Tag Archives: economy

PKW: Does It Outperform Because Of Strategy Or Sector Allocation?

Summary The PKW portfolio is built to take advantage of companies that are repurchasing shares. Over the last several years PKW has performed very well. The holdings are fairly concentrated but a focus on sectors with more buybacks could indicate less exposure to price based competition. My concern about the sector allocations is that they feel exposed to recessionary problems. If I was going to use PKW, I would want to include a heavy position in a long term treasury ETF to offset the risk in the portfolio. 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. I’m working on building a new portfolio and I’m going to be analyzing several of the ETFs that I am considering for my personal portfolio. One of the funds that I’m considering is the PowerShares Buyback Achievers Portfolio ETF (NYSEARCA: PKW ). 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 The expense ratio on the fund is arguably the largest drawback. At .68%, the expense ratio eats into the long term value that can be generated by the fund. If it continues to outperform the market that won’t be a problem, but that feels like a dangerous bet on the system continuing to work. If it does, then all economic theories based on efficient markets should be called into question. Largest Holdings The largest holdings represent very material portions of the ETF. The analysis of the portfolio is further complicated by the potential for substantial amounts of turnover within the ETF which may cause the holdings and sector allocations to change materially over time. When they change, the risk profile also changes. The ten largest holdings are included in the chart below: Heavy allocations to both Home Depot (NYSE: HD ) and Lowe’s (NYSE: LOW ) are interesting. If both companies are heavily committed to using their cash for buybacks rather than expanding competition against each other, it could be a favorable sign for both companies and help them see boosts in earnings. While I’ve been critical of industries that are destroying margins through excessive competition, seeing Lowe’s and Home Depot together seems like a positive sign. Of course, the companies will also be heavily influenced by other factors such as demand for their goods which will be tied to other factors in the economy. Sectors The sector allocation is heavily focused on consumer discretionary while staples are extremely low. Health care and utilities are also fairly light weight which leaves me concerned about how the portfolio would fair if the economy slipped substantially. I love how well the ETF has performed, but I’m wondering how much of that is a function of their methodology and how much is simply a measure of sector allocation during a period of low interest rates with expanding GDP and high corporate profits relative to total GDP. Building the Portfolio This hypothetical portfolio has a slightly aggressive allocation for the middle aged investor. Only 30% of the total portfolio value is placed in bonds and a third of that bond allocation is given to emerging market bonds. However, another 10% of the portfolio is given to preferred shares and 10% is given to a minimum volatility fund that has proven to be fairly stable. Within the bond portfolio, the portion of bonds that are not from emerging markets are high quality medium term treasury securities that show a negative correlation to most equity assets. The result is a portfolio that is substantially less volatile than what most investors would build for themselves. For a younger investor with a high risk tolerance this may be significantly more conservative than they would need. The portfolio assumes frequent rebalancing which would be a problem for short term trading outside of tax advantaged accounts unless the investor was going to rebalance by adding to their positions on a regular basis and allocating the majority of the capital towards whichever portions of the portfolio had been underperforming recently. (click to enlarge) A quick rundown of the portfolio The two bond funds in the portfolio are the iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEARCA: EMB ) for higher yielding debt from emerging markets and the i Shares 7-10 Year Treasury Bond ETF (NYSEARCA: IEF ) for medium term treasury debt. IEF should be useful for the highly negative correlation it provides relative to the equity positions. EMB on the other hand is attempting to produce more current income with less duration risk by taking on some risk from investing in emerging markets. The position in the iShares MSCI USA Minimum Volatility ETF (NYSEARCA: USMV ) offers investors substantially lower volatility with a beta of only .7 which makes the fund an excellent fit for many investors. It won’t climb as fast as the rest of the market, but it also does better at resisting drawdowns. It may not be “exciting”, but there are plenty of other areas to find “excitement” in life. Wondering if your retirement account is going to implode should not be a source of excitement. The position in makes the portfolio overweight on companies that are performing buybacks. The strategy has produced surprisingly solid returns over the sample period. I wouldn’t normally consider this as a necessary exposure for investors, but it seemed like an interesting one to include and with a very high correlation to SPY and similar levels of volatility it has little impact on the numbers for the rest of the portfolio. The core of the portfolio comes from simple exposure to the S&P 500 via the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ), though I would suggest that investors creating a new portfolio and not tied into an ETF for that large domestic position should consider the alternative by Vanguard’s Vanguard S&P 500 ETF (NYSEARCA: VOO ) which offers similar holdings and a lower expense ratio. I have yet to see any good argument for not using or another very similar fund as the core of a portfolio. In this piece I’m using SPY because some investors with a very long history of selling SPY may not want to trigger the capital gains tax on selling the position and thus choose to continue holding SPY rather than the alternatives with lower expense ratios. Risk Contribution The risk contribution category demonstrates the amount of the portfolio’s volatility that can be attributed to that position. To make it easier to analyze how risky each holding would be in the context of the portfolio, I have most of these holdings weighted at a simple 10%. Because of IEF’s heavy negative correlation, it receives a weighting of 20%. Since SPY is used as the core of the portfolio, it merits a weighting of 40%. Correlation The chart below shows the correlation of each ETF with each other ETF in the portfolio and with the S&P 500. Blue boxes indicate positive correlations and tan box indicate negative correlations. Generally speaking lower levels of correlation are highly desirable and high levels of correlation substantially reduce the benefits from diversification. Conclusion PKW has a high correlation to the S&P 500 and a similar level of volatility. When looking at the max drawdowns, it appears that during periods when the market shows fear the portfolio is more exposed to taking a hit. While I’m thoroughly impressed with the performance the ETF has shown, I am not buying into the theory that it will continue to outperform the market. I get the feeling that a really solid extended negative period for the market (rather than one week or so of free falling) could put a major dent into the portfolio. If I was going to build a portfolio with a large position in PKW, I would want to include a very material position in a long term treasury ETF for the negative correlation at -.42. The negative correlation would provide a better chance of gaining on the treasury ETF if fear or a recession took hold of the market and the underlying holdings began to suffer large setbacks. 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. 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.

