Tag Archives: etfs

Inside Vanguard’s New Muni Bond ETF

Vanguard Group, known for its low-cost offerings, has been making great strides in recent times in launching products on varied themes. At present, it is offering around 70 U.S. listed ETFs, and has managed to secure the second position (with about $457.1 billion market cap) among the top 10 fund sponsors list, following BlackRock (NYSE: BLK ). Most recently, the issuer stepped into the muni bond market. The fund trades under the name of Vanguard Tax-Exempt Bond ETF (NYSEARCA: VTEB ). Let’s look into the fund. The Proposed Fund in Focus As per the prospectus , the fund looks to track the performance of the investment-grade U.S. municipal bond market. The goal will be achieved by tracking the S&P’s National AMT-Free Municipal Bond Index. The basket is long-duration in nature. The fund charges 12 bps in fees, and the expense ratio is 86% less than the average expense ratio charged by funds with similar constituents. How Does it Fit in a Portfolio? Municipal bonds are great picks for investors seeking a steady stream of tax-free income. Usually, the interest income from munis is exempt from federal tax, and sometimes even state taxes, making these especially attractive to investors in the high tax bracket looking to reduce their tax liability. The proposed fund also looks to follow munis that have their interests excused by U.S. federal income taxes and the federal Alternative Minimum Tax (AMT). However, investors should note that tax-free bonds have lower yields than taxable bonds. With the increase in the U.S. taxes, the demand for municipal bonds has grown by leaps and bounds among high earners. The best part of the fund is that it includes high-quality muni bonds. Recently, the sentiment about the creditworthiness of some munis like Puerto Rico soured. Also, a gradually improving U.S. economy will provide relief to investors, as the credit quality of the municipal bonds could improve, thereby reducing default rates. Though yields will likely rise in the coming days, as the Fed is set to hike rates sometime in 2015, the tax benefit will look more promising with rising yields. For example, a 10% yield translates into 18% (for high tax payers) after considering the tax exemption as noted by Bloomberg . Probably this is why Vanguard has endorsed the idea of tax exemption the most. ETF Competition The fund has managed to amass about $50 million in assets within just 10 days of launch, which can be considered as a benchmark of its success. After all, Vanguard is known as a low-cost producer. VTEB is the lowest-cost product in the muni bond ETF space (see all muni bond ETFs here ). Still, this new fund has big competition in the form of the iShares National AMT-Free Muni Bond ETF (NYSEARCA: MUB ). MUB is the highest-grossing muni ETF, with about $5.2 billion assets. Plus, this fund also tracks the same index, i.e. the S&P National AMT-Free Municipal Bond Index, to provide exposure to a basket of 2,782 investment-grade securities. The average maturity for MUB stands at 5.54 years, while the duration is 4.74 years. The fund has a 30-day SEC yield of 1.73% and charges 25 basis points as expenses per year. In a nutshell, though Vanguard made a late entry to this thriving space, it is off to a strong start. Going forward, it should not face hurdles in garnering investors’ money, despite iShares’ presence with an ultra-popular product. Original Post

With Further Market Declines Likely, Keep The Long Run In Mind

This article originally appeared on the Independent Observer Blog . August was the worst month for U.S. markets in more than three years, so say the headlines. I suspect it was also the worst month in at least that long for many international markets as well. And, as today’s numbers show us, we aren’t done yet. As I write this, U.S. markets are down about 2.5 percent, and European markets closed down around 3 percent. There is actually not much more I can add to what I’ve already written. Current valuations remain relatively high , and there is certainly the potential for further declines if the market adjusts to more typical valuation levels. From a correction standpoint, the S&P 500 is still down less than 10 percent from the peak. In other words, for all the hype and worry, we are in a market decline that, by historical standards, is both small and normal. This is not to minimize the current situation, however. Substantial technical damage has been done to U.S. markets, which remain below both the 200-day and 400-day moving averages. This suggests to me that more weakness is very likely. Indeed, the odds of a more substantial decline are, in my opinion, rising as confidence continues to erode. Many decision rules that have tested well in the past are now pointing to more declines as well. With further market declines likely, what should you do? If you have longer-term money invested (i.e., you don’t need it for 10 years or more), try to stay put. And if you’re still contributing to your portfolio, remember that the decline actually represents an opportunity, since you can invest at lower prices and benefit from potential future growth. If you have shorter-term money invested (i.e., you need it in the next couple of years), or if you’re already drawing down your portfolio in retirement, work with your financial advisor to determine what effect a large decline would have on your financial well-being. Hopefully, your portfolio is structured in a way that any decline will have minimal impact over time. If not, you might want to consider making changes to ensure that is the case. Once your portfolio design meets your needs, though, unfortunately, there is little left to do but buckle up and endure the ride. Why this decline looks different I won’t say enjoy the ride, of course, but to make it less painful, consider that this decline is different: First, many previous and major, long-lasting declines – 2000 and 2008 being the most recent – came at the end of multiyear debt-fueled booms. We might get to that point eventually, but we’re not there now. Households have actually continued to pay off debt during the past few years, not add to it. Second, sustained declines typically took hold during periods of recession while, today, the U.S. economy continues to grow in a sustainable way. Third, the lack of corrections like this over the past few years has, arguably, been unhealthy. The current decline is actually a painful but necessary step to clear out market excesses and lay the groundwork for further advances. This prescription – prepare and keep the long run in mind – is neither easy nor satisfying. The only real thing it has going for it is that, over time, it generally works. That is what I try to focus on, and I suggest you do the same.

