Throughout 2010, some of the most desired investments included energy pipeline partnerships, convertible bonds, preferred stocks, REITs, junk bonds and dividend stocks. Pick any area in the first 10 months… you were shaking your money maker. Best of all, the lower risk Total Return ETFs had been keeping pace with riskier Common Stock ETFs.
Then came the Republican election victories, Federal Reserve intervention and an Obama tax compromise. Suddenly, stocks shifted into overdrive, with most U.S. stock benchmarks handily topping their April 2010 highs.
However, the recent return to riskier assets has been causing Total Return ETFs to slumber… if not downright slump. Consider the ways in which the results of the first 10 months differ from the results seen in November-December:
Waning Enthusiasm for Total Return ETFs?
| 1/1-10/31 | 11/1-12/13 | |||||
| JP Morgan Alerian MLP (AMJ) | 29.8% | 2.7% | ||||
| Vanguard REIT Fund (VNQ) | 25.1% | -0.7% | ||||
| iShares S&P Preferred Stock (PFF) | 14.2% | 0.0% | ||||
| SPDR S&P Dividend (SDY) | 12.4% | 1.3% | ||||
| iShares iBoxx High Yield (HYG) | 10.3% | -0.7% | ||||
| SPDR Convertible Bond (CWB) | 9.4% | 3.0% | ||||
| Dow Industrials Diamond (DIA) | 8.7% | 3.2% | ||||
| S&P 500 SPDR Trust (SPY) | 7.4% | 5.1% | ||||
With the exception of SPDR Convertible Bond (CWB) and perhaps JP Morgan Alerian Energy MLP (AMJ), income producing assets with the potential for capital appreciation have stalled. They look particularly humdrum when compared to the momentous growth of the Dow and S&P 500 over the last 5-6 weeks.
The reasons may not be too difficult to identify. Near-term tailwinds include:
- Seasonal stock appreciation from November to April
- Upgraded economic expectations
- avorable political dynamics
- Reflation-acting Fed
- Greater tax certainty
However, all of these “positives” are coming with an intermediate term price tag as well as long-term price tag. The intermediate term tag is a rapid increase in bond yields. While they may not yet be alarming, rising Treasury bond yields pressure the perceived benefit of all other asset choices; specifically, the narrowing credit spread between treasury yields and income producers like preferreds, junk and dividend stocks limits the appeal of the latter. (And if yields rise too far too fast, it could eventually call into question the risk-reward of common stock.)
The long-term price tag of spending money that we don’t have? A forsaken national debt and a cadre of bankrupt states. Yet it’s not clear when newfound exuberance will be shot down by the global investing public. Europe is not getting much in the way of the benefit of the doubt these days. (Is the U.S. really going to get the benefit of the doubt forever?)
I don’t believe that it’s time to ring the alarm bells. After all, the 10-year note appears to be ending 2010 in the same place that it began the year… at a historically low 3.25%. Many an economist anticipated that it would close the year between 4.0%-4.25%. What’s more, even if a reckoning is in the future, smart investors employ stop-loss limit orders and alternative protective measures.
Even when it comes to Total Return ETFs, I myself have not yet cashed in on these growth-income combos. I still view the credit spreads in an attractive light and I still hold funds like iShares High Yield Bond (HYG), JP Morgan Alerian (AMJ) and SPDR Convertible Bond (CWB). After all, Total Return ETFs may have hit a “soft patch,” but they sure haven’t hit my stop-loss sell orders.
Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.
