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Creating A Quality Growth Portfolio For Millennials

Summary I searched through all ETFs and found five for building a quality growth portfolio given the current environment. The five ETFs I found cover: U.S. Mega-Cap growth, biotechnology, International Growth, High Yield Bonds and Cash. The portfolio is weighted 70% stocks, 20% bonds, 10% cash. In this article, I will be creating a simple growth oriented portfolio for millennial investors. The goal of the portfolio is to hold five ETFs to gain exposure to high quality growth stocks as well as targeting specific high growth areas. U.S Equity: Vanguard Mega Cap Growth ETF (NYSEARCA: MGK ) I chose MGK because it only holds the largest market-cap growth stocks. I wanted to be more conservative with my main growth selection because the second part of my U.S. equity allocation consists of a high growth/high risk segment of the market, therefore for balance, I chose MGK. When looking for large-cap growth ETFs, I narrowed my search down to MGK and the iShares Russell Top 200 Growth ETF (NYSEARCA: IWY ). I chose MGK over IWY because of the lower cost and exposure to health care. MGK charges 0.11% and IWY charges 0.20%, which is not a huge difference, however when taken in combination with the data table below MGK stood out as the superior choice. My second ETF selection is a health care ETF, therefore, I did not want a lot of exposure to health care from my main selection. I looked at the health care allocations of IWY and MGK and found that MGK has a lower allocation to health care. Health Care Allocation MGK 14.00% IWY 17.95% [Table Data from IWY & MGK websites] Targeted Sector Growth Equity: ALPS Medical Breakthroughs ETF (NYSEARCA: SBIO ) I chose SBIO because of its exposure to small & mid cap high growth biotechnology companies. SBIO only holds companies with a market cap between $200 million and $5 billion. Most importantly, SBIO only holds those stocks with a sustainable cash burn rate and companies with at least one product in phase 2 or phase 3 of development. This distinguishes SBIO from other biotech ETF offerings because it is targeting companies that have moved passed the initial stage of development and have the cash available to be able to fund continued clinical trials. It is widely know that many biotechs with promising drugs build hype when they are in phase 2 or phase 3 because of the potential to go from zero or very little revenues to a significant amount. A complete picture of the selection process can be seen in the image below. (click to enlarge) [Chart from SBIO Fund page ] International Equity: iShares MSCI EAFE Growth ETF (NYSEARCA: EFG ) I chose EFG because it holds mainly large cap companies in developed markets excluding the United States and then selects those companies whose earnings are expected to grow at an above-average rate relative to the market. The following chart shows that growth oriented stocks in the EAFE have significantly outperformed the broad iShares MSCI EAFE ETF (NYSEARCA: EFA ) and value oriented stocks of the iShares MSCI EAFE Value ETF (NYSEARCA: EFV ). (click to enlarge) [Chart from Google Finance] Short-Term High-Yield Corporate Bonds: First Trust Tactical High Yield ETF (NASDAQ: HYLS ) I chose HYLS because of its high-yield and superior performance during the most recent run up in interest rates. I believe all investors; even millennials should have an allocation to fixed income even though it is not growth oriented. With the potential for rising rates aggressive bond ETFs will most likely suffer, which is why when I searched through all the high-yield ETFs available, HYLS stood out among its competitors. HYLS stood out because of its structure, 6%+ dividend yield and its performance. HYLS is actively managed and uses a fundamental process to select long positions and has the ability to short treasury bonds or corporate bonds. According to the HYLS fact sheet: The team uses a combination of a rigorous fundamental credit selection process with relative value analysis and believes that an evolving investment environment offers varying degrees of investment risk opportunities in the high-yield, senior loan, derivative and fixed-income instrument markets. The second reason I chose HYLS was because it performed very well during the most recent rising rate period from February 2nd 2015 until June 10th 2015. As you can see HYLS [Yellow Line] outperformed both major broad high yield bond ETFs including the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA: HYG ) and the SPDR Barclays Capital High Yield Bond ETF (NYSEARCA: JNK ). In addition, HYLS also outperformed short-duration high yield bond funds including the iShares 0-5 Year High Yield Corporate Bond ETF (NYSEARCA: SHYG ), the SPDR Barclays Capital Short Term High Yield Bond ETF (NYSEARCA: SJNK ) and the PIMCO 0-5 Year High Yield Corporate Bond Index ETF (NYSEARCA: HYS ). (click to enlarge) [Chart from Google Finance] Cash: PIMCO Enhanced Short Maturity Strategy ETF (NYSEARCA: MINT ) My final selection was MINT because I believe all portfolios either should have cash for safety or available to use for strategic purchases of quality growth stocks/ETFs. Millennials have a long-term horizon and if there is an opportunity to pick up a quality growth ETF or stock that is trading unjustly lower, having the cash available to do so is desirable. Portfolio Overview I have provided an example of what the portfolio would look like. As you can see, I allocated 30% to each main equity selection and 10% to SBIO, which made the total equity allocation to be 70%. Allocation MGK 30% SBIO 10% EFG 30% HYLS 20% MINT 10% Portfolio Composition Stocks 70% Bonds 20% “Cash” 10% Closing Thoughts The portfolio I created has exposure to quality growth companies in the U.S. and internationally. With the added allocation to target biotechnology, the portfolios growth should be enhanced by this high growth area of the market. In addition, by moving out on the credit risk spectrum for fixed income, the portfolio would generate some income, which instead of being reinvested into more HYLS, could be used to purchase more growth stocks/ETFs. Disclaimer : See here .

