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Ultimate Resource On How Black Families Can Fight Against Rising Inflation (#GotBitcoin)

Stagflation ETF Coming To Ride Soaring Prices, Slow Growth. Ultimate Resource On How Black Families Can Fight Against Rising Inflation (#GotBitcoin)

* Proposed Merk Fund Would Track TIPS, Real Estate, Oil, Gold
* A Place To Hide If Inflation Surge Proves More Than Transient

Investors may soon have an ETF to weather one of the worst possible outcomes for the U.S. economy: surging inflation coupled with stagnant economic growth.

Ultimate Resource On How Black Families Can Fight Against Rising Inflation (#GotBitcoin)

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The Merk Stagflation ETF would be passively managed and track an index of so-called “stagflation-sensitive” asset classes, according to a Securities and Exchange Commission filing Wednesday. If approved by regulators, the fund would hold 55%-85% U.S. Treasury Inflation-Protected Securities and between 5%-15% real estate, gold and oil.

Fears about stagflation — a toxic mix of rising costs, falling employment and slow growth — have stalked markets for months as consumer prices rise at the fastest pace in four decades and the Federal Reserve moves closer to raising interest rates to cool the pace of growth.

Few expect that to be the likely outcome, especially with Fed Chair Jerome Powell saying he’ll take a nimble approach to monetary policy and some price pressures expected to ease as supply chains roiled by the pandemic are repaired.

But elevated producer prices are a sign that concerns about stagflation could flare up again, according to Miller Tabak + Co.’s Matt Maley.

“There’s no question that stagflation concerns have eased in recent months, but I worry that they’ll rise again in the coming months. Therefore, a stagflation ETF could gain a lot of interest,” said Maley, the firm’s chief market strategist, who isn’t involved with the ETF. “Higher inflation and lower profit margins will likely raise concerns about stagflation before long.”

The ticker and management fees for the ETF are not yet listed.

Updated: 2-18-2022

Beware The Invisible Losses Inflation Foists On Investors

It’s more important than ever to understand the difference between nominal and real returns. Unfortunately, too many don’t.

When it comes to investment returns, most people, including those who work in financial markets, only consider nominal numbers. For example, they look at the price of the S&P 500 Index now, where it was a year ago and work out what the total return was including dividends in that period.

They do the same calculation for bonds, substituting interest payments for dividends. By those measures, the S&P 500 returned about 14% and 10-year U.S. Treasury notes lost about 5%. 1

But what investors should be looking at are real numbers, which take into account the effect of inflation. This is not an abstruse, academic distinction.

Good investments are ones that should, at the very least, maintain your ability to buy the things you want and need to buy in the future. In periods of low inflation, there isn’t much difference between nominal and real returns in the short term.

When inflation is high and rising, good nominal returns become more modest ones, modest returns turn into bad ones and bad returns turn into woeful ones. In the examples above, the real returns have been roughly 7.7% for the S&P 500 and minus 12.5% for 10-year Treasuries given that the consumer price index surged 7.5% in the period.

The Russell 2000 Index of small cap stocks lost 16% in real terms and, measured in dollars, emerging markets some 20%.

And with central banks set to rein in inflation, albeit very reluctantly, more obvious nominal losses will be added to less visible real losses. That is what happens when the risk premiums demanded by investors in almost every asset class are miniscule – as is still the case even after the recent turbulence in markets.

Government bonds are a decent proxy for extremely slim risk premiums. The overwhelming consensus in markets is that inflation will rapidly drop, capping the rise in short-term interest rates and bond yields and thus supporting all types of riskier assets.

Central banks have said they are on the case. Some of them have even promised to push short rates up a bit to combat inflation.

The rise in bond yields over the last six months has helped drive real yields — the yield offered by inflation-linked bonds before inflation is added in — higher. The yield on five-year Treasury Inflation-Protected Securities, for example, has jumped by a percentage point since mid-November. It is that rise in real yields that has unsettled other markets.

But the real yield on five-year TIPS is still below zero at minus 1%, and it is not clear what that number means. Indeed, the concept of future real yields is so fuzzy as to be almost meaningless. For very short-term rates, the real yield calculation is fairly straightforward: It is the official interest rate minus the inflation rate.

The federal funds rate, for example, is about zero, so the real rate given the latest consumer price index reading is minus 7.5%. Future real rates, though, are a residual.

They are merely the result of subtracting the expected inflation rate over the next five years from current nominal bond yields. But what markets expect and what they get are not the same thing. Inflation that is higher than markets expect means that actual real yields end up lower than forecast and vice versa.

If you’re confused about this, you’re not alone. I’m probably being generous in saying so are 95% of people who work in financial markets. For clarity, understand that two things, both guesses, dominate the current calculation of future real yields.

The first is that the market thinks the U.S. rate of inflation as measured by the CPI will fall to less than 3.5% over the next couple of years. The second is the main driver, which is that markets expect energy prices to fall. The spot price for West Texas Intermediate crude is roughly $92 a barrel.

It’s price for the first quarter of next year in the futures market is about $80. But both the forward energy market and the forward inflation market have been consistently and spectacularly wrong for almost two years.

If they continue to be wrong — and the chances are high because, among other reasons, fossil-fuel investment has plummeted in recent years but demand continues to grow — then inflation and inflation expectations will ratchet up further. And, all things equal, bond yields will have to rise a lot further to keep real yields from dropping.

The problem is that despite the rise in nominal bond yields in the past year, they remain so low that they reward investors even less than the expected rate of inflation over the life of the bond. Yet those expectations forecast a huge drop in the inflation rate.

But if inflation slows more modestly, or stays where it is, the only way for investors not to lose money in real terms is to demand much higher nominal yields on bonds. That means even more losses for investors on top of those they have already suffered on their fixed-income assets.

Efforts by central banks to contain inflation will just mean that investors lose money more obviously. That’s not just in government bonds, but increasingly in credit and equities as well. It’s a sort of lightbulb moment, but not in a good way.

 

Updated: 4-12-2022

The Safe Investment That Will Soon Yield Almost 10%

The March surge in the consumer-price index is the latest boon to buyers of U.S. savings bonds that are adjusted for inflation, known as I Bonds.

There’s no such thing as a free lunch in finance. Except maybe this: The interest rate on inflation-adjusted U.S. savings bonds will approach 10% beginning in May.

U.S. Treasury Series I Bonds, or I Bonds, will offer annual interest payments of 9.6%, based on the bond’s latest inflation rate calculation, which is tied to March’s consumer-price index.

Prices rose by 8.5% year over year in March, the fastest pace since December 1981, according to the Bureau of Labor Statistics.

The interest is compounded every six months and reassessed in May and November each year. The bonds haven’t always been hot sellers, but that has changed with the surge in U.S. inflation gauges.

Over the past six months, nearly $11 billion in I Bonds have been issued, compared with around $1.2 billion during the same period in 2020 and 2021, according to Treasury Department records.

That’s been a hot topic,” said Kathy Jones, chief fixed-income strategist at Charles Schwab. “The I Bond has been very popular because of the yield. For six months at least, you’ve got a pretty fat yield there.”

I Bonds are guaranteed by the federal government. The bonds pay a fixed rate that is set by the Treasury, plus an inflation-adjusted rate that is determined by the change in CPI over the past six months.

Thanks to the upward trajectory of CPI, I Bonds have become a top yielding U.S. asset, even though they carry virtually no risk of principal loss.

They also offer tax benefits. Holders can choose to defer declaring I Bond interest until maturity or redemption. That income may be tax-exempt for lower- and middle-income families that use the bond to pay for college tuition.

For investors seeking a safe and high-yielding investment, there is “nothing nearly as good as the I Bond,” said Joshua Rauh, a senior fellow at Stanford’s Hoover Institution.

The bonds could pay more if Treasury Secretary Janet Yellen chooses to raise the fixed interest rate, which has held at 0% since May 2020.

Even without a bump from Ms. Yellen, the rate will be more than 150 times the annual interest paid by the average U.S. bank on a savings account and more than triple the current yield on a 30-year U.S. Treasury bond. It’s also almost triple the 3.54% the I Bonds paid just one year ago.

There are a few strings attached. I Bonds can’t be traded like Treasurys and they are only available through the U.S. Treasury Department’s website, TreasuryDirect.gov.

They can’t be redeemed for at least one year and I Bonds redeemed after less than five years will be penalized the last three months of earned interest. There are special provisions for those affected by a disaster.

Since they aren’t purchased through banks or brokerages and don’t pay commissions or expenses, the assets have drawn limited attention from financial advisers. As of March 31, there was a total of $57.2 billion of I Bonds outstanding, which amounts to less than 0.25% of all U.S. debt held by the public, according to the Treasury Department.

Mr. Rauh is trying to change that. He wrote an opinion article in The Wall Street Journal in February with Stanford visiting economics fellow and former Federal Reserve Board member Kevin Warsh urging the administration to raise the annual cap on I Bonds from $10,000 to $100,000 per person.

(The current cap rises to $15,000 for individuals who choose to put $5,000 of their tax return in paper bonds.) Rep. Alex X. Mooney (R., W.Va.) said last month that he was introducing a bill that would ask Treasury to assess the feasibility and impact of raising the I Bond cap.

I Bonds were introduced in 1998 by former Vice President Al Gore and Treasury Secretary Robert Rubin as a way to help Americans save for investments like college and retirement and to “ensure that those savings will never be undercut by future inflation,” Mr. Gore said at the time.

Treasury is working on an overhaul of TreasuryDirect.gov to make it more user friendly, according to a senior spokesman, noting that the department is “currently in the process of developing an updated, modern replacement for the current TreasuryDirect system.”

 

Updated: 4-15-2022

Dividend Aristocrat Stocks Can Help You Keep Ahead Of Inflation. These 15 Take Top Prizes For Raising Payouts

Companies that have raised dividends the most over the past 10 years have tended to outperform the broader market — by a lot.

Some investors are interested in stocks that pay high dividend yields for a source of income. Others believe it is better to focus on total returns over long periods. The Dividend Aristocrats are a group of stocks that appeal to both camps.

Below is a list of Dividend Aristocrats that have increased their payouts the most over the past 10 years. The group’s performance has been, in a word, incredible.

Connection Between Dividends And Inflation

MarketWatch’s Mark Hulbert advises investors to pay attention to dividends when inflation is high. He points to data showing that companies in the benchmark S&P 500 Index SPX, -0.88% tend to increase dividends at a higher rate than inflation.

Turning to the S&P 500 Dividend Aristocrats — a group within the benchmark that has increased annual regular dividends for at least 25 years — Hulbert makes the case that this group can be expected to pay dividends matching the yield on 10-year U.S. Treasury notes TMUBMUSD10Y, 3.121% over the next decade.

And that’s on top of the potential for stock market gains when holding a group of blue-chip companies.

The Dividend Aristocrats don’t necessarily provide high income — many have low current dividend yields. The idea is that a commitment by management to increase payouts to owners over time might correlate with better long-term performance.

Best Dividend Compounders

We decided to highlight Dividend Aristocrats that have raised payouts the most over the past decade. To do this, we expanded our pool beyond those in the S&P 500.

S&P Global maintains a large number of Dividend Aristocrat indexes. You can see the full list here, and a shorter list of Aristocrat indexes tracked by exchange traded funds here.

We Focused On The Three Broad Groups Of Dividend Aristocrats Listed On U.S. Exchanges:

* The S&P 500 Dividend Aristocrats Index SP50DIV, is made up of the 65 stocks in the S&P 500 that have raised regular dividends on common shares for at least 25 years. It is tracked by the ProShares S&P 500 Dividend Aristocrats ETF NOBL.

The S&P 400 Dividend Aristocrats Index has 48 stocks of companies that have raised dividends for at least 15 consecutive years, drawn from the full S&P Mid Cap 400 Index MID. It is tracked by the ProShares S&P MidCap 400 Dividend Aristocrats ETF.

* The S&P High Yield Dividend Aristocrats Index is made up of the 119 stocks in the S&P Composite 1500 Index SP1500,  SP1500,  that have increased dividends for at least 20 straight years.

It is tracked by the SPDR S&P Dividend ETF SDY. The S&P Composite 1500 itself is made up of the S&P 500, the S&P Mid Cap 400 and the S&P 600 Small Cap Index SML.

So the S&P High Yield Dividend Aristocrats Index includes all the stocks in the S&P 500 Dividend Aristocrats Index. But it excludes some that are in the S&P 400 Dividend Aristocrats Index.

The name of the High Yield Dividend Aristocrats Index is confusing, because the yields aren’t necessarily high — they range from 0.19% to 5.08%.

Combining the three Dividend Aristocrat Indexes and removing duplicates gives us a pool of 136 companies.

From that group, here are the 15 companies that have shown the highest compound annual growth rates (CAGR) for regular dividend payouts over the past 10 years. It makes no difference what the current dividend yield may be or what it was 10 years ago:

Notes About The Dividend Aristocrats That Have Grown Payouts The Most Over The Past 10 Years:

* The Dividend Aristocrat with the highest 10-year dividend growth CAGR was Cintas Corp., which also had the best total return for 10 years through April 19, 2022, with dividends reinvested.

That return of 1,119% compares to a total return of 295% for the S&P 500. In fact, among this group of 15 best dividend compounders among the Aristocrats, 13 have beaten the S&P 500’s 10-year return.

* The current yields for the group may be low — 10 are below 2% and five are below 1%. Many also had low yields 10 years ago. But if you look at the second column from the right, you can see how high the yields would have grown on shares held for 10 years.

Based on current payouts and prices paid 10 years ago, three of the 15 now yield 10% or more, with nine yielding more than 7% and 12 yielding more than 5%.

All in all, this group of 15 Dividend Aristocrats that have grown their dividends the most over the past 10 years has performed remarkably well. It made no difference how high or low the dividend was. A focus on generous increases of the payouts was correlated with high total returns eventually high income.

Updated: 4-22-2022

How To Stop Your Fund Manager From Feeding On Your Cash

Investors don’t have to settle for scraps anymore now that interest rates are rising.

As interest rates rise, the benefits are accruing to the people who manage cash, not to the investors who hold it.

In the first quarter, the yield on three-month Treasury bills rose 0.46 percentage point. The yield on retail money-market mutual funds rose a measly 0.03 point—while their expenses shot up 0.22 point.

Don Roth, a 63-year-old aviation engineer in the Cincinnati area, says he might have to buy a new house soon, so he is keeping a higher-than-usual 5% of his portfolio in cash. “It’s frustrating,” he says. “It just sucks to see all that money sitting there earning absolutely nothing.”

With fund managers capturing nearly all the extra income from the Federal Reserve’s 0.25-percentage-point interest-rate increase last month, you’ll have to take matters into your own hands to maximize the return on your cash.

Money-market funds own investment-grade short-term debt; they seek to maintain a stable price per share, typically as close as possible to $1.00, and pay dividends that should rise and fall to track short-term interest rates.

Why, then, has almost all the recent rise in rates gone to asset managers, rather than investors?

Fund companies charge roughly 0.25% to 0.5% annually to manage retail money-market funds. With the Fed keeping interest rates within spitting distance of zero for most of the past decade, many money-market funds could barely cover what it cost to run them.

That left managers little choice but to skip charging some or most of their fees. Otherwise some of the funds would have produced less income than they incurred in costs, resulting in negative yields for investors.

So asset-management companies have been subsidizing these funds with fee waivers for years. Look, for example, at Dreyfus Government Cash Management, with $115 billion in assets.

According to a recent disclosure, this fund’s manager, a unit of Bank of New York Mellon Corp. , waived or reimbursed fees totaling $91 million between 2019 and 2021.

So, to some extent, it’s only fair that the recent rise in yield has gone into asset managers’ pockets (assuming expenses weren’t too high in the first place). Fund companies are performing a service and expect to be paid for it after years of forgoing normal fees.

To put it bluntly, “the big dog’s gotta eat first,” says Peter Crane, president of Crane Data, a firm that monitors cash and other short-term investments.

Here’s how heavy those subsidies have been: As of March, with rates heading up, Mr. Crane reckons money managers were pulling in total fees at a clip of about $10.3 billion a year.

At the end of 2021, with rates so low that managers had to waive fees, their take was running at only about $4 billion a year.

Some companies that run money funds might even try clawing back past fees they couldn’t collect when rates were low. A disclosure document from Columbia Management Investment Advisers, a unit of Ameriprise Financial Inc., suggests that firm may think it can.

A spokeswoman for Columbia declined to comment, although Mr. Crane doubts that any company would dare try such a clawback.

In any event, money funds are already in the money for them, but not yet for you. The average yield on the Crane 100 index of the 100 largest funds stood this week at 0.20%.

That’s up a hair from 0.15% on March 31 and an improvement from its pathetic 0.02% at the end of February—but still far below the yield this week on one-month and three-month U.S. Treasury bills, at 0.33% and 0.83%, respectively.

 

Updated: 4-25-2022

Wall Street Finds New Value In Cash As Global Fears Weigh On Markets

As bond yields rise and stock prices wobble, cash is no longer trash on Wall Street.

Worries about the war in Ukraine, China’s Covid-19 outbreak, a U.S. or European recession and surging global inflation are making a long-spurned asset increasingly popular with Wall Street’s top money managers these days: cash.

As stock and bond prices have retreated from records in the tumult of headlines, more asset managers said they are looking to move funds into low-risk, cash-like assets.

That marks a shift from recent years, when steadily climbing equity indexes trained investors to buy every dip and not miss out on gains by holding cash.

Rick Rieder, managing director at BlackRock Inc., said the world’s largest asset manager is increasing cash holdings by more than 50% in many portfolios to a weighting that is “much, much higher” than it had been in years past.

With central banks battling inflation by raising interest rates across the world, he expects stock prices to remain volatile for the next two to six months.

