Tag Archives: etf

How To Find The Best Style Mutual Funds: Q1’16

Finding the best mutual funds is an increasingly difficult task in a world with so many to choose from. How can you pick with so many choices available? Don’t Trust Mutual Fund Labels There are at least 929 different Large Cap Value mutual funds and at least 6296 mutual funds across twelve styles. Do investors need 524+ choices on average per style? How different can the mutual funds be? Those 929 Large Cap Value mutual funds are very different. With anywhere from eight to 741 holdings, many of these Large Cap Value mutual funds have drastically different portfolios, creating drastically different investment implications. The same is true for the mutual funds in any other style, as each offers a very different mix of good and bad stocks. Large Cap Blend ranks first for stock selection. Small Cap Growth ranks last. Details on the Best & Worst mutual funds in each style are here . A Recipe for Paralysis By Analysis I think the large number of Large Cap Value (or any other) style mutual funds hurts investors more than it helps because too many options can be paralyzing. It is simply not possible for the majority of investors to properly assess the quality of so many mutual funds. Analyzing mutual funds, done with the proper diligence, is far more difficult than analyzing stocks because it means analyzing all the stocks within each mutual fund. As stated above, that can be as many as 741 stocks, and sometimes even more, for one mutual fund. Any investor focused on fulfilling fiduciary duties recognizes that analyzing the holdings of a mutual fund is critical to finding the best mutual fund. Figure 1 shows our top rated mutual fund for each style. Figure 1: The Best Mutual Fund in Each Style Click to enlarge Sources: New Constructs, LLC and company filings The Barrow Value Opportunity Fund (MUTF: BALIX ) ranks first, the Brown Advisory Equity Income Fund (MUTF: BAFDX ) ranks second, and the Wall Street Fund (MUTF: WALLX ) ranks third. The Artisan Mid Cap Value Fund (MUTF: APHQX ) ranks last. How To Avoid “The Danger Within” Why do you need to know the holdings of mutual funds before you buy? You need to be sure you do not buy a fund that might blow up. Buying a fund without analyzing its holdings is like buying a stock without analyzing its business and finances. No matter how cheap, if it holds bad stocks, the mutual fund’s performance will be bad. Don’t just take my word for it, see what Barron’s says on this matter. PERFORMANCE OF FUND’S HOLDINGS = PERFORMANCE OF FUND If Only Investors Could Find Funds Rated by Their Holdings… The Vulcan Value Partners Fund (MUTF: VVPLX ) is the top-rated Large Cap Blend mutual fund and the overall top-rated fund of the 6296 style mutual funds that we cover. The mutual funds in Figure 1 all receive an Attractive-or-better rating. However, with so few assets in some of the funds, it is clear investors haven’t identified these quality funds. Disclosure: David Trainer and Kyle Guske II 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. 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.

NOBL: An ETF For Dividend Growth And The Quest For Yield

By Max Chen and Tom Lydon Investors seeking a steady yield-generating exchange traded fund to help diversify their portfolios in a volatile year can look to the ProShares S&P 500 Aristocrats ETF ( NOBL ) for quality stock market exposure and sustainable dividends. “By investing in dividend growth strategies, you not only get high-quality companies that have delivered strong total returns, you also get the potential for attractive yield,” according to ProShares . “If you look at effective yield, you’ll see dividend growth strategies have significantly outperformed the broader market.” NOBL, which has accumulated $1.39 billion in assets under management, shows a 2.03% 12-month yield and a 0.35% expense ratio. The dividend ETF has been outperforming the broader equities market. Year-to-date, NOBL rose 5.5% while the S&P 500 index was only 0.9% higher. Over the past year, NOBL increased 4.3% as the S&P 500 dipped 0.6%. NOBL’s 17.2% tilt toward industrials and 10.4% position in materials helped the ETF capitalize on the recent rally in more undervalued sectors of the market. Additionally, the fund holds large positions in more conservative or defensive sectors, including 12.9% in health care and 25.5% in consumer staples. The recent selling pressure in the equities market has also made dividend stock plays more attractive , especially as the Federal Reserve projects only two interest rate hikes this year, compared to previous expectations for four rate hikes. As the S&P 500 index experiences its worst start to a new year since 2009, yield spread between the benchmark and 10-year Treasuries widened to their largest spread in a year. The difference between U.S. equity dividend yields and government bonds can be used as a proxy for valuation comparison between the two assets. On average over the past year, the yield on 10-year Treasuries exceeded that of the S&P 500 dividends by 7.7 basis points. However, the recent volatility helped push yields on 10-year Treasury notes below 2%. NOBL, which tracks the S&P 500 Dividend Aristocrats Index, targets the cream of the crop, only selecting components that have increased their dividends for at least 25 consecutive years. Consequently, investors are left with a portfolio of high-quality, sustainable dividend payers as opposed to more high-yield focused funds that may contain companies on more precarious financial positions. High-yield equity funds can be enticing to income-seeking investors, but the higher yields come with higher the risks and are often unstable, writes Kevin McDevitt, a senior analyst for Morningstar . Alternatively, McDevitt argues that dividend growth is a more important factor for long-term dividend investors. “Dividend growth plays a big role in determining total income over the life of an investment,” McDevitt said. “As a general guideline, the higher a company’s, and by extension a fund’s, yield, the less quickly it will grow over time. Over the short run, this initial yield matters more than dividend growth. But as the time horizon grows, dividend growth has a greater impact on the overall payout.” ProShares S&P 500 Aristocrats ETF Click to enlarge 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.

