Greetings from the San Francisco MoneyShow! Long-time readers will likely know how fond I am of this great city, as well as how much I enjoy my face-to-face interaction with investors here at the MoneyShow.
As I write todayâ€™s Weekly ETF Report, I am just about to hold my first MoneyShow workshop. Yet before I have to step up to the stage, I wanted to make sure you knew about whatâ€™s happening right now in the domestic equity markets.
Now, if I didnâ€™t know better, I would think that we were right back to Y2K in the NASDAQ.
The tech-heavy index now trades back atÂ levels it hasnâ€™t been at in about 15 years, and just this morning the NASDAQ Composite hit a new all-time high. The gains have been fueled by stocks such as Amazon.com (AMZN), Facebook (FB), Google (GOOGL) and Netflix (NFLX), all of which are spiking to respective all-time highs.
The chart here of the PowerShares QQQ Trust (QQQ) shows the spike higher in the 100 largest NASDAQ stocks. Todayâ€™s near-1% gain in the index has lifted the Qs to all-time highs, well above their previous March 2000 peak.
How long will this Y2K-like bull spike continue? Will we see stocks in the NASDAQ 100 keep making new highs, or will we see a pullback later this year the way we did last October? That question remains open, answerable only with the benefit of hindsight.
What isnâ€™t an open question is that right now, subscribers to my Successful ETF Investing newsletter have been riding QQQ for months, and weâ€™ve benefitted mightily from being long the biggest and best stocks in the tech world.
If youâ€™d like to find out how you can benefit from the Qs, as well as all of the other ETFs weâ€™re recommending, then I invite you to check out my Successful ETF Investing newsletter today!
Everything with a Yield is in Trouble, Part II
The market has stabilized this week, a big change from last-weekâ€™s craziness of Greek bailout woes, a plunging Chinese stock market and computer â€śglitchesâ€ť on the NYSE trading floor.
This weekâ€™s settling down of last weekâ€™s threats is good, but it also tends to keep us too focused on the very short term. Thatâ€™s why itâ€™s very important to always try and take a step back and take a look at the bigger picture.
One way to do that is to look at how things have done duringÂ the past quarter, as well asÂ through the first six months of the year. The performance table here shows how the biggest exchange-traded funds (ETFs) by assets performed during Q2 and year to date.
Top 20 ETFs by Assets in Q2, YTD
|Ticker||Name||2015 2Q%||YTD%||Yield %|
|SPY||S&P 500 SPDRs||(0.28)||0.15||2.00|
|IVV||iShares S&P 500 Index||(0.29)||0.17||2.28|
|EFA||iShares MSCI EAFE Index Fund||(1.06)||4.36||3.50|
|VTI||Vanguard Total Stock Market ETF||(0.21)||0.96||1.75|
|VWO||Vanguard Emerging Markets ETF||0.02||2.15||3.78|
|VOO||VANGUARD S&P 500 ETF||(0.19)||2.15||1.91|
|IWM||iShares Russell 2000 Index||0.39||4.38||1.23|
|IWF||iShares Russell 1000 Growth Index||0.09||3.56||1.31|
|EEM||iShares MSCI Emerg Mkts Index||(1.27)||0.84||1.52|
|VEA||Vanguard Europe Asia Pacific||(0.45)||4.67||5.18|
|BND||Vanguard Total Bond Market ETF||(2.50)||-1.32||2.41|
|GLD||streetTRACKS Gold Shares||(1.13)||-1.07||0.00|
|IJH||iShares S&P MidCap 400 Index||(1.32)||3.58||1.26|
|VNQ||Vanguard REIT ETF||(11.41)||-7.79||4.08|
|IWD||iShares Russell 1000 Value Index||0.07||-1.20||1.99|
|AGG||iShares Lehman Aggregate Bond||(2.38)||-1.22||2.28|
|LQD||iShares iBoxx $ Liquid Invest Grade Bond||(4.92)||-3.09||3.41|
|VIG||Vanguard Dividend Appreciation ETF||(2.35)||-3.18||2.25|
|HEDJ||WisdomTree International Hedged Equity||(6.88)||10.73||6.30|
The dominant theme I see here when assessing the data is: everything with a yield is in trouble.
During Q2, we saw many Q1 winners falter, including the major ETFs such as the SPDR S&P 500 (SPY), iShares MSCI EAFE Index (EFA) and iShares MSCI Emerging Markets Index (EEM).
