Tag Archives: alternative

A New ETF In Town: The PowerShares S&P 500 Value Portfolio

Summary The value portfolio offers an academically proven investment model for investors. P/E, P/B and P/S are well known and commonly used financial metrics. Even though this ETF seems a bit boring, based on an abundance of academically proven factors I would prefer this ETF over an index ETF following the S&P 500. Invesco recently launched new ETFs, one of them I covered in an earlier article: ” A New ETF In Town: The PowerShares S&P 500 Momentum Portfolio (NYSEARCA: SPMO )”. This is part 2, discussing the PowerShares S&P 500 Value Portfolio (NYSEARCA: SPVU ), which is an interesting addition to the S&P 500 momentum portfolio. Both momentum and value are 2 investment strategies which have received wide coverage in the academic world and the world of finance practitioners. The SPVU tracks the S&P 500 enhanced value index which is focusing on 100 S&P 500 companies with the greatest value score calculated based on fundamental ratios: book value/price ratio, earnings/price ratio and sales/price ratio. SPVU: The Value Portfolio Source: ETFdb The issuer of this new ETF is Invesco, a large independent investment management company incorporated in Bermuda which has many other ETFs to offer. The expense ratio of 0.25% is a very reasonable number . With 2.5 million assets under management it’s not a large ETF. Value Portfolio: Selection Strategy This ETF is a so called smart-beta ETF and will spend at least 90% of its total assets in the S&P 500 Enhanced Value Index. The selection process for 100 stocks is based on the book value/price ratio, earnings/price ratio and sales/price ratio: The book value to price ratio is calculated by using the company’s latest book value per share divided by its price. The earnings to price ratio is calculated by using the company’s 12-month earnings per share divided by its price. The sales/price ratio is calculated by using the company’s 12-month trailing 12-month sales per share divided by its price. A value score is then calculated. The best 100 stocks are selected for the underlying index. Value: A much covered topic in the world of academia The book value to price ratio is an asset factor which has been widely covered in academics. For example, a P/B of 2 means that the stock is priced twice as much as it could sell for. It is also used to explain the portfolio return of portfolio managers, in for example academic models such as the Fama and French asset model . Generally, a firm with a lower book value to price ratio outperforms a firm with a higher book value to price ratio. A reason for this could be that a firm with a lower ratio indicates a distressed stock which makes it look cheap. Yet, if you believe in the efficient market hypothesis , a cheap stock could only be a cheap stock because investors consider it risky. The price to earnings ratio (the inverse of the earnings to price ratio) is one of the most widely used fundamental ratios in the financial markets. For example a P/E of 20 can indicate that you pay $20 for $1 of earnings. If then compared to numerous other investments, commonly it seems like a better deal if you pay the least for $1 of earnings. It has been proven, time and time again, that investment in a lower P/E related firm outperforms investments which yield a higher P/E ratio . Nevertheless, the world of academia has further expanded on price/earnings ratios recently, for example, in the discrepancy between negative P/E firms and positive P/E firms. Athanassakos (2014) concluded in his research that certain negative P/E firms indicate high forward stock returns, even though past price/earnings ratio research most of the time excluded negative P/E firms. I believe future research in the world of financial academia will continue in this path. The price to sales ratio is the third metric which is used in this ETF to value stocks. A lower P/S is preferable over a higher P/S ratio. Furthermore, it’s one of the best metrics used for companies which are a in a so called ‘turnaround’ modus, where the firm has lost earnings (negative P/E and no dividend for example), the P/S ratio offers the opportunity to compare firms. Additionally, the P/S also has been covered numerous of times in the world of academia where the outcome and conclusion is often very similar to each other. The price to sales ratio offers a good (to sometimes even better) explanatory power in explaining stock returns in comparison to for example the book-market value of a stock. All in all, this ETF follows 3 well known financial metrics which have been proven in the world of academics, decade after decade. Conclusion In addition to the momentum strategy ETF I consider it highly likely that this ETF will outperform the stock market as a whole over an extended period of time. This assumption is based on the abundance of research on the book/price, price/earnings and sales/price ratio in the world of academics. Yet, as the world of academia is moving forward, I would not be surprised to see updated Value ETFs where new metrics/findings will be implemented. I assume based on the current findings in academia that they will offer better risk/reward premiums to investors in comparison to this ETF. The world of negative P/E firms has yet to be uncovered to the same extent as positive P/E firms. Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions. This information is not a recommendation or solicitation to buy or sell securities, nor am I a registered investment advisor.

