Tag Archives: alternative

VWEHX: Giving You High Yields Since The ’70s

Summary High-yield bond fund that has shown good returns over the last decade. Junk bonds are in the top end of credit quality. Option to help with reducing risk and volatility in a portfolio. Mutual funds are a great way to improve risk adjusted returns for investors. There are many options when looking for high yield investments and recently I have been looking at high-yield bond funds. Vanguard High-Yield Corporate Fund Investor Shares (MUTF: VWEHX ) holds high rated “junk bonds” and aims for investors who are looking for consistent income. Since inception in 1978 the fund has had an average annual return of 8.48%. With how well the bonds are chosen and a high yield, this fund has the potential to fit into many portfolios. While it may not beat the market in overall return, there is going to be less risk and volatility to worry about. Expense Ratio The expense ratio is .23% for the minimum investment. This is a surprisingly low expense ratio for an actively managed fund seeking high-yield bonds. There is a minimum investment of $3,000 to invest in this mutual fund. The Lipper peer average expense ratio was 1.11% as of 12/31/2014. The management team had a turnover rate of 34.7% the last fiscal year and has performed well compared to similar funds. Yield VWEHX has a distribution yield of 5.58%, which is great for more current income in a portfolio. The combination of a high yield and a low expense ratio make this fund a definite option. While this fund is correlated on a short term basis to stocks, the high yield needs to be taken into consideration. During an extended down period for the market this high yield is going to greatly reduce the overall loss. However, when we are in a bull market a bond fund is not going to see a lot of growth. Here’s a comparison to the S&P: Even though you can definitely see the correlation, there is a massive difference in volatility. Over a long period of time VWEHX has performed very well on a returns basis because of the high yield. Because of how this fund functions, I wouldn’t have it in my portfolio unless I had a good utilization for the yield. Diversification Here’s a graph showing bond sector allocation: Along with 402 holdings, VWEHX has broad diversification. All the different sector and company exposure is a good first step in protecting against risk. Among the 402 holdings, there is a good balance of diversity without investing too much in a few companies. There is only one holding with over 1% and quickly shifts to the tenth being at .80%: On top of being well diversified, the management has shown over decades their process to choose bonds has worked. The fund uses a fundamental process when looking at credit quality. With how the bonds are chosen there is generally a higher credit quality and less volatility than competitors. The average annual returns over the past ten years has been 6.56% and over five years has been 6.33%. This has been a top performing high yield bond fund since its inception and continues to perform. I normally wouldn’t pay attention to one-year periods, but it makes a point of how this fund does during a bump. Over the last year the fund has had an annual return of .91%, which is in the top 10% for funds in this category. VWEHX’s high yield has saved the day again here. An interesting point to look at this fund is the yield and performance while selecting high-quality junk bonds as shown in the following chart: 90% of the holdings are B3 or above. Management has stated that they will never have more than 10% of the holdings below B quality. Over 85% is in the top end of non-investment grade bonds. There has been some speculation as to how management finds bonds, which can be found here . Whatever exact strategy is used, Wellington Management has done a good job choosing investments for this mutual fund. Conclusion VWEHX is broadly diversified and has had a high sustainable current income. VWEHX has higher credit quality bonds compared to the others junk bond funds. Management has used a credit selection process, which has shown a lower return volatility compared to competitors. High-yield bond funds will have a correlation to the market, but the lower risk and high income coming in from a high yield will get rid of massive bumps in volatility. I would want this fund around 5%-10% of my heavily indexed portfolio to help with income and reduce overall volatility.

