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Inside Guggenheim’s New High Income Infrastructure ETF

The income ETF space remains a favorite among investors as evidenced by the incredible level of interest seen in many of the products in the space. In fact, many issuers have lined up with several new funds focused on income strategies to tap into this sentiment (read: 3 ETFs Yielding Over 6% to Watch as Market Speculates Rising Rates ). This trend continues with Guggenheim which has just launched a fund with global coverage, focusing on the high income space, but with a slight tilt as the fund has a specific sector exposure i.e. infrastructure. In fact, the global footprint made the fund more attractive given the ultra-low interest rate backdrop prevailing in most developed economies. Below, we have highlighted the newly launched fund – Guggenheim S&P High Income Infrastructure ETF ( GHII ) – in greater detail. GHII in Focus This product tracks the S&P High Income Infrastructure Index, focusing on 50 high-yielding global infrastructure companies. These companies are engaged in several infrastructure-related sub-industries, such as energy, transportation and utilities. The individual stocks are moderately diversified as no single security forms more than 5.09% of the total fund assets. Sydney Airport (5.09%), Williams Companies, Inc. (4.99%) and Jiangsu Express Co. Ltd-H (4.79%) are the top three holdings of the fund. As far as geographic allocation is concerned, the U.S. takes the top spot with about one fifth of the basket followed by Australia (14.45%) and China (9.37%). Overall, the fund is spread across 15 countries. Utilities hold the lion’s share followed by Industrials (33.15%) and Energy (16.70%). The fund charges 45 bps in fee. How Could it Fit in a Portfolio? The ETF could be well suited for income-oriented investors seeking higher longer-term returns with low risk. Utilities and infrastructure related stocks are interest rate sensitive and recession resistant in nature. With interest rates being low in most developed nations, the appeal of utilities stocks has increased as these offer steady and strong yields (read: 3 Utility ETFs Surging to Start 2015 ). However, investors looking for a high-growth vehicle may not be satisfied with this product as infrastructure is generally a slow-growth business. Competition The main competitor of GHII is the established iShares S&P Global Infrastructure Index Fund ( IGF ) . This product also focuses in on global utilities ranging from transportation to electricity services, and it has already seen a great deal of interest from investors, as evidenced by its $1.18 billion in assets under management. This iShares fund charges 47 bps in fee. The U.S. takes about 32.8% of the basket followed by Canada (8.33%) and Australia (8.17%). The fund holds 75 stocks in total. The fund yields yielded about 2.98% as of February 19, 2015. The newly launched ETF will also face stiff competition from iShares S&P Global Utilities Index Fund ( JXI ) , which has amassed about $338.3 million in assets. The fund charges 48 bps in fees and yields about 3.67% annually (as of February 19, 2015) (read: FlexShares Launches Global Infrastructure ETF ). Another potentially sound player in the space is SPDR FTSE/Macquarie Global Infrastructure 100 ETF ( GII ) though the fund was behind the newly launched GHII in terms of assets within such a short span. Notably, within just seven days of launch, GHII has amassed about $189 million in assets while GII has garnered $112 million in AUM. So, though competition may be intensifying in the global infrastructure ETF world, GHII is definitely worth a closer look. The product charges reasonably in the space and has an attractive yield, which is drawing investors’ attention. We expect its winning trend to continue in the days to come. Also, most other global infrastructure ETFs have put a large weight on the U.S. unlike GHII. A lower focus on the U.S. market might earn GHII an extra advantage over its peers as the U.S. economy will likely see a rise in rates.

Got DIA? Got DJIA Stocks? Which Is Better?

