Sticking With a Popular REIT

By Tom Lydon, ETF Trends

Ten-year Treasury yields have jumped 16.4% since the start of February and it seems to be a foregone conclusion that the Federal Reserve will raise interest rates, perhaps as soon as June.

Fears of imminent rate hike have weighed on rate-sensitive asset classes ranging from utilities stocks to real estate investment trusts (REITs), but there is still a strong fundamental case for income investors to consider exchange traded funds such as the Vanguard REIT ETF (NYSEArca: VNQ). VNQ, the largest REIT ETF, is up 3.5% year-to-date.

While REIT investors may expect some short-term volatility, following a knee-jerk reaction to rising rates, the REITs space could continue to strengthen, along with an expanding economy.

“Running the numbers on VNQ supported the idea that it was worth a significant position in the portfolio. The REIT ETF is reasonably stable in price for something that can deliver such strong returns. Depending on the time period used and whether a trader uses monthly or daily returns, the risk standard deviation can range from 115% to 160% of the standard deviation they would measure for the S&P 500,” writes Colorado Wealth Management Fund in a post on Seeking Alpha.

VNQ has become a favorite of frugal income investors, ballooning to $28.4 billion in assets under management due in part to an annual expense ratio of just 0.1%, which makes it less expensive than 92% of rival funds, according to Vanguard data.

Home to 141 stocks, VNQ offers significant leverage to the fundamentally sound commercial REIT space with office an retail REITS combining for nearly 42% of the ETF’s weight. Residential REITs receive a 16.3% weight in VNQ.

All the right factors are fueling property demand. For instance, the housing market is recovering as home sales, housing starts and pricing are steadily on the rise. The jobs market is expanding, with more gains in 2014 than any year this century. More Americans are earning, cutting down debt and spending more. Additionally, the credit markets are in good standing, with rates and inflation both low.

REITs provide a liquid alternative to owning physical commercial real estate properties. REITs investments also share similar attributes with stocks and bonds. Since REITs are required to distribute at least 90% of their income from rent payments to investors, these real estate investments can generate attractive yields.

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Vanguard REIT ETF (VNQ) is a component of the D2 Capital Management Multi-Asset Income Portfolio. Current yield on the portfolio is 5.40% (as of 30 March 2015).

Disclosure:  I own the D2 Capital Management Multi-Asset Income Portfolio

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association. 

5 Secrets You Didn't Know About Traditional IRAs

By Tim Parker, Investopedia

If you don’t have an IRA, you probably should. Contribute to your 401(k) or similar retirement plan at work, if you have access to one, especially if your employer is matching the funds, but an IRA gives you complete control of of your contributions. Adding an IRA to your company retirement vehicle will boost your retirement savings options.

Individual taxpayers can open either a traditional IRA or a Roth IRA. Only the traditional kind lets you take a tax deduction when you open it and has no income restrictions limiting who can open one. See Roth Vs. Traditional IRA: Which is Right For You? (However, if you or your spouse is covered by a retirement plan at work, your deduction may be limited if your income exceeds certain levels.)

Finding information on the traditional IRA isn’t difficult but there are a few important factors that aren’t overly apparent. Here are five.

1. YOU DON’T INVEST IN AN IRA

Let’s not get picky with verbiage, but an IRA isn’t something you invest in. An IRA is a type of investment vehicle that allows you to earn money tax-free until you withdraw the funds. Think of it as the bucket that holds your investments – not the investment itself. If you simply deposit money into your IRA, you won’t make much of anything. Once you deposit the money, go in and invest with the help of a financial professional if needed.

2. YOU NEED TO COMPLETE THE BENEFICIARY FORM

If you weren’t asked to do it when you opened your IRA, you need to do it immediately. The beneficiary form tells the custodian what to do with the funds should you pass away. Without the form, your loved ones run the risk of not receiving the money.

If you did complete the form, keep it updated – especially if you go through a divorce or other major life change.

3. YOU HAVE TO WITHDRAW THE MONEY

Maybe you won’t have to rely on your IRA for living expenses once you retire. Wouldn’t it be great if you could leave the IRA to your children once you pass away? Unfortunately, a traditional IRA doesn’t work that way. Because of required minimum distributions (RMDs), you have to begin taking money from the account generally "by April 1 of the year following the year in which you turn age 70½."  If you don’t, expect some hefty tax penalties.