Correction Seems Over: Time For China ETFs?

Concerns over the Chinese economy had reached a delirious pitch in August. Issues like credit crunch, shadow banking activities, faltering manufacturing activity and a weak domestic market had first surfaced in 2012 and led to a hard landing for the economy. These concerns kept bothering the economy at regular intervals during the last three years. But recently these swelled up to take a gargantuan shape and tormented business globally. The economy’s GDP growth rate skidded to 24-year low in 2014. With no let-up in the downbeat data flows from the Chinese economy, investors have now started to doubt its ability to deliver the growth target for this year. Still the Chinese stocks performed phenomenally in the first half of 2015 with some of the ETFs having almost doubled. A series of rate cuts and easy policy measures made this possible. But this astounding run had to have a finishing line somewhere and thanks to this logic, the Chinese equities fell in the trap of a steep correction from June. A host of factors prompted this correction. Among these, overvaluation concerns after a steep ascent for about one year, small doses of economic stimulus failing to boost the struggling economy and the Chinese securities’ regulator’s repeated warnings about riskier trading as well as tightened rules for margin lending triggered the sell-off. Apart from this, to arrest the market crash, the Chinese government stopped new companies from selling shares to the public, introduced a fund to be used for purchasing shares earlier this month and banned investors with an over 5% stake from abandoning their shares for six months. In fact, the Chinese stock market underwent heavy panic-induced sell-offs several times in the last three months – August being the cruelest – mercilessly lashing the global markets. Behind the recent bloodbath was the Chinese policy makers’ devaluation of the country’s currency yuan by 2% in mid-August, apparently to shore up export competitiveness. This along with a six-and-a-half-year low Chinese manufacturing data for August went against the risk-on sentiment among investors. The Shanghai Composite Index has plunged about 39 % since June 12 and Chinese stocks lost over $5 trillion in the recent rout. In the last one month (as of September 8, 2015), db X-trackers Harvest CSI 500 China-A Shares Small Cap Fund (NYSEARCA: ASHS ) lost over 33% while large-cap China ETF iShares China Large-Cap ETF (NYSEARCA: FXI ) was off over 13%. Almost all ETFs erased their gigantic gains earned in the beginning of 2015. ASHS is off over 5%, while one of the top performing Chinese ETFs of the first half Market Vectors ChinaAMC SME-ChiNext ETF (NYSEARCA: CNXT ) is now left with just 4% return. Is the Correction Over? After this high drama, there was only one question in every mind. When will the correction be over? And to soothe investors’ nerves, PBOC which is known for too much interference in the stock market commented that the China market crash is ‘ almost over’ aided by government intervention. Yuan is also settling against the greenback after a topsy-turvy August. To add to this, China announced that it would eliminate personal income tax on dividends for long-term shareholders holding stocks for over a year and halve the tax for those who hold between a month and a year, per Reuters. The move was steered to bolster long-term investments, ward off short-term turbulence from the market and bring in stability over there. Not only this, China intends to launch “circuit breaker” on one of the country’s benchmark stock indexes to calm the market. Per the new norm, a 5% one-day gain or loss in the CSI 300 index (before 2:30 p.m.) would close trading in the country’s all equity indices for 30 minutes. Shifts of over 7% would result in a closed trade for the rest of the day. Though this decision is yet to be confirmed by the market participants, it hints at policymakers’ efforts to put off pointless volatility in the market. As per Goldman , Chinese government invested about $236 billion during the last three volatile months to cool down the stock market tantrum. Notably, China’s margin debts almost halved to about 1 trillion yuan. Rallying Chinese Equities Assisted by government measures, Chinese stocks started rallying from this week and also helped to drive other global markets. While almost all Chinese ETFs added smart gains on September 8, we highlight three beaten-down ETFs that presently carry a Zacks ETF Rank #2 (Buy) and might tide over heavy losses incurred in the recent upheaval. Notably, CNXT and ASHS returned investors around 13% on September 8, but both ETFs are still guilty of high valuation. On the other hand, the P/E (ttm) ratio of below-mentioned ETFs hovers in the range of 12 to 14 times versus CNXT’s P/E of 32 times and ASHS’s P/E of 35 times. This indicates that the trio trades at a cheaper valuation and can be good picks at the current level. db X-trackers Harvest CSI 300 China A-Shares Fund (NYSEARCA: ASHR ) The fund provides exposure to the large-cap segment of China A-share equity market by tracking the CSI 300 Index. The 305-stock portfolio has accumulated $480 million in AUM and sees solid trading volumes of about 4.6 million shares a day on average. The fund is heavy on financial stocks (38.4%) followed by industrials (17.7%) and consumer discretionary (10.74%) stocks. The product charges about 80 bps in fees per year from investors. The fund lost about 25.5% in the last one month while it added about 11.6% on September 8. KraneShares Bosera MSCI China A Share ETF (NYSEARCA: KBA ) This fund follows the MSCI China A International Index, holding about 300 securities in its basket. It is widely diversified across each component with none of these accounting for more than 2.275% share. However, the product is slightly skewed toward financials at about 34%. The ETF has accumulated $10.9 million while it trades in light volumes of around 25,000 shares per day. Expense ratio comes in at 0.85%. The fund was up about 11% on September 8 while it lost 24.2% in the last one month. Market Vectors China ETF (NYSEARCA: PEK ) This fund tracks the CSI 300 Index and holds a large basket of 465 stocks. The portfolio is well spread out across various securities with none holding more than 3.48% of assets. From a sector look, more than one-third of the portfolio is allotted to financials, followed by industrials (18.0%) and consumer discretionary (10.3%). The fund has amassed $80.5 million in its asset base and charges 72 bps per year. Volume is light as it exchanges about 150,000 shares per day on average. The fund was up 9.9% on September 8, while it retreated about 23% in the last one month. Original Post

