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SRV And SRF: Playing Games In Closed-End Funds

Summary Cushing Royalty & Income Fund and Cushing MLP Total Return Fund have both gone through a reverse stock split. The press release suggests it was done for shareholders. That’s sort of true, but you shouldn’t thank the CEFs for it. On September 14th, the Cushing Royalty & Income Fund (NYSE: SRF ) (now known as the Cushing Energy Income Fund ) and the Cushing MLP Total Return Fund (NYSE: SRV ) effected 1 for 5 reverse splits. That changes very little for shareholders except the price of the closed-end funds, or CEFs. That said, a higher price is better in some ways, but you still shouldn’t be thanking the funds for this move. What changes? The first thing to keep in mind with any stock split is that it does nothing to a shareholder’s ownership in a company. Your proportional ownership remains unchanged. So, in many ways, a stock split is mostly about theatrics. But that can be important. For example, some companies split their stocks two for one when the stock gets to around $100 a share. The idea being that people are more likely to buy shares in a company with shares selling at $50 than one with shares trading hands at twice that level. Maybe, maybe not… but clearly it’s about the show since the split would just turn a $100 share into two $50 shares. Reverse splits like the ones SRF and SRV just did are a bit trickier. Sometimes a company’s shares are trading at such low levels that they risk being delisted by their exchange. In that case, the split has a very real purpose, but that’s normally only an issue that impacts true penny stocks. In other cases, the move is just a show. Investors often avoid low-priced companies because of a concern over the risk of owning a company with a low share price. Institutional accounts, for example, often have minimum share price limitations. That’s not an unfounded fear, but it isn’t always realistic either. So companies with relatively low share prices will sometimes do a reverse split to prop up the price to attract more investors. Reversing the above example, a company that did a one for two reverse split would simply take two $50 shares and turn them into one $100 share. An Investor’s stake in the company isn’t altered, just the share price and the number of shares he or she owns. What about SRF and SRV? So a split doesn’t really change anything, even though there may be good reasons to do them. Are there bad reasons? The answer is yes. The reverse split at SRF and SRV has been billed as: The intent of the reverse share split is to potentially increase the Fund’s market price per common share and trading volume, thereby reducing the per share transaction costs associated with buying or selling the Fund’s common shares in the secondary market. Sure, with a higher share price, it may be easier to trade SRF and SRV. But that’s not likely the reason for the split. Although neither was at the point where you’d worry about a delisting, both were at the point where investors could reasonably be scared off by the low price. So the reverse split makes both SRF and SRV appear a bit more respectable. The problem is that both have made material use of return of capital in recent years. In fact, SRF has supported its distribution with nothing but return of capital since its initial public offering in early 2011. The net asset value, or NAV, fell from roughly $23 a share at the IPO to $5.60 at the end of May. By the time of the split, the NAV had fallen even further, falling into the $3.80 a share range. That’s brutal, particularly for a fund that’s only provided return of capital to its shareholders. The fund’s goal , by the way, is to seek a high total return with an emphasis on current income. I’m hard pressed to see how it’s lived up to that objective. SRV has done a little better, with its NAV falling to the $3.75 a share range before the reverse split from around $5.75 or so in late 2009. However, the high in the period was an NAV of around $8. So for many investors the NAV drop has been pretty harsh. And return of capital has been a big part of the distribution, representing roughly 60% of the disbursement between December of 2009 and May of 2015. That’s not a good number, but, to be fair, not nearly as bad SRF’s 100%. No dividend cuts, yet… At this point, neither fund has enacted a distribution cut. But with SRF offering a yield of over 15% and so much return of capital, I wouldn’t expect the payment to hold up. And if it does, then the split was cosmetic in that it helps to hide the fact that the fund has basically been self-liquidating since the day it came public. Based on the numbers, I just find it really hard to buy into the “ease of trading” logic the fund is using to justify the reverse stock split. SRV’s reverse split doesn’t look quite as bad, since the CEF yields around half as much as SRF. That could actually be sustainable, but only if the oil and gas sector on which the fund focuses turns around. If that doesn’t happen soon, the note in the split announcement highlighting that the September distribution was expected to be all return of capital is a not-so-subtle problem. And it could just get worse if low oil and gas prices force more dividend and distribution cuts in the oil and gas sector from which SRV generates its income. So SRV will be “easier to trade” too. But bumping up the share price via a reverse stock split still looks more like an attempt to paper over the trouble brewing with the distribution and NAV. Not where you want to be SRF and SRV are focused on a rough area of the market. If you are a contrarian that might interest you. But the high levels of return of capital for funds that have seen their NAVs fall dramatically should be a big concern. And the reverse stock split does nothing to change that dynamic – unless potentially large distribution cuts are made. The reverse split will probably make it easier to trade SRF and SRV, as the CEFs suggest. However, the splits look more like an attempt to cover deeper problems to me. I would avoid this pair. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Who Wants SCHC? I’m Trying To Buy Some

