Author Archives: Scalper1

My ‘Preferred’ Preferred Closed-End Funds

Summary Closed-end funds provide a great way to invest in preferred securities. FFC and PDT have beaten the S&P 500 over the past 10 years. The Preferred CEFs outperformed the lower cost ETF iShares US Preferred Stock Fund. Traditional preferred stocks provide a fixed dividend payment and generally do not mature but can be called on or after a specified call date. Some preferred stocks can adjust to floating rates (LIBOR plus a given percentage). It is possible to invest in individual preferred stock or select a fund that invests in preferred stocks. I invest in both individual preferred stocks and closed-end funds that focus on preferred stocks. The CEF approach will be more volatile but can provide diversification and higher income due to the leverage. iShares US Preferred Stock Fund (NYSEARCA: PFF ) provides a lower cost ETF alternative but it has lagged behind its closed-end fund cousins in performance. Over the last 5 years, the S&P 500 has outperformed my preferred closed-end funds, but if you look at the past 10 years, the picture looks quite different. Assuming that the stock prices are a bit toppy, the next 5 years maybe favorable for collecting the nice income from preferred stocks without missing out on a super-hot stock market appreciation. Fund 5 yr Month End average annual return 10 yr Month End average annual return John Hancock Premium Dividend Fund (NYSE: PDT ) 11.86% 10.87% Flaherty and Crumrine Preferred Securities Income Fund (NYSE: FFC ) 13.56% 10.49% SPDR S&P 500 (NYSEARCA: SPY ) 14.29% 7.40% iShares US Preferred Stock 6.49% n/a Below is the investment objective summary for the three preferred stock closed-end funds from Fidelity: John Hancock Premium Dividend Fund: The fund will invest in common stocks of issuers whose senior debt is rated investment grade or, in the case of issuers that have no rated senior debt is considered by the Adviser to be comparable quality. 80% of funds total assets consist of preferred stocks and debt obligations rated A or higher. Leverage ratio 34.1% Flaherty & Crumrine Preferred Securities Income Fund Inc: The fund invests normally at least 80% of its total assets in preferred securities that are mainly hybrid or taxable preferred securities. At least 80% of the preferred securities are investment grade quality. Up to 20% may be invested in securities rated below investment grade. It may also invest up to 20% of its assets in other debt securities and up to 15% in common stocks. Leverage ratio 34.65% First Trust Intermediate Duration Preferred and Income Fund (NYSE: FPF ): Under normal market conditions, the Fund will invest at least 80% of its Managed Assets in a portfolio of preferred and other income-producing securities issued by U.S. and non-U.S. companies, including traditional preferred securities, hybrid preferred securities that have investment and economic characteristics of both preferred securities and debt securities, floating rate and fixed-to-floating rate preferred securities, debt securities, convertible securities and contingent convertible securities. All three funds pay monthly distributions, have a positive NAV return, and a positive UNII Symbol 3 yr return on NAV 12 month return on NAV Distribution (Market) Discount Discount 52 wk average UNII Expense Ratio adjusted PDT 9.81% 3.42% 8.31% -9.95% -10.28% $0.0046 1.44% FFC 8.26% 3.13% 8.06% 8.35% 2.04% $0.0208 0.88% FPF n/a 6.00% 9.19% -9.32% -8.08% $0.1029 1.33% Year to Date, FPF’s NAV performance was quite a bit better than the S&P 500: Symbol YTD Price perf NAV perf PDT 5.25 2.86 FFC 14.21 3.95 FPF 2.41 6.21 SPY 3.02 2.95 Obviously, for long term investors a single year is not that meaningful. The table below shows the 5 yr and 10 yr returns of PDT and FFC compared to the S&P 500 index fund and the ETF preferred PFF. FPF does not have that much historic data available yet. Fund 5 yr Month End average annual return 10 yr Month End average annual return John Hancock Premium Dividend Fund 11.86% 10.87% Flaherty and Crumrine Preferred Securities Income Fund 13.56% 10.49% SPDR S&P 500 14.29% 7.40% iShares US Preferred Stock ( PFF ) 6.49% n/a Risks With Preferred Stock investments: Any investment carries risk and preferred stocks are interest rate sensitive. Preferred stocks are not appropriate if you believe that the rate increases by the Federal Reserve will continue or accelerate. Conclusion: The three preferred closed-end funds shown in this article may be a good addition to a diversified portfolio under the assumption that the interest rates will not rise drastically. They will not outperform the stock market in a bull market scenario but if the market drops or stays range-bound, the consistent income from the closed-end funds can then be channeled into other stock purchases or dividend reinvestments. FPF’s current discount is attractive. When looking at the 3 yr average discount, I would want to buy PDT at or below 13.44 and FFC at or below 18.97. FFC definitely has the best expense ratio of the three.

