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The ETF Monkey 2016 Model Portfolio: Vanguard Implementation

Summary In a previous article, I introduced The ETF Monkey 2016 Model Portfolio. This portfolio offers my suggested model for 2016 based on careful review of the 2016 outlook from multiple high-quality research firms and/or investment providers. In that article, I also promised to build and then track practical implementations of the portfolio using ETFs from three different providers. This is the Vanguard implementation. This article is designed to be read in conjunction with the article in which I introduced The ETF Monkey 2016 Model Portfolio . In that article, I offered what I believe to be a model portfolio for 2016, based on my reading and analysis of materials related to the 2016 outlook from several top-quality sources. I further explained that I would both build and track actual implementations of this portfolio using ETFs from three major providers: Vanguard, Fidelity (featuring iShares funds) and Charles Schwab. This article features the Vanguard implementation. Overview I will start with a couple of tables. The first will briefly recap the asset classes and weightings that I identified in The ETF Monkey 2016 Model Portfolio, followed by the name and symbol of the Vanguard ETF I selected to represent that portion of the portfolio. The second will present a summary of key data for each ETF, including data points such as the expense ratio and average spread, the current dividend yield, and the size and daily volume of the fund. Combined, these will give you, in one glance, a big picture overview of the expenses and returns, as well as some idea of the fund’s tradeability. In this fashion, when I have completed my articles for all three selected providers, you will be able to do some side-by-side comparisons if you wish. Finally, one by one, I will offer other comments and data for each ETF. So let’s get started. Here is the first table, presenting my ETF selections. Asset Class Weighting ETF Name Symbol Domestic Stocks (General) 30.00% Vanguard Total Stock Market VTI Domestic Stocks (High Dividend) 5.00% Vanguard High Dividend Yield VYM Foreign Stocks – Developed 20.00% Vanguard FTSE Developed Markets VEA Foreign Stocks – Emerging Markets 7.50% Vanguard FTSE Emerging Markets VWO Foreign Stocks – Europe 5.00% Vanguard FTSE Europe VGK TIPS 15.00% Vanguard Short-Term Inflation-Protected Securities VTIP Bonds 10.00% Vanguard Total Bond Market BND REITS 7.50% Vanguard REIT VNQ Here is the second table, presenting key data points. (click to enlarge) You will likely immediately notice the strength of Vanguard’s offerings across all asset classes represented in the portfolio. With the exception of VTIP, every ETF has an inception date at least as far back as 2007 and Assets Under Management (AUM) of over $10 billion, in some cases much higher. Finally, you will notice that the expense ratio across all ETFs is as low as .05% and no higher than .15%, with 5 of the 8 coming in at or below .10%. In summary, these are long-standing, low-expense ETFs with tremendous size and trading volume, representing great liquidity. This can be important during times of market volatility. Note: In view of Vanguard’s standing in the ETF field, I will use this article as the lead, or reference, article for the three implementations. I will in some cases refer back to, and compare, the related Vanguard ETF when discussing the selections I make for the Fidelity and Charles Schwab implementations of the portfolio. With that overview in mind, let’s now take a look at each of the ETFs. Vanguard Total Stock Market I have already written an in-depth article on this ETF for Seeking Alpha, in preparation for including it in The ETF Monkey Vanguard Core Portfolio . Feel free to consider that article if you wish. VTI tracks essentially the entire investable U.S. market in a single ETF. It does so by tracking the CRSP U.S. Total Market Index . As opposed to the S&P 500, which is comprised solely of large companies (large-cap), the landscape covered by VTI also encompasses many smaller companies (mid-cap, small-cap, and even micro-cap). Such companies, while offering a higher level of risk than their larger brethren, also offer greater opportunities for growth . At .05%, VTI still carries one of the lowest expense ratios in the ETF marketplace. While the competitors I will feature from both iShares and Charles Schwab now offer an even lower .03% expense ratio, I suspect Vanguard is standing pat for now because they offer market-leading expense ratios across a wider variety of ETFs than their competitors. As of 11/30/15, VTI contains 3,791 stocks, with its Top 10 holdings comprising 15.1% of the total. As such, this ETF provides about as solid a foundation as you could hope for when developing your domestic stock allocation. Vanguard High Dividend Yield I have also covered this ETF in depth in a recent article . As it happens, in terms of page views this is the most popular article I have ever managed to write for Seeking Alpha. VYM tracks the FTSE High Dividend Yield Index, which represents the U.S.