Tag Archives: etf-long-short-ideas

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.

Plan To Survive: Be Systematic! (Part 4)

My favorite strategy indices have a low correlation to both stocks and to bonds. As always, our cutting-edge strategy indices are only available to subscribers, but I hope that some of the strategy indices presented here will provide inspiration for readers to create their own methods for dealing with an increasingly difficult investment environment. Remember, hope is for people who do not use data. Wise investors plan using evidence-based methods. The logic behind this strategy index is that we can generate return from exposure to a leveraged S&P 500 position which only risks 30% of our capital. The position almost acts like a synthetic call option on the S&P 500. We can hedge this exposure imperfectly, but somewhat effectively, by buying leveraged long duration government bonds, getting short leveraged Euros (deflation anyone?), and by buying leveraged gold in case of monetary instability or inflation. I think this strategy could struggle if stocks and bonds drop simultaneously, with the dollar weakening vs. other currencies. Please note that even though the rules of this strategy index have been publicly released, like any other index, we require the execution of a licensing agreement with ZOMMA LLC for any form of commercial use, whatsoever. ZOMMA Quant Warthog II Rules: I. Buy UPRO (NYSEARCA: UPRO ) with 30% of the dollar value of the portfolio. II. Buy TMF (NYSEARCA: TMF ) with 20% of the dollar value of the portfolio III. Buy EUO (NYSEARCA: EUO ) with 40% of the dollar value of the portfolio. IV. Buy UGL (NYSEARCA: UGL ) with 10% of the dollar value of the portfolio. V. Rebalance annually to maintain the 30%/20%/40%/10% dollar value split between the instruments. Here are the results of a backtest of these rules in a log scale: (click to enlarge) Click to enlarge (click to enlarge) Click to enlarge This strategy index has powered through recent market volatility largely unscathed. Its Sharpe and MAR decimate the S&P 500 over the same period, with true multi-asset class exposure for both return generation and hedging. This helps the strategy achieve a lower volatility than that of the S&P 500, with a CAGR which exceeds the S&P 500’s by approximately 6% per year. Thanks for reading. We feature even more impressive strategy indices in our subscription service. If this post was useful to you, consider giving it a try. Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown; in fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk of actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all which can adversely affect trading results. Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in UPRO, UGL over 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.

RSX: Ready For December Wipeout

Oil falls under $40, which is extremely negative for Russia. Yet, the ruble and the dollar-denominated RSX show relative strength compared to oil. I explain why this happened and where I think RSX is heading. It looks like December is a poor month for the Market Vectors Russia ETF (NYSEARCA: RSX ). Last year, RSX suffered a steep decline as ruble collapsed amid weak oil and sanctions on Russia. This year, oil falls further, with Brent oil trading at just $38.24 at the moment of writing this article. Yet, RSX has yet to touch lows seen in last December. In fact, RSX did not go lower than the August lows. However, in my view, this magic won’t last forever. On Friday 11, the Russian Central Bank left its key rate unchanged at 11%. The rate is high, but the Central Bank had little to do in current circumstances. Sanctions on Turkey will be contributing to food inflation, which is especially pronounced in winter as Russia does not produce much fruits and vegetables in this season. Oil keeps falling and threatens the ruble (more on this later). A weaker ruble will contribute to inflation. No matter how Russia tries to jump-start production of everything internally, this is plain impossible, and the country still depends a lot on imports. In this light, the Central Bank’s hands were tied and it was forced to leave the rate unchanged despite the fact that the high rate hurts the economy. Meanwhile, the ruble is showing some extra strength. At the moment of writing this article, ruble was 70.43 to the dollar, making the ruble-denominated price of oil stand at just 2,693. As a reminder, the Russian budget for the next year is based on the ruble-denominated price of oil at 3,150. The relatively strong ruble hurts exporters which make up the majority of RSX’s holdings . At the same time, the relatively strong ruble prevents the dollar-denominated RSX from falling further down. This situation will not last forever. I strongly believe that the ruble will return to more acceptable levels. If it does not do so on its own, then the Central Bank will be forced to help in order to maintain the budget and help exporters to gain from the ruble weakness. I expect that the ruble will have a downside correction of at least 10% from the current levels, which will inevitably add to RSX’s weakness. I believe that current oil prices are an immense drag on the Russian economy. This drag has been so far underestimated by the market. The Russian Central bank has cut the ruble’s liquidity with the wise use of repo, but these tricks can’t go on forever. To highlight what I’m talking about, I’ve made a screenshot from the official site of the Russian Central Bank. As you can see, the amount of bids received is twice more than the money allotted. To further enhance the thesis that the Central Bank is artificially cutting liquidity to support the ruble, here’s the screenshot of several repo auctions in January 2015: (click to enlarge) And these are numbers from this summer: (click to enlarge) All in all, I believe that the current balance is not sustainable. Ruble will fall and RSX will follow. If oil stays at current levels for longer, RSX will have even more downside.