Inter - Economic Market Allocation - How the Average Investor can Beat the Market!
Welcome to my blog.
The purpose of this blog is to inform the investor and the trader about Market history and cutting edge strategies. Also important news stories that will shape their portfolio allocation.
Mr. Peter Casula Jr
A flurry of strong U.S. economic indicators, especially the better-than-expected May job growth number which is one of the key gauges of the Fed policy determination, set the stage for a September timeline for the Fed rate hike. This, along with rising supplies of debt securities pushed the yield on the benchmark 10-year Treasury note to this year's high of 2.42% on June 9.
In such a backdrop, yield-loving investors might be looking for ways to beat the benchmark Treasury yield and yet enjoy decent capital gains. For them, we highlight some ETF choices that provide extra yield and might be in focus once the Fed puts an end to the rock-bottom interest rate environment.
Senior Loan ETFs
Senior loans are issued by companies with below investment grade credit ratings. In order to make up for this high risk, senior loans normally have higher yields. Since these securities are senior to other forms of debt or equity, senior loans give protection to investors in any event of liquidation. As a result, default risk is low in this type of bonds, even after belonging to the junk bond space.
Moreover, senior loans are floating rate instruments and provide protection from rising interest rates. In a nutshell, relatively high-yield opportunity coupled with protection from the looming rise in interest rates post Fed tightening should help the fund to perform better in the second half of 2014.
The most popular and liquid fund in this space is BKLN with AUM of $5.7 billion. The fund tracks the S&P/LSTA U.S. Leveraged Loan 100 Index and holds 115 securities in its basket. It has weighted average maturity of 4.71 and average days to reset of just over 35.
Though senior loans account for a hefty 83.7% of the assets, high yield securities also make up for 9% share in the basket. The product charges an expense ratio of 65 bps a year and pays out an attractive dividend yield of 3.95%. The ETF has added nearly 1% in the year-to-date timeframe (as of June 9, 2015).
Preferred Stock ETFs
Preferred stocks are hybrid securities having the characteristics of both debt and equity. The preferred stocks pay the holders a fixed dividend, like bonds.
These types of shares normally get priority over equity shares both in case of dividend payments as well as at the time of liquidation if the company fails. Preferred stocks are thus relatively stable and usually exhibit a low correlation with other income generating assets.
These products are interest rate sensitive - lesser than the bond space though - but a high yield opportunity might present them as potential bets once the Fed hikes rates.
iShares S&P U.S. Preferred Stock ETF (NYSEARCA:PFF)
PFF is perhaps the biggest and the most popular name in the preferred stock ETF space. With total assets of $13.3 billion, it is one of the largest funds in this category. The ETF charges 47 basis points in fees.
The fund has returned 1.83% so far this year (as of June 9, 2015) and pays out 6.09% per annum as dividends. The ETF holds 302 securities in all and eliminates concentration risk by allocating a mere 15% of its total assets in its top 10 holdings.
Business Development ETFs
Business Development Companies (BDCs) are firms that give loan to small and mid-sized companies at relatively higher rates and often grab debt or equity stakes in those companies.
BDCs dole out high cash payments together with captivating the equity performance of the borrower. The U.S. law obliges BDCs to hand out more than 90% of their annual taxable income to shareholders.
The ETF looks to invest in a variety of BDCs which are traded in the American market by tracking the Market Vectors U.S. Business Development Companies Index. The ETF has $82.5 million in AUM.
In total, BIZD invests in 29 firms with a relatively high level of concentration in the top names. Ares Capital and American Capital account for 14.6% and 9.9% of total assets, respectively. The fund yields 8.29% annually (as of June 9, 2015) and is up about 3% year to date.
Industries That May Be Left Behind By The Wave Of Aging Boomers
Jun. 17, 2015 8:10 AM
The fraction of the US and global population over 65 is growing fast due to a post war bump in birth rates.
On top of the bump in birth rates, people are living longer due to improvements in medical care and healthier lifestyles.
Many sectors and industries will prosper from the aging of the boomer population.
Some industries and sectors may be left behind by the wave of aging baby boomers.
In the US, we refer to the post war bump in birth rate as the baby boom generation, "boomers" for short. While we don't often hear or read about the global baby boom generation, it is a real global phenomena. In several countries, the boomers are an even larger trend than they are in the US. This boomer population wave will slowly ripple across the globe over the next 35 years resulting in long-term investment opportunities in some sectors and potentially lower investment returns in other sectors. In a previous article, I provided some general and a few specific recommendations for sectors and stocks that should prosper as a result of the wave of boomer retirements. This article will focus on the investment sectors and industries that will potentially be left behind due to this aging population trend in the US.
