nasdaqvcit – Scalper1

Back To The Box Paradigm: A U.S. Fixed Income ETF Portfolio

Summary As markets make incomprehensible moves, stick to your rules, build a box. Do not attempt to chase market shadows, but devise and maintain strategies that fit your needs. One such strategy entails accepting duration risk for a higher distribution yield relative to a benchmark. Back To The Box Paradigm: A U.S. Fixed Income ETF Portfolio When the markets are moving in directions you cannot comprehend and cynicism erupts, stick to your rules. Make a box and stay inside of it. Do not attempt to chase shadows, but devise and maintain strategies that work. One such strategy, the box paradigm, is designed to accept duration risk for a higher distribution yield than its benchmark, the iShares Core U.S. Aggregate Bond ETF (NYSEARCA: AGG ). An ETF portfolio was selected to meet these objectives and is seen below in Table 1: (NYSEARCA: FLOT ) – iShares Floating Rate Bond ETF (NYSEARCA: BSV ) – Vanguard Short-Term Bond ETF (NYSEARCA: BIV ) – Vanguard Intermediate-Term Bond ETF (NASDAQ: VCIT ) – Vanguard Intermediate-Term Corporate Bond ETF (NYSEARCA: BLV ) – Vanguard Long-Term Bond ETF (NASDAQ: VCLT ) – Vanguard Long-Term Corporate Bond ETF AGG – iShares Core Total US Bond Market ETF Table 1 – Box Paradigm: U.S. Fixed Income ETF Portfolio As At January 30 th 2015 (click to enlarge) Environment Outside The Box The environment should first be ascertained, so that a proper box can be constructed. In its latest FOMC statement, the Fed thinks that the U.S. economy is growing at a solid pace. Labor market indicators have improved further as job gains grew and the unemployment rate fell. Household spending is also showing signs of improvement as a result of the decline in energy prices. Businesses have also been investing while core inflation remains low but stable. Table 2 – Economic Projections Of Federal Reserve Board Members And Federal Reserve Bank Presidents, December 2014 (click to enlarge) Source: Federal Reserve Charts 1-3: Central Tendencies Of Economic Projections, 2014-2017 And Over The Longer Run Source: Federal Reserve Initial estimates show that U.S. GDP grew 2.5% year over year in the 4th quarter of 2014. This rate is above the 4-quarter moving average of 2.4%, so the U.S. is still growing at an above-trend pace. Consumer spending was strong as real PCE rose 4.3% versus 3.2% in the previous quarter. This was the strongest quarterly increase in the post-financial crisis era. Residential investment improved given the loosening of mortgage credit and this trend is likely to continue. Chart 4 – U.S. GDP Growth (Year-Over-Year %) As At December 2014 (click to enlarge) Source: Bloomberg Given the current moves in the U.S. economy and expectations for a rate hike in the 3rd quarter of 2015, yields in the U.S. should be rising. But they are not. The U.S. 10-year yield is nearing historical lows, around 1.65%. The chart below shows a 3-year chart of the U.S. 10-year yield. Chart 5 – U.S. 10-Year Yield Weekly Candlestick Chart As At January 30 th 2015 (click to enlarge) Source: Bloomberg Quantitative Easing of other central banks appears to be keeping U.S. yields low as investors shift their portfolios from their local currency fixed income portfolios to U.S. dollar-denominated portfolios to attain the higher yield. Assumptions & Box Metrics Trying to predict market movements produces a certain level of cynicism as there is a 60% probability that the prediction made is wrong. With this level of duplicity, investors should assume the worst-case scenarios which would prevent ruin but leave room for gains, a personal put option. Let us take a look at the table below which shows the box metrics of the U.S. Fixed Income ETF Portfolio. Table 3 – Box Metrics Of U.S. Fixed Income ETF Portfolio (click to enlarge) The box paradigm portfolio weightings hold until the triggers are achieved, that is, a recognizable change in the interest rate environment in the U.S. Furthermore, box constructions prevent chasing the market and ensure that the objectives are set and met. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Keep A Diversified Portfolio For 2015

