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The 3 Key Elements Of A Bond ETF

As the Head of Fixed Income Strategy for iShares, I am fully versed in the seemingly complex world of bond ETFs. I wanted to take a little time to explore the basics for you, because the only way to fully appreciate the benefits that this type of investment can offer is to first understand how they work. First things first – here are three key elements that every investor should know: 1. A bond ETF typically tracks an index. While there are a few actively-managed fixed income ETFs, for our purposes we’ll focus on index-based products, which generally seek to track the performance of an index minus fees and expenses, and make up the majority of bond ETFs out there. Like equity indexes, bond indexes typically target a specific part of the market – such as a specific sector (e.g. Treasuries, corporates), credit rating (e.g. Aaa-A), or maturity range (e.g. 7-10 years). Bond indexes combine these elements in a variety of ways, allowing investors to access both broad and narrow segments of the bond market through the ETFs that track them. For example, you can access the total investment grade bond market through a fund like the iShares Core Total US Bond Market ETF (NYSEARCA: AGG ), or specifically target U.S. corporate bonds through a fund like the iShares Aaa-A Rated Corporate Bond ETF (NYSEARCA: QLTA ). Bottom line: Understanding the underlying index is key to knowing what you own in a bond ETF. 2. A bond ETF’s current price is visible and updated throughout the day on an exchange. While some investors appreciate the fact that they can trade an ETF intraday, others may never take advantage of this feature. And that’s okay, because the mere fact that bond ETFs trade on the stock exchange is still a benefit for those investors, because it provides price transparency in an otherwise opaque market. Individual bonds trade over-the-counter (OTC), which means that buyers and sellers negotiate individually in order to reach a deal. As a result, bonds can be hard to track down and quotes from different brokers can vary widely. In contrast, investors can see bond ETF execution prices on an exchange throughout the trading day. You can see what price at which you can buy and sell the ETF, allowing you to make more informed decisions about your bond investments. This can be particularly powerful during periods of time when markets are moving quickly or segments of the bond market are experiencing illiquidity. Bottom line: Whether you intend to trade or not, the fact that bond ETFs offer transparent pricing arms you with valuable information that can help you make an informed investment decision. 3. A bond ETF is managed by a human (sometimes several). A common misconception about bond ETFs is that they simply hold all the securities in the index they track, rendering a portfolio manager (PM) unnecessary. This is actually a flattering assumption; because if a bond ETF manager or PM is doing the job correctly investors are simply getting the exposure they expect, without much deviation from the performance of the underlying index (otherwise known as tracking error). The actions of the bond ETF manager are invisible. The truth is that there is a lot of work going on behind the scenes to make this happen. Bond indexes can hold hundreds and sometimes thousands of bonds, some of which are illiquid or thinly traded. As a result, a bond ETF manager is required to construct a portfolio that tracks the index as closely as possible using only the securities that are available at any given time. This can be particularly tricky in certain situations (for example, an illiquid market segment like high yield), but a good PM is able to navigate a range of market environments. Bottom line: Bond ETFs do have portfolio managers, and a skilled one will work to minimize tracking error on an ongoing basis so that investors get the exposure they’re seeking. Of course, there’s much more to the story than this, but these three points really get to the heart of what a bond ETF is. Original Post

UWTI: Forget About Growth

Originally published on August 6, 2015 VelocityShares 3X Long Crude ETN (NYSEARCA: UWTI ) is set to close down strongly on Thursday morning as oil traders worry that the market is far from a takeoff. An Oppenheimer report on the market suggested that the cut in supplies by producers won’t be enough to save them from the glut in the market, and much pain ahead. Fadel Gheit, who wrote the report for the research house, said that recent reports from the oil firms were a sign of shifting market outlook. “The priority now is to discontinue budget spending. The priority is to live within your means. Forget about growth. They are now in survival mode.” Oil pumpers slash budgets Mr. Gheit was commenting the recent changes to outlook seen in the earnings report of some of the biggest oil firms in the world. Chesapeake has cancelled its payouts to shareholders , Exxon Mobil (NYSE: XOM ) has slashed its capital spending and Royal Dutch Shell (NYSE: RDS.A ) (NYSE: RDS.B ) has cut more than 6,000 jobs . At the root of the trouble is OPEC . The global oil cartel has decided to keep its supply high despite the price of Brent falling below $50. Shell CEO told investors that his firm is “planning for a prolonged downturn.” Those betting on the VelocityShares 3X Long Crude ETN may want to do the same. Mr. Gheit said that major oil firms were “still not willing to abandon their rosy forecasts,” but, “at least they are addressing the near-term situation that we have to do something now and not wait for oil prices to recover.” Supply of oil is set to fall over the coming years because of lower investment from firms across the world, but it’s still not going to be enough to allow oil makers, or the price of the black liquid, to grow by a huge margin. VelocityShares 3X Long Crude ETN gets crushed After open this morning the VelocityShares 3X Long Crude ETN was trading for $1.28, down 4.1 percent for the day so far. Those who have been trading the ETF in the hope of a surprise oil spike have been hit hard in recent weeks as Iran’s coming entry into the global market keeps pushing prices lower. In the last month the ETN has lost more than 40 percent of its value. It has lost more than 70 percent since the year began. Rumors that VelocityShares 3X Long Crude ETN will be forced into a reverse split have not yet been met with any facts to back them up, but if prices keep crashing there may be no other option. Leveraged ETFs are not for the faint of heart and 3X oil, much like its gold cousins, has been a very difficult market to make money in in 2015. That trend may continue through the second half of the year and those that don’t know what they’re doing should reduce their exposure and stop trying to time a market that’s controlled by a cartel thousands of miles away. Original Post

