Tag Archives: apple

I’ll Take VNQ Over The Federal Reserve: Benefit From Low Rates

Summary The Vanguard REIT Index ETF is holding a diversified portfolio of REITs that can benefit from low rates. Wage growth is a bullish factor for domestic demand. Inventories at high levels relative to sales are bearish, but goods are frequently imported rather than built domestically. If the Federal Reserve follows the mandate to maintain high employment, they will need to keep rates low. The Vanguard REIT Index ETF (NYSEARCA: VNQ ) has been one of my core portfolio holdings and I don’t foresee it going anywhere. The fund offers investors a very reasonable expense ratio of .12%, a dividend yield running a hair under 4%, and a large degree of diversification throughout the industry as demonstrated in its sector allocations: Weak Bond Yields The yield on the 10-year treasury has dipped under 2% and I don’t expect it to end the year much higher. Our economy is depending on very low interest rates, which can be a boon for the equity REITs as it offers them access to lower cost debt financing for properties. Why Treasury Yields are Limited The Federal Reserve is largely incapable of pushing rates up. It might be technically possible for them to have some influence in pushing the rates higher, but it would be a disastrous scenario. The Federal Reserve is facing a dual mandate for low and steady inflation combined with high employment. If domestic interest rates are increased, it would encourage further capital flows into the country as globally investors would seek the security of buying treasuries. The predictable impact would be a stronger dollar that encouraged companies to ship more jobs abroad and a decline in domestic asset prices due to the “cheaper” goods being imported. Essentially, when interest rates are rising, it will need to be across the globe. Raising interest rates in only one developed country is asking for problems when the tools of production can be operated on a global scale. I understand investors are clamoring for respectable low-risk yields, but increasing rates is not practical. If Those Yields Stay Low If the bond yields are remaining low, investors are going to be searching for yield in other places. With that dividend yield around 4%, VNQ is one viable option for providing some yield to the portfolio. It isn’t just demand for the shares of the REIT, though. The REIT industry has another tailwind that makes it more favorable. Wage Growth is Bullish Some major employers like Wal-Mart (NYSE: WMT ), Target (NYSE: TGT ) and McDonald’s (NYSE: MCD ) have announced very substantial increases in their base wages. This is finally showing that domestic companies are finding value in their own employees. When capital is not flowing to labor, there is less demand in the society for physical goods. As corporate earnings were climbing in previous quarters, there wasn’t enough capital flowing back to “Main Street.” A growth in wages here should help combat weakness in sales for the corporate sector. This growth in wages is a favorable sign that major employers are seeing value from labor. Many investors may scoff that the jobs provided by these employers are creating “low wage” or “low class” jobs. That makes the increase in wages even more important. In a recovery in which too many of the new jobs were failing to provide material levels of income for workers, there is finally an increase near the bottom of the pyramid. Increasing Inventories to Sales is Bearish The following chart compares inventory levels with sales: (click to enlarge) We are seeing a growth in inventory levels, which is a dangerous macroeconomic sign, as higher inventory levels encourage companies to cut production. If the physical production is reduced, there is less demand for workers. That could bring us back towards higher levels of unemployment and weaker wage growth at the bottom of the pyramid. It also indicates that earnings could take a substantial hit. Weaker Earnings Projections Should Force Rates Down For the investors that are not familiar with the accounting for inventory costs, it is important to state that higher levels of production generally stretch fixed costs across more units of production. When companies have to cut production due to inventory levels becoming too high, it results in higher costs of production. Those higher costs can effectively be wrapped into the “inventory” line item and the expense won’t pass through the income statement until the inventory is sold. When the inventory is sold, the higher costs of production flow through the income statement as “cost of goods sold.” The REIT Impact If increasing inventories results in a large reduction in labor in the United States, it would be a problem for REITs as it would signal deteriorating fundamentals. On the other hand, a great deal of inventory comes from imports and a reduction in imports would not have the same dramatic impact. According to ABC news , in the 1960s only 8% of American purchases were made overseas. Now that value is greater than 60%. Whether we talk about residential REITs, office REITs, or retail REITs, a lack of domestic employment would be a bearish sign that would indicate a reduction in the consumption of goods. For residential REITs, the impact would be a drop in the amount of demand for apartments as unemployed workers are not a solid renting demographic. For the office REITs, there is a lack of demand for office space if the companies renting that space find their sales diminishing and must cut their costs. The retail REITs face a similar problem to the office REITs as they depend on consumers buying products from their tenants. Why I’m Still Holding onto VNQ The potential for weakening levels of employment as evidenced by factors like the increase in inventories relative to sales is a material concern. Despite that concern, I choose to remain long VNQ. The increasing inventories are a concern, but imports still fund a substantial portion of inventory. If rates were rising and forcing the dollar to appreciate even further, it would be a serious risk factor for the REITs, but it would also be a challenge directly to the mandate of full employment. So long as the Federal Reserve is following that part of their mandate, they will be forced to keep the rates low. That provides support to share prices as investors seek yield and it provides support to the underlying business by keeping the cost of debt capital lower. Because the REITs can benefit from a low cost of capital and the impact of higher wages, they are in position to gain twice. On the other hand, if I’m wrong and the Federal Reserve does opt to start jacking up short-term rates, then I’ll be eating some nasty losses on my portfolio value. I can’t be certain that I’m right, but I’m confident enough that I am holding VNQ and the Schwab U.S. REIT ETF (NYSEARCA: SCHH ) in my portfolio .