VT: A Simple Choice For Getting Global Exposure

Summary The ETF has a good expense ratio, but investors can get a lower ratio by combining VEU and VOO. Investors need to remember the importance of international diversification even as domestic equity as thoroughly outperformed during the latest bull market. While I support having some international diversification, this fund offers almost 45% of the holdings as international equity. That is a bit too high for me. I see this fund as being maximized by investors that want to add it to their domestic allocations or investors with a long time horizon. The Vanguard Total World Stock ETF (NYSEARCA: VT ) is a great ETF for getting exposure across the world. The holdings are about 55% domestic and around 45% international. Expenses The expense ratio is a .17%. Vanguard regularly sets the bar for creating low fee investment vehicles for investors to gain solid diversification with low costs. My one concern in this area is that investors could use the Vanguard FTSE All-World ex-US ETF (NYSEARCA: VEU ) for international allocations with a .14% expense ratio and the Vanguard S&P 500 ETF (NYSEARCA: VOO ) for domestic equity with an expense ratio of .05%. You could average those in any way you wanted since both parts offer lower expense ratios than the Vanguard Total World Stock ETF. Aside from that potential strategy to lower ratios, this is a very solid fund and a viable option for one stop shopping on equity exposure. Holdings I grabbed the following chart to demonstrate the weight of the top 10 holdings: For a total world ETF, I think investors had to expect Apple (NASDAQ: AAPL ) to be the top weight. The company is simply huge and their sheer size makes it necessary to give them a significant weight in any index attempting to replicate the entire world of equity securities. We have only stock that I think of as an international allocation within the top holdings. That, of course, is Nestle S.A. ( OTCPK:NSRGY ). As an international company, their sales are providing even further diversification as they rely on both developed and emerging markets for growth in sales. Nestle is the kind of dividend machine that SA Author Dividends Are Coming has suggested investors should buy and hold forever . The company is not always considered as a perennial dividend champion by domestic investors because their dividends appear to have suffered in a few years due to the currency exchange impacts. In their domestic currency, they are a great dividend growth company. Sectors (click to enlarge) If I was going to use a single ETF as the primary source of equity for my entire portfolio, I think I would prefer to see a slightly more defensive allocation strategy. For investors willing to go with the more aggressive allocations, such as having around 38% of the portfolio in the cyclical sectors, this is the kind of fund investors should consider for automatic investing. To avoid excess risk, that is a strategy for investors with a long enough time horizon to make up for losses as there should be both bull and bear markets over the next few decades. Region Domestic equities get a heavier weighting than international equities, but the international weights are fairly high. I must admit that as an investor I have a significant home country bias and I would not be comfortable with having even close to 45% of my equity in the form of international investments. For me the limit on international equity is closer to 30% and I prefer to run it closer to 15% to 20% of the total portfolio. I do feel compelled to point out that the allocation to emerging markets is within reason, so my concern would be coming from the strength of the allocations to developed markets. Generally developed markets are going to be less volatile than emerging markets but in this case the allocation to the developed markets is substantially larger and thus it is capable of generating more volatility at the portfolio level because of the weighting. Conclusion This is a solid ETF though the more attractive traders that don’t mind a more complex allocation may want to consider combining VEU and VOO if they really want to chase their expense ratios down to be as low as possible. In my opinion, this ETF should be combined with additional domestic allocations because the international allocations are simply a little too high for my taste. For investors that don’t mind the heavy international allocation and have a long time horizon to recover from any bear markets, this fund should be considered for regular purchasing.

