A Year of Surprising Developments

The Biggest Surprises of the Year

Every year has its surprises, and 2014 definitely is no exception.

This year brought about what I call the “big four surprises.” I call them that because A) each was truly a big development that influenced the entire global market, and B) because nearly all of these were completely unexpected.

The big four surprises are the following:

1) Lower interest rates. At the beginning of the year there was near-consensus opinion from market observers that interest rates were going higher. The Fed was going to end quantitative easing (QE), and possibly even raise the Fed funds rate. Those two factors, along with a boost in global economic activity, would send interest rates, i.e. bond yields, much higher in 2014 — so the theory went. Well, that just didn’t happen. Part of the reason why is that global growth didn’t ramp up, and U.S. Treasury bonds became the safe-haven asset class for a lot of foreign capital. Also, interest rates (bond yields) in other countries such as Japan and many European countries were so low by comparison that U.S. Treasury bond yields actually seemed robust.

2) Falling oil prices. Hands down this year’s most unexpected development was the precipitous plunge in oil prices. Through the first six months of the year, the price of a barrel of crude oil had gone up about 11%. In the last six months, oil prices are down 46.5%. That incredible plunge in the value of oil has many causes, not the least of which is geopolitical moves by OPEC. Yet there’s also the fact that the North American energy renaissance created a lot more supply. Along with slowing global demand, we’ve seen oil prices tumble.

3) A rising U.S. dollar. Given the incredible levels of dollar creation via money printing by the Federal Reserve, most people thought the dollar would continue to get weaker and weaker. Well, in 2014, the greenback gained in strength relative to its foreign currency rivals. And while this may be more the work of weaker currencies such as the euro and the yen, there’s no denying that the greenback reemerged as a force to reckon with on the currency front this year. This development is both good and bad depending on which sector of the market you’re talking about, and for different country-specific equity markets.

4) Record high stocks. The final surprise of the year was the number of record highs set by the U.S. stock market in 2014. Despite several minor pullbacks this year, and one very big pullback in October, stocks managed to keep pushing the throttle. As of the close of trading on Dec. 22, the Dow was brushing up against the 18,000 mark. As money keeps pouring into stocks, equity values in the United States just keep getting inflated, and inflated and inflated. But what’s likely to happen to your money when this equity bubble bursts?

In 2015, the surprises aren’t likely to be the same. In fact, the opposite of the current circumstances could occur. Whatever happens, we’ll be here again to help you identify, understand, and act, in defense of your own money — and in your own best financial interest.

We’ll do that not only here in the Weekly ETF Report, but also at our new website, ETF University, or ETFU.com, and with our brand new podcast, which provides insights on tactics and strategies you can use to take advantage of whatever the market throws your way.

It’s going to be an interesting year, so be sure to tune in here every week for all of it.

ETF Talk: International REIT Offers Diversification

This week’s ETF Talk introduces an international real estate investment trust (REIT) fund, the Vanguard Global ex-U.S. Real Estate ETF (VNQI), which complements the domestic REIT we featured last week.

While last week I suggested that domestic REITs might be a good safe haven in a potential market downturn, this week I’m looking ahead to 2015. The same reasoning for investing in domesic REITs that I shared last week also applies to international REITs. The only difference here is that international REITs typically have not run up in price.

I think that international markets are due for a bounce next year, so this REIT could be a good way to profit from a beaten-down investment as we move forward. Like its domestic partner, VNQ, VNQI has outperformed the rest of its market this year.

Although VNQI is down 1.1% this year, that performance actually is stronger when compared to the beating foreign markets have taken during the same period. REITs are a relatively attractive investment in a falling market, so it only makes sense that VNQI, while it has suffered alongside emerging markets, has not absorbed as much pain as other international assets. Like other Vanguard funds, this ETF has a low expense ratio, clocking in at 0.27%.

If foreign markets reverse direction and move to the upside in 2015, then VNQI stands to benefit along the way. And, with an attractive dividend yield of 4.29%, you have the opportunity to get both share price appreciation and a solid income stream.

VNQI’s top 10 holdings comprise 22.61% of its assets. These include Mitsubishi Estate Co. (MITEF), 3.4%; Mitsui Fudosan Co. Ltd. (MTSFF), 3.11%; Unibail-Rodamco SE (UNBLF), 2.82%; Cheung Kong Holdings Ltd. (CHEUF), 2.62%; and Sun Hung Kai Properties Ltd. (SUHJF), 2.55%.

