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Finally A New Airline ETF Prepares To Take Off

The U.S. aviation industry has been on cloud nine since the oil price succumbed to gravity. Moreover, a pickup in the domestic economy, rising cargo demand, a boost to tourism and the subsiding Ebola scare put the industry in the top-performing category. The sentiment around the sector was so bullish that Airlines rocketed to the highest level since 2001 in late December, per Bloomberg . Investors should note that the ETF industry was largely unable to reap the return out of this booming industry as Guggenheim closed the last airline ETF Guggenheim Arca Airline ETF (NYSEARCA: FAA ) in 2013. Prior to that, Direxion Airline Shares ETF (NYSE: FLYX ) had also faced the same fate in 2011. However, to fill the void, a new airline ETF has been filed lately. The fund looks to trade under the name of U.S. Global Jets ETF (JETS) . The Proposed Fund in Detail The passively managed product intends to track the U.S. global Jets Index that considers worldwide airline companies, per the prospectus. The index attaches weight to the companies on the basis of the square root of their average daily volume seen in the trailing three months. The index looks to consider 25 to 40 airline stocks across the market. The product will charge 60 bps in fees. How Does it Fit in a Portfolio? The global aviation industry holds a steady outlook for 2015. The outlook is especially positive for the U.S. economy, with GDP growth gaining momentum. Consolidation benefits, growing travel demand and enhanced ancillary revenues also provide an impetus for growth. Other regions including the Middle East, Latin America & Africa and Asia-Pacific also hold promise. Several Gulf-based airlines continue to build up their positions within the global airline industry. Fleet development should improve over the coming years. Apart from the high demand from the oil rich Gulf nations, a major part of the fleet demand will be driven by China and India, and continuous expansion of low budget carriers around the world. If this was not enough, an unexpected plunge in oil prices turned out to be the real catalyst in propelling the industry. Airline profit outlook depends on fuel prices, the major variable component in the industry. The oil price drop of about 50% seen in 2014 is yet to turn around in 2015. In such a bullish backdrop, the upcoming airline ETF has every reason to be successful, if it gets approval. ETF Competition The road ahead for the proposed ETF is nothing but clear skies. The industry has long been waiting for such a product after the shutdown of the Guggenheim fund. While there are no direct competitors to the product, investors should note that two transportation ETFs, namely the iShares Transportation Average ETF (NYSEARCA: IYT ) and the SPDR S&P Transportation ETF (NYSEARCA: XTN ) have weight in the airlines industry. While IYT puts about 45% of its weight in the airlines, air freight & logistics sectors, XTN places about one-fourth of the fund in them. We expect the newly filed product to cash in on the underlying sector’s allure and find a solid following among investors. Nonetheless, the two transportation ETFs could eat into the proposed fund’s asset base because of the formers’ diversified approach to the transportation sector. Still, investors solely eyeing the global aviation industry would be satisfied by the proposed JETS ETF.

Bonds To Bring Stability To Our 1% Portfolio

We are taking a bond position (low cost ETF) but not fully using our $180,000 allocated capital as bonds are too overbought right now. Hedging TIPS against US Treasury bonds is an option if you don’t want any to the corporate bond or short term bond sector. We now have $350k invested in our portfolio. Agricultural commodities are next on our radar. We have purposefully not invested in bonds thus far in our portfolio as I have been conducting extensive research into this area. To many, bonds are a boring vehicle as the returns are usually less than other asset classes. However they are vital in any portfolio as they bring stability and expectation as they are far less volatility than stocks. I am a firm believer that if you are approaching retirement, bonds should be a fundamental part of your portfolio and should outweigh your stock holdings. We have $180k to deploy in this asset class in our portfolio but we are not going to deploy all our available capital here just yet. Let’s go through this article and discuss why we are going to invest less and what bond vehicle(s) we are going to use in our portfolio. In a previous article, I spoke about portfolio re-balancing and position sizing in respective asset classes. I outlined that when an asset class becomes “Top Heavy” for us, we usually take some capital off the table and deploy that capital elsewhere in depressed sectors. Bonds have been on a glorious run for the past while with some analysts calling for a top anytime soon. Look at the charts below (10 year and 1 year) for (NYSEARCA: TLT ) and (NYSEARCA: IEF ) which are 20 and 10 year bond ETFs respectively. (click to enlarge) (click to enlarge) The 20 year bond has really outperformed recently with 28% gains in the last year alone which is extremely high for bonds. We do not want to deploy all our capital into this asset class just yet as I’m wary of the downside here. Nevertheless, the US bond bull may have many months and years to go as US dollar denominated funds are still seen as a safe haven by investors all over the world. We are not going to bet against the US government so $100,000 is going to be invested here instead of the allocated $180,000. So which bonds are we going to invest in? Let’s discuss. I looked first at “Treasury bills or T-bills”. These are short term instruments that don’t go beyond 12 months so they are essentially short term bonds. Next we have “Treasury notes” which mature from anything from one to ten years. These are good for income investors as the interest rate is fixed and you get interest payments every six months. Then you have our good old fashioned Treasury bonds, which are mid to long term (10 to 30 years). Finally we have TIPS, which are inflation adjusted. These bonds go up in value if inflation increases or down in value if deflation takes hold. TIPS are used by many professional investors as a hedge against long term treasuries. Long term treasuries usually fall in value (opposite to TIPS) when interest rates rise. This was an option I definitely looked at for our portfolio. However there are also corporate bonds where corporations pay you income in exchange for a fixed interest rate on your bond over a period of time. Blue chip US multinationals corporate bonds yield slightly higher returns than US Treasuries but since these bonds are related to equities, they also are more volatile. Another thing I am conscious of in our 1% portfolio is fees and commissions. Even though we are excellently diversified, we spend our fair share on broker commissions through the buying and selling of our underlyings. We currently have 40 positions in our portfolio and even though we have a very cheap broker, I hate giving money away. Also since bonds are far less volatile instruments than stocks, we will not be selling covered calls in this sector. The reward doesn’t justify the risk. Therefore I have decided to go with the Vanguard Total Bond Market ETF (NYSEARCA: BND ) and not go with multiple positions in this asset class. This asset class is to be our portfolio anchor. This ETF has returned 6% in capital gains over the last 5 years (see chart) and currently has a healthy 2% yield. What attracted me was the diversity (3000 US related bonds) and the expense ratio which is a very low 0.08%. (click to enlarge) So to sum up, we are investing $100k today into and holding for the medium to long term. If bonds start to lose value, then we have an extra $80k ready to deploy into this asset class if needs be. We now as of 20-01-2015 have in the region of $350k invested. (click to enlarge) Now that you’ve read this, are you Bullish or Bearish on ? Bullish Bearish Sentiment on ( ) Thanks for sharing your thoughts. Why are you ? Submit & View Results Skip to results » Share this article with a colleague