“For now, one of the most attractive things you can do is have patience, and if you can get paid to have patience that’s a pretty good place to be,” Mr. Rieder said.

Prime money-market funds’ holdings in the Americas rose from just under $146 billion in February to $193 billion in March, their highest levels of the year, according to data from the Investment Company Institute.

Many expect such holdings to keep rising as rates on money markets, short-term bonds and other cash-like investments climb with interest-rates set by the Federal Reserve.

Additionally, yields on 10-year U.S. Treasury notes rose last week above the rate of projected average annual inflation over the next decade for the first time since March 2020. That means investors can once again earn a return on risk-free U.S. government bonds and it is meaningfully more expensive for companies to borrow money.

These developments are testing the long-held market view that there is no alternative to U.S. stocks, which is often referred to using the acronym “TINA.” The lack of alternatives was “one of the biggest bull mantras for the equity market,” said Ohsung Kwon, U.S. equity strategist at Bank of America.

“If the cash yield really hits 3%, I think that the TINA argument really diminishes,” Mr. Kwon said. “That is obviously not the best environment for risky assets.”

In recent years, the S&P 500’s dividend yield, which measures the annualized payouts by companies in the index as a proportion of their share price, has exceeded the yield on bonds maturing in 10 years or more.

Moreover, stocks have delivered almost triple their historic return since 2009, meaning they offered both the income of bonds and the potential for greater gains—a compelling argument for portfolios to be overweight on U.S. equities.

Bank of America is expecting the Federal Reserve to raise U.S. interest rates to 3% by early next year from their current level of 0.25% to 0.50%.

That would produce a similar rate for cash-like assets such as money-market funds, which track short-dated Treasurys, high-quality investment-grade bonds and commercial paper. That rate would be more than double the current 1.4% dividend yield of the S&P 500.

Even though rates are well below that today, fund managers said they are ready to move into cash.

Bank of America’s April survey of global asset managers showed cash holdings are near the highest level since April 2020, which was the aftermath of the Covid-driven market selloff, and cash is one of the survey’s most popular trades.

Gaurav Mallik, chief investment strategist and global head of client solutions at State Street Global Advisors, said portfolios at his firm are holding at least 50% more cash than they did at the beginning of the year, with increased focus on “keeping dry powder” by holding cash and money-market funds.

“Cash is king right now in terms of the return you’re getting,” Mr. Mallik said.

The TINA narrative is drawing other challenges. Floating-rate debt, which pays increasingly higher interest as short-term borrowing costs rise, has garnered more attention recently, as have Treasury inflation-protected securities.

While bond prices have fallen, hurting investors who held them already, those lower prices mean higher payouts that are attractive to new investors.

In addition, fund managers and advisers said they are getting more questions from clients about vehicles such as savings bonds.

Rich Steinberg, chief market strategist at the Colony Group, said that as inflation started rising last year he began fielding inquiries about Series I savings bonds, which track the consumer-price index and will offer a yield of 9.62% in May. He purchased the maximum $10,000 investment each for himself and his wife.

Mr. Steinberg has increased holdings of cash and is looking to put more money in short-dated U.S. Treasury bonds if the Fed continues its expected path of raising interest rates to at least 2% by year-end.

“If the Fed follows the game plan that they’ve started to communicate, I think the TINA days are numbered,” he said.

Updated: 4-27-2022

21Shares Launches Hybrid Bitcoin And Gold ETP To Enable Inflation Hedge

Launched in cooperation with ByteTree, the new BOLD ETP by 21Shares comprises 18.5% of BTC and 81.5% of gold at launch.

21Shares, a major issuer of cryptocurrency exchange-traded products (ETP), is launching a new ETP tracking a mix of Bitcoin (BTC) and gold.

The Switzerland-based firm on Wednesday announced the launch of the 21Shares ByteTree BOLD ETP (BOLD), a new product aimed at providing inflation protection by tracking an index providing risk-adjusted exposure to both BTC and gold.

Listed on the SIX Swiss Exchange, the new hybrid ETP is subject to monthly rebalances, according to the inverse historic volatility of each asset. At launch, BOLD comprises 18.5% of BTC and 81.5% of gold.

The new ETP was developed in collaboration with the United Kingdom-based alternative investment provider, ByteTree Asset Management. The product is positioned as the world’s first combined BTC and gold ETP.

“Gold has historically delivered portfolio protection in inflationary environments while Bitcoin is the digital equivalent of gold,” ByteTree CEO Charlie Erith said, adding:

“In a time of rising structural inflation and heightened geopolitical risk, we believe this can act as an important risk and return diversifier in a balanced portfolio.”

21Shares co-founder and CEO Hany Rashwan pointed out that many people in the crypto community view BTC as a digital alternative to gold, stating:

“This hybrid product combines the traditional value of gold with the promising return rates of Bitcoin, which is considered by many as the new gold.”

With the new ETP, 21Shares has reached a major milestone as BOLD is the 30th digital asset ETP launched by the firm. Formerly known as Amun, 21Shares is one of the world’s largest crypto ETP providers, the world’s first multi-crypto ETP on the SIX Swiss Exchange in November 2018.

Earlier in April, 21Shares launched The Sandbox (SAND) ETP to offer crypto investors exposure to the metaverse. The new metaverse-focused ETP tracks the performance of SAND, the native token of community-driven gaming platform The Sandbox.

21Shares is also among the companies that are expected to launch Australia’s first Bitcoin and Ether (ETH) exchange-traded funds (ETF) soon. According to a recent update from Cboe Australia, the ETFs will not commence trading on Thursday as previously scheduled due to additional checks.

World’s First Combined Bitcoin, Gold Exchange-Traded Product Listed In Switzerland

The product was developed by ETP issuer 21Shares and crypto data provider ByteTree Asset Management.

The world’s first exchange-traded product (ETP) that combined exposure to bitcoin (BTC) and gold has been listed on the Swiss SIX stock exchange.

* The product was developed by ETP issuer 21Shares and crypto data provider ByteTree Asset Management.

* The ByteTree Asset Management BOLD ETP will track a customized benchmark index comprising bitcoin and gold, which rebalances on a monthly basis according to the comparative volatility of the two assets. Whichever has been less volatile over the past 360 days will be given the higher weighting.

* At launch the weighting will be 18.5% bitcoin and 81.5% gold.

* “Bond-to-equity ratio of 60:40 has lost its luster: BOLD is the new 60:40. Gold’s volatility is now lower than Nasdaq, but the yellow metal has offered better returns than tech stocks, tech stocks are falling because of peak internet. So, bitcoin is likely to outperform Nasdaq in both bull and bear markets,” said Charlie Morris, ByteTree’s founder and chief investment officer.

* While crypto ETPs have become widespread in Europe with more than 70 now listed, BOLD appears to the be the first that combines bitcoin and gold exposure.

* Bitcoin has often been compared to gold becuase its perceived benefits in portfolios as a hedge against inflation. Investment products that combine the benefits of the two while offsetting some of their risks could therefore prove popular as inflation in the eurozone area hit 7.5% last month.

Mom And Pop Investors Took A Billion-Dollar Bath Trading Options During The Pandemic

* A Way To Play Lottery, Just With Financial Market: Researchers
* Losses Happened During Post-Covid-Crash Bull Run In S&P 500

Of all the risky things amateur investors did while locked at home in the pandemic, dabbling in stock options was one that veteran investors were convinced would end badly.

They weren’t wrong.

Turns out, taking leveraged flyers on meme stocks mentioned on Reddit’s WallStreetBets trading forum is harder than it looks. New research from economists at the London Business School found that mom-and-pop day traders managed to lose more than $1 billion during the bull market.

The bill climbs to $5 billion when the cost of doing business with market-makers is factored in.

The study, “Retail Trading in Options and the Rise of the Big Three Wholesalers,” shines considerable light on the fate of individual investors who became obsessed with side bets on the stock market in the era of zero-commission trading.

Spurred by Reddit posts and urged on by Twitter and TikTok influencers, daily volume in bullish contracts set record after record as stuck-at-home tinkerers flocked to the contracts in an effort to juice up returns.

Researchers Svetlana Bryzgalova, Anna Pavlova and Taisiya Sikorskaya estimated that retail investors lost $1.14 billion trading options from November 2019 to June 2021, assuming a 10-day holding period. Trading costs ate up an additional $4.13 billion.

To measure the performance of nonprofessional traders, the authors tracked options orders coded as originating with retail brokerages and sent to high-volume market makers known as wholesalers.

A few factors were at play, said the authors, among them hapless market timing by the retail group. Super-wide bid-ask spreads in their options of choice ate up a large portion of the cohort’s potential gains.

Retail traders were a principal pandemic-era Wall Street story. At home with little to do during the early days of the Covid outbreak, many turned to wagering on the stock market. They placed bets on everything from sturdy tech companies to reopening plays and bankrupt firms.

It all reached a peak at the start of 2021, when an army of day-traders bid up the prices of so-called meme stocks like GameStop Corp., whose shares skyrocketed more than 50% in a single session on multiple occasions.

The study is one of the first big unpackings of that sensational chapter in modern market history. A sign that era is receding came Tuesday when Robinhood Markets Inc. said it is dismissing 9% of its full-time staff, after the online brokerage’s “hyper growth” has cooled.

But at the peak of the frenzy in 2021, small-time traders were buying more than 23 million call options a week, according to Options Clearing Council data compiled by Jason Goepfert at Sundial Capital Research.

That’s way above any other period going back to 2000. Sundial defines small-time as a trader who buy or sells 10 or fewer contracts at a time.

The derring-do of newcomers was frequently called out by Wall Street. One tactic in particular — buying out-of-the-money calls days or hours before they were likely to expire — was pilloried as a newbie gambler’s mistake.

In one celebrated instance, more than 50,000 contracts effectively betting that GameStop would surge sevenfold changed hands on Feb. 25, 2021. The option expired the next day.

Trading costs cited by the researchers may not have been easy to discern by many at-home traders. Platforms like Robinhood revolutionized so-called zero-commission trading — they route trading orders to market-makers like Citadel Securities or Susquehanna, who then pay the brokerages for the orders and, in return, provide cheaper trades for the Robinhood clients.

The no-fee trades lured a lot of new clients onto Robinhood and others. But the average bid-ask spread in options with less than a week to expiration is a “whopping” 12.3%, the LBS researchers found.

The average quoted spread of retail trades across all maturities is more than 13%, compared with 11% for the overall market. Therefore, they might have underestimated the indirect trading costs in the options market, the researchers wrote.

“The more they trade, the more they lose because of these bid-ask spreads — every time, they have to pay the round-trip trading costs,” said Pavlova in an interview.

Bryzgalova, an assistant professor at LBS, says among the types of contracts and stocks retail traders prefer, “these are all transactions that have lottery-like features.”

“They like skewness in payoffs, they like companies that recently have been traded a lot so they’re quite popular. They like, obviously, cheap contracts because many of them are cash constrained,” she said of patterns she observed among the retail crowd.

Retail traders tend to favor short-term options in particular, she added. “If you buy a call option, you pay some money for it today — and then it either doesn’t work out, so you get zero, or there’s a small chance that you get something positive,” she said.

“That’s why it looks like buying a lottery ticket to us,” she said, adding that there are other strategies investors can use that have different profiles in terms of gains or losses.

To be sure, the researchers say they had to work in certain premises since they did not have access to account-level data from a brokerage like Robinhood, meaning a rundown of when a trader moved into and out of certain positions.

Therefore, they had to make assumptions about the holding period, as well as prices.

They found that stocks mentioned on WallStreetBets tended to be highly favored by retail investors. That, however, didn’t mean their bets paid off — the list of top losers for retail trades include GameStop and AMC, though both of those stocks are in the top-five-winners basket for the market as a whole.

“So it is about market timing,” said Pavlova. “They were buying these names, but at the wrong time,” and are sometimes choosing the wrong contracts.

Perhaps most striking is that the market during this period racked up impressive gains, even accounting for a 35% Covid-induced decline during the first quarter of 2020. The S&P 500 rose more than 40% between November 2019 and mid-2021.

And just about everything caught a bid during that stretch — three of the index’s sectors each added more than 50%.

“Buying options is an easy way to lose money because of the highly-skewed payoff,” Pavlova said. “The options that they like, they lose money most of the time, and sometimes they get these really big wins — but those are rare.”

Updated: 4-28-2022

War Brings An Uncomfortable Windfall For Commodity Traders

* Volatility, Arbitrage Create Dynamics Where Traders Thrive
* Glencore, Bunge See Strong 2022 After Booming Start To Year

It’s an awkward but unavoidable truth: War in Ukraine is proving quite good for business for the world’s top commodities traders.

Glencore Plc expects its full-year trading profits will again exceed its targeted range following a bumper first-quarter performance, while crop giant Bunge Ltd. boosted its earnings estimates for the year by more than 20% after reporting its own stellar results.

Since Russia’s February invasion of Ukraine, commodity markets have been thrown into disarray. That has boosted prices and cut off supply, creating a harrowing environment for consumers of raw materials but the perfect conditions for trading houses.

Commodities traders, who transport the world’s resources, have been able to profit from the volatility, arbitraging cargoes through the web of sanctions and supply disruptions to keep material flowing.

“What we’ve always found is that in times of high volatility, high prices and high volume is when we have the opportunity to make the most money,” Bunge chief financial officer John Neppl said on a conference call following the release of the company’s booming first-quarter results.

To be sure, that activity doesn’t come without risks. The surge in volatility has put the balance sheets of commodity traders under huge strain, with massive daily price moves triggering billions of dollars in margin calls across the industry.

The bumper profits also come with increased scrutiny from policy makers and central banks, concerned by the industry’s liquidity and a perceived lack of market oversight.

“Yes traders are nimble, they are finding solutions and absorbing risk that the whole world doesn’t want to take,” said Jean-Francois Lambert, an industry consultant with Lambert Commodities. “So when the market is very volatile they make huge margins, that’s a fact of life.”

If the companies weren’t doing their job of hauling commodities from one place to another, nation’s would find it much harder to find the necessary resources, from diesel to food, he said.

Grains Shortage

Together, Russia and Ukraine are some of world’s top exporters of wheat, corn and sunflower oil. Disruptions of plantings in Ukraine and the challenges of paying for Russian grains have helped boost prices to multi-year highs.

Before the war, Ukrainian ports along the Black Sea were gateways for much of the region’s grains to be loaded onto ships bound for Asia, North Africa and the Middle East. Now they’ve become part of the war, blockaded and shelled.

As importing countries like Egypt, Algeria and China scramble for food products, those traders with positions outside the Black Sea such as Viterra and the so-called ABCD group of major crop merchants — Archer-Daniels-Midland Co., Bunge, Cargill Inc. and Louis Dreyfus — have been able to offer buyers grains from alternate sources like France, the U.S. and Brazil.

As prices for crude oil have remained elevated, that’s taken cooking products such as palm oil and soybean oil higher, benefiting crush margins for the traders.

ADM has not yet raised its earnings estimate for the year, although some analysts already have. It did say this week it anticipates 2022 results will exceed those of last year, without going into specifics.

Combined with a shortage of crops in South America, disruptions in the war-torn region will “drive continued tightness in global grain markets for the next few years,” ADM CEO Juan Luciano said in a conference call on Tuesday.

Whipsaw Energy

In the world of energy, independent traders such as Vitol Holding BV, Trafigura Group, Gunvor Group Ltd. and Mercuria Energy Group Ltd. are all closely held and do not release quarterly results.

Still, signs point to strong performance. For instance, shortages of diesel that have recently sent prices around the world surging were well flagged by some of the group.

Some of the biggest trading units are nestled within the wider business of energy majors, meaning more disclosure of performance.

TotalEnergies SE saw first-quarter profits rise threefold as prices for oil and refining margins surged, while rival Shell Plc has flagged that results for its gas-trading segment “are expected to be higher” than in the fourth quarter.

“The rebound in energy prices seen since the second half of 2021 amplified after Russia’s military aggression against Ukraine,” TotalEnergies’ CEO Patrick Pouyanne said in a statement on Thursday, adding on a later earnings call that margins could further improve.

Metals Dislocation

Meanwhile, Glencore, the world’s biggest commodities trader, said Thursday that its marketing division will record profits “comfortably” above the top end of its $2.2 billion to $3.2 billion guidance range this year.

The company is active in energy and also agricultural products through its stake in Viterra. But it’s metals trading where it really dominates, holding positions anchored by an array of mining and smelting assets.

Jefferies analyst Christopher LaFemina reiterated in a note on Thursday his buy rating for Glencore, calling it a “top pick” for U.K. mining companies. “Commodity market dislocations and supply shocks have created extraordinary arbitrage opportunities for Glencore’s marketing business,” he said.

Updated: 4-29-2022

Einhorn’s Greenlight Defies April’s Rout With 10.6% Gain

* Veteran Fund Manager Has Been Voicing Concerns About Economy
* Month’s Performance Brings This Year’s Total Return To 15.4%

David Einhorn’s Greenlight Capital chalked a 10.6% gain in April, according to a person with knowledge of the firm’s performance, weathering the worst month for U.S. stocks in years.

That brought his total return this year to 15.4%, the person said, asking not to be identified discussing the confidential results. A spokesperson for Greenlight declined to comment.

Einhorn, who founded the New York-based firm in 1996, has been signaling a bearish posture in recent weeks. In a letter to investors this month, the 53-year-old laid out concerns about the pace of Federal Reserve efforts to fight inflation and the potential for Russia’s invasion of Ukraine to hurt the U.S. economy.

“The market is beginning to price in its doubts about the Fed’s resolve and likely failure to return inflation to its 2% target.

Even as the Fed resets the market’s expectation to a faster tightening cycle, inflation expectations are increasing and long-term bond prices are falling,” Einhorn wrote in the letter.

There was a lot of potential for some pessimistic bets to pay off.

