The stock market has been pretty volatile lately as investors
awoke to the realization that the Fed will ultimately 'taper' its
QE program. Bond yields have surged and many international markets
have tumbled as markets tried to guess the Fed's next move.
The Fed's statement after its Wednesday meeting and chairman
Bernanke's press conference will hopefully provide some clarity
regarding the future direction of the monetary policy. While it is
quite unlikely that the Fed will actually dial down its bond
purchases until the economic prospects pick up significantly,
financial markets price in what they expect the Fed do in the
future and not what the Fed is doing now.
Inventors should remember that market moves are often sudden as
the sentiments change and though the long-term bullish trend for
stocks appears to be intact for now, this may the right time for
investors to position their ETF portfolios for an eventual tapering
of the Fed's unprecedented support and pickup in economic
Buy Growth Sector ETFs as the
Defensive sectors outperformed the broader market earlier this
year but since last month,
cyclical sectors have started surging ahead.
A s the economy shows further signs of
improvement, more and more investors will move out of defensive
sectors like utilities and consumer staples and into cyclical
sectors like technology and industrials. (Read: 3 Impressive Biotech ETFs Crushing the Market
Dividend ETFs that were concentrated in defensive
sectors-typically high dividend payers-- have also come under
pressure. These ETFs had become somewhat expensive as investors
continue to pour money into them the search of yield. While we
still like dividends paying stocks and ETFs, the next winners
in dividend ETFs will most likely be those focused on
relatively attractively valued, high-growth cyclical sectors.
Technology and Finance companies have been dividend growth
leaders in the last few years. Technology companies currently have
a lot of cash on their balance sheets and will continue to generate
large amounts of cash going forward too. Finance companies have
also been on the mend and many of them got Fed approval to raise
dividend after passing stress tests. (Read: Buy these ETFs for Excellent Dividend Growth
Investor should consider Vanguard Financial ETF ( VFH ), WisdomTree U.S. Dividend Growth ETF ( DGRW ), Vanguard Information Technology ETF ( VGT ) and Industrial Select Sector
SPDR Fund ( XLI ).
Prepare for the Rise in Interest Rates
Due to concerns about the Fed finally scaling down its asset
purchases, interest rates have been going up in the past three
weeks. 10 year treasury yield touched 2.29% on June 11,
the highest since April 2012. ( Read: Forget Dividend ETFs; Focus on Buybacks instead
Even though the tapering announcement from the Fed may not come
in the next couple of meetings, the rates will likely continue to
creep up. Thus, 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.
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 Fund ( FLOT ) and SPDR Barclays Capital Investment
Grade Floating Rate ETF ( FLRN
) have become increasingly popular with investors of late.
Investors should also look at Senior Loan ETFs like PowerShares
Senior Loan Portfolio ( BKLN ) and SPDR Blackstone / GSO Senior Loan
ETF ( SRLN ) that provide high yields and protection
against the potential rise in interest rates.
Some Emerging Markets Look More Vulnerable than
Many international markets, in particular some of the popular
emerging markets have tumbled in the last few weeks. Prospects of
an economic recovery and higher interest rates in the US have led
to the change in investor sentiment towards global markets.
Some of the emerging markets ETFs that had seen huge investor
interest in recent months like Philippines ( EPHE ) , Indonesia ( EIDO ) and Thailand ( THD) saw the worst sell-off. On the other some
smaller emerging markets/frontier markets avoided the crash.
While the sell-off may not be over for now, it is unlikely to
continue for a long time. In fact some markets have already started
attracting some bargain investors. Emerging markers still have much
better growth prospects than developed markets in the longer term.
At the same time, some emerging markets look more vulnerable than
Emerging nations that are dependent to a large extent on
commodity exports like Russia ( ERUS ), Brazil ( EWZ ), and Chile ( ECH ) are at greater risk due to the slowdown in
China and a rising US dollar.
Also the countries that are going through a period of political,
social and economic uncertainty-like Turkey ( TUR ), South Africa ( EZA ) and Egypt ( EGPT ) ---should be avoided even if they look
attractive on valuation basis.
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Days . Click to get this free report >>PWRSH-SNR LN PR (BKLN): ETF Research ReportsWISDMTR-US DV G (DGRW): ETF Research ReportsENI SPA-ADR (E): Free Stock Analysis ReportISHARS-MSCI CHL (ECH): ETF Research ReportsISHARS-MS RUSSA (ERUS): ETF Research ReportsISHARS-BRAZIL (EWZ): ETF Research ReportsISHARS-S AFRICA (EZA): ETF Research ReportsISHARS-FL RT NT (FLOT): ETF Research ReportsSPDR-BS GSO SL (SRLN): ETF Research ReportsISHRS-MSCI TURK (TUR): ETF Research ReportsVIPERS-FINANCL (VFH): ETF Research ReportsVIPERS-INFO TEC (VGT): ETF Research ReportsSPDR-INDU SELS (XLI): ETF Research ReportsTo read this article on Zacks.com click here.Zacks Investment
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