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Stock ETFs and the Yen

NEW YORK ( ETF Expert) -- Investors who own individual municipal bonds, real estate investment trusts, corporate bonds and/or preferreds may not see the day-to-day volatility of their holdings. For one thing, individual bond prices may not update regularly on web sites; similarly, those who do not value the liquidity of ETFs are less likely to watch price movement of their individual REITs and/or preferred stocks.

On the other hand, ETF enthusiasts tend to be folks who have a plan to sell. They're not married to their investments. In fact, if an asset class is trending significantly lower, they may leave the asset class until it comes back into favor. In essence, exchange-traded fund fans are less inclined to "buy-n-hold."

The fact that you can trade ETFs is frequently regarded as an advantage. However, there are times when the power to decide when to hold and when to fold serves as a double-edged sword. For example, the recent upswing in interest rates initially created a rational market-based response whereby rate-sensitive income producers (e.g., high-yield bonds, preferreds, dividend stocks, etc.) fell in price.

In the ETF world, however, initial selling promoted a less rational firestorm to dump REIT ETFs and emerging market bond ETFs at all costs; rates hadn't surged high enough to justify the level of hostility that occurred. (See this article.)

In the current week, 10-year yields have stabilized near 2.2%. Yet, contagion is spreading to Preferred Stock ETFs as well as more innocuous areas like Muni ETFs. Both of these rate-sensitive areas are witnessing daily percentage price declines far greater than common stock ETFs, and that's a phenomenon that market-watchers rarely witness. In some instances, the activity is representing "regular Joes" who choose to sell now and ask questions another day. More likely, however, institutional money managers, opportunistic short-sellers and heads of hedge funds are forcing "Mr. Retail" to think, blink and potentially sell in a panic.

Even though sellers have concentrated on any asset type that can be tied to rising interest rates, common stock ETFs are not immune. Daily price volatility for the SPDR Dow Jones Industrials (DIA) is averaging 1.25% month-over-month. Daily price volatility for the prior 4 1/2 months was closer to 0.75%.

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