Tag Archives: flat

8 ETFs To Watch In December

Traditional investors may pin hopes on the Santa Claus rally in the most successful month of the year, i.e., December, but they should note that this time Christmas might be a little dull, defying the natural progression of the end-of-season rally. A consensus carried out from 1950 to 2013 has revealed that December has ended up offering positive returns in 49 years and negative returns in 16 years, with an average return of 1.59%, as per Moneychimp , the best of the year. But this year, the Fed is scheduled for a rate hike after a decade, provided the economic momentum remains the same. And though the move now seems well digested by the market, a certain shock is inevitable post lift-off. In any case, 2015 had been quite downbeat so far. Even historically strong months couldn’t live up to investors’ expectations. All these made December a keenly watched month for the investing legion. We thus pinpoint a few ETFs that are highly in focus and could hop or drop in December. iPath U.S. Treasury Flattener ETN (NASDAQ: FLAT ) As the Fed hikes the benchmark interest rate, the initial blow would be at the short-end of the yield curve. The investing world has already started to prepare for the move. As a result, yield on the 6-month Treasury note soared 15 bps, from the 0.27% level seen at the start of November to 0.42% on November 30. In the same time frame, the yield on the 10-year Treasury note rose just 1 basis point to 2.21%. In fact, in the recent sessions, yields on 10-year U.S. Treasuries declined, indicating a flattening of the yield curve. So, a keen watch on the inverse bond ETF FLAT is needed to earn some quick gains from the bond market. This product provides inverse exposure to the Barclays US Treasury 2Y/10Y Yield Curve Index, which delivers returns from the steepening of the yield curve through a notional rolling investment in U.S. Treasury note futures contracts. FLAT was up 1.3% in the last one month. ALPS Barron’s 400 ETF (NYSEARCA: BFOR ) This all-cap U.S. equity ETF could be in watch in December. The fund could be used as a representative of the total stock market performance in a volatile (expectedly) month. It is made up of high-quality U.S. stocks. Since the month of December is likely to stay volatile and large-cap stocks might be hurt by a rising greenback post Fed tightening, an all-cap quality U.S. ETF might be the key to win ahead. ALPS U.S. Equity High Volatility Put Write Index ETF (NYSEARCA: HVPW ) The markets are likely to be wobbly post lift-off, and volatility levels should spike. Going bull on high-beta stocks may lead you to losses then. If this happens, investors can have a look at alternative ETFs like HVPW. The fund looks to take advantage of the stocks with the highest volatility in the U.S. equity markets. As the volatility in a given stock rises, so does the price of the options traded on it. The underlying index of the fund seeks to generate income by selling put options on the most volatile stocks in a given two-month period, along with interest earned on T-bills. HVPW added over 0.6% in the last one month. Vanguard High Dividend Yield ETF (NYSEARCA: VYM ) Since income ETFs underperform when rates rise, this high-income U.S. equities ETF might fall out of investors’ favor in December. However, still-subdued inflation and global growth worries might keep the yields on benchmark 10-year U.S. Treasury from rising fast. If this happens, VYM may not be as hit as it is feared right now. As of November 30, 2015, the fund yielded about 3.09%, while the yield on benchmark 10-year U.S. Treasury is 2.21%. VYM is down about 0.9% in the last one month (as of November 30, 2015). iShares U.S. Preferred Stock ETF (NYSEARCA: PFF ) Even in a rising rate environment, there are ways beat to the benchmark Treasury yield and earn smart income. Preferred stocks are one such option. Preferred stocks are hybrid securities that are characterized by both debt and equity. They have a higher claim on assets and earnings than common stock. These securities are less volatile than stocks, and yield in the range of 5-6%. PFF yields 5.87% as of November 30, 2015, while it charges 47 bps in fees. The fund was up about 3% in the last one month. iShares Russell 2000 ETF (NYSEARCA: IWM ) Small-cap stocks are the barometer of domestic economic health. So, when the U.S. economy shifts gear in December and experiences policy normalization, small-cap stocks should be the most beneficial zone. While small-cap growth ETFs like the PowerShares Fundamental Pure Small Growth Portfolio ETF (NYSEARCA: PXSG ) and the iShares Russell 2000 Growth ETF (NYSEARCA: IWO ) have already started rallying, we believe these could be high-risk choices, as smaller-capitalization and growth stocks are highly volatile in nature and succumb to a slowdown once the Fed hikes rates. So, investors can keep a close watch on small-cap blend ETFs like IWM. This Zacks Rank #2 (Buy) ETF was up over 3.2% in the last one month. WisdomTree International Hedged Dividend Growth ETF (NYSEARCA: IHDG ) While the Fed is preparing for a hike, other developed economies of the world and a few emerging economies are going the opposite direction. Due to growth issues, global superpowers like Europe, Japan and Australia are presently pursuing easy money policies. While stocks of the concerned region are likely to soar, a currency-hedged approach is essential to set off the effect of a surging greenback. IHDG serves both aspects. Moreover, IHDG takes care of investors’ income too, as the fund selects dividend-paying companies with growth features in the developed world ex-U.S. and Canada. This Zacks ETF Rank #3 (Hold) ETF was up over 1.9% in the last one month and yields 1.86%. Market Vectors ChinaAMC SME-ChiNext ETF (NYSEARCA: CNXT ) China, the epicenter of the global chaos in summer, should also be in focus in December. In any case, this segment is exhibiting excessive volatility lately, throwing shocks and surprises now and then. While Chinese stocks and ETFs soared at the start of November on a flurry of economic and demographic policy easing, it suffered its worst decline since summer to conclude the month. News about securities regulators’ probe into brokerages caused a stock market rout in China. On the positive side, the IMF agreed to declare yuan as a reserve currency, which hints at a stable economy. So, Chinese ETFs are on the fence now, with possibilities and perils on either side, and investors may be interested in tracking its course in December. Original Post

