Tag Archives: safety

3 Utility Mutual Funds For Steady Returns Amid Volatility

These are trying times for the markets, with most of the benchmarks striving to finish their trading days in the green and the mutual funds are not being spared either. While most of the sectors have been failing to attract investors’ attentions since the start of this year, the safe-haven appeal of the utility sector has bucked the trend to some extent. So buying utility mutual funds with strong fundamentals could help investors avoid this negative tone in a less risky manner. According to Lipper, net outflows for all equity funds came in at around $12 billion for the week ending Jan 6, indicating the market downturn. As a result, the demand for safe haven securities – such as those from the utility sector – is growing among investors. The broader S&P 500 utility sector – the Utilities Select Sector SPDR ETF (NYSEARCA: XLU ) – has attracted nearly $294.6 million of net inflow so far this year. Though the sector is only up 0.3% in the year-to-date frame, it is the only sector among major S&P 500 domains that finished in the positive territory during this period. Meanwhile, the sector gained nearly 2.6% in the past one-month period when the other major sectors registered a minimum loss of 4%. Before suggesting the appropriate utility mutual funds for your portfolio, let’s find out what is propelling the demand of securities from the utility sector. Why Utility? Concerns over China-led global growth issues and a persistent slump in oil prices dampened investor sentiment from the start of 2016, and have dragged down the major benchmarks into negative territory. Rising expectations about the lift-off of Iranian sanctions, which happened yesterday, dragged down the energy sector, which in turn weighed on the benchmarks on Friday. While WTI crude plunged by 6.1% to a 12-year low level of $29.42 per barrel, Brent crude declined nearly 0.1% to $31.01 a barrel. The VOLATILITY S&P 500 (VIX) – an important indicator of volatility level – jumped 12.2% on Friday and surged 6.3% in the year-to-date frame. In this volatile environment, the utility sector provides safety to investors due to its higher immunity against market peaks and troughs. Though the utility sector, which requires a high level of debt, was initially affected by the rate hike, its safe haven appeal gradually offset the impact. Also, after declining significantly in 2015, utility stocks are now offering attractive entry points. Meanwhile, the sector is also popular among investors for generally offering stable and healthy yields. Additionally, demand for essential services such as those provided by utilities is believed to remain unchanged even during difficult times. This is also an important factor behind the stability of the sector even during a market downturn. 3 Mutual Funds to Buy Given the safety and yields that are latent in the sector under discussion, below we present 3 utility mutual funds that carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy). We expect the funds to outperform its peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify the potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund. These funds have encouraging 4-week, and 3- and 5-year annualized returns. The minimum initial investment is within $5000. These funds also have a low expense ratio. American Century Utilities Fund Investor (MUTF: BULIX ) invests a large portion of its assets in equities related to the utility industry. BULIX’s portfolio is constructed on qualitative and quantitative management techniques. In the quantitative process, stocks are ranked on their growth and valuation features. BULIX currently carries a Zacks Mutual Fund Rank #1. It boasts a 4-week return of 3.2%. The 3- and 5-year annualized returns are 9.2% and 8.6%, respectively. The annual expense ratio of 0.67% is significantly lower than the category average of 1.25%. BULIX has a yield of 2.87%. Franklin Utilities Fund A (MUTF: FKUTX ) seeks capital appreciation and current income. FKUTX invests a large chunk of its assets in common stocks of public utilities that are involved in providing electricity, natural gas, water, and communications services. FKUTX currently carries a Zacks Mutual Fund Rank #2. It has a 4-week return of 4.1%. The 3- and 5-year annualized returns are 9.2% and 10.5%, respectively. The annual expense ratio of 0.73% is also lower than the category average. FKUTX provides a yield of 2.77%. Fidelity Telecom and Utilities (MUTF: FIUIX ) focuses on acquiring common stocks, investing heavily in telecom and utility companies. FIUIX may purchase both foreign and domestic securities. FIUIX utilizes fundamental analysis to select its holdings, studying both firm-specific and broader market and economic factors. FIUIX currently carries a Zacks Mutual Fund Rank #2. It boasts a 4-week return of 3.3%. The 3- and 5-year annualized returns are a respective 7.7% and 9.2%. The annual expense ratio of 0.79% is lower than the category average. FIUIX provides a yield of 2.06%. Original Post

Guggenheim Defensive Equity: Another Defensive ETF That Failed Miserably To Do Its Job