If you don’t want the confines of the RMD, look at the Roth IRA. There are no RMDs until you pass away.

4. YOU CAN’T BORROW FROM YOUR IRA (USUALLY)

Don’t fall for this common misconception. There are some retirement plans that allow you to take short-term loans, but the IRA isn’t one of them. If you “borrow” from an IRA, it’s no longer an IRA. You will pay taxes and penalties on the value of the entire IRA.

What you can do is withdraw money from an IRA and roll it over into a new IRA within 60 days. For details, see Can I borrow from an IRA without penalty? This is not considered a loan; it's a distribution and rollover and you can only do it once a year and need to be very careful about deadlines. For more information on raising money from your retirement funds, see 401(k) Loan Vs. IRA Withdrawal.

You also can’t pledge your IRA as collateral. If you do, the part of the IRA that is pledged is considered distributed. In other words, you have to pay taxes and penalties on it.

5. YOU CAN INVEST IN REAL ESTATE

Your IRA doesn’t have to hold only equities, bonds and other Wall Street-type investments. You can own real estate, too. The catch is that the real estate has to be a business property of some sort. You can’t purchase a second home or pay off your current home. But you can buy and flip a house as an investment property.

The IRS has strict rules regarding real estate in your IRA. Because of the higher dollar value and the less liquid nature of real estate, this option is only for the more sophisticated investor. Talk to the appropriate experts before considering adding real estate.

THE BOTTOM LINE

Statistics show that most people are behind in their retirement savings. An IRA is a perfect way to supplement your retirement vehicle at work. You can only deposit $5,500 per year ($6,500 if you are age 50 or older), but since you have control of the funds, that money can grow fast. Don’t feel qualified to invest on your own? There are plenty of fee-only advisors that are willing to help.
Once you've opened an IRA (it needs to be by December 31, the end of the tax year), you have until the year's tax filing deadline (usually April 15) to make your annual contribution.

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The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association. 

Interest Rates and Bonds

By AdvisorShares

Does an interest rate rise in June versus September versus December really matter all that much?  We know that the Fed will be increasing the federal funds rate at some point in the future, as it has sat at a historic low of 0-0.25% for the six years since the financial crisis.  It has nowhere to go but up.  But markets are forward looking mechanisms so will price in expected interest rates moves ahead of actual moves.  So as we sit today, has the market already priced in an interest rate move or could we expect a big spike in rates from here?

An ultimate move in the federal funds rate will not be a surprise to anyone and we don’t expect that once the Fed does begin to take action, they’ll move rapidly in raising rates.  If recent history has shown us anything, it is that today’s Fed is cautious and seemingly not wanting to surprise or shock markets.  There are also a number of headwinds that we expect to temper a strong move in rates, both by the Fed and in Treasury markets in general, including the strong U.S. dollar, inflation below the 2% target, still mixed domestic economic data, and the rate of U.S. government bonds relative to their counterparts throughout the developed world.  For instance, the rate of the U.S. 10-year Treasury being much higher than other 10-year government bond rates, it seems hard to make an argument that buyers won’t be there and ultimately temper rates from spiking.

So while short term rates will move up once the Fed starts to take action, we don’t expect to see a large and rapid increase on rates on the longer-term bonds, such as the 5-year and 10-year.

With all this speculation and concern about rising rates, what does the mean for financial markets once the Fed starts to take action?  Specifically for fixed income, investors often seem to be under the notion that anything “bond” related is highly interest rate sensitive and will take a hit if rates rise.

Certain asset classes, such as investment grade bonds have a high correlation to Treasuries, thus have much more interest rate sensitivity.  That means if rates (yields) increase in Treasury bonds, and prices decline, we would theoretically see the same sort of action in investment grade bonds—price declines.  However, high yield bonds are slightly negatively correlated to Treasuries, so we would expect to theoretically see minimal impact from a move in Treasuries, or even an increase in high yield bond prices.

Looking at the actual returns for the high yield asset class, in the 15 calendar year periods since 1980 where we saw Treasury yields increase, high yield bonds posted an average return of 13.7% over those annual periods.  A few other things to keep in mind, high yield bonds have historically been much more linked to credit quality than interest rates.  We would expect to see rates rise during stable to improving economic conditions, which we would expect to be favorable to business fundamentals and credit metrics, and thus to high yield investors.

