Tag Archives: etfs

Buy DVY Ahead Of The Fed Announcement

Regardless of Thursday’s announcement, rates will be low for a while. Utility stocks have taken a beating, and seem poised for a rebound. Dividend funds are a long-term trend that is not going away. The purpose of this article is to determine the attractiveness of the iShares Select Dividend ETF (NYSEARCA: DVY ) as an investment option. To do so, I will review DVY’s recent performance, current holdings and weightings, and trends in the market to attempt to determine where DVY may be headed for the rest of 2015, and in to the new year. With the Fed’s meeting tomorrow regarding interest rates, investors may want to initiate positions ahead of their announcement. First, a little about DVY. The Fund seeks investment results that correspond with the price and yield performance of the Dow Jones U.S. Select Dividend Index . The Index is generally made up of companies with relatively high dividend yields and that have maintained these yields for a long stretch of time, the minimum being 5 years. Because of its diversity and inclusion of only high dividend payers, DVY is not representative of the general market and or the DOW as a whole, but is weighted towards certain sectors specifically. DVY is currently trading at $73.87/share and pays a quarterly dividend of $.65/share, which translates to an annual yield of 3.52%. The fund has struggled in 2015, heading lower with the market as a whole. Year to date, DVY is down about 7%, excluding dividends. This compares to a drop of about 6.5% in the Dow Jones Index (NYSE: DOW ), a popular benchmark. Given its yield, DVY has slightly outperformed the DOW, but it is important to consider the Fed’s influence on the market before deciding to invest in DVY going forward. There are a few reasons why I like DVY, regardless of what the Fed decides to do, as I see the fund performing strongly in either scenario. First, if the Fed decides to not raise rates after tomorrow’s meeting, high-yielding safe sectors like utilities should outperform, as investors will scramble back into those stocks to earn that higher yield. This is important for DVY because the fund has a weighting of almost 33% towards the utilities sector . Over the past few years this sector has rallied each time the rate increase is delayed, or when there is speculation that it will be delayed. And this type of delay is precisely what most traders are betting on this time around, as most traders are betting the central bank will not increase rates at its Sept. 16-17 meeting. Traders are pricing in a 28 percent chance of action on Thursday. Odds of a move at the December gathering are about 59 percent, according to data compiled by Bloomberg. Given the very real possibility of a September delay announcement by the Fed, investors could profit by getting in to DVY ahead of time. Second, I also believe DVY should perform well even if the Fed does decide to raise rates. I believe this is the case because the increase is sure to be modest, and will likely not be followed by another increase this year. Because of this, investors will continue to be subject to ultra-low rates by historical standards, and will continue to look at dividend-focused exchange traded funds, as has been the long-term trend for years now. While most investors are increasingly conflicted about whether or not the Fed will raise rates, the amount of the increase, if it happens, seems to have a consensus that the rise will be to .25%, with a small possibility of .50%. Given that DVY is currently yielding 3.50%, and has the potential of price appreciation through stock gains, the potential return of this fund will still beat investing in U.S. Treasuries. Of course, investing in DVY is not without risks. As the past few months have shown, the Fed’s action (or lack thereof) on interest rates can heavily influence the markets. If the Fed decides to raise rates more aggressively than anticipated, funds like DVY will fall, and fall sharply, given that most traders are betting on the Fed being more dovish. Additionally, dividend funds have been falling out of favor with investors over the course of 2015, as some investors are predicting the years-long bull run for these funds to be ending. Data compiled by Bloomberg has shown outflows for popular dividend funds like DVY, and others, over the course of 2015. However, these are not scenarios I expect to occur. The Fed has been very straightforward about their intentions, and I do not believe they have any desire to “spook” the market with a large increase. I also expect, for reasons I outlined in the above paragraph, for the trend towards dividend ETF’s to continue to be profitable going in to the new year, as rates stay historically low for at least another six months. Bottomline: The market has undergone some volatility over the last few months and trended lower, and DVY has not been immune to this trend. However, the drop in stock price has pushed DVY’s yield above 3.50%, and offers a reasonable value while trading at 12.5 times earnings. The fund has suffered disproportionately as investors fret over a coming rate hike, but the rate hike will be small and could very well be delayed. If so, investors will look to get back in to DVY and similar funds as safe, high-yield alternatives will continue to be scarce. With a above-average yield and a beta of only .69 (indicating it is less volatile than the market as a whole), DVY provides investors with a relatively safe play to ride out any forthcoming volatility. I would encourage investors to take a serious look into this fund, regardless of the Fed’s decision this week. Disclosure: I am/we are long DVY. (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.

