Opinion

John Wasik

How to catch the market’s upside with a downside cushion

Nov 25, 2013 17:31 UTC

25 (Reuters) – Sometimes the very name of a
fund sounds like a security blanket if you’re a risk-averse
investor. Case in point: “Managed volatility funds” promise some
of the stock market’s upside with a cushion on the downside.

This burgeoning class of more than 400 funds is gaining a
gaggle of devotees. There is more than $200 billion invested in
them, according to Strategic Insight, up from $31 billion in
2006. While “managed volatility” isn’t well defined, these funds
provide a strategy that dampens volatility over time.

So why worry about market volatility when the market
continues to head higher and both the Dow Jones Industrial
Average and S&P 500 Index keep hitting new highs? Because market
downturns are often unpredictable and the overall risk of loss
never goes away. Yet while volatility funds provide some cushion
from frenetic markets, you pay a price for modest protection.

Take the BlackRock Managed Volatility Investors A fund
, which is one of the largest funds in the category
with more than $600 billion in assets. The fund has gained about
14 percent for the year through Nov. 22. While that’s less than
half the return of the S&P 500 during the same period, keep in
mind that the fund is taking long and short positions in the
stock market to hedge risk.

Like most of the managed volatility funds, the BlackRock
fund is an expensive holding. The “A” share class levies
a 5.25-percent front-end sales charge and charges 1.27-percent
annually in additional expenses.

Choosing an index fund when the indexes are sky-high

Nov 18, 2013 20:28 UTC

CHICAGO (Reuters) – When stocks are on a roll – as they have been thus far this year – you want to go big or go home.

Quite naturally, most investors want to take advantage of the market’s healthy gains this year. Yet with so many 401(k) offerings and a plethora of stock-index mutual and exchange-traded funds (ETFs) out there, which ones will give you the most bang for your buck?

The answer is surprisingly complicated because there are so many similar options. Many of the best funds are either ignored by investors who insist on owning individual stocks or are not offered in retirement plans. You may have to hunt them down or request that your employer add them.

Column: Smart-beta stock ETFs focus on fundamentals

Nov 12, 2013 12:06 UTC

CHICAGO (Reuters) – Holding stocks in a passive index fund as a core portfolio holding has generally been a rock-solid idea. You can own nearly the entire market at a low cost and not get snagged in market timing errors.

Yet most index funds are capitalization-weighted, meaning they hold the most popular stocks by market value. That could lead to owning the most overpriced stocks, which may incur more downside risk when the market heads south.

A better alternative could be to own “smart-beta” funds. While still built on indexes, the stocks within these baskets are often picked for their cash flow, book value, dividends and sales. That means instead of picking all of the potentially over-valued stocks that have won the market’s latest beauty contest, more fundamental measures are applied.

Smart-beta stock ETFs focus on fundamentals

Nov 12, 2013 12:00 UTC

CHICAGO, Nov 12 (Reuters) – Holding stocks in a passive
index fund as a core portfolio holding has generally been a
rock-solid idea. You can own nearly the entire market at a low
cost and not get snagged in market timing errors.

Yet most index funds are capitalization-weighted, meaning
they hold the most popular stocks by market value. That could
lead to owning the most overpriced stocks, which may incur more
downside risk when the market heads south.

A better alternative could be to own “smart-beta” funds.
While still built on indexes, the stocks within these baskets
are often picked for their cash flow, book value, dividends and
sales. That means instead of picking all of the potentially
over-valued stocks that have won the market’s latest beauty
contest, more fundamental measures are applied.

Column: Why IPOs are unlikely to produce long-term gains

Nov 4, 2013 18:00 UTC

CHICAGO (Reuters) – As the founders and backers of Twitter move toward the ultimate tweet – an initial public offering – it’s a good time to ask whether IPOs are good investments.

Can the hot social media buzz surrounding Twitter be sustained for the company to survive a flame-out? While few can accurately predict future earnings growth, management decisions and whether the service can grow and gain more popularity, it’s good to cast a cautious eye on IPOs in general and cast a wider net.

