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Annual Letters

A recent WSJ article pointed out that General Electric’s (NYSE: GE ) annual report was downloaded only 800 times in 2013. No one has the time or patience to read annual reports anymore with all the jargon and legal disclosures involved; it’s no wonder. But there are some great company letters out there. Buffett with Berkshire (NYSE: BRK.A ) (NYSE: BRK.B ) always tops the list. My personal favourite is Amazon’s (NASDAQ: AMZN ) Jeff Bezos. He talks about the company’s strategy and culture. He believes that Amazon is the “best place in the world to fail,” a key reason for its success. “We all know that if you swing for the fences, you’re going to strike out a lot, but you’re also going to hit some home runs. The difference between baseball and business, however, is that baseball has a truncated outcome distribution. When you swing, no matter how well you connect with the ball, the most runs you can get is four. In business, every once in a while, when you step up to the plate, you can score 1,000 runs. This long-tailed distribution of returns is why it’s important to be bold. Big winners pay for so many experiments.” Free shipping with Prime membership has been a major beneficiary. He adds that “we want Prime to be such a good value, you’d be irresponsible not to be a member.” Click to enlarge Activision Blizzard (NASDAQ: ATVI ) is my next favourite. “If you had invested $100 in our company 20 years ago, it would have returned over $4,400 today – almost nine times more than the $520 the S&P 500 would have returned in that same period of time and almost five times more than Berkshire Hathaway, which we generally regard as the gold standard to measure just about everything against.” Any company that measures themselves against Berkshire is setting an incredibly high standard. My final pick is Under Armour (NYSE: UA ). It is known as an aggressive upcoming brand; in 2015, Under Armour’s athletes secured MVP titles in the four major US sports. “We feel Under Armour’s brand promise is to create products you don’t know you need yet, but once you have them, you don’t know how you lived without them.” The best companies tend to explain their strategy simply. The CEO goes on to talk about the opportunity in connected fitness, but he reminds us that he’s not forgetting to sell shirts and shoes! Decisive has a position in Amazon. The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client’s or other person’s investment objectives. Before making an investment decision, you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.