Invest Like Henry Kissinger

By Carlton Delfeld “I’ve always acted alone. Americans like that immensely.” – Henry Kissinger Have you seen Henry Kissinger lately? At 92, he’s as fluent as ever on foreign affairs. It makes you wonder whether, even at this advanced stage of life, he could do a better job managing American foreign policy than our current leaders. This brings me to Ukraine, Russia, and China. They look like a beautiful mess right now – but within a reasonable period, American foreign policy will gravitate back to a Kissinger dictum: America can only afford one big power adversary at a time. At this time, the one adversary is clearly China. In short, the whole Ukraine-Crimea-Russia fiasco could’ve and should’ve been avoided. Unfortunately, Ukraine is a prisoner of geography and history. It’s a bridge between East and West – a classic buffer state. The country will always need to balance closer ties to Europe with good relations with Russia, and this practical consideration should be reflected in American diplomacy. Pushing Russia closer to China is certainly not in American interests. Lord Palmerston once said, “Nations have no permanent friends or allies – they only have permanent interests.” Thus, the probability is on the side of U.S.-Russia relations improving in the long run. The stakes are simply too large and the logic of some sort of rapprochement too clear and convincing. In fact, while headlines have created a perception of a crisis in U.S.-Russia relations, the reality is that diplomats on both sides are working hard on “alliance management.” As an emerging bond trader active in Russia put it to me, “A lot of this is elaborate political theatre.” I believe that the gap between perception and reality is where fortunes are made, and Russia is the perfect example. Despite the country’s reputation as being a non-competitive, monopolistic economy, there were over 21,300 foreign capital enterprises operating in Russia by the end of the second quarter. And American companies invested $1.18 billion in Russia in 2014, nearly double the $667.2 million recorded in 2013. What’s more, Russia’s stock market is trading at astoundingly cheap valuation multiples right now. We know the reasons: economic sanctions imposed by Western democracies, falling energy prices, and, finally, the falling ruble, which is down sharply against the dollar this year. The stocks in the Market Vectors Russia ETF (NYSEARCA: RSX ) are trading at an 80% discount to the S&P 500 Index and at less than 65% of break-up value. Howard Marks of Oaktree Capital puts price and value at the center of his book, The Most Important Thing: For a value investor, price has to be the starting point. It has been demonstrated time and time again that no asset is so good that it can’t become a bad investment if bought at too high a price. And there are few assets so bad that they can’t be a good investment when bought cheap enough. Plus, we don’t need a miracle to profit from the situation, either. An American hedge fund trader active in Russian markets put it to me this way: “Things don’t have to turn around in Russia for me to make money. They just have to get a little bit better.” This is the key. If energy prices stabilize or rise, if the situation in Ukraine improves, if the ruble bounces back – any one of these catalysts could spark a sharp rally. RSX is down 32% over the past year and has pulled back 16% from its recent peak in mid-May. So it’s a good time to get ready to pull the trigger on one of the largest oil and gas companies in the world, Lukoil ( OTCPK:LUKOY ). Lukoil exceeds even Exxon Mobil (NYSE: XOM ) in total proven oil reserves. Even more impressive, the company has remained free cash flow positive during the entire past decade. The company also has a very low risk of government intervention, with a professional board and management at the helm. Despite this, Lukoil is trading at 37% of break-up value and 4.4 times trailing earnings. Right now, I’d nibble on a position and take a more sizable stake when a clear uptrend develops in the stock. Like Kissinger, don’t fear acting alone. Investing in undervalued – even hated – stocks when they turn is the most consistent way to build substantial wealth. Original Post Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.