The S&P 500’s monthly drop of 8.8% marked the index’s worst April performance since 1970. The Nasdaq 100 fell 13.4% for its biggest slump since 2008. And fixed income wasn’t spared either, with a benchmark tracking bonds worldwide dropping more than 5% for the worst month since at least 1990.

Einhorn’s performance over the past four months is better than what he achieved for all of last year. Greenlight ended 2021 up 11.9%, as technology shares and other growth companies faltered toward year-end and value stocks started climbing.

In that case, Einhorn said in his fourth-quarter letter that almost all of the gains came from stocks he was long.

Einhorn is still clawing his way back from a 20% loss in 2015 and an additional 34% loss in 2018. He still needs a gain of 11.8% to get back to even.

Updated: 5-2-2022

The Ideal Portfolio to Survive a Bear Market

Given how much the economy has changed in such a short period, what worked in the past may not work now.

The U.S. stock market is very likely in a bear market that anticipates a recession will start later this year. This means the time is now to shift portfolios from risk-on mode to risk-off before the losses get even worse.

But what worked in the past when hedging against a bear market may not work now, given the ever-changing economic dynamics. It’s also important not to fall for some old myths.

In many ways, the economy is in uncharted waters. The pandemic spawned disruptions in global supply chains as frictions in the reopening of economies stoked inflation.

The war in Ukraine has sired additional price pressures that have left the Federal Reserve well behind the curve in fighting inflation and with its credibility severely strained.

So the central bank is playing catch-up, and is considering multiple increases in its federal funds policy rate of 50 or even 75 basis points. That and the recent bond markets yield-curve inversion, falling real wages as well as declining consumer confidence and real household spending, rising mortgage rates and excessive inventories almost guarantee a recession.

Then there’s the dramatic shift in Fed policy, from quantitative easing to quantitative tightening.

The central bank went from pumping $140 billion into the financial system every month, to winding down those purchases to nothing, to soon letting its balance sheet assets shrink – a big shock to equity holders who were accustomed to more-than-ample liquidity. So as the bear market deepens, here are some thoughts:

—Long the U.S. dollar against other major currencies. As the recession spreads globally and equity markets swoon, the greenback’s haven status will become more even desirable. British sterling, the euro and the Japanese yen have been especially weak and will probably continue to be so.

—Treasury bonds. The recent dramatic leap in yields may have fully discounted the Fed’s credit-tightening campaign. Also, as in the past, once the central bank realizes it has done the recessionary deed, it will reverse gears and ease credit. It’s normal for the Fed to cut the fed funds rate even before the onset of recession, and Treasury bonds rally at that point.

—Stocks are a long way from the bottom if the recession and bear market unfold as I predict. The S&P 500 is down 13.3% this year but has the potential to drop a further 32% given current valuations. Speculative stocks are especially vulnerable.

The long bull market since 2008 (with the exception of the early days if the pandemic in March 2020) and virtually free money has fueled highly-leveraged positions that will only be revealed when those securities crumble. Robinhood Market Inc.’s collapse may be the harbinger of more to come.

—Growth stocks can be disasters when their prospects fail to meet investor expectations, as was recently the case with Netflix Inc. The stock fell 35% on April 11, dragging down other streaming stocks.

Users flocked to Netflix in the early months of the pandemic while at home but easing lockdowns and competition from other streaming services in the past year have been brutal.

Netflix and other so-called FANG stocks depend on big earnings growth in future years, so they are extremely sensitive to interest rates that discount those earnings to determine present stock prices.

Ten dollars in earnings 10 years hence is discounted to $9.05 today at 1% interest rates, but to $5.58 at 6%. The NYSE FANG+ Index is down 34% from its November 2021 peak, and as the Fed raises rates and they fail to meet rosy projections, downward pressure will likely persist.

The Barron’s Big Money poll found 59% believe equities are the most attractive asset class, only 6% like cash and bonds weren’t even listed as an option. Stocks reach their bottom when the last bulls capitulate.

—Homebuilder stocks have dropped, but probably still have further to fall. Weakness in single-family housing demand is coming as mortgage rates rise, the pandemic-era bailout funds are spent and the pandemic-driven flight to homes in the suburbs and rural areas is completed.

New home sales in March fell 8.6% from February and 12% from a year earlier. At the same time, homebuilders have finally regained their confidence after the subprime mortgage collapse, and inventories of new homes are climbing.

—Covid variants persist. They aren’t as lethal as earlier, but they are very disruptive to global economic activity. China is facing renewed lockdowns in major cities, especially Shanghai, and the International Monetary Fund slashed its growth forecast for China this year to 4.4%, well below Beijing’s 5.5% target. Gone are the days of double-digit growth in China, the world’s second-largest economy.

—Cash. As the bear market unfolds, cash will continue to go from trash to king. Cash and short-term securities such as 3-month Treasury bills don’t return much and have negative inflation-adjusted returns but will provide much better returns than plunging stocks.

Many believe that spending on essentials such as utilities, consumer staples and health care is relatively immune from weakness in recessions. Therefore, their corporate earnings and stock prices should hold up. History says no.

This chart lists the price changes in the S&P 500 and its components in the last four recessions. The only non-negative was the 24.2% rise in consumer staples in the 2000-2002 bear market. As shown in the last column, the averages of all 10 fell by double digits.

As the bear market unfolds, defensive stocks will again be on the defensive. Consumer staples producer Proctor & Gamble Co. recently warned that shoppers may balk at the ever-rising prices that have fueled the company’s recent growth.

Consumers, especially lower-income households, are already buying staples in small quantities, switching to cheaper store brands and more-rigorously hunting for deals.

After households bought new appliances during the pandemic lockdown, they’re satiated and are now cutting back. Whirlpool Corp. is reducing its sales forecast for dishwashers, refrigerators and other products after company sales fell 8.2% in the first quarter.

Whirlpool said industry-wide volume in North America fell 4% in the quarter from a year earlier while inflation is hyping costs.

And worried Americans aren’t sleeping better at night. Mattress-makers are delaying product launches and cutting costs as demand for big-ticket items falls. That’s the reverse of earlier in the pandemic when home-improvement spending drove sales.

Carvana Co., a pandemic star that buys and sells used cars, is suffering. It sold 105,185 cars in the first quarter, 7,800 fewer than in the prior quarter. Rising interest rates, falling used-car prices and inflation-wary consumers are all weighing on sales. In the previous two years, Carvana doubled its sales volume.

Don’t expect the bear to hibernate until the depths of the recession can be fathomed and the Fed pivots from credit-tightening to ease. That may not be until 2023.

Updated: 5-3-2022

How To Invest When Both The Stock Market And Bonds Are Falling

The best protection from this volatility is to have a long-term financial plan and stick with it, advisers say.

Chances are your portfolio is taking a beating right now as stock and bond prices fall together for the first time in decades. Yet the best strategy in moments of volatility like this one, financial advisers say, is also one of the least satisfying: Do nothing.

Doing nothing right now is easier said than done, with anxiety rising along with inflation and interest rates, and the global economic uncertainties caused by the war in Ukraine and the third year of the pandemic only growing.

When losses mount, it is human nature to want to do something, behavioral economics has shown. Like King Lear, we tend to assume that “nothing will come of nothing,” even if decades of long-term market returns may show otherwise.

But when does it pay to act? When should traditional portfolios be scrapped? Advisers say that whether you should do nothing or something may depend primarily on if you are closer in age to the aging Lear or his daughter Cordelia.

For younger investors, the advice is simple: “Don’t sweat it,” said William Bernstein, an independent financial adviser based in Eastford, Conn. “If stocks tank, that’s good for you since you will be able to buy them more cheaply,” he said. ”If you are young you want the market to tank.”

“Doing nothing is pretty good advice if your time horizon is 10 years or more,” said Elliot Pepper, a financial planner in Baltimore. “Since markets can and will be volatile, always make sure the money you might need in the next six to 12 months isn’t in the stock market—it should be in cash such as a high-yield savings account or in U.S. Treasury bonds”, he said.

The best protection from this volatility is to have a long-term financial plan and stick with it, advisers say. Yet even those with a plan may find they can’t tolerate as much volatility as they initially thought.

Others may realize they hold a more aggressive portfolio, with a higher allocation to stocks, than they intended, simply because stock prices have risen significantly in recent years.

Paul Auslander, an adviser in Clearwater, Fla., says he has met with prospective clients “who come in thinking they have a 60/40 portfolio only to discover it has drifted to 80% in stocks.”

For older investors, things can be more complicated, and in times like now, “some modifications may be needed,” said Mr. Auslander.

Mr. Bernstein recommends assessing how much stock-market risk you can afford to take.

For example, a 65-year-old with a 25-year life expectancy who spends 2% of his or her $1 million portfolio annually, or $20,000, can afford to invest, and lose, significantly more in stocks than someone who needs a 5% withdrawal, or $50,000 a year.

Anyone needing those larger withdrawals should hold no more than 50% in stocks, advises Mr. Bernstein.

As bonds fall in tandem with stocks, some advisers say the traditional 60/40 stock-and-bond portfolio may need a rethink.

“It sort of dispels the idea that you can effectively hedge with your standard stock-and-bond mix of a portfolio,” said Kevin Gordon, a senior investment research manager at Charles Schwab. “If inflation keeps rising and if economic growth keeps slowing, that means we’re in a countercyclical type of environment for growth and inflation.”

Mr. Gordon suggests rebalancing your retirement portfolio more than just once a year.

“If you’re more of the passive type and you’re not taking a day-to-day approach to investing, the advice there is to not take as much as a calendar-based approach to rebalancing but take more of a volatility-based approach,” he says.

Elliot Dole, an adviser in St. Louis, is shifting some of his clients’ money into alternative investments such as lending funds to “diversify away from reliance upon only stocks and bonds.”

Ann Minnium, a financial planner in Margate City, N.J., likes to see at least 15% to 20% of a retiree’s bond portfolio in inflation-protected bonds and an 8%-to-10% allocation in real-estate investment trusts.

Consider dividend-yielding stocks such as public utilities, Mr. Pepper said. While they are stocks and are subject to price volatility, they also tend to have stable and continuing dividends that can act similarly to the stable and continuing interest payments of bonds in a portfolio, he said.

There are other actions to take that remain in the spirit of doing nothing.

Ann Gugle, a financial planner in Charlotte, N.C., says she is doing more tax planning with clients recently. Like she did in March 2020, she is recommending more Roth conversions and switching more clients’ 401(k) contributions to Roth.

She is also doing more tax-loss harvesting, which helps offset portfolio gains and helps clients who recently sold real estate at high prices. Tax-loss harvesting involves selling some stocks or assets that have fallen in value and using the losses to help offset capital-gains tax liability, reducing one’s overall tax bill.

For instance, Mark Keating, a financial planner in Sebastopol, Calif., says he recently sold a client’s shares of the Vanguard Total Bond Market Index Fund ETF, which is down roughly 10% year to date. In its place he purchased Vanguard California Intermediate-Term Tax-Exempt Fund Admiral Shares.

By doing this he was able to harvest a 10% loss for the client, which will reduce their 2022 taxes. Finding such an upside to losses may also have psychological as well as financial benefits, Nobel laureate and behavioral economics pioneer Richard Thaler said.

“Harvesting is such a nice term. Much better than ‘formally accepting the fact that this investment was a mistake,’” he said.

Updated: 5-5-2022

Search For Yield Pushes Investors Into Dividend-Paying Stocks

Shares offering dividends race past S&P 500, growth stocks in 2022.

Investors seeking shelter from volatility are turning to a part of the markets that had largely been overlooked last year: dividend-paying stocks.

Shares of companies paying big dividends to investors have trounced practically everything else this year.

They took a hit Thursday as the broader market tumbled, but have held on to their lead for 2022. The iShares Core High Dividend exchange-traded fund, which tracks 75 such stocks, is up 3.9% this year. That puts the fund far ahead of the S&P 500, which is down 13% in 2022.

The fund includes stocks such as Exxon Mobil Corp. , which has a dividend yield of 3.9%; Johnson & Johnson, which has a yield of 2.6%; and Coca-Cola Co. with a yield of 2.7%. All three are beating the market for the year.

What is unusual about this year’s rally in dividend-paying stocks is that it is the opposite of what market convention says happens when interest rates rise. Usually, investors say, dividend-paying stocks do poorly in a rising-rate environment.

That is because rates typically go up when the economy is growing. In boom times, investors tend to forgo the steady cash payments of bondlike stocks in favor of companies that have the potential to deliver bigger profits down the line.

But this time around, a different dynamic is at play. Interest rates have risen swiftly, not because investors are betting on an economic surge, but because accelerating inflation is forcing the Federal Reserve to act quickly to try to rein in price pressures. Some investors worry the Fed’s interest-rate increases may even tip the economy into recession.

That has drawn investors into shares of big dividend payers, which promise to deliver a steady stream of cash in the near term.

A bonus? Many dividend payers are in industries like utilities, telecommunications, and consumer staples, which consumers tend to rely on year-round, regardless of the economic environment.

That has made them especially attractive to investors who are worried the Fed won’t be able to combat inflation without significantly raising unemployment.

“I don’t want high risk. I want a cereal company with a dividend that I know is coming,” said Steve Chiavarone, senior portfolio manager and head of multiasset solutions at Federated Hermes.

Froot Loops maker Kellogg Co. , which has a dividend yield of 3.3%, is up 9% this year.

Mr. Chiavarone said Federated Hermes has been recommending that clients take an overweight position in dividend-paying stocks. It is the call they have the highest conviction in this year, he added.

In recent weeks, analysts at Bank of America Corp. and Goldman Sachs Group Inc. have also issued recommendations for clients to invest in dividend-paying stocks.

The rise in dividend-paying stocks comes as nearly every other part of the market has fallen this year. For years, investors had piled into shares of fast-growing companies, wagering the premium they paid for them would be justified by their better-than-average earnings.

That was especially true in an environment where interest rates had fallen to historic lows, making bonds look less attractive.

But investors have largely shied away from growth stocks this year. The S&P 500 technology sector is down 19%. The communication services sector, which includes technology-driven companies such as Netflix Inc., Alphabet Inc. and Facebook parent Meta Platforms Inc., is down 24%.

Besides growth stocks, small-caps, bonds, and value stocks—shares that trade at low valuations relative to their earnings—have also fallen this year.

“Part of the popularity of the high-dividend players has been the ‘nowhere to hide’ narrative in the markets this year,” said Art Hogan, chief market strategist at National Securities Corporation.

Another reason dividend-paying stocks are doing so well?

It has nothing to do with the dividends themselves. It is that many dividend payers are energy companies, whose shares have jumped this year as crude prices have taken off.

Oil-and-gas companies, for instance, make up around 7.4% of the Vanguard High Dividend ETF, said Jack Ablin, chief investment officer and founding partner at Cresset Capital. That has been a boost to the fund in a year where the S&P 500 energy sector has risen 45%.

After a good run, some investors who had put money in dividend-paying stocks say they are looking for bargains elsewhere.

Heading into this year, Verdence Capital Advisors had an overweight position in value stocks, said Megan Horneman, chief investment officer at the firm.

Ms. Horneman said the firm had bet that after years of lagging behind growth stocks, value stocks—many of which are dividend payers—would enjoy a rebound as economic growth started to show signs of slowing.

The market reversal has gone so far, though, that Ms. Horneman said the firm is no longer looking to shift more money into the bet.

“In fact, we’re looking at areas of the market that aren’t dividend payers that may be overpricing pessimism,” she said.

Swan Bitcoin Benefit Plan Helps Companies Reward Employees In Crypto

Early customers of the financial services company’s program are providing monthly bitcoin bonuses of between $50 and $100.

Wilson Auto Group, Voltage, Compton Magic and Everbowl are trying to convince their employees to embrace bitcoin through payouts of the cryptocurrency that are part of a unique benefit program created by Swan Bitcoin.

The four early adopters of Swan’s “Bitcoin Benefit Plan” for small businesses are providing monthly $50 and $100 BTC bonuses to every employee each month.

“It’s like a bitcoin education club that gets spawned at your company, and you’re all kind of going down this path with this shared purpose together,” Swan CEO Cory Klippsten said in a phone interview.

Swan, which offers bitcoin-based services for companies, hopes that monthly bonuses will be a major step in spurring mainstream bitcoin adoption.

Klippsten said that a good company benefit usually has a greater perceived value than its actual cost. Such plans generate enthusiasm for the cryptocurrency and help people learn about it.

Each month, up to $100 in bitcoin is deposited directly into employees’ Swan accounts. Companies that participate in the program pay Swan $2 a month per employee and take a 1% transaction fee.

Wilson Auto Group, Compton Magic and Voltage, among others, are already receiving positive feedback from employees.

“There is a ‘Stack Sats’ culture in Bitcoin, so being able to help team members stack more satoshis is a win-win for culture and their long-term savings,” Graham Krizek, founder and CEO of bitcoin infrastructure company Voltage, told CoinDesk via email.

C.J. Wilson, a bitcoin enthusiast and CEO of Wilson Auto Group, which owns car dealerships in Mississippi and Tennessee, said he was “trying to orange pill” his employees to accept bitcoin. The reference to the movie “The Matrix” has been adopted by bitcoin advocates to describe such acceptance.

Wilson employee Chris Williams, who has already received $100 in two payments, is among the early converts, calling the program “genius.”

“It’s fantastic. I got a deposit this morning … I’ve set up my account with my own personal email and then it’s gone straight into my account,” Williams said.

Updated: 5-6-2022

Which Investments Do Best When Real Interest Rates Are Negative?

History suggests the assets to buy—and the ones to avoid—according to this professor.

With inflation topping 8% by some estimates, real interest rates have hit a low not seen in the U.S. since the aftermath of World War II. In fact, they have turned negative.

