ETFs and the Music of the Markets, Part II

One of the beauties of exchange-traded funds (ETFs) is that they allow us to hear the “music of the markets” playing out in real time. This week, we’ll look at that music a bit, especially in light of today’s “dovish hike” by the Federal Reserve.
This is Part II of our series on ETFs and the Music of the Markets, so let me remind you what I said last week in Part I. First, we used the great Ray Charles’ words, as he once said that if you want to make the right music, “You just gotta take the time out to play the right notes…”

Simple enough, right? Only, not so much.

Still, when applied to investing, we can say that the music of the market also dictates that we “take the time out to play the right notes.”

Fortunately, the proliferation of ETFs in recent years has made playing the right notes a lot easier. Today, we can literally get portfolio exposure to just about any segment of the market by tapping on the computer keyboard right underneath our fingers.

Last week, I also told you that part of our mission here in the Weekly ETF Report is to help you acquire the knowledge and the skill to be able to play the right notes in your portfolio.

Well, today we had what may have been the most important Federal Reserve Open Market Committee meeting (FOMC) in recent memory, as today’s Fed decision will likely set the playing field for stocks and bonds going forward.

Before the meeting, the smart money was betting on (i.e. pricing in) what’s called a “dovish hike” by the central bank. This is a situation where the Fed hikes interest rates by 25 basis points, but also make the statement “dovish” enough that it doesn’t cause long-dated Treasury bond yields to rise… and that’s precisely what happened today.

The Fed did hike rates 25 basis points, and bond yields did fall. In fact, the benchmark 10-year Treasury yield fell sharply, down below 2.14%.

This is important, because it’s a problem for stocks in the long term. The reason why is because this market’s record-high rise has been fueled by the “reflation trade.” That means the market is expecting faster economic growth and more inflation. Yet a stronger economy is not being reflected in bond yields, which should be rising.

Also, the Fed admitted today that inflation is running below its 2% target rate. Yet the Fed still felt it could hike rates, and also begin the process of “normalizing” its balance sheet. “Normalizing” the balance sheet is Fed speak for “reducing Treasury holdings.” The Fed did announce its plans to do just that, even issuing an addendum to the FOMC statement outlining just how it would normalize that balance sheet.

The bottom line here is that the Fed did pretty much as expected with its “dovish hike.” And we know that because stocks did rise, albeit slightly, with the Dow Jones Industrial Average hitting an all-time closing high, which can be seen here in the chart of the SPDR Dow Jones Industrial Average ETF (DIA).

Now that the Fed is out of the way, so to speak, it will be interesting to see how other market sectors react in the days ahead.

Sectors such as the aforementioned Treasury bonds, gold and various interest-rate sensitive sectors such as utilities, financials, defensive stocks and real estate investment trusts (REITs) will be the key segments to watch in the weeks to come.

In Part III of our series, we’ll take a look at what’s happened in the wake of the Fed decision, and we’ll do so by listening to the music in the ETFs that play these various sector notes.

So, stay “tuned” (pun intended).

Special Announcement: Our New YouTube Investment Channel Now Online

From the desk of publisher Roger Michalski: We’re thrilled to announce the launch of our new Stock Investor YouTube channel, featuring videos from our team of financial experts. Our latest video is from Mike Turner, and it’s called: “A High-Probability Way To Predict the Price of an Investment 90 Days Out.” I encourage everyone to check it out today. And, if you find these videos helpful, please let us know by selecting the “like” button.

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ETF Talk: Robotics and Artificial Intelligence Fund Excels

By Eagle Staff

The exchange-traded fund (ETF) Robotics & Artificial Intelligence ETF (BOTZ) has done well so far this year by investing in companies involved in the development and production of robots or artificial intelligence aimed at benefiting humanity.

Artificial intelligence (AI) is a specific field in robotics where the ultimate goal is to create a machine with the capability of undertaking a thought process similar to that of humans. This includes the ability to learn, to reason, to use language and to formulate original ideas.

As fast-growing technological fields with high potential, robotics and AI have made vast advancements in recent years, especially in areas such as manufacturing. However, the speculative nature of the technology means that AI and robotics companies in the field inherently carry a fairly high degree of risk. BOTZ somewhat mitigates this problem by providing investors with exposure to a group of companies in the field, thus diversifying the risk to a certain extent.

BOTZ invests only about a quarter of its $146.43 million total assets in U.S. equities. The rest is invested in companies in other developed countries such as Japan.

Year to date, BOTZ has returned 25.37% versus the S&P 500’s 8.83%. From the chart below, you can see that the fund has been on a strong path upwards since the beginning of 2017, and its share price has climbed to the $19 range from $15. BOTZ has an expense ratio of 0.68% and does not pay a dividend.

Currently, BOTZ is working with a relatively small and concentrated basket of companies. Its total holdings consist of just 28 companies right now. The fund’s top five holdings are Intuitive Surgical Inc. (ISRG), 7.92%; Keyence Corp, 7.64%; SMC Corp, 7.42%; ABB Ltd. (ABB), 7.26%; and Mitsubishi Electric Corp, 6.94%.

If you believe in the future of robotics and artificial intelligence, I encourage you to look to Robotics & Artificial Intelligence ETF (BOTZ) to add to your portfolio.

As always, we are happy to answer any of your questions about ETFs, so do not hesitate to send us an email. You just may see your question answered in a future ETF Talk.

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On Avoiding Investor Overconfidence

One of the biggest mistakes investors make, especially during bull markets hitting all-time highs, is to become overconfident.

This mistake has many pitfalls, including thinking you’re smarter than the markets and failing to see that a decision you’ve made might not be correct.

Avoiding this negative influence on your investing results is the subject of an article in U.S. News & World Report titled, “The Dangers of Being an Overconfident Investor.”

I point this article out not just because it’s a very good read and has very helpful hints on avoiding overconfidence. It does. I point the article out because I am quoted extensively in it, offering up my thoughts on getting past the all-too-human tendency to allow yourself to be overconfident.

If you’ve ever experienced a market loss due to overconfidence, or if you just want to avoid ever doing so, this article is a must.

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Firmness, Not Strut

“Real firmness is good for anything; strut is good for nothing.”

— Alexander Hamilton

While it’s good to have confidence in one’s abilities, one also must be careful that confidence doesn’t turn into braggadocio or arrogance. So, be confident… but be humble.

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

In case you missed it, I encourage you to read my e-letter article from last week, which features part I of this article.

In the name of the best within us,

Jim Woods