Summary The Schwab International Small-Cap Equity ETF is getting very appealing again as it is dipping much lower amid international fears. I’ve been admiring this ETF for a while but couldn’t get the right entry price, I have a limit order pending. The ETF has a large volume of small-cap securities that are difficult to acquire for your portfolio which enhances diversification. The international equity allocations are fairly diversified. I wouldn’t mind even more diversification, but this is certainly good. I see a reasonable allocation of around 3% to 5% of the portfolio value to SCHC. I’m also using SCHF for part of my international position. The Schwab International Small-Cap Equity ETF (NYSEARCA: SCHC ) is one of the ETFs I have been keeping an eye on over the last month or two. On September 22nd, 2015, I put in a limit buy order for some shares. I’m still waiting to see if the price drops far enough to trigger the order, but it is “good til cancelled” and the standard period is 60 days until it would automatically cancel. Why I like SCHC The Schwab International Small-Cap Equity ETF is a fairly nice fit the diversified equity portfolio. While there are many options for international exposure, there are only a few of them that focus on the small-cap international market. Quite a few years ago there was a theory that small capitalization companies were capable of delivering superior performance because a lack of coverage by analysts would result in less efficient pricing and therefore higher risk premiums could be demanded. With the advent of total market indexes and broad market indexes, the demand for small cap companies increased and it was capable to effectively diversify the risk. International markets tend to be less developed than the U.S. financial market and I believe we may witness the same kind of performance in those markets. As more research is done and risk premiums are reduced, the international small-cap market may see some fairly solid performance. Heads I Win, Tails We Tie If my theory fails to pan out, there is still a benefit to SCHC that qualifies as “good enough”. Because the fund is focused on small-cap holdings it has very little overlap with other major international funds. I already use the Schwab International Equity ETF (NYSEARCA: SCHF ) for part of my international exposure. While there may be some solid correlation in returns due to similar risk factors for international markets, the individual holdings are very different. By adding a small position in SCHC to my international holdings I’m hoping to gain a slight amount of additional diversification. If SCHC simply matches SCHF for total return over the next few years but excels in different quarters, there will still be some benefits to be had from rebalancing the positions. These are probably going to be limited to fairly minor gains, but minor gains rather than a loss is a perfectly acceptable outcome to me. Volume of Holdings SCHC has a fairly impressive 1,666 holdings to go with an expense ratio of .18%. Since the expense ratio remains under .20%, it isn’t high enough to really chase me off and it feels reasonable when considering the sheer volume of international small-cap holdings. These are not the most liquid and easiest to acquire securities. All in all, I feel that I’m getting some value out of paying that ratio. Geography The following map breaks down the geographic allocations of the fund: (click to enlarge) I wouldn’t mind seeing slightly larger allocations to the smaller sections, but this is certainly a reasonable diversified batch. The top 3 countries are on different continents, which is a refreshing change from some of the “international” ETFs that place almost all of the equity in Europe. I have no issue with holding equity in European countries, but I’m buying these funds for diversification so seeing a strong mix of different markets is very favorable. Ideal Allocation I like SCHC as an allocation for 3% to 5% of my portfolio. I would still aim to keep a significant portion of the international equity allocation in the larger capitalization markets that may be more resilient to a sell off. If the markets really turn south and SCHC does sell off, I would want to keep increasing my allocations to take advantage of fear based selling. I think the best way to do that may be to just set ranges for where I want the position to be within the portfolio and to rebalance whenever it gets too high or too low. Since the ETF is free to trade from Schwab accounts, I can rebalance without much concern. What Goes with SCHC? Naturally investors will want a core position in domestic equity funds, but SCHC also benefits from being in a portfolio with long duration treasury securities. Those securities have a negative correlation with SCHC and would be ideal for a portfolio that includes rebalancing. Conclusion After another day of fear drove market prices around $28.50 per share, it seemed worth tagging on a limit buy order and seeing if I’d be able to snag some shares of this ETF. I’ve liked it for a while but didn’t have an order ready and waiting on the August 24th event where so many funds went on incredible sales. Now that we are seeing another attractive entry range, I have an order waiting to scoop up some shares. Disclosure: I am/we are long SCHF. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.

