The last two weeks in the markets have seen investors selling nearly every asset class across the board. Stocks, bonds, and commodity prices have fallen in tandem, which is a relatively rare event considering that most sell-offs favor a transition from one asset class to another. The hardest hit sectors have clearly been precious metals stocks; Index Universe reported that the Global X Gold Explorers (GLDX) and Market Vectors Junior Gold Miners ETF (GDXJ) lost 18.54% and 17.26% respectively last week.
However, the real story has been those ETFs that have held up well despite the barrage of selling on Wall Street. Throughout every correction, there are usually one or two bright spots that may signal areas of the market that will outperform during the next growth phase. Conversely, they may also be sectors that are acting as temporary safe havens from the storm, but will ultimately lose momentum when volatility subsides. Either way, it is important to identify these outperforming funds that can give your portfolio a much needed boost.
The first ETF on my watch list that has bucked the market downtrend is the SPDR S&P Regional Banking ETF (KRE). This ETF is composed of 77 small- and mid-cap banking stocks with total assets of over $1.5 billion. The top three holdings in KRE are Webster Financial Corporation (WBS), FirstMerit Corp (FMER), and Susquehanna Bancshares Inc. (SUSQ). This fund currently sits less than 1% from its 2013 highs and has shown excellent relative strength vs. the broader financial sector.
Regional banks may be viewed as safer than larger banks or investment houses because of their focus on risk aversion and core business strategies. Regional banks typically center their mortgage portfolios on the highest rated loans and are well capitalized by depositors to weather any potential economic downturns. While I don't have a position in KRE at this time, I am closely watching this sector for a favorable entry point moving forward.
US Dollar Index
Another area that has benefitted from the recent volatility in the broader stock market is the PowerShares US Dollar Bullish Fund (UUP). This fund is designed to track the daily price movement of the US dollar vs. a basket of six major foreign currencies. UUP is one of the only ETFs that gives you direct access to this currency strategy and currently holds over $700 million in assets.
One of the reasons that UUP has strengthened is due to the devaluation of foreign currencies along with the concomitant fall in the price of precious metals. In addition, investors are currently in the process of dumping nearly every other asset class, which is going to push money back into cash and/or money market funds. Right now, UUP looks strong, but I would be interested to see how it reacts when stocks or bonds stabilize. This may just be a temporary safe haven from the storm.
It should be noted that UUP is structured as a partnership that generates a K-1 for shareholders. The reason for this is that the fund must be structured as a partnership (instead of a trust) in order to participate in buying currency futures contracts. Before investing in UUP, you should read the prospectus and research the tax implications of this ETF on your portfolio.
Floating Rate Notes
The last ETF of my relative performance trifecta is the iShares Floating Rate Note ETF (FLOT). This ETF holds over $1.8 billion in very short-term debt of financial companies whose coupon payments change based on the prevailing interest rate environment. Floating rate notes are widely considered to be an effective tool to combat rising interest rates because of their short duration and adjustable coupons.
One of the benefits to investing in FLOT is that it holds highly rated investment grade notes, which have less credit risk than senior loans. This is one of the reasons why there has been such little price fluctuation in the fund. However, the drawback is a lower yield, with iShares listing the current 30-day SEC yield of FLOT at just 0.38%.
This may be the type of fund that is used as a short-term hiding spot for a portion of your fixed income portfolio until interest rates begin to stabilize. A little stability during this summer of volatility might be just what the doctor ordered.
Read more from David Fabian, Managing Partner at Fabian Capital Management:
Do Growth Investors Have Anywhere to Hide?
Three Great Income ETFs to Buy During This Correction
5 Mistakes to Avoid With Your ETF Portfolio
- The Dollar Is King (and 10 Other Developments Investors Need to Note)
- Gold's Big Post-Close Drop Tested a Significant Target
- 5 Things to Watch on the FOMC Announcement