-only component of the FTSE All-World High Dividend Yield Index . This index is comprised of stocks characterized by higher than average dividend yields. It does not include REITS, and also eliminates stocks forecast to pay zero dividends over the next 12 months. It contains 435 stocks, with its Top 10 entities comprising 31.3% of the total. VYM has substantial weightings in sectors such as financials, oil & gas, telecommunications and utilities. This holding is designed to help increase the level of income generated by the portfolio. Its 3.10% yield will act as a nice supplement to the 1.93% yield offered by VTI, while VTI should offer more opportunities for growth . Vanguard FTSE Developed Markets I briefly covered this ETF as well as VWO, the ETF discussed in the next section, in this article . In The ETF Monkey Vanguard Core Portfolio, I use the Vanguard FTSE All-World ex-US ETF (NYSEARCA: VEU ) as my ETF of choice. This is an excellent vehicle if one wishes to obtain ‘comprehensive’ exposure to foreign stocks, including both developed and emerging markets. At the same time, your relative exposure is decided for you, 17.30% in emerging markets as of 11/30/15. In contrast, for The ETF Monkey 2016 Model Portfolio, I am electing to use a combination of VEA and VWO, which allows us to determine our desired allocation between developed and emerging markets. One interesting note is that Vanguard is in the process of enhancing VEA, switching to an underlying index , which includes Canada, whereas the previous index VEA tracked did not. This ETF currently contains 1,866 holdings, with the Top 10 comprising 11.3% of its assets. It also sports a wonderful .09% expense ratio, stellar for an ETF, which provides international exposure. Vanguard FTSE Emerging Markets As alluded to in the section above, this is the counterpart to VEA. This ETF invests in stocks of companies located in emerging markets around the world, such as China, Brazil, Taiwan, and South Africa. Its goal is to closely track the return of the FTSE Emerging Markets All Cap China A Transition Index . The “transition” basically refers to the fact that, as Vanguard words it, the ETF “over time will build exposure to small-capitalization stocks and China A-shares.” However, they are doing so in a manner, which will minimize the transaction costs associated with this endeavor. This ETF currently contains 3,106 holdings, with the Top 10 comprising 18.2% of its assets. It carries an expense ratio of .15%, once again impressive for an ETF, which provides exposure to emerging markets, with all associated trading costs. Vanguard FTSE Europe This ETF seeks to track the performance of the FTSE Developed Europe All Cap Index , which measures the investment return of stocks issued by companies located in the major markets of Europe. A full 72.5% of the fund’s assets are comprised of companies in the United Kingdom, France, Germany, and Switzerland. This ETF currently contains 1,238 holdings, with the Top 10 comprising 16.0% of its assets. As mentioned in the article in which I introduced The ETF Monkey 2016 Core Portfolio, my goal was to slightly increase the overall weighting, or effect, of Europe in the portfolio. In that vein, if you were to compare the two, you would see that 8 of the Top 10 companies in VGK are also in VEA , with two companies from Japan breaking the Top 10 in VEA. As noted above, this ETF carries an expense ratio of .12%. Vanguard Short-Term Inflation-Protected Securities This ETF seeks to track an index that measures the performance of inflation-protected public obligations of the U.S. Treasury that have a remaining maturity of less than five years. As opposed to the iShares TIPS Bond ETF ( TIP), which I will feature in the Fidelity variant of the portfolio, this ETF keeps the maturity shorter. All TIPS have a maturity of 5 years or less, with the average duration being 2.3 years (as opposed to 8.44 years for TIP). As a result, VTIP can be expected to have less real interest rate risk, but also lower total returns relative to a longer-duration TIPS fund, such as TIP. Vanguard Total Bond Market I have already written an in-depth article on this ETF for Seeking Alpha, in preparation for including it in The ETF Monkey Vanguard Core Portfolio . Feel free to consider that article if you wish. This is a great ETF for achieving across-the-board domestic bond exposure in a single source. It contains both government and corporate bonds and maintains a moderate risk profile. It does not include bonds with a credit rating lower than Baa and has an average duration of 5.8 years. As you may be aware, concern has recently been expressed as to the safety and liquidity of bond ETFs. This article concerning a recent major default may be of interest. It features the fact that the default involved a mutual fund, not an ETF, and also that the fund invested in highly speculative and somewhat illiquid junk bonds. In contrast, BND contains 7,746 different bonds, 63.5% of its assets are in U.S. Government bonds, and no bonds rated lower than Baa are included, as noted above. Put otherwise, this is not a speculative vehicle. Vanguard REIT I briefly covered this ETF, along with two competitors, in this article . VNQ is often described as sort of the pre-eminent player in the field, the “big daddy” if you will. With an inception date of 9/23/04, 154 REITs in the portfolio, $27.39 billion in Assets Under Management (AUM), a low .12% expense ratio, and great daily trading volume leading to a wonderful average price spread of .01%, there are many reasons this ETF has been described using terms such as “the king” and “top of the charts.” This ETF tracks the MSCI US REIT Index . The Top 10 holdings comprise 35.9% of its assets, with Simon Property Group (NYSE: SPG ), its single largest holding, carrying a 7.9% weighting. Summary and Conclusion So there you have them. The 8 ETFS that make up the Vanguard implementation of my portfolio. I plan to follow up with similar articles for both Fidelity and Charles Schwab, and finally with an article that will begin the process of actually building and tracking the portfolios as of the closing price of all the components on December 31, 2015. Until then, I wish you… Happy investing!