Solid Holdings And Growing Dividends Are On Sale? I’d Like To Buy Those

Summary The Schwab U.S. Equity Dividend ETF offers investors very solid growth in dividends. Looking at the combination of yield and growth rate makes SCHD look like a very compelling long term investment. SCHD has been slightly less volatile than the S&P 500. I don’t want to stop buying equity when prices drop, so I’m buying the slightly less volatile equity. The holdings are a solid batch of companies with strong dividend histories and established market positions. Lately I’ve been looking for ETFs that offer investors more safety. We are seeing macroeconomic issues with corporate profits after tax making up record percentages of GDP and a stock market that, at least measured by the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) is getting quite expense when we measure price to earnings or price to sales. That creates a real problem for investors looking for investments that have respectable yields without absurd levels of risk. In my opinion, one of the better shelters for the potential volatility is the Schwab U.S. Dividend Equity ETF (NYSEARCA: SCHD ). How expensive is the market? To demonstrate the relatively high prices, I grabbed the following chart: (click to enlarge) I try not to focus too much on any single measure. However, it is worth noting that price to sales levels are fairly high and that is enough to concern me and encourage me to focus on using more conservative allocations. Some sectors such as telecommunications are seeing substantial pricing wars that will drive down both sales values and profit levels. That makes me fairly bearish about the outlook for that sector. In the same way, we have seen mining companies facing very high fixed costs. Rather than respond to lower prices by cutting production, many initially attempted to increase production so the fixed costs could be spread over more units of production. From a macroeconomic perspective, I think thinner profit margins stemming from fierce competition are very healthy for the long term economy. More intense competition drives more efficient allocation of resources and lower costs are a very material benefit for consumers. Despite those gains, I want to be careful not to overextend my portfolio in buying up companies with deteriorating earnings. I’ve had quite enough of that pain from Freeport-McMoRan (NYSE: FCX ) when I didn’t predict that copper prices would get smashed by hedge funds shorting copper futures contracts to express a bearish view on China. That was an interesting lesson to learn. It encouraged me to be more careful about firms that are susceptible to seeing declining pricing power. Why SCHD is great While SCHD offers investors some appealing characteristics, like a .07% expense ratio, I’m finding more to love than the low holding costs. SCHD is offering some pretty great dividend growth history. 2011 was an incomplete year and is not a fair comparison. The full year data begins in 2012. The impressive thing is that 2015 is also an incomplete year but it is already matching the distributions for 2013. This is a dividend ETF with a respectable yield and it is a solid choice as a core portfolio holding. Holdings The following chart shows the top 10 holdings: (click to enlarge) This is a pretty good batch. I can’t help but notice that they are putting heavy weights on some of the companies that seem to be out of favor right now. Verizon Communications (NYSE: VZ ) is an example of one of the companies that I’m concerned about as Sprint (NYSE: S ) wages a massive price war. On the other hand, I’m left wondering how long the fierce competition will last. In a market that is so heavily concentrated, it seems like a reduction in intensity of competition would immediately benefit all companies. You might wonder who would move first to calm the battle. My guess is Sprint, if they stopped battling I think Verizon and AT&T (NYSE: T ) would both quickly drop back into a more complacent strategy. I have to admit that I’m pretty big on seeing the heavy allocations to Exxon Mobil (NYSE: XOM ) and Chevron (NYSE: CVX ) because I expect those mammoths to get back on track. Investors may believe that cheaper gas is here to stay, but I think money in politics is here to stay for much longer. Don’t expect XOM and CVX to go quietly into the night. One way or another, the major gas companies will put up a fight for their shareholders. The Coca-Cola Company (NYSE: KO ) and Pepsi (NYSE: PEP ) have both trailed the S&P 500 dramatically over the last five years. I’ll take that risk because they have a great distribution system in place. While junk food may be on the way out and healthier food is on the way in, these companies still have an incredible economic moat. They can still acquire the more attractive products and utilize their system of delivery to add substantial value to the process. Remember KO wasn’t too shy about taking a major position in Monster Beverage Corp. (NASDAQ: MNST ) when they recognized that MNST had a very desirable product that needed a stronger global distribution channel. Conclusion When the volatility in the market gets ugly, I’d rather not sit on the sidelines. This great dividend ETF is just what I need to keep acquiring the kind of dividend champions I want to hold for decades. Now if the price would just drop a little further and trigger my latest buy order… Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SCHD, FCX over the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.