A Tiny Bond ETF Could Be Signalling the Start of a Big New Investing Theme

A Tiny Bond ETF Could Be Signalling the Start of a Big New Investing Theme

A little-known, thinly-traded bond exchange-traded fund saw its assets soar on Friday in what could be indicative of the next big theme in ETFs.

The iShares Interest Rate Hedged High Yield Bond ETF (HYGH) attracted nearly $35 million in inflows on Friday, its largest day on record, in what looked to be a small number of large block trades.

investors want yield
 Source: Bloomberg

This product is nearly identical to the well-known iShares High Yield Bond ETF (HYG), but with one key difference: It also employs interest rate swaps to hedge rate risk.

In light of the jump in bond yields since the U.S. election, interest rate hedged products could prove to be the new hot frontier in ETFs, taking the baton from once-beloved currency-hedged equity ETFs that offered investors ways to play the advent of Abenomics and the European Central Bank's quantitative easing.

"Investors just got finished using currency-hedged ETFs like central bank surfboards to ride waves of liquidity, now the tide is beginning to turn and you can see them starting to use interest-rate rate hedged ETFs as life rafts to deal with rising yields and expected rate hikes," said Eric Balchunas, ETF analyst at Bloomberg Intelligence. "HYGH is basically HYG but with zero duration — a sequel product essentially designed to attract investors who want HYG's exposure but without the rate risk."

The catch, he added, is that the cost of the hedge (2 to 3 percent) will rise along with Treasury yields.

Keeping with this theme of investors seeking protection from higher interest rates, the iShares Floating Rate Bond ETF (FLOT) took in the second-most inflows among fixed income products on Friday.

Interest rate hedged ETFs should be "an area of focus for investors in 2017, or even before then," said Todd Rosenbluth, director of ETF research at CFRA. However, none of these products have been around long enough to see how they perform amid a rising rate environment. HYGH, for instance, launched in May 2014 — well after the 2013 'taper tantrum' roiled the markets.

"This shouldn't stop investors from looking at them if you believe that rates are going to move higher and you want to maintain your fixed income exposure," he added. "The nearly 6 percent yield you're getting with this product can be quite attractive."

While high-yield spreads have tightened since the election, their investment grade brethren have fared better.

"The lackluster performance of high yield makes less sense fundamentally, as a stronger economy should be particularly supportive with the high yield market just inside long-term average spreads," writes Barclays Capital Inc. Global Head of Credit Strategy Research Bradley Rogoff.

The strategist attributed the underperformance since the election of junk bonds relative to investment grade debt to fund outflows. Through the seven sessions ending Nov. 18, investors yanked $871 million from the more popular, unhedged iShares product (HYG). On Friday, HYG saw greater withdrawals than any other fixed income ETF.

protection from the bond bloodbath
 Source: Bloomberg

Article and media originally published by Luke Kawa at bloomberg.com


Can You Make A Million In ETFs? Yes — With The Right Choices, Timing And Sizing

You love to trade, and you've set a goal to make a million dollars. You also wonder whether exchange traded funds can help you achieve that ambitious goal. Can ETFs in fact generate wealth in the same way that the best CAN SLIM-quality stocks can?

In some ways, the question is difficult to answer.

ETFs simply don't have as long a trading history as stocks. And even if some funds are concentrated in their holdings, one might think they cannot make as large a move as a highflying tech or the future Home Depot (HD).

Yet some ETFs are built with leverage, so they are designed to move at a similar tempo to high-growth equities. And when the market is favoring certain industry sectors, the right set of ETFs can be employed to take advantage of short, medium and long-term moves.

A look at some of the hot-performing ETFs so far this year should convince you that it's worth the time and effort to focus your research on ETFs as serious moneymaking vehicles.

nugt

Leveraged gold ETFs made huge strides this year. Take the Direxion Gold Miners 3X (NUGT), which seeks to provide three times the return of the NYSE ARCA Gold Miners Index. On Feb. 11, the highly liquid ETF cleared an aggressive entry point at 10.62 in heavy volume.

After a brief pullback, NUGT rose sharply over the next month, rising to as high as 14.93 on March 17 before cooling off. That's an impressive 41% advance, fueled in part by the fund's leverage. The same ETF moved sideways for a few weeks, then busted out again. On April 11, NUGT soared 18% in big turnover, clearing a new cup-base entry point at 15.03.

