Tag Archives: pro
In Search Of The Rate-Proof Portfolio
After October’s better-than-expected employment report , a December Federal Reserve (Fed) liftoff is looking more likely than it was earlier this fall. In response, U.S. interest rates have been on the rise in recent weeks, with Treasury yields reaching their highest levels since July earlier this month, according to Bloomberg data as of November 13. Remember that bond prices fall as yields rise. While the long-term rise in rates is likely to be contained due to numerous factors, I expect rates will continue drifting higher even if the Fed doesn’t hike its fed funds rate next month. The central bank has made it clear that its first rate hiking cycle in nearly a decade is coming sometime soon , whether that’s December or next year. So, it may be a good idea to start preparing your portfolio for the upcoming rate regime change , one where rates are expected to moderately increase and remain below historical averages. While there’s no such thing as a fully rate-proof portfolio, there are some simple moves you can make now to help better insulate your investments from rising rates. Here are a few ideas to consider: Focus on U.S. stock market sectors that appear well-positioned for a rising rate cycle. Two sectors worth considering: U.S. technology and U.S. financials (excluding rate-sensitive REITs). First, they’re cyclical sectors which tend to outperform when the economy is strong, as is typical in a rising rate environment. In addition, technology companies may be poised to outperform other sectors amid higher rates, in large part due to their large cash reserves and strong balance sheets. With limited debt financing, they may be less vulnerable than debt-laden firms due to the higher borrowing costs that result when rates rise. As such, this sector has the potential for sustainable growth and continued shareholder friendly policies even as rates increase. Meanwhile, for some financial institutions, such as banks, higher rates could mean higher profits. In a rising rate environment, banks can potentially improve their net interest margins, as the difference between what they make from lending (their revenue) and what they pay for deposits (their costs) may increase. It’s no surprise, then, that according to Bloomberg data as of November 13, the performance of U.S. bank stocks has closely tracked the two-year U.S. Treasury yield, a proxy for investors’ expectations of short-term interest rates. Currently, as the data show, both measures are trending higher. You can read more about the case for these two sectors in my recent post, ” 2 Sectors to Exposure When Rates Rise .” Consider new sources of income . One such income source to consider: exposure to companies that have the potential to sustainably grow and increase dividends over time. So-called “dividend growers 1 look more reasonably priced than their high-dividend paying counterparts , according to Bloomberg data, and thus, could potentially outperform high dividend stocks in a rising-rate environment. A dividend growth strategy may also offer more exposure to cyclical sectors that have the potential to grow alongside the economy. Seek a better balance of risk and return . In other words, when it comes to preparing your bond portfolio for rising rates, consider reducing interest rate exposure while focusing on credit exposure. Shortening the duration of your bond portfolio can potentially help manage losses due to rising interest rates; low duration can potentially mean less volatility or price risk. At the same time, corporate bonds typically provide the potential for additional yield over Treasuries, so exposure to this asset class can be a way to generate income to help offset some of the impact of rising Treasury yields. For more on these two fixed income strategies, check out my recent post on ” Ideas for Your Bond Portfolio When Rates Rise .” I can’t guarantee that the above investing ideas will make your portfolio rate-proof ; however, these strategies can potentially help you reduce the negative impact of rising rates as well as help capture the opportunities presented by the new rate regime. Learn more about these strategies for rising rates, and the exchange-traded funds (ETFs) that can help you put them into action, at iShares.com. Funds that can provide access to these strategies include the iShares U.S. Technology ETF (NYSEARCA: IYW ) and the iShares U.S. Financial Services ETF (NYSEARCA: IYG ), which can provide exposure to the U.S. Tech and U.S. Financials ex-REITs sectors, respectively. Meanwhile, the iShares Core Dividend Growth ETF (NYSEARCA: DGRO ) is one way to access dividend growers, and ETFs, such as the iShares Floating Rate Bond ETF (NYSEARCA: FLOT ) and the iShares Ultrashort Duration Bond ETF (BATS: NEAR ), can help you shorten your duration, while the iShares 1-3 Year Credit Bond ETF (NYSEARCA: CSJ ) is among the funds that can aid you in gaining credit exposure. [1] a subset of dividend-paying stocks with the S&P 500 Index that increased their dividends anytime in the last 12 months. This post originally appeared on the BlackRock Blog.
Sensible Market Timing
By Carl Delfeld Investing advice is a big business. Every day, investors are swamped with advice and ideas from thousands of experts. But I’ve noticed that very few are willing to even try to accomplish the most important task of an advisor – to help their clients avoid the sharp downturns that devastate portfolios and wealth. I’m not talking about day trading or other short-term strategies here, but rather educating the average investor so he or she can see the more enduring swings in the market. As legendary tycoon and investor, Sir James Goldsmith put it: The job of an investment company is to decide to invest in the right thing in the right place at the right time. But the right thing is the least important. If you picked the very best share in St. Petersburg in 1917 you could be the greatest genius in the world and still go bust… You have to be able to see the swings in the market. One common mantra of gurus is that stock prices follow earnings. This adage also applies to specific companies and the market as a whole. And we all know that Sir James Goldsmith is absolutely right that a sharply down market pulls almost all companies down – even those with rising earnings. So I found it interesting that a firm I greatly respect, Encima Global, recently came out with a cautionary message on U.S. equities. Below is a brief summary of why it thinks that stocks may be facing some rough times ahead: Weak earnings. Pro-forma earnings have appeared strong, but companies are presenting “constant currency” earnings. Actual revenues have been shrinking as expected, due to the sharp decline in world dollar GDP in 2015. For example, McDonald’s Corp. (NYSE: MCD ) reported constant currency sales growth of 7% (year over year in the quarter ending September 30), whereas actual revenue growth was -5%. Weak earnings prospects. 2016 world dollar GDP, the platform for corporate earnings, will be roughly at 2013’s $75.5 trillion level, yet expectations for the S&P 500’s dollar earnings are way above 2013. Weak U.S. investment and growth prospects. Today’s GDP data found that business’s fixed investment contributed only 0.3% to Q3 growth. That’s consistent with the weakness in orders for capital goods (orders have been below shipments for seven of the last eight months, signaling a slowdown ahead). Weak global growth. Japan looks to have fallen into a recession again. The growth outlook for Latin America continues to get worse, in part due to low commodity prices and lack of structural reforms. Europe’s growth has remained stubbornly weak, as well. The geopolitical risks are high. There’s the need for new leadership in Saudi Arabia, Iran’s rhetoric, issues in Syria, Iraq, and Russia, and tension in the South China Sea, to name a few. A negative change in technical factors. Equities often take a rest after going on a tear, as the S&P 500 did in October. Market breadth has been weak. Mid-cap stocks and the Dow transports underperformed the S&P 500 since the September 29 low. Valuations and debt burdens. In the end, we think equity prices will react to declining earnings prospects (prices too high versus declining earnings, especially if earnings are adjusted for quality deterioration). This is all important information and it may be on the mark, but it begs the question – what should you do about it? You may want to raise some cash by selling some U.S. stocks. Perhaps rotate some of this capital into out-of-favor markets like commodities or emerging markets. You might also want to put in place or tighten trailing stop losses to limit downside risk. Link to the original post on Wall Street Daily .