Today I sold the iShares MSCI Emerging Markets ETF (EEM) out of my Perfect 5 ETF Portfolio on my JubakAM.com and JugglingWithKnives.com subscription sites.
And today I’m replacing it in that portfolio with the Vanguard Intermediate Term Treasury ETF (VGIT).
Now obviously a Treasury bond ETF isn’t in the same asset class as an emerging markets ETF.
But what I’m looking for–always–in this ETF portfolio is diversification that lends safety to the portfolio. Emerging markets stocks currently have a strong correlation with developed market stocks so this portfolio doesn’t get much (or really any) diversification from adding emerging market stocks to a mix that includes U.S. stocks.
A treasury ETF, at the moment, does offer significant diversification–a negative correlation to the Standard & Poor’s 500 over the last 3 years–so adding this ETF adds safety to the overall portfolio.
It is also likely to add performance. The Vanguard ETF is up 3.97% year to date as of May 31 and 3.77% in the last three months and 2.08% in the last month. With U.S. Treasury bond yields still looking to fall (and bond prices looking to rise) I think that this ETF will continue its recent performance trend.
The risk, obviously, is that the global outlook will strike investors as rosier in the next few months than over the last few and that would lead to bond priced–and the value of this ETF falling. The 10-year U.S. Treasury closed at a yield of 2.12% on Friday, May 31. The 2016 low yield of 2.00% is certainly in play and any increase in worry over growth in the U.S. and global economy could push yields on the 10-year bond below 2% and toward a possible 1.5%. (This ETF yields 2.22% right now and the expense ratio is a low 0.07%.)
I’ve picked a Treasury ETF for safety–I don’t think this is the time to chase yield in the junk bond market, for example. And I’ve picked an intermediate term Treasury fund–that invests in bonds with a maturity of 3 years to ten years–instead of a longer maturity ETF because I get just about the same non-correlation (and thus diversification) from an intermediate term fund as from a long-term fund and historically intermediate-term ETFs have fallen by 8 or more percentage points less than long-term funds in any bond downturn.
Besides adding this ETF to my Perfect 5 ETF Portfolio with a 20% portfolio weighting, I’m also adding it to my Jubak Picks 12-18 month portfolio and to my Volatility portfolio on the JubakAM and JugglingWithKnives sites.
The iShares MSCI Emerging Markets ETF (EEM) that I just sold from my Perfect 5 ETF Portfolio had a 15% weighting in the portfolio. I’m giving the Vanguard Treasury ETF a higher weighting by taking my gold allocation down 5 percentage points to 20%.
After these changes the portfolio looks like this:
Invesco Currency Shares Japanese Yen (FXY) 25% weighting
Utilities Select Sector SPDR ETF (XLU) 25% weighting
SPDR Gold Trust (GLD) 20% weighting
iShares Core S&P 500 ETF (IVV) 10% weighting
Vanguard Intermediate Term Treasury ETF (VGIT) 20% weighting.
In an ideal world, I would have finished my Special Report on the Crisis in Global Capitalism on my subscription JubakAM.com site by now so I could place this sell–and the coming buy of a Treasury ETF–in the context of that crisis.
But this isn’t an ideal world.
That Special Report has taken way longer to finish than I expected–Global Capitalism, it turns out, is a big topic. Who knew? I do expect to finish and post the full Special Report on Monday on that JubakAM.com site. Progress has been slow but there has been progress.
And the goal posts in the current trade war keep moving. China, Mexico, India today. Tomorrow Europe? Who knows. I don’t feel comfortable waiting any longer to make this move in my Perfect 5 ETF Portfolio.
One of the strangest things, to me anyway, about the current risk-off climate is that emerging markets have done relatively well so far this year. Until May 5, the IShares MSCI Emerging Markets ETF (EEM) was up 7.33% for 2019. That’s inspite of all the worries about a slowdown in the global economy.
That now looks to have changed. The ETF was down 1.19% for 2019 as of the close on May 31. That’s a very sizable 8.5 percentage point drop in this ETF and in emerging market stocks as a whole. And I think the drop could well get worse if trade tensions between the United States and whoever increase.
So I’m selling this ETF out of my Perfect 5 ETF Portfolio with a 10.78% loss since I added it to the portfolio on October 6, 2017. This ETF had, most recently, a 15% weighting in the portfolio.
Here’s one set of ETFs I’m watching right now for signs that the market is headed for a breakdown–and reassurance that it’s just trapped in one of those rotation things.
On Monday, May 20, the Technology Select Sector SPDR ETF (XLK) fell like a stone, dropping 1.74% as technology companies in the United States moved to cut off sales to China’s Huawei Technologies after the White House imposed sanction on that company.
The Financial Select Sector ETF (XLF), however, moved ahead slightly–by just 0.11%, true, but still higher on the day. The financial sector had been struggling lately as bank stocks moved lower on the prospects of a cut (or two) in interest rates from the Federal Reserve.
As long as we see a continuation of that pattern, I’m not too worried about the health of the market as a whole.If on the other hand, I start to see days when both ETFs, both the technology and financial sectors, fall together, then I’ll put on my worry hat.Why?When the technology ETF falls and the financial ETF rises–or vice-versa–it’s a signal that investors and traders aren’t leaving the market but are simply, instead, rotating among sectors. In other words, they haven’t thrown up their hands on stocks as a whole. They’re just looking for a better opportunity while staying invested in the asset class. And since these two sectors carry the biggest weighting in the S&P 500, it’s likely that if one balances the other, the market as a whole isn’t about to fall off a cliff.
If, on the other hand, the two sectors slide lower together, or if, even worse, the weakness in one sector feeds into weakness in the other sector, then I think the chances of a significant sell off–a 5% or more correction perhaps–have moved higher and it’s time to pay extra attention to downside risk.
