Tag Archives: manufacturing

How These 4 ETFs Will Benefit From A Rate Hike

With excellent October jobs data, the interest rates hike for December is back on the table. The U.S. economy added 271,000 jobs in October, much above the market expectation of 180,000 and representing the strongest pace of a one-month jobs gain in 2015. The Fed in its latest FOMC meeting also hinted at a December lift-off if the U.S. economy remains on track. In a recent Wall Street Journal poll, about 92% of the economists believe that the first interest rate hike in almost a decade will come at the December 15-16 policy meeting, while 5% expect the Fed to wait until March. The rest expect the Fed to keep cheap money flowing for longer. This is especially true as recent headwinds have faded with substantial positive developments seen in the global economy and financial market lately. In particular, the Chinese economy is showing signs of stabilization on the back of better-than-expected GDP growth data and another rate cut while the Japanese and European central banks are seeking additional stimulus measures to revive their economies (read: China Investing: Should You Buy These New ETFs? ). Further, the U.S. economy is showing an impressive rebound after a lazy summer and is continuing to outpace the other economies. Though the manufacturing sector expanded at its slowest pace in more than two years in October on a weak global economy and strong dollar, rise in new orders spread some hopes in the sector. Consumer confidence picked up in October, as measured by the Thomson Reuters/University of Michigan index, which rose to 90 after dropping to 87.2 in September from 91.9 in August. Unemployment dropped to a new seven-year low to 5% in October from 5.1% in September and average hourly wages accelerated by 9 cents to $25.20 bringing the year-over-year increase to 2.5%, the sharpest growth since July 2009. The solid pay gains will increase consumer spending in the crucial holiday season, which will translate into stepped-up economic activities. Given the recently improving fundamentals, an increase in rates seems justified. As a result, investor should focus on the areas/sectors that will benefit the most in the rising rate environment. Here, we have detailed four of these and their best ETFs below: Financials A rising interest rate scenario would be highly profitable for the financial sector. This is because the steepening yield curve would bolster profits for banks, insurance companies and discount brokerage firms. A broad way to play this trend is with the Financial Select Sector SPDR ETF (NYSEARCA: XLF ) , which has a Zacks ETF Rank of 2 or a ‘Buy’ rating with a Medium risk outlook (read: Rate Hike Coming in December? Financial ETFs & Stocks to Buy ). This is by far the most popular financial ETF in the space with AUM of $18.8 billion and an average daily volume of over 37.2 million shares. The fund follows the Financial Select Sector Index, holding 89 stocks in its basket. It is heavily concentrated on the top three firms – Wells Fargo (NYSE: WFC ), Berkshire Hathaway (NYSE: BRK.B ) and JPMorgan Chase (NYSE: JPM ) – with over 8% share each while other firms hold less than 6.2% share. In terms of industrial exposure, banks take the top spot at 37.2% while insurance, REITs, capital markets and diversified financial services make up for double-digit exposure each. The fund charges 14 bps in annual fees and has lost 1.2% in the year-to-date timeframe. Consumer Discretionary Consumer discretionary stocks also seem a good bet in the rising rate scenario. This is because these typically perform well in an improving economy justified by the healing job market, recovering housing market, surging stock market and expanding economic activities. Further cheap fuel is an added advantage for this sector. One exciting pick in this space can be the Vanguard Consumer Discretionary ETF (NYSEARCA: VCR ) , which has a Zacks ETF Rank of 1 or a ‘Strong Buy’ rating with a Medium risk outlook. This fund follows the MSCI U.S. Investable Market Consumer Discretionary 25/50 Index and holds 384 stocks in its basket. This is the low choice in the space, charging investors just 12 bps in annual fees while volume is also solid at nearly 153,000 shares a day. The product has managed over $2 billion in its asset base so far. It is pretty spread out across sectors and securities with a slight tilt toward Amazon (NASDAQ: AMZN ) at 7%, while other firms hold no more than 5.7% share. Internet retail, restaurants, movies and entertainment, and cable & satellite are the top four sectors accounting for over 10% of total assets. VCR has gained 8% so far this year. Short-Term Treasury Though the fixed income world is the worst hit by the rising rates scenario, a number of ETFs that employ some niche strategies like the iPath U.S. Treasury Steepener ETN (NASDAQ: STPP ) could lead to huge gains. This product directly capitalizes on rising interest rates and performs better when the yield curve is rising. The ETN looks to follow the Barclays U.S. Treasury 2Y/10Y Yield Curve Index, which delivers returns from the steepening of the yield curve through a notional rolling investment in U.S. Treasury note futures contracts. The fund takes a weighted long position in 2-year Treasury futures contracts and a weighted short position in 10-year Treasury futures contracts. STPP charges 0.75% in fees and expenses while volume is light at around 1,000 shares a day. Additionally, it is an unpopular bond ETF with AUM of just $2.5 million. The note has surged 4.6% in the year-to-date timeframe. Negative Duration Bond Negative duration bond ETFs offer exposure to traditional bonds while at the same time short Treasury bonds using derivatives such as interest-rate swaps, interest-rate options and Treasury futures. The short position will diminish the fund’s actual long duration, resulting in a negative duration. As a result, these bonds could act as a powerful hedge and a money enhancer in a rising rate environment. Currently, there are a couple of negative duration bond ETFs, out of which the WisdomTree Barclays U.S. Aggregate Bond Negative Duration ETF (NASDAQ: AGND ) has AUM of $17.9 million and average daily volume of 13,000 shares. This ETF tracks the Barclays Rate Hedged U.S. Aggregate Bond Index, Negative Five Duration. The benchmark provides long positions in the Barclays U.S. Aggregate Bond Index, which consists of Treasuries, government bonds, corporate bonds, mortgage-backed pass-through securities, commercial MBS & ABS, and short positions in U.S. Treasuries corresponding to a duration exceeding the long portfolio, with duration of approximately negative 5 years. Expense ratio came in at 28 bps. The product has gained 0.3% so far this year. Link to the original post on Zacks.com