Dividend Oriented Retirement Portfolio Using Only 9 Commission Free ETFs

Asset allocation is set to generate approximately 3.0% yield. Dual momentum option is designed to enhance return while reducing risk. Three portfolio management styles are: Passive, Dual Momentum, and Tranche. A Tranche Model will reduce “luck” of rebalancing. Dividend yield closely matches that provided by a portfolio of Dividend Aristocrats. Retirement goals drive investors to save and invest. The following three models use eight ETFs for investing and one ETF, the iShares 1-3 Year Treasury Bond ETF ( SHY), as a cutoff or “circuit breaker” security. When set up using the following asset allocations, the portfolio will generate approximately 3.0% annually or not far off a portfolio built around Dividend Aristocrats. The nine ETFs are as follows. Vanguard Total Stock Market ETF ( VTI) Vanguard FTSE Developed Markets ETF ( VEA) Vanguard FTSE Emerging Markets ETF ( VWO) Vanguard REIT Index ETF ( VNQ) SPDR Dow Jones International Real Estate ETF ( RWX) PowerShares Emerging Markets Sovereign Debt Portfolio ETF ( PCY) iShares 20+ Year Treasury Bond ETF ( TLT) Vanguard Intermediate-Term Bond ETF ( BIV) iShares 1-3 Year Treasury Bond ETF (( SHY)) Passive Portfolio Model: The next major decision focuses on what percentage to invest in each ETF if one is constructing a portfolio to be passively managed. The percentage allocations follow the ” Swensen Six ” recommendations with a few modifications. RWX and PCY are new additions and BIV replaces TIP. SHY is the ninth ETF and is used strictly as a cutoff ETF in the momentum and tranche models – to be described below. VTI = 30% with a 1.96% yield VEA = 10% with a 3.07% yield VWO = 10% with a 3.1% yield VNQ = 15% with a 4.11% yield RWX = 5% with a 3.2% yield PCY = 10% with a 5.07% yield TLT = 10% with a 2.66% yield BIV = 10% with a 2.7% yield Using the above asset allocations, all one needs to do is keep the various asset classes in balance or close to the suggested targets. All ETFs pay a nice dividend, an advantage for retirees, while providing an equity emphasis for future return. The portfolio also meets the diversification requirement as there are hundreds of stocks and bonds spread out all over the globe. Dual Momentum Model: The dual momentum model is slightly more complicated compared to the passive model in that it requires a bit more time to manage. The basic concepts behind this model can be found in Antonacci’s Dual Momentum book or a condensed version in this Seeking Alpha article . The major advantage of this investing model is keep one out of deep bear markets as we experienced in the early part of this century and again in 2008 and early 2009. Using the same eight commission free ETFs, three metrics are used to rank the securities and compare performance with SHY. 1. Return of Capital (ROC1 and ROC2) are assigned weights of 50% and 30%. 2. Look-back periods are 91 and 182 calendar days. 3. A 20% weight is assigned to volatility where a mean-variance calculation is used and low volatility is rewarded. When a portfolio is reviewed, the securities are ranked as shown below. The recommendation is to only invest in the top two ranked ETFs, and then only if they are outperforming SHY. Based on current data (10/2/2015) only BIV and TLT meet this standard so 50% of the portfolio is invested in BIV and 50% in TLT. If there is a tie, then the investments are split evenly three ways. (click to enlarge) Tranche Model: The Tranche Model may be new to many investors and therefore requires a little explanation. The logic behind this model is to mitigate the “luck-of-review-day” problem. I review portfolios every 33 days so the reviews come at different times of the month. This also avoids wash sale issues and short-term trading fees that are accessed by brokers offering commission free ETFs. When a specific review days is selected, the dual momentum recommendations can vary from day to day. We might be lucky and find recommended buys on a day when the market down, or we could be unlucky and end up with a pair of ETFs that were not ranked so high on trading days on either side of the review day. What the Tranche Model (TM) does is permit the user to select multiple portfolios using different days of separation. The TM answers the question, what was the dual momentum recommendation two days ago, or four days ago? While the Tranche Model reduces risk, it also tends to reduce return. In the following screen-shot the number of Offset Portfolios is set to eight (8). The software permits as many as 12 portfolio options. The period (trading days) between offsets is set to 2. Otherwise, the settings are similar to the above dual momentum screen-shot. Recommendations from the Tranche Model, if rounding to the nearest 50 shares, are as follows. For a $100,000 portfolio, buy 200 shares of SHY or leave in cash. Purchase 400 shares of PCY, 250 shares of TLT, and 450 shares of BIV. Once the portfolio is positioned based on these recommendations, do nothing until the next portfolio review. (click to enlarge) The passive portfolio is the easiest to manage and there are tax advantages as shares are held for long periods of time. The dual momentum and tranche models require more attention, but will prevent major losses when major bear markets strike.

