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Car Hops To Camelot: Lessons Learned From A Bond-Unfriendly Era

Part 1: How a ‘stra-tactical’ approach can help investors stay ready for change This series uses historical economic snapshots to explore how a “stra-tactical” investment approach that combines strategic and tactical allocations can help investors manage volatility. This first blog looks at the bond-unfriendly period during the 1950s and early 1960s. Part 2 examines the bull equity markets of the 1980s and 1990s, while Part 3 looks at flows into equity and fixed income markets since the Great Recession. With prospects of continued volatility in equity and fixed income markets, maintaining a strategic allocation to assets that perform differently in various economic environments can help investors avoid having one asset class dominate portfolio performance. At the same time, investors need a stra-tactical investment approach that affords the flexibility to tactically pursue specific investment opportunities without going all-in or all-out of an asset class. This blog explores the reasons why this approach, with a meaningful allocation to bonds, may have benefited investors at certain times during the ’50s and early ’60s. Unhappy days for bonds The 1950s are commonly regarded as the worst for bond returns. In the rising interest rate environment that began in 1950 and extended through the Great Society in 1965, bonds returned around 2.0% on average, while stocks returned 16.2%. 1 Part of the reason bonds performed poorly during the period is that the absolute level from which interest rates rose at the beginning of the decade was artificially low – at or below 2.5%. 2 To maintain stability in the financial system preceding and during World War II, the Federal Reserve (the Fed) agreed to take steps that kept interest rates low, with short-term rates below 0.375% and long-term rates below 2.5%. 2 This policy ended in March 1950 when the Fed was allowed to resume an active and independent monetary policy. Long-term rates began rising from their low base of less than 2.5% shortly thereafter. By January 1960, they had nearly doubled to 4.7%. 1 When rates start at such a low base, the income on bonds isn’t sufficient to offset the capital loss from falling prices, and total return falls. Investing in bonds during a rising rate environment While this period of rising rates was clearly a hostile decade for fixed income, here are several reasons investors could have benefitted from an allocation to bonds: Stocks outperformed most of the time, but not all of the time . Bonds outperformed stocks in 1953, 1957, 1960 and 1962. 1 These years broadly corresponded with periods of economic slowdown or recession. In a rising rate environment, interest rates rise most of the time, but not necessarily all of the time. While such movements can be short-lived, they could result in portfolio underperformance. The downside for bonds, if held to maturity, is more limited than the downside of stocks. Even in the worst year (1959) of the worst decade, bonds were down 2.6%, compared with the worst year (1957) for equities, which were down 10.5%. 1 Bonds were significantly less volatile, in terms of standard deviation, than stocks (by less than half) during the period from 1950 through 1965. 1 History doesn’t repeat, but it can rhyme What does this all mean for today’s investors, who are anticipating a possible interest rate increase by the Fed in December 2015? Investors should resist the temptation to draw direct parallels between this historical period and the current interest rate environment because too many factors affect equity and fixed income market returns. But by looking to this period, investors can glean the importance of: Diversifying a portfolio by sources of economic risk rather than sources of return. A portfolio that can mitigate the unexpected risks of different macroeconomic environments may help an investor’s financial plan stay on track in any interest rate environment. Potentially reducing volatility with bonds even when rates rise. In addition to income, bonds may offer investors the benefit of lowering the volatility of portfolio returns. Instead of making investment decisions based on interest rate bets, investors need to be prepared for different economic outcomes. Talk to your advisor about a strategic portfolio allocation that includes exposure to stocks, bonds, commodities and other asset classes. Sources Federal Reserve Economic Data (FRED), “Historical Returns on Stocks Bonds and Bills – United States,” Aswath Damodran, Stern School of Business, New York University. Bonds are represented by US 10-year Treasuries; stocks are represented by the S&P 500 Index. Federal Reserve Bank of New York, “U.S. Monetary Policy and Financial Markets,” Ann-Marie Meulendyke, 1998, and University of Chicago Press, “Financial Markets and Financial Crises,” Glenn R. Hubbard, ed., January 1991. Important information Diversification does not guarantee a profit or eliminate