Real interest rates measure the interest one is receiving net of the inflation rate (that is, the interest rate minus inflation). Current estimates have real interest rates somewhere between negative 6% and negative 7%.

Often investors get spooked when negative real interest rates appear, since it means they are losing money (in a real sense) by holding on to safe assets like Treasury bills or T-Bonds. And many speculate that it is this loss of wealth that forces investors into riskier positions.

We decided to examine this phenomenon and see how different asset classes perform when real interest rates turn negative and stay negative for a while.

The upshot: Historical data shows that when real interest rates go negative, the riskiest asset classes (emerging-markets stocks, small-caps, etc.) have done extremely well in the first half of such a cycle—outperforming safer assets by over 1.5 percentage points a month.

Yet this reverses in the second half of the cycle: On average, the riskiest assets have underperformed by over a percentage point in the second half of a negative-rate cycle.

The Research

To investigate this issue, research assistants Jaehee Lee and Natalia Palacios helped me gather interest-rate data (based on T-bills), inflation data and mutual-fund-return data for various asset classes over the past 50 years.

We then examined periods during the past half-century when real interest rates went negative and stayed negative for more than a month.

We found seven such periods, the average length of which was 2.5 years. Next we divided each such cycle into a first and a second half to examine how the performance of the different asset classes compared during the two halves.

Two findings are worth noting. First, during the first half of a negative-rate cycle, the riskiest mutual funds performed best. Emerging-markets funds, U.S. small-cap funds and international-stock funds averaged 1.96%, 1.13% and 1.03% returns a month, respectively.

This is far superior to all other equities, and far better than the average bond fund, which had average returns of 0.35% a month during this period.

The Flip Side

Yet everything flipped as the cycles matured. In the second halves, the riskiest funds underperformed. For instance, emerging-markets funds lost an average of 1.13% a month. So while investors were seeking risk in the first half, it appears they quickly ran away from it the longer the U.S. remained in a negative real interest-rate environment.

As for the present situation, the current negative-rate cycle began in the second quarter of 2020. That means, if our pattern holds true, lots of investors likely have shifted over to riskier assets already.

But, since we are still in the cycle, approaching the beginning of the third year, it’s impossible to know yet where the first half ends and the second begins. Thus, even if we haven’t fully hit the point where investors move out of riskier positions, judging by historical data, it can’t be far off.

Investors Bet Big On Recovery Bonds

* This Year, Issuers Have Sold The Most Recovery Bonds Ever
* The Product Offers Spread Pick Up, Duration And High Ratings

Money managers scouring the credit markets for yield are being seduced by a relatively rare type of security — so-called recovery bonds — for their attractive spreads, duration and safety.

The bonds are typically issued by state utilities trying to recapture losses from natural disasters, such as wildfires or storms, through special fees levied on customers’ electric bills. The charges are then bundled up and sold as notes which get classed as asset-backed securities.

Issuances of recovery bonds soared in 2021, with roughly $2.3 billion of notes sold. This year, that figure has already doubled to roughly $4.7 billion so far, according to Bloomberg data. Those numbers are only likely to increase over the next couple of years, said JPMorgan strategists in an April 29 research note.

While these securitizations are still scarce compared to those backed by other asset classes, investors are eating them up. Utility giant PG&E Corp. recently issued $3.6 billion of recovery bonds — aimed at recouping costs caused by the wildfires that ravaged California in 2017 — in a deal that has both structured and corporate investors jostling for orders.

This is because recovery bonds unlock opportunities for ABS money managers that they cannot seem to find anywhere else. These include longer-dated tenors — ranging from 10 to 30 years — compared to most ABS deals which barely scrape the five-year mark.

For corporate investors, who usually do not play in structured products, the appeal is even greater given the high-quality AAA ratings of the notes which is not often seen in the corporate world.

“Corporate investors throw in big orders, splashing the pot,” said David Goodson, head of securitized credit at Voya Investment Management, in an interview. “That duration and spread at the AAA level makes these bonds look attractive relative value-wise.”

The assets offer a substantial spread pick up relative to other types of consumer ABS, such as bonds backed by auto loans and credit card debt, according to the JPMorgan strategists.

The difference in spreads between credit card and stranded asset ABS stands at almost 40 basis points, up from the low single digits in 2019, they wrote in their note.

The bonds are also backed by state legislation that allows utilities to impose recovery charges, making them a safe haven compared to other types of bonds backed by consumer credit, according to market watchers. Delinquencies are also less frequent than in other types of consumer credit-backed bonds.

“Electricity is a necessity so it’s unlikely that the consumer will stop paying,” said Deborah Newman, an ABS analyst at S&P Global Ratings, in an interview.

Another comfort for investors is that the bonds have a credit enhancement feature called a true-up mechanism. This adjusts customer charges to ensure that payments are balanced out and stabilized even if there are variations in collections, which can be too low or too high some months due to population changes or other factors.

There are, however, certain risks. Storms or other natural disasters that make it difficult for the utility to provide power is one of them, as the customer’s obligation to pay the charges is tied to receiving that electricity, said Newman.

But the downsides are relatively few. Even if a utility files for bankruptcy, the harm to ABS investors might still be minimal, as the utility will likely continue to operate even through bankruptcy, said Newman.

Apart from the PG&E offering, there is another recovery bond deal that could hit the market soon, led by a subdivision of the state of Louisiana.

 

Rising Inflation And War In Ukraine Push Investors Into Commodity ETFs

But beware: Investing in commodities isn’t for the faint of heart.

Investors spooked by inflation, geopolitical risk and volatility in the stock market are flocking to commodity ETFs to diversify and hedge their portfolios.

So far in 2022, through the end of April, $21.4 billion has flowed into exchange-traded funds in this sector, in contrast to the $6.3 billion in net outflows during the same period in 2021, according to Morningstar Direct. There are now 122 commodity ETFs, up from 112 last year.

Unsurprisingly, gold and other precious-metals ETFs did best, attracting 57.5% of all positive inflows in the commodities category, according to CFRA, an independent markets research and analytics firm.

Precious-metals ETFs are seen as a haven against inflation, which is running at the highest rate in 40 years.

The most popular was SPDR Gold Shares ETF (GLD). It had inflows of $7.4 billion, boosting total net assets to about $67 billion. The fund had year-to-date returns through April 29 of 4.8%, and one-year returns of about 8%.

Diversified commodity ETFs were second, garnering 33.7% of the total commodity net flows, followed by agriculture with 7.5% and industrial metals with 1.2%, CFRA reports.

“Historically, commodities offer the best protection against rising inflation compared to equities and other asset classes,” says Jim Wiederhold, associate director of commodities and real assets at S&P Dow Jones Indices. “And they tend to rise during times of geopolitical risk. We see this happening in real time as the Ukraine-Russia War rages on.”

Crushing Expectations

The S&P Global GSCI—a benchmark of 24 commodities in agriculture, energy and metals—had a total return of 39.9% through the end of April, while the S&P 500 fell 12.9%. The commodity index’s rally is a continuation of last year, when a 40.4% surge far exceeded expectations.

At the same time, commodities have also outflanked fixed-income securities. The S&P U.S. Aggregate Bond Index declined 8.87% through the end of April as rising rates hammered bond prices.

“We are now in the early innings of the next commodity supercycle due to supply and demand imbalances,” says Jason Bloom, head of fixed income and alternative ETF strategy for Invesco.

Forces at work, he says, include the move away from fossil fuels, investors’ focus on climate change, and the war in Ukraine. All three factors are causing supply scarcity for oil and natural gas, metals, grains and other agricultural commodities, Mr. Bloom says.

“The phenomenon should persist at least through year-end, so the outlook for commodity investments is strong,” says Aniket Ullal, vice president and head of ETF data and analytics at CFRA. “Even if the conflict in Ukraine ends, there are so many implications that need to be resolved that will keep commodity prices elevated.”

Ukraine is one of the world’s main exporters of wheat, corn and other grains, and animal and vegetable oils. It is also a supplier of iron ore, steel and potash used in fertilizer. The war has interrupted the country’s planting and agricultural production.

The resulting crimp in supply should cause a further rise in agricultural commodity prices in the months ahead. At the same time, the war is exacerbating the rise in oil and gas prices as the U.S. and other countries stop energy imports from Russia. Even before the war, global demand for oil and gas was outstripping supply.

A More-Diversified Approach

The No. 2 in net inflows, diversified commodity ETFs, according to market analysts and investment strategists, did well by investing in futures contracts of everything from aluminum, copper and wheat to natural gas.

The largest fund in this category, Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC), has attracted inflows of $3.6 billion in the past 12 months. The $8.85 billion fund has a return of 33.5% so far this year through April 29, and a one-year return of 53.5%.

Diversified commodity ETFs invest in baskets of commodities to lower the effects of market volatility on one particular sector, says Gargi Chaudhuri, head of iShares Investment Strategy Americas at BlackRock.

“This is important,” she says, “since commodities are more volatile than equities, and diversification helps lower risk of wild price swings in one asset due to any demand shock.”

One strategy popular among investors in the so-called environmental, social and governance space is combining a diversified agriculture ETF with a specialty metal ETF. The latter segment is especially attractive to investors who want to ride the trend to support green energy.

“Specialty metals such as lithium, copper, aluminum and nickel are used in electric vehicles,” says Mr. Bloom. In response to investor demand, the S&P GSCI Electric Vehicle Metals Index was launched in March.

It is a commodities futures-based index designed to reflect the performance of tradable metals used in the production of an electric vehicle. The current mix: nickel (36.73%); copper (27.3%); aluminum (17.72%); cobalt (9.9%); iron ore (8.34%).

Invesco has picked up on the trend, launching an ETF for metals used in electric vehicles in April. Invesco Electric Vehicle Metals Commodity Strategy No K-1 ETF (EVMT) will hold futures contracts and other financial products tracking such metals as copper, cobalt, nickel and aluminum.

A top-performing specialty-metal fund is the $3.14 billion SPDR S&P Metals & Mining ETF (XME). It tracks an index that provides exposure to a broad spectrum of metals and mining companies in the U.S. It has top holdings in MP Materials, Alcoa, Century Aluminum and Royal Gold. Year-to-date returns through April 29 were 25.6%, and one-year returns were 37.5%.

A Caution

Keep in mind that investing in commodities isn’t for the faint of heart. Commodities are more volatile than stocks. Prices can change on a dime due to many macroeconomic factors such as a supply-chain disruption, a slowdown in economic growth or a recession.

Commodity ETFs come in many varieties. It’s important for individual investors to do their homework and understand the fund’s investment strategy and the makeup of its portfolio.

Some ETFs hold physical commodities, while others hold commodity futures. If you are doing homework on a fund that invests in futures contracts, you might want to check its roll yield. It is the return generated by rolling short-term futures contracts into longer-term contracts. It is also important to track any commodity ETF’s one-year volatility rate as well as its annualized returns.

In the end, any investor must weigh the fund’s volatility risk against its upside potential.

Updated: 5-8-2022

Energy Stocks Still Have Gas In The Tank

Oil-and-gas stocks have had an amazing run as the rest of the market sagged, and there may be more to come.

Oil and natural gas are hot, and so are American energy stocks. But investors, whether they have been along for the ride or are just thinking of joining now, may be wary of getting burned.

January through March of this year was the best quarter for the sector since 1970, according to BofA Global Research. While the S&P 500 is down roughly 13% year to date, the energy sector is up 49%. That follows a year when energy stocks beat the broader index by 21 percentage points.

Passive index investors didn’t get a huge lift from energy’s shining moment. Energy accounted for just 2.7% of the S&P 500 at the end of last year, a far cry from the 11% weighting the sector commanded a decade ago.

And, according to BofA, active funds were significantly underexposed to the energy sector in the first quarter. Today, the weighting is at roughly 4.5%.

Investors who are tempted by energy’s returns might be wondering if the rally has already run its course. Energy is a cyclical sector, after all: Exhilarating peaks tend to be followed by equally harrowing troughs. Periods of high prices either lead to more drilling or damped demand, until eventually the commodity’s price falls.

How far are we into this cycle? It has been a little over two years since the most recent trough (right around the time oil futures briefly went negative) and the sector’s market value has more than tripled since.

The last two major cycles seem to imply the good times aren’t done: The last one—seen in the run-up to 2014—lasted about five years and four months, while the journey to the peak seen in 2008 took slightly longer than that (by another five months).

The caveat is that the time it takes from trough to peak has only shortened, in part because of the exploitation of U.S. shale, where fracking has made oil-and-gas extraction a speedy process. The most recent cycle, the lead-up to a peak in 2018, wasn’t very dramatic or lengthy, taking about 2½ years.

But this time may be different. It is notable how disciplined U.S. oil-and-gas companies plan to be with their drilling—and not just as atonement for past excesses. While equipment and labor shortages have been a feature of almost every energy cycle, Dan Pickering, founder and chief investment officer of Pickering Energy Partners, notes that he has never seen today’s level of scarcity.

The U.S. Energy Information Administration estimates that crude oil production in the U.S. could increase by 800,000 barrels a day in 2022 and then another 900,000 barrels a day in 2023. While that seems like a lot, it is a snail’s pace compared to prepandemic years. In 2018 and 2019, the U.S. increased oil production by 1.6 million and 1.3 million barrels a day, respectively.

Another factor affecting prices is a potential European ban on Russian oil imports, not all of which will find their way to countries like India and China. Before Russia’s invasion of Ukraine, the European Union was importing roughly 4 million barrels daily of crude oil and refined products from Russia.

The Energy Select Sector SPDR Fund, a widely followed ETF that tracks the energy sector in the S&P 500, is still 17% below its 2014 peak and 8% off its 2008 peak.

The enterprise value of stocks in the fund is about 5.9 times expected earnings before interest, taxes, depreciation and amortization for the next 12 months—almost a fifth below its 10-year average. And the sector’s valuation on that metric is still 52% lower than the S&P 500 compared with the 34% discount the sector experienced on average over the past decade.

While a cyclical industry is always a risky bet, the energy sector today is—by some measures—the most investor-friendly it has been in a while.

Updated: 5-20-2022

Why Your Index Fund Won’t Protect You From Tech’s Collapse

The S&P 500 is dominated by big tech, which was good news on the way up. Not so much on the way down.

Investors who thought their S&P 500 Index fund is diversified are getting a rude shock.

The benchmark stock index fell for a seventh straight week, its longest losing streak since 2001, but its drop would be far less dramatic if it wasn’t so heavily weighted to mega-cap tech stocks like Apple Inc., Microsoft Corp., Amazon.com Inc., Alphabet Inc. and Meta Platforms Inc.

The S&P 500 is, after all, a momentum play, since stocks with the largest market capitalizations carry the most weight, and tech’s dominance gives it outsized influence on the index’s performance.

That was positive for investors on the way up as the high-fliers surged, and now even savvy investors are getting a lesson on just how much of an impact a few stocks can have on the way down.

A simple way to see how big a role the five largest tech stocks played in the S&P 500’s recent decline is to look at what index returns would be if you left them out. So far this year, the S&P 500 is down 18%. Without the Big 5 in the mix, the index would be down just 12%.

For perspective on how tech’s place in the S&P 500 has grown, look back to another painful time, when the stock market bottomed on March 9, 2009. The largest stock then was $319 billion energy giant Exxon Mobil Corp., at 5.6% of the index, followed by consumer products company Procter & Gamble with a market value of $129 billion and a weighting of 2.2%.

Fast forward to the peak of the market on Jan. 3 of this year and Apple led the pack with a market value of nearly $3 trillion and 6.9% of the S&P 500, followed by Microsoft at about $2.2 trillion and 6.2%. In total, the Big 5 tech stocks made up nearly a quarter of the benchmark.

The tech concentration is even greater in the leading 401(k) retirement savings plans. The T. Rowe Price Blue Chip Growth Fund, for one, had more than 60% in its top 10 holdings as of March 31, which were led by Microsoft (11.6%), Amazon (10.9%), Alphabet (10.2%), Apple (8.7%) and Meta (5%). The fund is down 32.5% so far this year.

The long bull run has left plenty of other popular 401(k) funds stuffed with tech. The Fidelity Contrafund had 50.7% in its top 10 holdings as of March 31. The heaviest weight went to Amazon, at 8.2%, followed by Warren Buffett’s Berkshire Hathaway, a company that can act as ballast against volatile tech stocks.

But Berkshire itself isn’t immune to the lure of big tech. As of March 31, Apple was the largest common stock in Berkshire’s $390.5 billion stock portfolio, accounting for almost 41% of the portfolio’s total market value.

Updated: 5-23-2022

These Online Tools Boost Your Financial Know-How — And They’re Free

Some financial advisers run websites that offer tax and investing assistance at no cost.

Beyond helping clients manage their finances, some financial advisers aim higher. They educate consumers — people they will never meet — about personal finance.

These advisers have created free resources that empower individual investors to make wise financial decisions. Such resources also can enhance advisers’ marketing and brand identity — enabling them to reach a far wider audience than their client base.

Some of these online tools have legions of fans.

Consider year-end capital-gains distributions planned by mutual funds. Many investors know that their fund distributes realized net capital gains in November or December, but they may still struggle to manage their tax bill if they hold the fund in a taxable account.

Mark Wilson, a certified financial planner in Irvine, Calif., created a website [www.CapGainsValet.com] in 2014 that tracks funds’ end-of-year distribution announcements. Consumers can check the distributions for the 15 largest mutual fund firms at no cost.

(Separately, he offers advisers a paid service that provides distribution data on about 250 mutual fund firms, and a higher-tier option with more frequent, detailed updates on particular mutual funds.)

“It was an idea in my head 10 years before I started it,” Wilson said. An adviser since 1997, he maintained his full-time practice while launching the website. Capital-gains distribution season is limited to the last few months of the year, so that’s when he works overtime to track and assemble the data.