A Hedged ETF Strategy For Rising Interest Rates

The 10-year Treasury Yield at 1.8% is 1.2% below where it started 2014. Forecasts that rates would rise in 2014 were very, very wrong. With the 10-year yield now at a record low level, the probability of rising rates from here are better. Outlined below is a hedged strategy using short and long bond ETFs to profit from rising long term interest rates. In one of my accounts I hold about 20% in cash that I did not want to put into the equities market. My plan is to hold that money as available investment capital for the next time the equities market experiences a strong correction. In the current 0% interest on cash environment, I started to think about ways to put that money to work in a relatively low-risk way. I am also concerning about the effects of rising interest rates on the overall value of my income focused equity holdings. With the current level of interest rates paid on bonds, you need to take on quite a bit of duration to earn any meaningful rate of yield and I am unwilling to go 100% into a bond ETF with the prospects of higher interest rates somewhere in the not to distant future. In contrast, an inverse Treasury bond ETF will gain value when interest rates rise, but does not pay any income and will lose value if rates continue to decline. My research led me to try set up a combination investment of a bond ETF and an inverse Treasury bond ETF. The plan is to sell off the inverse ETF in stages as interest rates rise, reinvest the proceeds into the bond fund to generate a growing income stream from the bond ETF. The goal is to end up a few years down the road with the initial investment amount intact and all of the money in the bond ETF earning a higher yield than what is currently available in the market. Half of the cash in the account has been employed into this strategy. To put the strategy in play I initially selected the Schwab U.S. Aggregate Bond ETF (NYSEARCA: SCHZ ) and the ProShares Short 7-10 Year Treasury (NYSEARCA: TBX ) . SCHZ currently yields 2.03% with an average yield-to-maturity of 2.56%. Expenses are 0.06%. TBX is intended to provide a one-times inverse return of the Barclays U.S. 7-10 Year Treasury Bond Index and has expenses of 0.95%. Over the last year, the yield on the 10-year Treasury has declined by about 100 basis points (1.00%). For that period, the SCHZ share price appreciated by 4.50% and the TBX share price declined by 11.35%. With dividends reinvested for SCHZ you have roughly a 2 to 1 inverse return differential between TBX and SCHZ. Since I expect interest rates to increase over the next few years, my initial plan was to split the invested capital 40/60 between SCHZ and TBX. I started to leg into the two ETFs at the beginning of this year. At that time the 10-year Treasury carried a 2.12% yield, down 0.88% from where it started 2014. As the first two weeks of 2015 unfolded, the Treasury yield marched steadily lower. As the price of TBX dropped, I made two buy trades to establish an initial position. A point of interest, TBX is thinly traded and day only limit orders at or near the low end of the bid/ask spread typically get filled. When the 10-year yield dropped below 1.9%, I got more aggressive and I made two purchases of the ProShares UltraShort 20+ Year Treasury ETF (NYSEARCA: TBT ) , spread a week apart. TBT is a longer duration bond, leveraged ETF, so will change value at about 4 times the rate of TBX. With the 10-year yield setting record lows, I decided that there is an opportunity to make a relatively quick profit on an interest rate bounce off the 1.77% T-note yield bottom set on Thursday, January 15. Now with the full planned amount invested in the three ETFs, I am much more aggressively skewed towards rising interest rates than I initially planned. Here are the percentages invested in each ETF: SCHZ: 35% TBX: 48% TBT: 17% Currently, the total value of the three funds down 1.3% from the amounts invested. From this point, the plan is to profit from rising interest rates. As the share price of TBT rises, it will be sold off first with the proceeds invested into SCHZ. Even a modest rate climb back about 2% for the 10-year will turn this into a profitable trade. The SCHZ and TBX positions will be managed based on an expected slow 2-3 year rise in interest rates. Now that you’ve read this, are you Bullish or Bearish on ? Bullish Bearish Sentiment on ( ) Thanks for sharing your thoughts. Why are you ? Submit & View Results Skip to results » Share this article with a colleague