On The Statistical Significance Of The Knowledge Factor

Over the last week or so we’ve been highlighting how factor investing is not as cut and dry as advertised . The traditional simple factors (value, size, momentum, quality, low volatility) sometimes work and sometimes don’t so investors are left to make educated guesses about which factors will work in any given year. Here we’re defining “work” as these factors’ outperformance, or not, of the broad equity market. But the Knowledge Factor (the Gavekal Knowledge Leaders Developed World Index) doesn’t appear to have this same limitation. As we’ve shown already two times in the last five days, the Knowledge Factor – the tenancy of highly innovative companies to realize excess stock market performance – is the only factor that delivers consistent outperformance vs the global stock market. In the first chart below we show the yearly binary relative out/under performance of each MSCI Factor index relative to the MSCI World Index itself. A blue line and a +1 represents a year of outperformance for that factor and a red line and a -1 represents a year of underperformance. The results speak for themselves as it’s clear that there is no discernible trend in the out or underperformance of the five MSCI simple factors on a yearly basis. Said differently, sometimes the factor exposures outperform and sometimes they don’t. The top line that shows the Knowledge Factor’s relative performance is as stable as it gets, returning less than the MSCI World Index only twice in 16 years. Click to enlarge This next chart shows the cumulative performance since 2000 for each of the MSCI simple factors and the Knowledge Factor (the bars) and the yearly hit rate of outperformance relative to the MSCI World Index (the stars). Over time, the stable outperformance of the Knowledge Factor has resulted in by far the highest total return of any factor over the last two full market cycles. Click to enlarge Having laid out the above, we then analyzed the performance of the Knowledge Factor to see if there were certain market environments which were not supportive of the Factor’s outperformance. We looked at bull markets and bear markets, periods of rising and falling interest rates, periods of rising and falling commodity prices, and periods of rising and falling inflation trends. We observed no market environment in which the Knowledge Factor did not outperform the MSCI World Index, leading us to conclude that the Knowledge Factor is the gift that keeps on giving . Statistical Analysis: Today we want to take a slightly different tack to try to understand the sources of performance of the Knowledge Factor (the Gavekal Knowledge Leaders Developed World Index). We’re going to decompose the return of the Knowledge Factor to see if underlying simple factor tilts are the sole reason for this factor’s outperformance. If the Knowledge Factor is just an intelligent combination of the simple factors, then the return stream could be easily replicated and the relative performance of the Knowledge Factor described above would lose significance. To test the hypothesis that the Knowledge Factor adds value (aka Alpha) even after taking into account of any underlying factor exposure, we show a multiple regression of the since 2000 return stream of the Knowledge Factor (dependent variable) vs the all the MSCI simple factors (the independent variables). Given the below ANOVA table we observe the following: This factor exposure model does a good job explaining the return stream of the Knowledge Factor (the Gavekal Knowledge Leaders Developed World Index) because the adjusted r-square is .95, meaning that 95% of the Knowledge Leaders Index return stream is explained by this model. All of the beta coefficients except the Size Factor coefficient are in the single digits and none of the individual beta coefficients are statistically significant. In other words, there are no large factor tilts in the Knowledge Leaders Index returns and any factor tilts observed in the model cannot be statistically relied upon given the low t-stats and high p-values. Said even differently, none of the MSCI simple factors, in isolation or combined, can explain the returns of the Knowledge Factor. Even after taking into account the incredibly small and insignificant factor exposures, the Knowledge Factor has a highly statistically significant unexplained annualized alpha of 3.18%. We know the 3.18% alpha is statistically significant because the t-stat is greater than 2 and the p-value is close to zero. These results indicate that the Knowledge Factor is not simply an aggregation of the simple factors. The returns of the Knowledge Factor are all-together different than the return streams of the simple factors. This goes a long way in explaining why the Knowledge Factor consistently outperforms global stocks on a yearly basis and outperforms in all the market environments studied. There are no underlying factor tilts dictating the performance of Knowledge Leaders except the Knowledge Factor itself, which is the systematic mispricing of highly innovative companies. 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.