Summary Very few Exchange-Traded Funds get analyzed in detail, down at the individual holdings level. The DIA lends itself to that by its few, prominent components. The diverse nature of the 30 stocks in the DJIA Index, by design, raises the question of how to rate a CAT in comparison to a PG or a MSFT. And who’s doing the rating? What’s their bias? How do they define risk, and how is that balanced against reward? We get the Market-Making [MM] community to tell us daily, how far up and down the prices of the 30 stocks, and the DIA ETF, are likely to go next. Not voluntarily. But MM capital is regularly put at risk, protected by hedging transactions, helping big-$ funds adjust their portfolio holdings. The hedges’ cost and structure provide price range forecasts. Market-Makers never saw a profit they didn’t like or a risk they did Their principal customers, big-money institutional investment funds, work hard constantly, trying to stay employed at sweet-salary jobs by getting the capital in their charge to perform competitively. That takes shuffling around a lot of “chips” on their “poker table”. The size of their bets often stretches the capacity of markets’ ordinary way, every-day trading. To try to get their volume trade orders of 10,000 shares or sometimes millions of shares “filled” without chasing the issue’s price away from what they want to get, they often use trusted investment bank block-trade services. The kinds of stocks in the DJIA Index are just the ones most likely to see this sort of activity, which often dominates their price movement. The block trade house “makes the market” some 95% of the time by putting its own capital at risk temporarily, positioning that stub end of the “other side of the trade” that the other players in the Street will not accommodate right now, at the desired price. But the MM’s risk is always hedged by side bets in derivative securities – at a cost. Because of the cost, such protection is rarely overbought, because the fund originating the block order has to absorb the cost in the single price per share for the entire transaction. When the cost is too high, the fund balks, and the trade proposition is killed, along with its juicy (to the MM) transaction spread. So all the motivations are there to keep that game honest since the sellers of the price change protection insurance are often the proprietary trading desks of other MM firms. They are as equally well-informed on the future prospects of the subject as the house handling the block trade. And the competitive nature of the community is reminiscent of the seagull dock scene in the film “Finding Nemo”. Mine! Mine! Our Behavioral Analysis of the intelligent actions of the market professionals produces for each subject a price range MMs consider worth protecting against, either as a buyer or a seller of the protection. The change from current market quote to the upper end of the range is a forecast of possible, even likely, price gain, or reward. The opposite direction is a forecast of the kind of price drawdown risk that could be encountered. That risk may not have to be accepted and recognized as a loss, if in time the price rises. But the period the investment is “under water” is an emotionally disturbing condition, one that often leads investors to loss-taking to prevent the present from getting worse. Sometimes their fears are justified, and worst-case price drawdowns increase the emotional stress to the breaking point where investors accept what appears to be “inevitable”, but could have been avoided. Knowing what the worst has been and the odds of recovery to a profitable position from there minimizes that mistake. We have an established, Time-Efficient Risk Management Discipline [TERMD] procedure of portfolio management that enables us to evaluate the odds of a subject investment’s recovery from a price drawdown, back to a profitable transaction experience. That procedure, applied to all prior forecasts with upside to downside forecast proportions, usually gives a history from hundreds of actual market experiences. Figure 1 is a reward-to-risk map of the 30 DJIA stocks showing their current hedging-derived upside forecasts (on the green horizontal scale) and their worst-case price drawdowns (on the red vertical scale) following prior forecasts like today’s. Figure 1 (used with permission) The advantage of diversification is apparent in DIA [4], with worst-case price drawdowns no worse than all but one of the 30 stocks – at today’s market quotes and upside forecasts. The cost of that diversification is also apparent in the DIA’s upside prospect now being about +3%, compared to the average of the individual stocks of some +5% higher, around +8%. To get the odds for price recovery and a profitable transaction from today’s market prices, we need to check out column (8) of figure 2, today’s appraisals by MMs for the 30 stocks. Figure 2 (click to enlarge) Whoa! There’s a mess of numbers here. The MMs’ price range forecasts for the 30 stocks are in the first two data columns of Figure 2, followed by their separate forecasts for the SPDR Dow Jones Industrial Average ETF (NYSEARCA: DIA ), and as an additional market average index, the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ). The upside percent price change potential is in (5), and the worst-case prior price drawdowns are in (6). These are the coordinates used in Figure 1. The odds of a price recovery from worst-case price drawdowns are in column (8). For example, down at the bottom of the table are DIA and SPY, which have histories of 111 days and 215 days out of the last 5 years, 1,261 market days, in which 84 or 83 out of every 100 produced a profitable transaction using our standard TERMD portfolio management discipline. That is about 5 out of every 6 trades. The average gain by DIA (column 9) from all 111 such positions was only +1.9%. That compares