While we don’t expect a rapid increase in rates, if rates do rise, high yield bonds have a good historical track record in this type of environment.  Given the low to negative Treasury correlations versus other asset classes, an allocation to high yield bonds may serve to improve a portfolio’s diversification and potentially even lower risk depending on the mix of assets.

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Advisor Shares Peritus High Yield (HYLD) is a component of the D2 Capital Management Multi-Asset Income Portfolio. Current yield on the portfolio is 5.43% and year to date the portfolio is up 0.11% (as of 26 March 2015).

Disclosure:  I own the D2 Capital Management Multi-Asset Income Portfolio

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association. 

Use Municipal Bond Funds to Diversify a Portfolio

By Tom Lydon, ETF Trends

With the equities market seesawing again, investors may want to revisit fixed-income assets like municipal bond funds for a more conservative play.

Tax free municipal bonds may not be the most interesting investment theme, but they provide an investor’s portfolio with a safer play during market swings, writes Dan Moskowitz for Investopedia.

Looking at the potential risk profile, the average default rate of municipal bonds was 0.10% over 2014. In contrast, investment grade corporate bond default rates were about 0.50% over the past several years. Additionally, speculative-grade or junk bonds have a historical default rate of 4.5%.

The credit risk comes as no surprise since assets with greater returns typically come with greater risks.

The munis market has been supported by a growing economy and slower issuance of new debt. As the economy expanded, employment rates are up and tax revenue has been on the rise. Meanwhile, muni bond funds have been steadily gained as high demand outpaced a slower supply of new debt. Although, municipalities have been increasing new issuance this year.

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The D2 Capital Management Tax Free Income Portfolio is currently yielding 4.458% (Trailing 12 month Tax Equivalent Yield at 28% Tax Bracket, as of 25 March 2015).  Year to date the portfolio is up 1.07%

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association. 

Not what it used to be...

The DJIA closed down almost 300 points 25 March.  But before we go on about the market’s renewed volatility, we should do some math.  Bespoke Investment Group notes that with the DJIA trading above 18,000, a 100 point move is just 0.6%, or a “typical day for the market.”  That is a far cry from the mid-1990s, when a 100 point move was good for a 2% price change.  The upshot:  The next time you hear someone reference 100 point moves as an example of a pickup of volatility, remember that a 100 point move is not what it used to be.

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The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association. 

High-Yield Bond Funds Generate Income

By Katie Kuehner-Hebert

In a low-interest-rate environment, high-yield bonds are living up to their names, generating substantial interest income, says Mark Hudoff, portfolio manager of Hotchkis & Wiley High Yield in Corona del Mar, Calif. Even after defaults, investors still earned above-market returns that beat investment grade, he said. Indeed, his fund has had a trailing 12-month yield of 5.4% over the past year, according to Morningstar.

Currently, he says, high-yield bond funds are earning roughly 4 percentage points above Treasuries, and defaults are just above 1%. While high yield defaults are on the rise--estimates call for a rate of 1.5% to 2% before the end of 2015--they are still well below the long-term average of about 4.4%.

All of that makes high-yield an attractive option compared to investment-grade bonds. Even if the high-yield funds take some defaults, say for 50 basis points (or one half of a percent), they still can produce as much as three times the yield of investment-grade bonds.

Income, while attractive, isn’t the only reason to consider high-yield bonds. They also have a very low correlation with Treasuries – an average of 0.4. Bonds rated single-B have an even weaker link to the Treasury market. Compare that to an almost one-to-one correlation between investment grade bonds and Treasuries, Hudoff says.

That being said, says Hudoff, “High-yield bonds aren’t 100% immune from interest-rate risk.” He expects investors to pull back from the category a bit when the economy improves and the Fed starts raising interest rates.

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AdvisorShares Peritus High Yield (HYLD) is a component of the D2 Capital Management Multi-Asset Income Portfolio. Current yield on the portfolio is 5.49% (as of 16 March 2014).

Disclosure:  I own the D2 Capital Management Multi-Asset Income Portfolio

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

Munis Now a Better Value

By Amey Stone, Barron's

Municipal bond investors should use the volatility that kicked off in February as a buying opportunity, advises investment management firm BlackRock.

“One of our themes is living with volatility,” says Peter Hayes, who runs the municipal bonds group at BlackRock, which has $116 billion in assets under management. “We recommend taking advantage of any selloff to lock in a better entry point.”