Are You Afraid Of Rising Interest Rates? Here’s A Possible Solution

Summary The yield curve is an important graph that offers key information about the economy. Given that investors in a bull market are afraid of rising interest rates, other opportunities are being looked at. The Steepener and Flattener ETNs offer opportunities to take advantage of an increase in interest rates. The Fed recently decided to keep interest rates flat. But I believe interest rates will not remain flat forever. Therefore, it is worth taking a look at how someone could protect themselves against the rise of interest rates in the future. This article will focus on the characteristics of the yield curve with an emphasis on the Steepener ETN (NASDAQ: STPP ) and the Flattener ETN (NASDAQ: FLAT ). ETNs are structured products that are issued as senior debt notes, while ETFs represent a stake in an underlying commodity. These two ETNs are perfect opportunities to protect any investor against rising interest rates, as this surge will have an adverse effect on the stock market (NASDAQ: QQQ ). The Yield Curve The yield curve is a graph in which the yield of fixed-interest securities is plotted against the length of time they have to run to maturity. Here’s the current U.S. yield curve: (click to enlarge) Source: Treasury.gov . The short-term interest rates are administrated by the FOMC , while the long-term interest rates are created by the forces in the stock market. The Yield Curve Spread The yield curve spread is the yield differential between two different maturities of a fixed instrument. For example, the difference in yield between a two-year Treasury note and a 10-year Treasury note would create another line, a so-called spread. The later-maturity leg is considered a back leg and the leg that matures first is called the front leg . The spread between the two- and 10-year Treasury instruments has shown significant patterns over the last few decades, as seen here: Source: Forbes . The spread increases during bubbles, such as the tech bubble (1999-2001) and the mortgage crash (2007-09). This indicates that this strategy (taking advantage of the difference between the two- and 10-year yields) can be played out from time to time when equity markets might be under threat and heading toward a bear or bull market. This pattern is perfectly described below: (click to enlarge) Current times make things interesting, as interest rates are expected to increase in the future. This is a situation that has happened over and over again the last few decades: (click to enlarge) Source: Fed . As the graph above depicts, interest rates cycled upward and downward during the bull and bear periods of the economy. Yield Curve Strategies – Steepener and Flattener Source: Created by author. Flattener Strategy A flattening curve is a situation where the yields on the short-term and long-term dated treasuries are converging. In other words, they are coming closer together. From a bank perspective, this is not always considered favorable as banks borrow money at short-term rates while lending it out at long-term rates. When the yield curve converges, the short- and long-term yields come closer to each other and thus diminishing the profit for the bank. Yet, the steeper the yield curve gets, the higher the differential between long-term yields and short-term yields. That means more profit for a bank. When the yield curve becomes more flat, the iPath U.S Treasury Flattener ETN comes into play as it tracks the spread between the two-year and 10-year yields. One should not forget that these ETNs are leveraged, as a 0.1% move in the spread will indicate a 2% price change for FLAT . The flatter the yield curve gets, the better for the Flattener ETN. Steepener Strategy When the differences in yield in the short and long term are diverging (i.e., getting more steep), the iPath U.S. Treasury Steepener ETN is another option. The objective of this product is to hold a weighted long position in the two-year Treasury future and a weighted short position in the 10-year future, in contrast to the flattener. With a steepener you buy the spread, while with the flattener you sell the spread. They are opposites: Negative Rates As this article assumes rates will eventually go up, a potential scenario with negative rates — even though it has been deemed unlikely by Janet Yellen — should not be ignored. That’s because some economists believe the economy is still not growing as expected, and negative rates would basically indicate that anyone who wanted to borrow money would get paid. This would act as a potential strong stimulus to the economy. Even though it might appear to be an unlikely scenario at first, there are places in Europe that currently have negative rates in place, such as Switzerland. In the Fed’s projections, a negative Fed Funds rate was deemed plausible: Source : Fed . Summary Investors do not have to worry about a potential increase in interest rates as there are good investment vehicles to protect themselves against these potential rate hikes. As the yield curve has shown many predictable signs of explaining the economy , it’s important to keep an eye on how the yield curve develops over time. I currently do not hold positions in either ETN. However, both are on my watch list as I consider them splendid investment opportunities for when the equity markets dwindle lower or when the Fed finally decides to start increasing the Fed rate. Liquidity is a minor issue with both ETNs, but when interest rates eventually increase I expect liquidity to increase as well. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.