U.S. Markets open in 4 hrs 6 mins

Zacks Investment Ideas feature highlights: PowerShares S&P 500 Low Volatility, iShares S&P National Municipal Bond ETF and iShares Barclays 20+ Year Treasury Bond ETF

For Immediate Release

Chicago, IL – September 07, 2012 – Today, Zacks Investment Ideas feature highlights Features: PowerShares S&P 500 Low Volatility (SPLV), iShares S&P National Municipal Bond ETF (MUB) and iShares Barclays 20+ Year Treasury Bond ETF (TLT).

3 ETFs to Prepare for the Fiscal Cliff

ust a year after the debt debacle, it appears as though the markets are heading towards another key do-or-die situation resulting from more Washington inaction.

Fiscal cliff refers to expiration of Bush-era tax cuts, combined with drastic spending cuts on the defense and domestic budgets. Last week, we had a very interesting discussion on the topic, where most comments indicated that the market has not yet priced-in the fiscal cliff.

According to the Congressional Budget Office (CBO), the US will slip into deep recession with the real GDP declining by 0.5% between the fourth quarters of 2012 and 2013 and the unemployment rate rising to about 9% by the second half of 2013, if the fiscal cliff actually happens. There are many other estimates with more dire consequences for the economy. (Read: Invest like Mitt Romney with These Three ETFs)

It is possible that the congress will act to avoid the crisis but the investors should not forget that it is impossible to predict what the politicians will do. As such they need to prepare for any possible situation.

Below we have analyzed the possible market scenario as we approach the fiscal cliff and how the investors could position their portfolios using ETFs to benefit at the edge of the cliff. (Read: Are Preferred Stock ETFs Worth the Risk?)

Market Volatility will Rise- Use Low-Volatility ETFs for Hedging

The current volatility levels do not reflect the possibility of the fiscal cliff. Thus it is almost certain that the uncertainty will increase as we approach the year-end, resulting in high market volatility. We recommend investing in low-volatility ETFs that are designed for investors that want to avoid volatility and limit the downside in their portfolios while staying invested in equities. Low- volatility products in general have proven their ability to deliver superior risk adjusted returns historically.

PowerShares S&P 500 Low Volatility (SPLV)

SPLV tracks the S&P 500 Low Volatility Index, which consists of 100 stocks from the S&P 500 Index with the lowest realized volatility over the past 12 months.

The ETF currently has a 30 day SEC yield of 2.99%, while it charges an expense ratio of 0.25% per year. (Read: Three Low Volatility ETFs For Stormy Markets)

The fund was launched in May last year and has proved to be extremely popular with the investors as it has already garnered $2.3 billion in assets. The ETF holds 98 securities currently, concentrated mostly in the Utilities (31.2%) and Consumer Staples (28.7%) sectors.

Prepare For A Dividend Tax Increase- Municipal Bonds Look Attractive

Currently the qualified dividends are taxed at 15% top rate, same as long-term capital gains rate. If the tax cuts are not extended, long-term capital gains tax will revert to 20% but the dividends will be taxed as income, at rates up to 39.6%.  Additionally, there may be a 3.8% surcharge on investment income for investors with higher incomes.

While we do not recommend that the investors should sell their dividend stocks or ETFs in anticipation, as the dividend paying stocks and ETFs (typically with a value focus) have outperformed the broader markets over the longer-term, they should also look at some of the other more tax-efficient income alternatives.  

Municipal bonds will then look very attractive in terms of yield (tax-free at federal level) when compared with effective (after-tax) yield of other assets with similar level of risk.  (Read: Three Excellent Dividend ETFs for Safety and Income)

Further despite several reports about the possibilities of default, the actual defaults in this space so far have remained in-line with the historical averages.

iShares S&P National Municipal Bond ETF (MUB)

We prefer diversified national municipal bond ETFs since diversification reduces the risk of default. MUB is the largest and most popular fund in the municipal bond space, with assets of about $3.1 billion and average trading volume (3 months) of over 185,000 shares.

The ETF charges a low expense ratio of 25 bps and currently pays a 30-days SEC yield of 1.82% (tax-equivalent distribution yield of 4.39%). It uses sampling strategy, by holding about 2,000 securities out of the index’s more than 9,000 holdings. The weighted average maturity of the holdings is 6.0 years while the effective duration is 6.5 years.   (Read: 3 Multi-Asset ETFs for Juicy Yields and Stability)

Safe-Haven Trade Will be Back-Treasuries Will Rally Further

As the fear will return in the markets, safe-haven appeal of the US treasuries will get a boost. As a result, the treasuries will rally further and the riskier assets will sell off. Also if the government fails to reach an agreement, the resulting fiscal contraction will be good for the bonds. Further, in the event of further monetary stimulus by the Federal Reserve, the longer-end of the treasury curve will benefit more. (Read: Long Term Treasury ETFs: Ultimate QE3 Play)

We continue to believe that the US treasuries are not suitable for long-term investors at the current levels, as they yield negligible or negative real returns. However, the long-term treasuries may be great short-term plays to take advantage of the safe-haven trades. On the other hand, the high-yield segment of the bond market may sell-off so the investors may also consider tactical trades of shorting the junk bonds/ETFs and buying long-term treasuries.

iShares Barclays 20+ Year Treasury Bond ETF (TLT)

TLT tracks the Barclays U.S. 20+ Year Treasury Bond Index, which is a market capitalization weighted index of U.S. Treasury securities having maturity greater than 20 years.

Launched in February 2008, the fund has amassed more than $3.6 billion in assets so far. It holds 20 securities, with a weighted average maturity of 28 years and an effective duration of 17.3 years. The fund pays a 30-day SEC yield of 2.56% currently.

The expense ratio for the fund is 15 basis points, which is among the lowest charges in this space.


About Zacks

Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978 by Len Zacks. The company continually processes stock reports issued by 3,000 analysts from 150 brokerage firms.  It monitors more than 200,000 earnings estimates, looking for changes.

Then when changes are discovered, they’re applied to help assign more than 4,400 stocks into five Zacks Rank categories:  #1 Strong Buy, #2 Buy, #3 Hold, #4 Sell, and #5 Strong Sell. This proprietary stock picking system; the Zacks Rank, continues to outperform the market by nearly a 3 to 1 margin.  The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter Profit from the Pros.  In short, it’s your steady flow of profitable ideas GUARANTEED to be worth your time.  Get your free subscription to Profit from the Pros at:  http://at.zacks.com/?id=7298

Follow us on Twitter:  https://twitter.com/ZacksResearch

Join us on Facebook:  https://www.facebook.com/ZacksInvestmentResearch

Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.

Disclaimer: Past performance does not guarantee future results. Investors should always research companies and securities before making any investments. Nothing herein should be construed as an offer or solicitation to buy or sell any security.

Media Contact
Zacks Investment Research

800-767-3771 ext. 9339



Read the analyst report on SPLV

Read the analyst report on MUB

Read the analyst report on TLT

Zacks Investment Research

More From Zacks.com