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VWO: Good Diversification At A Low Cost

I have made no secret of the fact that we are in the process of transitioning our portfolio allocation such that our portfolio’s core will be comprised of mostly passive index investments . We feel there are several advantages to this approach, but the biggest reasons for the transition are: Greater diversification while achieving tremendous time savings I don’t believe there are enough Great/Amazing companies to build a portfolio around Our intention is adjust the core of our portfolio to consist of relatively non-correlated assets. With those parameters, we can hold this passive index core year in and year out and only have to rebalance periodically. In the past I have talked about the various ETFs we intend to own. Vanguard’s FTSE Emerging Market’s ETF (NYSEARCA: VWO ) is one of them, and I profile it below. Emerging market equity investments have struggled over the past few years. Below you can see how VWO has performed over the past 5 years, compared with the S&P 500 (using SPY as a proxy). While the bull market in US equity investments has surged higher, an investment in Vanguard’s FTSE Emerging Market ETF would have lost about 28% of its principal (excluding dividends). Click to enlarge The tremendous disparity in these returns has scared some investors out of investing in emerging markets, but this is the wrong call for our portfolio. Truth be told, I am not saying that every investor should have an allocation to emerging market equities. I won’t pretend to know YOUR personal hopes, goals, etc. If, however, you have chosen to include emerging markets as part of the plan for your portfolio, you must be happy with the poor performance of emerging market equities over the past few years. I know I am. Our most recent purchase of VWO shares was at $28.37 per share, but we made earlier purchases at higher levels. We, my wife and I, believe that exposure to emerging markets is an important part of our portfolio, and we have a great deal more money we would like to allocate to this asset class. Lower prices means that we get more for our investment dollar, but more importantly it also means that we are buying more of profits of the underlying businesses with the same investment. So what do you get when you invest in Vanguard’s FTSE Emerging Market’s ETF? Well for starters, you gain exposure to more than 3600 stocks scattered throughout emerging market economies. Below is a table from Vanguard’s website of the countries with the largest exposure to VWO. The exposure is weighted more heavily toward Chinese companies than I would prefer, but on the whole this fund provides excellent exposure to quite a few different economies. Additionally, being a Vanguard ETF, the fund’s expense ratio is very low at 0.15% annually. On their website, Vanguard claims this is lower than 90% of the fund’s competitors. The less money an investor shells out in fees, the more of the investment return that investor makes. Over time, those savings compound every year. Below is a table listing the 10 largest holdings in the ETF. Many of the company names are probably recognizable to you. Many of these companies are considered the “blue chips” of their respective countries. These businesses are some of the largest and best known companies in these markets. It is important for me to know my circle of competence, and I am aware that I do not understand emerging market businesses as well as I do American companies. The transparency of company filings and foreign accounting practices generally keep me from investing in individual companies that are based in emerging market economies. Using a vehicle like Vanguard’s FTSE Emerging Markets ETF allows me to gain my desired exposure, while also diversifying away the risk that a few individual companies are fraudulent and corrupt. Clearly these companies are found across the spectrum of industries. A breakdown of VWO’s sector representation can be found below. I am pleased with this diversification because it spreads the risk of industry specific downturns across all industries. It’s very convenient to have exposure to such a range of economies, industries, and companies from a single emerging market index ETF. As discussed earlier, the stocks of many emerging market companies have taken a drubbing over the past few years. According to Vanguard, the average price to earnings ratio of the companies found within Vanguard’s FTSE Emerging Markets ETF is 14.8 and the ETF pays out a dividend yield of 2.9%. Those both compare favorably to the S&P 500’s (with SPY as a proxy) price to earnings ratio of 16.77 and dividend yield of 2.17%. Most importantly, we are gaining exposure to economies that are growing, and demographic trends ensure these economies will make up a larger portion of global GDP in the future. Disclosure: Long Vanguard’s VWO ETF. This article is for informational purposes only and should not be considered a recommendation for anyone to buy, sell, or hold any equities. I am not a financial professional. The information above is provided by Vanguard.com and Yahoo Finance. Disclosure: I am/we are long VWO. 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.

