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No High-Yield Relief For MLP ETFs Post Fed

The Fed went ahead and hiked the short-term interest rates after almost a decade and investors are probably looking for high-yield but stable investing tools to weather the prospective bounce in the U.S. Treasury yields, but this search will not be easy now. Investors need to be very careful while picking high-yields securities in the present market condition. This is because of the fact that the Fed hike is not the only threat to the market, a below-$40 oil price seems to be the main culprit now. As a result, conventionally high-yield securities MLPs, which are normally stable in nature too, are now having a bloodbath. MLPs are involved in the business of transportation and storage of oil and gas, and they are suffering even more than the oil producers from the downturn in the market. MLPs primarily benefit from an uptick in oil production. Oil Price Slump Hurts Now oil prices are in a freefall and hovering around a seven-year low following the prospect of more production from OPEC nations amid supply glut and falling demand. So energy MLPs are being crushed. Now, Russia’s deputy finance minister expects oil price to range between $40 and $60 per barrel in the next seven years. So one can easily expect how prolonged the pain could be for the MLPs. As you may know, MLPs often operate pipelines or similar energy infrastructures that make it an interest-rate sensitive sector. This group catches investor eye as the players in it do not pay taxes at the entity level and hence must pay out most of their income (more than 90%) in the form of dividends. Investors looking for higher income levels outside the traditional bond sources generally bet on these products. Rising Rate Scenario: A Pain A rising interest rate environment would also adversely impact the performance of MLPs for a number of reasons. First, higher interest rates lower the appeal of high-yielding stocks such as MLPs, which have historically offered around 5% in yields and hence have attracted investors’ attention due to ultra-low interest rates. Secondly, MLPs heavily depend on external financing to run their operations as they distribute most of their income as dividends. As a result, a rise in interest rates would increase their financing costs, which in turn would diminish their ability to keep distribution payments at the existing level. Dividend Cuts Also, thanks to the oil rout, the cash position of MLPs is weakening. Upstream exploration MLP companies earn from every barrel of oil and are being thrashed by the endless weakness in oil prices. U.S. oil producers are resorting to a cutback in oil production in response to falling prices. Since pipeline operators are heavily dependent on them, a blow to the MLP balance sheet is inevitable. The situation is so acute that Street.com indicated a few MLPs which may cut dividend – the sole lure of the MLP investing – in the near term. Already the largest energy infrastructure company in North America – Kinder Morgan, Inc. (NYSE: KMI ) – cut its dividend by 75% on December 8. The author in the Street.com believes that Targa Resources Partners (NYSE: NGLS ) and Vanguard Natural Resources (NASDAQ: VNR ), which yield about 20% and as high as 55%, respectively, may resort to a cutback in the coming days. Crestwood Equity Partners (NYSE: CEQP ) is yet another mid-stream MLP which yields about 38.52% annually in dividend, but is in the danger list. Others are NGL Energy Partners (NYSE: NGL ) presently yielding 26.42% and NuStar Energy (NYSE: NS ) with a dividend yield of 13.05% at present that may not be able to sustain the same payout in the coming months due to financing issues. ETF Impact All these have kept the MLP ETFs space depressed, each losing in the range 15% to 30% in the last one-month frame (as of December 14, 2015). Year to date, these products have lost in the range of 22% to 55%. InfraCap MLP ETF (NYSEARCA: AMZA ), Yorkville High Income MLP ETF (NYSEARCA: YMLP ) and Cushing MLP High Income Index ETN (NYSEARCA: MLPY ) were the worst hit during the last one-month frame. Original Post

