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The FlexShares Global Quality Real Estate ETF Is As Much Domestic As Global

Summary GQRE has a fairly high expense ratio for half of the holdings being domestic equity. I don’t see a benefit to using one global REIT ETF when investors can combine a lower expense ratio domestic fund with an international REIT ETF. The ETF has more concentration to individual company weights than I would want to see. Investors should be seeking to improve their risk-adjusted returns. I’m a big fan of using ETFs to achieve the risk-adjusted returns relative to the portfolios that a normal investor can generate for themselves after trading costs. One of the funds I am researching is the FlexShares Global Quality Real Estate Index ETF (NYSEARCA: GQRE ). 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 GQRE sports an expense ratio of .45%. In any event, that falls short of being “excellent”. When we consider that around half of the positions are domestic equity, it looks even less appealing. I would favor getting a pure domestic equity REIT ETF for any diversified domestic exposure that is desired. There are several options with dramatically lower expense ratios for the domestic equity position. International equity REITs are a very small niche, and the sector generally has higher expense ratios, but there is no need to pay it on the domestic assets. Country Allocations I grabbed the following chart from the FlexShares website: If we look past the enormous domestic allocation, the next major weights are Hong Kong, Japan, United Kingdom and Japan. Those four are usually the top 4 countries for international REIT ETFs. I’ve looked at enough of them to simply know that off the top of my head. The interesting thing here is that they weighted Hong Kong at the top and Japan in the second place. Most international REIT ETFs, in my experience, are prone to overweighting Japan. If the fund were designed to have a heavier weight on the other countries that are traditionally underweighted, it would provide a nice bright spot in the portfolio. Holdings I grabbed the following chart to represent the top 10 holdings. (click to enlarge) Unlike most international REIT ETFs, the top holdings here should be recognizable to many investors. The top 10 holdings include 6 that are from the United States and fall under “large cap”. There is a benefit to large-cap REITs, because larger-capitalization companies tend to have more coverage, which results in more efficient pricing, and thus, a lower level of volatility. A Bright Spot in the Holdings While I’d like to see lower weights for individual holdings, I can still appreciate the sector exposure. The top holding is Public Storage (NYSE: PSA ). If you don’t remember them off the top of your head, I bet you will when you look at the photo below. I retrieved it from a piece by Michael Hooper on PSA : If you want some diversification in your exposures, then PSA makes great sense, since it operates in the storage sector of the REIT market. I have no problem with this being a major holding for any domestic equity REIT, and it frequently is one of the top holdings in domestic REIT ETFs. Moving down the list, we see that Simon Property Group (NYSE: SPG ) is another major holding. The downside here is that SPG is literally the #1 holding of most domestic equity REIT ETFs. If you are holding domestic equity REIT ETFs, you already have SPG in your portfolio. Seriously, check the holdings for your ETF and you’ll probably see SPG near the top. I have nothing against investors holding SPG. I hold domestic equity REIT ETFs, and the top position is Simon Property Group. However, my domestic REIT ETFs have expense ratios of .07% and .12%. As a sector, commercial REITs are being given a very heavy weighting. Because the fund is holding so many commercial REITs, I’m glad to see a storage REIT and two residential REITs near the top. However, I do wonder why they aren’t including established champions like Realty Income Corp. (NYSE: O ) if the goal is to establish a portfolio of REITs that are efficiently operating large operations. If the focus is on the “quality” of the underlying holdings, it is hard to argue against a triple net lease REIT with over 80 dividend raises to-date and a focus on only renting to customers with high credit quality and business that are likely to survive any moderate depressions. They do have National Retail Properties (NYSE: NNN ), which is a triple net lease REIT that I find very attractive. I like it enough that I bought shares of NNN for my portfolio to complement my position in REIT ETFs. Unfortunately, the position is only about 1% of the total portfolio. Liquidity The liquidity is bad. If investors want to take a position, only use limit orders to trade the ETF. Conclusion The fund offers heavy weightings to domestic equity that could be more efficiently purchased through domestic equity REIT funds. The fund appears to have a large bias towards buying large-cap REITs and their exclusion of one very high-quality net lease REIT leaves questions about how “quality” is the factor influencing selections. To be thorough, I downloaded the entire list of holdings to ensure that O was not simply positioned outside of the top 10. I didn’t see it anywhere in the fund. Overall, I’m not impressed with the fund. It could be an interesting play if the shares were deviating from NAV, but that would really put the investor in the place of trying to play as a market maker rather than an investor. If the expense ratio was low enough, I could see investors using this as a way to get global REIT exposure. In that case, I would want the domestic allocations to be even higher. Since international REITs move with international stocks, I don’t see the point of combining international REITs with domestic REITs. Yes, they are both REITs. That does not mean they need to be in the same fund.