Wilson’s website helps consumers time their mutual fund purchases (to avoid buying a fund planning an outsize payout that would trigger a steep tax bill). Other advisers roll out resources that address broader needs and seek to raise the public’s financial literacy.

Stacy Francis, a New York City-based certified financial planner, entered the field in 2002 in part because she saw firsthand how women who lack financial education can suffer. “My grandmother stayed in an abusive marriage because she did not have the skills to effectively deal with money,” Francis said.

Francis created a nonprofit organization, Savvy Ladies, almost 20 years ago. Its mission: to provide financial education and resources to women. The website [www.savvyladies.org] gets about 3,000 monthly visitors. In addition, the group offers a free helpline for women with money questions to talk with a financial expert.

“The helpline has expanded over time and we now have 119 volunteers who advise women,” said Judy Herbst, the group’s executive director. “We help over 150 women every month get connected with [a financial expert] for a free, one-hour consultation.”

Through their side endeavors, some advisers reach even more consumers. Josh Bannerman, a Dallas-based certified financial planner, launched a podcast in 2012 with a longtime colleague. He has recorded 1,200 “Stacking Benjamins” episodes over the past decade on topics including retirement planning, home buying and investing.

While the podcast is popular, Bannerman says the prevailing lack of financial knowledge in the U.S. is a societal problem. “It’s still not enough [listeners] based on how many people there are who could become more financially literate,” he said. “As planners, we have an obligation to help as many people as we can.”

 

Updated: 6-3-2022

Buy ‘Dull’ Cash-Flowing Stocks, Causeway’s Ketterer Says

Investors should buy “dull” companies that generate steady cash flows as stock markets face growing headwinds from inflation and a potential economic slowdown, according to the chief executive officer of Causeway Capital Management.

Energy companies, utilities, metals and consumer-staples firms are likely to continue generating growing earnings even if the economy slows, Sarah Ketterer said Friday in a Bloomberg Television interview.

While former darlings like tech companies have plunged in value, there are potential winners with solid upsides in the sector, she told “Wall Street Week” host David Westin.

“In that rubble of IT, the information-technology sector, there’s some fantastically defensive companies,” she said. “We call them value tech.”

One such recommendation: Fiserv Inc., a payment-processing firm critical for banks to run transactions. “The business is really sticky and the multiples on the stock are quite low,” Ketterer said.

Stocks inched lower this week, falling the most Friday after US employers reported they added more jobs than expected in May. The report fueled expectations the Federal Reserve will keep boosting interest rates to cool the economy and inflation.

Now’s a bad time to buy bonds, because prices fall when interest rates climb, Chris Ailman, chief investment officer of the California State Teachers’ Retirement System, told Westin.

“I would be underweight fixed income,” said Ailman, who managed $312 billion as of April 30 at the second-largest US pension fund. “This is a time when you need to find good long-term, but safe and boring investments.”

Among the best opportunities are illiquid assets such as toll roads, pipelines and other infrastructure, Ailman said.

 

Updated: 6-5-2022

Which Stocks Do Best During High Inflation?

A look at past inflationary periods offers clues on where to invest.

Investors commonly hear that when inflation surges, it is best to put your money into physical assets that track the jump in prices, with real estate often suggested as the best option.

But physical assets, particularly properties, generally can’t be bought as easily or quickly as securities, and acquiring them often entails significant transaction costs.

The second-best option is usually to rebalance your stock portfolio to shift it into industries that do well in an inflationary environment. So, when inflation surges, what industries do best for a stock portfolio?

To sum up: Shares in real-estate investment trusts or companies in the real-estate industry are not the best option. Stocks in the materials and energy industries outperform all others by a long shot, according to the findings of a study I conducted with my research assistants, Zihan Chen and Yiming Xie.

We gathered data on the returns for all stocks listed on the New York Stock Exchange or Nasdaq over the past 50 years. We then examined the course of the consumer-price index over those years and found three spikes in prices during which the inflation rate doubled in less than 24 months: March 1973 to May 1975, April 1978 to September 1980, and February 2021 to March 2022.

We separated each company in our data set into one of 10 industries, and examined how the median stock in each industry, in terms of returns, performed during those three periods of surging inflation.

The median real-estate stock delivered a 3.32% annualized return over the three periods, far below the annualized returns of 18% for the median energy company and 16.81% for the median materials company.

On the opposite end of the spectrum, healthcare (including pharmaceuticals) performed the worst, with an annualized return of minus 8.44%, followed by consumer staples at minus 6.73%, consumer discretionary at minus 5.71%, utilities at minus 4% and technology at minus 3.64%.

The negative results for healthcare, tech and consumer discretionary are understandable, because these are interest-rate-sensitive industries. But the results for consumer staples and utilities might surprise some investors, because these are often thought of as safe assets in rough times.

At the end of the day, the best move for investors who want to reposition their portfolios quickly when inflation is surging is to shift into materials and energy companies.

Updated: 6-7-2022

How Much Money Can You Make Chasing High-Yield Savings Rates?

We do the math to help you decide when is it worth moving your money for a higher return.

Bank accounts often get a bad rap for having a return that lands them just a step above stuffing your money under a mattress. Given how much sleep consumers are losing these days with record inflation and gas prices, chasing after a better deal by moving your money to a high-yield savings account seems like one easy solution.

The more complicated question: How much money can you really make by switching banks and therefore is it worth your effort?

Comparison Shop The Savings Rates

Congratulations, you’re comparing rates at a nice moment: “For the first time in years, it’s a good time to shop around for a better savings rate,” says Ted Rossman, senior industry analyst at Bankrate.com. (Note: Bankrate is a commercial partner of Buy Side from WSJ.)

That’s because in general when banks aren’t flush with cash, they offer higher yields. Additionally, savings interest rates can rise if the Federal Reserve holds off on purchasing U.S. Treasuries, and rising Fed interest rates can impact savings interest rates.

And the savings yield picture may get rosier. Experts expect the rate environment for high-yield savings accounts to improve in the near future, or at least not worsen.

Now for the math: Let’s say you’re starting with $10,000—a nice round figure. And let’s take what the Federal Deposit Insurance Corp. listed as the average savings account interest rate in mid-May: 0.07%.

Leave your money in a savings account at that rate for a year and you’d earn $7, whether compounded monthly or yearly, according to the compound interest calculator at Investor.gov.

What if you want to find an even better rate? To do that, you might want to look beyond traditional banks to online-only institutions such as those that offer combined services (where checking and savings are combined), financial services firms and credit unions, as they’re likely to offer better rates as they look to grow their customer base.

If the better rate you find is 1.25%, now you’d be looking at $126 after a year with monthly compound interest, according to the Interest.gov calculator. If you could, for instance, find a savings rate of 2% compounded monthly, a year later you’d have an additional $201.

You may also see special introductory offers that can make switching a better deal. In the spring, SoFi, for example, was offering new account holders between $50 and $300 when they sign up for direct deposit.

Note: Rates move all the time, and banks may also offer teaser rates that jump backward after a certain amount of time. No bank offers a guaranteed fixed rate on savings the way you’d get a fixed interest rate that you pay on a loan.

 

Updated: 6-8-2022

Chinese Internet Stocks Hit Three-Month High

Regulatory approval of videogames seen as a sign that Beijing is easing pressure on tech giants.

Chinese internet stocks jumped to a three-month high after regulators in China cleared dozens of videogames for release, a move investors welcomed as a new sign that Beijing is softening its stance on the technology sector.

Late Tuesday, the country’s National Press and Publication Administration said it had approved 60 videogame titles. The regulator had given the green light to a smaller batch of games in April, and before that hadn’t granted any approvals since last July.

Shares in Bilibili Inc., a video and gaming company, led gains in Hong Kong on Wednesday, surging 20%. The city’s Hang Seng Tech Index advanced 4.8% to close at its highest level since early March.

“Regulatory pressure has eased,” said Bruce Pang, head of macro and strategy research at China Renaissance Securities. He said the new gaming approvals were another positive signal for the internet sector, and had a spillover effect onto other companies including Alibaba Group Holding Ltd., the e-commerce giant.

Alibaba’s Hong Kong-listed shares jumped 10% Wednesday, while those in the gaming and social-media heavyweight Tencent Holdings Ltd. rose 6.5%. Neither Tencent nor smaller rival NetEase Inc. had any games in the two most recent batches of approvals. Bilibili also didn’t have any games approved in this round.

Chinese tech companies have endured a sweeping crackdown since late 2020, when Beijing halted the blockbuster initial public offering of Alibaba’s financial-technology affiliate, Ant Group Co. In another key initiative, authorities last August introduced rules limiting minors to three hours a week of online videogaming.

However, as China’s economy has slowed sharply this year, the tone has shifted, and top Chinese policy-making bodies, including the Politburo of the ruling Communist Party, have expressed their support for the sector.

In another sign of easing policy, on Monday The Wall Street Journal reported that China was concluding a yearlong probe into ride-hailing giant Didi Global one of the companies that was hardest-hit in the tech clampdown.

Analysts at Citigroup said Tuesday’s approvals bolstered their confidence that the pace of game approvals was returning to normal, as major Chinese cities reopen after strict lockdowns, and with tough measures now in place to protect younger gamers. They said Tencent’s and NetEase’s titles are likely to be included in subsequent batches of game approvals.

The recent string of positive economic and regulatory developments have all helped to lift the market’s mood, said Pruksa Iamthongthong, a senior investment director at Abrdn.

“There’s an understanding that the worst is over in terms of regulation, and we are seeing light at the end of the tunnel,” said Ms. Iamthongthong, a co-manager of the Asia Dragon Trust, which owns some large Chinese internet stocks.

Separately Wednesday, Tencent said it would roll out its “Honor of Kings” title internationally by the end of this year. Tencent’s flagship mobile game, which allows teams of players to battle one another online, has more than 95% of its users in China and remains the biggest profit driver for Tencent’s domestic games segment.

The global rollout comes as Tencent faces growing competition at home and is more actively expanding overseas. Its revenue from domestic games declined 1% from a year earlier in the quarter ended March, while that of international games still grew 4%.

Despite the rally, Chinese internet stocks remain far from their peaks. The Hang Seng Tech Index is still down about 15% year-to-date, for example, and down 56% from a record high reached in February 2021.

“China’s internet stocks have been one of the most unloved assets over the past year, and trade at a meaningful discount to historical valuations,” said David Chao, global market strategist for Asia Pacific at Invesco. “Any material hint that we’re coming out of the regulatory woods is a welcome sign,” he added.

 

Updated: 6-16-2022

Three Money Mistakes To Avoid In A Bear Market

There are ways to protect your finances in a downturn without acting rashly.

Spooked by the bear market and worried about what’s next, investors are looking for ways to shield their portfolios from more pain. Yet money moves made in fear can be bad ones, advisers and behavioral economists warn.

On Monday, the S&P 500 closed more than 20% down from recent highs, officially entering a bear market. On Wednesday, the Federal Reserve approved the largest rate increase since 1994 in a bid to hit the brakes on rampant inflation.

Whether the economy is in a recession or entering one is still up for debate. But concern is high among some economists and Americans in general about the path of the economy. When the economy weakens, unemployment rises, wages become stagnant and spending slows.

For investors, this sense of doom and gloom can prompt questionable financial decisions with investments, debts and household budgets, said Michael Liersch, head of Wells Fargo’s advice and planning center.

“People go back to what feels good and familiar from a financial perspective, rather than what actually will help them,” Mr. Liersch said.

Here Are Three Common Mistakes Advisers Say To Avoid When Choosing How To Defend Your Money In A Possible Downturn:

1. Panic Selling

Individual investors tend to sell after an economic downturn is already priced into equity markets, said Katie Nixon, chief investment officer at Northern Trust Wealth Management. By selling at this time, investors are locking in their losses.

“This perfect bad timing can have negative consequences for building wealth,” she said.

Dana Menard, a financial planner in Maple Grove, Minn., knows several people who halted 401(k) contributions during the last recession to boost their take-home pay. Doing so may boost short-term cash flow, but people then miss out on their employer match contributions, essentially losing free money, he said.

People also forget to resume contributions once markets start to recover and are missing out on gains because they have adjusted their lifestyle to a higher level of spending, said Mr. Menard.

Sticking your head in the sand isn’t an advisable strategy either, said Mr. Liersch, at Wells Fargo.

When looking, focus on how to rebalance your investment accounts by revisiting your target asset allocation and overall investment philosophy, said David Huebner, a financial planner in Fargo, N.D.

Use tax-loss harvesting to reduce your tax liability by replacing assets that are down with similar investments. Should you have extra cash on hand, take advantage of a stock market downturn to buy stocks that are trading lower, he said.

In addition to checking your balances, it is important to check your state of mind, said Betty Wang, a financial planner in Denver.

How do I feel about this market? Can I stomach this in the future? Down markets and recessions are a fact of investing, she said. Do you need to make any changes to how and what you invest in? If you still can’t sleep at night, it is likely time to reconsider your asset allocation, said Ms. Wang.

2. Using Up Emergency Savings To Pay Down Debts

Paying off credit card debt is among the best things you can do when interest rates are rising and uncertain market conditions are ahead, but some people take paying down debt too far, says Thomas Blower, a financial planner in Grand Rapids, Mich.

If you use up too much of your savings by aggressively paying off debts with low interest rates, such as a 3% fixed-rate mortgage, you could find yourself short on cash during a downturn, said Mr. Blower.

Ted Halpern, a financial planner in Ashburn, Va., said one month of core expenses such as rent or a mortgage payment should be your zero balance in your checking account heading into a recession. Keep about three months’ additional expense reserves held in your savings account, he said.

Review the liquidity of your emergency fund, said Kyle McBrien, a financial planner at Betterment. I Bonds, inflation adjusted government-savings bonds, and certificates of deposit are popular because of rising interest rates, but many CDs have early withdrawal penalties and I Bonds must be held for at least 12 months.

People often lack lines of credit when downturns happen, said Shaun Melby, a financial planner in Nashville, Tenn. It is much easier to get a home-equity line of credit or personal line of credit when economic conditions are favorable, so consider securing those lines now if you’re worried about the possibility of a recession, he said. It is also usually cheaper than borrowing on a credit card.

3. Spending As If Nothing Has Changed

Failure to reassess your budget and make frequent changes can leave you unprepared to adjust your spending during a downturn, said Curtis Crossland, a financial planner in Scottsdale, Ariz. Avoid spending more on nonessential items or signing up for new subscriptions and services, and look for ways to reduce optional expenses, he said.

Don’t add new fixed expenses, such as another car loan, if you can avoid it, he said. The idea is to keep your regular expenses as trim as possible.

Many people know what their income is but when it comes to what they spend, this number gets blurry, said Valerie Rivera, a financial planner in Chicago. Write out the necessary expenses needed to cover your life and cut any nonessentials, she said.

And waiting can pay off. During the dot-com boom in the late 1990s, Tara Unverzagt wanted to remodel her house. She started the prep work, finding an architect and putting away money for the project, but she waited until after the bust in 2000 to start the work that helped her get a better price, she said.

“If I can’t get the prices I want because the other side isn’t willing to negotiate, that’s usually a sign that I should wait until they are a little more hungry,” said Ms. Unverzagt, a financial planner in Torrance, Calif.

Updated: 6-24-2022

Fight The Bear-Market Blues With A Roth IRA Conversion

Roth IRAs are the best retirement plans to have, and this year’s market declines have put them on sale.

Attention, retirement savers: Don’t get spooked by the bear market and forget about doing a Roth IRA conversion. With prices down, the upside could be terrific.

On the other hand, don’t rush into a conversion willy-nilly. This move is never appropriate for some people and not a sure thing for anyone.

“A Roth IRA is the best retirement plan to own; the big question is how much you have to pay to get it,” says Natalie Choate, a tax lawyer in Wellesley, Mass., who has long specialized in retirement accounts and done several conversions herself.

The reason to consider a conversion in a bear market: When the value of assets like stocks and funds fall, the taxes on conversions to Roth IRAs often drop as well, and there’s greater potential for asset growth and withdrawals that are tax-free.

A growing number of taxpayers have opted for Roth IRA conversions in recent years. Taxpayers reported 892,000 Roth conversions totaling nearly $17 billion in 2019, according to the latest IRS data.

That’s about twice the levels of 2014, when 489,000 taxpayers converted about $8 billion. Conversions have been especially popular with taxpayers earning $200,000 to $500,000.

So let’s review what’s involved. A Roth conversion entails moving assets from a traditional IRA to a Roth IRA. Both accounts allow tax-free growth, but there are key differences.

With traditional IRAs, the contributions are often tax deductible, and withdrawals at age 59 ½ and older are fully taxable at ordinary-income rates like the ones for wages. Traditional IRAs often include rollovers from workplace plans like 401(k)s, so these IRAs can be very large.

With Roth IRAs, the contributions are in after-tax dollars, but withdrawals can be tax-free. In addition, Roth owners don’t have to take required withdrawals during their lifetime, while traditional IRA owners must start them at age 72.

The required withdrawals from traditional IRAs rise over time, depleting the account.

Under current law, savers can convert traditional IRAs to Roth IRAs by moving assets from one account to the other and paying income tax on the transfer.

This tax bill can be stiff, and there’s no assurance future growth will compensate the saver for having accelerated taxes. But converting when prices are down puts more income beyond the reach of Uncle Sam if prices recover and grow.

Ms. Choate says she has experienced both good and bad outcomes with her own Roth conversions. Her first one was of a basket of blue-chip stocks worth $100,000 in 2010 and has paid off handsomely—dividends alone have added $100,000 to the total.

But another, of a beaten-up energy stock she liked, flopped because the stock went to zero. So she paid tax she wouldn’t otherwise have owed.

Many factors matter when determining whether a Roth conversion makes sense. To help savers decide, here are key issues.