ETF Update: ETF Issuers Do Not Slow Down In December

Summary Every week, Seeking Alpha aggregates ETF updates in an effort to alert readers and contributors to changes in the market. There were 10 launches in the last 3 weeks. Have a view on something that’s coming up or a new fund? Submit an article. Welcome back to the SA ETF Update. My goal is to keep Seeking Alpha readers up to date on the ETF universe and to gain some visibility, both for the ETF community, and for me as its editor (so users know who to approach with issues, article ideas, to become a contributor, etc.) Every weekend, or every other weekend (depending on the reader response and submission volumes), we will highlight fund launches and closures for the week, as well as any news items that could impact ETF investors. December has been a busy month of the ETF industry, full of launches, company purchases and existing fund updates. On December 2nd, OppenheimerFunds (NYSE: OPY ) acquired 100% of the stock interests of VTL Associates, LLC, the owner of the RevenueShares brand of exchange traded funds. According to a press release from OppenheimerFunds, “VTL manages $1.7 billion for investors across eight ETFs and its separate accounts. Of the six ETFs that have sufficient track records to be rated by Morningstar, four are either four- or five-star rated.” The largest of these funds, the RevenueShares Large Cap ETF (NYSEARCA: RWL ), currently has $338.5 million in assets under management. It is unclear what direction OppenheimerFunds will take these ETFs in, but I hope to see further offerings from the company in 2016. Also shaking things up was First Trust, which on the 18th restructured two of its existing offerings. The First Trust ISE Global Copper Index Fund (NASDAQ: CU ) is now the First Trust Indxx Global Natural Resources Income ETF (FTRI), and the First Trust ISE Global Platinum Index Fund (NASDAQ: PLTM ) is the First Trust Indxx Global Agriculture ETF (FTAG). These are basically new ETFs when you consider the changes made. FTRI will cover the exploration and production side of the natural resources space, and FTAG offer investors coverage of all aspects of the farming industry. Clearly ETF issuers do not take the holidays off. With 2016 coming up, this is crunch time for filings and launches before end of year deadlines. Besides FTRI and FTAG there were 10 ETFs launched in the last three weeks. With tons to cover, let’s jump right in. Fund launches for the week of December 7th, 2015 Elkhorn launches its second ETF (12/10): After the success of the Elkhorn S&P 500 Capital Expenditures Portfolio (NASDAQ: CAPX ), Elkhorn has released its second exchange traded product. The Elkhorn FTSE RAFI U.S. Equity Income ETF (BATS: ELKU ) is designed to track the performance of domestic high yield stocks, focusing on sustainable income. Ben Fulton, Founder and CEO of Elkorn stated the following on the fund and its index in a press release : “Income remains an important area of need for investors and Research Affiliates brings a new and thoughtful approach to high yield equity investing.” iShares adds another emerging market fund to its lineup (12/10): The iShares FactorSelect MSCI Emerging ETF (BATS: EMGF ) seeks above-market returns over the long term from emerging market large- and mid-cap stocks. According to the ETF homepage, the fund features a “focus on drivers of emerging market equity performance: inexpensive stocks, financially healthy firms, trending stocks and relatively low market cap companies.” This is the 9th broad emerging market equity fund from iShares, all of which saw poor returns in 2015. Fund launches for the week of December 14th, 2015 Pacer rolls out 2 Europe focused ETFs (12/15): The Pacer Trendpilot European Index ETF (BATS: PTEU ) and the Pacer Autopilot Hedged European Index ETF (BATS: PAEU ) both