5 Market-Beating Broad International ETFs Of 2015

This has been a pretty rough year for the global stock market. Several China-driven offhand events causing global market rout in mid-year, growth worries in global superpowers like the Eurozone, Japan and Canada, Greek debt deal drama, the vicious cycle of oil price declines, commodity market upheaval, and finally the Fed rate hike in almost a decade kept the global markets edgy throughout the year. The impact of these events was harsh on the bourses. SPDR S&P 500 ETF (NYSEARCA: SPY ) has lost about 1% so far this year (as of December 22, 2015), Vanguard FTSE Europe ETF (NYSEARCA: VGK ) has shed about 5.1% during the same timeframe, iShares MSCI Emerging Markets (NYSEARCA: EEM ) has retreated as much as 16.9%, iShares MSCI All Country Asia ex Japan (NASDAQ: AAXJ ) has plummeted 11.5% and all-world ETF iShares MSCI ACWI (NASDAQ: ACWI ) has gone down over 4.7%. The price performance of these region-based ETFs was enough to tag 2015 as a down year for global stocks, on an average. In fact, as China devalued its currency yuan in a historic move in mid-August, there was a bloodbath in global equities. The U.S. and Asian stocks experienced a three -year low monthly performance in August. Europe saw the most horrible month since the 2011 debt debacle. Commodities crumbled to multi-year lows on demand issues and hit hard all commodity-rich nations. Still, the global market recouped some of its losses as the ECB extended its QE policy, BoJ made pro-growth changes in its accommodative policies and the Fed enacted a lift-off citing steady U.S. economic growth in the latter part of the year. These may give enough reasons to investors to look for international ETF survivors this year. For them, we have highlighted five ETFs that have gained at least 6% so far this year (as of December 22, 2015) defying the broad-based gloom. WisdomTree Intl Hedged Quality Div Growth ETF (NYSEARCA: IHDG ) While the Fed had been preparing for policy tightening the entire year and finally hiked rates, other developed economies of the world and a few emerging economies are going the opposite direction. Due to growth issues, global superpowers like Europe, Japan and Australia are presently pursuing easy money policies. As a result, stocks of these developed nations got an extra boost. Also, a currency-hedged approach was essential to set off the effect of a surging greenback. IHDG serves both aspects. Moreover, IHDG takes care of investors’ income too as the fund selects dividend-paying companies with growth features in the developed world ex U.S. and Canada. This Zacks ETF Rank #3 (Hold) ETF was up over 10% so far in 2015. SPDR SP International Consumer Staples Sector ETF (NYSEARCA: IPS ) This international consumer staples ETF has double-digit exposure in U.K., Japan and Switzerland. Other nations like France, Netherlands, Belgium also get weight in the range of 6-8%. Nestle ( OTCPK:NSRGY ) (13.58%) takes the top spot in the fund followed by Anheuser-Busch InBev (NYSE: BUD ) (5.9%) and British American Tobacco (NYSEMKT: BTI ) (5.85%). Ongoing easy policy measures and non-cyclical nature of the consumer staples sector helped the fund to endure global market shocks. IPS is up 8.8% so far this year (as of December 22, 2015). iShares MSCI EAFE Small-Cap ETF (NYSEARCA: SCZ ) This ETF targets the small cap segment of the developed market space. Small caps are considered the measure of domestic economy. These are less ruffled by global economic concerns and most importantly the surging U.S. dollar. Since cheap money available in Japan, Germany and U.K. resulted in improving consumer sentiment in those regions, this small-cap ETF emerged as a winner. SCZ is up over 7.7%. SPDR S&P International Health Care Sector ETF (NYSEARCA: IRY ) Health care is another recession-proof sector and thus remained less ruffled in the down year of 2015. The fund puts double-digit weight in Switzerland (25.44%), Japan (17.15%) and U.K. (14.30%) and Germany (10.23%). The fund is heavy on pharmaceuticals sector (74.27%) followed by Health Care Equipment & Supplies (9.45%). IRY has advanced over 7% so far this year (as of December 22, 2015). iShares MSCI EAFE Minimum Volatility (NYSEARCA: EFAV ) This fund targets the low volatility stocks of the developed equity markets, excluding the U.S. and Canada. In terms of country profile, Japan and United Kingdom take the top two spots at 28.5% and 24.2%, respectively, followed by Switzerland (10.43%). It is slightly tilted toward financials at 21.7%, closely followed by consumer staples (16.8%), health care (15.9%), industrials (11.1%) and consumer discretionary (10.6%). The fund is up 6.5% so far this year (as of December 22, 2015). The fund has a Zacks ETF Rank #3 (Hold) with a low risk outlook. Original Post