SCANA Corp. Dividend Stock Analysis

Summary SCANA Corp operates in electric and gas utilities in North Carolina, South Carolina and Georgia. SCANA Corp is a dividend contender having raised dividends for 15 consecutive years and has a Chowder Rule of 5.8. SCANA Corp’s new facility construction in S.Carolina is seeing higher costs and delays resulting in a credit rating downgrade from both Moody’s and Fitch. SCANA Corp (NYSE: SCG ) is an electric and gas utility company operating in North Carolina, South Carolina and Georgia. It owns nuclear, coal, hydro, natural gas and oil, and biomass generating facilities. The major subsidiaries include: South Carolina Electric & Gas – provides electricity and natural gas throughout South Carolina. A regulated public utility and principal subsidiary of SCANA Corporation, SCE&G generates, transmits, distributes and sells electricity to over half a million customers in 24 counties and provides natural gas to customers in 36 counties. PSNC Energy – provides natural gas services in North Carolina. A regulated public utility, PSNC Energy purchases, sells and transports natural gas to more than 508,000 residential, commercial and industrial customers. SCANA Energy – markets natural gas services in Georgia. A leading natural gas marketer, SCANA Energy serves about 460,000 residential, commercial and industrial customers statewide. Other subsidiaries include: SCANA Energy Marketing Inc (markets natural gas and provides energy-related services), SCANA Services Inc (provides administration, management, and other services to SCANA subsidiaries), South Carolina Generating Company Inc (supplies electricity for SCE&G), and South Carolina Fuel Company Inc (fuel supplier for SCE&G). (click to enlarge) (Source: SCANA 2015 Wells Fargo Energy Symposium Presentation ) Corporate Profile (from Yahoo Finance) SCANA Corporation, through its subsidiaries, engages in the generation, transmission, distribution, and sale of electricity to retail and wholesale customers in South Carolina. It owns nuclear, coal, hydro, natural gas and oil, and biomass generating facilities. The company also purchases, sells, and transports natural gas; offers energy-related services; and owns and operates a fiber optic telecommunications network, ethernet network, and data center facilities in South Carolina. In addition, it offers tower site construction, management, and rental services, as well as sells towers in South Carolina, North Carolina, and Tennessee. As of December 31, 2014, the company supplied electricity to approximately 688,000 customers; and provided natural gas to approximately 859,000 residential, commercial, and industrial customers in North Carolina and South Carolina, as well as markets natural gas to approximately 459,000 customers in Georgia. It serves municipalities, electric cooperatives, other investor-owned utilities, registered marketers, and federal and state electric agencies, as well as chemical, educational service, paper product, food product, lumber and wood product, health service, textile manufacturing, rubber and miscellaneous plastic product, and fabricated metal product industries. The company was founded in 1924 and is based in Cayce, South Carolina. A Closer Look SCANA Corp operates both in electric and gas utility sectors. This has been identified in the industry as the path to growth going forward. Other competitors who operated solely in the electric-only business, have started purchasing assets in the gas-utility business in order to diversify and achieve growth. We have seen this lately with the moves from Southern Company (NYSE: SO ) acquiring AGL Resources Inc (NYSE: GAS ); and Duke Energy (NYSE: DUK ) acquiring Piedmont Natural Gas (NYSE: PNY ). The moves are motivated by the fact that electric-only utilities are seeing declining revenues over the years due to a combination of energy conservation, energy efficiency and shift towards independent power generation/natural gas usage. In addition, power generating companies are moving to secure natural gas infrastructure as the industry moves to accommodate the US government mandate targeting power plants to cut carbon emissions by 32% (by 2030) on the 2005 levels. Most of the CEOs in the utility industry have accepted the terms and do not intend to fight against the mandate. SCANA has an advantage here as the company is ahead of competition in securing the electric and natural gas infrastructure. In addition, a major part of the company’s power generation comes from zero-emitting sources: hydro and nuclear. The company also has an advantage by operating in North and South Carolina, which is seeing population growth as residents move to these states where cost of