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Did Restaurant Earnings Impact This New ETF?

With the introduction of the new Restaurant ETF (NASDAQ: BITE ) at the end of last month, time has come to evaluate the impact of the recent spate of restaurant industry earnings on it. Most of the restaurant stocks delivered better-than-expected earnings and rising same-store sales (comps) in the last reported quarter. The upbeat results definitely speak about the strong fundamentals of the industry. Low fuel cost, an improving U.S. economy, rising consumer confidence, higher consumer spending and better job prospects all bode well for the restaurant industry. Let us take a quick glance at some of these results. Restaurant Earnings in Detail McDonald’s Corporation (NYSE: MCD ) posted earnings per share of $1.40 for the third quarter that beat the Zacks Consensus Estimate of $1.27 by 10%. Earnings, in constant currencies, grew 44% year over year driven by decline in total costs and expenses and a lower share count. Revenues of $6.62 billion declined 5% year over year due to currency headwinds but grew 7% in constant currencies, beating the Zacks Consensus Estimate by 2.7%. This was driven by comps growth at all its segments. The maker of hamburgers and fries expects comps to grow in the fourth quarter as well. Starbucks Corporation’s (NASDAQ: SBUX ) adjusted earnings of 43 cents per share in the fourth quarter of fiscal 2015 missed the Zacks Consensus Estimate of 44 cents by 2.3%. However, earnings were on the higher end of management’s guided range and grew 16% year over year as solid top-line growth offset lower margins. Sales rose 18% to $4.91 billion, outpacing the Zacks Consensus Estimate of $4.89 billion by 0.5% driven by robust comps. Global comps growth of 8% was higher than a 7% rise in the previous quarter, driven by increased traffic trends. The company expects revenues to grow more than 10% in fiscal 2016, excluding the extra 53rd week. Comps are expected to grow somewhat above the mid-single-digit range. Buffalo Wild Wings Inc.’s (NASDAQ: BWLD ) third-quarter results were disappointing. The restaurant operator’s adjusted earnings of $1.00 per share fell 12.2% year over year and were short of the Zacks Consensus Estimate of $1.28 by 22% owing to higher food and labor costs. Despite a 22% increase, the company’s revenues of $455.5 million missed the consensus estimate by roughly 1.8%. It also expects single-digit net earnings growth for 2015 compared with 13% growth expected previously. The Wendy’s Company’s (NASDAQ: WEN ) adjusted earnings came in at 9 cents per share, exceeding the Zacks Consensus Estimate by 12.5% and year-ago earnings by 28.6% driven by lower expenses and improved margins. Total revenue of $464.6 million beat the consensus mark of $442.0 million by 5% but declined 6.5% from the prior year. The company marginally revised its earnings, EBITDA and comps guidance for 2015 on the basis of strong year-to-date operating results and encouraging response to the 4 for $4 promotion that began in October. ETF Impact Strong results notwithstanding, the performance of restaurant stocks has not been commensurate due to several headwinds like the threat of higher labor costs due to demand for rising minimum wages, price wars, strong currency and a slowdown in the Chinese economy. This found a reflection in the performance of BITE, which exclusively focuses on this industry. The fund has tumbled 5.8% since its launch (as of November 12, 2015). Except McDonald’s and Starbucks, nearly all the stocks in the fund’s top 10 holdings nosedived in the past one month. Investors, therefore, should exercise caution before hopping into this niche ETF and closely monitor its price movements in the coming days. Let us take a look at this ETF in greater detail. BITE tracks the BITE Index, which is an equal-weighted index comprising 45 publicly-traded companies in the U.S. The fund’s holdings include some of the renowned companies in the restaurant industry that operates a broad variety of restaurant formats raging from quick serve and fast casual to casual dining and fine dining. The fund’s top five holdings include McDonald’s, Starbucks, Carrols Restaurant Group Inc. (NASDAQ: TAST ), Chuy’s Holdings, Inc. (NASDAQ: CHUY ) and Ruth’s Hospitality Group Inc. (NASDAQ: RUTH ). Together, the top 10 holdings occupy 27.6% of the fund’s assets. BITE has net assets worth $2.4 million and is thinly traded with an average volume of around 5,000 shares per day. The fund is a bit expensive with 0.75% in expense ratio. Original Post