China Stimulus Raises Hopes: Japan ETFs To Lead

Battered by the China-led global rout, Japanese stocks made a spectacular comeback in today’s trading session. The Nikkei 225 Stock Average skyrocketed nearly 8%, representing the biggest one-day jump in seven years. Steep gains came after a day when the index crashed 2.4%, wiping out all of the gains made this year. Optimism was mainly driven by stimulus hopes in China that could reinvigorate growth in the world’s second-largest economy. China will strengthen its fiscal policy, boost infrastructure spending and speed up the reform of its tax system to support the economy. Though this sparked off a rally in stocks across the globe, the Japanese stocks are leading the way higher. This is because prime minister Shinzo Abe provided an additional boost to the Japanese stock market, as it is seeking new reforms including a corporate tax cut to shore up the country’s economy. Abe is looking for a tax cut of at least 3.3% to 31.33% next year, starting April 2016, from the current 34.62% and aims to bring it down to the twenties over the next several years. Further, the steep drop in recent weeks made the Japanese stocks cheap, compelling investors to scoop up the bargain stocks. As of September 8, Nikkei 225 was trading at 16.4 times estimates earnings , the lowest level since October. Given an astounding surge in stocks, Japan ETFs are also expected to see smooth trading and investors should definitely tap this opportunity by investing in the top-ranked ETFs. While there are a number of funds with a Zacks Rank #1 (Strong Buy) or #2 (Buy), some are deep in red and thus offer attractive buying opportunities at present. In particular, the large cap centric funds – SPDR Russell/Nomura PRIMETM Japan ETF (NYSEARCA: JPP ), SPDR MSCI Japan Quality Mix ETF (NYSEARCA: QJPN ), Maxis Nikkei 225 Index Fund (NYSEARCA: NKY ) and iShares MSCI Japan ETF (NYSEARCA: EWJ ) – lost in double digits over the past one month. QJPN and JPMV have a Zacks Rank #1 while NKY and EWJ hold a Zacks Rank #2. Apart from these, Japan hedged funds – iShares Currency Hedged MSCI Japan ETF (NYSEARCA: HEWJ ), db X-trackers MSCI Japan Hedged Equity (NYSEARCA: DBJP ) and WisdomTree Japan Hedged Equity Fund (NYSEARCA: DXJ ) – also seem excellent picks. These ETFs offer exposure to the broad Japanese stock market, while at the same time provide hedge against any fall in the Japanese yen. The trio has a Zacks Rank #1 and is down nearly 14% over the past one month. Original article .