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How To Avoid The Worst Style ETFs: Q3’15

Summary The large number of ETFs has little to do with serving your best interests. Below are three red flags you can use to avoid the worst ETFs. The following presents the least and most expensive style ETFs as well as the worst overall style ETFs per our Q3’15 Style ratings. Question: Why are there so many ETFs? Answer: ETF providers tend to make lots of money on each ETF so they create more products to sell. The large number of ETFs has little to do with serving your best interests. Below are three red flags you can use to avoid the worst ETFs: Inadequate Liquidity This issue is the easiest issue to avoid, and our advice is simple. Avoid all ETFs with less than $100 million in assets. Low levels of liquidity can lead to a discrepancy between the price of the ETF and the underlying value of the securities it holds. Plus, low asset levels tend to mean lower volume in the ETF and larger bid-ask spreads. High Fees ETFs should be cheap, but not all of them are. The first step here is to know what is cheap and expensive. To ensure you are paying at or below average fees, invest only in ETFs with total annual costs below 0.46%, which is the average total annual cost of the 281 U.S. equity style ETFs we cover. Figure 1 shows the most and least expensive Style ETFs. QuantShares provides 2 of the most expensive ETFs while Schwab ETFs are among the cheapest. Figure 1: 5 Least and Most Expensive Style ETFs (click to enlarge) Sources: New Constructs, LLC and company filings Investors need not pay high fees for quality holdings. The i Shares Enhanced U.S. Large-Cap ETF (NYSEARCA: IELG ) earns our Very Attractive rating and has low total annual costs of only 0.08%. On the other hand, the Schwab U.S. Small-Cap ETF (NYSEARCA: SCHA ) holds poor stocks. No matter how cheap an ETF, if it holds bad stocks, its performance will be bad. The quality of an ETFs holdings matters more than its price. Poor Holdings Avoiding poor holdings is by far the hardest part of avoiding bad ETFs, but it is also the most important because an ETFs performance is determined more by its holdings than its costs. Figure 2 shows the ETFs within each style with the worst holdings or portfolio management ratings . Note that there are no ETFs in the All Cap Growth and All Cap Value style under coverage. Figure 2: Style ETFs with the Worst Holdings (click to enlarge) Sources: New Constructs, LLC and company filings Ark, iShares, and Guggenheim appear more often than any other providers in Figure 2, which means that they offer the most ETFs with the worst holdings. Our overall ratings on ETFs are based primarily on our stock ratings of their holdings. The Danger Within Buying an ETF without analyzing its holdings is like buying a stock without analyzing its business and finances. Put another way, research on ETF holdings is necessary due diligence because an ETF’s performance is only as good as its holdings’ performance. PERFORMANCE OF ETF’s HOLDINGs = PERFORMANCE OF ETF Disclosure: David Trainer and Max Lee receive no compensation to write about any specific stock, style, or theme . 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. I have no business relationship with any company whose stock is mentioned in this article.

The Best Companies To Work For Provide The Best Returns

Summary I use employee review site Glassdoor to find the best companies to work for in America. Companies with high employee satisfaction seem to provide less volatile returns. The best company to work for in 2015 was Google. Do you work for a great company? Does it take care of your needs? Does it have a happy workforce overall? If so, are you tempted to invest in its share program? Maybe you should. In this article, I look at some of the best and worst-rated companies in America in order to see which companies give the best investment returns. Introduction When it comes to analyzing stocks, many investors focus on traditional measures of valuation such as company finances, financial ratios , or earnings projections. But one problem with this is that all investors are looking at the same things. I believe that there is sense in looking at some other, more qualitative, factors too. After all, there is more to a company that just a set of numbers on a piece of paper. Companies are made up of individual people and as English philosopher Alain De Botton said: To write up the goings-on in businesses only in economic terms, to sum up an entire company as being +1.20 or to compress the experiences of 8,000 people into a turnover of 375,776 seems as limited as reducing a novel of the complexity of Price and Prejudice to a ledger of the characters’ bank accounts. – The News, Alain De Botton . Knowing this, I believe it is important to not only analyze the financials of a business but also the manner in which the company treats its employees. And in my view , a company that treats its employees well is likely to perform more reliably and make better returns for investors. To analyze this concept, I