Several characteristics have provided consistent risk-adjusted excess return for sector and industry ETFs, including value-, momentum-, quality-, and sentiment-related factors. This article highlights an industry ETF that is currently very attractive using an ETF selection model based upon such factors: VanEck Vectors Semiconductor ETF (SMH).
April 15 may be behind us, but it’s not too soon to start planning ahead for 2019 taxes. Municipal bonds are attractive after-tax investments for those in higher tax brackets and do a better job of diversifying stock risk than corporate bonds. Although attractive national muni bond ETFs are available, closed-end municipal bond funds are currently selling at above-average discounts to NAV and may be an especially attractive way to invest in the space. In particular, AllianceBernstein National Municipal Income Fund (AFB) is selling at an unusually large discount of 12%. In addition to its attractive distribution yield and moderate level of interest rate and credit risk, buying its assets at 88 cents on the dollar makes it an especially appealing investment for high tax bracket investors. If the NAV discount reverts back toward a more normal level, which my research indicates is likely, it will be icing on the cake.
Keynes was a very successful investor as well as a renowned economist. Much of his success can be attributed to his willingness to depart from conventional wisdom even in the face of intense criticism and the risk of failure. Investors can learn something from him.
Many ETFs offer “liquid alternatives” of various kinds, but very few have provided meaningful returns that are uncorrelated with the stock market, which is the whole point of investing in alternatives. IQ Merger Arbitrage Index ETF (MNA) is an exception. MNA offers investors a relatively low-cost passively-managed fund that systematically harvests the merger arbitrage risk premium. The fund has had a low correlation with the S&P 500, low volatility, and an impressive return history. It was just named “Alternative ETF of the Year” at the 2019 Mutual Fund and ETF Industry Awards.
Many investors try to fill in all nine of the “style boxes:” growth, core, and value along the style axis; large, mid, and small along the size axis. Unfortunately, all nine boxes have a very high correlation to each other. Their shared U.S. stock market risk means that they will all fall together. To obtain meaningful diversification requires allocating to equity asset classes with much lower correlations to U.S. stocks, including real estate and international stocks.
Nearly all portfolios are dominated by stock risk. For example, in a 60/40 stock/bond portfolio, stocks typically account for well over 90% of the risk. Therefore, in seeking to reduce overall portfolio risk, it is much more important to diversify stock risk than bond risk. Bonds currently have a low correlation with stocks, and so do a good job of diversifying stocks, but bonds also currently have low expected return.
The presence of many individual country ETFs (exchange-traded funds) and CEFs (closed-end funds) makes country-targeted investing easy. It can also be profitable. This article will highlight several characteristics that have provided consistent risk-adjusted excess return, including value-, quality-, and sentiment-related factors.
Vanguard’s target date funds include a meaningful allocation to international bonds despite their ridiculously low (or in many cases negative!) yields. Their rationale is based on the premise that global capital markets are efficient and asset prices provide a fair return that reflects their risks. This assumption is so firmly embedded in the Vanguard DNA that they are apparently unable to adjust to the compelling evidence that many international bonds are artificially overpriced and should be avoided.
The presence of many sector and industry ETFs makes industry-targeted investing convenient and inexpensive. It can also be profitable. This article will highlight several characteristics that have provided consistent risk-adjusted excess return, including value-, momentum-, quality-, and sentiment-related factors.
The dots are coming! The Fed is scheduled to release its famous “dot plot” of forecasts of various key economic figures, including the Fed funds rate, tomorrow (Wednesday, March 20th). The reaction of the Fed funds futures market may portend the stock market’s reaction in the days ahead. In this article, we examine the interest rate changes implied by the 6-month Fed funds futures contract as a potential stock market allocation indicator.