Rather than repeat in this article the data and charts showing the forecast of population age demographics through 2050, I will provide the link to my June 1 article Riding The Age Demographics Wave To Higher Returns. Those readers who have not read the earlier article should at least read through the first section to get a full understanding of the magnitude of the change in age demographics we will see over the next 35 years. Assuming readers are already familiar with the age demographic forecasts, I'll jump right to those industries and sectors that I believe have the potential to be left behind by the boomer retirement wave.
People of 65 years and older typically purchase fewer new cars than the two age groups below them. Fewer people in the over 65 age group are commuting to the office and fewer are traveling for business. Hence, fewer new cars are purchased by this age group. The chart below shows the percentage of new vehicle registrations by age group for 2007 and 2011, the last year for which I could find data.
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The forecast for population growth by age group is provided in the chart below.
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A more detailed breakdown of the over 65 age group growth forecast is provided in the following chart.
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Using these three charts, we can forecast the impact of a growing over 65 age group on new vehicle purchases. While the overall US population will grow and demand for new vehicles will likely grow along with the population, that growth rate in new vehicle registrations will likely be lower due to a significant part of that growth being in the over 65 age group. The compound annual growth rate in new vehicle registrations based solely on US population growth is 0.7%. By factoring in the disproportionate increase in the over 65 age group and their lower purchase rate, the compound annual growth rate in new vehicle registrations drops to 0.5%.
Granted, we are dealing with pretty small annual increases. However, over 35 or 40 years, the difference between 0.5% and 0.7% annual growth rates is significant. It is also not clear to me that the younger age groups will have the same level of vehicle ownership per capita that the boomer generation supported. In particular, the millennials generation has shown a heavier reliance on mass transit and other forms of transportation. If this trend towards alternate forms of transportation holds with the younger generation, the auto industry in the US may be looking at a long spell of very low growth in demand.
Housing in the US has been on a slow recovery since the 2009 recession. To put the new home sales into perspective, the chart below shows how far we have recovered since the low in 2009.
Source: US Census Bureau
The reader should note that the recovery rate (slope of the line) is lower than in past post recession recoveries. There are probably many reasons for the slow recovery in new home sales. Slow growth in employment, slow growth in wages, low labor participation rate, etc. Another factor that may be slowing the recovery in new home sales is the retirement of the boomers. The year 2010 marked the official start of the boomer retirements. The over 65 age group new home purchases typically are moves to downsize and often are moves to town homes or condominiums versus single-family homes. Over the next 35 years, many in the boomer generation will be selling their larger single-family homes and downsizing to smaller homes or multi-unit dwellings.
Similar to light trucks and automobiles, the continued population growth in the US will increase demand for housing. However, in my opinion, there will likely be a shift in the type of housing. Fewer large single-family homes will be built in favor of smaller homes and multi-unit dwellings. This will have an impact on the large home construction companies in the US requiring them to transition to building smaller dwellings. How this transition will impact growth and profit margins will depend on how well these companies manage the transition.
Brick and Mortar Retailers
Brick and mortar retailers have been struggling for some time due to the advent of the internet and the ease with which people can now purchase almost anything online, often forego the cost of sales tax, and have it delivered to their front door. The boomer retirements are likely to add to the struggle. Not because the over 65 generation are heavy internet users but because retirees typically spend less on retail purchases in a number of areas after they retire and more on healthcare, leisure and travel. For example, retirees typically spend less on clothing and shoes, especially business attire. The need to have a half dozen suits, dress shirts and ties just isn't there after retirement. There is no need for new Carhartt construction wear and steel-toed boots after retiring from a career in construction. With a doubling of the US population over the age of 65 in the next 35 years and 20% of us being over the age of 65 in 2050, I believe the brick and mortar retailers will continue to suffer. Those retailers that can transition to a lower overhead internet based sales model should continue to grow. Those that cannot will likely follow in the footsteps of Sears (NASDAQ: SHLD).
I'm staying away from the brick and mortar retailers for my portfolio. While, I'm a firm believer in REITs with a focus on healthcare properties, skilled nursing and independent/assisted living facilities, I'm staying away from equity REITs that focus on retail shopping centers and malls for my portfolio.
With the tsunami of boomer retirements just starting, there will be profound changes to come in the US and global economies driven by the large number of people entering their retirement years. There will be market winners during the passing of this wave of retirements and there will be some market losers (or laggards at least) as well. I've laid out the rationale for the changes I believe will be forthcoming and highlighted some of the market winners (previous article) and some of the market losers/laggards in this article. I'm structuring my portfolio to capitalize on the market winners and stay away from the losers.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.