Dovish Fed, Rising Oil And Falling USD Set Stage For GLD Rally

Summary Central banks in Japan and Europe continued to ease monetary policy, and Fed had just revealed its dovish side as two governors stood out to oppose the rate hike this year. GLD had formed a double bottom since August and reformed the uptrend on October 1 as oil got stronger and USD weakened. This sets the stage for stronger inflation, and GLD is about to get more valuable in its role as an inflation hedge. In this article, I am going to express my views on gold as seen on the SPDR Gold Trust ETF (NYSEARCA: GLD ). Basically, I am bullish on gold and see the current weakness as a mere retracement for the serious gold investor to build their gold stockpile at slightly lower prices. Gold serves as an inflation hedge throughout time. The current situation is making it easy for inflation to burst above the 2% inflation target suddenly and on a prolonged basis. This is because major central banks are all engaged in monetary easing, and there are no concrete signs that they are going to stop anytime soon. Japan & Europe To Continue on Easing Bias The Bank of Japan (BOJ) renewed its commitment to increase its monetary base by $80 trillion yen per year on its latest monetary policy statement on 7 October, 2015 . This is despite a moderately growing Japanese economy as inflation was still below its 2% target at 0.2% for August 2015. In Europe, inflation continued to be weak. Eurostat reported that inflation was negative 0.1% for the month of September 2015. This is one reason that the ECB continued to keep main refinancing interest rates at 0.05% and deposit facility interest rates at -0.20% . In addition to negative inflation, Europe is facing more risk to its growth as seen in the recent speech by ECB President Mario Draghi to the International Monetary and Finance Committee on 9 October, 2015 : “However, developments surrounding the slower growth in emerging market economies are posing renewed risks to the euro area outlook. Our monetary policy measures have supported, and continue to support, domestic demand, contributing to the euro area recovery and to a gradual improvement in the inflation outlook.” Hence it is clear that the ECB would not be changing its monetary easing stance soon and would continue to purchase $60 billion per month of public and private securities. Fed Steps Away For 2015 Rate Hike Most crucially, the Federal Reserve had just made it clear that it is doubtful over the lack of inflation in the US. The first hint came when the Fed failed to raise interest rates in its September 2015 meeting as widely anticipated. Next, the September meeting’s minutes were released, and it showed that the Fed officials were more worried about the lack of inflation despite the steady growth in the US. It was mainly blamed on low oil prices and the strong USD. After the minutes were released, Chair Janet Yellen and FOMC Vice Chair William Dudley stepped forward and made speeches to keep the hopes of a hike rate alive in this year, presumably in December 2015. However, recently, we have heard that two Fed governors had stepped out in opposition of a rate hike this year. It is rare to hear from Fed Governors Lael Brainard and Daniel Tarullo . Brainard made the case that he wanted to see a more robust recovery and Tarullo wanted to see a more robust inflation recovery. The Bureau of Labor Statistics reported that the most recent consumer price index declined 0.2% for September 2015. Fed governors have a permanent vote on the FOMC, and it should be noted that both immediate past Chairman Ben Bernanke and current Chair Janet Yellen had to go through the appointment of Fed governor before their supreme appointment. Hence the fact that both Fed governors bothered to appear on record to make their stance is a highly noteworthy event. With such opposition, it would be very difficult for Chair Yellen to hike rates this year even if she felt that it was necessary to do so to get ahead of the curve. Externally, this dovish position is supported by the IMF. Therefore, it should not come as a surprise that a Reuters survey showed that 55% of the polled economists expect a rate hike in December, and this is down from 60% in the previous month. Bullish GLD Formation Aided By Strengthening Oil & Weakening USD As we can see on the chart below, GLD had been on the rise since August and has since formed a double bottom. (click to enlarge) Source: StockCharts The Fed had overlooked the recent recovery of oil prices and has provided the ideal environment for inflation to grow. (click