March has provided one such entry point after a rough February in which the S&P Municipal Bond Index returned -0.92%. For the 13 months prior, munis did well, says Hayes, so he wasn’t surprised there was a correction. He says the decline wasn’t due to a dramatic change in investor sentiment, but was partly due to increased supply.

That’s because the decline in yields over the course of 2014 inspired local governments to refinance their debt at the new lower rates. “It took a market adjustment to absorb,” says Hayes.

The new supply isn’t going away anytime soon. “As long as rates stay low, we will see more refundings,” says Hayes, although he thinks the rush to lock in the low rates will cool somewhat by year end.

The Federal Reserve is likely to raise rates later this year, but Hayes doesn’t expect a dramatic rise in muni yields in 2015.

He concludes a research note this week on muni market performance:

"...Muni-to-Treasury ratios remain historically compelling, and recent market action has left munis attractive vs. corporate bonds as well..."

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The D2 Capital Management Tax Free Income Portfolio is currently yielding 4.45% (Trailing 12 month Tax Equivalent Yield at 28% Tax Bracket, as of 13 March 2015).  Year to date the portfolio is up 0.45%

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association. 

Why Holding Cash May Mean Losing Money

By Russ Koesterich -- BlackRock Chief Investment Strategist

Six years into one of the better bull markets of the modern era, investors are still holding onto a lot of cash. According to a survey last year by State Street’s Center for Applied Research, globally retail investors are holding 40% of their assets in cash. Is this a good idea? The answer may be no.

Negative returns. Cash is one of the three major asset classes and it serves several legitimate purposes in a portfolio: it dampens volatility and provides liquidity. The cost is that cash typically produces much lower returns than stocks or bonds. Once you adjust for both inflation and taxes, average returns have been negative.

Given that U.S. short-term interest rates are stuck at zero, and are likely to remain unusually low for some time even if the Federal Reserve starts to raise rates later this year, return for cash this year is almost certain to be negative. The only potential exception would be if the U.S. enters a deflationary environment.

Help cushion volatility with bonds. It’s true that the volatility of cash is low, but there are other ways to potentially bring down volatility in a portfolio: adding bonds is one option.

For the past five years or more, bonds have had a strongly negative correlation with stocks; in this environment, adding bonds to a stock-heavy portfolio now is highly diversifying. Unless you have an unusually low risk tolerance, an outsized cash allocation is rarely optimal.

No right amount. While there is no such thing as “the right amount” when it comes to cash or any other asset class, investors need to consider both their return objectives and risk tolerance when making allocation decisions that are right for them. For a portfolio with a multi-decade horizon and high return objectives, cash positions could be relatively small; cash has been adding little to expected returns and investors should be able to manage the volatility with a long investment horizon. The shorter the time horizon, the more cash you should consider holding. Barring a very short horizon—say two years or less—a 30%-40% cash position would likely result in a negative after-inflation return.

On the other hand, a large temporary cash position makes sense for market timers, who believe they have the skills to move in and out of asset classes and profit from such actions. But as the State Street numbers suggest, for many investors it is easier to get out of the market than to get back in.

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The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association. 

S&P IQ Talks Tactical Sector Strategies

S&P Capital IQ Research Director Todd Rosenbluth joined joined ETF Trends Publisher Tom Lydon at the ETF.com Inside ETFs conference in Hollywood, Fla. to discuss how advisors can tactically use sector exchange traded funds and what some of the hot sectors could be in 2015.

Rosenbluth highlighted economically-sensitive sectors, such as industrials and technology, as potential outperformers this year.

“Technology companies have stronger growth prospects than the broader market,” said Rosenbluth. “Capital IQ consensus data says 2015 is going to be a stronger year than the S&P, yet the sector trades a discount on P/E and a P/E to growth basis.

Rosenbluth also highlighted consumer staples and utilities as richly valued, noting that the utilities sector is home to a number of overvalued stocks and is vulnerable to rising interest rates.

The full video can be seen here.

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First Trust Nasdaq Technology Dividend Index ETF (TDIV) is a component of the D2 Capital Management Multi-Asset Income Portfolio. Current yield on the portfolio is 5.50% and year to date the portfolio is up 2.05% (as of 3 March 2015).

Disclosure:  I own the D2 Capital Management Multi-Asset Income Portfolio

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association.