the risk of loss. Past performance cannot guarantee future results. In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions. Fixed-income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating. Although bonds generally present less short-term risk and volatility than stocks, the bond market is volatile and investing in bond funds involves interest rate risk; as interest rates rise, bond prices usually fall, and vice versa. Bond funds also entail issuer and counterparty credit risk, and the risk of default. Additionally, bond funds generally involve greater inflation risk than stocks. The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE All data provided by Invesco unless otherwise noted. Invesco Distributors, Inc. is the US distributor for Invesco Ltd.’s retail products and collective trust funds. Invesco Advisers, Inc. and other affiliated investment advisers mentioned provide investment advisory services and do not sell securities. Invesco Unit Investment Trusts are distributed by the sponsor, Invesco Capital Markets, Inc., and broker-dealers including Invesco Distributors, Inc. PowerShares® is a registered trademark of Invesco PowerShares Capital Management LLC (Invesco PowerShares). Each entity is an indirect, wholly owned subsidiary of Invesco Ltd. ©2016 Invesco Ltd. All rights reserved. Car hops to Camelot: Lessons learned from a bond-unfriendly era by Invesco Blog

Playing Offense With Defense Stocks

Increased government spending is boosting the prospects of aerospace, defense and related firms By Nick Kalivas After years of decline, 2015 saw a rebound in plans for government defense spending – a trend that shows no signs of abating. At the same time, valuations on aerospace and defense stocks are attractive relative to the broader market. With these trends in mind, I believe now might be a good time for investors to consider adding potential offense to their portfolios with defense stocks. Defense dominates the headlines in 2015 The following news stories were reported in November and December, illustrating global interest in boosting defense programs. “Japan to spend a record $41 billion on defense.” 1 “War on Islamic State brings $50 billion European defense boost.” 2 “The House and Senate Armed Services Committees … increased the fiscal 2016 spending caps for defense and nondefense activities by $25 billion each.” 3 “South Korea approves 3.6% increase in 2016 defense budget.” 4 “US said to move ahead with $1.83 billion arms sale to Taiwan.” 5 Defense orders pop in November These headlines indicate a shift from a four-year trend of declining defense orders, which appears to be bottoming even before newly expanded budgets can be deployed and reflected in government data. The US Commerce Department’s November durable goods report showed a 44% jump in defense orders from October. 6 Defense orders are highly volatile, but the six-month average is starting to climb after an extended period of weakness. Notice the upward trend in defense orders in the following chart. Unfulfilled defense orders have been declining since late 2012, which has hurt the defense industry’s performance. However, the defense order-to-shipment ratio is trending upward over the past year, which suggests that there could be a firming in industry order backlogs (unfilled orders). 6 A rising backlog could, in turn, boost confidence in defense company earnings and garner the attention of investors. In addition, computer and electronic equipment orders rose 0.4% from the previous month in November – building on October’s 2.1% gain. 6 This is relevant, as the defense industry has become more high-tech over time. In my view, technology companies with exposure to the defense industry are likely to benefit from higher defense spending and increased computer and electronic equipment orders. Civilian aerospace is still strong It’s also important to note that many defense contractors have exposure to commercial aerospace firms. Examples include Boeing (NYSE: BA ), United Technologies (NYSE: UTX ) and Honeywell (NYSE: HON ). 7 Cheap energy prices support airline industry profits and often lead to lower air fares, which can boost aircraft and aircraft maintenance demand. In its third quarter 2015 business outlook, Boeing projected higher air passenger traffic and meaningful replacement demand in its outlook for the commercial airline business. As indicated in the graphic below, unfilled aircraft orders reported by the US Commerce Department are at historically high levels – underscoring the continued strength of commercial aerospace. 6 Source: Bloomberg L.P. as of Dec. 23, 2015 Defense and aerospace valuations are attractive Valuations for defense and aerospace firms are also compelling. As of Dec. 23, the S&P 500 Aerospace and Defense Industry Index was trading at an 8.0% discount price-earnings (P/E) ratio to the S&P 500 Index. Relative valuations were richer in the mid 1990s and mid-2000s, but have come down since early 2014. 