to enlarge) Source: StockCharts The other factor that would encourage inflation would the continued weakening of the USD, as seen in the chart below: (click to enlarge) Source: StockCharts Both effects require time to appear on the official reports which often come up with two months of delay. In the meantime, the market is actively pricing in higher inflation as gold prices have been on the uptrend since 1 October, 2015, in its latest wave up. Conclusion Gold prices are on the verge of a breakthrough as indulgent central banks around the world continue to either ease monetary policy or at the best stick to a neutral stance. The action of the Fed to signal clearly that it is unlikely to hike rate this year is a game changer. Don’t be too affected by the minor weakness on October 16. This is due to a strong consumer confidence report and this only provides a needed profit-taking opportunity. Gold should continue its uptrend after the retracement as fundamentals are in its favor.

9 Simple College Savings Tricks

Summary Why is saving for college so hard? How to co-opt your kid and work together to save all you need. Demand an adequate ROI and decide if it is really worth it. Why is saving for college so hard? How can I pay for my kids’ college? Like everywhere else, where the government has entered into a market as a massive, price-insensitive third-party payer, it has completely distorted the price system. If you have ever heard a politician say “_________ is not a privilege, but a right”, then it is probably a subject with significant malinvestment. Here is what has happened with some of the most distorted markets over the course of my lifetime: So that is the world we face when paying for college. Here are ten simple tricks for facing this daunting task. Long-term Goal While I want to have everything organized as efficiently and rationally as possible for my kids, my long-term goal is to nurture independent adults. I have a reminder on my Microsoft (NASDAQ: MSFT ) Outlook calendar to have the locksmith come to change the locks when the youngest kid turns eighteen. After that, I expect them to succeed under their own power. One: co-opt your kids First, co-opt your kids as active participants in the process of saving for college. Whenever they want to spend money, make sure that they denominate that expense in the length of time that it will take them to earn that money. Two of my favorite places for them to save include Toronto-Dominion Bank (NYSE: TD ) and MainStreet Bank. Each kid can make $10 per year at TD. TD offers a summer reading program in which kids can earn $10 each for reading 10 books. You can get the form here . In addition, our TD branch has a coin deposit machine. As it accepts only U.S. dollars, the rejects slot typically contains a few dollars’ worth of Canadian and other foreign coins for the kids to collect. Each kid can make $40 per year in interest from MainStreet Bank. Kids can each earn $40 per year in interest in a Junior Airsavings account . These accounts offer an annual percentage yield/APY of 4% for accounts up to $1,000 owned by depositors under eighteen years old. Each kid can make $50 per year from DFCU Financial. Deposits age 0-17 get $50 in cash per $100 account. If you have an account at DFCU or if you can open one (either via a family relationship or living in their region of Michigan), it might be worth getting your kids set up with accounts too. If you live in a state that offers refunds on beverage container deposits, kids can help collect bottles. My final step in co-opting each of my kids in this effort is to offer them $0.50 on the $1.00 for any merit or athletic scholarship (or any other kind they can find) that they earn. There is a ton of money out there and I want them to have the mentality of constantly looking for such opportunities to exploit. “Never, ever, think about something else when you should be thinking about the power of incentives.” – Charlie Munger Two: start them on credit cards Kids can make an average of $272 each year from Fidelity. The best credit card deal available is the Fidelity Investment Rewards American Express (NYSE: AXP ) Card. There is no age limit. You can co-sign the agreement, get cards in your kids’ names and start building their credit history. The average American kid’s expenses are $13,611 per year. With the 2% cash back on this card, that comes to a rebate of $272 each year. Once the kids are legitimately earning income from chores, they can start funding their IRAs with this card. Three: set up a family bank Kids can make about $109,565/ each year with a family bank. According to the IRS, the long-term adjusted Applicable Federal Rate/ AFR is currently 2.3%. In order to qualify as a loan, parents need to charge that amount of interest to each kid. However, parents can also gift the interest rate payment up to $28k . So, one can loan up to $1,217,391 from each couple to each of their kids per year without it costing them any net interest. If they can compound at 9% per year, that will come to just under $110k per year per kid. Four: Max out your 529 You can contribute $370,000 to each kid’s Nevada 529. Here is why I think Nevada’s is the best one. If you fail to max out any tax-advantaged saving and investing opportunity, you are stealing from yourself. Five: Odd Lots Throw around your (lack of) weight. With my kids, we focus on how small scale can be an edge. One tactic is to exploit odd lot opportunities. These have proved to be lucrative – a great relationship between risk and reward with a limited downside. For kids’ accounts with under a million dollars in them, they can be among the best opportunities. The question of how to make $10,000 out of $5,000 is very different than making $1 billion out of $500 million. You might as well take advantage of all of the quirky opportunities strewn around the capital markets to make money at small scales. However, due to capacity constraints, I am keeping all of my best odd lot opportunities here . Six: Dividends I do not expect much of a tailwind from the U.S. equity market over the next few decades based on the market multiples discussed here . So a substantial part of the total returns that one may expect will come from dividends. One example of a high dividend payer worth considering is Digirad (NASDAQ: DRAD ): While it has returned over 20% since it was first disclosed on Sifting the World, it remains an attractive opportunity. You can read more about their recent acquisition in M&A Daily . Seven: hire world-class asset allocators… for free There is only a small number of world-class asset allocators running publicly traded companies. Berkshire Hathaway’s ((NYSE: BRK.A )/(NYSE: BRK.B )) is the most famous. Whenever you can get them at a discount to their net asset value, it is as if you are hiring one of the greats for free. For example, from time to time, you can get the Tisch family for free by buying Loews (NYSE: L ) at a discount to NAV. Today, you can get John Malone for free when you buy Liberty Media (NASDAQ: LMCA ). Seize such opportunities. In investing, you get what you don’t pay for. Eight: demand a strong return on investment This formula doesn’t just work for your money, but works well for any constrained resource including your time, energy, and focus. Demand a strong ROI on everything that you do. “I don’t get out of bed for less than $10,000 a day.” – Linda Evangelista Well I don’t get out of bed for less than a 10% ROI. Some of the top ROI for undergraduate schools include Stanford, MIT, and Princeton. Many of the best educational ROIs are degrees in computer science, medicine, business, engineering, and law. While there are many subjects that may be intrinsically interesting, one should ask if it is worth piling up mountains of debt for them, especially if they are subjects that you can pursue on your own. Generally, hard subjects pay off. If you learn something quantitative, data-based, and difficult, you can probably pick up the qualitative, subjective, and easy stuff on your own later. However, if you slide through school working on easy subjects, then the hard stuff will torture you later in life. Nine: no one has to go to college Fayetteville State University notable alumni “Junkyard Dog” If your kid gets accepted to MIT and wants nothing more than to pursue computer programming, it is probably a worthwhile endeavor. But there are also many schools and many degrees that have substantially negative ROIs. If your best bet for college is Fayetteville State University or you want to study mime, then the annual return over the subsequent twenty years will probably be quite negative. Consider skipping college altogether. You can apply here for a $100,000 Thiel Fellowship to skip college and build new things. Some people, including some extremely wealthy people, cannot afford college. Even if they have the tuition bill in their petty cash drawer, they cannot afford college because the opportunity cost is too high for people with ideas worth acting on right away. Four years is a long time, especially if you have a great idea worth pursuing. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.