FVC: First Trust To Roll Out Dynamic Focus Five ETF

By Jonathan Jones and Tom Lydon First Trust, the seventh-largest U.S. ETF issuer, is planning to introduce a dynamic version of its popular First Trust Dorsey Wright Focus 5 ETF (NASDAQ: FV ) . The First Trust Dorsey Wright Dynamic Focus 5 ETF (NASDAQ: FVC ) is expected to debut today, reports ETF Trends . The new ETF will track the Dorsey Wright Dynamic Focus Five Index. “The index is designed to provide targeted exposure to five First Trust sector and industry based ETFs as identified by DWA’s proprietary relative strength methodology. This methodology is a ranking system used to measure a security’s price momentum relative to its peers and helps DWA identify meaningful patterns in daily share price movements,” according to a statement issued by First Trust . FV, one of the most successful ETFs to come to market in 2014, follows DWA’s relative strength ranking system where sector ETFs are compared to each other to measure price momentum relative to other ETFs in the universe and the top five ranking ETFs are included in the underlying index. The momentum strategy basically bets that hot movers will continue to rise, so investors would essentially be buying high and selling even higher. FVC’s underlying index “allocates to the cash index when the relative strength of more than one-third of the universe of First Trust ETFs begins to diminish relative to the cash index.” “The index seeks to identify major themes in the market, have exposure to those sectors whose price action is superior to others in the universe, and eliminate exposure to those sectors whose price action is sub-par to others in the universe. In instances where relative strength diminishes across equity sectors, the index gains varying amounts of exposure to the cash index,” according to the statement. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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 And Worst Of February: Market Neutral Funds

The 68 mutual funds and ETFs in the market neutral category averaged modest gains of 0.08% in February while flows to the category turned positive for the first time since September 2014. The Vanguard Market Neutral Fund (MUTF: VMNIX ) was February’s biggest recipient of inflows, at roughly $279 million, while the AQR Diversified Arbitrage Fund (MUTF: ADAIX ) suffered the month’s steepest outflows at $295 million. Neither of the funds, which posted respective February returns of 1.55% and 1.33%, ranked in the top or bottom three performers for the month, though. Best Performers in February The three best-performing market neutral funds in February were: The QuantShares US Market Neutral Value Fund was February’s top-performing fund, returning +3.83%. Unfortunately, for shareholders, the fund’s one-year performance through February 29 stood at -6.35%, ranking in the bottom 13% of the category. For the three years ending Leap Day 2015, CHEP returned an annualized -0.52%. Its February outperformance is evidence of its more-volatile-than-average nature, with a one-year standard deviation of 6.45% compared to the category average of 4.81%. On a three-year basis, CHEP looks even less predictable, with annualized volatility of 7.70% compared to the category average of 4.25%. The Cognios Market Neutral Large Cap Fund, by contrast, returned a solid +2.45% in February and had one-year returns of +11.07% through the end of the month. Those annual gains were good enough to rank in the top 7% of its peers, and its three-year annualized returns through February 29 stood at an impressive +9.57%, ranking in the top 4% of the category. For the past year, COGIX has been even more volatile than CHEP, with a standard deviation of 8.01%. But COGIX’s one- and three-year alphas of 7.60% and 9.62% – relative to the returns of the Barclays U.S. Aggregate Bond Total Return Index – more than make up for its outsized volatility. Finally, the Causeway Global Absolute Return Value Fund) ranked third in February, with returns of +2.40%. Its annual returns through the end of the month stood at a less impressive -0.48%, ranking it near the middle of the category. Over the longer term, however, CGAIX’s three-year returns of +4.11% were good enough to rank in the top 11% of market neutral funds over that time span. Worst Performers in February The three worst performing market neutral funds in February were: Mother’s Day comes in May, but February was unkind to MOM. The QuantShares US Market Neutral Momentum Fund, which sports the “MOM” ticker symbol, was the worst performer of its kind last month, losing 6.14%. Nevertheless, the ultra-volatile MOM – with its annual standard deviation of 12.66% – was still up 10.68% for the year, as of February 29, and its three-year annualized returns through that date stood at +3.24%. The TFS Market Neutral and BlackRock Global Long/Short Equity funds tied as the second-worst market neutral performers in February, with one-month returns of -3.97%. The funds’ one-year returns were also uninspiring at -6.85% and -6.75%, respectively. But over the three-year period, the BlackRock fund’s annualized gains of 2.89% greatly outdid the TFS fund’s annualized losses of 0.84%. Past performance does not necessarily predict future results. Jason Seagraves contributed to this article.