6 Source: Bloomberg L.P. as of Dec. 28, 2015 A potential alternative for investors interested in defense and aerospace Investors looking for access to the aerospace and defense sector might consider the PowerShares Aerospace & Defense Portfolio (NYSEARCA: PPA ). PPA holds a mixture of traditional aerospace and defense companies, as well as information technology and materials companies that are involved in the defense industry. Sources: 1 RT.com, Dec. 22, 2015 2 Bloomberg L.P., Nov. 24, 2015 3 Bloomberg L.P., Nov. 4, 2015 4 Bloomberg L.P., Dec. 3, 2015 5 Bloomberg L.P., Dec. 15, 2015 6 Bloomberg L.P., Dec. 23, 2015 7 As of Dec. 31, 2015, Boeing, UTX and Honeywell make up 6.46%, 6.40% and 6.35% of PPA’s holdings, respectively. Important information The S&P 500 Aerospace & Defense Index is a capitalization-weighted index designed to capture a composite return of the stocks in the S&P 500 Index that are operating in the aerospace and defense industry, according to the Global Industry Classification Standard. An investment cannot be made in an index. Past performance cannot guarantee future results. Price-earnings (P/E) ratio, also called multiple, measures a stock’s valuation by dividing its share price by its earnings per share. There are risks involved with investing in ETFs, including possible loss of money. Shares are not actively managed and are subject to risks similar to those of stocks, including those regarding short selling and margin maintenance requirements. Ordinary brokerage commissions apply. The Fund’s return may not match the return of the Underlying Index. The Fund is subject to certain other risks. Please see the current prospectus for more information regarding the risk associated with an investment in the Fund. Investments focused in a particular industry, such as aerospace and defense, are subject to greater risk, and are more greatly impacted by market volatility, than more diversified investments. Stocks of small and mid-sized companies tend to be more vulnerable to adverse developments, may be more volatile, and may be illiquid or restricted as to resale. The Fund is non-diversified and may experience greater volatility than a more diversified investment. Before investing, investors should carefully read the prospectus/summary prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the Funds call 800 983 0903 or visit invescopowershares.com for prospectus/summary prospectus. The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE All data provided by Invesco unless otherwise noted. Invesco Distributors, Inc. is the US distributor for Invesco Ltd.’s retail products and collective trust funds. Invesco Advisers, Inc. and other affiliated investment advisers mentioned provide investment advisory services and do not sell securities. Invesco Unit Investment Trusts are distributed by the sponsor, Invesco Capital Markets, Inc., and broker-dealers including Invesco Distributors, Inc. PowerShares® is a registered trademark of Invesco PowerShares Capital Management LLC (Invesco PowerShares). Each entity is an indirect, wholly owned subsidiary of Invesco Ltd. ©2015 Invesco Ltd. All rights reserved.

ETF Investing Strategies To Brave Volatility In 2016

Global stocks were in a mess in 2015, stymied by the sudden currency devaluation in China, spiraling Chinese economic slowdown and the resultant shockwaves across the world. Also, the return of deflationary threats in Eurozone despite the QE measure, a sagging Japanese economy, the oil price rout and a slouching broader market complicated the scenario. Back home, putting an end to prolonged speculation, the Fed finally hiked the key interest rate by 25 bps at the tail end of the year. All these put the New Year in a critical juncture. The investing world may be at a loss of ideas on where to park money for smart gains. For them, below we detail possible asset class movements in 2016 and the likely smart ETF bets. Bull or Bear in 2016? The million-dollar question now is whether U.S. stocks will buoy up or drown in 2016. While policy tightening and overvaluation concerns give cues of an end to the bull run, a dubious performance in 2015 raises hopes that the stocks will rebound soon. After all, the Fed is not hiking rates to rein in inflation. The tightening is reflective of U.S. economic growth and lower risk of deflation, both of which are encouraging for stocks. Thus, stocks should offer decent, if not spectacular, returns next year. Investors can capitalize on a steady U.S. economy via the momentum ETF iShares MSCI USA Momentum Factor (NYSEARCA: MTUM ) . To rule out the negative impact of a higher greenback, investors can also try out more domestically focused small-cap ETFs; but a value notion is desirable to weather heightened volatility. S&P Small-Cap 600 Value ETF (NYSEARCA: VIOV ) is one such fund. Investors dreading interest rate hike may also try out this rate-restricted ETF PowerShares S&P 500 ex-Rate Sensitive Low Volatility ETF (NYSEARCA: XRLV ). Sectors to Hit & Flop Since investors will be busy in speculating the pace and quantum of Fed rate