ETF Update: High-Grade Bond Opportunity?, Homebuilders on Edge, Retail Holiday Fears

Opportunity for High-Grade Bond ETFs?

Current market conditions may ultimately translate into a brighter future for corporate bond and ETFs.

The high-grade bonds are being priced with a highly pessimistic view of the future. Long-term maturity corporate bonds could reward dauntless investors with large spreads producing high yields, reports Robert Huebscher of Advisor Perspectives.

High-paying bonds may be tantalizing with their near double-digit yields. Nevertheless, these bonds may suffer from risks with deteriorating economies, rising inflation, widening spreads, and the chance of defaults.

If you are pondering the possibility of high-grade debt, high-grade 10-year maturities are being recommended for their liquidity and extensive offerings.

High-grade bond funds may yield less than individual bonds. The tradeoff for a lower-yielding fund would be a diversified exposure, liquidity, real market values, and much more information covering credit.

The funds for high-grade bonds do not provide exclusive exposure to high-grade corporate markets and historical year-to-date performances may not prove to be a useful guideline for selecting a fund.

The safer bet for the risk-averse is a short-term investment. But for those who are comfortable with more risk could consider looking into long maturities if they feel that they’re right for them.

A sample of some corporate bond ETFs:

• iShares iBoxx $ Invest Grade Corp Bond (LQD): down 9.7% year-to-date; yield 6.5%

• iShares iBoxx $ High Yield Corporate Bondd (HYG): down 23.8% year-to-date; yield 11.1%

 

Homebuilder ETF Await Foreclosure-Prevention Program

Real estate and homebuilder-related ETFs are left waiting in the wings while the implementation of a federal foreclosure-prevention program is worked out.

Disagreements on how to structure the program are complicating the details and most likely delaying any action at this time. The White House and the FDIC are at odds over basic questions about the effort’s size and breadth, while the prospect that the new president will come in and re-draw the design and scope of the plan has added to the pause, reports Damian Paletta and Deborah Soloman for The Wall Street Journal.

Under the new plan, the government would cover roughly half the loss on reworked loans that went into foreclosure. The plan would use between $40 billion and $50 billion from the government’s $700 billion financial-market rescue fund to create these loss-sharing agreements between banks and the government.

The FDIC’s plan has been in the advanced stages, however, it is believed that the plan is strongly opposed by the White House. The proposal would touch down on two or three million homeowners and would encourage banks to rework troubled loans by providing a partial federal guarantee for losses on modified mortgages that meet specific criteria.

White House officials are consulting with industry groups. Meanwhile, ETFs in a holding pattern include:

• SPDR S&P Homebuilders (XHB), down 28.7% year-to-date

• iShares Dow Jones US Home Construction (ITB), down 30.5% year-to-date

Retail ETFs Fear Holiday Blahs

While retailers in general are anticipating flagging sales reports, online shopping is expected to grow, up to a 15% increase from last year, giving relief to certain retail ETFs. However, the number of online retailers with such optimistic expectations has fallen this year.

Online retailers are more resilient when it comes to the economy as the recent survey from Shop.org implies. The survey of 60 online retailers was conducted for Shop.org from Oct. 1 through 20. Shop.org expects online retail sales to rise 17% for the whole year to $204 billion, reports Cheryl Lu-Lien Tran for The Wall Street Journal.

Consumers are turning to online shopping because it is easier to comparison shop, and some offer free shipping, which in turn saves on higher gas prices. Retailers for the online shoppers are offering more such as product videos, customer reviews, Facebook pages to promote sales and clearance sale pages.

Retail HOLDRs (RTH) are down 23% year-to-date. Among the online retailers that are major components in the fund are Amazon (AMZN), 5.9%; Best Buy (BBY), 4.2%; and Target (TGT), 8.9%.