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Sector ETFs To Benefit From Global Negative Interest Rates

The world is heading toward negative interest rates policies (NIRP) to stimulate sagging growth and prevent deflationary pressure. Most central banks, including the ones in Japan, Sweden, Switzerland, Denmark and Europe have adopted this policy. The central bank of Denmark was the first and foremost to set a negative tone for rates in mid 2012. It lowered its certificates of deposit ( CD ) rates to minus 0.20% from 0.05% in order to protect the krone’s peg to euro. Then the Danish central bank underwent a series of rate cuts in January and February 2015 going deeper into -0.75%. However, in January 2016, the bank raised the interest rates for the first time in almost two years by 10 bps to -0.65% (read: 5 Best Performing Country ETFs of 2015 ). The European Central Bank (ECB) joined the group in June 2014 by slashing the deposit rate from zero percent to -0.1%. The ECB then pushed the rates further to -0.3% in December 2015 and deeper to -0.4% on March 10, 2016. Switzerland introduced negative interest rates in December 2014, when the Swiss National Bank said it would charge banks 0.25% interest on bank deposits in an effort to curb its strengthening currency. The Swiss bank pushed the rates further into the negative territory to -0.75% in January 2015. Swedish Riksbank implemented negative rates in February 2015 when it cut repo rate to minus 0.1% from zero. The bank reduced the rates three times since then with the latest cut by 15 bps in February 11, 2016 to -0.50%. Last but not the least, Japan was the latest country to join the league in late January 2016 as the Bank of Japan set its benchmark interest rate at -0.1% (read: Japan ETFs to Buy on Negative Interest Rates ). NIRP: A Good or Bad? Though the negative rates policy has raised worries over the health of the banks and increased chances of default, it is actually a good for the economy and the stock markets. This is because the strategy would make lending cheaper and encourage spending, thereby leading to greater economic growth. In addition, it would make borrowing attractive for both consumers and business, driving demand for loans. As such, it will give a huge boost to sectors like real estate, housing and utilities. Further, NIRP would lead to capital outflows leading to depreciation of the currency, which will encourage exports and manufacturing. Investors should note that the NIRP policy has not been tested before and so, does not have any history. Given this, many investors want to reposition their portfolio to the sector ETFs that will benefit from NIRP. Below we have highlighted some of them: Vanguard Global ex-U.S. Real Estate ETF (NASDAQ: VNQI ) This fund offers a broad exposure across international REIT equity markets by tracking the S&P Global ex-U.S. Property Index. Holding 663 stocks in its basket, the fund is well spread out across components with none holding more than 3.3% share. European firms account for 26% of assets, while Japan makes up for 24% share, and Sweden and Switzerland getting 2% each. The product has AUM of $3.1 billion and average daily volume of 316,000 shares. It charges 18 bps in fees per year from investors and has lost 0.22% so far this year. WisdomTree Japan Hedged Real Estate Fund (NYSEARCA: DXJR ) This fund seeks to provide exposure to the Japanese real estate sector while at the same time offers hedge against any fall in the yen relative to the U.S. dollar. This is easily done by tracking the WisdomTree Japan Hedged Real Estate Index. In total, the fund holds 93 stocks with each holding less than 8.5% share. Expense ratio came in at 0.48%. The product has accumulated $145.8 million in its asset base and trades in a moderate volume of 63,000 shares a day on average. DXJR is down 4.8% in the year-to-date timeframe and has a Zacks ETF Rank of 2 or ‘Buy’ rating with a Medium risk outlook. iShares FTSE EPRS/NAREIT Europe Index ETF (NASDAQ: IFEU ) This product targets 96 companies engaged in the ownership and development of the developed European real estate market. It tracks the FTSE EPRA/NAREIT Developed Europe Index, charging investors’ 0.48% in expense ratio. The fund is less popular and less liquid in the European space with $64.3 million in AUM and average daily volume of around 23,000 shares. IFEU has lost 6.2% in the year-to-date timeframe. WisdomTree Global ex-U.S. Utilities Fund (NYSEARCA: DBU ) This fund follows the WisdomTree Global ex-US Utilities Index, which measures the performance of the dividend-paying companies in the utilities sector of the developed and emerging equity markets, excluding U.S. European firms account for 54% of the portfolio while Japan takes 5% share. With AUM of $14.4 million, the fund is diversified across 97 securities with none holding more than 2.5% share. It charges investors’ 58 bps in annual fees and trades in a paltry volume of 4,000 shares a day. The ETF has shed 0.5% so far this year. Link to the original article on Zacks.com

