How Key Sector ETFs Performed in Q2

A Q2 ETF Roundup

The first half of the year is already over. Yes, I know it feels like we just kicked off 2015, but this weekend we celebrate our nation’s birthday. To me, the July 4th holiday represents the unofficial break before we get back to business in the second half of the year.

So, how did things shake out during the first half of the year? How about during the second quarter?

Let’s start with domestic stocks in the S&P 500 with the chart here of the SPDR S&P 500 (SPY). The benchmark measure of domestic equities faltered in the final week of the quarter, with SPY now trading below its short-term, 50-day moving average.

Although the fund still remains above its long-term, 200-day moving average, the performance in Q2 is nothing to boast about. During Q2, SPY was basically flat, down 0.28%. Year to date, SPY has managed to eke out a total return of just 0.15%.

That’s the definition of dead money.

Unfortunately, the action was worse outside of the United States, with the iShares MSCI EAFE Index ETF (EFA) down 1.06% in Q2. Despite the pullback during the second three months of the year, EFA’s first quarter has kept its year-to-date performance strong with a 4.36% total return.

The other big international market segment we like to track is emerging markets. In Q2, the iShares MSCI Emerging Markets ETF (EEM) also gave back ground, falling 1.27%.

Through the first half of 2015, EEM still is in the black, but only slightly, with a 0.84% total return.

The table below shows the performance — in Q2 and year to date — of eight key market sectors we watch on a daily basis.

The big takeaways from the data here are the following:

1. Global equity markets are backing off after a great start to the year.
2. Large-cap tech stocks in the QQQ continue to attract capital.
3. Bond prices have come under pressure during Q2 and for the full year.
4. Gold prices remain slightly lower.
5. Oil prices have really come back off the canvas, up nearly 20% in Q2. Yet even with that big second-quarter move, oil prices remain about 4% below where they were at the beginning of the year.

So, what will the second half of 2015 bring for markets?

Before we get any read on that, we’ll have to get past the ongoing mess that is the Greek bailout negotiations. If Greece fails to stay in the European Union, that will throw a big wrench into the global market machinery.

The market also will need to get some definitive clarity on what the Fed is likely to do with interest rates. Will there be a “one and done” rate hike in 2015? Or, will the Fed put off hiking rates until next year? What happens if the Fed hikes rates not once, but twice this year?

These unknowns are all pending, and their outcome will determine what’s next for stocks, bonds, currencies, commodities — and most importantly, your money.

ETF Talk: This Fund Gives You Diversity and Dividends

A business development company (BDC) is one that helps relatively small companies to grow and to develop, primarily by providing loans and capital investments. Investors can buy shares in public BDCs to gain exposure to the small private companies they finance, as well as the BDCs themselves. Today’s featured fund, BDC Income ETF (BIZD), pools together a collection of BDCs and offers a high dividend yield.

Many BDCs are able to pay strong dividends, and BIZD ranks among the Top 10 dividend-paying ETFs on the ETFU.com website. This fund holds a broad collection of BDCs to track the industry’s results closely. One of its top holdings, Main Street Capital Corporation (MAIN), is a BDC that serves relatively small and private companies.

MAIN pays out an attractive and consistently rising dividend. It also is a recommendation in the monthly Forecasts & Strategies investment newsletter of my Eagle Financial Publications colleague Dr. Mark Skousen. BIZD offers exposure to Main Street and companies like it.

The dividend yield paid out from BIZD produces an enticing 8.29% yield. BIZD is a fairly small fund, with only $80.5 million in assets under management. Its year-to-date performance shows a 0.22% loss, but investors are still on track to turn a profit due to its dividend payments. The chart below shows 12 months of performance from BIZD.

This fund is fairly concentrated, with 66.67% of its assets distributed among its top 10 holdings. Among them are Ares Capital Corp. (ARCC), 14.68%; American Capital Ltd. (ACAS), 9.93%; Prospect Capital Corp. (PSEC), 7.90%; FS Investment Corp. (FSIC), 6.97; and Main Street Capital Corp. (MAIN), 5.07%.

An exchange-traded fund (ETF) that invests purely in BDCs could be a good addition to the portfolio of an investor who is seeking to avoid the risk of choosing just one such company. If this idea appeals to you, BDC Income ETF (BIZD) is the only ETF on the market that matches this description.

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.

ETF University: Learning the Lingo (Part II)

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 who 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 the launch of ETF University at the ETFU.com website.

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

Here is part two, i.e. five additional key terms and concepts that you must become familiar with if you are going to invest using ETFs.

1. 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.
2. Long/Short ETFs: Funds that employ a strategy of going long in 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.
3. Developed Market ETFs: These are funds that invest solely in the developed world’s equity markets, e.g. the euro zone, the United Kingdom and the United States.
4. Emerging Market ETFs: These funds invest only in emerging market countries, specifically China, Brazil, India, Russia and many others.
5. 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 “pre-emerging market countries,” they include nations such as Argentina, Egypt and Nigeria.

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

The Mark of an Educated Mind

“It is the mark of an educated mind to be able to entertain a thought without accepting it.”

— Aristotle

The greatest of philosophers knew that you can have an “open mind” about theories and various opinions without having to accept their veracity uncritically. Remember that the next time you get a pitch from a financial advisor, real estate agent, car salesman or anyone else.

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 that compares the progress of stocks in the United States, Europe and China. I also invite you to comment in the space provided below my Eagle Daily Investor commentary.

Have a great holiday 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.