decided to gather data from the employee review site Glassdoor . If you haven’t heard of Glassdoor, it’s basically a site that allows employees to leave anonymous reviews of employers. By storing up this data, Glassdoor has been able to rate companies across the globe based on levels of employee satisfaction. I therefore took the best and worst companies (as rated on Glassdoor) and analyzed which companies had performed the best over the subsequent few years. Best Companies To Work For In 2012 In 2012, Glassdoor released a list of the best 50 companies to work for in America and gave top place to Bain & Company. The highest publicly listed company was Facebook (NASDAQ: FB ), which was praised for its “attractive salary and friendly employees.” The following table shows 2012’s best 11 companies to work for in America and the subsequent share price of those companies, beginning 8/11/2012: (Note, I only included companies on the list that were publicly listed on one of the major US exchanges). As the table indicates, the best publicly listed company in 2012 according to Glassdoor ratings was Facebook. The stock went on to give a 77% one-year return and a 240% three-year return. Investing $1000 into each of the 11 best-rated companies would have made a 20.28% return on investment over one year and a 61.62% return over three years. Worst Companies To Work For In 2012 Turning now to the companies that were rated worst. This data was gathered from 24/7 Wall Street , originally from Glassdoor. The table below shows the worst rated 11 companies and their subsequent share performance: As shown in the table, the worst company to work for in America was Dish Networks (NASDAQ: DISH ). However, investing in DISH would have produced an excellent one-year return of 47.57% and a 3-year return of over 100%. Moreover, investing $1000 into each of the worst-rated companies would have returned 67.46% over one year and 110% over three years, sharply outperforming the return for the best-rated companies. RadioShack (NYSE: RSH ) It’s also worth noting though, that one company on this list (RadioShack) would have been a very bad choice for your portfolio. Users on Glassdoor criticized RadioShack for its “poor management, below average pay, and strenuous hours.” And if you’d invested in RadioShack alone, you would have lost 81% of your capital. In fact, the company was later forced into liquidation in February 2015. Best Companies To Work For In 2013 In 2013, the highest rated public company on Glassdoor was Facebook again. And following is the top 9 companies to work for in 2013 and their subsequent share performance from 7/20/2013: As is clear, investing in the best-rated companies would have been a good strategy in 2013. The top rated company, Facebook, produced a 166% return over the first year and a 276% return over two years. Investing $1000 into each stock would have returned 29.84% in the first year and 49.73% over two years. Worst Companies To Work For In 2013 In 2013, there were some new entries into the worst-rated companies to work for in America including businesses such as NCR Corp. (NYSE: NCR ) and Dollar General (NYSE: DG ). As you can see from the following table, the worst 9 companies to work at in 2013 produced poor returns over the next one and two-year time horizon: Investing $1000 into each of the worst-rated companies in August 2013 would have produced just a 0.75% return on investment in the first year and a 6.84% return over two years. (click to enlarge) So what can we make of these results? The goal of this piece was to try and find a link between employee satisfaction and share price performance, and on first glance, our findings are not completely compelling. In 2012, the worst places to work actually turned out to be the best stocks to invest in. This suggests that a contrarian type strategy, where investors look for businesses on the verge of turnaround could be worthwhile. However, this finding was reversed in 2013 where the worst-rated companies significantly underperformed. Less volatility One interesting insight to be culled from this study is the case of RadioShack. The stock ended up in bankruptcy in 2015 with its stock price going to zero. And the inclusion of the company in the worst-rated list in both 2012 and 2013 is telling. So, using this data on its own might not be particularly wise. But it does seem likely, that the best companies to work for give less volatile, more reliable, stock returns overall. In general, companies should be evaluated not just on their finances but based on the individuals that make up the business as a whole. Personally, I would rather invest in those companies with the most content employees. – As of 2015, the best company to work for in America was Google ( GOOG ). – Dates chosen to reflect release of the worst companies list in order to avoid look-ahead bias – Number of companies used chosen in accordance with the number available on the worst companies list. 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.

What Will Happen To Utility Stocks If The Fed Raises Rates?