This fund is an inexpensive way to get exposure to international real estate markets. If this prospect interests you, you may want to check out Vanguard Global ex-U.S. Real Estate ETF (VNQI).

If you want my advice about buying and selling specific ETFs, including appropriate stop losses, in invite you to subscribe 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.

Top 10 ETF FAQs

I get a lot of questions every day about ETFs. So, this week I decided to compile a list of the top most frequently asked questions (FAQs) to help investors understand the basics of ETFs and how they work. So, here you go!

1) What is an ETF?

An ETF, or exchange-traded fund, is an investment fund traded on stock exchanges. An ETF holds assets such as stocks, commodities or bonds. Most ETFs track an index, such as the S&P 500 or Dow Industrials, etc.

2) What are the advantages of investing with ETFs?

There are many advantages of investing with ETFs. The primary advantages of using ETFs include their low cost, ease of use, transparency, wide variety of choice, tax efficiency and liquidity.

3) What are the disadvantages of using ETFs?

ETFs do require some specialized knowledge to understand how to use them successfully. In some cases, they can be more complicated than mutual funds. When purchasing an ETF, you also incur a transaction fee. If you are making small purchases month after month, over time those fees can reduce your total return. There are more than 1,600 ETFs listed on U.S. exchanges, so the sheer number alone can be intimidating for some investors.

4) Where, and how, do I buy ETFs?

The purchase or sale of ETFs is done through a brokerage account. Popular national brokerage firms such as Fidelity, Schwab, TD Ameritrade and Vanguard are good choices for your brokerage account. Once you have a brokerage account, you can follow that investment firm’s instructions to buy and sell ETFs online.

5) What are the main differences between ETFs and mutual funds?

ETFs are priced throughout the trading day, while mutual funds are priced just once a day at the close of trading. ETFs are completely transparent, meaning you always know what an ETF holds. Mutual funds are only required to report their holdings quarterly. ETF purchases do involve a transaction fee, but there are no sales charges or deferred sales charges like there are with mutual funds. ETFs also are much cheaper, more tax efficient and offer far more choice than mutual funds.

6) What are some common mistakes made when investing with ETFs?

Investing involves risk, and using certain ETFs (e.g. ETFs that use leverage) can be inappropriate for some investors. Some small, i.e. thinly traded, ETFs have wide bid/ask spreads. This can cause investors to buy at a high price and to sell at a low price. ETFs require some specialized trading knowledge to sidestep these and other mistakes. Educating you on how to avoid these mistakes is one of the missions of Doug Fabian’s Weekly ETF Report.

7) Are ETFs for stocks only?

No. ETFs allow investors to allocate to stocks, specific market sectors, foreign stocks, fixed income, commodities and currencies. The growth in the number and variety of ETFs over the past several years means that almost every type of asset class that is publicly traded now is accessible with ETFs.

8) Do ETFs pay dividends and interest like mutual funds?

Yes. ETFs pass through dividends paid from stocks, as well as interest from fixed income securities, directly to shareholders. Distribution frequency varies depending on the ETF, as some ETFs pay monthly while others pay quarterly or semiannually.

9) What are the tax advantages of using ETFs?

ETFs offer greater tax advantages to shareholders than mutual funds. Because most ETFs are structured like an index fund, there is an extremely low turnover rate in the holdings when compared to mutual funds. It is the buying and selling of assets within a mutual fund that tends to create tax issues, but there is very little of that when investing with ETFs.

10) Are there costs and sales charges when purchasing ETFs?

When purchasing an ETF, you likely will incur a transaction fee that is charged by your brokerage firm. While there are no sales charges, commissions or redemption fees associated with ETFs, you likely will have to pay the small transaction cost associated with buying and selling any asset.

If you have questions about anything ETF related, just send me an e-mail.

Grinchy Wisdom

“It came without ribbons! It came without tags!”

“It came without packages, boxes or bags!”

And he puzzled three hours, till his puzzler was sore.

Then the Grinch thought of something he hadn’t before!

“Maybe Christmas,” he thought, “doesn’t come from a store.”

“Maybe Christmas…perhaps…means a little bit more!”

–Dr. Seuss, How the Grinch Stole Christmas!

If the stresses of the holidays start getting to you, remember the wisdom of the Grinch. Remember that Christmas, perhaps, means a little bit more.

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 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 value of emerging markets this coming year. I also invite you to comment in the space provided below my Eagle Daily Investor commentary.

Merry Christmas,

Doug Fabian