GMOM: Momentum Swings From Bonds Back To Stocks

Summary GMOM shifted from stocks to bonds in late August, but was too late to protect itself from the summer market plunge. GMOM missed the October snap-back relay in stocks, but has recently repositioned itself to be overweight in equities. The recent whipsaws has not been kind to GMOM, but it may regain its lustre in strongly trending markets. The Cambria Global Momentum ETF (NYSEARCA: GMOM ) is an actively managed ETF that seeks to exploit the momentum factor across different asset classes. Essentially, GMOM invests in the top 33% of a target universe of 50 ETFs based on measures of trailing momentum and trend. Assets include domestic and foreign stocks, bonds, real estate, commodities and currencies. The fund rebalances monthly into ETFs with strong momentum and are in an uptrend over the medium term of approximately 12 months with systematic rules for entry and exit. Seeking Alpha author Left Banker has penned an excellent pair of articles describing the construction of this ETF, and thus these details will not be rehashed here. Instead, this article seeks to highlight the fact that GMOM has just recently switched from a bond-heavy portfolio back into stocks. Locating the previous switch to bonds In his last feature article on GMOM in Feb. 2nd, 2015, Left Banker found that GMOM was broadly diversified across numerous asset classes, with about 46% in equity, 31% in bonds, 18% in real estate (including mREITs) and 6% in commodities. Fast-forward to Nov. 3rd, 2015, and the situation is drastically different. Nearly 94% of the portfolio was in bonds , with the remaining 6% or so in REITs. GMOM holdings on Nov. 3rd, 2015 iShares 7-10 Year Treasury Bond ETF (NYSEARCA: IEF ) 17.56% iShares 3-7 Year Treasury Bond ETF (NYSEARCA: IEI ) 17.12% Vanguard Short-Term Bond ETF (NYSEARCA: BSV ) 17.08% iShares 1-3 Year Treasury Bond ETF (NYSEARCA: SHY ) 12.11% Vanguard Total Bond Market ETF (NYSEARCA: BND ) 10.93% Vanguard Total International Bond ETF (NASDAQ: BNDX ) 6.44% iShares Residential Real Estate Capped ETF (NYSEARCA: REZ ) 6.22% Vanguard Short-Term Corporate Bond ETF (NASDAQ: VCSH ) 6.01% iShares MBS ETF (NYSEARCA: MBB ) 6.00% Total 99.47% As GMOM does not publish its historical holdings, I do not know the exact time that it made the switch from bonds to stocks. However, given the significant underperformance of both U.S. (the SPDR S&P 500 Trust ETF (NYSEARCA: SPY )) and international stocks (the iShares MSCI ACWI ex-U.S. Index ETF (NASDAQ: ACWX )) stocks compared to their respective bond counterparts, the Vanguard Total Bond Market ETF [BND] and the Vanguard Total International Bond ETF [BNDX] over the summer, I infer that change to the better-performing bond ETFs was made sometime during those months. To narrow down the precise timing of the switch further, I compared the total performance of GMOM with SPY and BND over the past three months. We can see that the stock market plunge in late August was acutely felt by GMOM, suggesting that GMOM was still heavily invested in equities at that time. However, GMOM did not track the market fluctuations experienced by SPY in the month of September, nor the snap-back rally in stocks in October. This suggests that the switch from equities to bonds took place sometime at the start of September. We can see from the graph above that while moving to a bond-heavy portfolio protected GMOM from the market gyrations experienced by SPY in September, it also caused GMOM to miss out on the fantastic rally in stocks the following month. This illustrates a general observation: momentum strategies tend to underperform in whipsaw situations. A similar set of circumstances was chronicled for the AlphaClone Alternative Alpha ETF (NYSEARCA: ALFA ), which uses the 200-day MA in order to time its hedges (which is a type of momentum strategy), in my recent article entitled ” ALFA Underwhelms As Hedge Fund Darlings Crater Plus An Untimely Hedge .” From bonds back to stocks Checking the holdings of GMOM a few days later, I discovered that a massive shift had taken place in the constituents of this ETF. The portfolio had shifted from 94% bonds to only 29%. REITs increased from 6% to 17%. Stocks increased from a measly 0% to 53% (70% if you include REITs as stocks). GMOM holdings on Nov. 6th, 2015 iShares Global Tech ETF (NYSEARCA: IXN ) 10.61% iShares Global Consumer Discretionary ETF (NYSEARCA: RXI ) 10.60% Vanguard REIT ETF (NYSEARCA: VNQ ) 10.60% Cambria Shareholder Yield ETF (NYSEARCA: SYLD ) 10.59% iShares Global Consumer Staples ETF (NYSEARCA: KXI ) 10.59% Vanguard Total Stock Market ETF (NYSEARCA: VTI ) 10.57% PowerShares Emerging Markets Sovereign Debt Portfolio ETF (NYSEARCA: PCY ) 10.56% Vanguard Total International Bond ETF BNDX 6.43% iShares Residential Real Estate Capped ETF REZ 6.17% Vanguard Short-Term Corporate Bond ETF VCSH 6.02% iShares MBS ETF MBB 6.00% Total 98.73% The recent change in the portfolio is also shown graphically below. Obviously, the recent move back into equities is a direct consequence of the ferocious rally in the stock market over the past month and a half. With stocks knocking again on the door of all-time highs, one has to ask the question, is this really the best time to be overweight equities? If you answered “yes” to that question, then you are likely a momentum investor, and GMOM might be an ideal fund for you. If you answered “no,” you would do well to sell GMOM now that it has shifted again back into stocks (and you should also ask yourself why you were invested in this fund in the first place?). Summary The recent whipsaws in the stocks, and to a lesser extend bond, market has not been kind to a momentum fund such as GMOM. Indeed, while having performed comparably with U.S. and international stocks and bonds in the first six months or so of its lifetime since inception, it now trails all four major asset classes by a wide margin. If this whipsaw behavior were to continue, GMOM will likely continue to underperform. On the hand, strong trending markets (both bull and bear) in various asset classes should allow GMOM to focus on what it does best: exploiting the momentum premium. GMOM Total Return Price data by YCharts For more information about other momentum ETFs, see my previous articles ” Comparing 4 Tactical/Momentum ETFs ” and ” An Update On 4 Tactical/Momentum ETFs “.

