Author Archives: Scalper1
VT: A Simple Choice For Getting Global Exposure
Summary The ETF has a good expense ratio, but investors can get a lower ratio by combining VEU and VOO. Investors need to remember the importance of international diversification even as domestic equity as thoroughly outperformed during the latest bull market. While I support having some international diversification, this fund offers almost 45% of the holdings as international equity. That is a bit too high for me. I see this fund as being maximized by investors that want to add it to their domestic allocations or investors with a long time horizon. The Vanguard Total World Stock ETF (NYSEARCA: VT ) is a great ETF for getting exposure across the world. The holdings are about 55% domestic and around 45% international. Expenses The expense ratio is a .17%. Vanguard regularly sets the bar for creating low fee investment vehicles for investors to gain solid diversification with low costs. My one concern in this area is that investors could use the Vanguard FTSE All-World ex-US ETF (NYSEARCA: VEU ) for international allocations with a .14% expense ratio and the Vanguard S&P 500 ETF (NYSEARCA: VOO ) for domestic equity with an expense ratio of .05%. You could average those in any way you wanted since both parts offer lower expense ratios than the Vanguard Total World Stock ETF. Aside from that potential strategy to lower ratios, this is a very solid fund and a viable option for one stop shopping on equity exposure. Holdings I grabbed the following chart to demonstrate the weight of the top 10 holdings: For a total world ETF, I think investors had to expect Apple (NASDAQ: AAPL ) to be the top weight. The company is simply huge and their sheer size makes it necessary to give them a significant weight in any index attempting to replicate the entire world of equity securities. We have only stock that I think of as an international allocation within the top holdings. That, of course, is Nestle S.A. ( OTCPK:NSRGY ). As an international company, their sales are providing even further diversification as they rely on both developed and emerging markets for growth in sales. Nestle is the kind of dividend machine that SA Author Dividends Are Coming has suggested investors should buy and hold forever . The company is not always considered as a perennial dividend champion by domestic investors because their dividends appear to have suffered in a few years due to the currency exchange impacts. In their domestic currency, they are a great dividend growth company. Sectors (click to enlarge) If I was going to use a single ETF as the primary source of equity for my entire portfolio, I think I would prefer to see a slightly more defensive allocation strategy. For investors willing to go with the more aggressive allocations, such as having around 38% of the portfolio in the cyclical sectors, this is the kind of fund investors should consider for automatic investing. To avoid excess risk, that is a strategy for investors with a long enough time horizon to make up for losses as there should be both bull and bear markets over the next few decades. Region Domestic equities get a heavier weighting than international equities, but the international weights are fairly high. I must admit that as an investor I have a significant home country bias and I would not be comfortable with having even close to 45% of my equity in the form of international investments. For me the limit on international equity is closer to 30% and I prefer to run it closer to 15% to 20% of the total portfolio. I do feel compelled to point out that the allocation to emerging markets is within reason, so my concern would be coming from the strength of the allocations to developed markets. Generally developed markets are going to be less volatile than emerging markets but in this case the allocation to the developed markets is substantially larger and thus it is capable of generating more volatility at the portfolio level because of the weighting. Conclusion This is a solid ETF though the more attractive traders that don’t mind a more complex allocation may want to consider combining VEU and VOO if they really want to chase their expense ratios down to be as low as possible. In my opinion, this ETF should be combined with additional domestic allocations because the international allocations are simply a little too high for my taste. For investors that don’t mind the heavy international allocation and have a long time horizon to recover from any bear markets, this fund should be considered for regular purchasing.
Source Capital: Big Change Is Coming At This Closed-End Fund
SOR has a long and solid history. But the long-time portfolio manager has retired. The portfolio remake in the wake of his retirement changes everything. Source Capital (NYSE: SOR ) is one of the old timers in the closed-end fund, or CEF, world. Over the long haul it’s done pretty well, using a focused portfolio to opportunistically invest in small- and mid-cap companies with high returns on equity. But now that the manager is has retired, throw that history out. Source Capital’s advisor, FPA Group, is changing everything . Out with the old Source Capital’s now-retired manager was Eric Ende. He had been with FPA since 1984 and worked closely with the fund’s previous manager. He took over the fund in 1996 and basically kept running the fund the same way it had been run previously. But Ende has now retired. SOR data by YCharts Unlike the last manager transition, which was nearly 20 years ago, there’s no smooth hand off planned. FPA is taking an entirely new approach with the fund. That’s big news that current investors shouldn’t ignore. For starters, the fund will shift from an all-equity portfolio to a balanced portfolio that mixes stocks and bonds. Stocks will vary from 50% to 70% of assets and bonds will live in the range of 30% to 50%. This, in and of itself, isn’t a bad thing. But it is a vast change from the previous all-stock focus and shareholders need to be aware of the remake. Moreover, Source will no longer be keyed in on small- and mid-cap stocks. Over the next year or so the closed-end fund will be shifted to a globally diversified large-cap focus. Again, not a bad thing, per se, but a big change from what the fund had been doing for decades. There’s also a not-so subtle shift from what was more of a growth bias to a value approach that’s going to be part of this transition. There’s a couple of take aways here. The first is that the closed-end fund’s historical performance isn’t a useful guide anymore. That performance was built on an investment approach that no longer exists. So, for all intents and purposes, Source Capital should be looked at as a new fund. Second, the changes taking place will have a major impact on shareholders financially. For example, FPA expects 100% of the fund to turnover next year. Thus, every stock holding is set to be sold as it resets the portfolio to a new baseline. That will increase trading costs, but, more important, will lead to as much as $39 a share in distributions in 2016, according to FPA. Source Capital’s NAV was recently around $76 a share, so this is a really big event. And expect every penny to be taxable. Source is also going to initiate a stock repurchase program with the aim of reducing the closed-end fund’s discount to it net asset value. That discount is only around 10% right now, so it’s not a huge discrepancy. In fact, a 10% discount is the trigger for the buyback and about the average discount over the trailing three years. So this probably won’t be a big change. But combined with the portfolio remake and expected capital gains distributions, this has the potential to further shrink Source Capital over time. That could lead to higher expenses as there’s fewer assets over which to spread the costs of running the fund-which will now be run by a team of five managers. What should you do? If you’ve owned Source Capital for years, you need to rethink your commitment to the fund. It is no longer the same animal. Moreover, there’s no track record to go on anymore for this CEF and the next year is going to be one of material portfolio change. That, in turn, will lead to a large tax bill. If you like the idea of owning a balanced CEF, you might want to give the new approach some time to prove itself. But don’t look at the next year or so as the start of the new approach-the management team will need around a year to get the fund repositioned. You’ll need to sit through the transition and then start examining performance, perhaps using January 2017 as a “start” date for tracking the new approach. In other words, for a year or so, there’s no way to really know what you own here. If you don’t like the new approach or don’t want to sit through the portfolio makeover, then you might want to sell sooner rather than later. In the end, this is a big change and if you don’t buy in to it for any reason, you should get out. Yes, that could have significant tax implications for your portfolio, but the makeover is going to lead to a tax hit anyway.