An Aggressive Allocation Strategy For Young Investors

Summary Using 5 ETFs investors can create a fairly efficient and aggressive equity portfolio. These ETFs are all listed as “commission free” for Schwab accounts and have low expense ratios. The strategy uses 25% international allocations and 75% domestic allocations. To create some bond sensitivity in a pure equity portfolio the allocation to domestic equity REITs is significantly higher. For this article I want to present a fairly aggressive allocation for young investors looking for a simple portfolio. This portfolio would be too aggressive for many older investors, and it even for younger investors that are unable to take the risk of going all in on equity. This portfolio holds precisely zero bonds, and investors would need to be aware of the higher volatility that this portfolio would experience. Holding a portfolio that is devoid of bonds is not a new strategy to me. My personal portfolio (counting investments under my wife’s name) is devoid of bonds with the exception of holding mREITs. The mortgage REITs are essentially a levered and option-embedded bond fund. My mREIT holdings are around 20% of my total portfolio. While the mREITs do represent bonds in a way, they are certainly not reducing the volatility of the portfolio the way that a simple treasury allocation would. The Five ETFs The five ETFs that I would suggest for this portfolio are: SCHE Schwab Emerging Markets ETF SCHC Schwab International Small-Cap Equity ETF SCHF Schwab International Equity ETF SCHH Schwab U.S. REIT ETF SCHD Schwab U.S. Dividend Equity ETF This allocation strategy results in 25% of the equity being invested internationally through the combination of three international funds with the rest of the portfolio being held in domestic investments. The equity REITs in SCHH get a heavier allocation than some investors would feel comfortable using because the equity REITs have some correlation with bonds. In effect, this is allowing the portfolio to import a small amount of bond sensitivity while still maintaining an aggressive all equity allocation. The weights I would use for this kind of portfolio are shown below: Rationale for Allocations – SCHH Since this aggressive strategy is not using bonds, it would be very reasonable to go overweight on either equity REITs or utilities since both have some very material correlation to bonds. Both of these sectors can be used as sources and compete for allocations from investors seeking income. Without bonds, I would want to overweight SCHH. This can be seen in my portfolio allocations as I have been keeping domestic equity REITs around 20 to 25% of my total portfolio. Rationale for Allocations – SCHE, SCHC, SCHF The rationale for the allocations among SCHE, SCHC, and SCHF is fairly simple. I like incorporating a small amount of SCHE for exposure to markets that otherwise would not be present in the portfolio. Currently, SCHE is the only one of these five ETFs that I do not own. By April I will probably have a small position in SCHE. The other four are already present in my portfolio. I feel the emerging markets are more dangerous than the developed markets, so I think SCHE positions should remain smaller than SCHC or SCHF. SCHC is the small-capitalization companies in the developed markets, and the fund keeps growing on me. I think these smaller capitalization companies in the international markets are going to be less efficiently priced than the larger capitalization companies. I expect this to give SCHC a little boost to performance. Even if I’m effectively buying those companies blindly, the position is diversified effectively. SCHF is giving more of what I consider the standard international allocation. The positions are in larger companies that are more established and may be more efficiently priced, however I’m starting to like international markets after several years of poor performance. Out of these three international funds I would expect SCHF to be the least volatile and it has a very low expense ratio for international investment at .08%. To be fair, this list is intentionally restricted to funds with very low expense ratios relative to peers in the space. Rationale for Allocations – SCHD I’ve used SCHD instead of a total or broad market ETF in this example which might surprise some investors. If I’m creating a hypothetical portfolio for a young investor, why wouldn’t I just use the whole market ETFs? The reason for using SCHD is the same reason that I put a heavy weight on equity REITs for the portfolio. This hypothetical portfolio is designed with zero allocation to bonds and SCHD has more defensive sector allocations than broad market ETFs. Perhaps most notable SCHD goes overweight on consumer staples which tend to withstand fierce selloffs in the market. If the portfolio were designed to incorporate more bonds, then I think the appeal of a broad market ETF would increase. Because I started with the assumption of a younger investors that wants to go without bonds, I opted to make the core equity holding a more defensive allocation. Hypothetical Use For an equity heavy strategy like this, dollar cost averaging would be very appealing. In this scenario I would favor rebalancing over just letting the positions sit. For a shorter time frame, I don’t think it would matter much but if the investor was simply going to let the portfolio run for longer than a decade, then I think some rebalancing would be favorable. Commissions Since trading commissions can eat into an investor’s return and my hypothetical young investor is stuck investing less than $10,000 per year, I picked only funds that would be commission free for investors using Schwab. In choosing a brokerage, I think one important consideration is which funds they offer as “commission free”. My only relationship with Schwab is having my personal accounts there. They got my business by offering an attractive list of commission free ETFs and knowing how to handle a solo 401K account. Volatility I ran a regression on this portfolio compared to the S&P 500 using returns since October of 2011. (click to enlarge) Investors should expect that this portfolio would underperform the S&P 500 over the last 4 years if they have been following global markets because international equity significantly underperformed domestic equity. Despite that under performance, it is worth noting that the combined portfolio had an annualized volatility of 12.8% compared to the S&P 500 having an annualized volatility of 13.5%. I believe this reflects an equity portfolio that is intelligent structured to reduce total volatility while offering the potential for significant returns. Conclusion A portfolio like this can be an option for a young investor with a strong enough risk tolerance to run a portfolio that is purely invested in equity. In my opinion, a strategy like this that is focused on ETFs should involve some plan for rebalancing.