Tag Archives: japanese

Why Popular Investments Are Usually Wrong

By Alan Gula Oscar Wilde, the 19th century poet and playwright, once said: “Everything popular is wrong.” The Irish wordsmith wasn’t referring to the financial markets, but he may as well have been. That’s because investors should be very wary of the popular stocks, sectors, and exchange-traded funds (ETFs) du jour. While it’s true that momentum can persist, more often than not, popularity is the kiss of death. In finance, the degree of popularity is typically referred to as sentiment. Fundamentals matter in the long term, but sentiment is what really drives short- and intermediate-term moves in the financial markets. Caution is, therefore, essential when sentiment reaches a bullish extreme. The Texas Hedge It was a no-brainer, can’t-lose trade. Pundits on CNBC and Bloomberg TV were supremely confident in the outcome. Fund flows poured in to take advantage of its inevitability. This was a “layup” – a sure thing. The Bank of Japan (BOJ) was going to depress the value of the Japanese yen, and Japanese equities would rise due to exporters benefiting from a cheap currency. Naturally, everyone wanted to be long Japanese stocks, but short the yen, and the WisdomTree Japan Hedged Equity ETF (NYSEARCA: DXJ ) provided an easy way to do just that. Except now investors are realizing that they aren’t hedged at all. Ironically, the yen has gone through the roof ever since the BOJ implemented a quasi-negative interest rate scheme. The U.S. dollar/Japanese yen exchange rate (USD/JPY) recently hit its lowest level since October 2014 (a decline in USD/JPY represents dollar weakness, yen strength). Thus, anyone betting on a decline in the yen is getting bludgeoned in the market. Not only that, Japanese equities are, unsurprisingly, falling in tandem with USD/JPY. This is a lose/lose situation for DXJ holders. Since April 2015, when I warned that investors in currency “hedged” ETFs were essentially speculating on currency movements, DXJ has lost 26% of its value (including distributions). Going back even further to early 2014, DXJ has produced a total return of negative 6%. Alas, it was so popular! Over the same time frame, the S&P 500 has returned a positive 16%. Shifting Sentiment To be sure, DXJ now offers a far better risk-reward proposition than it did a year ago. Basically, the fund may excel because the trade is not nearly as popular. We’re even seeing currency futures speculators, in aggregate, bet on yen appreciation . The last time this group had a net long position in the yen was 2012, right before the yen plummeted as “Abenomics” was introduced. In other words, the sentiment of this crowd is a contrarian indicator. Sentiment notwithstanding, the fundamentals for Japan, in general, remain poor. Japan has a shortage of the most precious natural resource on the planet: children. Do the central planners really think that burning their currency at the stake is going to solve anything? Well, they certainly shouldn’t. Nonetheless, the short-term swings will continue, as prices are determined – at the margin – by human behavior and emotions. This is why serially buying the most popular investments is a great way to destroy wealth. Meanwhile, the fundamentals for U.S. Treasuries remain strong. The real trick, however, will be knowing when they, too, have become overly popular. Original Post

Best Performing Bond ETFs Of Q1

Chances for the 33-year bull run in the bond market to fall flat in 2016 increased when the Fed enacted a rate hike in December 2015 after almost a decade. But in reality, bonds kept bouncing throughout the first quarter on a low-yield environment in most developed markets across the world. Thanks to China-led global market worries and the 12-year plunge in oil prices, the global market went berserk to start this year. All these buried risk-on sentiments and boosted relatively safer fixed-income securities in the quarter, pulling bond yields down. In fact, the impact of the global financial market turmoil was so deep-rooted that the Fed halved its number of rate hike estimates for 2016 from four to two in its March meeting. Also, Fed chair Yellen reaffirmed a ‘cautious’ stance on future policy tightening. Needless to say, the very move dragged down the U.S. benchmark bond yields and pushed up its prices. Notably, yields on 10-year Treasury notes dropped 41 bps to 1.83% (as of March 30, 2016) in the quarter, leading U.S. Treasury valuation to soar. Meanwhile, deflationary threats led the central banks of Japan and Eurozone to widen their already ultra-easy monetary policies. At its January-end meeting, BoJ set its key interest rate at negative 0.1%. BoJ then hinted at further cuts in interest rates if the economy fails to improve desirably. In Europe, the ECB president Mario Draghi turned super dovish in March by raising the monthly bond purchase size to EUR 80 billion from 60 billion previously. Also, ECB lowered the deposit facility rate to negative 0.4%, down from the previous rate of negative 0.3%. It also cut its main refinancing rate and marginal lending rates by 0.5% each to zero percent and 0.25%, respectively. Quite expectedly, the twin boosters of easy money policy globally and a delayed rate hike in the U.S. made fixed-income securities a winner in the first quarter. It would thus be interesting to note the ETFs that were the leaders in the bond space during the quarter. Returns are as per xtf.com . 25+ Year Zero Coupon U.S. Treasury Index Fund (NYSEARCA: ZROZ ) ZROZ follows the BofA Merrill Lynch Long US Treasury Principal STRIPS Index, which focuses on Treasury principal STRIPS that have 25 years or more remaining to final maturity. It charges just 15 basis points in expenses while the 30-day SEC yield is 2.62% currently (as of March 29, 2016). ZROZ has added 14.3% so far this year (as of March 30, 2016). The fund has a Zacks ETF Rank #2 (Buy) with a High risk outlook. DB German Bund Futures ETN (NYSEARCA: BUNL ) German bonds and the related ETFs also made an impressive rebound as these offer safety. Following extremely lower yields due to accommodative ECB policies, “German government bond yields are set to record their biggest quarterly fall in 4-1/2 years ” on March 31, 2016. The note looks to provide investors exposure to the U.S. dollar value of the returns of a German bond futures index, replicating the performance of a long position in Euro-Bund Futures. The note is up 14.3% so far this year (as of March 30, 2016). Vanguard Extended Duration Treasury ETF (NYSEARCA: EDV ) The fund seeks to match the performance of the Barclays U.S. Treasury STRIPS 20-30 Year Equal Par Bond Index. This means that this benchmark zeroes in on fixed income securities that are sold at a discount to face value, and then the investor is paid the face value upon maturity. The fund charges 10 bps in fees. This Zacks Rank #2 ETF yields 2.71% annually. The fund has returned 13% so far this year (as of March 30, 2016). DB Japanese Govt Bond Futures ETN (NYSEARCA: JGBL ) Very low bond yields following Bank of Japan’s decision to push key interest rates to the negative territory to engineer the sagging economy were behind JGBL’s surge. Many analysts are of the view that ” negative bond yields are here to stay in 2016″ for Japanese bonds. The product looks to track the DB USD JGB Futures Index, which is intended to measure the performance of a long position in 10-year JGB Futures. JGBL advanced about 9.9% so far this year (as of March 30, 2016). PIMCO 15+ Year U.S. TIPS ETF ( LTPZ ) The fund tracks the BofA Merrill Lynch 15+ Year US Inflation-Linked Treasury Index and is up 9.6% so far this year (as of March 30, 2016). As U.S. inflation improved in the quarter, TIPS ETFs came into the limelight. Original Post