FLOT Vs. FLRN: The Best Floating Rate ETF

The Fed rate hike may be just around the corner and investors have started probing every possible safe option in a likely rising rate environment. A barrage of solid economic data, including a more-than-seven-year low unemployment rate in August, an improving service sector, decent consumer confidence, and a pretty strong housing market raised speculations over the first rate hike in more than nine years. Investors should note that while fixed income investing underperforms in a rising rate environment, there are several plays, even in the bond market, that could ward off rising rate worries. A floating rate instrument is such an option. Floating rate notes are investment grade bonds that do not pay a fixed rate to investors but have variable coupon rates that are often tied to an underlying index (such as LIBOR) plus a variable spread depending on the credit risk of the issuers. Since the coupons of these bonds are adjusted periodically, these are less sensitive to an increase in rates compared to traditional bonds. Unlike fixed coupon bonds, these do not lose value when the rates go up, making the notes ideal for protecting investors against capital erosion in a rising rate environment. Below we highlight two popular floating rate bond ETFs and try to figure out which one is a better bet at the current level: iShares Floating Rate Note ETF (NYSEARCA: FLOT ) This is the most popular fund in the floating rate securities market space that follows the Barclays US Floating Rate Note < 5 Years Index. Holding 458 securities, the fund has an average life of 1.78 years and effective duration of 0.14 years. The product has amassed over $3.60 billion in its asset base while trades in volume of 650,000 shares per day on average. Sector-wise, the fund invests over half of its assets in banking followed by 8.4% weight in areas with no guarantee. Companies like JPMorgan (NYSE: JPM ) (4.12%), Goldman (NYSE: GS ) (4.07%) and Citigroup (NYSE: C ) (3.49%) are top three holdings of the fund. Bonds with 1-2 years of maturity have the highest exposure of 33.17% in the fund while bonds with 0-1 years take the second position with 28.69% weight. Expense ratio comes in at 0.20%. The fund is off 0.02% so far this year (as of September 11, 2015) and yields about 0.48%. SPDR Barclays Capital Investment Grade Floating Rate ETF (NYSEARCA: FLRN ) This ETF tracks the Barclays U.S. Dollar Floating Rate Note < 5 Years Index with average maturity of 1.73 years and modified duration of 0.12 years. It holds 445 securities and has been able to accumulate $387 million in its total asset base. The fund charges 15 bps in annual fees while volume is moderate at under 30,000 shares. Sector-wise, the product is tilted toward the financial sector with 61% exposure followed by the industrial sector (25.43%). Individual holding-wise, no stock holds more than 1.60% in the fund. Goldman gets the top priority followed by Kommunalbanken (0.97%) and Toronto-Dominion Bank (NYSE: TD ) (0.91%). Here also, bonds with 0-1 years and 1-2 years of maturity hold top positions with 30.88% and 36.21%, respectively. It has lost 0.3% in the year-to-date timeframe and has a dividend yield of 0.59% (as of September 11, 2015). Which One is the Better Bet? While both options are pretty intriguing in a rising rate environment and quite similar in nature, there's a subtle difference between the two that might give one ETF an edge over the other in a rising rate environment. The chart below details the two bond ETFs: FLOT FLRN Effective Maturity 1.78 years 1.73 years Effective Duration 0.14 years 0.12 years Default Risks Slightly higher FLRN Slightly lower than FLOT Interest Rate Risks Slightly higher FLRN Slightly lower than FLOT Concentration Risks Slightly High Slightly Low Expense Ratio 0.20% 0.15% Yield 0.48% 0.59% To sum up, both FLOT and FLRN both have high exposure in the better-performing financial sector. Both handle around 450 bonds and certain international exposure, but are dollar-denominated in nature. Yet, FLRN appears a less risky product compared with FLOT going by various risk matrixes. FLRN is cheaper too. Link to the original article on Zacks.com

How To Avoid The Worst Style ETFs: Q3’15

Summary The large number of ETFs has little to do with serving your best interests. Below are three red flags you can use to avoid the worst ETFs. The following presents the least and most expensive style ETFs as well as the worst overall style ETFs per our Q3’15 Style ratings. Question: Why are there so many ETFs? Answer: ETF providers tend to make lots of money on each ETF so they create more products to sell. The large number of ETFs has little to do with serving your best interests. Below are three red flags you can use to avoid the worst ETFs: Inadequate Liquidity This issue is the easiest issue to avoid, and our advice is simple. Avoid all ETFs with less than $100 million in assets. Low levels of liquidity can lead to a discrepancy between the price of the ETF and the underlying value of the securities it holds. Plus, low asset levels tend to mean lower volume in the ETF and larger bid-ask spreads. High Fees ETFs should be cheap, but not all of them are. The first step here is to know what is cheap and expensive. To ensure you are paying at or below average fees, invest only in ETFs with total annual costs below 0.46%, which is the average total annual cost of the 281 U.S. equity style ETFs we cover. Figure 1 shows the most and least expensive Style ETFs. QuantShares provides 2 of the most expensive ETFs while Schwab ETFs are among the cheapest. Figure 1: 5 Least and Most Expensive Style ETFs (click to enlarge) Sources: New Constructs, LLC and company filings Investors need not pay high fees for quality holdings. The i Shares Enhanced U.S. Large-Cap ETF (NYSEARCA: IELG ) earns our Very Attractive rating and has low total annual costs of only 0.08%. On the other hand, the Schwab U.S. Small-Cap ETF (NYSEARCA: SCHA ) holds poor stocks. No matter how cheap an ETF, if it holds bad stocks, its performance will be bad. The quality of an ETFs holdings matters more than its price. Poor Holdings Avoiding poor holdings is by far the hardest part of avoiding bad ETFs, but it is also the most important because an ETFs performance is determined more by its holdings than its costs. Figure 2 shows the ETFs within each style with the worst holdings or portfolio management ratings . Note that there are no ETFs in the All Cap Growth and All Cap Value style under coverage. Figure 2: Style ETFs with the Worst Holdings (click to enlarge) Sources: New Constructs, LLC and company filings Ark, iShares, and Guggenheim appear more often than any other providers in Figure 2, which means that they offer the most ETFs with the worst holdings. Our overall ratings on ETFs are based primarily on our stock ratings of their holdings. The Danger Within Buying an ETF without analyzing its holdings is like buying a stock without analyzing its business and finances. Put another way, research on ETF holdings is necessary due diligence because an ETF’s performance is only as good as its holdings’ performance. PERFORMANCE OF ETF’s HOLDINGs = PERFORMANCE OF ETF Disclosure: David Trainer and Max Lee 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. (More…) 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.