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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

Precious Metals Get The Better Of Equities: 5 Mutual Funds To Buy

Of late, gold and other precious metals are trouncing equities as weaker economic growth both in the U.S. and globally continue to dent investors’ sentiment. In times of economic upheaval, investors dump equities to look for safe haven assets, and precious metals are well suited to serve this purpose. Lower interest rate environment across the globe is also luring investors to bet on precious metals. After seeing three back-to-back years of losses, these metals have rallied about 20% this year. Hence, investment in mutual funds having exposure to precious metals will surely be a prudent choice. Domestic Economic Growth Weak U.S. economic growth stalled in the first three months of the year since businesses and consumers turned cautious with their spending. The economy expanded at an annualized rate of 0.5% in the first quarter, its weakest quarterly growth in two years, according to the Commerce Department. Into the second quarter, things aren’t looking bright either. The battered U.S. manufacturing sector did stabilize a bit in April, but is yet to regain full health, while consumer spending may have further experienced a slowdown in April. The ISM manufacturing index dropped to 50.8 in April from 51.8 in March. The Reuters/University of Michigan consumer sentiment index, on the other hand, declined to 89.0 in April from 91.0 in March. When a country’s growth prospects are headed south, investors mostly get out of risky investments like stocks. By the end of April, investors pulled money out of equities at the fastest pace since last summer’s market rout and poured money into precious metals, which boast of a safe haven appeal. Precious metals tend to retain their value and even increase their value during times of market downturn. Let’s also not forget that we are in May, which is predominantly a bad month for investment. Investors as it is tend to offload their stock holdings this month and reenter the markets in fall. Global Growth Uncertainties And it’s just not a domestic malice. Global growth worries also continue to linger on. Soft Chinese and British factory data rekindled fears of slowing global growth. In China, manufacturing activity slipped last month. China’s official manufacturing PMI fell to 50.1 in April from 50.2 in March. The production index, new orders index and the new export orders index all ticked down in April. British factory output for the month of March was abysmal. Factory output declined 1.9% than a year earlier, its steepest fall since May 2013, according to the Office for National Statistics. Shut down in the steel industry led to such broad-based declines. Meanwhile, the European Commission cautioned about slow economic growth among many large countries. All these factors boosted the appeal for precious metals. Fed Rate Hike Not in the Cards Coming back to domestic shores, expectations that the Federal Reserve won’t raise rates at the June meeting lifted precious metals. The latest report on weak job creations in April made the Fed cautious about raising rates sooner. The U.S. economy created a total of 160,000 jobs in April. This increase in hiring was the slowest since September. Moreover, the labor force participation rate declined to 62.8%, which could mean that people found it a bit more difficult to get jobs. The Fed is already cautious about raising rates in the near term as the U.S. inflation rate in the first quarter came in way below its desired level. Lower interest rates generally tend to boost precious metals, as it makes yield-bearing assets such as U.S. Treasuries less attractive. Lower rates also adversely affect the dollar, which in turn raises the appeal for precious metals. Add to this, central banks across the world including Japan, Sweden, Switzerland, Denmark and Europe are adopting negative interest rates. This is why investors are snapping up gold this year. Top 5 Precious Metals Mutual Funds to Invest In As mentioned above, concerns about domestic and global economic growth along with near-zero and even negative interest rates around the world are playing a major role in helping precious metals gain at the expense of equities. In fact, when it comes to the yellow metal, banking behemoths such as The Goldman Sachs Group, Inc. (NYSE: GS ) and JPMorgan Chase & Co. (NYSE: JPM ) have turned bullish. Goldman Sachs increased its three, six and twelve-month forecasts to $1,200, $1,180 and $1,150 an ounce from an earlier prediction of $1,100, $1,050 and $1,000 per ounce, respectively. JPMorgan Private Bank’s Solita Marcelli has said that “We’re recommending our clients to position for a new and very long bull market for gold.” Banking on these bullish sentiments, it will be judicious to invest in mutual funds that have considerable exposure to precious metals. We have selected five such precious metals 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 their portfolio without the numerous commission charges that stocks need to bear. The American Century Global Gold A (MUTF: ACGGX ) invests the majority of its assets in companies that are engaged in mining, processing, distributing and exploring in gold. ACGGX’s year-to-date return is 75.4%. Annual expense ratio of 0.92% is lower than the category average of 1.44%. ACGGX has a Zacks Mutual Fund Rank #1. The Fidelity Advisor Gold A (MUTF: FGDAX ) invests a large portion of its assets in securities of companies engaged in gold-related activities, and in gold bullion or coins. FGDAX’s year-to-date return is 65.9%. Annual expense ratio of 1.2% is lower than the category average of 1.44%. FGDAX has a Zacks Mutual Fund Rank #1. The Franklin Gold and Precious Metals Advisor (MUTF: FGADX ) invests the majority of its assets in securities of gold and precious metals operation companies. FGADX’s year-to-date return is 70.7%. Annual expense ratio of 0.84% is lower than the category average of 1.44%. FGADX has a Zacks Mutual Fund Rank #2. The Deutsche Gold & Precious Metals A (MUTF: SGDAX ) invests a major portion of its assets in companies engaged in activities related to gold, silver, platinum or other precious metals. SGDAX’s year-to-date return is 69.4%. Annual expense ratio of 1.25% is lower than the category average of 1.44%. SGDAX has a Zacks Mutual Fund Rank #1. The Wells Fargo Precious Metals A (MUTF: EKWAX ) invests a large portion of the fund’s net assets in investments related to precious metals. EKWAX’s year-to-date return is 69.8%. Annual expense ratio of 1.1% is lower than the category average of 1.44%. EKWAX has a Zacks Mutual Fund Rank #2. Link to the original post on Zacks.com