The big reversals of fortune were in high-yield categories, with the Vanguard REIT ETF (VNQ), iShares Lehman Aggregate Bond (AGG) and iShares iBoxx $ Liquid Investment Grade Bond (LQD) all seeing a big downturn in Q2.
What all of these funds have in common is that they all are interest-rate sensitive. That means theyâ€™ve sold off in anticipation of the Federal Reserveâ€™s first interest-rate hike in nearly a decade.
If you have a lot of exposure to high-yield income funds, now is the time to check your positions out and make sure you can absorb the inevitable downturn here once the Fed squeezes the trigger and finally raises the cost of capital.
That first rate hike is most likely going to come this year, so you had better be prepared.
ETF University: Learning the Lingo (Parts I, II)
Exchange-traded funds have come a long way during the past several years, yet despite how far theyâ€™ve come, I still encounter many investors who arenâ€™t familiar with some of the basic terms and lingo associated with ETFs.
The lack of solid foundational knowledge when it comes to ETFs is something weâ€™ve moved to correct with of ETF University at the ETFU.com website.
During the past couple weeks, weâ€™ve gone back to basics so that we all are on the same page when it comes to â€śspeaking ETF,â€ť learning the basic ETF lingo thatâ€™s crucial to further your understanding of these most excellent investment vehicles.
The following are the top 10 key terms and concepts that you must become familiar with if you are going to invest using ETFs.
- ETF Expense Ratio: This is the cost of ownership in a given ETF. Basically, this is what it costs an investment company to manage the fund. Expense ratios in ETFs are far less, on average, than they are in mutual funds. The cost efficiency with ETFs is one of their most-attractive attributes.
- Leveraged ETFs: These ETFs employ futures and options contracts on a particular sector or index in the pursuit of a specific performance goal. Some leveraged ETFs are designed to deliver twice the daily results of the underlying index, while others are designed to deliver three times the daily performance. These funds should be used sparingly, as they are more volatile than non-leveraged ETFs.
- Inverse ETFs: Funds that are designed to deliver the opposite of an indexâ€™s performance. For example, if an index falls 2% during a given trading session, an inverse ETF should rise 2%. Inverse funds are usually used during bear markets, as they allow investors to profit from falling equity or bond prices.
- Country-Specific ETFs: Funds that hold equities based only in a specific country. The focus of these funds means you get targeted exposure to that countryâ€™s equity market.
- Currency-Hedged ETFs: These are ETFs that use currency futures to help hedge out the influence of currency fluctuations on their underlying holdingâ€™s performance. These funds work well when country-specific funds have a struggling currency.
- Market-Cap-Weighted ETFs: These are ETFs that follow the traditional market-capitalization-weighted indexes like the S&P 500. Companies with the largest market capitalizations will have the highest weights in the index, and thus the highest allocations in a specific ETF. The opposite here is an Equal-Weight ETF, which invests in each component of an index equally.
- Long/Short ETFs: Funds that employ a strategy of going long one sector while shorting another. The strategies here can be complex, or relatively simple, depending on the fund. Traditionally, long/short ETFs have offered lower volatility and a lower correlation to the major domestic markets.
- Developed Market ETFs: These are funds that invest solely in the developed worldâ€™s equity markets, e.g. the euro zone, the United Kingdom and the United States.
- Emerging Market ETFs: These funds invest only in emerging market countries, specifically China, Brazil, India, Russia and many others.
- Frontier Market ETFs: This segment of the ETF market invests in very small, undeveloped countries that typically are much riskier than emerging markets. Sometimes referred to as â€śpre-emerging market countries,â€ť they include nations such as Argentina, Egypt and Nigeria.
For more information regarding all things ETFs, check out ETFU.com.
On Getting Started
â€śThe way to get started is to quit talking and begin doing.â€ť
— Walt Disney
A lot of great ideas are born, and then die, in conference rooms. Why? Well, because everyone loves to talk about what they want to do, but very few like to actually do whatâ€™s necessary to make their ideas a reality. If youâ€™re more of a talker than a doer, then I recommend halting the chatter, rolling up your sleevesÂ —Â and starting the doing.
Wisdom about money, investing and life can be found anywhere. If you have a good quote youâ€™d like me to share with your fellow Weekly ETF Report readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Ask Doug.
In case you missed it, I encourage you to read my e-letter column from last week on Eagle Daily Investor about how high-yield assets performed in the first half of 2015. I also invite you to comment in the space provided below my Eagle Daily Investor commentary.
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