Scalper1 News
Summary FSTA tracks one of my favorite sectors and there is nothing to hold against it. From the market capitalizations of the companies down to the top 10 holdings, everything looks intelligently designed. While many consumer staples ETFs would be scared to go overboard on tobacco, FSTA gets it. Consumer Staples funds should be loaded up on companies producing addictive products. I’m a little concerned about the sheer size of the allocations to Coca-Cola and Pepsi because of a movement towards healthier foods. I wouldn’t want to cut out those holdings because I think the distribution and branding systems give them moats for competing in healthy foods. One of the sectors I’ve come to like is the consumer staples sector. Unfortunately, many investors seem to be catching on to how desirable the sector allocation is when there are concerns of a new correction or recession. One of the funds that I’m considering is the Fidelity MSCI Consumer Staples Index ETF (NYSEARCA: FSTA ). I’ll be performing a substantial portion of my analysis along the lines of modern portfolio theory, so my goal is to find ways to minimize costs while achieving diversification to reduce my risk level. Expense Ratio The expense ratio on the Fidelity MSCI Consumer Staples Index ETF is only .12%. This fund gets my stamp of approval for giving investors consumer staples exposure at a very reasonable expense ratio. Market Cap The ETF has a focus on large capitalization companies, but investors should be worried if this chart looked different. The idea is to load up the portfolio on big companies that are designed to withstand negative events in the economy. I think large companies make more sense than smaller companies in that aspect because I want to see companies that are market leaders with strong pricing power in an established industry. Geography There really isn’t much to talk about here. This is all domestic equity. Sector This sector breakdown is excellent. Personally, I have a moral objection to companies that sell tobacco products because they cause cancer. On the other hand, I don’t have a moral objection to risk adjusted returns. The result of that conflict is that I have to admire the structure of this portfolio. I’d love to see a further breakdown in some categories such as beverages because I’d value having some alcohol in the portfolio as well. When I’m looking at consumer staples, I want companies that sell products that are absolutely addictive. This is just cold hard logic. Market leaders that can dictate pricing on addictive products are in the ideal position to survive recessions without a major drop in sales or earnings. Largest Holdings This is a solid batch of holdings. I don’t see a single company on the list that looks exposed to a recession. I’ll admit that having both Coca-Cola (NYSE: KO ) and Pepsi (NYSE: PEP ) at the top of the portfolio feels a little heavy. If I was going to tweak the portfolio a little, I might drop those two in favor of having a little more alcohol. My big concern about those companies is that I believe we are in a very long term shift towards healthier food and some of their branding value is going to be lost. The reason I would still want a significant allocation is because they are both masters of building brands and have established enormous distribution networks across the world. When (or if) that sustained shift to healthier foods does occur, I expect both Pepsi and Coke to be in position to buy up smaller companies with the right products and then run the products through their branding and distribution product. Simply put, even if they don’t have the right products yet, they have incredible economic moats that should help them acquire the right products and utilize those products better than smaller competitors could. As I’ve been going through consumer staples ETFs, I’ve noticed that Wal-Mart (NYSE: WMT ) is suspiciously absent from some of them. I think that is a mistake. I really like Wal-Mart as a dividend growth company and I think the employee wage issues are overblown . Building the Portfolio The sample portfolio I ran for this assessment is one that came out feeling a bit awkward. I’ve had some requests to include biotechnology ETFs and I decided it would be wise to also include in the related field of health care for a comparison. Since I wanted to create quite a bit of diversification, I put in 9 ETFs plus the S&P 500. The resulting portfolio is one that I think turned out to be too risky for most investors and certainly too risky for older investors. Despite that weakness, I opted to go with highlighting these ETFs in this manner because I think it is useful to show investors what it looks like when the allocations result in a suboptimal allocation. The weightings for each ETF in the portfolio are a simple 10% which results in 20% of the portfolio going to the combined Health Care