Macro Themes And The Implications: Time To Pay Attention To U.S. High Yield Bonds

By Dr. Chenjiazi Zhong Key Macro Themes and the Implications Low inflation : Inflation is low but it does not mean inflation is zero. The slow growth in global economy keeps inflation subdued even as CPI slowly rises. Global policy divergence : Fed continues to normalize slowly as other central banks pursue stimulus policies. Investors should expect yields to rise modestly. Supply-side weakness : Across developed countries, the low productivity and growth in labor force will ultimately cap longer-dated yields. Strength in U.S. economy : U.S. economy remains resilient; recession risks are being overpriced for 2016, which indicates a good environment for high yield bond. Gradual recovery in Europe : The expansion in Europe is on track; monetary policy is a key factor that will support EU stocks and credit markets. Japan – beyond Abenomics : The economic risk in Japan is becoming more binary; the asset returns will be more geared to fiscal response. Emerging markets rebalancing : The stats of emerging markets implies that the environment is stabilizing and the valuations are undemanding. The short-term risks exist but investors can expect the conditions will improve in 2016. China in transition : That China is shifting from resources to services will continue to weigh on global trade. U.S. High Yield Bonds In an environment of full valuation, fragile investor sentiment, favorable relative valuations of credit over equity, slow but positive growth with limited recession risk that is priced in, high yield credit that offers equity-like returns is an attractive proxy for stocks. U.S. High yield credit spreads widened the most since 2011. U.S. high yield bonds offer lower volatility than equities due to their coupon income. In down markets, a larger coupon for high yield bonds helps to offset market declines; in up markets, high yield bonds usually correlate to rising equities. Moreover, high yield bonds are generally not impacted by modest rise in interest rates; spreads are more a reflection of market expectations for future default rates rather than expectations for higher interest rates. Furthermore, high yield bonds managers charge lower fees as compared to the hedge funds specializing in distressed debt. Despite U.S. high yield bonds offer equity-like return, investors need to adjust or discount the asset class for its potential for downside losses, liquidity constraints, sector risks, and other realities: The high yield bonds market is characterized by asymmetric risk whereby the potential for downside losses outweighs upside capital appreciation. Asymmetric risk exposure is a situation in which the potential gains and losses on an investment are uneven. The high yield bonds are traded over the counter, which highly depends on dealer capital. Additionally, the majority of high yield bonds do not trade on a daily basis, which means there may be a significant difference between trade prices and broker quotes. Independent fundamental analysis is paramount. The market generally anticipates upgrades and downgrades long before the actual rating changes. The difficulty in estimating defaults is defaults are not correlated to the severity of recessions. For instance, the 2008-2009 period was not the worst for defaults but it was dramatic to other asset classes. The key to long-term success in investing in high yield bonds is managing credit risk, avoiding dangerous concentrations and minimizing defaults in the portfolio. In addition, in harvesting carry across extended credit markets, security selectivity becomes even more crucial . Investors shall stay engaged, know the securities; do not be afraid of sentiment. The increase in volatility is creating numerous opportunities for fundamental, bottom-up investors. With more movement in the market, there is a wider range of possible outcomes, some of them lost, but some of them gained. While the downside increases, so does the upside. As with any investment, the riskier it is, the greater the possible return is. Furthermore, a contrarian stance, backed by a comprehensive understanding of companies’ long-term fundamental prospects, will provide a strong foundation to withstand as well as profit from a world of rising volatility.