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Hedge Rising Yields With These Junk Bonds ETFs

The path of junk bond ETFs has been patchy for the last couple of months. The space put up a dull show in 2014. The acute plunge in oil prices in the second half of the last year weighed heavily on the space, especially on the energy bonds. This was because the U.S. energy companies spread their presence widely to the high-yield bond market to materialize the shale-oil boom. Thus, fears of their default amid the oil price massacre prompted junk bond sell-offs. Since things have not meaningfully improved on the oil price front especially with the signing of the Iran nuclear deal and sluggish global demand backdrop, junk bonds started taking cues from the Fed interest rate policy. The Fed emphasized the strong U.S. growth momentum in the second half of 2015 that alternatively means the start of policy tightening sometime later this year. The exit from the rock-bottom interest rate policy would raise yields on the treasury notes, thereby hurting the bonds’ prices. In such a scenario, junk bond ETFs could emerge as intriguing options as these are high-yield in nature. Demand for strong and steady current income will likely prevail in the coming months. Investors’ drive for higher yield has become so obvious in the zero-or-negative-yield scenario in the Euro zone and Japan that the global high-yield space has gained immense traction lately, even at the cost of higher risks. Meanwhile, Grexit worries that brewed for over a month frittered away lately with the approval of a new bailout program. Chinese stocks have also stabilized after a wild rout. All these whet investors’ risk-on sentiments to some extent. As a result, the ultra-popular iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA: HYG ) and SPDR Barclays Capital High Yield Bond ETF (NYSEARCA: JNK ) enjoyed ‘their largest daily inflows’ in the week ended July 17, 2015. On July 15, JNK and HYG witnessed 4% and 2.23% rise in AUM topping the fixed income list, per etf.com . In such a backdrop, junk bond ETFs with outsized yield mentioned below may weather the rising rate risks to a large extent. These funds could provide investors with a strong income potential and relatively stable returns while maintaining low correlated assets, and thus could be in focus for high-yield seekers: Interest Rate Hedged High Yield Bond ETF (NYSEARCA: HYGH ) Along with high yield, this fund hedges rise in rates and thus serves as an option to play rising yield in the U.S. The fund holds in its basket iShares iBoxx $ High Yield Corporate Bond ETF while taking short positions in U.S. Treasury futures to diminish rising rate concerns. HYGH has a weighted average maturity of 4.60 years while its effective duration stays ultra-low at negative 0.32 years. HYGH is high yield in nature as evident from its 30-day SEC yield of 5.68%. HYGH charges 0.55% of expense ratio. The fund added about 1.8% in the last five trading sessions (as of July 16, 2015) and is up 0.8% year to date. ProShares High Yield Interest Rate Hedged ETF (BATS: HYHG ) This fund also behaves in the same fashion as that of HYGH while tackling rising rate worries. Its strategy is to take a short position in U.S. Treasury futures. Like HYGH, it also has a pretty high yield (and a modest expense ratio of just 50 basis points) of 5.6% in 30-Day SEC terms, indicating that this could be a safer bond and yield play for investors anxious about the possibility of rising rates. This $105.8 million ETF was up 1.8% in the last five trading sessions (as of July 16, 2015). High Yield Long/Short ETF (NASDAQ: HYLS ) The fund seeks to provide current income by investing primarily in a diversified portfolio of below investment-grade or unrated high-yield debt securities. Though capital appreciation is its secondary motive, it has added a bit this year, gaining 4.5% YTD. The product thrives on long-short strategies. Net weighted average effective duration (considering the short positions) is 2.91 years indicating low interest rate risks. The fund is meant for an intermediate term as evident from 6.18 years of weighted average maturity. The product is expensive with an expense ratio of 1.29% per annum. Volume is light, trading in less than 35,000 shares per day that ensures extra cost for the product in the form of a wide bid/ask spread. The fund yields 6.40% (as of July 16, 2015). iShares Global High Yield Corporate Bond Fund (BATS: GHYG ) This fund tracks the Markit iBoxx Global Developed Markets High Yield Index. The index captures the performance of the global high yield corporate bond market. The fund’s effective duration stands at 4.09 years suggesting moderate interest rate risk. It charges an expense ratio of 40 bps and yields around 4.90%. The fund has added about 1.1% so far this year and was up over 1.9% in the last five trading sessions. Original Post

