Tag Archives: alternative

QLC: Large-Cap ETF With High-Quality Stocks

Summary QLC is an equity fund focusing on large-cap companies that are financially strong, have low valuation, and have positive performance. I compare QLC’s portfolio to four categories of large-cap ETFs, with a total of 16 ETFs being compared. There are some interesting characteristics to be found in large-cap ETFs that may be of interest in trying to choose an effective investment. A serious all-ETF portfolio needs at least one fund that focuses on large-cap U.S. equities ; arguably, large-cap companies are the mainstay of the American economy and, as a result, large-cap holdings are arguably the mainstay of any portfolio. There are currently at least 118 ETFs that focus, in one way or another, on U.S. large caps. 1 There are a variety of ways of approaching such a target: sector, size, growth, value, dividend yield, earnings, fundamentals – what have you. For its part, Northern Trust Investments ‘ FlexShares Funds recently issued a new fund: the FlexShares U.S. Quality Large Cap Index Fund (NASDAQ: QLC ). As I looked into this fund I found some interesting things that lead me to believe this ETF may have tremendous potential. The Fund The index used to model the fund’s portfolio consists of the 600 largest companies among the companies listed in the Northern Trust 1250 Index . 2 Companies are selected on the basis of three criteria: “Companies that exhibit financial strength and stability relative to the broader universe of eligible securities.” “Securities trading at lower valuations .” Stock that is displaying ” positive momentum .” 3 The weighting applied to holdings is also determined by the three criteria listed above. The fund is rebalanced/reconstituted quarterly. 4 In view of the potential frequency of reconstitution, the ER of 0.32% seems reasonable. There would seem to be the likelihood of a high turnover rate. Distribution of dividends is planned to be quarterly; distribution of capital gains is planned to be made annually. 5 In the table above, my estimate of the fund’s income includes only dividends that may be realized from its holdings as of 6 October 2015. Expenses are my estimate based on NAV (as of 6 October) and ER. The calculation of a dividend yield of 1.80% is based solely on dividend income realized by the fund that would, in principle, be paid to shareholders. 6 ,7 In the course of selecting its holdings, FlexShares manages to maintain diversity in its portfolio: (click to enlarge) Performance As is the case with any new ETF, there is little to go by in terms of the fund’s actual performance. As a substitute, I have been taking the at-the-time current portfolio for the fund and running it back for five years, to give an indication of how that particular iteration of the fund’s index has paid off. I use the weighting for each holding as it is on the day I download the fund’s holding. This may not be exactly precise , but it would be practically impossible to accurately weigh the portfolio’s holdings as they would be weighted by the index over the past five years – particularly when the weighting system is a proprietary one, as it is for QLC . The test is done with an initial $25,000 in funding. The basic performance of QLC ‘s portfolio since 1 October 2010 is reflected in the following chart: (click to enlarge) The growth of the portfolio has been fairly steady, although it does reflect the poor market conditions of the past few months. The total performance over the five years has been 103.85%. By itself, of course, the performance of the portfolio – while attractive – does not give any indication of it compares to the market in general. The following chart compares QLC ‘s portfolio to three indices: the S&P 500 , the Dow Jones Industrial Average , and the Dow Jones U.S. Large-Cap Index . 8 (click to enlarge) The performance of QLC portfolio has been quite nice when compared to the performance of the three indices; it has outperformed the S&P and the Large-Cap Index by more than 300bps , and has nearly 500bps over the DJIA. This piqued my interest. If the QLC portfolio did well compared to relevant indices, how would it look compared to other large-cap-focused ETFs? To see how the performances would compare, I performed four trials: QLC versus Large-Cap ETFs that did not use specialized focus (“straight”). QLC versus “growth” oriented large-cap ETFs. QLC versus “value” oriented large-cap ETFs. QLC versus large-cap ETFs that based selection on specialized criteria (“alternative-factor”). In each case but one I compare QLC to four other ETFs; in the case of “alternative-factor” ETFs there are only three “competitors” – most of these funds are relatively new, with less than two or three years performance to consider. 