living is lower. (click to enlarge) (Source: SCANA 2015 Wells Fargo Energy Symposium Presentation ) SCANA intends to grow earnings in a target range of 3%-6% (95% of which comes from regulated operations) and analysts expect a growth rate of 4.45% over the next five-year period. Credit Rating Downgrades Two rating agencies, Moody’s and Fitch, downgraded SCANA Corp earlier this year. Moody’s gives the company a Baa3 credit rating with a “Negative” outlook ( downgraded in Sep 2015 ). Fitch gives the company a “BBB-” with a “Stable” outlook ( downgraded in May 2015 ). The rating downgrade was mainly due to the delay and cost of the construction of new nuclear reactors in Jenkinsville, South Carolina. The costs are expected to rise to $11B from the initial $9.8B price tag and completion of Unit 2 reactor will be pushed out three years to 2019. SCANA has announced that the delay and related cost increases are due to design and fabrication issues associated with the production of submodules used. Moody’s issued the following statement with the ratings downgrade: “The negative outlooks reflect the projected deterioration in the financial profile across SCANA and its subsidiaries over the next few years” said Ryan Wobbrock, Assistant Vice President. “Although the supportive regulatory environment in South Carolina helps assure the recovery of new nuclear build expenses at SCE&G, we see leverage ratios rising across the family” added Wobbrock. The negative outlooks for SCANA and SCE&G incorporate the 2 September South Carolina Public Service Commission (SCPSC) vote of approval for a revised cost and construction schedule on the Summer new nuclear project. Moody’s views the SCPSC support as a material credit positive because it allows SCE&G to recover increased costs over a protracted time period. Through LTM 2Q15, SCANA and SCE&G produced cash flow to debt metrics of around 14% and 18%, respectively. However, over the next twelve to eighteen months, we expect each company to produce cash flow to debt below 15%, as capex for the nuclear spend reaches its highest levels (i.e., as of the 2Q15 Base Load Review Act (BLRA) filing, new nuclear gross construction capex is projected to be around $776 million for the 2015 period, $1,077 million for 2016, and $1,003 million for 2017), accompanied by an increasing debt load. We see the annual BLRA revenue increases, which recover Construction Work in Progress costs, as insufficient to improve the current negative trend of financial performance through 2019. Dividend Stock Analysis: Financials Expected: A growing revenue, earnings per share and free cash flow year over year looking at a 10-year trend. A manageable amount of debt that can be serviced without affecting future operations. (click to enlarge) (Source: Created by author. Data from Morningstar) (click to enlarge) (Source: Created by author. Data from Morningstar) Actual: The utility industry is resilient and has seen steadiness over the years. However, revenue has continued to face some pressure over the years although the earnings have seen steady rise since 2011. The debt load is stable over the course of time although high at $6.3B (vs. equity of $5.4B) resulting in a debt/equity of 1.16. The company’s balance sheets show a current ratio of 0.90. Credit ratings: S&P gives it a “BBB+” credit with a “Stable” outlook. Moody’s gives the company a Baa3 credit rating with a “Negative” outlook (downgraded in Sep 2015). Fitch gives the company a “BBB-” with a “Stable” outlook (downgraded in May 2015). SCANA’s yield to maturity is as shown below: (click to enlarge) (Source: Morningstar) Dividends and Payout Ratios Expected: A growing dividend outpacing inflation rates, with a dividend rate not too high (which might signal an upcoming cut). Low/Manageable payout ratio to indicate that the dividends can be raised comfortably in the future. (click to enlarge) (Source: Created by author. Data from Morningstar) Actual: Utility companies are slow and steady growers and are perfectly suited for long-term dividend investors. SCANA is a Dividend Contender having raised dividends consecutively for 15 years. The 1-, 3-, 5-, and 10-year dividend CAGRs are 3.3%, 2.6%, 2.2%, and 3.8% respectively. Coupled with a current dividend yield of 3.61%, SCANA has a Chowder Rule number of 5.8. The current payout ratio is 41%. Outstanding Shares Expected: Either constant or decreasing number of outstanding shares. An increase in share count might signal that the company is diluting its ownership and running into financial trouble. (click to enlarge) (Source: Created by author. Data from Morningstar) Actual: The number of shares have steadily increased over the years. Book Value and Book Value