Comparing U.S., European and Asian Stocks

The ‘Big 3’ ETF Segment Divergence

We are just days away from 2015’s halftime, and that’s a good excuse for us to take a look at how what I call the “Big 3” exchange-traded funds (ETFs) have performed this year.

The Big 3 are the SPDR S&P 500 ETF Trust (SPY), the iShares MSCI EAFE ETF (EFA) and the iShares MSCI Emerging Markets ETF (EEM).

The chart below displays each fund’s respective price action since the beginning of the year.

As you can see, stocks in Europe, Australasia and the Far East (EFA) have easily outpaced stocks in the United States and stocks in emerging markets with a 10.04% year-to-date return through June 25.

The preceding chart also clearly shows the big run in emerging markets (EEM) from mid-March through late April. Yet in the case of EEM, the fund has come back down hard after hitting the highs of the year. EEM is up 3.41% this year.

As for domestic equities (SPY), their performance has been far less volatile than EEM, but the halftime result is just about the same. SPY has managed just 3.17% upside since the New Year.

I’m still a firm believer in the potential upside of emerging markets, as I think many of these markets represent outstanding value and growth plays.

As for Europe and the Far East, the latest money-printing schemes by both the European Central Bank (ECB) and the Bank of Japan (BOJ) continue to fuel this segment higher. That tells me that EFA is poised to continue to outperform in the second half of the year.

Finally, with the Federal Reserve now clearly signaling that it will raise interest rates at least once before 2015 expires, that reality is likely to act as a dampener to any potential uptrend in U.S. equities.

This situation could lead to more stagnant returns during the next six months or, worse, it could lead to an exodus — and subsequent correction — in domestic equities.

Want to find out how you can prepare for a Fed-induced equity sell-off? Then check out my Successful ETF Investing newsletter today.

ETF Talk: Diverse Dividends Offer Broad Appeal

Conventional wisdom explains that it is vitally important for any investor to diversify his or her holdings. This is intended to minimize risk from movements or events that disproportionately hurt one type of investment. A fund that offers a way to gain the benefits of diversification is Arrow Dow Jones Global Yield ETF (GYLD).

This fund takes a balanced multi-asset approach across five different strategies. Its holdings emphasize dividends and are based on five separate, specific indexes. It has approximately even holdings in equities, real estate, sovereign debt, corporate debt and alternative assets, with each subcategory targeted towards dividend-paying investments. As the fund’s name indicates, it includes positions from around the globe in each of these areas.

The fund pays out an overall yield of 7.91%, compared to an expense ratio of 0.75%, so investors are rewarded nicely for owning it. Though it has declined by 1.42% this year, when its monthly dividends are accounted for, investors in GYLD have profited in 2015 overall. The following chart shows the fund’s one-year performance.

In terms of individual positions, this fund allocates 8.36% of its assets to its top 10 largest positions. These include Shenzhen Investment Ltd., 1.12%; Ladbrokes PLC, 0.91%; Lewis Group Ltd., 0.87%; LRR Energy LP, 0.84%; and Chesapeake Granite Wash Trust, 0.81%.
In terms of sectors, the fund is most strongly allocated to real estate, financial services and utilities. GYLD’s portfolio of countries includes the United States, Australia, Singapore, France and many others.
For investors seeking a simple way to invest in a number of asset classes for a high and diverse yield, Arrow Dow Jones Global Yield ETF (GYLD) could be just what they want.

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.

It’s a Low-Volatility World

In my experience, when a market is rife with relatively low volatility, investors tend to get complacent.

All too often, complacence leads to not really being prepared for a shift in market character. It also leads to not being ready for big price movements in stocks.

Not being prepared leads to fear, and fear leads to bad, emotional decisions with your money — and that is never good.

This year, the low-volatility tune is being sung throughout the S&P 500 Index.

A recent Bloomberg story highlighted the relative lack of big, one-day moves in the stock market since December.

According the story:

Days of frantic buying or selling have been absent from the U.S. stock market this year. The Standard & Poor’s 500 Index hasn’t posted a gain or loss of 2 percent or more for 126 days, the longest streak since one ending in February 2007…The last time the gauge went without a 2 percent move in the first half of the year was in 2005.

That’s a lot of stasis in equity markets of late, and that is the perfect breeding ground for bad, emotionally driven decisions when the volatility returns.

To fight complacence, I rely on the Fabian Plan, which uses an objective measure of where the market currently sits with respect to its key, 200-day moving average.

To find out how you can learn how the Fabian Plan works, click here.

ETF University: Learning the Lingo

Exchange-traded funds (ETFs) have come a long way during the past several years. Yet despite how far they’ve come, I still encounter many investors that aren’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 we’ve moved to correct with ETF University at the ETFU.com website.

This week, I want to go back to basics so that we are on the same page when it comes to “speaking ETF” and learning the basic ETF lingo that’s crucial to further your understanding of these most excellent investment vehicles.

Here are five key terms and concepts that you must become familiar with if you are going to invest using ETFs.

1. 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.
2. 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.
3. Inverse ETFs: Funds that are designed to deliver the opposite of an index’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.
4. 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 country’s equity market.
5. Currency Hedged ETFs: These are ETFs that use currency futures to help hedge out the influence of currency fluctuations on performance of their underlying holdings. These funds work well when country-specific funds have a struggling currency.

Next week, we’ll have five more ETF lingo terms you need to know, so be sure to read my next report.

For more information regarding all things ETFs, check out ETFU.com.

Supreme Court Wisdom

“When the Supreme Court moved to Washington in 1800, it was provided with no books, which probably accounts for the high quality of early opinions.”

— Robert Jackson

The great U.S. statesmen knew the power of common-sense decisions by the Supreme Court. It certainly seems that these days, the “Supremes” could use a little more Robert Jackson — and maybe also fewer bookshelves.

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 rising popularity of currency-hedged ETFs. I also invite you to comment in the space provided below my Eagle Daily Investor commentary.

Have a great weekend,

Doug Fabian

Upcoming Appearance

I will be attending the San Francisco MoneyShow, July 16-18, at the Marriott Marquis. To register, click here. Mention priority code 038970.