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Should You Short S&P 500 With ETFs This Summer?

It seems that the S&P 500 has left its sunny days behind! This key U.S. index last hit a record high of 2,131 on May 21, 2015, and lost about 4.3% in the last one year (as of the May 19, 2016). As a matter of fact, the index suffered corrections ( down over 10% from previous highs) during this timeframe and could not really regain its lost ground. The hollowness of this one year becomes more prominent when you look at 45 record highs in 2013 and 53 in 2014, as per Wall Street Journal. Though the start of 2015 was equally grand with 10 highs till May 21, the journey afterward was simply lackluster. This makes it imperative to understand investors’ perception on the S&P 500 before it approaches its anniversary of highs on May 21, 2016. What’s Behind This Decline? There are plenty of reasons. One of the main factors is the global market crash that was induced by the Chinese currency devaluation and extreme plunge in oil prices last summer. Since then China and oil have been a pain in the neck. In addition to this, earnings recession, overvaluation concerns, Fed liftoff in December and ambiguity over the Fed’s next moves amid global growth issues challenged the broader market. If this was not enough, when market watchers were almost sure about a delayed policy tightening in the wake of threats to the stability of the U.S. economy, the latest Fed minutes hinted at the possibility of a June hike. As an instant reaction, the S&P 500 fell to its lowest level since March on May 19. The reason for this fall was the fear of shrinkage in liquidity in the stock market. Turbulent Times Ahead for S&P 500? A volley of upbeat data released lately on retail, housing, inflation and consumer sentiments may boost the Fed’s confidence that the economy can now digest an additional hike. Then again, the global market is still edgy and has all the power to derail the U.S. index if the Fed acts alongside. In today’s concept of an open economy, it is hard to bet on a large-cap stock index just on the basis of domestic market recovery. First, if the Fed strikes, the greenback will jump hurting the profitability of companies with considerable exposure in foreign lands. More than 30% of the S&P 500 revenues depend on international economies. Plus, investors should note that IMF, while slashing global growth forecasts recently, reduced the U.S. growth forecast for 2016 too from 2.6% to 2.4% . After all, though inflation is rising, it is yet to reach the level where it can digest further hikes comfortably. In April 2016, American inflation was at 1.13%. Notably, a rise in rates lowers inflation. Also, uncertainties regarding election in November flares up risk in the S&P investing. Earnings of the S&P 500 index are likely to decline 6.7% in the first quarter of 2016 while revenues are expected to fall 1% as per the Zacks Earnings Trends issued on May 18. Though the trend looks up from the second quarter onward with expected earnings reduction of 6% for the ongoing quarter, earnings growth of 0.4% in Q3 and again growth of 7.3% in Q4, it is less likely for the S&P 500 to jump before late second half. Analyst Bearish on S&P 500 In March 2016, Goldman commented that the index in overvalued. It recently noted that “the forward P/E multiple of the S&P 500 index ranks in the 86th percentile relative to the last 40 years. They note that the median stock in the index trades at the 99th percentile of its historical valuation on most metrics.” Goldman also noted that historically the S&P 500 index is fairly range-bound until November in a presidential election year. Bank of America believes that the S&P 500 could slip to its February lows, while Morgan Stanley has applied the famous maxim “Sell in May and go away” to stocks at least till November. All in all, no great news is expected from the S&P 500 in the coming summer. Short via ETFs? Going by the above thesis, the S&P 500 will likely see rough trading ahead, but investors could easily profit from this decline by going short on the index. There are a number of inverse or leveraged inverse products in the market that offer inverse (opposite) exposure to the index. Below we highlight those and some of the key differences in each: ProShares Short S&P500 ETF (NYSEARCA: SH ) This fund provides unleveraged inverse exposure to the daily performance of the S&P 500 index. ProShares UltraShort S&P500 ETF (NYSEARCA: SDS ) This fund seeks two times (2x) leveraged inverse exposure to the index. ProShares UltraPro Short S&P500 (NYSEARCA: SPXU ) Investors having a more bearish view and higher risk appetite could find SPXU interesting as the fund provides three times (3x) inverse exposure to the index. Direxion Daily S&P 500 Bear 3x Shares (NYSEARCA: SPXS ) Like SPXU, this product also provides three times inverse exposure to the index. Bottom Line We would also like to note that the relative strength index of the S&P 500 based ETF (NYSEARCA: SPY ) is presently 43.92. This indicates that the fund is yet to enter the oversold territory. Original post