Growth Expected: Growing book value per share. (click to enlarge) (Source: Created by author. Data from Morningstar) Actual: The book value has trended upwards at a good pace over the years. Valuation To determine the valuation, I use the Graham Number, average yield, average price-to-sales, and discounted cash flow. For details on the methodology, click here . The Graham Number for SCANA with a book value per share of $37.92 and TTM EPS of $5.27 is $67.05. SCANA’s average yield over the past five years was 4.39% and over the past 10 years was 4.44%. Based on the current annual payout of $2.18, that gives us a fair value of $49.66 and $49.10 over the 5- and 10-year periods, respectively. The average 5-year P/S is 1.42 and average 10-year P/S is 1.21. Revenue estimates for next year stand at $34.41 per share, giving a fair value of $48.86 and $41.63 based on 5- and 10-year averages, respectively. The consensus from analysts is that earnings will rise at 4.45% per year over the next five years. If we take a more conservative number at 4%, running the three-stage DCF analysis with an 8% discount rate (expected rate of return), we get a fair price of $92.86. The following charts from F.A.S.T. Graphs provide a perspective on the valuation of SCANA. (click to enlarge) (Source: F.A.S.T. Graphs ) The chart above shows that SCANA is slightly overvalued. The Estimates section of F.A.S.T. Graphs predicts that at a P/E valuation of 15, the 1-year return would be 3.88%, confirming that the valuation is high. (click to enlarge) (Source: F.A.S.T. Graphs ) Conclusion Electric utilities in general have seen slower sales industry-wide amid a combination of energy conservation, energy efficiency and shift towards independent power generation/natural gas usage. Coupled with the new regulations from the US government to reduce carbon emissions, electric utilities have started focusing a shift away from dirty fuels such as coal. SCANA has operations concentrating on the nuclear field and already owns a lot of the natural gas infrastructure. However, the capex costs from the construction of new nuclear facilities in South Carolina are ballooning and has resulted in ratings downgrade from both Moody’s and Fitch; and chances of an upgrade anytime soon are low. Earnings are expected to grow at 4.45% over the next five years and dividend growth will lag a bit, although the company has some leeway to grow those dividends making the investment lucrative. The company appears slightly overvalued based on the valuation metrics used above. If we give equal weight to all metrics used above, we get a fair value of $57.95. An added risk for investors is the rise of interest rates by the US Fed. Bond substitutes such as utility stocks suffer in a rising rate environment and investors should stay weary. Full Disclosure: None. My full list of holdings is available here .

VTINX: An Excellent ‘Set And Forget’ Retirement Income Fund

Summary VTINX is a fund-of-funds, but Vanguard does not charge any additional management fee. Globally diversified- about 30% equities, 70% fixed income. The fund’s ten year record puts in the top 10% of its peers. Morningstar has set up a group of mutual fund categories for Target-date retirement funds. These funds often appear in 401k and other retirement plans. A Target-date portfolio provides a diversified exposure to stocks, bonds, and cash for investors who have a specific scheduled retirement date. These portfolios aim to provide investors with an attractive level of return and risk, based solely on the target date. Over time, management adjusts the allocation among asset classes to more conservative mixes as the target date approaches. Morningstar divides target-date funds into the following categories: Target-Date 2000-2010 Target-Date 2011-2015 Target-Date 2016-2020 Target-Date 2021-2025 Target-Date 2026-2030 Target-Date 2031-2035 Target-Date 2036-2040 Target-Date 2041-2045 Target-Date 2050+ Retirement Income Many mutual fund families offer target-date mutual funds that roughly correspond to the Morningstar categories. For example, Vanguard currently offers twelve target-date funds: Target Retirement 2010, Target Retirement 2015, Target Retirement 2020, Target Retirement 2025, Target Retirement 2030, Target Retirement 2035, Target Retirement 2040, Target Retirement 2045, Target Retirement 2050, Target Retirement 2055, Target Retirement 2060, Target Retirement Income In theory, Target Retirement Income is the only one that is not supposed to continually change over time. Each of the other funds gradually evolves until seven years after their retirement income date when they are merged into Target Retirement Income. For example, Target Retirement 2020 will eventually resemble the Target Retirement Income fund in the year 2027. Of course, theory is not always the same as practice. In practice, Target Retirement Income has not been entirely static over the years. There have been several changes since inception: 2006: the allocation to stocks was increased from 20% to 30%, and three foreign stock funds were added. 