Summary Relative to the yield on the 10-year Treasury, utilities actually look cheap today. Based on earnings, however, they look expensive. The decline in utility prices so far this year is likely the market preparing for a rate increase. If rates do go up, the worst of the damage has likely already been done; and there won’t be a large amount of additional downside. Utilities are often thought of as a “bond substitute”. They have fairly steady earnings and usually have regulatory support to keep them healthy. Investors often think of utility dividends as a revenue source comparable to a bond’s interest payment. Ever since 2008’s financial crisis, utility valuations have been influenced by the artificially low interest rate environment the Fed created. Since the returns available from bonds have been so terrible, investors have naturally moved to utility stocks as a way to increase their income. As the Fed discusses the possibility of higher rates, investors should think about the implications for their utility holdings. You can really see how interest rates have impacted utility stocks (as measured by the Philadelphia Utility Index (UTY) since 2014 in the following chart. Chart 1 (click to enlarge) Source: FactSet In 2014, while interest rates were falling, all stocks were basically rising (as shown by the S&P 500), but the utilities seemed to be receiving an added boost. Utilities peaked early this year, and since then, as Treasury yields have risen, they have taken a fall much greater than the rest of the market. A large amount of the utility drop is likely from investors anticipating a Fed rate increase and trying to get out before a big fall. Expanding this chart to the turn of the century provides additional observations. Chart 2 (click to enlarge) Source: FactSet First off, you can see that utility dividend yields were lower than the 10-year treasury essentially until late 2002. At that point Enron, the California Electricity Crisis, and unwise investments by many players in the industry, finally took its toll, and utility values crashed. The yield on the 10-year treasury was actually falling because of the recession, but utilities performed terribly even with their “safe haven” status. Then over the next few years, as 10-year Treasury rates rose, utilities actually performed well. Utility dividend yields again were below 10-year Treasury until the 2008 financial crisis. The next thing to look at is the rise in the 10-year rate in 2013. There was a sizable initial drop when interest rates bounced off their lows, but the UTY stabilized before the upward move in rates was complete. Also, UTY components Exelon (NYSE: EXC ) and FirstEnergy (NYSE: FE ) were going through dividend cuts at this time, which may have had a bigger impact on the group’s underperformance than the rise of the 10-year. The next chart shows the ratio of the UTY’s dividend yield to the 10-year Treasury. Since the turn of the century, utility yields have been about 1.2x the 10-year Treasury. Today’s ratio is about 1.9x, which is more than one standard deviation above the average over the past fifteen years. Chart 3 (click to enlarge) Source: FactSet The above chart basically says that utilities are cheap today relative to the 10-year Treasury. You could also argue that the historical average ratio between utility yields and the 10-year is actually artificially high because of industry issues early in the century, making today’s ratio look even further cheaper compared to the “true” average. An alternative way to look at this data is to take the spread between utility dividend yields and the 10-year. This still basically leads to the same conclusion that utilities are cheap against Treasuries on a yield basis. Chart 4 (click to enlarge) Source: FactSet So if we just limited the analysis to the impact of interest rates, utility investors wouldn’t have much to worry about. Treasury rates are still so low that there will be plenty of investors looking for a way to get higher income with relative safety. Utility yields have such a cushion that as 10-year rates increase, the spread would likely just shrink from the higher Treasuries. If utility yields were to increase, it would just keep spreads at today’s extreme levels. Of course utilities trade on more than just dividends, and another big driver for valuations is earnings. Chart 5 (click to enlarge) Source: FactSet On this basis things don’t look as good for the utility group, but it isn’t a disaster waiting to happen. P/E ratios have come in a lot since they reached their peak at 18x earlier this year, but the current utility P/E of 14.8x is still above its 14.1x average over the last 15 years. If you look at the middle of the last decade, Treasury yields were 200-300bp greater than they are today, and utility P/E ratios were equal to or greater than today’s levels. So there is precedent for earnings valuations to be at today’s levels in an interest rate environment higher than today’s. This chart seems to imply that the drop in utilities this year has just been a preemptive move by the market, and if a Fed rate increase leads to higher interest rates, utilities have already made the majority of their adjustment. The post-Enron period was mentioned earlier in this article, and that is an event that could have artificially skewed the average P/E of the group below its “true” level. Of course, other unique things have happened in the past that could artificially move the average higher. For example, in the time period right before the Financial crisis, competitive power generation had a very positive outlook. It looked like these assets were only going to rise in value. Shale gas did a number on that