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Would You Like Stocks or Bonds With That Interest Rate Announcement?

17 September 2015 in Trading Ideas

With expectations divided about the timing of an interest rate increase by the U.S. Federal Reserve, any decision announced today might surprise about half of investors at best. Recent market activity suggests otherwise.1

A survey of 51 economists, money managers and strategists by CNBC found that 49 expected a rate hike in September; 43 percent said it might occur later, and 8 percent said they were unsure.2

A majority of those surveyed said they believed that prices of stocks and bonds already reflect the likelihood of an interest rate increase: 60 percent saying stocks reflected the increase and 53 percent saying bonds reflected the increase.

Money has been pouring into bond exchange-traded funds.3 The two-week period ending on Friday saw $9.8 billion of inflows, marking a seven-month high.

Bond ETFs have averaged $400 million of inflows per day since the start of the third quarter, totaling $19.9 billion so far.

U.S. Treasury bond ETFs hold $66 billion in assets, more than double what they held five years ago, according to TrimTabs Investment Research.4

The flow of funds into bond ETFs apparently has less to do with their performance and more to do with investors’ perception that the Fed may not raise interest rates this month, according to TrimTabs.

And here’s why: Historically, when interest rates have increased, the prices of previously issued bonds have decreased.

Bond ETFs appear in 11 motifs, and the one with the biggest returns as of this writing happens to be called Deflation. It saw a return of 5.9 percent over the past 12 months, including a 3.7 dividend yield.5

This compares to a 0.2 percent return and 2.4 dividend yield for the U.S. Bond Index benchmark.6

Deflation’s strong numbers come from having a 49.1 percent weight in the Vanguard Extended Duration ETF, which has had an annual return of almost 6.7 percent.

The other leading performers in the fixed income ETF motif category include:

U.S. Treasury Ladder, up 4.2 percent over the past 12 months, with a 1.8 percent yield;
American Bonds, up 2.4 percent over the past 12 months, with a, 1.8 percent yield;
New York Munis, up 2.3 percent over the past 12 months, with a 2.6 percent yield;
California Munis, up 2.4 percent over the past 12 months, with a 2.8 percent yield; and
AMT-Free Munis, up 1.4 percent over the past 12 months, with a 2.3 percent yield.

Fixed income appears to be capturing some outflows from stock-based investments.7 Equities have fallen from recent peaks, although without reaching trough levels. Less than two months ago, stocks were near their highs for the year after rallying 4 percent in the span of three weeks.

Now, the Standard & Poor’s 500 is down 0.96 percent for the year and the Dow Jones Industrial Average is down 3.22 percent. However, the NASDAQ Composite, is up 6.2 percent, reflecting gains in biotechnology and energy companies that largely do not appear in the other two benchmarks.8


As for how this compares with equity motifs, well over half of the ones that contain stocks or stock ETFs are outperforming their benchmarks as of this writing, with returns of up to 29.2 percent over the last 12 months. That’s how Online Gaming World fared.9

Others include:

Used Car Tune-Up, up 28.1 percent over the last 12 months;
Drug-Patent Cliffs, 26 percent;
Electronic Trading, 25 percent
Tech Takeout Targets, 24.6 percent; and
World of Sports, 24.8 percent.10

It’s probably a stretch to attribute these performance figures to a lack of concern among bond and stock investors about when the Fed might raise rates. But to the extent that prices reflect demand, the numbers may reflect a lack of fear, if nothing else.

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The exchange traded funds prospectus contains its investment objectives, risks, charges, expenses and other important information you should read and consider carefully prior to making an investment decision. Please review the current prospectus, available from the Prospectus link.

ETFs have unique features that you should be aware of, which can include distribution of any gains, risks related to securities within the portfolio, and tax consequences. The data quoted herein represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that your investment, when redeemed, may be worth more or less than their original value. Current performance may be lower or higher than the performance data provided. Please review the prospectus or other research tools provided on this site for more recent performance information. Contact Motif Investing at 1-855-586-6843 to obtain the most recent month-end performance data.

Fixed income investments are subject to various unique risks, including changes in credit quality, market valuations, liquidity, prepayments, early redemptions corporate events, tax ramifications, and other factors. Fixed income securities are subject to increased loss of principal during periods of rising interest rates.

1 Walker Barton, Susanne, “Treasuries Gain as Bond Market Sees Fed Delaying Rate Increase,” Bloomberg, September 13, 2015.
2 Liesman, Steve, “Wall Street Now Sees a September Fed Rate Hike: CNBC Survey,” CNBC, September 16, 2015.
3 Healy, Beth, “Investors Betting That the Fed Will Hold the Line on Rates, ETF Data Shows,” The Boston Globe, September 15, 2015.
4 Alpher, Stephen, “TrimTabs: Money Pours Into Bond ETFs,” Seeking Alpha, September 15, 2015.
5 All motif performance data as of market close EST September 16, 2015.
6 Benchmark performance data from Yahoo Finance, as of market close September 16, 2015.
7 Murphy, Cynthia, “August ETF Flows Slow to a Trickle,” ETF.com, September 1, 2015.
8 Yahoo Finance, performance data as of 1:30 pm EST September 16, 2015.
9 All motif performance data as of market close September 16, 2015.
10 All motif performance data as of market close September 16, 2015.