track strategies that focus on the FTSE Eurobloc Index. PTEU is similar to previous Pacer funds, as it uses complex technical indicators to hedge its position when the market outlook is poor, and go all in when the outlook is strong. PAEU however is the first of Pacer’s Autopilot funds. Still alternating between a hedged or unhedged market position, PAEU instead hopes to take advantage of the fluctuation in exchange rates. Guggenheim launches a smart beta DJIA ETF (12/16): According to the funds homepage, the Guggenheim Dow Jones Industrial Average Dividend ETF (NYSEARCA: DJD ) “seeks investment results that correspond generally to the performance, before the fund’s fees and expenses, of the Dow Jones Industrial Average® Yield Weighted index.” Unlike other large indexes, the Dow is a price-weighted index, meaning the priciest of the 30 stocks in the index make up the largest positions. This dividend focus is a better fit for income seeking investors still looking to hold the DJIA in their portfolios. State Street Global Advisors (NYSE: STT ) launches a natural resources ETF (12/16): The SPDR S&P North American Natural Resources ETF (NYSEARCA: NANR ) tracks an index of “U.S. traded securities that are classified under the GICS energy and materials sector excluding the chemicals industry; and steel sub-industry” according to the fund homepage. The iShares North American Natural Resources ETF (NYSEARCA: IGE ), a very similar fund which has been trading since 2001, currently has a YTD of -25%. Hopefully the industry improves in 2016. Fund launches for the week of December 21st, 2015 JPMorgan (NYSE: JPM ) adds to its growing ETF lineup (12/21): – The JPMorgan Diversified Return Europe Equity ETF (NYSEARCA: JPEU ) is the 6th ETF from JPMorgan and its third launch of 2015. According to a press release from the issuer, “JPEU is designed to serve as the foundation of a developed Europe equity portfolio, combining portfolio construction with stock selection in an effort to produce higher returns with lower volatility than traditional market cap-weighted indices.” WisdomTree (NASDAQ: WETF ) launches 2 U.S. Equity funds (12/23): The WisdomTree Dynamic Long/Short U.S. Equity Fund (NYSEMKT: DYLS ) is primarily a long ETF strategy that adds short exposure when needed to act as a market risk hedge. According to the fund’s homepage, the WisdomTree Dynamic Bearish U.S. Equity Fund (NYSEMKT: DYB ) “is able to be net short or market neutral when the market environment is considered poor or mixed, and can have a small net long position when the environment is deemed more attractive.” Alpha Architect adds an international alternative to QMOM (12/23): The MomentumShares U.S. Quantitative Momentum ETF (BATS: QMOM ), launched earlier this month, now has an international twin. The MomentumShares International Quantitative Momentum ETF (NYSEMKT: IMOM ) is focused on high quality momentum companies based in developed international markets. Dr. Wesley Gray commented in a press release : “We seek to deliver a high-conviction momentum approach backed by extensive academic and market research and a substantive knowledge of the manner in which irrational investor behavior creates mispricing. With IMOM, we can now give our investors access to this strategy with an international lens.” There were no fund closures for the weeks of December 7th, 14th and 21st, 2015 Have any other questions on ETFs or ETNs? Please comment below and I will try to clear things up. As an author and editor I have found that constructive feedback is the best way to grow. What you would like to see discussed in the future? How can I improve this series to meet reader needs? Please share your thoughts on this first edition of the ETF Update series in the comments section below. Have a view on something that’s coming up or a new fund? Submit an article.