9 The four straight large-cap ETFs are: iShares Russell 1000 ETF (NYSEARCA: IWB ) iShares Morningstar Large-Cap ETF (NYSEARCA: JKD ) SPDR S&P 500 ETF (NYSEARCA: SPY ) Vanguard Large-Cap ETF (NYSEARCA: VV ) (click to enlarge) The growth-oriented ETFs consist of: iShares Russell Top 200 Growth ETF (NYSEARCA: IWY ) SPDR S&P 500 Growth ETF (NYSEARCA: SPYG ) Vanguard Growth ETF (NYSEARCA: VUG ) Vanguard Russell 1000 Growth ETF (NASDAQ: VONG ) (click to enlarge) The value large-cap ETFs include: Guggenheim S&P 500 Pure Value ETF (NYSEARCA: RPV ) iShares Russell 1000 Value ETF (NYSEARCA: IWD ) SPDR S&P 500 Value ETF (NYSEARCA: SPYV ) Vanguard S&P 500 Value ETF (NYSEARCA: VOOV ) (click to enlarge) The three alternative-factor ETFs are: First Trust Capital Strength ETF (NASDAQ: FTCS ) Guggenheim S&P 500 Equal Weight ETF (NYSEARCA: RSP ) PowerShares S&P High Quality (NYSEARCA: SPHQ ) (click to enlarge) In all four trials, only one ETF was able to rise to the occasion: Guggenheim’s RPV , in the “value” category; indeed, until this year, RPV outperformed QLC’s portfolio, and did it quite handily. While 15 ETFs may not be a very large selection of the 117 (besides QLC ) large-cap ETFs, it would seem to constitute a representative sampling. To the extent that is true, there would seem to be very little to differentiate between the various funds out there. The overall range of 74.20% to 94.74% (( RPV )) belies the fact that (A) RPV exceeds the performance of all other ETFs (other than QLC ) by at least 600bps; (B) as a group, the growth-oriented ETFs outperformed the other groupings, clustering between 88.02% (( SPYG )) and 87.15% (( IWY )) – a spread of 87bps; (C) the ETFs in each grouping tend to cluster together, within a few hundred basis points of each other. In any event, the portfolio of companies currently held by QLC far outperforms the competition. Whether this will translate into outperformance in the future remains to be seen, and past performance can never be taken as an indication of future performance. That being said, however, there is more than passing cause for some optimism here. Assessment There are a couple of observations that can be made, but let’s start with QLC : the fund seems to have a lot going for it. If the success of QLC ‘s portfolio can be attributed to the formula used by Northern Trust’s indices, this is certainly an ETF to keep an eye on. It would definitely be a fund to put on one’s watchlist – it might bear watching until it has a year behind it, to get a better idea of turnover rate, ultimate distribution yield and trading volume/liquidity; it is simply too early to get a feeling for these. I have put QLC on my watchlist as a potential replacement for the PowerShares S&P 500 Low Volatility ETF (NYSEARCA: SPLV ), or to compliment it. What seems to be something of interest (at least, to me ) is RPV . This ETF outstripped it value-based brethren, and outperformed everything but QLC ; in general, however, each grouping had a tendency to cluster. It might be worth further investigation if one is interested in finding a large-cap ETF that has proven potential . The only real question I have is why it has experienced a drop this year that has been disproportionately worse than that experienced by other large-cap funds. As for the large-cap funds in general, it looks as if the growth-oriented funds are where the best performance (as a group) are to be found. There is a fairly large gap behind the growth cluster, with the alternative-factor cluster coming in next, straight cluster third and value ETFs bringing up the rear. Except for RPV . Disclaimers This article is for informational use only. It is not intended as a recommendation or inducement to purchase or sell any financial instrument issued by or pertaining to any company or fund mentioned or described herein. All data contained herein is accurate to the best of my ability to ascertain, and is drawn from the Company’s Prospectus, Statement of Additional Information, and fact sheets. All tables, charts and graphs are produced by me using data acquired from pertinent documents; historical price data from The Wall Street Journal . Data from any other sources (if used) is cited as such. All opinions contained herein are mine unless otherwise indicated. The opinions of others that may be included are identified as such and do not necessarily reflect my own views. Before investing, readers are reminded that they are responsible for performing their own due diligence; they are also reminded that it is possible to lose part or all of their invested money. Please invest carefully. ——————– 1 A recent search on the ETF.com screener shows 118 funds when U.S. large-cap funds are searched. 2 Which, as one might expect, consists of the 1250 largest companies (by market cap) in the U.S. 3 FlexShares Trust Prospectus, FlexShares US Quality Large Cap Index Fund (QLC), p. 1. My emphasis. Prospectus is available here . A company’s “financial strength and stability” is measured by proprietary formula. A stock’s momentum is calculated regularly by the index. 