prediction, but you could argue that the unique situation inflated the historical group average. (And maybe utilities with competitive assets are entering another period with increasing values. See here for more on that possibility.) Since there are reasons to adjust the average utility P/E up or down to get a “true” number, this article just uses the 14.1x based on the historic values. Another thing to note from chart 5 is that during the rising rate period of 2003-2004, when utilities made a substantial upward run, P/E ratios started much lower than today’s levels. This should wipe out any hope that a rise in rates today would come with an increase in utility stocks similar to 2003-2004. That was really a unique situation that doesn’t currently apply. This year’s move from an 18x P/E to a 14.8x P/E means about an 18% drop in utility stocks. If the P/E were to fall to the 14.1x historic average, this would require a further drop of 4.7%. If the group were to really get hit hard, and P/E ratios went to 13x, then the group would have to drop 12% from today’s level. If utility P/E ratios started going much lower, you would expect value investors to start moving into the space and prevent a freefall. Of course, when thinking of P/E ratios we also need to think about how the group compares to the market in general. The following chart shows the P/E of utilities compared to the P/E of the S&P 500 over time. Chart 6 (click to enlarge) Source: FactSet Based on this chart we again have a situation where utilities are trading a little rich compared to historical averages, but not outrageously so. Treasury yields have been more than 200bp higher than today’s level with utility P/E ratios compared to the S&P even higher than today. There could be some downward pressure on utilities based on this metric, especially if P/E ratios in the S&P 500 contract, but there is no reason to think things will go back to the way they were at the turn of the century. One last area that will be mentioned in this note is the impact of higher rates on utility earnings. Regulators set utility rates based on an allowed return on equity. As interest rates have been falling, these allowed ROEs have been falling as well. Chart 7 (click to enlarge) Source: SNL A Fed increase in rates should slow down this drop in utility ROEs, and help support utility earnings in the future. So a rate increase is not all bad news for utility investors. Conclusion While a rise in interest rates is not a good thing for owners of utility stocks, a tightening by the Fed in the near future should not lead to a disaster in these names. Right now it seems that low interest rates have increased demand for utilities by attracting investors looking for yield. As these investors have come into the space they have driven up P/E ratios in the sector, and investors focused on this valuation metric have likely stayed away. As rates rise, the balance between these two forces should gradually shift. But rates are starting at such a low level that utility yields will still be attractive to people looking to juice up the income in their portfolio, so there shouldn’t be a mad rush out from dividend-focused investors. The Philadelphia Utility Index has already fallen almost 18% off of its peak earlier this year. Utility P/E valuations were extremely high at that time, and it is likely the drop was in anticipation of interest rates falling later this year. Utilities would have to fall about 5% to bring their P/E back to this century’s average of about 14.1x, and they would only have to fall 12% to get down to 13x. If valuations start reaching these lower levels, then value investors would likely start moving back into utilities. The other thing to remember is that a rate increase is not all bad news for utilities. Higher rates should be beneficial in utility rate cases, allowing them to earn higher returns. So, even with a Fed increase, interest rates are likely to remain low and income investors will still want to own utilities for the added income. If too many income-driven investors leave and utilities go down by more than 12%, earnings valuations should start to look cheap, and it would put a floor under these names. Also, higher rates should help utilities in their rate cases, benefiting future earnings. So while you should expect a decline from the utility group if rates go up, it shouldn’t be a giant one. Housekeeping Items I am making the assumption that an increase in rates by the Fed will lead to a general increase in all Treasury rates. In theory, there are scenarios where you could say a rate increase at the Fed might lead to lower rates elsewhere in the financial world. (Maybe the Fed’s increase signals increased confidence in America’s economy, and money floods into US Treasuries lowering rates.) I’m not going to get in any type of complicated repercussions from a Fed increase. This analysis makes the simple assumption that if the Fed increases rates, Treasury rates will also increase. Historic utility performance was based on the Philadelphia Utility Index. The current components of the index are: AES Corp. (NYSE: AES ), Ameren (NYSE: AEE ), American Electric Power (NYSE: AEP ), CenterPoint Energy (NYSE: CNP ), Consolidated Edison (NYSE: ED ), Covanta (NYSE: CVA ), Dominion Resources (NYSE: D ), DTE Energy (NYSE: DTE ), Duke Energy (NYSE: DUK ), Edison International (NYSE: EIX ), El Paso Electric (NYSE: EE ), Entergy (NYSE: ETR ), Eversource Energy (NYSE: ES ), Exelon, FirstEnergy, NextEra Energy (NYSE: NEE ), PG&E (NYSE: PCG ), Public Service Enterprise Group (NYSE: PEG ), Sourthern Company (NYSE: SO ), Xcel Energy (NYSE: XEL ). 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.