BlackRock Cuts Fees To Offer Cheapest ETF Ever

The ETF fee race is far from over. BlackRock (NYSE: BLK ) has announced fee cuts for seven iShares exchange-traded funds in response to competition from low-cost competitors such as Vanguard Group. According to Tuesday’s announcement the new management fee for BlackRock’s iShares Core S&P Total U.S. Stock Market ETF will be 0.03%, making it the cheapest ETF on the market, excluding those with temporary fee waivers. In plain English that means that fees amount to just $3 per year for every $10,000 invested, writes Chris Dieterich for Barrons . (click to enlarge) Via S&P CapIQ BlackRock cuts fees in response to low-cost rivals Vanguard and Charles Schwab (NYSE: SCHW ) “The entire U.S. stock market is the epitome of buy and hold, and price does matter more to those kinds of investors. It’s really importantly to have the most cost-efficient fund in that space,” said Ruth Weiss, head of the U.S. iShares team. Other ETFs in the “core” buy-and-hold friendly product suite will have their fees reduced. BlackRock also announced the iShares Core International Aggregate Bond ETF, a new international bond ETF for which trading will begin on Thursday. Its expense ratio of 0.15% is even less than the rival Vanguard Total International Bond ETF, which has a ratio of 0.19%. BlackRock also announced that its iShares Core S&P Total U.S. Stock Market ETF will follow the S&P Total Market Index from next week, a move which will make it more exposed to micro- and small-cap U.S. companies. As a result it will become more similar to the Vanguard Total Stock Market ETF. Rivals eating in to BlackRock ETF market share BlackRock currently holds $818 billion in ETFs, representing 38% of a total $2.1 trillion U.S. market. Although it remains the largest asset manager in the world, BlackRock has been losing market share to low-cost rivals Vanguard and Charles Schwab. At the end of 2006 BlackRock held 58% of the total ETF market. In that time Vanguard has grown from 5.2% to 22% of the total ETF market share. Until the BlackRock announcement, Charles Schwab offered the two cheapest ETFs, at 0.04%. Although Schwab only manages $37.5 billion in assets, or 1.8% of the market, the company is growing fast. In 2015 Schwab’s ETF asset growth rate is 28%, compared to 7.8% for BlackRock and 12% for Vanguard. Disclosure: None