Tag Archives: health

High Beta Underperforming Low Volatility

As the market continues to trade sideways in its, seemingly, directionless trade, it is helpful to observe various intermarket relationships and technical indicators to see what exactly is driving returns and to check-up on the overall health of the market. One interesting dynamic of the market this year is the underperformance of high beta stocks in relation to low volatility stocks. In a typical bull market, high beta stocks outperform as market psychology shifts to a “risk on” mindset where cyclical companies (such as high beta and high growth stocks) are favored over non-cyclical companies that provide lower, more protected exposure. This has not been the case this year. High beta stocks have underperformed low volatility stocks measured by the ratio of the performance of the PowerShares S&P 500 High Beta Portfolio ETF (NYSEARCA: SPHB ) over the PowerShares S&P 500 Low Volatility Portfolio ETF (NYSEARCA: SPLV ) . As the ratio moves higher, high beta is outperforming low volatility and as the ratio moves lower, low volatility is outperforming high beta. The performance dispersion can partially be explained by the difference in sector weighting of these two ETFs. Given SPHB’s high beta, cyclical tilt, overweights in Energy and Industrials have been a big drag on performance. Conversely, SPLV has no Energy exposure and higher weightings to Consumer Staples and Health Care, two sectors that traditionally carry lower volatility and have outperformed the broader market this year. These are a few examples of why the low volatility strategy is outperforming not only high beta names this year, but has also caught up to the S&P 500. This being said, it is interesting to note that growth stocks are still outperforming value stocks in the same time period, shown by the relationship between the iShares S&P 500 Growth ETF (NYSEARCA: IVW ) and the iShares S&P 500 Value ETF (NYSEARCA: IVE ) . While this is not a new dynamic to this bull market, the amplified disparity in performance since the end of June is noteworthy as investors continue to favor companies with higher growth rates in this slow, bump along environment. High beta stocks may reverse trend and outperform the low volatility strategy should the market resume a trend to new highs, but until then, low volatility is in play. Share this article with a colleague

The Complete Guide To Consumer Staples ETFs

The consumer staple sector showed great improvement in the first half of 2015 on the back of moderate economic recovery, better job prospects, improved business and renewed optimism as a result of the housing recovery. Rising wages and cheaper fuel were the other positives. With oil and natural gas prices subsiding, consumers are left with more disposable income. Commodity costs have in many cases stabilized, which have improved profit margins for certain staples companies. Consumers are also expecting lower inflation primarily due to lower gas prices. However, the continued appreciation of the U.S. dollar relative to most foreign currencies acted as a near-term headwind to the earnings of U.S.-based staples companies with significant international operations. Other risks included potential price wars, a competitive environment, slowdown in international markets (including continued slowdown in China), political turmoil in Russia, sluggishness in Japan and an unfavorable economic environment in Europe. Industry players like McCormick & Co., Inc. (NYSE: MKC ), Energizer Holdings, Inc. (NYSE: ENR ), General Mills, Inc. (NYSE: GIS ), Molson Coors Brewing Co. (NYSE: TAP ), Tyson Foods, Inc. (NYSE: TSN ) have posted positive earnings surprises of 9.4%, 14.5%, 4.5%, 7% and 2.7%, respectively, in their recently reported quarters. On the contrary, Monster Beverage Corporation (NASDAQ: MNST ) and Sysco Corp. (NYSE: SYY ) fell short of their respective Zacks Consensus Estimate, mainly due to currency headwinds. Hopefully, the second half of the year will prove to be better for these companies with a strong rebound in earnings. Given the defensive nature of this sector, it will outperform when equity markets are more bearish and underperform when bullish. The ups and downs of the sector due to the U.S. and global exposure can be played with a wide array of ETFs. The ETFs can act as an excellent investment medium for those who wish to take a long-term exposure within the consumer staples sector. For those interested in taking a look at consumer staples, we have highlighted a few ETFs tracking the industry, any of which could be an interesting pick: Consumer Staples Select Sector SPDR ETF (NYSEARCA: XLP ): Launched on December 16, 1998, XLP is an ETF that seeks investment results corresponding to the S&P Consumer Staples Select Sector Index. This fund consists of 39 stocks of companies that manufacture and sell a range of branded consumer packaged goods, with the top holdings being The Procter & Gamble Co. (NYSE: PG ), The Coca-Cola Company (NYSE: KO ) and Philip Morris International, Inc. (NYSE: PM ). The fund’s expense ratio is 0.15% and it pays out a dividend yield of 2.56%. XLP had about $7.37 billion in assets under management as of July 2, 2015. Vanguard Consumer Staples ETF (NYSEARCA: VDC ): Initiated on January 26, 2004, VDC is an ETF that tracks the performance of the MSCI US Investable Market Consumer Staples 25/50 Index. It measures the investment return of large-, mid-, and small-cap U.S. stocks in the consumer staples sector. The fund has a total of 101 stocks, with the top three holdings being Procter & Gamble, Coca-Cola and PepsiCo, Inc. (NYSE: PEP ). It charges 0.12% in expense ratio, while the yield is 1.91% as of now. VDC has managed to attract $2.8 billion in assets under management till May 31, 2015. First Trust Consumer Staples AlphaDEX (NYSEARCA: FXG ): FXG, launched on May 8, 2007, follows the equity index called StrataQuant Consumer Staples Index. FXG is made up of 40 consumer staples securities, with the top holdings being The WhiteWave Foods Company (NYSE: WWAV ), Pilgrim’s Pride Corporation (NASDAQ: PPC ) and CVS Health Corporation (NYSE: CVS ). The fund’s expense ratio is 0.67% and the dividend yield is 1.55%. It had $2.62 billion in assets under management as of July 2, 2015. Guggenheim S&P 500 Equal Weight Consumer Staples (NYSEARCA: RHS ): Launched on November 1, 2006, RHS is an ETF that seeks investment results corresponding to the S&P 500 Equal Weight Index Consumer Staples. This is an equal-weighted fund and constitutes 37 stocks, with the top holdings being ConAgra Foods, Inc. (NYSE: CAG ), Monster Beverage Corp. ( MNST ) and Reynolds American, Inc. (NYSE: RAI ). The fund’s expense ratio is 0.40% and it pays out a dividend yield of 1.81%. RHS had about $271.0 million in assets under management as of Jul 6, 2015. Fidelity MSCI Consumer Staples ETF (NYSEARCA: FSTA ): FSTA, launched on October 21, 2013, is an ETF that seeks investment results corresponding to MSCI USA IMI Consumer Staples Index. This is a cap-weighted fund and constitutes 100 stocks, with the top holdings being Procter & Gamble, Coca-Cola and PepsiCo. The fund’s expense ratio is 0.12% and the dividend yield is 2.67%. FSTA had about $147.1 million in assets under management as of June 30, 2015. Original Post