Measuring Performance Vs. A Benchmark: The Case Of The Low Volatility Factor

When is tracking error not really an error? By Nick Kalivas, Senior Equity Product Strategist, Invesco PowerShares Traditional indexes were never intended to define what makes a sound investment opportunity, which has fueled the popularity of factor-based investing. But they do serve as useful benchmarks for investment performance. How closely a portfolio or index tracks a particular benchmark index is referred to as “tracking error.” Tracking error is often considered in the context of a portfolio relative to an underlying index. But tracking error can also exist between two indexes, which raises questions. Take, for example, the case of low volatility investing – one of the most popular investment factors in use today. Could the S&P 500 Low Volatility Index – a commonly used barometer of low volatility stock performance – result in too much tracking error relative to its parent index, the S&P 500 Index? Because the S&P 500 Low Volatility Index selects 100 stocks from its parent index with the lowest realized volatility over the previous year, the S&P 500 Low Volatility Index can have sector exposure that is materially underweight or overweight relative to the S&P 500 Index. Should this be a concern? That depends on your perspective. The relationships between tracking error and low volatility exposure The table below shows the impact of blending the S&P 500 Low Volatility Index with the S&P 500 Index over a five-year period. It reveals a number of informational nuggets. Relationship between low volatility exposure, tracking error and performance April 30, 2011, through March 31, 2016 Source: Bloomberg L.P., March 31, 2016. Past performance is no guarantee of future results. First off, note the correlation between factor tilt and performance. During this time period, investors who had more low volatility exposure realized higher absolute and risk-adjusted returns. By itself, an allocation to the S&P 500 Low Volatility Index outperformed the S&P 500 Index by 22.5% (13.60% to 11.10%), with 24.4% less volatility (9.30% to 12.30%) over the five-year period. The results are consistent with the low volatility anomaly, which states that low volatility stocks may outperform higher volatility stocks and the broader market on an absolute and risk-adjusted basis.1 Note that the return per unit of risk increases as the low volatility factor tilt increases (0.90 for a 100% S&P 500 Index allocation, for example, to 1.22 with a 50-50 blend). Also note the proportional correlation between allocation to the S&P 500 Low Volatility Index and tracking error. The chart below plots this relationship alongside risk-adjusted return. Source: Bloomberg L.P., March 31, 2016. Past performance is no guarantee of future results. As you can see, the relationship between low volatility factor exposure and tracking error is linear. Tracking error is relatively small when small amounts of low volatility are blended into the S&P 500 Index. A portfolio with a 30% weighting in low volatility stocks, for example, had less than a 2.50% tracking error to the S&P 500 Index; 50-50 blend produced 4% tracking error. Keep in mind, though, that risk-adjusted returns also improved with increased tracking error. What all of this implies is that investors and their advisors can mix and match according to their comfort level. Blending material amounts of the low volatility factor into a portfolio will likely lead to increased tracking error relative to the S&P 500 Index, but can also enhance the performance of a portfolio on both an absolute and risk adjusted basis. What’s your choice? Learn more about the PowerShares S&P 500 Low Volatility Portfolio (NYSEARCA: SPLV ). Read more blogs by Nick Kalivas . Important information Correlation is the degree to which two investments have historically moved in relation to each other. Tracking error measures the divergence between price behavior of a portfolio and the price behavior of a benchmark. Volatility measures the standard deviation from a mean of historical prices of a security or portfolio over time. The S&P 500® Low Volatility Index consists of the 100 stocks from the S&P 500® Index with the lowest realized volatility over the past 12 months. An investment cannot be made into an index. Typically, security classifications used in calculating allocation tables are as of the last trading day of the previous month. There are risks involved with investing in ETFs, including possible loss of money. Shares are not actively managed and are subject to risks similar to those of stocks, including those regarding short selling and margin maintenance requirements. Ordinary brokerage commissions apply. The Fund’s return may not match the return of the Underlying Index. The Fund is subject to certain other risks. Please see the current prospectus for more information regarding the risk associated with an investment in the Fund. Investments focused in a particular industry or sector, such as the industrials sector are subject to greater risk, and are more greatly impacted by market volatility, than more diversified investments. The Fund is non-diversified and may experience greater volatility than a more diversified investment. There is no assurance that the Fund will provide low volatility. The Global Industry Classification Standard was developed by and is the exclusive property and a service mark of MSCI, Inc. and Standard & Poor’s. S&P® is a registered trademark of Standard & Poor’s Financial Services LLC (S&P) and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones). These trademarks have been licensed for use by S&P Dow Jones Indices LLC. S&P® and Standard & Poor’s® are trademarks of S&P and Dow Jones® is a trademark of Dow Jones. These trademarks have been sublicensed for certain purposes by Invesco PowerShares Capital Management LLC (Invesco PowerShares). The Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Invesco PowerShares. The Fund is not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, Dow Jones, S&P or their respective affiliates and neither S&P Dow Jones Indices LLC, Dow Jones, S&P or their respective affiliates make any representation regarding the advisability of investing in such product(s). Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. Business relationship disclosure: This article was posted on the Invesco PowerShares’ blog by an Invesco PowerShares’ employee on April 21, 2016: http://www.blog.invesco.us.com/measuring-performance-vs-benchmark-low-volatility-factor

