Archive for March, 2014

Why are so many people Investing in ETFs?

Over the last few years there has been a great proliferation in ETF’s, both in the number and type that are being offered to investors. Indeed, approximately 700 new ETF’s have come into existence since 2010, which has created a much greater access for investors to a wider variety of asset classes.

Since ETF’s trade on a major stock exchange they can, unlike mutual funds, be bought and sold during the trading day at any time.

$188 billion was the net inflow last year of US listed ETF’s, just a hair shy of the record in 2012 of $190 billion, according to Morningstar, a financial research firm. It’s actually not surprising that US equity ETF’s garnered the biggest amount of investment dollars among all ETF categories last year, given the eye-popping performance of the US stock market.

“ETFs are sort of the Amazon.com of the fund world,” said Ben Johnson, Morningstar’s director of passive funds research. “They have had a leveling effect, offering both individual investors and large institutions access to a wide variety of exposures at very low prices.”

Short duration bond ETF’s have increased greatly in popularity because, as experts are quick to note, many fixed income investors have become nervous recently by the prospect of rising rates.

Bank loan ETF’s have also gained favor with investors as they invest in floating-rate bank loans that are made to companies who are rated below investment grade. One reason that investors find them attractive is that, in general, they offer higher yields than corporate and government bond funds as well as protection against rising rates. Floating-rate bank debt is also adjusted periodically as short-term rates rise or fall, making ETFs better than bonds that pay a fixed interest rate or coupon.

ETFs are also closely tied to the flexibility that the offer. For investment advisors, this is a very alluring feature as it allows investors to target very narrow segments of the fixed income and equities markets.

For example, target maturity bond ETF’s invest in bonds that mature in the same year, as well as baskets of bonds that are tied to an index. When their underlying assets reach maturity the funds liquidate, something that appeals to investors who want the certainty and regular income that comes with buying and holding bonds until they mature, as well as gaining greater diversification that would be difficult to achieve on their own.

The funds do not have a guaranteed return however, and investors may well end up getting back less than their original principal if a bonds (or bonds) in their portfolio default, as well as if they cash out before a fund’s expiration date.

Like other types of bond funds however,  target maturity ETF’s of shorter duration are less sensitive to rising interest rates than their counterpart longer maturity ETF’s.

“Because of the way you are able to manipulate small segments of the market, you can build what you want using ETFs,” said Krell of Cassaday & Co. “You can literally pick your exact bond maturities and credit qualities through ETFs.”

It’s well-known among investors that US equity markets have gotten off to a pretty rough start here in 2014. Because of that being the case, there is much higher interest in fixed income securities resurfacing this year. Almost all bond ETF’s struggled in 2013  to keep up with the quick pace of the equity market and, by the end of the year, many funds were in the red. Now that the Federal Reserve has begun to taper their massive bond buying purchases however, a lot of investors are beginning to return to this once coveted asset class.

Fixed Income makes a Return

Long heralded as key diversification agents, the income securities are also excellent source of current income. Investors hungry for more yield however were forced to turn to other corners of the market after the central bank started implementing a number of stimulus policies that ended up keeping interest rates close to zero. These included REITs, MLPs and dividend paying stocks.

Investors have been drawn back to what is considered a safe haven asset class in 2014 due to a combination of the aforementioned tapering by the feds as well as a recent spike in volatility. Because of this, there are a number of bond ETF’s net have, so far, seen impressive inflows so far this year. (The data below is as of 2/14/14)

  • 1-3 Year Treasury Bond ETF (SHY, A)
  • 3-7 Year Treasury Bond ETF (IEI, A-)
  • Ultra 7-10 Year Treasury ETF (UST, B+)you will
  • Total Bond Market ETF (BND, A)
  • 1-3 Year Credit Bond ETF (CSJ, A-)
  • 20+ Year Treasury Bond ETF (TLT, B)

Some of the best  inflows so far in 2014 had been seen by treasury bond funds. Vanguards Total Bond Market ETF is also quite popular.  All bond funds aren’t doing as well as these of course and one of the most popular, the iBoxx $ High Yield Corporate Bond ETF (HYG, A), will actually see 1.83M of outflows.

What’s the Bottom Line

What the year-to-date flow data shows so far this year is that investors have had a crucial shift in their mentality from 2013. As investors begin to return to this “safe haven” asset class due to monetary policy changes and recent market volatility, Bond ETFs are becoming more attractive once again. Tapering from the Feds is expected to continue to the year, meaning that we might still see fixed income securities gaining more traction sometime in the near future.

 

With Wall Street expecting $.40 in earnings, Dunkin Brands, the purveyor of some of the most delicious doughnuts (and relatively good coffee) in the US surprised the market with fourth-quarter earnings of $.43 as well as a top line of $183.2 million (the consensus was $178 million).

Not only did the brand boost its quarterly dividend from $.19 to $.23 per share, it’s expected that the revenues will grow from 6% to 8% this year. While their apple crumb donut isn’t exactly what you would call “health food” at 490 calories,  Dunkin Brands , the parent company of Dunkin’ Donuts and Baskin-Robbins, is certainly having a run of healthy sales growth as of late.

Even better for investors is the fact that, while about 30% of Dunkin’ Donuts 2800 stores  are not located in the US, the vast majority of those that are within US borders are on the East coast, giving the brand an awful lot of room to keep expanding.

Gina Sanchez, founder of Chantico Global,  says that “I think that there is incredible growth potential,” saying that while Dunkin’ Donuts rival McDonald’s had same-store losses in the fourth quarter, Dunkin’ Donuts same-store sales during the same time period were positive. Sanchez further added that “If you look at their expansion plans, they have over 7300 stores across the nation. Only 190 one of those stores are in the West. They are planning 5000 new store openings in the West, 1000 of which will be in California. That’s incredible opportunity.”

Thursday’s jump in the stock market to just over $50 per share after their earnings announcement meant a break above a key technical level, according to the managing partner of Belpointe Alternative Investments, Jeff  Tomasulo. “It’s actually looking really good,” he said about their stock. “For the last two-years, it really hasn’t broken below that 20-week moving average. Then, for the last two months, we saw it in a trading range between $46 and $49.”

He recommended that investors track whether or not the stock can hold above the $46 to $49 trading range, as well as remain above its 20 week moving average which is currently around $47. “Those are some really good points to use,” he added.

So if you’re looking to add something sweet to your portfolio (and you don’t mind that it comes with a few extra calories),adding Dunkin Brands  certainly looks like a palatable idea. Whether or not you’ll need a coffee with that is up to you.

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