Keep in mind that Main Street and Wall Street investors may have entirely different takes on IPOs. Short-term traders may “flip” the stock after a few days – or even hours – and then move on. Individual investors may be gun-shy about owning IPOs after last year’s botched offering of Facebook. It took a year for investors to recover from the company’s initial price decline.

Why IPOs are unlikely to produce long-term gains

Nov 4, 2013 17:57 UTC

4 (Reuters) – As the founders and backers of
Twitter move toward the ultimate tweet – an initial
public offering – it’s a good time to ask whether IPOs are good
investments.

Can the hot social media buzz surrounding Twitter be
sustained for the company to survive a flame-out? While few can
accurately predict future earnings growth, management decisions
and whether the service can grow and gain more popularity, it’s
good to cast a cautious eye on IPOs in general and cast a wider
net.

Keep in mind that Main Street and Wall Street investors may
have entirely different takes on IPOs. Short-term traders may
“flip” the stock after a few days – or even hours – and then
move on. Individual investors may be gun-shy about owning IPOs
after last year’s botched offering of Facebook. It took a
year for investors to recover from the company’s initial price
decline.

Beyond the Glitches: Profiting from Obamacare

Oct 28, 2013 17:16 UTC

CHICAGO, Oct 28 (Reuters) – In the shadow of the bungled
rollout of the U.S. Affordable Care Act health insurance
exchanges, a handful of companies are quietly profiting from the
biggest expansion of healthcare since Medicare in the mid-1960s.

Companies that were supposed to be collateral damage from
the new wave of ACA regulations have become Wall Street
darlings. Those that specialize in health records technology,
insurance and pharmaceuticals will benefit from the need for
more drugs, medical services and policies through the state and
federal exchanges.

In its first weeks, the ACA healthcare exchange websites
were swamped with more than half a million Americans applying
for insurance, with more than 19 million visiting the federal
site alone. Despite numerous technical roadblocks, those strong
traffic numbers bode well for companies that benefit from
selling new policies along with the Medicaid expansion that is
part of the new health law.

Three portfolio strategies to hedge political risk

Oct 21, 2013 17:50 UTC

CHICAGO (Reuters) – For angst-addled market watchers, the U.S. debt ceiling and budget chaos has been like one of those amusement-park rides in which you ride upside down. It’s harrowing and probably not over yet.

In addition to market and credit risk in the stock and bond markets, you need to be acutely aware of political risk. That means finding pockets of profit that are not dependent upon Washington.

Here are three strategies:

1. Balance risk in one fund

If you’re a fairly moderate to conservative investor, having a balanced fund as a core holding could replace several funds that hold just stocks or bonds. While you’re not entirely insulated from political risk, it’s more of a hedge than being completely exposed to stocks or bonds. But can you get one mutual fund to do this for you in a tactical way?

How to navigate the troubled municipal bond market

Oct 15, 2013 19:45 UTC

CHICAGO (Reuters) – If you can avert your eyes from the federal government’s budget and debt-ceiling crisis, you may spot more trouble ahead in the state and local municipal bond markets.

Detroit’s bankruptcy, Puerto Rico’s fiscal woes and unfunded pension liabilities in other states and cities are giving the nearly $4 trillion muni bond market the jitters. Investors have been yanking money out of muni bond funds for more than seven months – triggering redemptions of almost $50 billion since March, according to Morningstar.

That beats the nearly $45 billion in outflows from November 2010 to August 2011, when some soothsayers were predicting massive defaults based on weakening state and local finances and pension liabilities. And the exodus is far from over as the muni bond market heads for one of its worst years in the past half decade.

Circuit breakers investors can use for a debt default

Oct 7, 2013 18:23 UTC

CHICAGO (Reuters) – In times of calamity, every portfolio needs a set of circuit breakers.

And, as Congress speeds toward the debt-ceiling barrier, it is a good idea to consider some inverse exchange-traded funds(ETFs) that move in the opposite direction of stock and bond indexes.

The first major hurdle is October 17, when the Treasury will need authority to sell more debt securities – or face default on its obligations. What if markets get spooked over Washington’s inability to reach a consensus on fiscal matters? If traders truly believe that Congress won’t issue more debt to pay bills it has already racked up, that will send interest rates on Treasury paper soaring.

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