How To Pick An Emerging Market Fund

By Tim Maverick If there’s one truism I’ve found during my years in the investing field – which date back to the 1980s – it’s the fact that everything is cyclical. What runs hot will inevitably turn cold in a few years, and vice versa. This reality is beautifully illustrated in this following periodic table of asset class returns. The table appeared in The Wall Street Journal courtesy of Budros, Ruhlin & Roe in Columbus, Ohio. The firm’s advisors use it to explain to clients why diversification is necessary. It also reinforces my contrarian bent. For instance, I’m not at all interested in the red-hot biotech and tech industries right now. Instead, I’m looking at a sector everyone is avoiding like the plague… emerging markets . I’ve been investing in emerging markets since the 1980s. Today, I’d like to share some tips on how to pick the best emerging market funds – and, just as importantly, how to avoid the losers. Tip #1: DON’T Use an Index Fund Index funds seriously narrow your investing universe. That’s true here in the United States, as well, but it’s really bad in emerging markets. Data from the Institute of International Finance brings home my point. Only about $7.5 trillion of the $24.7 trillion universe of emerging market stocks is contained in the various indices run by J.P. Morgan (NYSE: JPM ), MSCI (NYSE: MSCI ), and others. The rest is simply ignored. I don’t know about you, but I don’t want to pretend that roughly 70% of emerging market stocks don’t exist. As I’ve said before, you don’t shop in just one aisle at the grocery store. Don’t do it in the stock market, either. Tip #2: Don’t Invest in Closet Indexers So now we’ve eliminated index funds. Next up is looking at the top 10 positions in any fund you’re considering. If you see the names of companies like Samsung Electronics Co. Ltd. ( OTC:SSNLF ) , Taiwan Semiconductor Manufacturing Co. Ltd. (NYSE: TSM ) , and China Mobile Ltd. (NYSE: CHL ) , move on. The fund manager is a closet indexer. They’re only interested in matching the index by which they’re judged, rather than actually making money for the fund’s shareholders. Tip #3: Avoid Funds That Over-Invest in Two Sectors Finally, it’s important to look at the sector breakdown of a fund. In far too many cases, these funds are over-invested in just two sectors. If you see 50% or more invested into financials and technology, skip over this fund. This fund manager doesn’t understand emerging markets and may be confused into thinking that they’re investing in the U.S. market. Indeed, these two sectors are loved by U.S. fund managers, and that fascination is one reason I believe most emerging market funds have performed so badly. What to Look For Now that we know what to avoid, let’s figure out what we should be looking for in an emerging market fund. I’m a great believer that people are people, no matter where they live. And all people aspire to better their lives and those of their children. For me, that means investing in funds that emphasize the growing consumer class in developing economies. Look at China, for instance. It’s moving away from an industrial economy toward a consumer economy. Just as we no longer consider U.S. Steel Corp. (NYSE: X ) a bellwether for the U.S. economy, we probably shouldn’t count on industrials to perform that role in China much longer, either. And that means you don’t want to own the usual Chinese names. Instead, you want to own something like the South Korean cosmetics company AmorePacific Corp. ( OTC:AMPCF ) . Its sales and revenues are soaring thanks to Chinese demand, which is boosting its stock. Another option is a frontier market stock like Safaricom Ltd. ( OTC:SCOM ) , Kenya’s dominant telecom firm. Kenyans have the same mobile phone addiction as everyone else, and the safety valve is that it’s 40% owned by telecom giant Vodafone Group Plc (NASDAQ: VOD ) . In closing, stick with funds that emphasize the growth of consumerism in places like China. Companies like Apple Inc. (NASDAQ: AAPL ) are benefiting, and so will the myriad number of home-grown consumer companies in the emerging world. Link to the original post on Wall Street Daily