Reducing Portfolio Risk With Help From Momentum Model

Reduce portfolio risk by activating momentum model. Reduce portfolio risk based on security volatility. Reduce portfolio risk through the use of stop-loss orders. Controlling portfolio risk is every bit as important as seeking portfolio return, particularly when markets are high and volatile. The following analysis takes readers through a process of controlling portfolio risk with help from a tranche momentum spreadsheet. Main Menu: We begin with the following Main Menu where the basic assumptions are laid out by the portfolio manager. In the following example we are using twelve (12) ETFs plus SHY as the cutoff security. Hence the name, Baker’s Dozen. Many of the ETFs carry low correlations with each other, an important factor to consider when identifying securities to populate a momentum oriented portfolio. In the follow screen-shot we set the number of offset portfolios to 8 and the period between offsets to two (2). What this means is that the securities are ranked multiple times (8) on different dates (separated by 2 days) based on two different look-back periods plus volatility. Using these three metrics, the ETFs are ranked each review period. My preference is to review a portfolio every 33 days so the review is rotated throughout the month. Not only are the ETFs ranked based on current data, but they are ranked two, four, six, eight, and etc. days ago so we know what the rankings looked like up to sixteen (8 x 2) days ago. The look-back periods are 60 and 100 trading days. A 20% weight is assigned to the volatility as we are looking for securities with low volatility. Only two securities are selected for each offset portfolio. This becomes more apparent in the second screen-shot so move down to that slide. (click to enlarge) Tranche Recommendations: Here we have what is called the Tranche Momentum model worksheet. This is the first of three risk reducing mechanisms. The tranche model is designed to reduce the “luck-of-trading-day” as this is a problem inherent in all back-tests as well as real portfolio management. Instead of splitting the portfolio into 50% VNQ and 50% MTUM , as the current offset recommends, we note that offset 3 recommended divisions between VNQ and TLT . Offset portfolio #5 recommended 50% allocation to SHY and 50% to VNQ. Using eight (8) portfolio offsets ends up dividing the portfolio into four securities where the percentages are based on the number of times the ETF shows up in one of the eight rankings. The worksheet permits as many as 12 portfolio offsets, but I tend to favor using eight. The following worksheet ranks the ETFs using both absolute and relative momentum principles. Readers will note that the current portfolio holds 200 shares in VTI, but the tranche momentum model recommends none as VTI is under-performing SHY, our “circuit breaker ETF.” Momentum becomes one of our risk reducing mechanisms as under-performing securities are screened out of the active portfolio. (click to enlarge) Risk Reduction Recommendations: The following worksheet combines recommendations from the above tranche data and adds a volatility factor to come up with a list of recommended ETFs. In the following slide the Maximum Trade Position Risk percentage is set to 2.0% so the total portfolio is not exposed to more than a 6% draw-down until the next review period. The still leaves individual ETFs at unacceptable risk levels which we control in the final screen-shot. Before moving to the final slide, look at the individual recommendations. Shares held in VTI and PCY are sold out of the portfolio as VTI is under-performing SHY and PCY has not shown up as a recommended ETF in any of the last 8 offset portfolios. The recommendations are to hold the following four ETFs. 75 shares of SHY – round up from 74. 300 shares of VNQ – rounded to the nearest 100 shares. 100 shares of TLT – rounded to the nearest 100 shares. 350 shares of MTUM – rounded to nearest 50 shares. (click to enlarge) Manual Risk Reduction Recommendations: For the final risk reduction activity the recommendations from the above worksheet are followed which still leaves a few ETF exposed to excess risk. The final step is to place stop-loss or Trailing Stop Loss Orders (TSLOs) on VNQ and MTUM. VTI is either sold at market or a 6% TSLO is used. While the current portfolio holds $8,000 in cash, the recommendation is to increase it to $32,500. Note that the current portfolio carries a risk of 4.8%, but if the suggested adjustments are made, the risk drops to 3.4%. (click to enlarge) With the aid of the tranche momentum spreadsheet we limit portfolio risk through absolute and relative momentum principles as these keep us out of deep bear markets. Further portfolio risk is controlled by placing stop-loss orders as a way of clamping down on excess draw-downs. Granted, these procedures work when we have an orderly market. Guarding against “flash crashes” is an entirely separate problem.