Tag Archives: author

IFGL: International REIT Exposure Could Include More Countries

Summary The ETF offers investors a fairly unique risk exposure. The fund has heavier allocations to individual countries than I would prefer. 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 iShares FTSE EPRA/NAREIT Global Real Estate Ex-U.S. Index ETF (NASDAQ: IFGL ). 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 IFGL sports an expense ratio of .48%. Not impressive, in my opinion. Yield The ETF offers a fairly nice distribution yield 3.66%. While there are some things I don’t like, that is a fairly respectable yield. If investors are going to buy an ETF where the individual holdings are largely unfamiliar to them, then I’d prefer to see the ETF have a strong yield to encourage the shareholders to maintain their positions during periods of volatility. Some investors will focus on wanting to see the value of their portfolio increase with every statement, but I think they should also keep an eye on the amount of income the portfolio is generating. Country Allocations I grabbed the following chart from the iShares website: (click to enlarge) I understand that international equity REIT ETFs have a tendency to overweight Japan. No big deal, we can work around that. On the other hand, they are also going fairly heavy on Hong Kong. The top 4 country weights represent around 65% of the portfolio. I find that a little disappointing since I believe international REIT exposure should be designed to improve diversity in small allocations and lead to a lower risk portfolio rather than believing that investors should use the allocation to pump up returns. Since I like this niche for only small allocations to reduce risk rather than drive returns, a heavy allocation to individual countries is a negative factor for me. What I would like to see is the top allocations reduced and increase in the allocations to other parts of Europe (such as Sweden and Switzerland). I wouldn’t mind seeing some fairly light allocations to more exotic locations either to get a little REIT exposure to the emerging markets. Missing Allocations If you’re trying to build a thoroughly diversified international position for the portfolio, it would be wise to consider including ETFs in Latin America and Africa. I’m not a fan of putting huge weights on emerging markets, but a very small weight is reasonable since the goal is diversification of risk factors. Investors may also notice that this ETF went heavy on Hong Kong rather than including an allocation directly to China. I don’t have a problem with that strategy. The markets are correlated but I’d feel more comfortable with the exposure to Hong Kong. REITs The other thing investors should remember is that this international allocation is investing in REITs. In the domestic market REITs and regular equity markets can diverge quite substantially over years so investors would be wise to consider including allocations to the normal corporate international market. Holdings I built the following chart to represent the top 10 holdings. (click to enlarge) These allocations are a little heavy in my opinion. Just like the allocations to individual countries were heavy, I’d rather see the ETF limiting positions to around 2% to 3% of the portfolio as the cap for a single allocation. The positions should not have a hard cap that would force immediately sales and expose the ETF to losses from rapidly liquidating positions, but a soft cap that encourages them to reallocate capital would be favorable. Conclusion The expense ratio is too high for my liking, but the ETF still offers some diversification benefits as long as the weight is low. I’d really prefer to see the ETF offering a more thorough diversification across both individual holdings and weights for countries. If investors are confident these markets will outperform over the next several years, than there is no problem with the concentrated allocation. If the investors, like me, see international REIT ETFs as a diversification play then it doesn’t make sense to have the positions concentrated.

