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A High-Yield Option For Income Investors

Investing in financial markets has become considerably more difficult since the summer. High yielding assets, as well as stocks have taken a beating. Market Vectors High-Yield Muni ETF, however, has seen a steady increase in principal, while providing an attractive dividend yield. As the Treasury yield curve has contracted, alongside falling equity markets, investors have been left with few avenues to invest. Higher yielding dividend stocks, generally yielding below 3%, have seen declines in principle due to the most recent equity market rout. Additionally, junk bonds have seen broad selling pressure as investors shunned riskier assets for fear of slowing economic activity. A lone star, however, has emerged in the form of the Market Vec tors High-Yield Municipal Index ETF (NYSEARCA: HYD ) . This asset has risen close to 4% since early July, while yielding a dividend of 4.81%. This combination of appreciation of principle, as well as stable dividend yield, could be a smart play for investors seeking income in coming months. With the Federal Reserve stuck to its zero-bound lending rate, income investors have had trouble finding sustainable income sources. The global economy continues to weaken, alongside the persistence of foreign central banks loosening monetary policy, causing the Fed to potentially have trouble hiking rates in the near future. The chart below is of the iShares 7-10 Year Treasury Bond ETF (NYSEARCA: IEF ) over the iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ) . This indicator represents the Treasury yield curve. When the indicator declines, it signals a contraction of the yield curve, and thus lowered expectations of a rate hike for monetary policy. Since peaking in the summer of 2015, slowing economic growth, and global financial market volatility has spooked Fed members, forcing them to push out their projected time frame for hiking rates. Furthermore, with investors continuing to buy bonds, yields have fallen to levels providing very little income for investors. (click to enlarge) Moreover, financial market volatility has pushed both junk bonds, and broader equity markets lower. Investors feel that equity markets have topped globally, and the combination of falling currencies, and commodities signal that global growth concerns are finally resulting in increased caution. While dividend stocks may be outperforming the market on a relative basis, these companies are still losing value in 2015. As U.S. earnings season disappoints, investors are pushing all sectors lower. Additionally, weak equity market performance is weighing on junk bonds as risk sentiment diminishes. After my degradation of basically every asset class, there seems to be one lone performer that has provided true safe-haven status. High yielding municipal bonds have outperformed as investors favor the comfort of government backed securities, alongside an attractive yield. As municipalities have lowered their leverage in recent years, their perceived stability has risen. This index also does a nice job of spreading risk, allowing investors to get exposure to a basket of riskier municipal bonds, with lower overall default risk. The Market Vectors High-Yield Muni ETF has proven a strong investment amid the recent volatility in bonds, equities, and currencies. As long as the Fed prolongs raising rates, and financial markets remain volatile, this high yielding municipal ETF should provide steady gains. (click to enlarge)

Lipper U.S. Fund Flows: Net Outflows For Money Market Funds During Wild Week Of Trading

Lipper’s fund macro-groups (including both mutual funds and exchange-traded funds [ETFs]) had aggregate net outflows of $7.0 billion for the fund-flows week ended Wednesday, September 2. This activity represented the second consecutive week of overall negative net flows; investors took out $5.5 billion the previous week. Money market funds (-$10.3 billion) posted the largest net outflows among the macro-groups, bettered by municipal bond funds (-$586 million) and taxable bond funds (-$40 million). Equity funds, with net inflows of $3.9 billion, were the only group on the positive side of the ledger for the week. By Patrick Keon In what was a wild week of trading, the Dow Jones Industrial Average (+65.87 points) and the S&P 500 Index (+8.35 points) each managed to register gains of 0.4% for the week. Market activity for the week was bracketed by two days of superior results; the Dow and the S&P posted combined gains of over 4% on both the first and last trading days of the week. That was enough to offset the approximately 3% loss both indices suffered on Tuesday, September 1. Tuesday’s sell-off, which represented the third worst performance of the year for U.S. stocks, was triggered by continued fears about the economic situation in China. Additional poor economic data from China (its manufacturing purchasing managers index fell to a three-year low) again raised concerns that the world’s second largest economy was headed toward an extended slowdown. The U.S. markets rallied on the first and last trading days of the week on a combination of factors: strong U.S. economic data, rising oil prices, and China’s taking steps to calm its volatile market. U.S. second quarter GDP was revised sharply upward (to 3.7% from 2.3%), which gave rise to speculation the Federal Reserve could still impose an initial interest rate hike in September, despite the turmoil in China. Oil prices bounced during the week after an extended downturn left them at six-year lows. News of decreasing oil reserves was the cause for the rally, which saw the U.S. and global oil benchmarks (West Texas Intermediate Crude and Brent Crude) both appreciate more than 20% from their respective recent lows. Despite Tuesday’s activity, China’s moves to stabilize its market did have a positive impact around the globe. The U.S. market was buoyed at the start of the week by news that China planned to put in controls to limit the yuan’s weakening versus the dollar. The markets also closed the week strengthened by additional measures from China, which stated it would tighten trading rules on stock index futures and foreign exchange derivatives in an effort to solidify its market. The net outflows for the week from money market funds (-$10.3 billion) was only the third time during the third quarter the group had suffered losses. The positive flows performance this quarter has reduced the year-to-date net outflows for money market funds to approximately $40 billion. Institutional Treasury money market funds were responsible for the lion’s share of the week’s net outflows; $12.1 billion net left their coffers. For equity funds, ETFs accounted for all the net inflows (+$4.8 billion) for the week, while mutual funds saw net outflows of $865 million. The ETF activity was dominated by SPDR S&P 500 ETF Trust (NYSEARCA: SPY ), which took in over $7.2 billion of net new money. For mutual funds-in a continuation of this year’s trend-nondomestic equity funds (+$746 million) experienced positive net flows, while domestic equity funds (-$1.6 billion) saw money leave. It was a tale of two cities for taxable bond funds: ETFs took in $4.3 billion of net new money, while mutual funds experienced net outflows of $4.4 billion. The outflows were widespread on the mutual funds side, but Lipper’s High Yield Funds (-$714 million) and Loan Participation Funds (-$451 million) classifications were hit the hardest. The biggest contributors to the positive flows for ETFs were SPDR Barclays 1-3 Month T-Bill ETF ( BIL , +$845 million), iShares 1-3 Year Treasury Bond ETF ( SHY , +$698 million), and iShares 7-10 Year Treasury Bond ETF ( IEF , +$573 million). The $545 million of net outflows for municipal bond mutual funds marked their sixth straight week of outflows. Funds in Lipper’s national municipal bond fund classifications were responsible for $460 million of the outflows. Share this article with a colleague