10%-Yielding HDLV May Be A Good Choice If Interest Rates Remain Low

Summary HDLV is filled with blue-chip cash-generating machines. The recent mini-“Taper tantrum” sparked a sell-off in dividend stocks. HDLV is up only 12% from its 52-week lows and may be a good choice if interest rates don’t rise. Introduction In December of 2014, I comprehensively analyzed the methodology and composition of the ETRACS Monthly Pay 2xLeveraged US High Dividend Low Volatility ETN (NYSEARCA: HDLV ), a fund that was only incepted a few months prior. HDLV is a 2x leveraged fund that seeks to hold U.S. companies that possess both a high yield and low volatility. Readers may refer to my previous article for more detailed information on the methodology and composition of this fund. The recent mini-“Taper tantrum” has sparked a sell-off in dividends stocks, particularly those deemed to bond-like. Not surprisingly, this includes many of the top constituents in HDLV, which include blue-chip cash-generating machines such as Verizon Communications (NYSE: VZ ), AT&T (NYSE: T ), Philip Morris (NYSE: PM ), Altria Group (NYSE: MO ) and Duke Energy (NYSE: DUK ). As HDLV is nearly one-year old, this article seeks to provide an update on HDLV to see if it has been able to meet its dual mandate of high dividends and low volatility. Recent performance The graph below shows the price of HDLV and the yield of the 10-year treasury note since February of this year. We can see from the chart that the two lines move in opposite directions, suggesting that the recent price action of HDLV (or rather, its underlying constituents) has been driven by investor fixation on interest rates rather than any material change in the fundamentals of the companies. Interest rates have fallen again over the last two months, allowing HDLV to rise around 12% from its 52-week lows. HDLV data by YCharts How has HDLV performed relative to the broader market? HDLV is a 2X leveraged ETN that tracks twice the monthly performance of the underlying index, which has been considered to be a strategy that reduces the “beta decay” of leveraged securities. Therefore, the performance of HDLV since inception is compared to the UBS ETRACS Monthly Reset 2xLeveraged S&P 500 total Return ETN (NYSEARCA: SPLX ), and the Direxion Monthly NASDAQ-100 Bull 2X Fund (MUTF: DXQLX ), which track twice the monthly return of S&P 500 and NASDAQ-100, respectively. The chart above shows that DXQLX has had by far the best total performance. Although HDLV has recently underperformed, its total return since inception is still slightly higher than that of SPLX. Volatility Has HDLV managed to exhibit lower volatility than the broader market? Unfortunately, as SPLX is not very liquid, its volatility data is distorted by the high bid-ask spreads on the instrument. Therefore, I used the ProShares Ultra S&P 500, a daily-resetting 2X leveraged version of the SPDR S&P 500 Trust ETF ( SPY), instead. The graph below shows the 30-day rolling volatility of HDLV and the ProShares Ultra S&P 500 ETF (NYSEARCA: SSO ) since Nov. 2014. HDLV 30-Day Rolling Volatility data by YCharts The graph above shows that for slightly over half the time, HDLV has had a lower volatility than SSO, suggesting that is has been less volatile than the broader market. This data is corroborated by InvestSpy , which shows HDLV having significantly lower volatility and beta compared to SSO since inception. One area where HDLV appears to underperform SSO is in its maximum drawdown of -14.50% compared to -10.40% for SSO. However, the maximum drawdown figures may not be directly comparable because HDLV resets its leverage monthly whereas SSO resets daily. Ticker Annualized Volatility Beta Daily VaR (99%) Max Drawdown Total return HDLV 21.70% 1.13 3.20% -14.50% 14.60% SSO 25.20% 2 3.70% -10.40% 15.80% SPY 12.60% 1 1.90% -5.30% 9.00% Composition Since my last article in December of 2014, HDLV has undergone three rebalancing events (in January, April and July). The table below shows the top 10 constituents of HDLV in Dec. 2014 and Aug. 2015. Dec. 2014 Aug. 2015 