to Disney (NYSE: DIS ) up near the top of figure 2, with a similar 84/100 odds, but it has an achieved gain of twice that of DIA at +3.8%. Further, it took (column 10) only 29 market days – 6 weeks – to reach its sell targets or 3-month holding time limits while DIA took 35 days, or 7 weeks. For the investor most concerned with safety of principal and averse to investing choices, the difference is trivial, inconsequential. But for the investor attempting to build wealth, the compounding of 3.8% gains more than 8 ½ times a year, compared to 1.9% compounded 7 times makes the difference in investment growth of +38% a year vs. +14% (column 11). We have ranked the 30 stocks held in DIA by their forecast price growth per day held (in prior like forecasts) weighted by their prior odds of profit, net of worst-case losses weighted by their odds of loss, with some other minor adjustments, to get an odds-weighted (reward vs. risk) figure of merit for each of these stocks in (15). It is a useful means of setting preferences between investment alternatives for investors concerned with growing their investment wealth. For those concerned with safety or income, it is far less useful. Comparing (15) data for the top ten such ranked DJIA stocks in the upper blue row so labeled, with the next blue row, averaging all 30, shows that at current market prices the top ten are 9 times (14.8 vs. 1.6) as beneficial to the DIA as the other two-thirds of the holdings. Comparing DIA to SPY finds the broader market average is more than twice as strong by this measure, (6.3 vs. 2.7). That may be a suggestion that the DJIA Index is now higher priced temporarily than the S&P 500. Other comparisons, not shown, lead to the same conclusion. The more interesting comparisons are between the average of nearly 2,500 stocks and ETFs, and the market indexes, DIA and SPY. Upside price change forecasts are twice as large for the population as for SPY and 3+ times as large as for DIA. But history shows them to be far riskier (6) at -9.4% price drawdowns than either ETF. That difference, plus far lower odds of capturing a profit (66 out of 100 in column 8), combine to create a net negative figure of merit in (15). Both ETFs provide the security of positive measures. Conclusion DIA at its current market quote offers investing prospects far less attractive than the principal market-average-tracking alternative SPY. An examination of the DIA holdings individually puts over a third of them in the category of a negative influence on the DJIA Index, and thus on DIA. While the ETFs S&P and DIA do provide safety from large price drawdowns encountered by individual stocks, they may give that reward at a high cost to future wealth growth from selective use of specific index holdings. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Bond Fund Choices For Retiree Portfolios

Summary Most retirees need/want some of their portfolio allocated to bond funds. For those with “about right” total assets for retirement, institutions recommend bond allocation of 40% to 60%. Numerous factors will tend to keep intermediate and long-term interest rates “lower for longer”. The middle of the bond yield curve is probably the best place to be. Corporate bonds and municipals make more sense than Treasuries for most individual accounts. Many retirees or near retirees need help deciding how to allocate between bonds and stocks, or how to prepare for a productive discussion about allocation and security selection with their advisor. This is intended to help those investors with the bond fund element of the decision. Fund Allocations: This table shows institutional recommendations for asset allocation for investors in the withdrawal stage of their financial lives, and with assets approximately sufficient for their needs (not great excess assets and not great deficiency – relative to lifestyle costs). Adjusting for Your Circumstances: According to the experts, retirees should be at or between these bond/stock allocation limits: 60/40 and 40/60. That allocation makes the global assumption that retiree assets are “just about right” – not way too little, or “way more than needed”. If assets are “way too little”, then retirement postponement, part-time work, and/or proportional reductions in standard of living is probably necessary; and the 60/40 to 40/60 allocation probably still makes sense. If assets are “way more than needed”, there are two reasonable alternatives to the 60/40 to 40/60 allocation. One alternative is to be more conservative, because the gradual loss of earning power in a heavy fixed income portfolio is seen as an acceptable trade-off to have a smoother ride. The other alternative is to be more aggressive – probably by investing “sufficient” assets in the 60/40 to 40/60 allocation, and then investing the balance in equities to grow the overall portfolio. Historical Results of 11 Bond/Stock Allocation Risk Levels: Using our 11 levels of allocation, experts recommend that you be in what we have labeled “Balanced-Conservative”, “Balanced Moderate” or “Balanced Aggressive”. This chart shows the 39-year historical returns for all 11 allocation levels, including mean return, best return and worst return, as well as the returns statistically expected at +/- 1, 2 and 3 standard deviations from the mean (roughly representing these probability ranges: 67%, 95% and 99.7%). This chart shows the returns of each allocation over multiple short and long-term periods. This chart shows the calendar year returns for 2008 through 2014 for each allocation. US Bond Funds Don’t Come In Just One Flavor, or Have One Outcome: Once you decide on the bond allocation level that makes sense, you might then want to consider what type, duration and quality of bonds to use. The allocation data above assumes aggregate US bonds (which has morphed over time as the relative level of government and