U.S. Stocks Rise 2.1% For The Week, But Don’t Lament Being Diversified

The Standard & Poor’s 500 stock index rose 2.1% last week, lifted by better-than-expected earnings reports from tech giants Amazon (NASDAQ: AMZN ), Microsoft (NASDAQ: MSFT ) and Alphabet (NASDAQ: GOOG ) (NASDAQ: GOOGL ). When trading closed on Friday, the S&P 500 stock index had erased all of the losses sustained since the correction of late August-early September, when the index declined by as much as 13.4% from its high. The U.S. bull market, now over six years old, last week was going strong. Ironically, however, all this good news about U.S. stocks can be a little frustrating to diversified investors because it makes prudent, diversified investors look like laggards versus the S&P 500. So now’s a good time to remember that diversified investors won’t ever perform as well as a hot asset class or as bad as the worst asset class. (click to enlarge) This chart illustrates how the S&P 500 outperformed a broad range of 13 assets classes in the five years ended September 30, 2015. The index of U.S. blue-chip, publicly-held companies gained 87%, a very strong gain for a five-year period. The S&P 500 was driven higher because the U.S. economy rebounded more strongly from the global debt crisis and the Great Recession. The return on the S&P 500 was significantly better than most of the other asset classes in this diverse group of 13 types of investments. It would be natural to lament not concentrating your portfolio on U.S. stocks instead of building a diverse group or asset classes. It’s frustrating not performing as well as the S&P 500. However, that’s not how strategically investing for the long run and using Modern Portfolio Theory works. Being diversified means, by definition, not placing your entire portfolio in any single asset class. You diversify because no one can be certain that the next five years will be as good for American stocks as the last five years. Owning a broad range of asset classes means you won’t ever perform as well as the No. 1 asset class. But it also assures your portfolio won’t perform as poorly as the worst asset class that you hold. Diversification and rebalancing periodically, which is the core of Modern Portfolio Theory, provides a strategic course of moderation. The idea is to avoid the big swings of being concentrated in one or two asset classes. Concentrating a portfolio in U.S. stocks could have given you bigger gains, but it can also work against you and land you with larger losses when stocks are out of favor, and can make it more difficult to stay the course when stocks are knocked down in a correction or bear market. So don’t kick yourself if all your money was not riding on U.S. stocks the past five years. While past performance is not a guarantee of your future results, it is also true that a long-term investment strategy cannot fairly be measured against short-term trends.

