Why 2015 Could be Volatile for Markets

New Year, Big Volatility

If the first six trading days of 2015 are any harbinger of what’s to come for the entire year, then strap on your seatbelts and get ready for an “A-ticket” rollercoaster ride.

Since the start of the year, there has been BIG volatility in the equity markets, as stocks are getting pulled down and then pushed back up by conflicted traders trying to make sense of it all.

Now, for the past several weeks I’ve been telling my podcast listeners that 2015 is going to be much different than 2014. I suspect that we’ll see much more volatility this year, and things have certainly started out that way.

Forces such as a rising U.S. dollar and plunging oil prices (see accompanying charts), as well as ultra-low bond yields and the omnipresent uncertainty about when the Federal Reserve will start to raise interest rates, have contributed to the push-pull that we’ve seen this year and that we are likely to keep seeing for at least the first half of 2015.

My advice to investors right now is to make sure you have plenty of cash on the sidelines in case this market volatility morphs into a markedly across-the-board decline.

If that doesn’t happen, and if stocks shrug off the negatives of falling oil prices, then you can always put that cash to work in targeted exchange-traded funds (ETFs) offering the best risk-reward proposition.

Top 10 Domestic, Top 10 International Dividend ETFs

One of the bright spots of the past several years for yield-hungry investors has been dividend-oriented ETFs. Both domestic and international dividend ETFs offer the prospect of attractive yields along with solid share-price appreciation. But in 2014, it was domestic ETFs that trounced their international brethren in terms of total return.

The two tables below offer a stark contrast between the recent performance of the top 10 domestic income ETFs and the top 10 international dividend ETFs.

Here we see that all of the domestic funds were firmly in the black last year, and all had double-digit-plus percentage gains. Meanwhile, all but one of the top international dividend funds finished in negative territory.

Even though international dividend ETFs offer higher yields than their domestic counterparts, there is no doubt that in 2014 the juice was definitely with domestic dividend ETFs.

But, will 2015 see more of the same, or will this be the year when money returns to international equities? While nobody knows this answer for certain, what I do think is that at least from a value and bargain perspective, international dividend ETFs look a lot more tempting to buy.

ETF Talk: The World’s Most Popular ETF

Last week, I explained why it’s important to have a working knowledge of the largest ETFs in the industry. This week, I’ll begin to deliver on helping you gain such knowledge, beginning with SPDR S&P 500 ETF (SPY).

The S&P 500 is a well known stock market index that follows a changing selection of 500 companies, and SPY is the most common way to tether your investing results to the index. The S&P had an excellent 2014, so this is a timely moment to discuss it.

Similarly to the index it tracks, SPY gained 11.29% last year. The U.S. stock market had an excellent year on the global stage, though it was not the world’s most profitable. SPY possesses an astonishing $215 billion in assets under management, dwarfing even the second-largest ETF on the market. SPY weights its holdings approximately to the same degree they are used to calculate the S&P itself. Its expense ratio is 0.09%.

Some of the companies that compose the S&P pay dividends and, as such, SPY provides a dividend yield of 1.78%. This chart shows the exact trajectory of its performance throughout 2014.

SPY’s top 10 holdings comprise 17.43% of its assets, and all 10 are names known by the average investor. These holdings include Apple Inc. (AAPL), 3.54%; Exxon Mobil Corporation (XOM), 2.14%; Microsoft Corp. (MSFT), 2.09%; Johnson & Johnson (JNJ), 1.60%; and Berkshire Hathaway Class B shares (BRK-B), 1.49%.

SPY is an accessible way to get exposure to a selection of strong U.S. stocks, but don’t take my word for it — just look at how much capital other investors have poured into it. If you think this vote of confidence is encouraging to you, consider trying SPDR S&P 500 ETF (SPY).

If you want my advice about buying and selling specific ETFs, including appropriate stop losses, please consider subscribing to my Successful ETF Investing newsletter. As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an e-mail. You just may see your question answered in a future ETF Talk.

10 Ways to Be a Better ETF Investor in 2015

It’s another year, another new calendar and another new set of challenges for investors.

Indeed, this time of year everyone is looking to make resolutions and to implement new ways to be better people in the year ahead. And while I can’t really help you with common resolutions like eating better or exercising more, I can help you to be a better exchange-traded fund (ETF) investor in 2015.

Here are 10 ways to do just that in the year ahead.