Just 15 sessions later, NUGT rose to as high as 24.79, up 65% from the new entry.

How could an ETF trader make the most of these two short-term moves?

Several skills need to be mastered. First, you need to become comfortable analyzing charts and looking for clues of big demand. In the second half of January, NUGT provided some clues. One, volume on the up days in price expanded heavily, and down days featured quieter trade.

Second, check the strength of the sector. IBD's stock research tables can help, since they rank 33 separate industry sectors based on multiple periods of relative performance. The top five sectors are generally going to be leading the market.

In IBD's Feb. 1 edition this year, the Mining sector lagged its peers, ranked 31st out of 33. Stocks in the sector were on composite up just 2% for the year. Things changed quickly; on March 1, Mining gushed to the No. 1 spot as the big money sought to put more money into gold and silver producers.

Proper position sizing is key. Let's say you have half a million dollars and want to turn it into a million. You cannot afford to be too concentrated in one ETF, but you also want to have a sizable position so that you can cash in a big gain when you are right.

So consider this strategy: In each ETF you trade, build a $62,500 position, which would represent one-eighth of your portfolio. A 20% gain on the position would score a profit of $12,500, boosting your portfolio account by 2.5 percentage points. Accumulate 40 such winning trades over time, and you've netted a half million in profits, minus your trading losses and commissions.

When it comes to buying the ETFs that represent traditional growth sectors such as retail, medicine or technology, you likely will do better when IBD's current outlook points to a confirmed uptrend. Here, following the IBD ETF Strategy will be immensely helpful. Most stocks -- and thus ETFs -- will follow the general direction of the market. IBD Leaderboard features daily commentary on this strategy as well as an annotated chart of the Nasdaq composite, showing precise signals on when to go 100% long, cut exposure to 50%, and go completely in cash.

Don't forget that some leveraged ETFs can produce unintended results if you hold them too long. Due to the mathematical nature of these funds, the long-term performance won't necessarily match the index it tracks -- especially those that designed to act inverse to the equity index.

Last but never least, always keep your losses small in every trade. It's human to make mistakes, and even the best traders in the world know they will make lots of errors. But the most successful traders, in ETFs or otherwise, will have an iron discipline in doing their best to let their big winners grow while never letting their losses exceed a set threshold -- say, 7%-8% in a normal uptrend and 3%-4% in sideways or choppy markets.

Article originally published at investors.com


Still Time to Buy Gold Miners?

Still time to buy gold miners?

Finally, after months—nay, years—of dismal performance, gold mining stocks look good. Producers, I mean, not juniors.

Proxied by the Market Vectors Gold Miners ETF (NYSE Arca: GDX), these stocks are up better than 56 percent since the top of the year. That’s certainly good absolute performance, but it’s also good on a relative basis—relative to gold, that is.

The attractiveness of gold mining stocks traditionally boils down to leverage. Miners are bellwethers of sorts, traditionally rising earlier and faster than metal in bull cycles and swooning sooner and quicker in downturns. Leverage has been negative for GDX since 2010. You can see from the chart below that the mining ETF’s relative strength turned down months ahead of the 2011 price peak in the SPDR Gold Shares (NYSE Arca: GLD).

 

 

Bottoming action in late 2015 then presaged the 17 percent rise in GLD this year.

There’s another more compelling chart illustrating the resurgence in the miners. If you plot the price ratio of GLD to GDX, you get a graphic representation of investors’ favor. As the ratio rises, bullion becomes the preferred exposure for gold punters; when the ratio falls, mining stocks are fancied.

Just last week, the ratio broke through a key support level after cascading below the 200-day moving average, the first such occurrence in years.

Clearly, investors like gold now, but they love gold mining shares. And why not? Several of the big names in the GDX portfolio have washed themselves clean of the dirt that once sullied their balance sheets. That allows more of gold’s price buoyancy to percolate to the bottom line. A 10 percent rise in bullion could translate to a 50 percent hike in company cash flows. Now, that’s leverage.

And how does that translate to GDX’s price? GDX is dancing at the $22 level now. Long-term charts show a triple-top breakout pointing to a $36 objective. Patient investors are likely to use April price pullbacks to bargain shop, then ride the fund’s typical bullish seasonality and lighten up on their positions in August.

Originally posted by at The Market's Measure.