Manning & Napier Pro-Blend Conservative Term Series S, September 2015

Objective and strategy The fund’s first objective is preservation of capital. Its secondary concerns are to provide income and long-term growth of capital. The fund invests primarily in fixed-income securities. It tilts toward shorter-term, investment grade issues, while having the ability to go elsewhere when the opportunities are compelling. It also invests in foreign and domestic stocks, with a preference for dividend-paying equities. Finally, it may invest a bit in a managed futures strategy as a hedge. In general, though, bonds are 55-85% of the portfolio. In the past five years, stocks have accounted for 25-35% of the portfolio, though they might be about 10% higher or lower if conditions warrant. Adviser Manning & Napier (NYSE: MN ). Manning & Napier was founded in 1970 by Bill Manning and Bill Napier. They’re headquartered near Rochester, NY, with offices in Columbus, OH, Chicago and St. Petersburg. They serve a diversified client base of high-net worth individuals and institutions, including 401(k) plans, pension plans, Taft-Hartley plans, endowments and foundations. It’s a publicly traded company with $43 billion in assets under management. Of that, about $18 billion are in their team-managed mutual funds and the remainder in a series of separately managed accounts. Manager The fund is managed by a seven-person team headed by Jeffrey Herrmann and Marc Tommasi. Both of them have been with the fund since its launch. The same team manages all of Manning & Napier’s Pro-Blend and Target Date funds. Management’s stake in the fund We generally look for funds where the managers have placed a lot of their own money to work beside yours. The managers work as a team on about 10 funds. While few of them have any investment in this particular fund, virtually all have large investments between the various Pro-Blend and Lifestyle funds. Opening date November 1, 1995. Minimum investment $2,000. That is reduced to $25 if you sign up for an automatic monthly investing plan. Expense ratio 0.87% on $1.5 billion in assets as of August 2015. That’s about average for funds of this type. Comments Pro-Blend Conservative offers many of the same attractions as the Vanguard STAR Fund (MUTF: VGSTX ), but does so with a more conservative asset allocation. Here are three arguments on its behalf. First, the fund invests in a way that is broadly diversified and pretty conservative . The portfolio holds something like 200 stocks and 500 bonds, plus a few dozen other holdings. Collectively, those represent perhaps 25 different asset classes. No stock position occupies as much as 1% of the portfolio, and it currently has much less direct foreign investment than its peers. Second, Manning & Napier is very good . The firm does lots of things right, and they’ve been doing it right for a long while. Their funds are all team-managed, which tends to produce more consistent, risk-conscious decisions. Their staff’s bonuses are tied to the firm’s goal of absolute returns, so if investors lose money, the analysts suffer too. The management teams are long-tenured – as with this fund, 20-year stints are not uncommon – and most managers have substantial investments alongside yours. Third, Pro-Blend Conservative works . Their strategy is to make money by not losing money. That helps explain a paradoxical finding: they might make only half as much as the stock market in a good year, but they managed to outperform the stock market over the past 15. Why? Because they haven’t had to dig themselves out of deep holes first. The longer a bull market goes on, the less obvious that advantage is. But once the market turns choppy, it reasserts itself. At the same time, the fund has the ability to become more aggressive when conditions warrant. It just does so carefully. Chris Petrosino, one of the managing directors at Manning, explained it this way: We have the ability to be more aggressive. For us, that’s based on current market conditions, fundamentals, pricing and valuations. It may appear contrarian, but valuations dictate our actions. We use those valuations that we see in various asset classes (not only in equities), as our road map. We use our flexibility to invest where we see opportunities, which means that our portfolio often looks very different than the benchmark. Bottom Line The Pro-Blend Conservative Term Series S Fund has been a fine performer since launch. It has returned over 6% since launch and 5.4% annually over the past 15 years. That’s about 1% per year better than the total stock market and its conservative peers. In general, the fund has managed to make between 4-5% each year; more importantly, it has made money for its investors in 19 of the past 20 years. It is an outstanding first choice for cautious investors.