) . To rule out the negative impact of a higher greenback, investors can also try out more domestically focused small-cap ETFs; but a value notion is desirable to weather heightened volatility. S&P Small-Cap 600 Value ETF (NYSEARCA: VIOV ) is one such fund. Investors dreading interest rate hike may also try out this rate-restricted ETF PowerShares S&P 500 ex-Rate Sensitive Low Volatility ETF (NYSEARCA: XRLV ). Sectors to Hit & Flop Since investors will be busy in speculating the pace and quantum of Fed rate hikes in 2016, rate sensitive sector ETFs would be winners and losers. Financial sector ETF PowerShares KBW Bank ETF (NYSEARCA: KBWB ) and insurance ETF Dow Jones U.S. Insurance Index Fund (NYSEARCA: IAK ) generally perform better in a rising rate environment. Plus, Consumer Discretionary ETFs like Consumer Discret Sel Sect SPDR ETF (NYSEARCA: XLY ) and tech ETFs like Technology Select Sector SPDR ETF (NYSEARCA: XLK ) also perform well in the early rate hike cycle as per historical standard. Lower gasoline prices should also help consumers to create a wealth effect. On the other hand, high-yielding sectors and the sectors which are highly leveraged will falter in a rising rate environment. So Utilities Select Sector SPDR ETF (NYSEARCA: XLU ) and Vanguard REIT ETF (NYSEARCA: VNQ ) could be at risk. Having said this, we would like to note that these are just initial blows and after a few upheavals, the market movement should even out. Where Will Bond Markets Go? The year 2016 may mark the end of the prolonged bull run in the bond market as the first U.S. rate hike in a decade may make investors jittery in 2016. This is more likely if rates steadily move up in the coming months, with the Fed’s current projections hinting at four rate hikes in 2016. Agreed, interest rates environment remained benign even after the lift-off, owing to the global growth worries. But the scenario may take a turn in 2016 if economic data come on the stronger side, inflation perks up and wage growth gains momentum. On the other hand, the possibility of another solid year for fixed income securities can’t be ruled out, especially when stocks are not that cheap. However, investors should note that yield curve is likely to flatten ahead. Since the inflation scenario is still muted, long-term bond yields are expected to rise at a slower pace while short-term bond yields are likely to jump. Yield on the 6-month Treasury note soared 39 bps to 0.50% since the start of the year (as of December 29, 2015) while the yield on the two-year Treasury note jumped 43 bps to 1.09% and the yield on the 10-year Treasury note rose just 18 bps to 2.32%. Thanks to the potential flattening of the yield curve, the inverse bond ETF iPath US Treasury Flattener ETN (NASDAQ: FLAT ) could be a hit next year. Now that interest rates will be topsy-turvy, floating rate ETFs like iShares Floating Rate Bond (NYSEARCA: FLOT ) should do better going ahead. Investors can also take a look at the interest rate-hedged high yield bond ETFs as solid current income from these securities can make up for capital losses. High Yield Interest Rate Hedged ETF (BATS: HYHG ) is one such option, yielding over 6.50% annually. However, one should also note that the high-yield bond market is presently undergoing a tough time due to the energy market default. So, less energy exposure is desired in the high-yield territory. About 14% of HYHG is invested in the energy sector. Drive for Dividends The Fed may hike key interest rates, but it has hardly left any meaningful impact on long-term treasury yields. So, the lure for dividends will remain intact. U.S.-based dividend ETFs including Vanguard High Dividend Yield ETF (NYSEARCA: VYM ) and Schwab US Dividend Equity ETF (NYSEARCA: SCHD ) could be useful for investors in waiting out the volatility via current income. Want to Visit Abroad? Where? It’s better to stay diversified as far as the global market investing is concerned. Due to the divergence in monetary policies between the U.S. and other developed economies, many analysts are wagering on Europe and Japan (where substantial and prolonged QE reassures are on). Per an analyst , earnings in both regions “will make them attractive from a standpoint of possible capital appreciation.” Plus, the European markets were in occasional disarray this year due to economic hardships. This has made the stocks compelling. However, currency-hedging technique is warranted while visiting foreign shores. Europe Hedged Equity Fund (NYSEARCA: HEDJ ) and Japan Hedged Equity Fund (NYSEARCA: DXJ ) are two choices in this field. Investors can also stop over at China but with a strong stomach for risks. Golden Dragon Halter USX China Portfolio (NYSEARCA: PGJ ) should be a modest bet for this. Occasional Volatility to Crack the Whip Volatility has been pretty strong in the market in 2015 and the trend should continue in 2016. Investors can deal with this in various ways. First comes low volatility ETFs like SPDR S&P Low Volatility ETF (NYSEARCA: SPLV ) and iShares MSCI Minimum Volatility ETF (NYSEARCA: USMV ) , second are defensive ETFs like U.S Market Neutral Anti-Beta Fund (NYSEARCA: BTAL ) and AdvisorShares Active Bear ETF (NYSEARCA: HDGE ) , and last but not the least in queue are the volatility ETFs themselves such as C-Tracks on Citi Volatility Index ETN (NYSEARCA: CVOL ) and ProShares VIX Short-Term Futures (NYSEARCA: VIXY ) . Notably, as the name suggests volatility products are quite rowdy in nature and thus suit investors with a short-term notion. Original Post Scalper1 News
Scalper1 News