EWI: 3 Coins In The Fountain

A long established fund, with consistent dividend returns. The fund is well off its highs attained before the financial crises of 2008. Italy, as part of the larger EU, offers investors the opportunity to grow with a recovering EU economy. Among the available legions of ETFs there are only two mostly Italian weighted at better than 94% and they are closely related funds. First, is the plain vanilla iShares MSCI Italy Capped ETF (NYSEARCA: EWI ) and the currency hedged version, the iShares Currency Hedged MSCI Italy ETF (NYSEARCA: HEWI ). The currency hedged fund HEWI, as its ticker symbol suggests, is identically the EWI fund with the addition of a U.S. Dollar vs Euro currency hedge. It should be noted that a currency hedge does its best to mitigate fluctuation in currency exchange. Just briefly, when the U.S. Dollar strengthens against the Euro, Euro denominated profits will seem to shrink when translated into U.S. Dollars even if Euro denominated profits remain unchanged. Conversely, when the Dollar weakens vs the Euro, Euro denominated profits will seem to grow, even if Euro denominated profits remain unchanged. A currency hedge is designed to ‘smooth out’ these fluctuations. However, there are costs associated with currency hedge, so an investor would a long term horizon may or may not fully benefit from a currency hedge. Hence, the choice of the hedged [HEWI] or unhedged [EWI] version is left to the discretion of the investor. The benchmark index is Morgan Stanley Capital International [MSCI] Italy 25/50 Index (NYSEARCA: USD ): The MSCI Italy 25/50 Index is designed to measure the performance of the large and mid-cap segments of the Italian market. It applies certain investment limits that are imposed on regulated investment companies, or RICs, under the current U.S. Internal Revenue Code. With 26 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in Italy. The fund’s cap refers to U.S. IRS tax code in that: …at the end of each quarter of its tax year no more than 25% of the value of the RIC’s assets may be invested in a single issuer and the sum of the weights of all issuers representing more than 5% of the fund should not exceed 50% of the fund’s total assets… Lastly, the MSCI cap methodology is designed to minimize turnover. (click to enlarge) ( Data From MSCI and BlackRock) The three heaviest weighted sectors are a little different. The fund weights the Energy Sector energy about 10.8% more than does the index; Financials about 4.41% lighter than the index and Utilities almost 13% heavier than the index. So the fund leans a little more defensively than does the index. In spite of the difference, the iShares Italy capped fund EWI seems to emulate the MSCI index rather well. iShares EWI vs the MSCI Index 1 Year 3 Year 5 Year 10 Year Inception MSCI Italy 25/50 Index -7.09% 7.97% -0.58% -2.83% 4.07% iShares Italy Capped EWI -7.23% 8.21% -0.59% -2.83% 4.16% (Data From BlackRock) As far as individual holdings, MSCI only list the top ten heaviest weighted holdings. A quick comparison reveals a slight difference from the fund. First, the top ten Index holdings represents 65.42% of the entire index, whereas the top ten holdings of EWI represents 68.74% of the fund’s holdings. As far as individual top ten holdings, the iShares fund carries three identical financials and Telecom Italia (NYSE: TI ) 3.6132% of the fund’s total holdings. On the other hand, the MSCI Index carries a fourth financial, Banca Monte Dei Paschi di Siena ( OTCPK:BMDPY ) 5.25%, of the index. The fund carries the bank also, but it accounts for only 2.096% of the total fund. Top ten comparison of MSCI Index vs iShares EWI Sector MSCI EWI Sector Consumer Discretionary LUXOTTICA GROUP (NYSE: LUX ): 4.66% LUXOTTICA GROUP: 4.58% Consumer Discretionary Consumer Discretionary FIAT CHRYSLER AUTOMOBILES NV (NYSE: FCAU ): 4.00% FIAT CHRYSLER AUTOMOBILES NV: 4.11% Consumer Discretionary Energy ENI (NYSE: ENI ): 11.00% ENI: 11.96% Energy Financials INTESA SANPAOLO ( OTCPK:ISNPY ): 12.13% INTESA SANPAOLO: 13.48% Financials Financials UNICREDIT ( OTC:UNCFY ): 7.57 UNICREDIT: 8.72% Financials Financials BANCA MONTE DEI PASCHI DI SIENA SP: 5.25% ASSICURAZIONI GENERALI: 4.53% Financials Financials ASSICURAZIONI GENERALI ( OTCPK:ARZGY ): 4.48% ATLANTIA: 4.56% Industrials