Category Archives: etf

NOBL: An ETF For Dividend Growth And The Quest For Yield

By Max Chen and Tom Lydon Investors seeking a steady yield-generating exchange traded fund to help diversify their portfolios in a volatile year can look to the ProShares S&P 500 Aristocrats ETF ( NOBL ) for quality stock market exposure and sustainable dividends. “By investing in dividend growth strategies, you not only get high-quality companies that have delivered strong total returns, you also get the potential for attractive yield,” according to ProShares . “If you look at effective yield, you’ll see dividend growth strategies have significantly outperformed the broader market.” NOBL, which has accumulated $1.39 billion in assets under management, shows a 2.03% 12-month yield and a 0.35% expense ratio. The dividend ETF has been outperforming the broader equities market. Year-to-date, NOBL rose 5.5% while the S&P 500 index was only 0.9% higher. Over the past year, NOBL increased 4.3% as the S&P 500 dipped 0.6%. NOBL’s 17.2% tilt toward industrials and 10.4% position in materials helped the ETF capitalize on the recent rally in more undervalued sectors of the market. Additionally, the fund holds large positions in more conservative or defensive sectors, including 12.9% in health care and 25.5% in consumer staples. The recent selling pressure in the equities market has also made dividend stock plays more attractive , especially as the Federal Reserve projects only two interest rate hikes this year, compared to previous expectations for four rate hikes. As the S&P 500 index experiences its worst start to a new year since 2009, yield spread between the benchmark and 10-year Treasuries widened to their largest spread in a year. The difference between U.S. equity dividend yields and government bonds can be used as a proxy for valuation comparison between the two assets. On average over the past year, the yield on 10-year Treasuries exceeded that of the S&P 500 dividends by 7.7 basis points. However, the recent volatility helped push yields on 10-year Treasury notes below 2%. NOBL, which tracks the S&P 500 Dividend Aristocrats Index, targets the cream of the crop, only selecting components that have increased their dividends for at least 25 consecutive years. Consequently, investors are left with a portfolio of high-quality, sustainable dividend payers as opposed to more high-yield focused funds that may contain companies on more precarious financial positions. High-yield equity funds can be enticing to income-seeking investors, but the higher yields come with higher the risks and are often unstable, writes Kevin McDevitt, a senior analyst for Morningstar . Alternatively, McDevitt argues that dividend growth is a more important factor for long-term dividend investors. “Dividend growth plays a big role in determining total income over the life of an investment,” McDevitt said. “As a general guideline, the higher a company’s, and by extension a fund’s, yield, the less quickly it will grow over time. Over the short run, this initial yield matters more than dividend growth. But as the time horizon grows, dividend growth has a greater impact on the overall payout.” ProShares S&P 500 Aristocrats ETF Click to enlarge Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

On The Statistical Significance Of The Knowledge Factor

Over the last week or so we’ve been highlighting how factor investing is not as cut and dry as advertised . The traditional simple factors (value, size, momentum, quality, low volatility) sometimes work and sometimes don’t so investors are left to make educated guesses about which factors will work in any given year. Here we’re defining “work” as these factors’ outperformance, or not, of the broad equity market. But the Knowledge Factor (the Gavekal Knowledge Leaders Developed World Index) doesn’t appear to have this same limitation. As we’ve shown already two times in the last five days, the Knowledge Factor – the tenancy of highly innovative companies to realize excess stock market performance – is the only factor that delivers consistent outperformance vs the global stock market. In the first chart below we show the yearly binary relative out/under performance of each MSCI Factor index relative to the MSCI World Index itself. A blue line and a +1 represents a year of outperformance for that factor and a red line and a -1 represents a year of underperformance. The results speak for themselves as it’s clear that there is no discernible trend in the out or underperformance of the five MSCI simple factors on a yearly basis. Said differently, sometimes the factor exposures outperform and sometimes they don’t. The top line that shows the Knowledge Factor’s relative performance is as stable as it gets, returning less than the MSCI World Index only twice in 16 years. Click to enlarge This next chart shows the cumulative performance since 2000 for each of the MSCI simple factors and the Knowledge Factor (the bars) and the yearly hit rate of outperformance relative to the MSCI World Index (the stars). Over time, the stable outperformance of the Knowledge Factor has resulted in by far the highest total return of any factor over the last two full market cycles. Click to enlarge Having laid out the above, we then analyzed the performance of the Knowledge Factor to see if there were certain market environments which were not supportive of the Factor’s outperformance. We looked at bull markets and bear markets, periods of rising and falling interest rates, periods of rising and falling commodity prices, and periods of rising and falling inflation trends. We observed no market environment in which the Knowledge Factor did not outperform the MSCI World Index, leading us to conclude that the Knowledge Factor is the gift that keeps on giving . Statistical Analysis: Today we want to take a slightly different tack to try to understand the sources of performance of the Knowledge Factor (the Gavekal Knowledge Leaders Developed World Index). We’re going to decompose the return of the Knowledge Factor to see if underlying simple factor tilts are the sole reason for this factor’s outperformance. If the Knowledge Factor is just an intelligent combination of the simple factors, then the return stream could be easily replicated and the relative performance of the Knowledge Factor described above would lose significance. To test the hypothesis that the Knowledge Factor adds value (aka Alpha) even after taking into account of any underlying factor exposure, we show a multiple regression of the since 2000 return stream of the Knowledge Factor (dependent variable) vs the all the MSCI simple factors (the independent variables). Given the below ANOVA table we observe the following: This factor exposure model does a good job explaining the return stream of the Knowledge Factor (the Gavekal Knowledge Leaders Developed World Index) because the adjusted r-square is .95, meaning that 95% of the Knowledge Leaders Index return stream is explained by this model. All of the beta coefficients except the Size Factor coefficient are in the single digits and none of the individual beta coefficients are statistically significant. In other words, there are no large factor tilts in the Knowledge Leaders Index returns and any factor tilts observed in the model cannot be statistically relied upon given the low t-stats and high p-values. Said even differently, none of the MSCI simple factors, in isolation or combined, can explain the returns of the Knowledge Factor. Even after taking into account the incredibly small and insignificant factor exposures, the Knowledge Factor has a highly statistically significant unexplained annualized alpha of 3.18%. We know the 3.18% alpha is statistically significant because the t-stat is greater than 2 and the p-value is close to zero. These results indicate that the Knowledge Factor is not simply an aggregation of the simple factors. The returns of the Knowledge Factor are all-together different than the return streams of the simple factors. This goes a long way in explaining why the Knowledge Factor consistently outperforms global stocks on a yearly basis and outperforms in all the market environments studied. There are no underlying factor tilts dictating the performance of Knowledge Leaders except the Knowledge Factor itself, which is the systematic mispricing of highly innovative companies. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