As the equities markets are crashing all over the planet, more conservative players look to play defense by considering defensive investments and related exchange traded funds to hedge against the current correction. Defensive Stocks and Sectors During market downturns, high volatility and economic uncertainties, many investors use a risk aversion strategy by rotating to defensive sectors through buying defensive stocks and ETFs to shelter from the storm. Defensive Stocks and Sectors are those deemed non-cyclical and not very dependent on the overall economic cycle. The traditional sectors considered defensive are utilities, consumer staples and healthcare. After all, consumers cannot easily manage without gas and electricity, soap and toothpaste and of course their medicine. Other sectors deemed defensive are the telecom sector and the US real estate REIT sectors. Part of what makes defensive stocks and sectors appealing is their relatively higher and “safer” dividend which caters to investors wanting equity exposure but less risk. DEF Fund Description The Guggenheim Defensive Equity ETF (NYSEARCA: DEF ) seeks investment results that correspond to the performance, before the Fund’s fees and expenses, of the Sabrient Defensive Equity Index (the “Defensive Equity Index”). The Fund invests at least 90% of its total assets in US common stocks, American depositary receipts (“ADRs”) and master limited partnerships (“MLPs”). Guggenheim Funds Investment Advisors, LLC (the “Investment Adviser”) seeks to replicate the performance of the Defensive Equity Index which is comprised of approximately 100 securities selected from a broad universe of global stocks, generally including securities with market capitalizations in excess of $1 billion. For more information about this ETF click here . ETF methodology and Sector Allocation Index selection methodology is designed to identify companies with potentially superior risk/return profiles to outperform during periods of weakness in the markets and/or in the American economy overall. The Index is designed to actively select securities with low relative valuations, conservative accounting, dividend payments and a history of outperformance during bearish market periods. The Index constituents are well-diversified and supposed to represent a “defensive” portfolio. The sector allocation of this ETF is as follows: DEF Dividend and Fees DEF pays a respectable dividend of 3.31% and charges an acceptable management fee of 0.65%. The Perfect Defensive ETF? At first glance, DEF looks like a pretty diversified ETF, positioned within the right sectors to hedge against economic downturns in its focus on traditional defensive stocks, including utilities, real estate and consumer defensive. With its highly regarded investment advisor Guggenheim and an investment strategy that seems logical, DEF might even look like the perfect defensive ETF, as its name suggest, but is it really? Performance of DEF in the past 30 days The following chart depicts the performance of DEF against the S&P 500 index tracked by the SPDR S&P 500 ETF (NYSEARCA: SPY ) during the past 30 days ending Friday January 15, 2016: Click to enlarge As noted on the chart above, DEF utterly failed as a defensive ETF as it tumbled 6.4% when the S&P 500 Index fell 8.4%. Let us compare the performance of DEF against the average performance of the five defensive sectors: Source ycharts.com The failure of DEF is even more evident based on the above table as DEF tumbled by 6.4% against an average decline of 4% for the five main sectors considered to be defensive. So what went wrong with this ETF which seems to tick all the right boxes? In order to understand what went wrong we have to dig a little deeper. Three reasons DEF failed to do its job as a defensive ETF Geographical allocation issues A high 9.3% geographical exposure to the Asian market, of which about one-third relating to emerging markets. The allocations include countries such as Singapore, Taiwan, Japan and Asian emerging markets, all of which are very sensitive to China and took a large hit from the Chinese stock market crash. Stocks in this category include Telekomunik Indonesia (NYSE: TLK ), Japanese Nippon Telegraph & Tele (NYSE: NTT ), and Korean SK Telecom Co (NYSE: SKM ). Direct exposure to China (China Mobile (NYSE: CHL ), China Petroleum & Chemicals (NYSE: SNP ), and Chunghwa Telecom (NYSE: CHT )). About 2% is allocated to South American markets which are highly dependent on commodities and tend to be more sensitive to economic and market volatility and uncertainty. Stocks in this category include Banco De Chile-ADR (NYSE: BCH ) and Mexican Grupo Aeroportuario PAC-ADR (NYSE: PAC ). Sector Allocation issues The Fund has a high 8.2% exposure to the energy sector including oil and gas Master Limited Partnerships. These sectors got hammered the past month. DEF holds indeed high risk stocks for the current environment, such as National Oilwell Varco (NYSE: NOV ) and Targa Resources Partners (NYSE: NGLS ). A 3.2% exposure to the basic material sector which has been diving for the past two years, as commodity prices reached multi-year lows on concerns of a China slowdown. Stocks in the ETF include AGL Resources (NYSE: GAS ) and Syngenta AG (NYSE: SYT ). A very high exposure of 14.5% to the telecom sector proved to be too much for a defensive ETF, as the sector plunged 7.6% to become one of the ugliest defensive plays for the past month. Stocks in the ETF include Verizon (NYSE: VZ ), Frontier Communications (NASDAQ: FTR ), NTT Docomo and Vodafone (NASDAQ: VOD ). Passive Investing Strategy The most notable problem with DEF Fund lays in the fact that it uses a “passive” or “indexing” investment approach which makes it vulnerable as economic conditions change. DEF does not have a dynamic system in place to exclude currently risky sectors which once used to be considered safe, such as the oil sector and commodities sector, or to limit exposure to disfavored regions and countries. Conclusion Guggenheim Defensive Equity DEF – don’t get fooled by its name! The same can be said about other Defensive ETFs which may seem right at first glance. Investors should still do their due diligence and closely examine how the underlying assets are invested before putting money at work. Special note I am currently sharing on Seeking Alpha additions to my high-yield “Retirement Dividend Portfolio” (target yield 6% to 9%), with the latest one: Hedging My High Dividends with German Exposure . Follow me for future updates!

