A slew of positive economic data in the last few days has led
many market participants to believe that the Fed will start
tapering this month. On the other hand, some analysts still think
that there are a number of factors that support the case for
continuation in QE at current levels.
While no one can actually predict whether they will or they will
not decide on tapering in the upcoming meeting, it appears that
the market has already priced in some tapering-about $10 to $15
billion cut in the $85 billion monthly purchases. The actual
timing is somewhat irrelevant now-it may start in September,
December or early next year. (Read:
3 Cyclical ETFs for an Improving Economy
In anticipation of tapering, interest rates have moved up
significantly, the 10-year Treasury note yield touched 3%
yesterday-the highest since July 2011 and a sharp move from 1.6%
seen earlier this year. Rising rates have resulted in increasing
losses for bonds.
Bond Bear Market is Here; Realign Your Portfolio
Considering that yields have surged too much, too soon, there is
a chance that they may come down slightly before going up again
and it is also likely that the next move up will not be as steep
as the current one. But one thing is absolutely clear-the 30 year
bull run in bonds is over. (Read:
3 Excellent ETFs for Dividend Growth
Going by the performance of Barclays U.S. Aggregate Index, bond
market is on track to deliver its
this year, since 1994. It is not surprising that bond ETFs have
seen massive outflows in the past few months.
Investors seeking to have some exposure to bonds could consider
short-term bond funds, as the Fed has made it clear that
short-term rates will continue at near-zero levels for a long
time. Some of the popular ultrashort bond ETFs like Vanguard
Short-Term Bond ETF (
) have seen increased inflows of late.
Many investors have invested in floating rate loans funds as
these ETFs enable investors to earn a decent return, while
reducing the credit risk (being secured by liens on company
assets) and withstand rising interest rates without losing value
(being floating rate assets).
PowerShares Senior Loan ETF (
) has been one of the top asset gatherers among ETFs-with a $3.9
billion asset gain this year. The product has not disappointed
its investors; it has returned 2.2% year-to-date, while yielding
an attractive 4.7%.
Considering that corporate profits have been on the decline while
corporate leverage is now
back to pre-crisis levels
, investors may like to keep an eye on their investments even
though there are no apparent warning signs in the space as of
now. Companies below investment grade ratings had $2 trillion of
junk bonds and leveraged loans outstanding in July, and will need
to refinance those at higher rates as rates rise.
Inverse bond ETFs like ProShares Ultrashort 20+ Year Treasury ETF
) are also becoming increasing popular with investors as they
provide an opportunity to profit from rising interest rates.
However investors need to remember that they are powerful but
complex tools and are not meant for long-term buy and hold
3 Biggest Mistakes of ETF Investing
Rising Rates = An Improving Economy; Invest in Cyclical
Many investors fear that rising rates will kill the stock market
rally, but the fact is that the increase in rates reflects an
improving economy and lower risk of deflation-which are positive
for stocks. While economy is certainly not going to start growing
at breakneck speed anytime in near future, the overall economic
picture continues to brighten slowly.
Increase in interest rates are bad for stocks only when the
central bank raises them to combat inflation, which is not going
to be the case anytime in the near future.
There are some sectors that will benefit more in the improving
economic environment and this may be right time for investors to
start repositioning their portfolio with higher allocation to
some of the cyclical sectors like technology, industrials and
energy that have a better earnings growth outlook for 2014,
compared to the current year.
Some of the ETFs from these sectors like Industrial Select Sector
), Vanguard Information Technology ETF (VGT) are worth
considering. If the labor and housing markets continue to
recover, consumer discretionary and retail sectors may also
continue their outperformance. (Read:
3 Top Ranked Consumer ETFs to buy now
Regional banks benefit in the current environment of rising
longer-term rates and steepening yield curve. Investors could
look at SPDR S&P Regional Banking ETF (
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