Proposed SEC Rules Could Shake Leveraged ETFs

Leveraged ETFs have been investors’ darlings this year thanks to stock market volatility. This is because these funds try to magnify returns of the underlying index with the leverage factor of 2x or 3x on a daily basis by employing various investment strategies such as swaps, futures contracts and other derivative instruments (read: 10 Most Heavily Traded Leveraged ETFs YTD ). Due to the compounding effect, investors can enjoy higher returns in a very short period of time provided the trend remains a friend. However, these funds are extremely volatile and are suitable only for traders and those with high risk tolerance. These run the risk of huge losses compared to traditional funds in fluctuating or seesawing markets. Further, their performances could vary significantly from the actual performance of their underlying index over a longer period when compared to a shorter period (such as, weeks or months). Despite this drawback, investors have been jumping into these products for quick turns. Will these allure continue in the months ahead if the new rules proposed by the SEC are enacted? Inside the New Proposed Rules Under the proposed rules , the fund has to limit its notional exposure to derivatives of up to 150% of the net assets or 300% if the fund actually offers lower market risk. Additionally, it should manage the risks associated with derivatives by segregating certain assets (generally cash and cash equivalents) equal to the sum of two amounts: Mark-to-Market Coverage Amount: A fund would be required to segregate assets equal to the amount that the fund would pay if the fund exited the derivatives transaction at the time of determination. Risk-Based Coverage Amount: A fund would also be required to segregate an additional risk-based coverage amount representing a reasonable estimate of the potential amount the fund would pay if the fund exited the derivatives transaction under stressed conditions. Apart from these, the fund would implement a formalized derivatives risk management program administered by a risk manager. ETF Impact These rules, if enacted, would shake the leveraged ETF world, in particular the triple leveraged funds. This is because the funds might be forced to increase exposure to low risk and low-return safe assets like cash and equivalents in order to offset the risk of derivatives exposure. This could eat away the outsized returns that the leveraged ETFs have been providing to investors (see: all Leveraged Equity ETFs here ). Notably, there are 135 leveraged products and 87 leveraged inverse products as per xtf.com. Of these, 46 leveraged and 36 leveraged inverse products have three times exposure to the underlying index and would be the most in trouble. In particular, the proposed rules would hurt the leveraged long and short ETFs structured via the Investment Company Act of 1940, potentially forcing providers to change the legal structure or leverage factor, or to close them. Notably, Direxion and ProShares are the two issuers that would be the most impacted as they have several equity and fixed income ETFs that rely on three times derivatives-based leverage and has been structured via the Investment Company Act of 1940. Some of the most popular ones are the ProShares UltraPro QQQ ETF (NASDAQ: TQQQ ) , the Direxion Daily Financial Bull 3x Shares ETF (NYSEARCA: FAS ) , the ProShares UltraPro S&P 500 ETF (NYSEARCA: UPRO ) , the Direxion Daily Small Cap Bull 3x Shares ETF (NYSEARCA: TNA ) , the Direxion Daily 20+ Year Treasury Bear 3x Shares ETF (NYSEARCA: TMV ) , the ProShares UltraPro Short S&P 500 ETF (NYSEARCA: SPXU ) , the Direxion Daily Small Cap Bear 3x Shares ETF (NYSEARCA: TZA ) and the ProShares UltraPro Short QQQ ETF (NASDAQ: SQQQ ) . However, some commodity leveraged ETFs providing investors’ triple exposure to the index could escape the new rules by virtue of their registration as commodity pools with the Commodity Futures Trading Commission (CFTC). In Conclusion While the SEC proposal is a concern for leveraged ETF providers, it is not yet finalized or may fall apart. Even if the rules are adopted, it will take months or a year to have a full impact on the ETF world. Link to the original post on Zacks.com

