Whether Volatility Will Return in September

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Will September Bring Back the Volatility?

The summer is over, at least in Wall Street’s eyes, and traders now have returned to the floor after the long Labor Day weekend. Back to work means back to big trading volume, and I suspect that means we could see a return of volatility.

To be certain, this year volatility has been largely absent, and, except for a few scattered weeks of fearful selling in January, April, late July and early August, things have been steadfastly bullish. In fact, recent action in the S&P 500 tells the tale of a market determined to push higher.

SPX_090314

After falling to an approximate three-month low on Aug. 7, equities staged a nice rally that saw the S&P 500 rise in 12 of the last 16 trading sessions. The broad-based measure of the domestic market now trades just above the psychologically significant 2,000 level.

The question many, including me, are asking is can this rally keep going without another significant pullback?

I suspect the answer is “no,” but this market has continued to surprise. The biggest surprise to me is the continuation of extremely low bond yields (interest rates), which has caused bond prices to continue to move higher. I doubt many market pros thought that after the first eight months of the year, the iShares 20+ Year Treasury Bond ETF (TLT) would be up 17%, more than doubling the S&P 500’s 8.4% year-to-date gain.

TLT_090314

Given this market’s penchant for surprise, I think we have to be very vigilant at this juncture, especially as we move into the seasonally weak months of September and October. To keep tabs on any change of direction in stocks or bonds, be sure to take at least a weekly look at several key charts, including the S&P 500, the 10-Year Treasury Note Yield ($TNX), the US Dollar Index ($USD) and an international index such as the iShares EAFE Index (EFA).

Keeping tabs on domestic and international stocks, as well as the value of the dollar, and the action in the bond market, is a great way to give yourself the heads-up before any meaningful market shift takes place. The idea here is the better prepared you are to deal with volatility, or a change in direction, the better investor you’ll be.

ETF Talk: Demystifying ‘Smart Beta’ Funds

Many exchange-traded funds (ETFs) have their holdings weighted by market capitalization. In other words, the total market value of a company’s shares determines what proportion of an ETF’s assets are invested in that holding. But “smart beta” funds are different, since they are not market-cap weighted.

For example, the market-cap-weighted SPDR S&P 500 (SPY), an S&P 500 ETF, has as its top two holdings Apple (AAPL), 3.36%, and Exxon Mobil (XOM), 2.47%. Apple is a bigger company than Exxon Mobil, so it has proportionally more representation in SPY’s holdings.

Although “smart beta” funds also follow a passive index like other ETFs, the smart beta funds do so in ways besides the traditional market-cap-weighted approach.

There are several different ways a smart beta fund can be structured to avoid following the market-cap-weighted method. The most basic approach is to weight all stocks in an index equally, instead of by market cap. Another way is to weight the stocks in an index based on different fundamentals, such as book value, cash flow, sales or dividends. There are not really many limits on approaches smart beta funds can use; any number of other factors, like volatility, can be used to determine how much of a fund’s assets are put into each holding.

As an example, let’s compare SPY with the Guggenheim S&P 500 Equal Weight ETF (RSP), a smart beta fund that puts an equal weighting on each stock in the S&P 500. SPY has gained 8.62% this year, while RSP has done better, with an increase of 9.49%. RSP also has a yield of 1.37%. The chart below compares the performance of these two S&P 500 funds during the last year.

RSP_090314

“Smart beta” has been gaining prominence among investors, but many individuals still do not know all the details about these funds. My hope is that this ETF Talk has served to demystify the concept of smart beta funds, and you now feel comfortable looking further into these nontraditional ETFs.

If you want my advice about buying and selling specific ETFs, including appropriate stop losses, please consider subscribing to my Successful ETF Investing newsletter. As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an e-mail. You just may see your question answered in a future ETF Talk.

September ETF Snapshot: The New ETF Report

This month, we’re doing a little something different with our ETF Snapshot, and it involves our comprehensive ETF Report. At my investment advisory firm, Fabian Wealth Strategies, the last thing we ever want to do is stay static, and not improve. That’s the surest way to mediocrity, and we don’t embrace mediocrity — we embrace excellence.

Beginning with this month’s (September) issue of the ETF Report, we have made several big changes designed to add to your knowledge base, and to make it easier for you to locate and identify the kinds of ETFs you’re looking for to achieve your investment objectives.

Our new ETF Report includes supplementary categories of funds, including a section on high income funds such as BDCs and MLPs. We’ve also added a yield column to the report, a data point of major concern for income investors. In addition, we have adjusted the sorting and categorizing of funds in the international and emerging markets sectors. For example, Japan and China funds now have been broken out into their own respective categories. On the commodity front, we have sorted the broader segment into more focused sectors such as energy, metals and miners, and agriculture, to name just a few.

At Fabian Wealth Strategies, our goal is to help make ETF investing easier for our readers, podcast listeners and clients. With this month’s ETF Report changes, we’ve made a significant step in doing just that.

To find out more about these changes, just check out our ETF Snapshot today!

NOTE: Fabian Wealth Strategies is a Securities and Exchange Commission-registered investment adviser, and is not affiliated with Eagle Financial Publications.

Because That’s Where the Money Is

When a journalist once asked the legendary criminal Willie Sutton why he robbed banks, Sutton allegedly replied, “Because that’s where the money is.”

When it comes to government and taxes, the same criminal wisdom applies. You see, when the federal, state and local taxman needs money, they aren’t going to go after the Average Joe. Rather, they are going to come after you, the wealthy investor that’s enjoyed success. With this truism in place, it behooves you to begin preparing yourself to deal with higher taxes now, before the assault on your bank account gets really aggressive.

Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Weekly ETF Report readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Ask Doug.

In case you missed it, I encourage you to read my e-letter column from last week on Eagle Daily Investor about my three favorite red-hot ETFs. I also invite you to comment in the space provided below my Eagle Daily Investor commentary.

All the best,
Doug Fabian
Doug Fabian

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