and Biotechnology sectors. Outside of that we have one spot each for REITs, high yield bonds, TIPS, emerging market consumer staples, domestic consumer staples, foreign large capitalization firms, and long term bonds. The first thing I want to point out about these allocations are that for any older investor, running only 30% in bonds with 10% of that being high yield bonds is putting yourself in a fairly dangerous position. I will be highlighting the individual ETFs, but I would not endorse this portfolio as a whole. The portfolio assumes frequent rebalancing which would be a problem for short term trading outside of tax advantaged accounts unless the investor was going to rebalance by adding to their positions on a regular basis and allocating the majority of the capital towards whichever portions of the portfolio had been underperforming recently. Because a substantial portion of the yield from this portfolio comes from REITs and interest, I would favor this portfolio as a tax exempt strategy even if the investor was frequently rebalancing by adding new capital. The portfolio allocations can be seen below along with the dividend yields from each investment. Name Ticker Portfolio Weight Yield SPDR S&P 500 Trust ETF SPY 10.00% 2.11% Health Care Select Sect SPDR ETF XLV 10.00% 1.40% SPDR Biotech ETF XBI 10.00% 1.54% iShares U.S. Real Estate ETF IYR 10.00% 3.83% PowerShares Fundamental High Yield Corporate Bond Portfolio ETF PHB 10.00% 4.51% FlexShares iBoxx 3-Year Target Duration TIPS Index ETF TDTT 10.00% 0.16% EGShares Emerging Markets Consumer ETF ECON 10.00% 1.34% Fidelity MSCI Consumer Staples Index ETF FSTA 10.00% 2.99% iShares MSCI EAFE ETF EFA 10.00% 2.89% Vanguard Long-Term Bond ETF BLV 10.00% 4.02% Portfolio 100.00% 2.48% The next chart shows the annualized volatility and beta of the portfolio since October of 2013. (click to enlarge) Risk Contribution The risk contribution category demonstrates the amount of the portfolio’s volatility that can be attributed to that position. You can see immediately since this is a simple “equal weight” portfolio that XBI is by far the most risky ETF from the perspective of what it does to the portfolio’s volatility. You can also see that BLV has a negative total risk impact on the portfolio. When you see negative risk contributions in this kind of assessment it generally means that there will be significantly negative correlations with other asset classes in the portfolio. The position in TDTT is also unique for having a risk contribution of almost nothing. Unfortunately, it also provides a weak yield and weak return with little opportunity for that to change unless yields on TIPS improve substantially. If that happened, it would create a significant loss before the position would start generating meaningful levels of income. A quick rundown of the portfolio I put together the following chart that really simplifies the role of each investment: Name Ticker Role in Portfolio SPDR S&P 500 Trust ETF SPY Core of Portfolio Health Care Select Sect SPDR ETF XLV Hedge Risk of Higher Costs SPDR Biotech ETF XBI Increase Expected Return iShares U.S. Real Estate ETF IYR Diversify Domestic Risk PowerShares Fundamental High Yield Corporate Bond Portfolio ETF PHB Strong Yields on Bond Investments FlexShares iBoxx 3-Year Target Duration TIPS Index ETF TDTT Very Low Volatility EGShares Emerging Markets Consumer ETF ECON Enhance Foreign Exposure Fidelity MSCI Consumer Staples Index ETF FSTA Reduce Portfolio Risk iShares MSCI EAFE ETF EFA Enhance Foreign Exposure Vanguard Long-Term Bond ETF BLV Negative Correlation, Strong Yield Correlation The chart below shows the correlation of each ETF with each other ETF in the portfolio. Blue boxes indicate positive correlations and tan box indicate negative correlations. Generally speaking lower levels of correlation are highly desirable and high levels of correlation substantially reduce the benefits from diversification. (click to enlarge) Conclusion FSTA has a great expense ratio, great sector, and great allocations within the sector. This ETF is a slam dunk for long term holdings. The only concern I have about the sector right now is that other investors have caught on and started bidding up the price. There is one other worrying factor for the ETF. The average volume on it is quite dreadful. There are two ways to look at that issue. One is to bemoan the weak trading volume increasing the bid-ask spread. The other option is to look for ways to trade the ETF without commissions and then to keep using limit orders to try to enter at an attractive price. The ETF has far more liquidity problems than the underlying securities and the low expense ratio is fairly attractive for investors looking for a long term holding. The biggest caution here is that investors should avoid using any “market” orders. Only trade this one with limit orders. Scalper1 News
Scalper1 News