Tax Rate At Conversion Vs. Tax Rate At Withdrawal

If the tax rate on the Roth IRA conversion is lower than the expected rate when the assets would be withdrawn, that weighs in favor of a conversion. If the rate at conversion is higher than the expected rate at withdrawal, that weighs against.

So savers should try to do Roth conversions in lower-tax-rate years. For example, a conversion could make sense for an older person who has retired but hasn’t started taking required IRA payouts, or for a young worker who has IRA or 401(k) savings who pauses work to go back to school.

For this reason, advisers often recommend doing partial Roth conversions over several years to avoid income that pushes a saver into a higher tax bracket.

Asset Prices

The lower prices are, the lower the tax bill on a Roth conversion often is. That’s a boon—as long as prices recover and grow.

Spokespeople for Fidelity Investments, Charles Schwab Corp., and Vanguard Group confirm that they allow investors to select individual holdings from traditional IRAs and convert them to Roth IRAs “in kind.”

So investors who want to transfer a beaten-down holding don’t have to sell it, transfer cash, and re-buy the holding in the Roth account.

Ability To Pay The Tax Bill With ‘Outside’ Funds

Savers who can’t pay the tax bill on a Roth conversion with funds outside the account probably shouldn’t convert, say specialists. Paying the taxes with IRA assets shrinks the amount that can grow tax-free.

The ‘Widow’s Penalty’

The year after a spouse dies, the survivor can no longer file jointly. As a result of being a single filer, the survivor’s tax rate often rises even if income has dropped.

If this is likely, the couple may want to do Roth conversions to avoid higher tax rates for the surviving spouse.

State And Local Taxes

State and local taxes on traditional and Roth IRA contributions and withdrawals vary greatly, so take them into account when analyzing a conversion.

For example, a soon-to-be retiree who plans to leave a high-tax area in California or New Jersey for a low-tax one in Florida or Nevada will likely want to move before doing a Roth conversion.

And watch for quirks. Attorney Mark Klein of the Hodgson Russ law firm notes that while New York is known as a high-tax state, it allows many residents who are 59 ½ or older to skip state income tax on the first $20,000 withdrawn from a traditional IRA annually. This benefit can lower taxes on a Roth

Leaving Roth IRAs to nonspouse heirs such as grandchildren will often provide them more flexibility than leaving them traditional IRAs.

Both types of accounts often must be emptied within 10 years, but heirs of Roth IRAs can wait until the end of the term to withdraw their tax-free funds. Heirs of traditional IRAs must take taxable payouts annually if the owner died after age 72.

If an IRA owner lives in one of the few states with estate or inheritance taxes or will owe federal estate taxes, leaving a Roth IRA instead of a traditional IRA to heirs could reduce death duties.

Potential For Future Large Deductions

Savers who could have outsized tax deductions in retirement—such as for nursing-home costs—should remember that such deductions can shelter withdrawals from traditional IRAs. A Roth conversion of such amounts now could bring an unnecessary tax bill.

Potential To Minimize Other Taxes

Having tax-free Roth IRA withdrawals helps some taxpayers minimize other taxes or surcharges, such as Medicare Part B and Part D premiums that rise as income does. This can also help filers stay below the $200,000 (singles) or $250,000 (joint filers) threshold for the 3.8% surtax on net investment income.

Age At Conversion

Savers age 72 and older must take their required annual payouts before doing a Roth IRA conversion. That raises taxable income and makes conversions less attractive.

Updated: 6-27-2022

Yield-Hungry Investors Are Flocking To High-Dividend ETFs

With bonds slumping, a record amount of money is pouring into exchange-trade funds focused on big dividend payouts.

With markets in tumult and inflation surging, the allure of high-dividend stocks is growing fast.

Exchange-traded funds that track the highest-yielding stocks have taken in about $25 billion in assets so far this year, a new record for the value-oriented category, and inflows could reach $50 billion by year-end, according to Bloomberg Intelligence senior ETF analyst Eric Balchunas.

Companies that pay big dividends to their holders have long been wallflowers compared to sexier tech stocks, but that’s changing as the Federal Reserve rapidly hikes interest rates, raising fears of a recession, sending growth stocks spiraling and causing bond prices to slump.

“Investors have a need for yield, yet people are skittish to get that yield in the bond market because they know the Federal Reserve is hell-bent on raising rates,” Balchunas said on Bloomberg’s “Trillions” podcast. “With these ETFs, you’ve got this perfect one-two punch where they have two things people want right now — exposure to energy and high dividends.”

Energy companies often have high dividend yields, and the sector is the only portion of the S&P 500 Index that’s in the green this year as the war in Ukraine has crimped supplies, with the sector rising 29% as of Friday’s close versus a decline of 18% for the broader benchmark.

Meanwhile, dividend-paying stocks have outperformed every other factor except value year-to-date, according to data compiled by Bloomberg.

Some of the high-dividend ETFs have energy stakes approaching 20%, helping boost their performance. Exxon Mobil Corp., which yields just over 4% and whose stock is up 42% this year, is a top holding in many funds.

These include the WisdomTree US High Dividend Fund and the iShares Core High Dividend ETF, both of which have total returns of about 2% so far this year.

Many funds have dividend yields between 3% and 4%, about double the S&P 500’s trailing 12-month yield of 1.6%. While the 10-year Treasury note yields over 3% as well, “until the Fed cools off, the bond market is going to be a tough place,” said Balchunas.

“We’ve seen it in mutual fund flows with older investors bailing. That will be a constant drain on the prices of bonds for the foreseeable future.”

The yields offered by high-dividend ETFs may be similar across funds, but they vary greatly in how they find that yield. The Vanguard High Dividend Yield ETF holds about 440 stocks and tracks the FTSE High Dividend Yield Index, which is made up of US companies (excluding real estate investment trusts) that have paid above-average dividends for the previous 12 months.

The SPDR Portfolio S&P 500 High Dividend ETF, meanwhile, homes in on 80 of the S&P 500’s highest-yielding companies.

The ETFs also weight their portfolio companies differently, which can dilute or amp up concentration. Some weight by market cap, some weight every stock equally, and some weight based on dividends.

In WisdomTree’s ETF, for example, which focuses on the highest dividend yields, Exxon Mobil has a 7.3% weight, while it is a much more tame 2.8% in Vanguard’s market cap-weighted fund.

“If a fund weights by dividends you clearly are going to have some stocks that dominate, and that can be a little scary, because yes, this thing yields a lot but now it’s really controlling your fund,” said Balchunas. “Some investors would likely opt for the equal-weighted version on these funds.”

Consumer-Staples Stocks Are Bright Spot In Bleak Market

Molson Coors, Hershey and Campbell Soup are among the S&P 500’s best performers of late.

Almost everything has fallen in the stock market this year. Consumer-staples stocks are bucking the trend.

Shares of companies selling staples such as beer, chocolate and canned soup have raced past the broader market in 2022. Molson Coors Beverage Co. is up 19% for the year, while Hershey Co. has risen 14% and Campbell Soup Co. has gained 11%. That is compared with the S&P 500, which has fallen 18%.

One reason why? Consumer-staples companies are commonly regarded as a haven during volatile markets and recessionary periods. Investors often buy shares of companies that sell these day-to-day household goods for their strong dividend yields and steady business.

Shares of staples companies trailed well behind those of technology companies the past several years, but investors wary of decades-high inflation, tightening monetary policy and a potential recession are now taking another look at the group.

“The shift over the next quarter should be to be more defensive,” said Justin Burgin, director of equity research at Ameriprise Financial. “In bear markets, it’s the portfolio that loses the least is the winner.”

Mr. Burgin said the firm is still overweight shares of technology, financial and healthcare companies, but is considering adding exposure to more defensive sectors, like staples.

He noted that staples companies have had nearly unchanged—albeit lower—profit margins for the past decade, making them relatively stable investments.

“It’s steady. It doesn’t change… it’s a good place to kind of hide out,” he said about the sector.

Some analysts believe consumer sector companies, especially big-box retailers, may be able to hold up better than other industries in the short term as costs for things from labor to fuel rise.

“In the near term, having the staples part of the market is an important part of the portfolio,” said Mona Mahajan, a senior investment strategist at Edward Jones. “There’s a focus on the lower-end consumer and where they’re gravitating as inflation starts to bite a little bit.”

Analysts have warned that higher prices could push consumers to adjust spending habits, which could lead to a recession. A consumer survey conducted by Morgan Stanley Research released last week listed inflation as the No. 1 concern for two-thirds of respondents.

To be sure, not all investors are convinced staples stocks can keep rising.

The S&P 500’s consumer-staples sector hit an all-time high in April, but has fallen since then as investors have grappled with higher-than-expected inflation readings and downbeat earnings reports from major retailers.

Walmart Inc. missed first-quarter earnings expectations due to pressures such as high fuel prices, labor costs and inventory levels.

Jack Janasiewicz, portfolio manager at Natixis Investment Managers Solutions, says the staples sector faces two key risks: continuing economic slowdown and potential margin compression. He says he is shying away from the stocks because the companies don’t have room to absorb more price increases without passing them down to consumers.

“Now’s not the time, just kind of looking to batten down the hatches in the staples sector,” Mr. Janasiewicz said.

The S&P 500’s consumer-staples sector is also more expensive than the broader index, trading at 20.13 times its expected earnings over the next 12 months versus 16.46 times earnings for the benchmark as a whole, as of Thursday.

Mr. Janasiewicz said his firm is staying away from investments in materials, industrials and commodities, instead acting more keenly on healthcare and bellwether tech stocks.

The U.S. is experiencing some of the highest rates of inflation the nation has seen since the early 1980s as Americans are noticing price hikes at the grocery store, gas station and coffee shop.

The price of goods and services climbed 6.8 percent in November, according to the most recent U.S. Labor Department data. The inflation rate rose by that same tally in October. All told, inflation has risen by at least 5 percent since June.

The statistics basically mean “for every dollar you have, you can’t buy the same amount of goods and services,” said Vicki Bogan, a finance professor at Cornell University in upstate New York.

“At the core of this, prices are going up, so the money that you have, you can’t buy as much,” said Bogan, who is also an expert on household finances.

Black households are being hit the hardest by inflation. They are paying more for goods and services across the board due to the spike in prices. African-Americans spent 7.1 percent of their post-tax income on energy, compared to 5.4 percent spent by whites, Forbes reported.

Black households spent 12.5 percent of their income on food, versus 11.1 percent for whites. According to a Bank of America researchers, the spending power shock from these higher inflation categories was 4 percent for African-Americans, compared to 2.9 percent for whites.

There’s no true consensus from economists on when inflation may slow down, with some predicting later this year and others forecasting further out to 2023 and 2024. But even if prices continue to rise this year, there are steps Black households can take now to fend off rising inflation, Bogan told Finurah.

1. Learn New Skill To Gain Better Employment

Now might be a good time for the family’s income earners to update their professional skills or learn entirely new ones, Bogan said.

That’s because one solid way to combat inflation is to find a higher paying job or start working in a field that stays in high demand no matter how poorly the economy performs, Bogan said.

2. Up Your Investing Game In The Stock Market

Some Black families have investment portfolios that are mostly in bonds, but because inflation is so high right now, “the value of any bond assets are eroding over time,” Bogan said. Instead, it might be time to get more aggressive and invest in individual stocks, mutual funds or exchange-traded funds, she said.

The thinking behind this strategy, Bogan said, is for a family to grow its invested money at a higher percentage than the rate of inflation. It’s important for Black households to invest more right now in particular because “otherwise you’re kind of losing money,” Bogan said.

3. Time To Move? Weigh Your Option On Renting Or Buying

Bogan said, depending on where a family lives, the household should do research and see if it’s cheaper for everyone to move into a rental unit or purchase a home. Each family will come to a different conclusion, she said, but the goal here is to lower one’s monthly housing cost.

The average apartment rent price in the U.S. rose to $1,680 for a one-bedroom and $1,958 for a two-bedroom, according to December data from Apartmentguide. The average monthly mortgage payment is roughly $1,600, according to U.S. Census data from September.

4. Hold Off On Big Purchases For Now

Bogan said the price of nearly everything expensive has gone up, so it wouldn’t be wise for families to overpay on something if the purchase isn’t absolutely necessary. Perhaps that means delaying the purchase of a new car or holding off a vacation trip out of town, she said.

The goal with this strategy is to keep as much money in the household as possible until inflation falls.

“Maybe some of those prices may go down in the future,” Bogan said.

Updated: 2-10-2022

Higher Inflation Is Probably Costing You $276 A Month

Who is feeling the price squeeze the most? Millennials, Latinos and the middle class are at the top of the list.

The average U.S. household is spending an additional $276 a month because of inflation that is rising at its fastest rate in 40 years, a new economic analysis showed.

The squeeze stems from higher prices across a range of products and services, including cars, gasoline, furniture and groceries.

Inflation accelerated to a 7.5% annual rate in January, the Labor Department said Thursday, reaching a new four-decade high as consumer demand and supply constraints continued to push prices higher. Inflation has been above 5% for the past eight months.

“A lot of people are hurting because of high inflation. $276 a month—that’s a big burden,” said Ryan Sweet, a senior economist at Moody’s Analytics who conducted the analysis. “It really hammers home the point of ‘what is the cost of inflation?’”

Mr. Sweet came up with the figure by comparing what the average household spent under 7.5% inflation versus the amount it would have spent when inflation was 2.1%, the average in 2018 and 2019.

Prices for certain goods and services jumped more than prices for others—which means people who paid for those things probably have suffered a bigger inflation burden than those who didn’t.

Any consumers unlucky enough to have needed a new washing machine might have taken a bigger hit compared with others from inflation, because laundry-equipment prices leapt 12.1% last year.

Research shows that inflation is also squeezing some groups, on average, more than others. The consumer-price index reflects the change in prices for the average basket of spending.

But people’s spending baskets vary based on who they are, which influences to some degree their daily needs, where they live, how they get around and what they do for fun.

With prices for different goods and services rising at different rates, those variations influence how big a chunk inflation is eating out of their budgets.

A study by Wells Fargo & Co. economists broke out the impact in fine demographic detail based on December 2021 inflation rates. It uses the spending basket for 2019 and 2020—more recent than that used for CPI—and found that inflation hit 6.5% in December, down from the 7% reported by the Labor Department using the spending basket for the previous two years.

The calculations don’t necessarily capture the whole picture of each demographic group’s financial realities. The economists noted that the way the government measures housing costs means they likely overstated the cost burden for homeowners and understated it for renters.

Lower-earning households devote the biggest share of their budgets to rent, which means they probably are experiencing much higher inflation.

Here Are Some Of The Study’s Findings:

• Middle-class households were squeezed harder than other groups, with prices up 6.7% in December. That is 0.5 percentage points higher than for the lowest and highest income brackets. Transportation costs proved decisive here: Middle-class households spend a bigger share of their budgets than others on gasoline—its price was up nearly 50% in December—and used vehicles. Higher earners tend to buy new cars, prices for which climbed at a slower rate. Just 72% of households in the bottommost earning group owned or leased vehicles in 2020, compared with 90% overall, according to Labor Department data.

• Higher-earning households spent relatively more on dining out and recreation, which rose much less than overall inflation. This group also devotes more spending toward education, in part because, on average, it has more children under 18 years old than other income groups, Labor Department data show.

• Hispanic or Latino households faced inflation of 7.1%, thanks again to a disproportionately large share of spending on used autos and gasoline. That compared with 5.6% for Asian families, who tend to earn more than the average American household.

Those ages 35-44 saw their costs rise 6.9% in 2021, higher than any other age group, though the rate for younger age groups was just slightly less. Those ages 65 and up experienced 5.8% inflation, in large part because of the share of their spending that went toward healthcare—16%, versus 4% for those under 25. Healthcare services rose just 2.5% in 2021. Younger consumers spent a bigger share of their budgets on cars and gasoline.

Inflation’s ripple effects might affect groups differently, too. An analysis of auto lending by New York Fed economists found that surging auto prices offset the drop in interest rates, translating to an 8% jump in the monthly payment for the typical new auto-loan borrower to $418 in 2021 compared with 2020.

That so far hasn’t resulted in trouble making payments—except among the under-30 crowd. Delinquency rates among this group rose in the fourth quarter, suggesting that “there may be challenges brewing for some younger borrowers,” the economists said.

Updated: 10-8-2022

Why Are My Inflation-Protected Bonds Falling When Inflation Is So High?

A look at how a popular post-pandemic investment works and how you can benefit.

You would think this would be TIPS’ time to shine.

Instead, the prices of Treasury inflation-protected securities—government bonds that are adjusted to keep up with inflation—have declined this year, even as inflation has soared.

These declines show how hard it has been to find a safe harbor from the fastest price-level rise in four decades.

Through Thursday, inflation-protected bonds tracked by ICE had lost 13.2% this year, including price changes and interest payments. The comparable loss for ICE’s index of regular Treasury bonds was 13.5%.

Holding a TIPS to maturity still ensures that inflation won’t reduce the purchasing power of your initial investment (more on this in a moment). But meanwhile, falling market prices are vexing investors who were counting on TIPS to cushion their portfolios.

“These are some of the most pressing questions we get: Why the heck are my TIPS down when inflation is so high?” said Collin Martin, a fixed-income strategist at the Schwab Center for Financial Research.

Here is how TIPS work and why they haven’t been immune to the bond-market selloff this year.

How Do TIPS Protect Against Inflation?

The government sells TIPS that mature in five, 10 or 30 years. Like Treasurys, TIPS pay interest twice a year—exempt from state and local taxes—at a rate locked in when the bond is issued.

The difference is that the face value of a TIPS adjusts to account for changes in the consumer-price index. That means interest payments rise with inflation, and so does the amount you get back when the bond matures.

Say you buy $1,000 of TIPS at face value maturing in 2027, with a 1% coupon. If the CPI didn’t rise, you would get $10 in coupon payments every year, or $5 every six months.