Gold hit a seven month high on Friday, gaining more than 1%. Spot gold briefly broke above $1300 an ounce. Gold futures climbed 1.5% to $1,298.30 an ounce. The SPDR Gold Shares ETF (GLD) climbed 1.46% to $122.86 on volume 10% above the daily average. The 52-week high for this ETF is $129.47. The SPDR Gold Shares ETF is a member of my Perfect 5 ETF Portfolio. I increased the allocation to GLD to 25% of this 5-ETF portfolio on December 26.
That gold should jump as an agreement was reached to end the partial government shut down might seem odd. After all isn’t gold supposed to be a safe haven in stressful times and doesn’t ending the shutdown make these times less stressful? Well, perhaps gold just isn’t very impressed by a deal that reopens government for a whopping 3 weeks–until February 15. Or maybe gold is responding to other stresses than the shutdown itself.
Among these are next week’s meeting of the Federal Reserve. The Fed is widely expected to hold off on any further interest rate increases. A lack of rate increases weakens the dollar and that pushes gold higher. There is also some speculation on Wall Street that besides not raising rates next week, the U.S. central bank will give some indication that it will slow the speed with which it is reducing the size of its balance sheet. That would also weaken the dollar. (That possibility seems unlike to me at this meeting. The January 31 meeting of the Open Market Committee, doesn’t include a scheduled press conference and the Fed prefers not to make major policy changes at meetings without press conferences. The next meeting with a press conference is set for March 21.)
The Dollar Spot Index (DXY) showed the U.S. currency down a large 0.82% against this basket of international currency.
Other precious metals also climbed today with palladium, which hit a record high of $1434.50 an ounce last week, gaining 2.9% on the day. Silver gained 2.3%. Platinum was up 1.8%.
The Standard & Poor’s 500 gained 0.85% on the day. The Dow Jones Industrial Average closed higher by 0.75%. The NASDAQ Composite moved up 1.29%. And the small cap Russell 2000 climbed 1.26%.
The CBEO S&P 500 Volatility Index (VIX), which rises and falls with the willingness of traders and investors to pay up to hedge risk, fell 7.78% to 17.42 at the close.
On December 27 I switched to the Invesco Currency Shares Japanese Yen ETF (FXY) from the Vanguard FTSE Developed Markets ETF (VEA) in my Perfect 5 ETF Portfolio in an effort to get more yen exposure and a little more safety during this Bear market. Tomorrow I’m going to add this ETF to my Jubak Picks and Volatility Portfolios for the same reason. I don’t think the gains from this ETF will be eye-popping during the Bear–I’d be happy with 5%–but this does look like one of the few places to park money right now that promise any gains and solid safety.
Japanese stocks themselves moved into a Bear market on Christmas but the yen looks like it will again gain from its role as a safe haven currency in times of turmoil. (And especially in times of turmoil for the U.S. dollar.)
The yen is up 2.5% against the dollar from the close of trading on December 28 in Tokyo to today, lining the currency for the biggest advance during any Japanese new-year-holiday break since 2008, according to Bloomberg. The Bank of Japan is now the only major central bank following a policy of quantitative easing in a so-far vain attempt to flood the market with liquidity in order to push up both economic growth and inflation by keeping the price of the yen low. But in the face of slower growth in Japan and the Federal Reserve’s decision to back off on the pace of its interest rate increases, investors and traders seeking safety have bought yen faster than the Bank of Japan can add to supply. That’s not good news for Japanese exporters, who are seeing the price of their goods climb from overseas buyers, or for the Japanese economy.
But it doesn’t look like the trend is about to reverse itself soon. In early trade in Asia–Japan’s markets are still closed for the country’s New Year’s holiday–the yen climbed to 104.74 to the dollar in intraday trading. That’s within spitting distance of the March low at 104.74 to the dollar. And it looks likely to bring into play a climb to 100 yen to the dollar.
I’m looking for safety here and I won’t be holding this position longer than the Bear market lasts. I’d be happy with a 5% gain during that holding period.
Back on October 3 I switched from the Invesco Currency Shares Japanese Yen ETF (FXY) to the Vanguard FTSE Developed Markets ETF (VEA) in an effort to get a little more performance out of this slot in my Perfect 5 ETF Portfolio. (This ETF invest in both Japan and Europe.) And for a little while it worked–about a month I’d say–as the euro picked up strength against the U.S. dollar.
But for the last month as European stocks have slipped into a bear, this positioning in my ETF Portfolio has just not worked. Japanese stocks themselves moved into a bear market on Christmas but the yen looks like it will again gain from its role as a safe haven currency in times of turmoil. (And especially in times of turmoil for the U.S. dollar.)
In the last month the Vanguard Developed Markets ETF is down 7.20% while in the last month the Invest Currency Shares Japanese Yen ETF is up 2.25%. (Remarkable–to me at least–given the descent of Japanese stocks into a bear.)
So as of tomorrow, Friday December 28, I’m selling the Vanguard FTSE Developed Markets ETF out of out of my Perfect Five ETF Portfolio. And I’m re-buying the Invest Currency Shares Japanese Yen ETF.
I had a 25% allocation in the portfolio to the Vanguard Developed Markets ETF. I will shift that 25% allocation to the Invest Currency Shares Japanese Yen ETF.
After this trade the allocations in this portfolio will be
10% to the iShares Core S&P 500 ETF (IVV)
25% to the Invesco Currency Shares Japanese Yen ETF (FXY)
15% to the iShares MSCI Emerging Markets ETF (EEM)
25% to the Goldshares SPDR ETF (GLD)
25% to the Utilities Select Sector SPDR ETF (XLU)