4 Prospectus, p. 1. 5 Prospectus, p. 15. 6 Investors are reminded that the income distributed by an ETF is not limited to dividends it has received from its holdings. ETFs also distribute capital gains, interest received, as well as income from other instrumentalities. My estimate is typically below the sum actually paid out by the fund. 7 I am trying out some new data. In addition to my “expense margin” (how much is left after expenses are taken out of gross income), I have added “income yield” (gross income divided by NAV) and “return on NAV” (RONAV) (net income divided by NAV). All of these are intended to reflect aspects of ETF performance the way certain data reflect the performance of a company (operating margin, sales to assets, ROA, respectively). Certainly, some of this data will be more meaningful once a fund has a year’s worth of activity behind it. 8 This is in no way intended to make any claim about the performance of QLC – which didn’t exist until September, 2015; nor is it intended to make any claim about the future performance of the fund. 9 I wanted to limit the comparisons to funds with 5 years of performance history, for sake of fairness.

VHDYX: Fantastic Equity Mutual Fund For Long Term Investing

Summary VHDYX has great sector exposure with a low expense ratio. Well created equity index for anyone planning for long term retirement. Fund is focused on a high dividend and invested in the large companies in the U.S. market. Saving for retirement can be a daunting task when choosing where to invest money. If the ability to save for the long haul is available use it to your advantage. Some portfolios may look too volatile and risky but time is often a great answer. The fund we will be looking at for long term investing is the Vanguard High Dividend Yield Index Fund Investor Shares (MUTF: VHDYX ). Expense Ratio The expense ratio for VHDYX is .18%, which looks great for a mutual fund. Diversification The following chart shows the top ten holdings and also gives a good idea of what we’re looking at in this fund: I would like to see an index with 436 stocks have less than 30% of its holdings in the top ten. That being said, I still like the broad range of sector exposure. The index does invest 98.94% into domestic companies. There are some global giants among the holdings so there will be some international exposure. I stress some because if international exposure is really important for a portfolio I don’t think this index will be enough. Great diversification here with no sector being over 15%. Technology and health care are the two equity sectors that I would look into investing more in. With the advancement and cost effectiveness of automating jobs I tend to favor having technology around 14%. Health care should be a strong sector with the rising age of the population for the next couple of decades. Beyond baby boomers, people are also living longer which is magnifying poor health habits. With a pure equity index I was glad to see telecommunications and basic materials so low. Telecommunications does have the ability for some serious upside but the problem is knowing where it will come from. Everyone wants to sell you their new phone. The competition is rising and causing the sector to really buckle down and intelligently decide what to do next. We have seen some major flops even by the telecommunication giants and now would be a bad time to fall behind. There are plenty of good arguments for who will come out on top but I’m sure we’re all in for a few surprises. With companies working on snazzy new features and trying to be the first one to market breaking technology it’s not a position I want to be heavily invested in. Risk Even though there are hundreds of stocks in this index it is still an equity fund. There is going to be quite a bit of volatility with the market and therefore a lot of risk on a short term basis and there is a chance that a handful of years could take rough swings. There is a high correlation between VHDYX and the S&P 500 and I would invest in them both the same way – long term. Below is a comparison with VHDYX and its benchmark: These returns do look good but I would not use this information to invest if I wanted to retire in five years and could not handle losses. There is the option of diversifying the risk to your liking but if it were me I would make sure I could invest for at least ten years. Yield The yield at 3.29% is what makes this index a winner for me. So many investors plan on a long term goal which involves taking some money out of their portfolio. Where many mistakes happen is watching an index drop and then deciding to pull their position. The high yield here allows you to invest and leave it alone for years while collecting dividends. Conclusion There is a lot to be positive about when looking at this mutual fund. There’s ten sectors to be diversified in and the amount allocated is well thought out. The high yield allows investors to put the money in the index and then leave it alone. The correlation to the S&P 500 should continue with the funds current holdings of only large U.S. companies. On the flip side there is some risk involved; especially if your goals aren’t long term. There is very little international exposure and almost 31% of the holdings in the top ten companies. I would like to see heavier weights for the smaller holdings while maintaining similar sector allocations. I’m heavily debating making it a part of my portfolio. I would want to invest with a long time horizon, such as 15 years, so that I could ride out any bumps in the economy while reinvesting dividends to grow the position