But if the CPI climbs by 8.3%—as it did in the 12 months through August—your coupon payment would rise by the same percentage, to $5.42.

If inflation continued, the coupon would keep rising, and you would get back a higher principal amount in 2027. The extra principal would compensate you for all the CPI inflation over the years since you bought the bond.
Is that all there is to it?

Yes—if you buy a TIPS and hold it to maturity.

But a variety of factors—first and foremost interest rates—can affect bonds’ market prices. As a result of rising rates, prices of practically all bonds have fallen this year. That means that if you bought a new five-year TIPS in January and sold it today, you would have to accept a lower price.

Why have rates increased? The Federal Reserve has been raising them to fight inflation. Higher interest rates reduce the discounted current value of practically all investments—even those with inflation-adjusted coupon payments in the future.

If TIPS Can Lose Market Value During High Inflation, What Are They Good For?

If withstanding inflation is your only goal, buying and holding a newly issued TIPS until it matures will get the job done.

The real yield on five-year TIPS is now about 1.8% a year—or about 9.3% total over five years. In effect, the Treasury is guaranteeing TIPS owners that their money will buy 9.3% more goods and services in 2027 than it can now, no matter what happens to inflation between now and then. (Federal taxes, to be sure, will eat some of those gains.)

Inflation protection makes TIPS very different from the way regular five-year Treasury notes work. If you buy one of those today, you will get nominal yields of about 4.2% a year over the next five years.

But if inflation averages 5% a year between now and 2027, your money will buy less than it can today, not more.

What If I Am Invested In A Fund That Owns TIPS?

Some investors own TIPS through mutual funds or exchange-traded funds that focus on inflation-protected bonds. BlackRock, Vanguard, Schwab, Fidelity and other money managers all offer low-cost TIPS funds.

Financial advisers say that investing in funds can have some advantages over buying bonds directly. You don’t have to worry about reinvesting your money after bonds mature:

The fund manager will handle that for you. Funds can also provide diversity, giving you exposure to TIPS that mature over a variety of time spans.

For investors who value predictability, bond funds and ETFs have some drawbacks. Their price rises and falls with the prices of the bonds they own. Unlike individual bonds, they don’t have a maturity date, so there is no date on which you are guaranteed to get your principal investment back.

If you need to cash out of your TIPS fund at a time like now, when bond prices have fallen, you might not get back as much as you originally invested.

On the other hand, because TIPS funds continually replace maturing bonds with new ones, fund investors are now gaining exposure to the higher yields that newly issued TIPS are offering.

If you bought a TIPS earlier this year and simply held it, you wouldn’t enjoy benefits from the substantial rise in yields this year.

How Do The Pros Use TIPS?

Schwab’s Mr. Martin said that for most individual investors, it is a bad idea to try to time the market by trading TIPS from day to day. But professional traders buy and sell TIPS when they think prices are high or low compared with regular Treasurys.

For example, a five-year Treasury note is now yielding about 2.4 percentage points more than a five-year TIPS (4.2% versus 1.8%). That figure is called the breakeven inflation rate.

If inflation over the next five years averages that amount, buying and holding a Treasury will be exactly as good as buying and holding a TIPS.

If you believe that inflation will actually average 3%, however, you would want to buy TIPS and sell Treasurys, since the breakeven inflation rate wouldn’t be enough to compensate you for the inflation that you expect. Instead, you would want the firm inflation protection that TIPS guarantee.

If other traders agree with you, rising demand for TIPS will push up their price. That will depress the yield, which moves inversely.

That trading would help nudge the breakeven inflation rate closer to 3%—a move that would align market prices more closely with traders’ expectations. This dynamic is why many investors consider the breakeven inflation rate a market-based forecast of how much prices will rise.

Updated: 10-13-2022

I Bond Rate Will Likely Drop To 6.47% After CPI Report

Inflation is still hot, but inflation-linked I Bond rates are going down. Today’s CPI figure implies that the rate on the U.S. Treasury’s Series I Savings Bond will be 6.47% starting Nov. 1—unless the Treasury decides to increase it by adding a fixed rate to the bond.

The current rate of 9.62% still applies for all bonds purchased through Oct. 31. Those bonds will earn 9.62% for six months, then switch to the new rate for the next six months.

The I Bond rate formula includes a fixed component on top of the inflation-adjusted rate, but the fixed portion has been 0% since May 2020. It was last above 1% in 2007.

I Bond Facts:

* The rate on I Bonds changes every six months, based on six months of inflation data (March to September and September to March).

* So even though year-over-year inflation is still running above 8%, month-to-month inflation has cooled in recent months.

* The 9.62% rate is the highest paid since I Bonds were introduced in 1998.

* More than $22.3 billion worth of I Bonds have been purchased this year through September on the Treasury Department’s website. That’s already a record high for I Bond gross sales and is more than five times the amount of I Bonds sold in all of 2021, according to data from the Treasury Department.

* I bonds are only available through the U.S. Treasury Department’s website, TreasuryDirect.gov, and individual Americans can purchase a maximum of $10,000 per calendar year. They can’t be redeemed for at least one year and I Bonds redeemed after less than five years will be penalized the last three months of earned interest.

 

Updated: 10-17-2022

I Bond Hacks For Bypassing $10,000 Limit And Scoring Better Returns

Now is the time to purchase US Series I savings bonds before rates reset, experts say.

The sleeper hit of 2022 investing is about to lose some of its luster — but it still might be one of the best places to store your cash.

The rate for US Series I savings bonds is estimated to drop to 6.47% beginning Nov. 1, down from a record high of 9.62%. That’s because the yield is linked to the change in inflation over the six-month period from March to September, which slowed from the prior stretch despite core inflation notching new highs.

Even with the lower yield, I bonds are still an appealing option for investors looking for a place to store cash they won’t need in the immediate future — especially compared to still-low rates on high-yield savings accounts and certificates of deposit, and the 23% slump in the S&P 500 this year.

“There’s nothing really comparable right now from a return standpoint,” said Kyle Newell, owner of Newell Wealth Management in Orlando, Florida. “It’s a really solid investment with inflation so high.”

One catch: Each individual can technically only purchase up to $10,000 in I bonds during a calendar year, but there are a few workarounds that experts recommend.

Act Quickly

Most importantly, you should buy I bonds before Nov. 1 if you want to take advantage of a higher interest rate.

Bonds purchased between now and the end of October will have the 9.62% interest rate for the subsequent six months. After that, the bonds will assume the rate set on Nov. 1 for the next six months.

Since inflation is edging lower, the best time to purchase I bonds is now, according to Chris Diodato, founder of WELLth Financial Planning in Palm Beach Gardens, Florida.

“We know the Fed is really really focused on curbing inflation, and that’s what the interest rate is based off,” he said.
Use Your Tax Refund

Although each individual can only purchase $10,000 in I bonds each calendar year, there’s a loophole: Those who use their federal income tax refunds can buy an additional $5,000, bringing the total to $15,000.

“In order for this strategy to work, you must be receiving a refund — not owe money — when filing,” said Elliot Pepper, financial planner and director of tax at Northbrook Financial in Baltimore.

When you file your tax return, you can tell the IRS that you want to use part or all of your refund to purchase I bonds by filling out Form 8888. Then the agency will mail you the paper bonds — which could take a bit of time considering the current backlog at the IRS.

The TreasuryDirect website, known for being slow and wonky, allows users to convert their paper bonds into electronic securities.

Buy for Others

The humble I bond can be the gift that keeps on giving.

Because the $10,000 limit applies only to each individual with a tax ID, adults can purchase I bonds in their children’s names, said Noah Damsky, a financial planner at Marina Wealth Advisors in Los Angeles. You just need to use a separate social security number.

That means a married couple could buy $20,000, and a family of four could invest $40,000. For minors, you can open a custodial account on TreasuryDirect that’s linked to the parent’s account.

There’s also an option to invest via a business, using an employer identification number, or EIN. That applies to trusts, corporations or LLCs.

“Many people have trusts and LLCs that they effectively have 100% control over, so these entities can be a great way to increase holdings over the $10,000 limits,” Pepper said.

Cash Options

This all assumes that buying an I bond is the right move for your financial goals. Experts caution against putting too much cash into the bonds, which must be held for a minimum of one year. Cashing them in before five years means forfeiting interest from the previous three months.

“Make sure you’re thinking about this in the grand scheme of things,” Newell said. “Still keep enough emergency fund and liquid cash — you don’t want to short yourself there.”

Another option for storing cash is a high-yield savings account, which has the benefit of being more liquid. Users can typically make withdrawals anytime for no fee or penalty.

Goldman Sachs Group Inc.’s popular consumer bank Marcus currently features a 2.35% annual percentage yield, and competitor Barclays is offering 2.4%.

Jay Zigmont, founder of financial advisory service Childfree Wealth in Mississippi, recommends services like MaxMyInterest.com to find out which products are offering the best rates.

Certificates of deposit, or CDs, can provide an even higher return if you’re willing to lock up your money longer, with different products featuring lockup periods ranging from three months to six years or more. Marcus offers CD options, from six months at 2.5% annual percentage yield to six years at 3.5%.

Finally, some exchange-traded funds effectively act as cash-like instruments. Ultra-short-duration bond ETFs typically include fixed-income securities that mature within a year.

For instance, there’s the BlackRock Ultra Short-Term Bond ETF (ICSH) and the Vanguard Ultra Short Bond ETF (VUSB). Treasury ETFs like BlackRock’s iShares 0-3 Month Treasury Bond ETF (SGOV) are also widely considered safe because they’re backed by the federal government.

Updated: 10-27-2022

Treasury Says Orders For I Bonds With 9.62% Rate Might Not Be Completed by Deadline

Investors rushing to purchase I Bonds with a six-month return of 9.62% are taxing the government website.

So many investors are scrambling to buy I Bonds, which pay a 9.62% interest rate if purchased by Oct. 28, that the Treasury Department said its overwhelmed site might not complete all the orders in time.

The government’s TreasuryDirect site, the only place investors can directly purchase securities such as I Bonds and Treasury bills, this week became one of the most visited federal sites on the web, officials said, and has experienced intermittent outages. The interest rate on I Bonds is expected to drop to about 6.47% beginning Nov. 1.

Safe, staid inflation-adjusted Series I savings bonds don’t capture much of the investing spotlight in most years. They became breakout stars of 2022 as inflation reached a four-decade high, markets plunged, and investors searched for a safe place to park their money.

During just the final week of October, the Treasury issued $1.95 billion in I Bonds, more than the total for fiscal year 2021. In just one year, some 3.7 million new accounts were created on the site, more than the 2.4 million for the prior 10 years combined.

“The popularity of I Bonds shows how people want to throw whatever they can at a problem like inflation,” said Kelly Klingaman, a financial planner in Austin.

The interest rate on I Bonds is recalculated every six months. The I Bond interest rate is based on a calculation tied to the consumer-price index. The overall CPI increased 8.2% in September from the same month a year ago, according to the Bureau of Labor Statistics. There is a $10,000 annual limit per person for I Bonds, yet there are certain strategies to exceed that ceiling.

Investors must complete purchases and receive a confirmation email by Oct. 28 to ensure they will get the 9.62% rate, according to the TreasuryDirect website.

The Treasury doubled its server capacity in an effort to address the outages, a Treasury Department spokesman said. The system experienced some moments of slow performance and was briefly unavailable, the spokesman said.

People continue to have difficulty accessing and logging on to the site.

“Due to unprecedented requests for new accounts, we can’t guarantee customers will be able to complete a purchase at the current 9.62% rate by the Oct. 28 deadline. The TreasuryDirect system has been, and continues to, process the payments that have been completed,” a spokesman said.

If a customer receives a confirmation that their purchase has been made or completed then the payment will be processed, a spokesman said.

This isn’t the first time the website crashed due to high I Bond demand. The TreasuryDirect website experienced outages on May 3, a day after the 9.62% rate was announced.

Users regularly take to social media to complain about the TreasuryDirect website and sometimes go to great lengths to make their I Bond purchases.

“The TreasuryDirect website isn’t known for its user friendliness,” said Elliot Pepper, a financial planner in Baltimore.

Tuesday night Mr. Pepper was working with a client to open custodial accounts and purchase more I Bonds before the rate change and twice they were knocked off the website for seemingly no reason, he said.

Eventually they were able to open the accounts and buy I Bonds, but it was quite stressful at the time, he said.

Still, as long as people are comfortable with the 12-month lock up period, I Bonds are a great place to invest excess cash right now, he said.

During the time that the I Bond is held, there are no federal taxes due. Though investors get the benefit of compounding interest every six months, they don’t pay any federal taxes until they actually cash out the bonds.

Additionally, there are no state or local taxes on the interest earned, which is a big benefit for investors in high-tax states, said Mr. Pepper.

More than $22.3 billion worth of I Bonds have been purchased this year through September on the Treasury Department’s website.

Bipartisan legislation introduced in the Senate in September would raise the cap on purchases to $30,000 per person when CPI holds above 3.5% year-over-year for a period of six months or more.

The yield for I Bonds far exceeds cash, and the bonds are appealing for investors who want to grab a higher rate of return without the risk of the stock market.

Treasury Sold $500 Million In I Bonds Friday Morning, On Final Day To Lock In 9.62% Rate

The interest rate on inflation-adjusted I Bonds is expected to drop to around 6.47% starting Nov. 1

Oct. 28 is investors’ last chance to buy I Bonds that earn a 9.62% interest rate. Yet a surge in demand for the inflation-adjusted bonds has overwhelmed the TreasuryDirect site and the Treasury Department said it cannot guarantee orders will be completed in time.

Many investors managed to beat the clock and the tech issues. As of 12 p.m. ET, about 52,000 accounts had been created and more than $500 million in I Bond purchased on Friday alone, Treasury said. Thursday, about 82,000 accounts were created totaling roughly $750 million in I Bond sales.

That brings this week’s I Bonds sales to about $3.2 billion so far, Treasury said.

Michael Erat and his wife, Linda Erat, were among the thousands of people who had success.

After eight hours of wrestling with the TreasuryDirect website, Mr. Erat purchased his $10,000 I Bond allotment.

“It was an eight-hour struggle,” said Mr. Erat, who lives in northeast Pennsylvania.

Mrs. Erat managed to make the purchase in about half the time of her husband.

Others have still not been able to access the TreasuryDirect site or log on to their account to buy I Bonds.

Safe, staid inflation-adjusted Series I savings bonds don’t capture much of the investing spotlight in most years. They became breakout stars of 2022 as inflation reached a four-decade high, markets plunged, and investors searched for a safe place to park their money.

As the deadline to get the 9.62% rate approached this week, the government’s TreasuryDirect site, the only place investors can directly purchase I Bonds, became one of the most visited federal websites, officials said, and has experienced intermittent outages for several days this week.

Still, many investors continue to run into difficulties accessing and logging on to the site.

Todd Miller, who lives in Camarillo, Calif., hasn’t been able to unlock his TreasuryDirect account. He has been trying for several days to get assistance, calling the site’s help number and waiting over two hours.

He was told Friday by a customer service representative that due to system outages, he wouldn’t be able to get his account unlocked in time to snag the 9.62% I Bond rate.

“I think the government should extend the deadline on this sale,” said Mr. Miller.

“We have tripled TreasuryDirect’s capacity in the last day and continue to see customers successfully create accounts and purchase bonds at record levels. Any additional updates to TreasuryDirect during the final days of the rate window, such as a delay to the Nov. 1 rate change, would pose significant risk to the operational integrity of the system,” said a Treasury spokesman.

“Due to unprecedented requests for new accounts, we can’t guarantee customers will be able to complete a purchase at the current 9.62% rate by the Oct. 28 deadline. The TreasuryDirect system has been and continues to process the payments that have been completed,” a spokesman said.

If a customer receives a confirmation that their purchase has been made or completed by Oct. 28 11:59:59 p.m. ET, then the payment will be processed, a spokesman said.

Users regularly take to social media to complain about the TreasuryDirect website and sometimes go to great lengths to make their I Bond purchases.

“The TreasuryDirect website isn’t known for its user friendliness,” said Elliot Pepper, a financial planner in Baltimore.

It isn’t just people trying to buy I Bonds who are frustrated with the site’s outages.

Investors can’t buy or redeem T-Bonds, Treasury notes, or T-bills through TreasuryDirect if they can’t access the site or log in due to the high demand.

Updated: 10-24-2022

Declining I Bond Rates Make These Alternatives Look More Appealing

With the yield on popular Series I savings bonds expected to fall to 6.47%, some bonds and Treasuries are offering competitive returns.

Is it time to move beyond I bonds?

Inflation-linked Series I savings bonds have been one of the few dependable return generators in retail investors’ portfolios this year, with yields since May at a record 9.62%.

But I bond yields are likely heading down. According to estimates based on inflation figures between March and September, the rate offered for I bonds purchased after the end of October is expected to be 6.47%.

That’s better than the more than 20% drop in the S&P 500 Index this year and much higher than a standard savings account. But when you take into consideration I bonds’ taxation at the federal level, the notoriously clunky website and declining yields, other somewhat similar options start to look more appealing. That’s a big change from previous years.

“For the better part of the past decade, it was nearly impossible for investors to park in short-term fixed-income vehicles and generate anything more than peanuts,” said Nate Geraci, president of the ETF Store, an investment adviser. “That’s clearly changed this year with rapidly rising rates.”

Certificates of Deposit

If you’re willing to lock up your money temporarily, certificates of deposit — also known as CDs — can provide solid returns. The lockup period depends on the product but usually ranges from three months to six years or more, with better rates for longer lockup periods.

Institutions like Goldman Sachs Group Inc.’s Marcus, Capital One Financial Corp., Barclays Plc and Ally Bank all offer CDs, with rates that are rising alongside the Federal Reserve’s hikes.

