In their search for yield along with safety, millions of investors have poured into long-term Treasury bonds throughout the financial crisis.
But long-term bonds are not where you want to be when interest rates rise. In fact, we’re already seeing a reversal in long-term bonds.
The reversal in the long-term Treasuries means that bond prices are falling and yields are rising; if you bought bonds at the higher price, you could be losing principal right now. If you’re not paying attention, these moves could be a cold splash of water in the face.
Still, if you want to invest in Treasuries, it is suggested that holding short-term Treasury securities is currently safer than holding long-term T-notes. You can get this exposure in funds such as SPDR Barclays Capital 1-3 Month T-Bill ETF (NYSEArca: BIL) and PIMCO 1-3 Year U.S. Treasury (NYSEArca: TUZ).
If you would rather short long-term Treasuries, that’s an option with ProShares UltraShort 20+ Year Treasury (NYSEArca: TBT) and Direxion Daily 30+ Year Treasury Bear 3x Shares (NYSEArca: TMV).
Small-Caps
Good things come in small packages. Last year, large-caps jumped 12.8%, but that wasn’t enough to beat either mid-caps, which rose 24.9%, or small-caps, which gained 25%.The average company in the Russell 2000 posted a 165% gain in income last year, the most since 2003, as S&P 500 profits rose 29 %, according to data compiled by Bloomberg.
Profits among smaller companies rose five times faster than larger ones last year, and analysts’ predictions show the outperformance will continue. An 80% jump in profit for small-cap shares has been forecast for 2011.
Additionally, small-cap favoritism often seen in January may be enough to cancel out thoughts of another asset class. In all Januarys since 1926, according to Fama and French, the smallest-caps have beaten the largest-caps by a huge amount — 7%, on average, in fact.
- PowerShares S&P SmallCap Financials (NYSEArca: XLFS)
- iShares S&P SmallCap 600 Index (NYSEArca: IJR)
- Schwab U.S. Small-Cap (NYSEArca: SCHA)
- WisdomTreeSmallCap Dividend (NYSEArca: DES)
Getting Started
There’s no way to predict what the markets will actually do this year, of course. Although these are ideas, we suggest you sign up for alerts to be notified of trading opportunities in any of these asset classes – or others that we didn’t mention.
If you’d rather have a ready-made portfolio containing these asset classes, consider using one of our model portfolios. You can find them all here…or build your own!
For full disclosure, Tom Lydon’s clients own shares of MOO, DIG, SLV, GLD, TBT, SCHA and IJR.