Fed Rate Hike Wait May End Today: ETFs To Gain And Lose

After keeping the interest rates at near-zero levels for seven years, the Fed is expected to exit the historic loose monetary policy era at the FOMC meeting to be concluded later today. Per the latest Wall Street Journal poll, about 97% of the economists believe that the Fed will raise rates today while the rest expect the Fed to wait until next year. The probability of a lift-off today is 87% as per private economic forecasters and 83% according to CME Group. Since the Fed has indicated a gradual path for rates hike, the market is speculating at least a quarter percentage point increase in interest rates today. The Fed officials gave strong signals of a December lift-off in recent months. This is especially true, as the U.S. economy has now emerged from the financial crisis and the Great Recession, and is on a firmer footing. With back-to-back months of solid jobs growth, unemployment rate at a seven-year low and moderate inflation, chances of the first rate hike in almost a decade is now looking more real. Additionally, stepped-up economic activities, rising business and consumer confidence, increasing consumer spending, and recovering housing fundamentals will continue to fuel growth in the world’s second largest economy. Further, major headwinds that have plagued the financial market seem to have faded with substantial positive developments in the global economy. In particular, the Chinese economy is showing signs of stabilization while the Japanese and European central banks have ramped up more stimulus measures to revive their economies. Given the improving fundamentals, the historic turn is widely expected, but a collapse in oil prices, which is raising fears of deflation, is weighing heavily on the Fed action. That being said, several ETFs are in focus on the upcoming Fed decision. A few ETFs will be rewarded if the Fed raises rates or signals a hawkish outlook while a few will be severely impacted. Let’s have a look to those: ETFs to Gain SPDR S&P Regional Banking ETF (NYSEARCA: KRE ) A rising interest rate scenario would be highly profitable for the financial sector as a whole. This is because the steepening yield curve would bolster profits for banks, insurance companies and discount brokerage firms. In particular, the ultra-popular KRE, having an AUM of $2.7 billion and average daily volume of 4.7 million shares, will benefit the most. The product follows the S&P Regional Banks Select Industry Index, charging investors 35 basis points a year in fees. Holding 93 securities in its basket, the fund is widely spread out across each security with an equal-weight approach of around 1%. The product has a Zacks ETF Rank of 2 or “Buy” rating with a High risk outlook. PowerShares DB USD Bull ETF (NYSEARCA: UUP ) Rising interest rates will pull in more capital into the country and lead to an appreciation of the U.S. dollar. UUP is the prime beneficiary of a rising dollar as it offers exposure against a basket of six world currencies – euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. This is done by tracking the Deutsche Bank Long U.S. Dollar Index Futures Index Excess Return plus the interest income from the fund’s holdings of U.S. Treasury securities. In terms of holdings, UUP allocates nearly 57.6% in euro while 25.5% collectively in Japanese yen and British pound. The fund has so far managed an asset base of $1.2 billion while it sees an average daily volume of around 2.1 million shares. It charges 80 bps in total fees and expenses, and has a Zacks ETF Rank of 3 or “Hold” rating with a Medium risk outlook. Deutsche X-trackers MSCI EAFE Hedged Equity ETF (NYSEARCA: DBEF ) The diverging policy in the U.S. and the rest of the world will definitely compel investors to recycle their portfolio into the currency-hedged ETFs. For those seeking exposure to the developed market with no currency risk, DBEF could be an intriguing pick. The fund follows the MSCI EAFE U.S. Dollar Hedged Index and holds 931 securities in its basket, with none accounting