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How You Can Beat The Market With Dividend Aristocrat ETFs

With stocks down across the board to start the year, many investors are scrambling to find better selections for today’s more uncertain market environment. While utilities and consumer staples are becoming more popular thanks to this sentiment, there are also non sector-specific ways to improve performance relative to the market. One outperforming strategy has been to focus on higher quality dividend-paying companies. Stocks in this area haven’t seen incredible returns, but they have done far better than the broad market over the past few months. But not just any dividend-paying stock will do, as a focus on the so-called ‘dividend aristocrats’ should be a go-to strategy for investors in this market environment. What is a Dividend Aristocrat? A dividend aristocrat stock is a company that has a long track record of increasing dividend payments year after year. The number of years required varies depending on who you ask, but at least ten consecutive years of dividend increases is usually required to get into this select bunch. A company that fits this bill is a rare breed since it has been able to boost payments no matter what is happening in the broader economy. This shows an impressive ability to manage capital effectively, while also taking care of shareholders too. How to Invest While you can find a few specific stocks that are in the dividend aristocracy, an easier way to play this trend might be with ETFs. There are actually a few funds tracking this corner of the market, and all have been outperforming the broad S&P 500 in this recent rough patch. That’s right, the SPDR S&P Dividend ETF (NYSEARCA: SDY ) , the ProShares S&P 500 Aristocrats (NYSEARCA: NOBL ) , and the Vanguard Dividend Appreciation ETF (NYSEARCA: VIG ) have all easily outperformed the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) over the past three months, while the trio are also outperforming from a one-year outlook as well. Clearly, a focus on quality has been the way to go in this uncertain market environment. What’s The Difference? While all three have managed to beat out broad markets, investors have to be wondering what are the key differences between the three main dividend aristocrat ETFs? Well, for the most part, the key difference is how exclusive of a club the funds make the aristocrats. VIG is the least exclusive, as it allows companies to join its benchmark after raising dividends each year for at least one decade. SDY is the next in line with a similar policy, but for two decades, while NOBL is the most exclusive, only holding companies that have raised dividends every year for at least a quarter century. As you might be able to guess, the higher the barrier to entry, the fewer the companies that pass the screen. As such, NOBL has the fewest number of securities at 50, followed by about 100 for SDY and roughly 175 for VIG. All three do a pretty good job of spreading out assets, but actually VIG is the most concentrated thanks to its cap-weighted focus. Meanwhile, NOBL is the least concentrated thanks to its equal weighted focus, which puts the same amount in each stock, while SDY takes a different approach, weighting by dividend yield. Either way, consumer and industrial stocks are top holdings in each of the three, while all of them have little in the energy sector, largely thanks to the recent sector downturn. And while all three are extremely tradable, there are some expense differences to note as well. VIG is the cheapest – as is usually the case with Vanguard products – and comes in at 10 basis points a year compared to 35 for the other two. While none are really that expensive, it is certainly a big difference on a relative basis, and something to consider for cost-focused investors out there. Key Caveat While all three might have a dividend focus, it is important to remember that they zero in on companies that are growing dividends at a constant rate, not necessarily those that are paying out the most in terms of yield. In fact, while all three beat out the broad market in terms of their 30-Day SEC yield, none top three percent either. So while they are modest income destinations, investors who are just seeking yield will likely be disappointed by the dividend aristocrat family. Bottom Line The dividend aristocrat space is often overlooked by investors in favor of ‘sexier’ or more enticing market segments. However, over the past few months, stability and rock solid companies have been in vogue instead. This trend has allowed the dividend aristocrat ETFs of VIG, SDY, and NOBL to beat out the market and provide investors with a bit more stability in this uncertain time too. Just remember, none of these aristocrat funds are going to pay you a huge yield, but in turbulent economic times their outperformance makes the aristocrat funds the nobility of the investing world, and definitely worth consideration for your portfolio. Original Post

Adding Risk Parity To A Portfolio

We’re always trying to build a better mousetrap around here by adding non-correlated asset classes to our portfolio. While there is no “free lunch” in economics, true diversification is about as close as you’re ever going to get. And by “true diversification,” I mean adding assets to the portfolio that really do zig when the others zag. A portfolio of 100 stocks doesn’t offer much diversification benefit when the entire market rolls over. At any rate, Dr. Phillip Guerra and I have cooked up a suite of alternative portfolios based on the principles of risk parity. We’ve been running our Active Risk Parity Portfolio With 7% Annual Volatility Target live since September, and we’ve backtested it to 1996. The results aren’t too shabby, if I do say so myself. Average annual returns of 11.5% with a maximum drawdown of just 9.8% and a correlation to the stock market of just 0.24. Rather than target returns – which are impossible to know with any accuracy in advance – we target volatility. While volatility will also fluctuate over time, we find it to be more accurate to target, and also that it gives us a better handle on risk. The key to making money over time is first to avoid losing it. I don’t consider this a replacement for a traditional long stock portfolio. In fact, most of the money I manage is long-only and dividend-focused. But I certainly do consider this a nice addition to a traditional stock portfolio. With bonds not likely to offer much in the way of return anytime soon, you need viable alternatives for the “40” in the old 60/40 portfolio of stocks and bonds. A risk parity model can certainly fill that role. This article first appeared on Sizemore Insights as Adding Risk Parity to a Portfolio . Disclaimer: This article is for informational purposes only and should not be considered specific investment advice or as a solicitation to buy or sell any securities. Sizemore Capital personnel and clients will often have an interest in the securities mentioned. There is risk in any investment in traded securities, and all Sizemore Capital investment strategies have the possibility of loss. Past performance is no guarantee of future results. Original Post