Best And Worst Q4’15: Small Cap Value ETFs, Mutual Funds And Key Holdings

Summary The Small Cap Value style ranks tenth in Q4’15. . Based on an aggregation of ratings of 16 ETFs and 255 mutual funds. . VBR is our top-rated Small Cap Value style ETF and RVFIX is our top-rated Small Cap Value Style mutual fund.. The Small Cap Value style ranks tenth out of the twelve fund styles as detailed in our Q4’15 Style Ratings for ETFs and Mutual Funds report. Last quarter , the Small Cap Value style ranked tenth as well. It gets our Dangerous rating, which is based on an aggregation of ratings of 16 ETFs and 255 mutual funds in the Small Cap Value style. See a recap of our Q3’15 Style Ratings here. Figure 1 ranks from best to worst the ten Small-Cap Value ETFs that meet our liquidity standards and Figure 2 shows the five best and worst-rated Small-Cap Value mutual funds. Not all Small Cap Value style ETFs and mutual funds are created the same. The number of holdings varies widely (from 12 to 1502). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Small Cap Value style should buy one of the Attractive-or-better rated ETFs or mutual funds from Figures 1 and 2. Figure 1: ETFs with the Best & Worst Ratings – Top 5 (click to enlarge) * Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings The Direxion Value Line Small- and Mid-Cap High Dividend ETF (NYSEARCA: VLSM ) and the First Trust Mid Cap Value AlphaDEX ETF (NYSEARCA: FNK ) and are excluded from Figure 1 because their total net assets are below $100 million and do not meet our liquidity minimums. Figure 2: Mutual Funds with the Best & Worst Ratings – Top 5 (click to enlarge) * Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings The Vanguard Small-Cap Value ETF (NYSEARCA: VBR ) is the top-rated Small Cap Value ETF and the Royce Small-Cap Value Fund (MUTF: RVFIX ) is the top-rated Small Cap Value mutual fund. DBR earns a Neutral rating and RVFIX earns an Attractive rating. The PowerShares Fundamental Pure Small Value Portfolio ETF (NYSEARCA: PXSV ) is the worst-rated Small Cap Value ETF and the Aston/River Road Independent Value Fund (MUTF: ARIVX ) is the worst-rated Small Cap Value mutual fund. PXSV earns a Dangerous rating and ARIVX earns a Very Dangerous rating. The Buckle, Inc. (NYSE: BKE ) is one of our favorite stocks held by Small Cap Value ETFs and mutual funds and earns our Very Attractive rating. For the past decade, the company has grown after-tax profit ( NOPAT ) by 13% compounded annually. Not only has the company posted strong profit growth, but Buckle has improved its return on invested capital ( ROIC ) from 18% to a top quintile 30% during the same time frame. Concerns over the retail industry have led shares of this fundamentally sound company to be significantly undervalued. At its current price of $32/share, Buckle has a price to economic book value ( PEBV ) ratio of 0.6. This ratio means that the market expects Buckle’s NOPAT to permanently decline by 40%. If Buckle can grow NOPAT by 5% compounded annually for the next five years , the company is worth $69/share today – a 115% upside. Dean Foods (NYSE: DF ) is one of our least favorite stocks held by Small Cap Value ETFs and mutual funds and earns our Dangerous rating. Dean Foods was also placed in the Danger Zone back in December 2012. Since 2010, Dean Foods’ NOPAT has declined by an alarming 48% compounded annually. The company’s ROIC has fallen from 4% in 2010 to a bottom quintile 1% on a trailing-twelve-month basis. Despite the deterioration of business operations, Dean Foods remains priced for significant profit growth. To justify its current price of $19/share, Dean Foods must grow NOPAT by 19% compounded annually for the next 17 years . This expectation seems optimistic given that Dean Foods’ profits have steadily declined since 2010. Figures 3 and 4 show the rating landscape of all Small Cap Value ETFs and mutual funds. Figure 3: Separating the Best ETFs From the Worst ETFs (click to enlarge) Sources: New Constructs, LLC and company filings Figure 4: Separating the Best Mutual Funds From the Worst Funds (click to enlarge) Sources: New Constructs, LLC and company filings D isclosure: David Trainer and Thaxston McKee receive no compensation to write about any specific stock, style, or theme.