3 Income Funds You Should Hold In 2016

Summary If 2015 has taught us anything it’s that there is a high degree of risk in individual high yield sectors such as master limited partnerships and junk bonds. My top income themes for 2016 are centered around large, diversified, and proven investment vehicles that circumvent the hit-or-miss proposition of individual sectors. I think you will find these actively managed mutual funds and low-cost ETFs offer attractive characteristics as core holdings for nearly every style of income investor. Forecasting where the market will end up in 2016 is a very difficult task, as innumerable variables will intercede over the course of the next twelve months. The actions of the Federal Reserve in particular are going to be a heavy influence on income investors as they seek to position their portfolios for capital preservation and dependable dividend streams. If 2015 has taught us anything it’s that there is a high degree of risk in individual high yield sectors such as master limited partnerships and junk bonds. These groups have erased years of accumulated gains in a manner of months as credit headwinds weigh on investors’ minds. In addition, the trendless direction of interest rates will likely lead to above-average volatility in high quality fixed-income holdings as well. My top income themes for 2016 are centered around large, diversified, and proven investment vehicles that circumvent the hit-or-miss proposition of individual sectors. That may seem boring to those who like to tempt fate with the glory of a turnaround story or make assumptions in continued strength of momentum names. Nevertheless, I think you will find these actively managed mutual funds and low-cost ETFs offer attractive characteristics as core holdings for nearly every style of income investor. Vanguard High Dividend Yield ETF (NYSEARCA: VYM ) If you are looking for an essential equity income fund to own in 2016, then VYM should near the top of your list. This exchange-traded fund houses 435 U.S. stocks with characteristics of consistently high dividend yields. Top holdings include well-known names such as Microsoft Corp (NASDAQ: MSFT ), Exxon Mobil Corp (NYSE: XOM ), and General Electric Co (NYSE: GE ). VYM has exposure to virtually every sector of the stock market, which means that it is a highly diversified and transparent investment vehicle. I like to think of this fund as the “S&P 500 of dividend stocks” because of its market-cap weighted structure and broad index construction methodology. Currently VYM has a 30-day SEC yield of 3.25% and income is paid quarterly to shareholders. The embedded expense ratio of this fund is just 0.10% and it has over $11 billion in total assets. I have owned this ETF as a core holding in my Strategic Income Portfolio for several years and expect that it will continue to add value in 2016 as well. It’s simply difficult to find a better investment vehicle for those that crave a low-cost, dividend-focused stock fund. PIMCO Income Fund (MUTF: PONDX ) Most bond investors have their core holdings in passive indexes such as the Vanguard Total Bond Market ETF (NYSEARCA: BND ). However, in my opinion, an over allocation to a passive fixed-income basket may lead to weak performance over the course of the next several years. One of my favorite actively managed bond funds to supplement or replace existing passive strategies is PONDX. This portfolio is governed by Daniel Ivascyn and Alfred Murata of PIMCO, who were named MorningStar’s 2013 U.S. Fixed-Income Managers Of The Year. The PONDX strategy is built on the foundation of a flexible, multi-sector approach with the goal of income and long-term capital appreciation. It takes a global slant by incorporating themes from overseas markets and has been known to use hedges to control risk and limit interest rate sensitivity as well. The effective duration of PONDX is just 3.09 years and it has a current 30-day SEC yield of 3.03%. This fund has an admittedly higher expense ratio than a comparable ETF at 0.79%. However, the performance over the last several years has well compensated investors for the superior security selection and risk management techniques. PONDX has gained 2.81% versus 0.81% in BND on a year-to-date basis in 2015. Over the last three years, PONDX has returned 17.02% versus just 4.02% in BND. The fund is rated 5-stars by Morningstar and has been consistently ensconced in the top of its peer group over the last 3 and 5-years. I own this fund in my own account alongside my clients and feel that the managers’ expertise navigating credit and interest rate volatility will make for a solid bond holding in 2016. Note: Larger investors or those working with an advisor may benefit from the institutional share class PIMIX, which charges an expense ratio of 0.45%. Vanguard Wellesley Income Fund Admiral Shares (MUTF: VWIAX ) For those seeking a conservative multi-asset income fund with a solid track record and low fees, look no further than VWIAX. This fund is one of the few actively managed offering from Vanguard that has been in existence for over 40 years. Yet true to the Vanguard approach of minimal cost, the expense ratio of VWIAX is only 0.18%. The fund invests in a mix of income generating assets that fluctuate between 35-40% stocks and 60-65% bonds. The stock allocation consists of 59 large-cap names such as Wells Fargo Inc (NYSE: WFC ) and Merck & Co (NYSE: MRK ) to name a few. The bond sleeve consists of high quality corporate and government securities with an average maturity of 6.5 years. VWIAX has a current 30-day SEC yield of 2.83% and dividends are paid quarterly to shareholders. In a world filled with aggressive income strategies trying to position themselves as high yield standouts, this stalwart mutual fund aims for a quality and dependable asset allocation mix that has survived the test of time. This helps keep volatility low and risks in an acceptable range that retirees or other capital preservation-focused investors can appreciate. Furthermore, it has been rated 5-stars by Morningstar over 3, 5, and 10-year time horizons. The bottom line is that these three income funds offer solid value in 2016 by sticking with investment themes that have historically provided dependable results. They can also be supplemented with tactical or alternative investment themes to enhance the overall yield of your portfolio or capitalize on a relative value opportunity.