1. Find more money to invest in ETFs. It’s time to dump those mutual funds, get out of your bank savings account that’s paying next to zero interest and roll over any old 401(k)-type accounts into a self-directed IRA. Doing so will result in more money to invest in the best ETFs that the market offers.
2. Consolidate your accounts at one brokerage. Whether it’s Schwab, Fidelity, TD Ameritrade or Vanguard, there is no need to have more then one brokerage firm. I find many investors have multiple accounts at multiple financial institutions. All this does is create more paperwork, more confusion, more passwords and more problems for your investing. Move your assets to one brokerage firm, and make life easier in 2015.
3. Start a Roth IRA. It may seem trivial or small potatoes in the big picture, but if you qualify for a Roth IRA, you should open one ASAP. Here’s why. A Roth IRA is a tax-free savings account. The key word here is FREE. There are no taxes on withdrawals of your contributions at any time, nor are there any taxes on earnings in retirement. There are also no required minimum distributions with a Roth. You can contribute $5,000 per year ($6,000 if you’re over 50).
4. Become passionate about ETFs. This does not mean you make knowing about ETFs a full-time job. Rather, it means that you are engaged with your money, and that you spend the appropriate amount of time making sure your investments are right for your goals. For example, going into 2015, you MUST review all of your accounts and all of your positions. Review your asset allocation, cash positions and the performance of your accounts. This process should be done quarterly at a minimum, but preferably it should be done monthly. Also, spend some time learning about the ETF landscape, and the easiest way to do that is to read this publication, as well as listen to my weekly ETFU.com podcast.
5. Spread the word. Nothing is more powerful for achieving success than to help others. Now, I’m not talking about boasting about what a great investor you are. What I’m referring to is talking with your spouse, your friends, your children and your co-workers about their money and about ETFs. Ask them if they are using ETFs. If they say no, ask them why not. Talk to them about ETFs just like you would if you got a great deal on something like a car or a home. Hey, when you share helpful knowledge, other helpful knowledge tends to come back to you.
6. Look before you leap. There will be hundreds of stories about the best ETFs and top-performing ETFs of 2014 during the next few weeks. It happens every year. Many of the top performers will be sector-specific ETFs or leveraged ETFs. And while I know it’s tempting, please don’t buy another ETF until you look at the following: fund objective, asset class, assets under management, expense ratio, volume and top holdings. Also remember that repeat winners, especially sector specific winners, are rare.
7. Check out the top 20. The top 20 ETFs hold 40% of the $2 trillion industry. These are the most successful ETFs in terms of assets, but they also have the lowest fees and some of the best core positions for your portfolio. I will be doing some detailed editorial on the top 20 over the course of the first quarter of 2015. Look at today’s ETF Talk for greater detail on one of the top 20 ETFs.
8. Consider China a key place to invest. China became the world’s largest economy in 2014. It also was the top-performing international stock market, with gains north of 40% in the China A-shares market. China opened its investment markets in 2014 and has implemented major economic and market reforms. And, consider that China’s economy is growing at a 7% rate, which actually is comparatively slow for the behemoth nation. There are now more than 25 ETFs dedicated to China, and these funds represent a key place for investors in 2015.
9. Look at last year’s losers for this year’s winners. More often then not, when the calendar rolls over, last year’s winners tend to morph into next year’s losers — and vice versa. I am looking at energy, commodities, emerging markets and international opportunities as we move into 2015, and that’s because they have been many of the most unloved sectors of 2014.
10. Join ETFU.com. Become a charter member of our new educational website, ETF University, or ETFU.com. The mission of this site is to change the way you invest and enhance your level of investment success using ETFs. Read the stories and special reports, watch the videos and, most importantly, listen to my weekly ETFU.com podcast. The best part is that it’s all FREE, and it’s all for you, so check it out as soon as you can.

I think 2015 is going to be a very interesting year, so be sure to tune in here every week to make sense of it all.

Rushdie on Freedom

“Religion, a medieval form of unreason, when combined with modern weaponry becomes a real threat to our freedoms…”

–Salman Rushdie

This week’s heinous events in Paris remind us that religious extremism mixed with violence is a toxic cocktail that threatens the entire free world. Writer Salman Rushdie has known this ever since the Ayatollah Khomeini put a price on his head for penning a novel. Now, French satirical journalists are the latest victims of this disgraceful extremist attempt to silence free speech. Let’s not let this happen here at home. It’s up to all of us to stand up for freedom and free speech, and against religious extremism intent on imposing its will on America. Je suis Charlie!

Wisdom about money, investing and life can be found anywhere. If you have a good quote you’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 the top 10 ways to be a better ETF investor in 2015. I also invite you to comment in the space provided below my Eagle Daily Investor commentary.

All the best,

Doug Fabian