Industrials ATLANTIA ( OTCPK:ATASY ): 4.43% TELECOM ITALIA: 3.61% Telecommunications Utilities ENEL ( OTCPK:ENLAY ): 7.73% ENEL: 8.93% Utilities Utilities SNAM ( OTCPK:SNMRY ): 4.00% SNAM: 4.26% Utilities Represents 65.42% of the Index Represents 68.74% of the Fund (Data from BlackRock and MSCI) It’s worth making note of the difference between those two top holdings. Banca Monte Dei Paschi di Siena provides corporate and consumer banking services, asset management, life insurance, pension funds and investment trust. The bank has a market cap of $5.3876 billion, has a negative EPS at -5.97 and does not pay a dividend. Lastly, the shares are rather volatile with a beta of 1.73 times the market. Telecom Italia’s primary businesses are landline and mobile telephone service, internet and internet protocol TV as well as the office product and IT provider, Olivetti , as a wholly owned subsidiary. Telecom Italia company is the leading company in its sector, with international operations in Brazil and Argentina in addition to domestic operations. Telecom Italia has a market cap of $19.87 billion, a P/E of 25.65 and a beta of 1.43 times the market, however, no dividend yield. (click to enlarge) Lastly, a few words about the Italian economy: Italy seems to have two economies: the northern, industrial economy as well as a lagging southern economy. The difference is notable. The entire economy grew at about 0.3% in 2015-Q1 with full year expectations of about 0.7%. The Eurozone economy, (EU19) as a whole, grew at 0.4% in Q1. The results were similar in Q2, with Italy growing at 0.2%, while the entire EU19 grew at 0.3%. However, according to the Economist , ” A Tale of Two Economies” , North and Central Italy grew at 2%, well ahead of the Eurozone as well as the entire EU, (EU28). To put it perspective: … Of the 943,000 Italians who became unemployed between 2007 and 2014, 70% were southerners… … Italy’s aggregate workforce contracted by 4% over that time; the south’s, by 10.7%… …Employment in the south is lower than in any country in the European Union, at 40%; in the north, it is 64%… In the North, per Capita GDP is about $35,500; in the south about $19,250. Unemployment in the North is 9.5%; in the south 20.7%. Public debt is approximately 133% of GDP. The economic obstacles in the south go beyond direct economic regions, including changing demographics. About 700,000 Italians migrated to the northern part of the country and skilled labor is in short supply in the south. Lastly, the southern region contains the islands Sardinia and Sicily where growth and recovery have been slower. Until recently, both islands have been weighed down by higher utility and transportation costs to and from the mainland. Their economies rely heavily on the Hospitality Industry. However, recent reforms and infrastructure upgrades have had very positive results. To put progressive reforms in perspective, Sicily now ranks as the 8th and Sardinia 13th of the fastest growing of the 20 regions in Italy. Sardinia is currently seeking tax haven status, and is currently free from custom duties; Sicily is developing Etna Valley, attracting electronics firms such as STMicroelectronics (NYSE: STM ) and Numonyx, a wholly owned subsidiary of Micron Technologies (NASDAQ: MU ). Key Facts Summary Net Assets Outstanding Shares Holdings x-cash or derivatives 20 Day Average Volume Expense Ratio (Industry Average 0.44%) Price/ Earnings Price/ Book Beta Annualized Yield iShares EWI Italy 25/50 Capped $1.1504 billion USD 79.5 million 26 494,696 0.48% 22.39 1.10 0.85 3.69% and 2.52% TTM (Data from BlackRock and MSCI) At first glance, an investor might shy away based on the Italian economy and to be sure, there is a risk. However, Italy is a key component state of the larger European Union. In other words, the Italian economy is not entirely left to its own devices and is subject to the rules and regulations governing its membership in the EU. True the EU has had some difficult years, but amazingly, has not only come out intact, but has even added a new member. Right now, Italy’s economy as an EU member will feel the effects of a global economic contraction. However, for those investors with patience, the potential for the Italy economy as a member of a fully recovered EU economy, may prove profitable in the long run.