Economic Lethargy Continues To Bankroll The U.S. Stock Bull

Both wage growth and employment have shown lackluster improvement since the end of the Great Recession in mid-2009. Americans do not believe the economy is improving because they are not earning more money or securing higher-paying employment. The weaker the economic picture, the more likely the stock bull will prevail. Over the past century, the U.S. stock market typically turned down prior to the onset of a recession. You did not need to predict economic contraction; rather, you monitored the Dow and the S&P 500 because the benchmarks acted like leading indicators of bad times ahead. (Investors checked the market internals to get a sense for whether or not stocks themselves might “roll over.”) Stocks demonstrated their predictive powers as recently as October of 2007. The bear market eroded 20%-30% of value before the National Bureau of Economic Research (NBER) even acknowledged the recession’s inception date (12/07) in October of 2008. On the flip side, U.S. equities in today’s world do an atrocious job at recognizing economic sluggishness. The skepticism of chief financial officers (CFOs) at the largest corporations just hit two-year lows. Small business optimism registered its worst reading in 15 months. Meanwhile, you’d have to travel back to November of 2014 to find the sort of pessimism that exists today on the part of the American public. “Gary,” you protest. “People do not always act based upon the way that they feel.” Just the facts, then? The industrial sector – an economic segment that incorporates manufacturing, mining, and utilities – posted its weakest year-over-year (YOY) growth in more than five years. Wholesale sales (YOY) have been in steady decline since 2011, contracting 3.4% in June. Retail sales plummeted in June as well. (No snow. Was it just too hot outside?) And perhaps most importantly, both wage growth and employment (as a function of the population) have shown lackluster improvement since the end of the Great Recession in mid-2009. The take-home is twofold. First, Americans do not believe the economy is improving because they are not earning more money or securing higher-paying employment. For instance, the erosion of roughly one-and-a-half million higher-paying manufacturing jobs has been supplanted by the same number of lower-paying waiter/bartender positions. This dynamic hardly represents economic well-being. Second, the weaker the economic picture, the more likely the stock bull will prevail. In fact, the entire reason that the Federal Reserve needed to enact three rounds of electronic money creation via quantitative easing ($3.75 trillion in “QE”) on top of six-and-a-half years of zero percent overnight lending rates is because the economy has been too weak to tighten borrowing costs. Ironically, Fed chairwoman Yellen maintains that she anticipates hiking rates some time in 2015. Even though annual economic growth throughout the recovery has been stuck near the 2% level? Even as the Fed has downgraded its own expectations for economic expansion for the seventh consecutive year? Even as the the Fed has overestimated the pace of expansion in each of the last seven years? The bond market via the iShares 7-10 Year Treasury Bond ETF (NYSEARCA: IEF ) is not entirely sure if overnight lending rates will be bumped up or not. The fact that the slope of the 50-day moving average has turned lower here in 2015 suggests higher yields in the future, in much the same way that the announcement of QE tapering sent bond yields skyrocketing in 2013. However, IEF’s higher lows over the past five weeks coupled with strong resistance for the 10-year yield near 2.5% may suggest otherwise. Even more intriguing is the likelihood that the pace of any rate hikes may be more important than the timing of the first shot. September? Doubtful. December. Probably. Yet fed funds futures have only priced in a rate of 0.75% by the end of 2016. Only three rate hikes over the next 18 months? Or maybe it will be six at 0.125% so that the pace is even slower than the seemingly preordained quarter-point moves. (You heard the concept of one-eighth of a point here first!) Impressively, stocks continue to benefit from every economic downgrade as well as the lowered expectations for the rate hike timeline. If the European Central Bank (ECB) in Europe can successfully kick Greek debt woes down the pathway – if Chinese authorities can successfully decree that “thou shalt buy-n-hold Shanghai shares” – U.S. stocks may not have much too fear. Indeed, the uptrends for core holdings like the iShares S&P 100 ETF (NYSEARCA: OEF ), the Health Care Select Sect SPDR ETF (NYSEARCA: XLV ) and the Vanguard Information Technology ETF (NYSEARCA: VGT ) remain intact. At the same time, we’re holding a larger-than-usual amount in cash/cash equivalents (15%) in most portfolios. Debt-fueled excess in Greece, Puerto Rico and China gave us a peek of the challenges that central banks around the world will be facing. Global economic deceleration and sky-high U.S. valuations are another. We anticipate an opportunity in the 2nd half of 2015 to buy quality assets at significantly lower prices. Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.