Dual ETF Momentum March Update

Scott’s Investments provides a free “Dual ETF Momentum” spreadsheet which was originally created in February 2013. The strategy was inspired by a paper written by Gary Antonacci and available on Optimal Momentum. Antonacci’s book, Dual Momentum Investing: An Innovative Strategy for Higher Returns with Lower Risk , also details Dual Momentum as a total portfolio strategy. My Dual ETF Momentum spreadsheet is available here and the objective is to track four pairs of ETFs and provide an “Invested” signal for the ETF in each pair with the highest relative momentum. Invested signals also require positive absolute momentum, hence the term “Dual Momentum”. Relative momentum is gauged by the 12 month total returns of each ETF. The 12 month total returns of each ETF is also compared to a short-term Treasury ETF (a “cash” filter) in the form of the iShares Barclays 1-3 Treasury Bond ETF (NYSEARCA: SHY ). In order to have an “Invested” signal the ETF with the highest relative strength must also have 12-month total returns greater than the 12-month total returns of SHY. This is the absolute momentum filter which is detailed in depth by Antonacci, and has historically helped increase risk-adjusted returns. An “average” return signal for each ETF is also available on the spreadsheet. The concept is the same as the 12-month relative momentum. However, the “average” return signal uses the average of the past 3, 6, and 12 (“3/6/12″) month total returns for each ETF. The “invested” signal is based on the ETF with the highest relative momentum for the past 3, 6 and 12 months. The ETF with the highest average relative strength must also have an average 3/6/12 total returns greater than the 3/6/12 total returns of the cash ETF. Portfolio123 was used to test a similar strategy using the same portfolios and combined momentum score (“3/6/12″). The test results were posted in the 2013 Year in Review and the January 2015 Update . Below are the four portfolios along with current signals: Return Data Provided by Finviz Click to enlarge As an added bonus, the spreadsheet also has four additional sheets using a dual momentum strategy with broker specific commission-free ETFs for TD Ameritrade, Charles Schwab, Fidelity, and Vanguard. It is important to note that each broker may have additional trade restrictions and the terms of their commission-free ETFs could change in the future. Disclosures: None

The Fox And The Hedgehog

“The fox knows many things while the hedgehog knows one big thing.” Click to enlarge Photo: Jeremy P. Gray The Greek poet Archilocus noticed this almost 3,000 years ago. We often see two different types of people. Some people go everywhere and study everything – pursuing contradictory ideas. They’re eclectic, diffused, and omnivorous. On the other side are souls who pursue a singular, unitary vision, an all-embracing organizing principle that gives the world coherence. We see this all around us. In literature, Dante was a hedgehog: he wanted to give the world a great poem about heaven and hell. Shakespeare, on the other hand, was a fox. He wrote plays about everything and everybody. In history, George Washington was a hedgehog – with the simple idea of American greatness – while Thomas Jefferson was a fox. And in modern life, outstanding business leaders are hedgehogs: think of Steve Jobs with his focus on design and functionality. And superior investors are often foxes: Warren Buffett, Peter Lynch, John Templeton. Both approaches are necessary. In business, a company needs a singular vision to cut through the clutter and make the main thing the main thing. It’s too easy to get distracted by the crisis of the day and never spend time or energy on what’s crucial. Hedgehogs get things done and keep their teams focused. But with investing, foxes rule. A portfolio needs to be diversified, limiting its exposure to any single area – reducing risk – while spreading its assets among an array of industries that generate new products and ideas – improving return. Investors need to be fox-like and flexible. And they have to be interested in everything, from genomic sequencing to quantum computing to chain-store sales to bitcoins and block chains. Investors should leave no stone unturned when searching for value. Foxes and hedgehogs each have an important role to play. A lot of times, they end up married to each other. Which one are you?