Amazon Is Not The Only Name In Online Retail

When investors think about online retail stocks, certainly the first name that comes to mind is retail behemoth Amazon (NASDAQ: AMZN ). Not only has it surpassed brick-and-mortar competitor Wal-Mart (NYSE: WMT ) as the largest global retailer, but in the growing world of online retail, it holds approximately a quarter of the market share . Amazon will report its first quarter earnings on April 28th after the close. Amazon had a streak going of beating earnings until last quarter when it missed analyst expectations by 38%. Going into this quarter, it faces many of the same issues. The company is heavily reinvesting into business: partnering with Air Transport Services Group (NASDAQ: ATSG ) to boost shipping and logistics, buying content for its newly announced stand-alone streaming video service, and investing in new devices such as the Echo. Despite its position as a market leader and its bright growth prospects, as an investment, Amazon stock is down more than 8.5% YTD versus a positive return of 2.5% for the S&P 500 Index. Thanks to an uncertain earnings outlook coupled with a premium P/E ratio of more than 500X earnings, Amazon has failed to beat the market this year. Fortunately, Amazon is not the only name to play in the online retail space. EQM Indexes launched its Online Retail Index ((IBUYXT)) on December 1, 2015. The Index is now being tracked by the Amplify Online Retail ETF (NASDAQ: IBUY ), which launched on April 20 of this year. The index is comprised of a basket of global companies involved in three primary market segments: online retail, online marketplace, and online travel. The index is NOT capitalization weighted which allows equal exposure to other companies in the industry. The Investment Case for Online Retail Almost everyone has purchased merchandise online. Ecommerce is the fastest growing segment of retail sales. Global online sales are expected to grow 117% by 2018 . So as an investment theme, you can make a strong argument that online retail is a good place to have exposure. Online retail exhibits strong growth characteristics, continues to gain market share relative to brick-and-mortar retail, and is expanding globally. Thanks to advantages such as competitive pricing, shopping convenience, greater product selection, and rapid delivery, online commerce appears to be a disruptive technology that is here to stay. The mall isn’t dead, it has just moved online! Other Names in Online Retail Looking at the year-to-date performance of the stocks within the EQM Online Retail Index, Amazon is not even among the top-ten performers. Indeed, many of the top-performing names are companies that 1) US investors only have limited access to, OR 2) are names that they may not be familiar with. Let’s start with the top-performing name in the Index this year aptly named Start Today ( OTCPK:SATLF ), a Japanese e-commerce apparel retailer. The stock, which trades locally in Japan, but also as a U.S. ADR, is up more than 29% on a US dollar basis this year. Online retailer Overstock.com (NASDAQ: OSTK ) is also up more than 24% this year, after posting strong Q4 results in February. Also up in excess of 23% this year is Canadian-based Shopify (NYSE: SHOP ), a leading cloud-based commerce platform designed for small and medium-sized businesses. Clearly, Amazon stock is not the only game in town! Online retail offers a diverse and global set of opportunities. Indeed, retail is not the only industry that has been transformed by online commerce. Online travel has almost put travel agencies out of business by democratizing the price and availability of travel and vacation options. Besides U.S. names in the online travel space such as Priceline (NASDAQ: PCLN ), Expedia (NASDAQ: EXPE ), and TripAdvisor (NASDAQ: TRIP ), there are many global players that have delivered strong growth and investment performance. Makemytrip Ltd. (NASDAQ: MMYT ) is an India-based online travel retailer that allows travelers to research and plan trips. One of the key strengths of online commerce is that it is not limited by geographic boundaries. While Makemytrip may cater to specific demographics, its offerings are available around the globe. The stock is up 8.9% YTD. So just like ecommerce offers broad access to all types of merchandise, owning a basket of names in online retail offers diversified exposure to this attractive thematic opportunity. That is not to say that all performance is rosy in online-retail land. Chinese online beauty retailer Jumei International (NYSE: JMEI ), online jewelry retailer Blue Nile (NASDAQ: NILE ), and UK food delivery service Just Eat Plc ( OTC:JSTLF ) are all down in excess of 20% this year as they have struggled to execute. Expect more consolidation in the online retail industry, especially in online travel, as the stronger players gobble up their smaller competitors. Expedia acquired competitor Home Away last December in the online travel space. And Japanese travel booking site Ikyu was purchased by Yahoo! Japan in a deal that closed in February . What about other retail ETFs? Interestingly, while other retail sector ETFs offer broad exposure to traditional retail, their exposure to ecommerce and virtual retail is extremely limited. Look at the limited exposure among retail and internet ETF offerings. ETF Ticker # of Online Retail Stocks % Weight AMZN % Weight Non-US? Consumer Discretionary Select Sector SDPR Fund XLY 5 17.17 11.25 N SPDR S&P Retail ETF XRT 12 11.35 1.17 N PowerShares Dynamic Retail Portfolio PMR 1 3.03 0.00 N Market Vectors Retail ETF RTH 2 19.50 14.95 Y First Trust Dow Jones Internet Index Fund FDN 7 30.55 10.18 N as of 12/31/15 Furthermore, most of these ETFs are U.S. focused and fail to offer exposure to the many non-U.S. companies that are innovators in the space. Conclusion In summary, there are many reasons investors should want exposure to a globally diverse basket of stocks focused on online retail sales, rather than owning just a name or two: Get diversified investment exposure to the fastest growing global segments of online commerce: online retail, online marketplace, and online travel Participate in the accelerating growth potential being fueled by trends such as mobile growth and user-interface innovation Gain access to online retail growth opportunities outside the U.S. At the end of the day, the universe of opportunities is broader and more diverse than just Amazon. Disclosure It is not possible to invest directly in an index. Exposure to an asset class represented by an index is available through investable instruments based on that index. EQM Indexes does not sponsor, endorse, sell, promote or manage any investment fund or other investment vehicle that is offered by third parties and that seeks to provide an investment return based on the performance of any index. EQM Indexes makes no assurance that investment products based on the Index will accurately track index performance or provide positive investment returns. EQM Indexes is not an investment advisor, and makes no representation regarding the advisability of investing in any such investment fund or other investment vehicle. A decision to invest in any such investment fund or other investment vehicle should not be made in reliance on any of the statements set forth on this website. Prospective investors are advised to make an investment in any such fund or other vehicle only after carefully considering the risks associated with investing in such funds, as detailed in an offering memorandum or similar document that is prepared by or on behalf of the issuer of the investment fund or other vehicle. Inclusion of a security within an index is not a recommendation by EQM Indexes to buy, sell, or hold such security, nor is it considered to be investment advice. Disclosure: I am/we are long IBUY. 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. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.