What (Returns) To Expect When You’re Expecting

Investing decisions should always be made in the context of your overall financial plan. And although we know short-term forecasts are futile , a retirement plan needs to include some assumptions about returns and risk over the long term. To help with this important task, my colleague Raymond Kerzérho , PWL Capital ‘s director of research, has just updated our white paper, Great Expectations: How to estimate future stock and bond returns when creating a financial plan . As we explain in the paper, there are two main approaches to estimating future stock returns. The first is to rely on a historical premium: over the last 50 years, stocks have delivered returns of about 5% above inflation, so one could simply expect that to continue. The second approach raises or lowers that expected premium depending on whether stocks are currently undervalued or overvalued. You can apply similar methods to expected bond returns, using either the long-term premium (about 2.7% over inflation) or the current yield on a benchmark index. Both methods are flawed, but an average of the two is likely to be a useful estimate. Imagine that you are doing retirement projections going out 30 years. Using an expected return of 4.5% for bonds based on their long-term average seems wildly optimistic. But on the other hand, assuming bonds will yield just 2% for the next 30 years (based on their yield today) seems unnecessarily conservative. An average of these two estimates (3.3%) is a reasonable compromise. You can dig into the paper for all the details, but here are the numbers we’re using for inflation, bonds and stocks in our plans these days: Estimated long-term returns (as of December 2015) Asset class Expected return Inflation 1.80% Canadian bonds 3.30% Canadian equities 7.10% U.S. equities 6.30% International developed equities 7.20% Emerging markets equities 9.80% Source: PWL Capital And here’s how those numbers combine in various balanced portfolios. In the table below, we’ve also included the standard deviation (a measure of volatility) for each asset mix, and the maximum drawdown (or cumulative decline) experienced in similar portfolios since 1988: Expected return and risk of various portfolios Equities/Bonds Expected Return Standard Deviation Cumulative Decline 0% / 100% 3.30% 3.90% -11% 10% / 90% 3.60% 3.80% -10% 20% / 80% 4.00% 4.00% -10% 30% / 70% 4.40% 4.50% -10% 40% / 60% 4.80% 5.30% -14% 50% / 50% 5.10% 6.20% -18% 60% / 40% 5.50% 7.20% -23% 70% / 30% 5.90% 8.20% -28% 80% / 20% 6.30% 9.20% -33% 90% / 10% 6.70% 10.30% -39% 100% / 0% 7.00% 11.40% -44% Sources: PWL Capital, Morningstar Direct How low can you go? In this new edition of our paper (which was first published almost two years ago), we’ve added a postscript to help put these numbers in context. If you’ve looked at the returns of a balanced portfolio over the long term , you may be surprised (and disappointed) by the expectations we describe in the paper. Even since the late 1980s, traditional index portfolios delivered annualized returns in excess of 7% or 8%, even with a conservative asset mix, compared with our expectation of just 5.1% for a portfolio of half stocks and half bonds. Why so gloomy? The first important point is that over the last 20 to 30 years, bonds enjoyed a long bull market as interest rates trended steadily downward (10-year Government of Canada bonds yielded close to 10% in 1988). This cannot be expected going forward, so we think it’s reasonable to plan for conservative portfolios to deliver significantly lower returns in the foreseeable future. It’s also reasonable to expect equity returns to be lower than they have been since 1988. By traditional valuation measures, stocks are relatively more expensive today: for example, the S&P 500 had a price-to-earnings ratio of 14 at the beginning of 1988, compared with 24 at the end of 2015. Finally, inflation was 4% in 1988, compared with just 1.4% in 2015. The numbers in the tables above are nominal returns, which are not adjusted for inflation. Remember that a 6% return with 2% inflation is very similar to an 8% return with 4% inflation. When viewed in terms of purchasing power, the gap between historical returns and expected future returns is not as wide as it first appears. Disclosure: Holdings include: ZRE, HXT, XRB, XMD, VAB, VTI, VXUS.