Marc Faber is of the opinion that investors need to remain diversified across asset classes in 2015 and I am in full agreement with this opinion. I am overweight on US equities and Indian equities for 2015 while I am underweight on Chinese Equities and Euro-zone equities. US Treasury bonds are an attractive investment for 2015 along with corporate bonds that provide an attractive yield. In an interview with Bloomberg , Marc Faber opined that he expects volatility and surprises in the coming year. In line with this view, Marc Faber suggested that investors should remain diversified across asset classes in the coming year. I am in full agreement with his views and this article discusses some interesting investment options for the coming year. I want to start with relatively safe assets and my first choice for 2015 is US Treasury bonds. I must add here that I am bearish on US Treasury bonds for the long-term. However, for 2015, I believe that Treasury bonds are a “must have” for the portfolio. As the chart below shows, the global economy is on a decline and the advanced economy (excluding US) is slowing down sharply. Even China’s growth for 2015 remains uncertain with negative surprises coming from the economic data. In such a global economy outlook, it is important to own Treasuries and I believe that US Treasuries will rally from current levels through 2015. In particular, the first half of 2015 will be better than the second half. Investors can therefore consider exposure to Vanguard Long-Term Government Bond ETF (NASDAQ: VGLT ) and the Vanguard Short-Term Bond ETF (NYSEARCA: BSV ). The second investment option in my radar is the corporate bond ETF. As US markets trend at record highs and US corporate profit remains robust, corporate bond ETF’s are an exciting investment option. The interest in corporate bonds is evident with the Vanguard Intermediate-Term Corporate Bond ETF (NASDAQ: VCIT ) witnessing robust fund inflow according to this report. The intermediate bond ETF provides a healthy SEC yield of 3.16%, making it an attractive investment option when the US economy and corporate profits are likely to be strong in 2015. The Vanguard Long-Term Corporate Bond ETF (NASDAQ: VCLT ) and the Vanguard Short-Term Corporate Bond ETF (NASDAQ: VCSH ) also provide a SEC yield of 4.38% and 1.68% respectively. I believe that investors can remain invested in these ETF’s through 2015. Gold (NYSEARCA: GLD ) has been my choice among safe assets in the past. However, I am not bullish on gold for the first half of 2015. I believe that a strong dollar will keep gold lower at least in the first half of 2015. Investors with a long-term view can however consider gradual exposure to gold at current levels. While the near-term outlook is negative, gold remains a good investment and a good currency with a 3 to 5 year investment horizon. My opinion is to have limited exposure to gold in 2015 as high exposure can potentially harm the returns prospects for the portfolio. Coming to equities, I believe that US equities will continue to perform well in 2015 and I have discussed reasons in the past for my view. The primary reasons being a resilient US economy, weak Euro-zone, Japan and Chinese economies and a strong job market to add to a the robust markets. However, I must caution here that the broad index (NYSEARCA: SPY ) might not continue to provide robust returns. Since March 2009, the US index is up by 200% and I don’t expect the same rate of upside to continue in the coming year. My view therefore is to remain selective in terms of picking stocks and sectors instead of exposure to the broad based index. With oil prices plunging, there are some very attractive opportunities in the oil and gas space and I recently wrote on Occidental Petroleum (NYSE: OXY ), which is a good pick for 2015 in my view. I also remain positive on Encana (NYSE: ECA ) among oil and gas stocks in the coming year. I believe that in terms of steady performance, the healthcare sector will remain a bright spot in the coming year and investors can consider exposure to the Vanguard Healthcare ETF (NYSEARCA: VHT ). I must also mention here that the US consumer confidence is at a record high since the financial crisis on the back of a stronger economy and improving jobs markets. I believe that for the first quarter of 2015, consumption based themes will do well. I am bullish on Wal-Mart (NYSE: WMT ) for the first quarter of the year and depending on the consumption pattern and improvement in the jobs market, the stock investment horizon can be extended. Among global markets, I am most bullish on Indian equities and I believe that the Indian markets can be a star performer in the coming year. The Indian government has promised big reforms in the budget coming up in March 2015 and I believe that there is likely to be a pre-budget rally. Further, interest rates have peaked in India and with inflation cooling down; I expect a series of rate cuts in the coming year. That will provide an additional boost to the markets and interest rate sensitive sectors such as banking and infrastructure. In the banking space, my stock pick is ICICI Bank (NYSE: IBN ), which is India’s largest private sector bank. As reforms unfold and as interest rates cuts come in 2015, the bank is best positioned to benefit. Besides the option of directly investing in Indian markets, investors can consider investment through ETF’s. Considering the broad markets, iShares India 50 ETF (NASDAQ: INDY ) and iShares MSCI India ETF (BATS: INDA ) are also good investment options. While the former gives exposure to 50 largest Indian stocks, the latter gives exposure to large and mid-sized companies in India. In conclusion, 2015 is likely to be volatile and the best strategy is diversification. On an overall basis, I remain overweight on US and Indian equities and underweight on China and Euro-zone equities. However, investors need to apply bottom-up approach to investing even in attractive markets. I expect oil to remain largely in the range of $50 to $70 per barrel for the coming year. However, I do expect some oil and gas companies to perform well and I have mentioned some names in the article.