hikes in 2016, rate sensitive sector ETFs would be winners and losers. Financial sector ETF PowerShares KBW Bank ETF (NYSEARCA: KBWB ) and insurance ETF Dow Jones U.S. Insurance Index Fund (NYSEARCA: IAK ) generally perform better in a rising rate environment. Plus, Consumer Discretionary ETFs like Consumer Discret Sel Sect SPDR ETF (NYSEARCA: XLY ) and tech ETFs like Technology Select Sector SPDR ETF (NYSEARCA: XLK ) also perform well in the early rate hike cycle as per historical standard. Lower gasoline prices should also help consumers to create a wealth effect. On the other hand, high-yielding sectors and the sectors which are highly leveraged will falter in a rising rate environment. So Utilities Select Sector SPDR ETF (NYSEARCA: XLU ) and Vanguard REIT ETF (NYSEARCA: VNQ ) could be at risk. Having said this, we would like to note that these are just initial blows and after a few upheavals, the market movement should even out. Where Will Bond Markets Go? The year 2016 may mark the end of the prolonged bull run in the bond market as the first U.S. rate hike in a decade may make investors jittery in 2016. This is more likely if rates steadily move up in the coming months, with the Fed’s current projections hinting at four rate hikes in 2016. Agreed, interest rates environment remained benign even after the lift-off, owing to the global growth worries. But the scenario may take a turn in 2016 if economic data come on the stronger side, inflation perks up and wage growth gains momentum. On the other hand, the possibility of another solid year for fixed income securities can’t be ruled out, especially when stocks are not that cheap. However, investors should note that yield curve is likely to flatten ahead. Since the inflation scenario is still muted, long-term bond yields are expected to rise at a slower pace while short-term bond yields are likely to jump. Yield on the 6-month Treasury note soared 39 bps to 0.50% since the start of the year (as of December 29, 2015) while the yield on the two-year Treasury note jumped 43 bps to 1.09% and the yield on the 10-year Treasury note rose just 18 bps to 2.32%. Thanks to the potential flattening of the yield curve, the inverse bond ETF iPath US Treasury Flattener ETN (NASDAQ: FLAT ) could be a hit next year. Now that interest rates will be topsy-turvy, floating rate ETFs like iShares Floating Rate Bond (NYSEARCA: FLOT ) should do better going ahead. Investors can also take a look at the interest rate-hedged high yield bond ETFs as solid current income from these securities can make up for capital losses. High Yield Interest Rate Hedged ETF (BATS: HYHG ) is one such option, yielding over 6.50% annually. However, one should also note that the high-yield bond market is presently undergoing a tough time due to the energy market default. So, less energy exposure is desired in the high-yield territory. About 14% of HYHG is invested in the energy sector. Drive for Dividends The Fed may hike key interest rates, but it has hardly left any meaningful impact on long-term treasury yields. So, the lure for dividends will remain intact. U.S.-based dividend ETFs including Vanguard High Dividend Yield ETF (NYSEARCA: VYM ) and Schwab US Dividend Equity ETF (NYSEARCA: SCHD ) could be useful for investors in waiting out the volatility via current income. Want to Visit Abroad? Where? It’s better to stay diversified as far as the global market investing is concerned. Due to the divergence in monetary policies between the U.S. and other developed economies, many analysts are wagering on Europe and Japan (where substantial and prolonged QE reassures are on). Per an analyst , earnings in both regions “will make them attractive from a standpoint of possible capital appreciation.” Plus, the European markets were in occasional disarray this year due to economic hardships. This has made the stocks compelling. However, currency-hedging technique is warranted while visiting foreign shores. Europe Hedged Equity Fund (NYSEARCA: HEDJ ) and Japan Hedged Equity Fund (NYSEARCA: DXJ ) are two choices in this field. Investors can also stop over at China but with a strong stomach for risks. Golden Dragon Halter USX China Portfolio (NYSEARCA: PGJ ) should be a modest bet for this. Occasional Volatility to Crack the Whip Volatility has been pretty strong in the market in 2015 and the trend should continue in 2016. Investors can deal with this in various ways. First comes low volatility ETFs like SPDR S&P Low Volatility ETF (NYSEARCA: SPLV ) and iShares MSCI Minimum Volatility ETF (NYSEARCA: USMV ) , second are defensive ETFs like U.S Market Neutral Anti-Beta Fund (NYSEARCA: BTAL ) and AdvisorShares Active Bear ETF (NYSEARCA: HDGE ) , and last but not the least in queue are the volatility ETFs themselves such as C-Tracks on Citi Volatility Index ETN (NYSEARCA: CVOL ) and ProShares VIX Short-Term Futures (NYSEARCA: VIXY ) . Notably, as the name suggests volatility products are quite rowdy in nature and thus suit investors with a short-term notion. Original Post