4 Energy Mutual Funds To Buy As Oil Prices Move North

For a considerable period of time, the energy sector was plagued by an abundant supply of oil. While major oil producing nations pumped oil, demand moved south on global economic sluggishness. However, disruptions in oil suppliers, including Nigeria and Canada, were more than welcome by the beleaguered energy sector. U.S. shale output is also likely to decline in June says the U.S. Energy Information Administration (EIA). These factors collectively helped U.S. crude price to reach a seven-month high on Tuesday and the Goldman Sachs Group, Inc. (NYSE: GS ) to have a bullish outlook. The banking behemoth went a step further saying that it expects crude demand to improve this year, which will further reduce the demand-supply disparity. Given these positive trends, investing in energy mutual funds won’t be a bad proposition. Nigerian Saboteurs, Canadian Wildfires Supply outages in Nigeria along with wildfires in Canada continue to boost oil prices. In Nigeria, attacks by a militant group called Delta Avengers on oil installations led to shut down in production. Nigeria reduced its crude production to 1.69 million barrels per day (bpd), hitting its lowest level in 22 years. The group has recently bombed an offshore platform owned by Chevron Corporation (NYSE: CVX ). Among the other attacks, this group targeted a series of refineries and an export terminal. The Alberta region in Canada has, on the other hand, been under fire for two weeks now that is threatening major oil sands production facilities. According to the Conference Board of Canada, these facilities are estimated to produce 1.2 million barrels a day, which almost comprise $1 billion in economic activity. Investors are also keeping an eye on other oil producing nations such as Venezuela and China. Venezuela is in the grip of a serious economic crisis. The country is currently operating under a “constitutional state of emergency,” thanks to its high inflation rate and shortages in food and power. Meanwhile, China witnessed crude output of 4.04 million bpd in April this year, reflecting a 5.6% decline from the year-ago level. Goldman Projects Deficit in Oil Market Supply shortages mostly in Nigeria and Canada prompted Goldman Sachs to say that the oil market is facing a deficit in crude production. Goldman reversed its bearish bet and raised its oil price forecast for this year to $51 a barrel. A few months ago, Goldman projected that oil prices would remain around $20 per barrel following crude oversupply. Goldman also said that “the oil market has gone from nearing storage saturation to being in deficit much earlier than” it anticipated. U.S. Shale Oil Output Declines According to the monthly report from the EIA, output from seven major U.S. shale plays is likely to fall by 113,000 bpd to 4.85 million bpd in June. The profitability of shale drillers has been seriously affected, leading to such a projection. At the Eagle Ford shale play in South Texas, oil output is expected to witness the highest drop, down 58,000 barrels in June. The Bakken Shale play, which stretches from Canada into North Dakota and Montana, will experience the second largest decline in output, a projected fall of 28,000 bpd, the report mentioned. Top 4 Energy Mutual Funds to Invest In Oversupply of oil has always been a major concern for energy companies. But, as mentioned above, supply side disruptions have helped oil prices gain momentum. Demand, on the other hand, is expected to gain traction. Goldman projects 2016 worldwide crude demand to improve by 1.4 million bpd, which is higher than its prior expectation. This will further bridge the gap between supply and demand. Banking on these bullish trends, it will be judicious to invest in mutual funds that have considerable exposure to the energy sector. We have selected four such energy mutual funds that have given impressive year-to-date returns, boast a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy), offer a minimum initial investment within $2,500 and carry a low expense ratio. Funds have been selected over stocks, since funds reduce transaction costs for investors. Funds also diversify the portfolio without the numerous commission charges that stocks need to bear. Fidelity Advisor Energy Fund A (MUTF: FANAX ) invests a major portion of its assets in securities of companies engaged in the energy field, including the conventional areas of oil, gas, electricity and coal. FANAX’s year-to-date return is 12.5%. Annual expense ratio of 1.11% is lower than the category average of 1.47%. FANAX has a Zacks Mutual Fund Rank #2. Guinness Atkinson Global Energy Fund (MUTF: GAGEX ) invests the majority of its assets in equity securities of both U.S. and non-U.S. companies engaged in the production, exploration or discovery, or distribution of energy. GAGEX’s year-to-date return is 12.1%. Annual expense ratio of 1.41% is lower than the category average of 1.47%. GAGEX has a Zacks Mutual Fund Rank #2. Vanguard Energy Fund (MUTF: VGENX ) invests a large portion of its assets in the common stocks of companies involved in activities in the energy industry, such as the exploration, production and transmission of energy or energy fuels. VGENX’s year-to-date return is 16.4%. Annual expense ratio of 0.37% is lower than the category average of 1.47%. VGENX has a Zacks Mutual Fund Rank #1. Fidelity Select Energy Service Portfolio (MUTF: FSESX ) invests a major portion of its assets in securities of companies engaged in the energy service field, including those that provide services and equipment to the conventional areas of oil, gas, electricity, and coal. FSESX’s year-to-date return is 5.1%. Annual expense ratio of 0.81% is lower than the category average of 1.47%. FSESX has a Zacks Mutual Fund Rank #2. Original Post

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