Hit And Flop ETFs Of February

After a brutal sell-off in January and amid heightened uncertainty, the major U.S. bourses are on track to end the month of February in the green. Stocks advanced in the back-end of the month with two consecutive weeks of gains courtesy of the bargain hunting, a recovery in crude oil prices and abating fears of a recession in the United States. In particular, a slew of encouraging data pertaining to retail sales, consumer spending, producer prices, factory production and inflation points to regained momentum in the U.S. economy after a sluggish fourth quarter. Additionally, the second estimate of Q4 GDP data came in much higher than the initial estimate as the economy expanded at a faster rate of 1% annually than 0.7% reported by the Commerce Department in January. Further, hopes of stimulus from the central banks in Europe and Japan renewed confidence in global economic growth. However, concerns over corporate profits, global economic growth and uncertainty in the timing of next interest rate hike continued to weigh on stocks during the month. As a result, investors’ flight to safety in gold also continued with bouts of volatility. That being said, we have highlighted the three best- and worst-performing ETFs of February. Best ETFs iShares MSCI Global Gold Miners ETF (NYSEARCA: RING ) – Up 33.0% Global uncertainty and financial market instability have brought back the allure for metals, especially gold, boosting their demand. Acting as leveraged plays on underlying metal prices, metal miners tend to experience larger gains than their bullion cousins in the rising metal market. In fact, RING is the biggest winner, having surged nearly 33% in value. This fund follows the MSCI ACWI Select Gold Miners Investable Market Index and holds 30 securities in its portfolio. The product is heavily concentrated in the top three firms – Barrick Gold (NYSE: ABX ), Newmont Mining (NYSE: NEM ) and Goldcorp (NYSE: GG ) – which combine to make 29.5% of total assets. Canadian firms take the lion’s share at 51.2%, while South Africa (19.4%) and the U.S. (11.4%) round out the top three. RING is the cheapest choice in the gold mining space, charging just 0.39% in fees and expenses. The fund has been able to manage assets worth $78.9 million. Materials Select Sector SPDR ETF (NYSEARCA: XLB ) – Up 8.5% The material sector has been gaining strength, with robust performances in its chemical business as well as the metals & mining and steel industries. Growing automotive, a solid residential construction market and increasing production are expediting growth. That said, the most popular fund, XLB, with AUM of $2 billion, has gained 8.5% in February. It tracks the Materials Select Sector Index, charging investors 14 bps in fees per year. In total, the fund holds about 29 securities in its basket, with Dow Chemical (NYSE: DOW ) and DuPont (NYSE: DD ) taking the top two spots, with over 11% allocation each. In terms of industrial exposure, chemicals dominates the portfolio with three-fourth share, while containers & packaging and metals & mining round out the top three positions. The product has a Zacks ETF Rank of 4 or “Sell” rating and a Medium risk outlook. Deep Value ETF (NYSEARCA: DVP ) – Up 7.1% Value investing has been a safer option for investors in turbulent times, as these stocks are less susceptible to trending markets and exhibit lower volatility than their growth and blend counterparts. This fund tracks the TWM Deep Value Index, which provides an opportunity to invest in undervalued dividend-paying stocks within the S&P 500 index with solid balance sheets and strong earnings and free cash flow. Holding a small basket of 20 stocks, the fund is heavy on the top firms, with Exxon Mobil (NYSE: XOM ), Symantec Corp. (NASDAQ: SYMC ) and Newmont taking the largest allocation with a combined share of 23.3%. Consumer discretionary, energy and industrials are the top three sectors, with 15% allocation each. DVP is unpopular in the large cap value space, with AUM of $65.8 million, and is a high-cost choice, charging investors 80 bps in fees per year. It has gained 7.1% in February and has a Zacks ETF Rank of 2 or “Buy” rating. Worst ETFs First Trust ISE-Revere Natural Gas Index ETF (NYSEARCA: FCG ) – Down 18.8% Natural gas producers have been the biggest laggards as natural gas price dropped to the lowest level since 1999 on expanding supply and falling global demand. Notably, a mild winter in the U.S. and EU continues to push levels of demand down this month. Consequently, FCG, which offers exposure to U.S. stocks that derive a substantial portion of their revenues from the exploration and production of natural gas, is down 18.8% this month. The fund follows the ISE-REVERE Natural Gas Index and holds 29 stocks in its basket, which is well spread out across components, with none holding more than a 5.61% share. The fund has amassed $145.5 million in its asset base, while charging 60 bps in annual fees. FCG has a Zacks ETF Rank of 3 or “Hold” rating with a High risk outlook. Yorkville High Income MLP ETF (NYSEARCA: YMLP ) – Down 18.0% MLP is the corner that has received the worst blow from the oil price slide, with YMLP shedding the most – 18% this month. The fund follows the Solactive High Income MLP Index, charging 82 bps in annual fees. Holding 26 stocks in its basket, it is highly concentrated on the top 10 holdings at 57%, suggesting higher concentration risk. Oil, gas and consumable fuels take the top spot from a sector look at 66.4%, followed by energy equipment & services (20.9%) and gas utilities (10.4%). The product has managed $63.1 million in AUM. PowerShares Dynamic Energy Exploration & Production Portfolio ETF (NYSEARCA: PXE ) – Down 15.9% The energy sector remained under pressure from lower oil prices and unfavorable demand/supply imbalances. The recent jump in oil prices hasn’t been able to drive the sector, with PXE plunging nearly 16% in February. This fund tracks the Dynamic Energy Exploration and Production Intellidex index and evaluates stocks based on a various investment criteria, including price momentum, earnings momentum, quality, management action and value. It has 31 stocks in its basket, with none holding more than 7.38% of assets. It is a high-cost choice in the energy space, with 0.64% in expense ratio. The fund has AUM of $56.6 million and a Zacks ETF Rank of 5 or “Strong Sell” rating with a High risk outlook. 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