Can Flight To Safety Save These Treasury Bond ETFs?

The bond market behaved in a peculiar manner when it started recording decline in yields across the yield-curve spectrum from December 17, just a day after the Fed hiked key interest rate after almost a decade. Agreed, the Fed move was largely expected and much of the meeting’s outcome was priced in before. Still, this time around, the bonds market did not act wild at all – especially the long-term bonds – as it did in taper-trodden 2013. On December 16 – the day the Fed announced the hike, the two-year benchmark Treasury yield jumped 4 bps to 1.02% – a five-and-a-half year high. The yield on the 10-year Treasury note rose just 2 bps to 2.30% and yield on the long-term 30-year bonds saw a 2-bps nudge to 3.02%. But yields on the benchmark 10-year Treasury bond fell 11 bps to 2.19% in the next two days accompanied by a 12-bps slump in 30-year Treasury bond, 5-bps dip in the two-year benchmark Treasury yield and a 7-bps decline in the ultra-short three-month benchmark Treasury yield. Why the Dip in Bond Yields? Investors must be looking for reasons why the bond market went against the rulebook, which says when interest rates rise, bond yields jump and bond prices fall. Several investors thought that the bull era of bonds will come to an end with the Fed tightening its policies. However, the Fed’s repeated assurance to go ‘gradual’ with the rate hike policies might have soothed bond investors’ nerves. Plus, while a healing job market strengthened the prospect of the next hike again in March 2016, a still-subdued inflationary backdrop led investors to mull over a near-term deflation possibility amid a rising rate environment. Added to this, global growth worries, the possibility of a scarier plunge in greenback-linked oil prices (as the U.S. dollar soars post Fed hike), weakening overall commodity market and possibility of lower U.S. corporate profits in the upcoming quarters might have propelled a flight to safety. Investors should also take note of the Fed funds rate projection. The estimated median funds rate was maintained at 0.4% for 2015 and 1.4% for 2016, while the same for 2017 and 2018 were lowered from 2.6% to 2.4% and 3.4% to 3.3%. The projected range for 2015, 2016 and 2017 was changed from negative 0.1-positive 0.9% to 0.1-0.4%, from negative 0.1-positive 2.9% to 0.9-2.1% and from 1.0-3.9% to 1.9-3.4%, respectively. All these show no material threat to long-term bonds and the related ETFs after the first Fed hike. 25+ Year Zero Coupon U.S. Treasury Index Fund (NYSEARCA: ZROZ ) This ETF follows the BofA Merrill Lynch Long US Treasury Principal STRIPS Index, which focuses on Treasury principal STRIPS that have 25 years or more remaining to final maturity. The product holds 20 securities in its basket. Both the effective maturity and effective duration of the fund is 27.22 years. This fund is often overlooked by investors as evident from an AUM of $158.5 million. The product charges 15 bps in annual fees and returned 2.1% on December 17, 2015. The fund is down 4.2% so far this year. The fund yields 2.70% annually and has a Zacks ETF Rank #2. Vanguard Extended Duration Treasury ETF (NYSEARCA: EDV ) For a long-term play on the bond market, investors have EDV, a fund that seeks to match the performance of the Barclays U.S. Treasury STRIPS 20-30 Year Equal Par Bond Index. This means that this benchmark zeroes in on fixed income securities that are sold at a discount to face value, and then the investor is paid the face value upon maturity. This particular 74 bond basket has an average maturity of 25.1 years. The effective duration of the ETF stands at 24.7 years, suggesting high interest rate risks. The fund has amassed about $371.1 million in assets. Investors should also note that this is a cheap product, as it charges just 12 basis points a year, so it will be a very low cost way to get into long duration bonds. The fund has lost about 5.4% in the year-to-date time frame on rising rate worries but gained 1.8% on December 17. This Zacks Rank #2 ETF yields 2.86% annually. iShares 20+ Year Treasury Bond (NYSEARCA: TLT ) This iShares product provides exposure to long-term Treasury bonds by tracking the Barclays Capital U.S. 20+ Year Treasury Bond Index. It is one of the most popular and liquid ETFs in the bond space having amassed over $5.7 billion in its asset base and more than 8.4 million shares in average daily volume. Its expense ratio stands at 0.15%. The fund holds 31 securities in its basket. The average maturity comes in at 26.65 years and the effective duration is 17.37 years. The fund gained over 1.1% on December 17. TLT has a Zacks ETF Rank #2 with a High risk outlook. Original Post