ETFs To Play 3 Undervalued Sectors

Though a mountain of woes punctured the U.S. market momentum in the first half of 2015 with the S&P 500 barely adding gains thanks to global growth worries, rising rate concerns and specifically the strength of the dollar, the second half looks to be shaping up in a great way. Greece worries have tailed off as the nation somehow managed to strike a debt deal with its international lenders, in turn soothing the nerves of global investors. Back home, the all-important Q2 earnings season got off to a strong start with Finance sector – the backbone of any economy – living up to expectations. All these once again fueled up the market with the Nasdaq registering consecutive record highs in mid-July and the S&P 500 trading at just 0.3% discount to its all-time high hit in May due to the massive rally we’ve seen since for the last six years. So, one might wonder if any value sector is left at all. A value play is especially required given the disappointing earnings string from a few tech bellwethers that has made investors jittery. No doubt, with all the major indices trading at around all-time highs, it is hard to find value plays at home. But for those investors fervently looking for undervalued sectors, there are still a few hidden treasures out there. While several indicators are used to examine any stock or sector’s valuation status, price-to-earnings ratio or P/E has been the most widespread. We have identified three sector picks having the lowest forward P/E ratio for this year’s earnings in the pack of 16 S&P sectors classified by Zacks and detail the related ETFs to play those sectors’ undervalued status. Auto – First Trust Nasdaq Global Auto ETF (NASDAQ: CARZ ) The U.S. automotive industry is accelerating with rising income, persistently lower energy prices, a low interest rate environment, and growing consumer confidence. All these drove auto sales 4.4% higher to 8.52 million units in the first half of 2015, signifying the best six months in a decade. And if this was not enough, auto sales are likely to hit 17 million in full-year 2015, a level never touched in the last 15 years. Despite strong fundamentals, the sector has a P/E ratio of 10.8 times for 2015 and 9.3 times for 2016, the lowest in the S&P universe, as per the Zacks Earnings Trend issued on July 16. Investors should note that the P/E of auto industry trades at 41.3% discount to the current year P/E of S&P and 43.6% discount to the next year P/E. The space is down 4.5% so far this year which says that it is time to turn its loss into your gains. Investors should note that there is only a pure play CARZ in the space that provides global exposure to nearly 40 auto stocks by tracking the Nasdaq OMX Global Auto Index. CARZ has a Zacks ETF Rank #2 (Buy) and is up 1.2% so far this year (as of July 20, 2015). Finance – Vanguard Financials ETF (NYSEARCA: VFH ) The financial sector has set an upbeat tone this earnings season. Several factors including fewer litigation charges, effective cost control measures, loan growth and investment banking activities have given Q2 earnings a boost and made up for still-the low interest rate environment which has long been bothering the sector’s revenue backdrop. Investors should also note that the Fed is preparing for an interest rate lift-off which will pave the way for financial stocks and the related ETFs going forward. The space has a current-year P/E of 14.3 times, a 22.3% discount to the S&P while its next year P/E stands at 13.1 times, a 20.6% discount to the S&P 500’s 2016 P/E. The space has added 2.2% so far this year (as of July 20, 2015). While there are plenty of financial ETFs, investors can take a look at Zacks #1 (Strong Buy) ETF VFH. This $3.48-billion ETF holds a broad basket of over 550 stocks in its portfolio. The fund is up 3.7% so far this year. Transportation – iShares Dow Jones Transportation Average Fund (NYSEARCA: IYT ) This one could be a risky bet as the sector is out of favor right now, having retreated big time from the year-to-date frame (down over 12%). A strong dollar is taking a toll on the profits of big transporters, but other drivers including stepped-up economic activities and cheap fuel are still alive and kicking. This raises optimism on the transportation sector going forward. Actually, transportation stocks gave a havoc performance last year having advanced over 25%. Thus, probably overvaluation was the concern which pushed the space in the bear territory. The current and the next year P/Es for the sector are 13.2 and 12.6 times, a 28.3% and 23.6% discount to the S&P 500, respectively. One way to play this trend is with iShares Dow Jones Transportation Average Fund, which tracks the Dow Jones Transportation Average Index and holds 20 stocks in its basket. The fund has a Zacks ETF Rank #3 (Hold) with a High risk outlook. Original Post

Investing Beyond The Borders

By Charissa Cashin, Director Fund Product Management and Development – Principal Funds After World War II, the U.S. became the world’s undisputed economic leader. American investors looking for a wide range of opportunities needed to look no further than their own back yards. Investing outside the U.S. was seen as unnecessarily risky. But today, even with the Greece-triggered euro commotion and the China stock market turmoil, those who think international investing is too risky should keep the following in mind. In China, India, and Brazil alone, the growing middle classes have propelled these economies to the size of the industrialized “G7” countries. By 2050, these countries are predicted to make up nearly half of world output, far exceeding the G7. While America undoubtedly still has a wealth of innovative companies and market leaders, opportunities abroad are increasingly plentiful. And although international investing may not be for everyone and certainly involves some risk, ignoring the opportunities beyond our borders means passing up on the potential for additional growth. Markets outside the U.S. may offer some of the best investing opportunities available right now. Technology companies in Asia are great examples. Everyone thinks of Apple (NASDAQ: AAPL ) when they think of tech stocks, but what they don’t always realize is that a lot of its components are made overseas. Those manufacturers are making a lot of money, but they’re not as overexposed as Apple – which creates a buying opportunity. There are also good prospects for under-appreciated growth in Europe, which has a lot of global, export-oriented companies. And with the strengthening of the dollar, there may be more purchasing power for these products outside of Europe. Emerging markets may be another area of opportunity. After sub-par performance over the last few years, some of these markets may offer outstanding values. Active managers keep an eye open for values like these that can lean to uncommon buying opportunities. International investing is an important way to build diversification in your portfolio. That’s because international equities don’t always move in the same way as domestic equities. When international equities are up, for instance, domestic equities may be down – and vice versa. This kind of potential for low correlation can help reduce a portfolio’s overall volatility. Add to that the potential for growth available internationally, and you have some very good reasons for considering investments beyond the U.S. borders.