Marcus now has options ranging from a six-month CD with an annual percentage yield of 2.5% to a six-year CD yielding 3.5%.

Harris Holzberg, chief investment officer at Holzberg Wealth Management, is implementing a CD “ladder” for his clients who have short-term cash they don’t want to put in the stock market.

He splits the total amount of cash into four products: a three-month, six-month, nine-month and 12-month CD. Then every three months, a quarter of the client’s money is returned and they can decide what to do with it — put it in the stock market, keep it in cash, or put it in another CD. The strategy yields about 4% annually on average, he said.

“If interest rates keeps going up, I keep rolling it at higher and higher yields,” Holzberg said. “Eventually, if you determine yields have peaked, you can extend your maturity to lock in those higher yields. It gives you a very nice rate of return with very nice flexibility.”

Muni Bonds

Holzberg is also recommending municipal bonds to his clients, especially those with a high net worth. These debt securities are issued by state and local governments, and usually aren’t subject to federal or state income taxes — making them appealing to those in the highest tax brackets.

“Munis are a great solution in taxable accounts,” he said. “We had not been looking at muni bonds for years because rates were so low but now they’re attractive.”

Right now, one-year muni bonds with a triple-A credit rating provide a yield of almost 3%, compared to nearly zero last year. If you buy a muni with a lower credit rating and longer duration — more risky because there’s a greater likelihood of default — yields can go even higher.

Still, Jason Dall’Acqua, president of Crest Wealth Advisors in Maryland, cautions against taking too much risk for a greater return.

“Like most investments at this time, focusing on high credit quality and strength of the issuer is important,” he said.

Some investors prefer to invest in muni bonds via exchange-traded funds, which can be easier to buy — they’re available on online brokerages like Vanguard and Fidelity — and are more diversified.

Two popular ones are BlackRock’s iShares National Muni Bond ETF (MUB) and the Vanguard Tax-Exempt Bond Index ETF (VTEB).

Treasury ETFs

US Treasury yields are rising as the Fed hikes interest rates, making them more attractive as an income-generating investment. Because they’re backed by the federal government, these bonds are considered some of the safest out there.

Buying them individually can be a hassle due to the wonky TreasuryDirect website. It’s often easier to purchase a Treasury ETF that tracks an index of the bills, like the iShares 20+ Year Treasury Bond ETF (TLT).

You can also buy Treasury ETFs that contains bills with lower remaining maturities like the iShares 1-3 Year Treasury Bond ETF (SHY) or the iShares 7-10 Year Treasury Bond ETF (IEF).

Erik Baskin, founder of Baskin Financial Planning in Ohio, likes Treasuries as a way to diversify a long-term portfolio.

“They’re often moving in the opposite direction of stocks because they’re a safe haven,” he said. “The current yields are incredible.”

Right now, the 20-year yield is about 4.6% and the 30-year is 4.34%.

Corporate Bond ETFs

For those looking for a bit more yield than Treasuries, Geraci recommends looking at ultra-short bond ETFs.

“A combination of meaningful yield and minimal duration risk makes ultra-short bond ETFs a nice place to wait out the current stock and bond market turmoil,” he said.

Two of his picks are the JPMorgan Ultra-Short Income ETF (JPST) or PIMCO Enhanced Short Maturity Active ETF (MINT), which maintain a duration of less than one year.

Mike Bailey, director of research at FBB Capital Partners, favors higher-quality corporate bonds that mature in four to six years, which can provide yields between 5% and 6%. The Invesco Bulletshares 2027 Corporate Bond ETF (BSCR) is one way to gain exposure to that area without picking individual bonds.

“If inflation fades and interest rates go back down, these relatively safe bonds will be a nice way to generate income, especially if we hit a recession and stock performance remains choppy,” Bailey said.

 

Updated: 10-31-2022

‘Nowhere To Hide’: Bond Managers Lag Benchmark In Rare Misfire

* Roughly 60% Of Funds Trailing Main Bloomberg Bond Index
* Worst Showing Since 2018, But History Shows Rebound Is Likely

Active bond managers are licking their wounds amid this year’s historic fixed-income rout and are banking on a big rebound in 2023 to show their worth.

Roughly 60% of the funds pegged to Bloomberg’s flagship bond-market index have trailed the benchmark this year, the worst showing since 2018. That means most investors turning to bonds for a semblance of shelter from this year’s carnage in markets would have been better off in cheaper, passively managed index funds.

It’s a humbling display for active managers, who typically beat their benchmark by nimbly shifting between Treasuries, corporate debt, mortgages and asset-backed securities to tap the best opportunities.

But 2022 has obliterated almost every corner of fixed income, with a punishing selloff fueled by aggressive Federal Reserve interest-rate hikes to tame stubbornly high inflation.

“There’s been nowhere to hide in 2022 and cash was king,” said Jack McIntyre, a portfolio manager at Brandywine Global Investment Management. “Clients don’t pay you to stay in cash for a long time.”

Active managers still dominate the US bond market, with assets totaling $3.6 trillion, up from $2.4 trillion in 2012, according to Morningstar Direct data. But index funds are growing rapidly: Their assets have surged more than 400% in that period to $1.9 trillion.

Inflection Point

The active crowd has reason to take heart as the market may finally be approaching an inflection point. Treasuries are coming off their first weekly gain since July, and softening growth is setting up a possible pivot in Fed policy that could give portfolio managers a chance to outshine their peers with sector calls and bond-picking skills.

While officials are expected to deliver a fourth consecutive rate increase of 75 basis points on Wednesday, bets are mounting on a smaller boost at the central bank’s next meeting in December.

History is on the side of active managers. In the past decade, there have only been three other times when the median trailed the benchmark.

In the two most recent instances, the next year brought redemption, with 70% or more outperforming the benchmark as the bond market snapped back with a stronger performance.

It would be hard to imagine a tougher environment than 2022. The 10-year yield peaked at 4.34% in October, the highest since 2007, from 1.5% at the start of the year, and the main Treasury index has tumbled 14%, dwarfing all prior annual declines.

“In the last 20 years, it’s been almost risk-free for bond fund investors,” said Russel Kinnel, director of manager research at Morningstar Research Services LLC. This year has been “a sobering reminder that bond funds of all stripes have risks.”

The preference of late is to allocate money to longer-dated bonds as the Fed’s inflation-fighting campaign increases the prospect of rate cuts starting next year. It’s an outlook that should generate price appreciation, reigniting the twin engines of fixed-income total returns.

Bonds provide a regular income stream, while falling rates would drive price increases. This year, an income gain of roughly 1.3% in the main Treasury index has hardly offset a price decline of about 15%.

Surveys show investors have been adding interest-rate risk to their portfolios in a bet on lower long-term yields. JPMorgan Chase & Co.’s latest Treasury client poll was the most bullish in two years.

“We came into the year with zero Treasury exposure,” said David Giroux, who manages the $46 billion T. Rowe Price Capital Appreciation Fund. The fund, which invests in both stocks and bonds, has lost 12.8% this year, beating its benchmark. Giroux shifted money into five-year Treasuries around mid-year, then to the 10-year after its yield recently rose above 4%.

“One of the challenges for a lot of investors and not just bond managers is that they hug benchmarks,” he said. “We have always taken the attitude of going to where we see value and take advantage of what the market is giving us.”

Benchmark Pain

Sticking close to one’s benchmark has been painful this year, with markets slumping so deeply. But even managers with greater leeway in how much duration — a measure of interest-rate sensitivity — they can have were caught out by the inflation and rate shock.

“We have more flexibility than other managers but we didn’t take full advantage of that,” said McIntyre, noting his fund’s mandate allows him to reduce duration to 12 months. “We came in short duration at the start of the year, just not short enough. We could have run a one-year duration in our portfolios and weathered the storm better.”

The rationale for staying more exposed to bonds reflects the business model of active managers, who are supposed to navigate volatility adroitly.

Now that yields have soared, McIntyre’s fund is overweight duration in Treasuries relative to its benchmark as he expects a recession next year and falling inflation.

“Markets are very fluid and they are transitioning from a period when global central banks supported asset prices to one where they are being more supportive of the economy through restoring price stability,” said Arvind Narayanan, a senior portfolio manager and co-head of investment-grade credit at Vanguard Group Inc.

“This is an environment for active bond managers to find opportunities for their clients,” he said.

Updated: 1-9-2023

Americans Have Missed Out On $603 Billion Of Free Money Over The Last Eight Years By Sticking With Big Banks

WSJ’s Dion Rabouin explains why people aren’t moving their money in smarter ways and why they should be.


 

Ultimate Resource On How Black Families Can Fight Against Rising Inflation (#GotBitcoin)

Ultimate Resource On How Black Families Can Fight Against Rising Inflation (#GotBitcoin)

 

Ultimate Resource On How Black Families Can Fight Against Rising Inflation (#GotBitcoin)


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Blockstream Launches Bitcoin Mining Farm With Fidelity As Early Customer (#GotBitcoin?)

Commerzbank Tests Blockchain Machine To Machine Payments With Daimler (#GotBitcoin?)

Bitcoin’s Historical Returns Look Very Attractive As Online Banks Lower Payouts On Savings Accounts (#GotBitcoin?)

Man Takes Bitcoin Miner Seller To Tribunal Over Electricity Bill And Wins (#GotBitcoin?)

Bitcoin’s Computing Power Sets Record As Over 100K New Miners Go Online (#GotBitcoin?)

Walmart Coin And Libra Perform Major Public Relations For Bitcoin (#GotBitcoin?)

Judge Says Buying Bitcoin Via Credit Card Not Necessarily A Cash Advance (#GotBitcoin?)

Poll: If You’re A Stockowner Or Crypto-Currency Holder. What Will You Do When The Recession Comes?

1 In 5 Crypto Holders Are Women, New Report Reveals (#GotBitcoin?)

Beating Bakkt, Ledgerx Is First To Launch ‘Physical’ Bitcoin Futures In Us (#GotBitcoin?)

Facebook Warns Investors That Libra Stablecoin May Never Launch (#GotBitcoin?)

Government Money Printing Is ‘Rocket Fuel’ For Bitcoin (#GotBitcoin?)

Bitcoin-Friendly Square Cash App Stock Price Up 56% In 2019 (#GotBitcoin?)

Safeway Shoppers Can Now Get Bitcoin Back As Change At 894 US Stores (#GotBitcoin?)

TD Ameritrade CEO: There’s ‘Heightened Interest Again’ With Bitcoin (#GotBitcoin?)

Venezuela Sets New Bitcoin Volume Record Thanks To 10,000,000% Inflation (#GotBitcoin?)

Newegg Adds Bitcoin Payment Option To 73 More Countries (#GotBitcoin?)

China’s Schizophrenic Relationship With Bitcoin (#GotBitcoin?)

More Companies Build Products Around Crypto Hardware Wallets (#GotBitcoin?)

Bakkt Is Scheduled To Start Testing Its Bitcoin Futures Contracts Today (#GotBitcoin?)

Bitcoin Network Now 8 Times More Powerful Than It Was At $20K Price (#GotBitcoin?)

Crypto Exchange BitMEX Under Investigation By CFTC: Bloomberg (#GotBitcoin?)

“Bitcoin An ‘Unstoppable Force,” Says US Congressman At Crypto Hearing (#GotBitcoin?)

Bitcoin Network Is Moving $3 Billion Daily, Up 210% Since April (#GotBitcoin?)

Cryptocurrency Startups Get Partial Green Light From Washington

Fundstrat’s Tom Lee: Bitcoin Pullback Is Healthy, Fewer Searches Аre Good (#GotBitcoin?)

Bitcoin Lightning Nodes Are Snatching Funds From Bad Actors (#GotBitcoin?)

The Provident Bank Now Offers Deposit Services For Crypto-Related Entities (#GotBitcoin?)

Bitcoin Could Help Stop News Censorship From Space (#GotBitcoin?)

US Sanctions On Iran Crypto Mining — Inevitable Or Impossible? (#GotBitcoin?)

US Lawmaker Reintroduces ‘Safe Harbor’ Crypto Tax Bill In Congress (#GotBitcoin?)

EU Central Bank Won’t Add Bitcoin To Reserves — Says It’s Not A Currency (#GotBitcoin?)

The Miami Dolphins Now Accept Bitcoin And Litecoin Crypt-Currency Payments (#GotBitcoin?)

Trump Bashes Bitcoin And Alt-Right Is Mad As Hell (#GotBitcoin?)

Goldman Sachs Ramps Up Development Of New Secret Crypto Project (#GotBitcoin?)

Blockchain And AI Bond, Explained (#GotBitcoin?)

Grayscale Bitcoin Trust Outperformed Indexes In First Half Of 2019 (#GotBitcoin?)

XRP Is The Worst Performing Major Crypto Of 2019 (GotBitcoin?)

Bitcoin Back Near $12K As BTC Shorters Lose $44 Million In One Morning (#GotBitcoin?)

As Deutsche Bank Axes 18K Jobs, Bitcoin Offers A ‘Plan ฿”: VanEck Exec (#GotBitcoin?)

Argentina Drives Global LocalBitcoins Volume To Highest Since November (#GotBitcoin?)

‘I Would Buy’ Bitcoin If Growth Continues — Investment Legend Mobius (#GotBitcoin?)

Lawmakers Push For New Bitcoin Rules (#GotBitcoin?)

Facebook’s Libra Is Bad For African Americans (#GotBitcoin?)

Crypto Firm Charity Announces Alliance To Support Feminine Health (#GotBitcoin?)

Canadian Startup Wants To Upgrade Millions Of ATMs To Sell Bitcoin (#GotBitcoin?)

Trump Says US ‘Should Match’ China’s Money Printing Game (#GotBitcoin?)

Casa Launches Lightning Node Mobile App For Bitcoin Newbies (#GotBitcoin?)

Bitcoin Rally Fuels Market In Crypto Derivatives (#GotBitcoin?)

World’s First Zero-Fiat ‘Bitcoin Bond’ Now Available On Bloomberg Terminal (#GotBitcoin?)

Buying Bitcoin Has Been Profitable 98.2% Of The Days Since Creation (#GotBitcoin?)

Another Crypto Exchange Receives License For Crypto Futures

From ‘Ponzi’ To ‘We’re Working On It’ — BIS Chief Reverses Stance On Crypto (#GotBitcoin?)

These Are The Cities Googling ‘Bitcoin’ As Interest Hits 17-Month High (#GotBitcoin?)

Venezuelan Explains How Bitcoin Saves His Family (#GotBitcoin?)

Quantum Computing Vs. Blockchain: Impact On Cryptography

This Fund Is Riding Bitcoin To Top (#GotBitcoin?)

Bitcoin’s Surge Leaves Smaller Digital Currencies In The Dust (#GotBitcoin?)

Bitcoin Exchange Hits $1 Trillion In Trading Volume (#GotBitcoin?)

Bitcoin Breaks $200 Billion Market Cap For The First Time In 17 Months (#GotBitcoin?)

You Can Now Make State Tax Payments In Bitcoin (#GotBitcoin?)

Religious Organizations Make Ideal Places To Mine Bitcoin (#GotBitcoin?)

Goldman Sacs And JP Morgan Chase Finally Concede To Crypto-Currencies (#GotBitcoin?)

Bitcoin Heading For Fifth Month Of Gains Despite Price Correction (#GotBitcoin?)

Breez Reveals Lightning-Powered Bitcoin Payments App For IPhone (#GotBitcoin?)

Big Four Auditing Firm PwC Releases Cryptocurrency Auditing Software (#GotBitcoin?)

Amazon-Owned Twitch Quietly Brings Back Bitcoin Payments (#GotBitcoin?)

JPMorgan Will Pilot ‘JPM Coin’ Stablecoin By End Of 2019: Report (#GotBitcoin?)

Is There A Big Short In Bitcoin? (#GotBitcoin?)

Coinbase Hit With Outage As Bitcoin Price Drops $1.8K In 15 Minutes

Samourai Wallet Releases Privacy-Enhancing CoinJoin Feature (#GotBitcoin?)

There Are Now More Than 5,000 Bitcoin ATMs Around The World (#GotBitcoin?)

You Can Now Get Bitcoin Rewards When Booking At Hotels.Com (#GotBitcoin?)

North America’s Largest Solar Bitcoin Mining Farm Coming To California (#GotBitcoin?)

Bitcoin On Track For Best Second Quarter Price Gain On Record (#GotBitcoin?)

Bitcoin Hash Rate Climbs To New Record High Boosting Network Security (#GotBitcoin?)

Bitcoin Exceeds 1Million Active Addresses While Coinbase Custodies $1.3B In Assets

Why Bitcoin’s Price Suddenly Surged Back $5K (#GotBitcoin?)

Zebpay Becomes First Exchange To Add Lightning Payments For All Users (#GotBitcoin?)

Coinbase’s New Customer Incentive: Interest Payments, With A Crypto Twist (#GotBitcoin?)

The Best Bitcoin Debit (Cashback) Cards Of 2019 (#GotBitcoin?)

Real Estate Brokerages Now Accepting Bitcoin (#GotBitcoin?)

Ernst & Young Introduces Tax Tool For Reporting Cryptocurrencies (#GotBitcoin?)

Recession Is Looming, or Not. Here’s How To Know (#GotBitcoin?)

How Will Bitcoin Behave During A Recession? (#GotBitcoin?)

Many U.S. Financial Officers Think a Recession Will Hit Next Year (#GotBitcoin?)

Definite Signs of An Imminent Recession (#GotBitcoin?)

What A Recession Could Mean for Women’s Unemployment (#GotBitcoin?)

Investors Run Out of Options As Bitcoin, Stocks, Bonds, Oil Cave To Recession Fears (#GotBitcoin?)

Goldman Is Looking To Reduce “Marcus” Lending Goal On Credit (Recession) Caution (#GotBitcoin?)

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