Tag Archives: function

Floating Rate ETFs For Rising Rates Protection

Summary Interest rates have declined this year. Fixed-income investors who want to hedge against rising rates can take a look at floating-rate bond ETFs. Floating-rate bond ETF options and how they work. As was the case at this time a year ago, plenty of investors are banking on the new year bring an interest rate hike from the Federal Reserve. Should expectations of higher interest rates gain momentum, it would not be surprising to see investors embrace floating rate exchange traded funds as additions to fixed income portfolios. ETFs such as the iShares Floating Rate Bond ETF (NYSEArca: FLOT ) , SPDR Barclays Investment Grade Floating Rate (NYSEArca: FLRN ) and the Market Vectors Investment Grade Floating Rate (NYSEArca: FLTR ) have floating interest rates . Specifically, floating rate notes have a so-called reset period with interest rates tied to a benchmark, such as the Fed funds, LIBOR, prime rate or U.S. Treasury bill rate. Carolyn Bigda reports for Kiplinger , FLOT owns variable-rate, investment-grade bonds that banks issue to companies; the interest rates adjust every quarter. Unlike most “bank loan” funds, though, Floating Rate holds only bonds that have been extended to high-quality companies, so it has less credit risk than a typical bank-loan fund does. Floating Rate Bond yields just 0.4%. But if the Federal Reserve begins to raise short-term interest rates in 2015, as seems likely, you’ll get the full benefit of fatter yields with little risk to your principal. The fund, which launched in 2011, returned a minuscule 0.3% over the past year and 1.8% annualized over the past three. FLOT, the largest of the floating rate ETFs, has seen increased demand this year as investors have prepared for an interest rate increase that has yet to arrive. The ETF, which debuted in June 2011, has hauled in $355.6 million of its $3.9 billion in assets under management since the start of the year. Still, competition in the floating rate ETF space is intense. In November, Van Eck lowered the fees on FLTR to 0.14% per year from 0.19%. FLTR tracks the Market Vectors US Investment Grade Floating Rate Index (MVFLTR), which consists of U.S. dollar-denominated floating rate notes issued by corporate issuers and rated investment grade by at least one of the three rating services: Moody’s, S&P or Fitch, according to Market Vectors . FLOT charges 0.2% per year and has a 30-day SEC yield of 0.4%. FLTR’s 30-day SEC yield is 0.59%. Market Vectors Investment Grade Floating Rate (click to enlarge) ETF Trends editorial team contributed to this post.

Americas’ Oil Price War Could Boost Refiner-Heavy ETF

Summary Canada and Mexico are competiting to sell to refiners in the Gulf Coast. Greater competition could cause more discounts to the benefit of refiners. An energy-sector ETF with a heavy refiner exposure. As Canada and Mexico compete for oil processing along the U.S. Gulf Coast, West Texas Intermediate oil prices may remain depressed, but oil refiners and sector-related exchange traded funds could come out on top. The new Seaway Twin pipeline could double the amount of heavy Canadian crude oil to the Gulf, pressuring crude from Mexico and Venezuela that have traditionally fed refineries along Texas and Louisiana, Bloomberg reports. The greater competition could cut down costs for oil refiners. For instance, in December, state-owned Petroleos Mexicanos raised its discount for U.S. buyers by the most since August 2013. Now, Valero Energy (NYSE: VLO ) and Marathon Petroleum Corp (NYSE: MPC ), which invested in equipment to refine heavy crude, will benefit the most from the increased Canadian supply. While there are no specific oil refiner ETFs available, the PowerShares Dynamic Energy Exploration & Production Portfolio (NYSEARCA: PXE ) is a refiner heavy ETF , with components like the Occidental Petroleum (NYSE: OXY ), which like Exxon (NYSE: XOM ) and Chevron (NYSE: CVX ) is an integrated oil firm and has refining operations, and PXE features four pure play refiners among its top 10 holdings for a combined 18% of the ETF’s overall holdings. Specifically, VLO is 5.2% and MPC is 5.0%. The U.S. Gulf Coast remains the go-to area for heavy crude oil processing in the Americas. Consequently, Latin American countries will fight to maintain their spot in the U.S. “U.S. refineries built out their capacity to run heavy barrels,” John Auers, executive vice president at Dallas-based Turner Mason & Co, said in the Bloomberg article. “Refineries in the rest of world aren’t built to run heavy barrels.” Consequently, in an attempt to stay competitive, Mexico’s discount to refineries and its reliance on oil revenue could also weigh on the iShares MSCI Mexico Capped ETF (NYSEARCA: EWW ) . While EWW has no exposure to the energy sector, oil sales still accounts for over 25% of Mexico’s government revenue . WTI crude was down 2.5% Monday to $53.4 per barrel. The United States Oil Fund (NYSEARCA: USO ) , which tracks West Texas Intermediate crude oil futures, has plunged 40.9% over the past three months. PowerShares Dynamic Energy Exploration & Production Portfolio (click to enlarge)

