Everything with a Yield is in Trouble
There was a whole lot of crazy in the markets this week. From Greece to China to the corner of Wall St. and Broad St., things were indeed wild.
Greece’s bailout woes, China’s stock market plunge and a computer outage on the trading floor of the NYSE all contributed to the strange week. Yet, by midday Friday, stocks in the Dow were up some 200 points, and the major U.S. indices were on pace to enjoy a winning week.
This is the kind of trading week that’s easy to get caught up in. It’s also easy to lose track and forget what’s gone down for most of the year.
Given our tendency to focus on the very short term, I want to step back and take a look at the performance table here of the biggest exchange-traded funds (ETFs) by assets during Q2 and year to date.
By doing so we can identify the operative patterns influencing our investments, as well as what investment trends are most likely to net us positive results going forward.
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 |
| QQQ | PowerShares QQQ | 1.39 | 3.70 | 0.95 |
| 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 exchange-traded funds (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 they’ve sold off in anticipation of the Federal Reserve’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.
Jim Woods is a 30-plus-year veteran of the markets with varied experience as a broker, hedge fund trader, financial writer, author and newsletter editor.
His books include co-authoring, “Billion Dollar Green: Profit from the Eco Revolution,” and “The Wealth Shield: How to Invest and Protect Your Money from Another Stock Market Crash, Financial Crisis or Global Economic Collapse.” He’s also ghostwritten many books and articles, as well as edited content for some of the investment industry’s biggest luminaries. Read more about Jim Woods.