2010: the allocation to foreign stocks was increased from 6% to 9%, and the three foreign stock funds were consolidated into Total International. 2013: A 14% position in Total International Bond was added, and Inflation-Protected Securities and Prime Money Market funds were dropped and replaced with Short-Term Inflation Index. 2015: The international equity allocation will increase from 30% to 40% of the equity allocation, and the international fixed income allocation will rise from 20% to 30% of nominal fixed income exposure. Overall Objective and Strategy The Target Retirement Income Fund is designed for investors already in retirement. The primary objective is current income with some capital appreciation. The fund currently invests in five Vanguard index funds. The fund holds approximately 30% of assets in equities and 70% in bonds. Fund Expenses The Vanguard Target Retirement Income Inv ( VTINX) is a fund-of-funds, but Vanguard does not change any management fee to assemble the funds for you. The expense ratio is 0.16% only because the five acquired funds. This is 67% lower than the average expense ratio of other mutual funds in this category. Minimum Investment VTINX has a minimum initial investment of $1,000. Past Performance VTINX is classified by Morningstar in the “Retirement Income” or RI category. Compared with other mutual funds in this category, VTINX has had solid performance, largely because of its low expenses. The fund is more defensive than most of its peers, and tends to outperform in weak markets like 2008, while underperforming in very strong years like 2009. These are the annual performance figures computed by Morningstar since 2005. VTINX Category (RS) Percentile Rank 2005 3.33% 3.30% 48 2006 6.38% 7.34% 56 2007 8.17% 4.46% 1 2008 -10.93% -18.06% 6 2009 14.28% 18.36% 80 2010 9.39% 8.94% 42 2011 5.25% 1.60% 9 2012 8.23% 9.01% 67 2013 5.87% 7.36% 56 2014 5.54% 4.36% 19 YTD -0.53% -1.99% 5 Last 5 Years 4.99% 3.67% 10 Source: Morningstar Ten Year Performance Graph VTINX – Current Portfolio Composition Vanguard Total Bond Market II Index Fund 37.3% Vanguard Total Stock Market Index Fund 18.0% Vanguard Short-Term Inflation-Protected Securities Index Fund 16.8% Vanguard Total International Bond Index Fund 16.0% Vanguard Total International Stock Index fund 11.9% The current SEC Yield is 2.06%. Mutual Fund Ratings Lipper Ranking : Funds are ranked based on total return within a universe of funds with similar investment objectives. The Lipper peer group is Income. 1 Yr#92 out of 587 funds 5 Yr#208 out of 457 funds 10 Yr#68 out of 266 funds Morningstar Ratings : The Morningstar category is Retirement Income Overall 4 stars Out of 144 funds 3 Yr 4 stars Out of 144 funds 5 Yr 4 stars Out of 132 funds 10 Yr 4 stars Out of 64 funds Fund Management The fund is managed by three individuals in Vanguard’s Equity Investment Group. Michael H. Buek, CFA, Principal William Coleman Walter Mejman Comments There is a lot of research showing that diversification across regions, asset classes and market capitalizations can enhance long term risk adjusted returns. That is a key idea behind Vanguard’s target date retirement funds which allocate funds according to expected returns and investor risk tolerance based on the number of years left until retirement. Diversification is also useful for those already retired. The Vanguard Target Retirement Income Fund provides a low cost, well diversified balance of income and growth. As of November 30, 2015, the fund had $10.58 billion invested. The fund’s fixed income holdings (around 70%) are well diversified including short, intermediate and long-term governments, agency and investment-grade corporate bonds. In addition, the fund owns inflation-protected, mortgage-backed and asset-backed securities and foreign bonds issued in non-U.S. currencies, but hedged by Vanguard to minimize currency exposure. The stock holdings (around 30%) are a diversified mix of U.S. and foreign stocks including large-caps, mid-caps and small caps. VTINX can serve very well as a core holding in a retirement account, and may also be used in taxable accounts by retired investors when IRA required minimum withdrawals are more than they need for living expenses. VTINX normally pays out quarterly distributions, but Vanguard allows you to set up your own automatic withdrawals as needed.