XLG Doesn’t Belong On The Efficient Frontier, I Can Name 3 Superior ETFs

Summary I’m taking a look at XLG as a candidate for inclusion in my ETF portfolio. The expense ratio relative to the diversification is simply poor. The high correlation with other major funds (like SPY) limit the uses for the ETF. I can’t see any way to include XLG in a portfolio on the efficient frontier. I’m not assessing any tax impacts. Investors should check their own situation for tax exposure. Investors should be seeking to improve their risk adjusted returns. I’m a big fan of using ETFs to achieve the risk adjusted returns relative to the portfolios that a normal investor can generate for themselves after trading costs. I’m working on building a new portfolio and I’m going to be analyzing several of the ETFs that I am considering for my personal portfolio. One of the funds that I’m considering is the Guggenheim Russell Top 50® Mega Cap ETF (NYSEARCA: XLG ). I’ll be performing a substantial portion of my analysis along the lines of modern portfolio theory, so my goal is to find ways to minimize costs while achieving diversification to reduce my risk level. What does XLG do? XLG attempts to track the total return of the Russell Top 50® Mega Cap Index. At least 90% of funds are invested in companies that are part of the index. XLG falls under the category of “Large Blend”. Does XLG provide diversification benefits to a portfolio? Each investor may hold a different portfolio, but I use (NYSEARCA: SPY ) as the basis for my analysis. I believe SPY, or another large cap U.S. fund with similar properties, represents the reasonable first step for many investors designing an ETF portfolio. Therefore, I start my diversification analysis by seeing how it works with SPY. I start with an ANOVA table: (click to enlarge) The correlation is almost 97.5%. That high correlation will limit the potential for benefits through diversification and puts XLG in a difficult situation where it may have to be considered as an alternative to SPY rather than as a complimentary holding. Standard deviation of daily returns (dividend adjusted, measured since January 2012) The standard deviation is excellent. For XLG it is .6868%. For SPY, it is 0.7300% for the same period. SPY usually beats other ETFs in this regard, so having a lower standard deviation is excellent. Mixing it with SPY I also run comparisons on the standard deviation of daily returns for the portfolio assuming that the portfolio is combined with the S&P 500. For research, I assume daily rebalancing because it dramatically simplifies the math. With a 50/50 weighting in a portfolio holding only SPY and XLG, the standard deviation of daily returns across the entire portfolio is 0.7038%. If an investor wanted to use XLG as a supplement to their portfolio, the standard deviation across the portfolio with 95% in SPY and 5% in XLG would have been .7270%. Why I use standard deviation of daily returns I don’t believe historical returns have predictive power for future returns, but I do believe historical values for standard deviations of returns relative to other ETFs have some predictive power on future risks and correlations. Yield & Taxes The distribution yield is 1.91%. The yield is almost 2%, which I think is about the minimum yield for a large position in a portfolio if the investor is retiring. It’s close enough to that arbitrary cut off that it could certainly be used, though I don’t find it very attractive for that. I’m not a CPA or CFP, so I’m not assessing any tax impacts. Expense Ratio The ETF is posting .20% for an expense ratio. I want diversification, I want stability, and I don’t want to pay for them. The expense ratio on this fund is higher than I want to pay for an ETF that invests in U.S. equity securities. I understand some ETFs will need higher expense ratios because of their operations, but I have not found any justification for this expense ratio. I’ll touch on this again in the part on holdings. Market to NAV The ETF is at a .11% premium to NAV currently. Premiums or discounts to NAV can change very quickly so investors should check prior to putting in an order. I wouldn’t want to pay a premium greater than .1% when investing in the ETF, though there could be arguments for various accounting issues which may justify the premium. Largest Holdings Consider me unimpressed by the holdings here. It’s not that I don’t like the individual holdings of the ETF, but I want diversification in an ETF. Diversification costs money. If the expense ratio is going to be .20%, I would want substantially better diversification. If an investor has a fairly large pool of money, they could just buy all of the underlying securities and eliminate the expense ratio. If the holding period was long enough, their costs may end up being lower. I’m picking ETFs based on diversification at cheap prices. This is the opposite of that. (click to enlarge) Conclusion I’m currently screening a large volume of ETFs for my own portfolio. The portfolio I’m building is through Schwab, so I’m able to trade XLG with no commissions. I have a strong preference for researching ETFs that are free to trade in my account, so most of my research will be on ETFs that fall under the “ETF OneSource” program. I’m not impressed with XLG. I like the low standard deviation of returns, but the fairly high correlation means I’m not able to diversify away much of the remaining risk. It could be used as a replacement for SPY because of the low standard deviation of returns, but there are other ETFs with lower expense ratios that can be used for those purposes. For instance, I would use (NYSEARCA: SCHD ) or (NYSEARCA: SCHV ) before XLG if I was looking for exposure to huge U.S. Companies with slightly less volatility. If I was willing to pay higher expense ratios than those two funds, I’d look at (NYSEARCA: SPLV ) with an expense ratio of .25% but a significantly lower standard deviation of returns. In my opinion, XLG is suffering from high expense ratios that cause the ETF to be slightly less efficient than competitors. I might come back and analyze XLG further at some point, but with so many great ETFs to choose from I’m not sure I’ll find time to spend one that was weak in my first pass. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis. The analyst holds a diversified portfolio including mutual funds or index funds which may include a small long exposure to the stock.