With all major stock indexes near their all-time highs, the
most important question on the minds of investors is whether this
rally can continue and for how long.
Many investors are skeptical of the stocks' ability to
continue their bull-run in the face of unimpressive economic data
and corporate earnings. But since most investors believe
that the Fed has been the main force behind the market surge,
they have been more focused on any signs regarding the future
direction of central bank policy than on the economy.
No wonder, stock rally hit a brief pause when there were some
"conflicting" signals from the Fed about the continuance of the
monetary stimulus at current levels. (Read:
Invest like Warren Buffett with these ETFs
And while the long-term bullish trend for stocks appears to be
intact for now, chances of a pull back in the near-term cannot be
ruled out. This may the right time for investors to review and
adjust their ETF portfolios to reduce their risk in the current
Do you hold long-duration bond
in your portfolio?
Considering that interest rates will most likely go up from
the current levels, it may be a good idea to get rid of all long
duration products in your portfolio, as they will be hurt the
most in a rising interest rate environment.
Remember very short-term rates will stay low as long as the
Fed maintains the fed funds at near zero levels--most likely till
the second half of 2015, but the long-term interest rates will
begin moving up as soon as market anticipates any likely change
in the Fed's monetary policy.
Yields on the benchmark 10 year note rose above 2%, for the
first time since mid-March when the minutes of the recent FOMC
meeting revealed that some officials were prepared to start
winding down the program from next month.
Recent fund flows reveal that investors are getting
increasingly worried about the interest rate risk in their bond
portfolios. While interest rate sensitive ETFs had significant
outflows, funds with less interest rate sensitivity/shorter
duration gathered assets.
Investors could consider switching to shorter duration
products or products that provide protection against interest
rate rise. Floating Rate ETFs like iShares Floating Rate Note
) and SPDR Barclays Capital Investment Grade Floating Rate
) have become increasingly popular with investors of late.
Investors should also look at Senior Loan ETFs like
PowerShares Senior Loan Portfolio (
) and SPDR Blackstone / GSO Senior Loan ETF (
) that provide high yields and protection against the potential
rise in interest rates. (Read:
Buy these ETFs to profit from the great duration
Are you paying too much for "income"?
Dividend stocks and ETFs have been hot this year as investors
continue to chase yield in the current environment of rock-bottom
interest rates, and we have been recommending high quality
dividend ETFs for quite some time. (Read:
4 Best ETF Strategies for 2013
Many dividend focused ETFs have outperformed the broader
market this year but some of them look quite expensive as of now.
While high dividend stocks and ETFs may retain their appeal in
the near- to mid- term, given historically low interest rates,
the demand for them may go down slightly due to expensive
My top pick among dividend ETFs is Vanguard Dividend ETF (
), which has Zacks rank #1 (Strong Buy). Unlike some other
dividend ETFs that focus on higher yield, this ETF focuses on
higher quality of earnings. Further, this product has much lower
exposure to rather expensive Utilities (1.3%) and Healthcare
(8.5%) sectors, compared with many other dividend focused
VIG is currently trading at a P/E ratio of 15.59, which looks
quite attractive compared with 18.01 for SPDR S&P Dividend
) and 16.83 for iShares DJ Select Dividend ETF (
) -two other very popular dividend ETFs.
Did you buy and forget Leveraged/Inverse ETFs?
Some investors find leveraged ETFs very appealing in a bull
market, as they are an easy way to double or triple returns.
While these ETFs are perfectly suited to traders, professional
investors and hedgers, they are not at all suitable for 'buy and
They match their stated objective on a "daily basis" but for
any other time period, their performance can vary significantly
mainly due to the compounding factor. While ETFs like Ultra
S&P500 ETF (
) and Ultrapro S&P 500 ETF (
) work perfectly when the market is trending in the same
direction, they typically underperform these objectives when the
market becomes choppy. (Read:
Leveraged and Inverse ETFs suitable only for
short term trading
Further, investors are required to pay high costs (expense
ratios) for these ETFs, which eat away at profits. Then,
most of these ETFs use futures and other derivatives to achieve
their investment objectives, which in turn result in rebalancing
We are not saying that these ETF strategies should not be
used; they should not be held for a long-term and if held, they
need to be monitored closely.
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PWRSH-SNR LN PR (BKLN): ETF Research Reports
ISHARS-FL RT NT (FLOT): ETF Research Reports
SPDR-BC IG FR (FLRN): ETF Research Reports
SPDR-SP DIV ETF (SDY): ETF Research Reports
SPDR-BS GSO SL (SRLN): ETF Research Reports
PRO-ULTR S&P500 (SSO): ETF Research
PRO-ULT S&P500 (UPRO): ETF Research
VANGD-DIV APPRC (VIG): ETF Research Reports
VANGD-HI DV YLD (VYM): ETF Research Reports
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