Archive for February, 2010

A Sign of Rising Interest Rates?

Tuesday, February 23rd, 2010

The U.S. Federal Reserve surprised the market last week by raising the U.S. discount rate by a quarter of a point (0.25%).

Fed Chairman Ben Bernanke insists the rate hike should not be considered to be monetary tightening, but the bond market doesn’t answer to the Fed Chairman and recognizes that the interest-rate cycle has reached the point where tightening has begun.

There are other signs that a trend of interest rates moving higher has begun.

Generally, when the stock market sells off, the bond market moves in the opposite direction.  When news about Greece’s debt problems hit the market and stock prices declined, typically we would have seen a significant flight to safety, resulting in a significant rally in the bond market.  We saw some shifting of assets to safer investments, but the shift quickly faded.

To identify a trend, investment managers typically look at the long end of the curve, and the 30-year bond showed signs of weakness, in spite of Greece’s debt problems.

Whether rising interest rates is indeed a trend should be determined during the week ahead, with new Treasury Inflation-Protected Securities (TIPS) offerings.  Up for auction will be:

  • $44 billion in two-year Treasuries
  • $42 billion in five-year notes
  • $32 billion in seven-year notes
  • $8 billion in 30-year TIPS

 The 30-year TIPS offering is the first offering of that duration since 2001, as some have considered a 30-year maturity as being unnecessarily long.  Whether the 30-year TIPS will stimulate investor interest remains to be seen.  If the auction is poorly received, higher rates will most likely be on the horizon.  Stay tuned.

More Wenning Advice

Monday, February 15th, 2010

Want more information than we’re providing here?  

Visit the Wenning Investments Web site.  In our news room, you’ll find an archive of our Wenning Advice newsletter.  You’ll also find articles quoting me that have appeared in The Wall Street Journal, Forbes and other media.

Want more?  If there’s a topic you want addressed, leave me a comment here or send me an e-mail.  I look forward to hearing from you.

Exchange-Traded Funds Have Grown Up

Monday, February 15th, 2010

Not long ago, exchange-traded funds (ETFs) were hardly ever considered as an investment option for retail investors.  While many investors had heard of them, they were generally considered to be just another type of index fund.

Still, led by the popularity of the SPDR (aka, Spider), which is based on the S&P 500 stock index, ETFs grew to $610 billion in assets by May 2008.  By then there were 680 ETFs for every index imaginable.

With last year’s introduction of actively managed ETFs, they are likely to become even more popular.  There are already as many varieties of ETFs as there are of mutual funds and their numbers are growing rapidly.

ETFs, like mutual funds, are professionally managed and each fund represents an index or group of investments with specific characteristics in common.  For example, the first and most famous ETF was the SPDR (aka, Spider), which is based on the S&P 500 stock index.

Like mutual funds, ETFs range from very low risk to very high risk investments.  Unlike mutual funds, though, ETFs are priced continuously, not daily, and are traded on exchanges.  ETFs also provide an opportunity for investors to gain exposure to alternative investments, adding diversification to their portfolio.

Because ETFs are traded like stocks and bonds, they provide the same level of trading flexibility and can be used for hedging strategies.  They also are lower priced than most mutual funds and are more tax efficient, as there is little turnover in their portfolio securities and they don’t have to sell securities to meet investor redemptions.  These advantages may fade somewhat as actively managed ETFs proliferate.

Overall, ETFs offer advantages over mutual funds and cost less – so what’s not to like?

An Investment For Pessimists

Monday, February 15th, 2010

When it comes to investments with exotic sounding names, it’s hard to beat inverse-leveraged exchange-traded funds.

Then again, it’s also hard to beat them when the market is sinking.

Given their potential for performing well in down markets, it’s worth knowing what they are and how to use them.

Our next post will explain exchange-traded funds (ETFs).  Put what about that “inverse-leveraged” part?

An inverse fund moves in the opposite direction from the underlying securities.  For example, an inverse fund for the S&P 500 would move up when the S&P 500 moves down.  Unfortunately, of course, it would move down when the S&P 500 moves up.

If the inverse fund is also leveraged, it will move farther.  For example, if the fund is “double-beta” leveraged and inverse, it will move up two points for every point the underlying securities move down.  That’s great if the market is dropping in value, but you won’t be too happy if the market jumps 200 points and your ETF drops 400 points.

Inverse-leveraged ETFs can be risky, but they can also help reduce risk if they are used as part of a hedging strategy.  Consider that having a percentage of your investments in an inverse-leveraged ETF can balance losses in the rest of your portfolio if the market drops in value.  As such, they can reduce the overall risk in your portfolio.

Conversely, day traders are also using them to speculate on market movements or the movement of specific sectors.

Regardless, inverse-leveraged ETFs, as well as inverse ETFs and leveraged ETFs, are proliferating rapidly.  ProFunds introduced the first six leveraged and inverse international ETFs, and registered another 48 inverse and leveraged commodity and currency ETFs.  Rydex, which already has similar offerings, has added a half dozen of an expected 55 inverse and leveraged domestic ETFs that are based on specific investment styles and sectors.