Huh? What? Short Attention-Span Investors

Summary Eight seconds. That’s all we, as human beings, use to focus on any one particular thing before being distracted or allowing our minds to wander. The implications of having such a short attention span are immense. The frequency of short-term gains and focus on the here and now prevents many from taking a longer-term view which can help mitigate risks. “The Internet is a big distraction.” – Ray Bradbury Every day I like to do what millions of people around the world do: read up on news. Not too long ago, you’d see open newspapers from crowds of subway-passengers looking for ways to make the commute more tolerable. Now? Seemingly everyone turns on their smartphone, or tablet to absorb the news of the moment. We feel smarter, we feel more educated “knowing” what’s going on in the world around us. One particular story hit me a few months ago on a normal day commuting to work, which I took an excerpt from below: “Humans have become so obsessed with portable devices and overwhelmed by content that we now have attention spans shorter than that of the previously jokingly juxtaposed goldfish. Microsoft surveyed 2,000 people and used electroencephalograms (EEGs) to monitor the brain activity of another 112 in the study, which sought to determine the impact that pocket-sized devices and the increased availability of digital media and information have had on our daily lives. Among the good news in the 54-page report is that our ability to multi-task has drastically improved in the information age, but unfortunately attention spans have fallen. In 2000 the average attention span was 12 seconds, but this has now fallen to just eight. The goldfish is believed to be able to maintain a solid nine.” Source: The Independent Eight seconds. That’s all we, as human beings, use to focus on any one particular thing before being distracted or allowing our minds to wander. We went from 12 seconds (already hilariously low), to an even shorter 8 seconds just a little over a decade later. I shudder to think how short that attention span will get in the next decade, and the next, and the next. We live in a world where there is so much noise, so much distraction, that we simply can’t focus anymore. Investors have mentalities of traders, and traders act like high-frequency algorithms which base decisions on information which is largely impossible to process without advanced computing power. The implications of having such a short attention span are immense, as it results in a complete inability to focus on the long-term, and think beyond the talking point of the moment. People like to watch the behavior of certain exchange traded funds like the S&P 500 SPDRs ETF (NYSEARCA: SPY ), and the iShares Russell 2000 Index Fund ETF (NYSEARCA: IWM ) because that intraday movement feeds our short-term, unfocused addiction to data. Too bad it doesn’t actually help. Short focus also makes discipline harder and harder to have consistently. One of the reasons we purposely designed our alternative Morningstar 4 Star overall rated ATAC Inflation Rotation Fund (MUTF: ATACX ) (rating as of 9/30/15 among 234 Tactical Allocation Funds derived from a weighted average of the fund’s 3-year risk-adjusted return measures) to be quantitative in nature is to force unemotional discipline into tactical risk management. All of the knowledge in the world doesn’t matter if we qualitatively get distracted and can barely focus for more than 8 seconds on any one topic, let alone plan out an asset allocation policy or rotational strategy based on opinion as opposed to math. Focus tends to be what differentiates the great from the good. The temptations, however, are enormous in an instant gratification world where we want to make money every single second, because we can only focus on a few of those seconds before deciding (with conviction) whether something is working or isn’t. To be better at long-term wealth generation, I believe we need to focus first and foremost on what longer-term quantitative analysis suggests matters most. As stated in the summary versions of our award winning papers (click here to download), the major focus for investors and traders shouldn’t be chasing upside, but minimizing downside. The problem? The frequency of short-term gains and focus on the here and now prevents many from taking a longer-term view which can help mitigate risks. What do you do about it? Turn your screens off, shut down your phones, and focus on only those things that have tended to have predictive power. Too much information is a massive distraction, and detrimental to focusing on real wealth generation techniques as opposed to the trade of the moment. Now, where’s that newspaper? Opinions expressed are those of the author and are subject to change, are not intended to be a forecast of future events, a guarantee of future results, nor investment advice. The Fund’s investment objectives, risks, charges, expenses and other information are described in the statutory or summary prospectus, which must be read and considered carefully before investing. You may download the statutory or summary prospectus or obtain a hard copy by calling 855-ATACFUND or visiting atacfund.com . Please read the Prospectuses carefully before you invest. For each fund with at least a three-year history, Morningstar calculates a Morningstar Rating™ (based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a fund’s monthly performance including the effects of sales charges, loads, and redemption fees), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. (Each share class is counted as a fraction of one fund within this scale and rated separately, which may cause slight variations in the distribution percentages.) The ATAC Inflation Rotation Fund was rated against the following numbers of U.S.-domiciled Tactical Allocation funds over the following time periods: 234 funds in the last three years for the period ending 9/30/15. With respect to these Tactical Allocation funds, ATAC Inflation Rotation Fund received a Morningstar Rating of 4 stars for the three-year period. Past performance is no guarantee of future results. ©2015 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Mutual fund investing involves risk. Principal loss is possible. Because the Funds invest primarily in ETFs, they may invest a greater percentage of its assets in the securities of a single issuer and therefore is considered non-diversified. If a Fund invests a greater percentage of its assets in the securities of a single issuer, its value may decline to a greater degree than if the fund held were a more diversified mutual fund. The Funds are expected to have a high portfolio turnover ratio which has the potential to result in the realization by the Fund and distribution to shareholders of a greater amount of capital gains. This means that investors will be likely to have a higher tax liability. Because the Funds invest in Underlying ETFs an investor will indirectly bear the principal risks of the Underlying ETFs, including but not limited to, risks associated with investments in ETFs, large and smaller companies, real estate investment trusts, foreign securities, non-diversification, high yield bonds, fixed income investments, derivatives, leverage, short sales and commodities. The Fund will bear its share of the fees and expenses of the underlying funds. Shareholders will pay higher expenses than would be the case if making direct investments in the underlying funds. All investing involves risks. Fund holdings and sector allocations are subject to change and should not be considered a recommendation to buy or sell any securities. Reference to other securities should not be interpreted as a recommendation of these securities. Diversification does not assure a profit nor protect against loss in a declining market. As of 10/21/2015, the fund does not hold any of the following securities in Its portfolio: SPY, IWM The ATAC Inflation Rotation Fund is distributed by Quasar Distributors, LLC. No other products mentioned in this piece are distributed by Quasar.