corporate issuance changed, and as the relative levels of maturities have changed). You may wish to lock-in more predictably to a type or duration or quality for your portfolio, or to manage the mix as you see fit, instead of taking whatever the aggregate provides. You can do that with funds. Given that, let’s look at some of your choices: Corporate and Municipal Bonds Typically Best For Individuals: Corporate bonds or muni bonds are most likely to be suitable for you. Treasuries are generally best for tax-exempt investors (pensions, foundations, and foreign governments), while corporate and municipal bonds, with higher after tax returns are generally best for individuals. Corporate high yield did very well after the crash, but that party is over, and they have been faltering as of late, since the yield spread to Treasuries had reached a very low level. High-yield bonds have a high correlation with stocks and are not good counter cyclical diversifiers. Long-term corporates have done best as rates fell, and will continue to do well if interest rates decline, but will do poorly if rates increase. Short-term corporates have contributed least to return, and probably have more downside risk than normal, due to the Fed planning to exit QE by gradually raising short-term rates. Intermediate-term bonds are probably best bet. The muni charts are for nominal returns, which you have to gross up for your tax bracket. They have been more consistent in their returns, and their high-yield bonds have not suffered as corporate high yields have done – making them less correlated with stocks than high-yield corporate bonds. Yield, Duration and Quality Metrics for Bond Fund Types: Here are some metrics for the specific bond funds shown in the charts above. These two tables show yield, duration, quality, and quality composition of each representative fund. How Interest Rate Changes Impact Bond Prices: Here is how changes in interest rates impact bond values: Which Way Are Rates Likely to Go Near-Term? Some big names expect intermediate and long rates to decline, and short rates to rise, but not to historical “normal” levels. The inflation crowd expects rates to rise due to inflation. The anti-Fed crowd expected rates to rise when Fed bond buying ceased, but that did not happen. Most experts last year forecasted rising rates (I bit on that), but we were wrong. The “lower for longer” crowd (including Bill Gross, Jeff Gundlach and Robert Shiller) point out these factors: US Treasury rates are the highest among major developed market issuers – creating demand for our bonds, which raises prices and lowers yields. US currency is the strongest at this time among major currencies – creating demand for our bonds, which raises prices and lowers yields. Aging Baby Boomers, who have most of the money, are net savers (formerly net borrowers) reducing demand for loans, which tend to reduce bank offered rates, and they want to own bonds, raising prices and lowering yields. Aging Baby Boomers, are reaching for yield, and will rotate out of dividend stocks into bonds as rates rise, dampening rate increases. US corporations approach saturation debt, with lower net issuance, reducing supply vs. demand, which raises prices and reduces rates. Federal deficits are declining, which lowers Treasury issuance, reducing supply vs. demand, which raises prices and reduces rates. Municipal issuance is down, lowering supply vs. demand, raising prices and reducing rates. Why Foreign Money Will Flow to US Bonds: Here is data showing how much higher US rates are than German and Japanese rates, for example: Speculators, who believe the dollar will remain strong, can borrow in Germany or Japan in local currency, and use the money to buy US bonds and make a nice spread similar to the spread that banks make on their deposits. That increases Treasury prices and lowers yields. What Does The Treasury Yield Look Like Now? Here is where the US Treasury yield curve stands today (the black line). You can see that the yield on the long end of the curve has been declining, while the short end of the curve has been rising. Rates are far below the 2007 level (gray line), but are not expected to get back to that level any time soon. How Are The Pros Viewing The Path of Very Short-Term Rates? How far will the short end rise? Here is the Fed Funds futures curve, which forecasts a 1.9% short end 2 years from now. If the intermediate-term Treasuries stay as they are, the yield curve above would be flat, but that is some time away. It is unknown whether intermediate rates will rise to keep the curve steep or whether it will go flat. This forecast suggests that short-term bonds are probably not good opportunities. They do little good if rates stay the same, and they suffer if rates rise. Conclusion: Even for aggressive investors, some small allocation to bonds has historically improved total return and risk/reward. Knowing about the range of bond fund options, and how various bond allocations relate to your specific circumstances is an important step in setting up a retirement portfolio. There is a lot more to think about than what is presented in this short article, but for a huge number of retirees or near retirees, this is something they still have to get under their belt before they manage their own money, or prepare themselves for a productive discussion with their investment advisor. Disclosure: The author and clients have some of these funds in their portfolios in varying degrees based on individual specific circumstances. General Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions. This article is presented subject to our full disclaimer found on the QVM site available here . Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Disclosure: The author and clients have some of these funds in their portfolios in varying degrees based on individual specific circumstances.