If there is one thing that every investor should understand, it is that often the conventional wisdom on Wall Street just doesn’t play out. A prime example of this situation is the downtrend in interest rates so far in 2014.
At the beginning of the year, the U.S. Federal Reserve began the much-talked about “taper” of quantitative easing, or QE. So far, the Fed has reduced its bond buying from $85 billion per month down to $55 billion per month. Conventional wisdom says that the reduction in bond buying from the Fed should have caused interest rates to rise. However, this just hasn’t happened yet.
As of this writing, the yield on the benchmark 10-Year Treasury Note is just above 2.7%. That metric is way down from the 2.99% level on Jan. 2. In percentage terms, that’s more than a 10% drop in yield — a move that’s left a lot of bond watchers scratching their heads in amazement.
So, why have rates been so low despite the Fed’s tapering?
A recent editorial in the Wall Street Journal by E.S. Browning does a good job of shedding some light on the issue, offering up sound reasoning as to why.
First off, the decline in interest rates this year is largely symptomatic of concerns about weak foreign economic growth, as well as sluggish economic data here at home. Tepid global and U.S. growth also has kept core inflation metrics below the Fed’s target of 2%. Yields are sensitive to inflation, and usually low inflation translates into low interest rates.
Second, there’s been strong demand for bonds this year, which Browning writes has come from institutions, pension funds and insurance companies that want to protect the stock market gains they’ve captured during the past couple of years. That likely has helped prompt a rotation away from equities and into bonds, and that demand has kept bond prices higher and bond yields down.
A third reason is the Fed itself, which consistently has pledged to keep interest rates low despite the taper. During the past several years, the smart money really has learned that fighting the Fed is a futile effort, so the theory here is that as long as the Fed has pledged to keep rates in check, that’s what is likely to happen.
Finally, there’s the technical picture in bonds that continues to show interest rates remain under pressure. According to Asbury Research, a firm which tracks a series of technical indicators that have proven spot-on in terms of interest-rate trends, recent buying patterns of commercial futures traders; the action in U.S. Treasury bonds vs. German government bonds; and also surveys of trader attitudes all indicate lower rates on the horizon.
The bottom line here is that despite the Fed’s tapering, there are other, more important drivers operating in the bond market.
As an investor, the low-yield conundrum should be viewed as an opportunity to make big gains in sectors that benefit most from the current situation. Bonds, precious metals and especially emerging markets are some of best ways to take advantage of the trends we’ve witnessed in rates. That is precisely what we are investing in with my Successful Investing advisory service.
ETF Talk: Direxion Differentiates Itself with Leveraged Funds
Alternative investments are those outside of the three traditional asset classes: stocks, bonds or cash. Such alternative investments also can give diversity to your portfolio, as well as provide a safe haven during a crisis similar to the one in 2008, where stocks plummeted but interest rates were too low to make most bonds or other interest-bearing investments attractive. A notable provider of alternative investment exchange-traded funds (ETFs) is Direxion.
Direxion is an investment firm that was founded in 1997 as a mutual fund provider. It now offers more than 50 alternative ETFs, mostly of the leveraged variety. For example, these funds are designed to be able to triple, earn the inverse of, or earn triple the inverse of the relevant index in the course of a single day. This sort of investing is the complete opposite of the trend-following, long-term approach we take in Successful Investing. But if you are interested in trading aggressively and frequently, with a willingness to monitor your investments daily, Direxion’s ETFs can be used to potentially make — or lose — a lot of money quite quickly.
Direxion also offers a few long-term ETFs. But its focus is to tap alternative strategies, not to offer routine sector or geographic plays. One of its funds is the Direxion All Cap Insider Sentiment Shares (KNOW), which examines the S&P 1500 to find the stocks that insiders are buying. KNOW has achieved a gain of 1.96% so far in 2014, following a relatively steady upward trend compared to the S&P 500 this year. Last year, the fund rose 34.69%. KNOW also offers a 1.07% yield.
Direxion’s leveraged and inverse ETFs are not intended for an investor who can’t weather losses. However, if you have additional investment income you’re willing to risk on pure speculation, Direxion is one way you can get a decisive investment result in a very brief period.
If you want my advice about buying and selling specific ETFs, including appropriate stop losses, please consider subscribing to my Successful 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 may see your question answered in a future ETF Talk.
ETF Sector Spotlight: Emerging Markets
After last year’s marked underperformance, March brought with it happier times for the emerging markets. The Vanguard FTSE Emerging Market ETF (VWO), the largest equity emerging markets ETF by total assets, handily outperformed the S&P 500 (SPY) by almost 4%.
Moreover, for the week ended April 4, emerging markets funds actually saw net inflows, a big change from the record net outflows during the first quarter.
It remains to be seen whether these factors are just anomalies in a down market, or if they are harbingers of further gains to come. Either way, the emerging markets deserve your attention.
In this month’s ETF Sector Spotlight, we have compiled the 10 largest equity-focused Emerging Market ETFs that you should know about. This list shows you the many ways to play the emerging markets through ETFs. An investor could choose to invest in all emerging markets, select regions, select countries, and even select sectors within regions or countries.
To see which funds made our Top 10 Emerging Market ETFs list, get your ETF Sector Spotlight today!
NOTE: Fabian Wealth Strategies is a Securities and Exchange Commission-registered investment adviser, and is not affiliated with Eagle Publishing.
Victory over Self
“I count him braver who overcomes his desires than him who conquers his enemies; for the hardest victory is over self.”
The greatest of all philosophers knew that the self is often our worst enemy. And though it takes a lot of discipline and hard work, the more you can control your whims, the better person you are likely to be.
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 Making Money Alert 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.