In several August columns, I discussed the reasons for selling pressure in September. The S&P 500 SPDR Trust (SPY) failed for a 3rd time to break through price barriers. China began pulling back 3-4 weeks ago. What's more, small caps and tech underperformed less risky stock assets in August.
Historically, September rarely moves higher after summertime rallies. Sometimes it's as simple as that.
Yet the problem that high-yield bonds and U.S. stocks are facing goes a bit deeper in 2009; that is, the Paul-Revere-like cry, The Recession is ending! The Recession is ending! can't quite compete with doubts about the quality of the recovery.
For instance, momentum carried junk bond ETFs like iShares iBoxx High Yield Bond (HYG) and SPDR Capital High Yield Bond (JNK) to 16.1% and 23.5% year-to-date gains respectively. However, nearly 1/3 of high-yield bonds are trading at historically high distressed levels. What's more, credit spreads between junk and investment grade bonds are reflecting a historically high, double-digit default rate.
Ergo, plenty of companies still feel the sting of a questionable environment for economic growth. This is easily seen in a chart of the iBoxx High Yield Bond Fund (HYG) such that, it is now falling below its 50-day moving average. Even more clearly, like emerging markets and other riskier assets, HYG actually lost ground in August.
So what can you do right now? First, you let stop-loss sell orders do their jobs; an emotion-free plan to lock in profits is always preferable to panic.
Second, as the cash levels are raised in your portfolio, you want to prepare your Buy List. What investments would you buy if they fall 10% or more from their 2009 peak levels?
For my part, I will probably consider foreign ETFs with exceptional yields for a post-correction party. In addition, I will probably go right back to the river, where Small-Cap China (HAO), Small-Cap Brazil (BRF), natural resources investments and PowerShares Nasdaq 100 (QQQQ) will surely benefit from un-invested, sidelined cash in the wings. (The waiting will be the hardest part!)
Indeed, I expect sidelined money to return in force, right around the time that Q3 corporate earnings get under way in October. With cash earning zero, corporate earnings improving steadily and asset managers getting the mandate from clients to make money, there's enough positives to finish 2009 with a bang. Investors just need to exercise patience.
If you're itching to invest in something immediately, take a look at increasing a reliable income stream. As much as I may view SPDR Barclay International Treasury Bond Fund (BWX) as a portfolio mainstay, new foreign bond ETFs have also come on the scene.
For instance, SPDR Barclays Short Term International Treasury Fund (BWZ) has a 30-day SEC yield of a mere 1.15%... a full percentage point less in income. Yet the cousin SPDR has one quarter of the average maturity at just 1.7 years. In effect, you get the currency hedge as well as the low correlation for diversification purposes... with a bit less overall risk.
Another consideration is the likelihood of inflation in foreign countries where economies are beginning to expand. The worldwide stimulus spending and ultra-low interest rates probably seal the deal. That's why an investor might be interested in the SPDR DB International Government Inflation-Protected Bond Fund (WIP).
The average maturity for WIP is 12 years to BWX's 8 years. And the SEC yield for WIP is 50 basis points less at 1.75%. Yet the added benefit of purchasing power protection should world inflation gauges rise would increase the value of WIP's net underlying assets.
If you'd like to learn more about ETF investing... then tune into In the Money With Gary Gordon. You can listen to the show live or via podcast or on your iPod.
Disclosure Statement: ETF Expert is a web log (blog) that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.