IDACORP: Consistent Utility Outperformer Still Looks Solid

Summary IDACORP has outperformed utility benchmarks on one year, five year, and ten year timeframes. Idaho’s recovery from the recession has been incredibly resilient, helping the utility perform above peer averages. The dividend yield isn’t amazing, but shareholders should expect 5% annual increases over the next five years. IDACORP (NYSE: IDA ) provides electric utility services to over five hundred thousand customers in southern Idaho and eastern Oregon. Idaho has been a relatively strong state coming out of the recession, maintaining below average unemployment while adding healthy, higher-paying jobs and maintaining a pro-business environment. These factors have combined with prudent management style from IDACORP has resulted in a company with a rapidly rising dividend in a normally benign sector. This performance has elevated shares, bringing them onto the radar for many investors. Those who got in early on this tiny utility with just 3,600MW of capacity have been awarded with solid gains as the shares have continued to repeatedly trounce utility benchmarks year in and year out. Is the long-term outlook for IDACORP as favorable as its past? Non-ownership Operational Risk Idaho Power generates nearly half of its power from coal-fired generation. Beyond the general risks of coal (shift to renewables, coal ash, regulatory risk, high capital expenditures to bring plants into emissions compliance), Idaho Power also bears the risk of not having a controlling interest. The three coal plants in which it has an interest are operated by Portland General (PGE), PacifiCorp, and NV Energy. This non-controlling interest gives Idaho Power limited control in operations, but it also gives the company an easier out if does choose to exit coal operations by being able to sell its partial stakes. As for continuing coal operations, the Boardman plant, as outlined in my article on Portland General , is already slated to be closed by 2020. Based on Idaho Power’s 2013 review, they will continue to undertake operations at the other two plants for the foreseeable future. Operating Results Roughly half of IDACORP’s power generation is generated from hydroelectricity generated along the Snake River and its tributaries. When water conditions are poor (due to poor snowpack melt in the spring, low rainfall, or a combination of both), hydroelectric generation falls. In order to fill these gaps, the company must usually purchase power on the open market to fill the gaps. Likewise when the rivers are strong, IDACORP has excess power to sell on the open market for additional revenue. Idaho has been experiencing historically warm and dry conditions for the past several years, which has led to a decrease in yearly power generation from its hydroelectric plants. Purchased power will touch $250M in 2015, up $80M from 2010 levels. As an offset to this, dry and hot weather means higher energy demand from IDACORP customers. Peak energy usage for the utility generally comes in the summer as customers run their air conditioners and irrigation pumps, dry weather exasperating the power draw needed to run these key items. In spite of this gross margin weakness, primarily due to increased purchased power, operating margins have been expanding. This has been primarily due to management chokehold on operations and maintenance costs. Cash from operations has been growing while capital expenditures have been falling. Cash burn has been marginal, with long-term debt barely moving over recent years. The current dividend yield of 2.84% is highly sustainable in my view and future growth is easily supported by operational cash flow. Conclusion IDACORP is a small utility that does trade at a fair premium to peers. The dividend yield is quite small but has been growing, especially in the last few years. The company can easily support future dividend increases so I expect that the company will bump the dividend meaningfully over the next five years, likely in the 5% range. While I might not advocate buying at current prices near 52-week highs, it definitely deserves to be on investor watch lists looking for steady, reliable future returns.