for more than 1.92% share. The product is skewed toward the financial sector with one-fourth of the portfolio while consumer discretionary, industrials, consumer staples and healthcare round off the top five with double-digit exposure each. Among countries, Japan takes the top spot at 24%, closely followed by the United Kingdom (18%), Switzerland (10%) and France (10%). The ETF has an AUM of $13.0 billion and trades in solid volume of more than 4.1 million shares a day. It charges 35 bps in fees per year from investors and has a Zacks ETF Rank of 3 with a Medium risk outlook. iPath U.S. Treasury Steepener ETN (NASDAQ: STPP ) As yield rises, bonds and the related ETFs fall. But this product directly capitalizes on rising interest rates and performs better when the yield curve is rising. The ETN looks to follow the Barclays U.S. Treasury 2Y/10Y Yield Curve Index, which delivers returns from the steepening of the yield curve through a notional rolling investment in U.S. Treasury note futures contracts. The fund takes a weighted long position in two-year Treasury futures contracts and a weighted short position in 10-year Treasury futures contracts. STPP charges 0.75% in fees and expenses while volume is light at around 1,000 shares a day. Additionally, it is an unpopular bond ETF with an AUM of just $2.6 million. ETFs to Lose SPDR Gold Trust ETF (NYSEARCA: GLD ) Gold will continue to remain under immense pressure as higher interest rates would diminish gold’s attractiveness since the yellow metal does not pay interest like fixed-income assets, and the product tracking this bullion like GLD will lose further. The fund tracks the price of gold bullion measured in U.S. dollars, and kept in London under the custody of HSBC Bank USA. It is the ultra-popular gold ETF with an AUM of $21.6 billion and average daily volume of around 6.1 million shares a day. Expense ratio came in at 0.40%. The fund has a Zacks ETF Rank of 3 with a Medium risk outlook. iShares Mortgage Real Estate Capped ETF (NYSEARCA: REM ) Mortgage REITs could be in more trouble if the Fed starts raising rates as short-term rates would rise faster than the long-term rates, thereby leading to a tight spread and lower profits for mREIT companies. REM is the most popular mortgage REIT ETF with an AUM of $819.2 million and average daily volume of less than 1 million shares. The ETF tracks the FTSE NAREIT All Mortgage Capped Index and holds 38 securities in its basket with large allocations to the top two firms – Annaly Capital (NYSE: NLY ) and American Capital Agency (NASDAQ: AGNC ). These firms collectively make up for 26.4% share while other securities hold no more than 8.5% share. The fund charges investors 48 bps a year in fees and has a Zacks ETF Rank of 3 with a Medium risk outlook. iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA: HYG ) The high-yield corner of the fixed income world is the most watched area ahead of the Fed meeting. This is because the exit from the rock-bottom interest rate policy would raise yields on the Treasury notes, thereby fading the sole lure of the high-yield bonds. HYG is the largest and most liquid fund in the high-yield bond space with an AUM of over $14.4 billion and average daily volume of around 9 million shares. It charges 50 bps in fees per year from investors. The fund tracks the iBoxx $ Liquid High Yield Index and holds 1,009 securities in the basket. Effective duration and average maturity came in at 4.340 and 5.44 years, respectively. The ETF has a Zacks ETF Rank of 4 or “Sell” rating with a High risk outlook. iShares MSCI Emerging Markets ETF (NYSEARCA: EEM ) The end of a cheap and an abundant dollar era would pull out more capital from the emerging markets, stirring up concern for most nations. Additionally, a prolonged weakness in commodities has been dampening the appeal for these markets. The most popular emerging market ETF – EEM – tracks the MSCI Emerging Markets Index and charges 68 bps in annual fees from investors. Holding 846 securities, the product is widely spread out across various securities with none holding more than 3.51% of assets but is tilted toward the financial sector at 27.5%, followed by information technology (21.2%). Among the emerging countries, China takes the top spot at 26.3% while South Korea and Taiwan round off the next two spots with double-digit exposure each. The fund has a Zacks ETF Rank of 3 with a Medium risk outlook. Original post