Displaying items by tag: rates

(New York)

Want to maintain your portfolio’s income, but also afraid of rising rates? Many are, as it is a difficult challenge keep income high but not experience losses. With that in mind, here are a handful of mutual funds which should help do just that. One area to look for diversified income right now is in multi-asset income funds. Some of the best are the American Funds Income Fund of America (AMECX), the Vanguard Wellesley Income (VWINX), the BlackRock Multi-Asset Income (BAICX), the JPMorgan Income Builder (JNBAX), and the Principal Global Diversified Income (PGBAX).

FINSUM: Many of these funds are quite old and have had great performance. Fees are all over the map, but one of the areas where they tend to succeed is in having good performance with lower volatility than the market as a whole.

(New York)

Whether investors like it or not, the market seems to have finally come to grips with the reality of higher rates. That realization has started to change the performance of different assets from even a week ago. So who will win and who will lose? On the positive side, financials and banks seem likely to benefit, as they make a great deal of their income from interest. Energy and materials stock are likely to shine as well as they benefit from the expanding economy. On the losing side will be utilities, housing, and autos stocks, all of which are sensitive to higher rates in their own ways. No one can be sure how tech might respond, as the sector is young enough that there is not good evidence to say how it might react.

FINSUM: The business case for how most sectors will be impacted by higher rates is clear. If only share performance were so simple.

(New York)

One of the big beneficiaries of all the geopolitical events of this year, as well as of rates hikes, has been small caps. Smaller companies tend to perform better in economic expansion, and they look more likely to hold up to foreign trade tensions as they have a more domestic focus. After hitting records in August, small caps are now in correction territory, having lost 10% from their high. They are now underperforming large caps for the first time this year as many see trade tensions easing.

FINSUM: Small caps sometimes suffer at the end of economic expansions, so this move makes sense. Still an almost 9% loss in the Russell 2000 this month is rough.

(New York)

We have been running a lot of stories lately about the best investments for a rising rate environment. The reasons are obvious. However, instead of pointing out ETFs for allocation etc, we found a good piece interviewing money managers about how they are handling their portfolios. Some of those interviewed are relying on short-term bonds to minimize their rate risk. Since the yield curve is quite flat, you get almost no extra compensation for the rate risk of holding longer maturity bonds. One manager highlighted that bonds in the 2-5 year window were a sweet spot. Some also said the market is over-discounting inflation and that inflation linked assets were a good idea.

FINSUM: Short-term bonds seem a like good play, but we have also been impressed with the interest rate hedged ETFs out there, which often go long corporate bonds and short Treasuries to offset any losses. They seem to have performed well.

(New York)

Junk bonds have had a rough monthly, and it is not hard to see why. The rise in yields and the anxiety about stocks have combined to push yields on junk steeply higher, from 6.18% on October 1st to 6.61% now. In aggregate, the bonds are down 1%+ this month. However, the truth is that the losses could have been much worse, and within that idea, is an important story. That story is that ETFs, which have offered much greater ease of access to investors, actually seemed to have supported prices in the recent turmoil. The head of bond trading at Oppenheimer put it best, saying “The ETF market, which was supposed to subtract liquidity from credit markets, is actually adding liquidity by aggregating the risk and bringing in people who want to take macro risk as opposed to micro bond level risk … The ETF market ends up providing the live bid-ask spread that even the credit markets themselves cannot generate”.

FINSUM: This is a fascinating argument as it runs counter to the long-running narrative about how fixed income ETFs could cause a big blow up because of a “liquidity mismatch” between ETFs and the underlying asset.