Name Ticker Weighting / % Name Ticker Weighting ConocoPhillips (NYSE: COP ) 10.11 Verizon Communications Inc. VZ 9.89 Verizon Communications Inc. VZ 10.01 AT&T Inc. T 9.55 AT&T Inc. T 9.77 Philip Morris International PM 9.42 Philip Morris International PM 9.20 Altria Group Inc. MO 8.87 Altria Group Inc. MO 7.62 Duke Energy Corp DUK 6.89 Duke Energy Corp DUK 5.84 Southern Co SO 6.18 Southern Co (NYSE: SO ) 5.04 Ventas Inc (NYSE: VTR ) 4.06 Health Care Reit Inc (NYSE: HCN ) 3.90 Health Care Reit Inc HCN 3.70 PPL Corp (NYSE: PPL ) 3.34 Consolidated Edison Inc (NYSE: ED ) 3.68 Entergy Corp. (NYSE: ETR ) 3.11 HCP Inc (NYSE: HCP ) 3.29 Top 10 total 67.94 65.53 We can see that 7 companies, namely VZ, T, PM, MO, DUK, SO and ECN, have remained in the top 10 of constituents of HDLV since 8 months ago. 3 companies have been removed from the top 10 of constituents, including the former top holding COP, as well as PPL and ETR. Meanwhile, VTR, ED and HCP have joined the top 1o constituents of HDLV. Moreover, and as mentioned in my previous article, HDLV is a very top-heavy fund. The top 10 constituents currently account for 65.53% of the total assets of the fund, down slightly from 67.94% in Dec. 2014. As a counterpoint, given that the names in the top 10 are all blue-chip, cash-generating, “widow-and-orphan” stocks, this underdiversification of companies does not unduly worry me. However, what maybe a cause for concern is the underdiversification of sectors . The top 10, or 65.53% of the fund, is entirely concentrated into telecommunications (T, VZ), tobacco companies (PM, MO), utilities (DUK, SO, ED) and healthcare REITs (VTR, HCN and HCP). These sectors are quite interest-rate sensitive, and thus may all decline together when (if?) rates rise, or conversely move up together when rates fall, as has been the case for the past year. Dividends HDLV has paid out 10 dividends since inception, as shown in the chart below. These distributions sum up to $2.12, which based on the current price of $26.64 and annualized to 12 months represents a yield of 9.57% . Risks HDLV charges a management expense ratio of 1.45%, which constituents of a tracking error of 0.85% and a surreptitiously hidden financing spread of 0.60%. This is added to the three-month LIBOR of 0.31% to give a total expense ratio of 1.76%. While this seems high, keep in mind that owning HDLV allows you to effectively control 2X of assets. Therefore, dividing the total expense ratio of 1.76% by 2 gives an effective expense ratio per dollar of assets controlled of 0.88%. If we don’t include the LIBOR in the expense ratio, the effective expense ratio (-LIBOR) is 0.73%. While this is still higher than other popular dividend ETFs such as the iShares Select Dividend ETF (NYSEARCA: DVY ) (0.39%), the SPDR S&P Dividend ETF (NYSEARCA: SDY ) (0.35%) and the Vanguard Dividend Appreciation ETF (NYSEARCA: VIG ) (0.10%), the ability to access cheap leverage may still make this fund more cost-effective for investors than buying on margin themselves. Additionally, and as mentioned above, the constituents of HDLV are quite interest-rate sensitive, and so this fund will likely decline if interest rates spike higher. Finally, as HDLV is an ETN, it is subject to the credit risk of the issuer, in this case UBS. Conclusion I believe that HDLV has been able to meet its dual mandate of high and dividends and low volatility over the past 12 months. Investors who believe that low interest rates are here to stay for longer will be attracted to the blue-chip, income-generating nature of the top constituents of HDLV. The 2X leveraged nature of HDLV has pushed its trailing yield to 9.57% (annualized from 10 months). Moreover, HDLV is currently up only around 12% from its 52-week lows, which may be an attractive entry point for initiating a position. On the other hand, drawbacks of this fund are its overconcentration in companies and sectors, and its sensitivity to interest rates. Readers interested in other high-dividend low-volatility funds may peruse my previous articles on the PowerShares S&P 500 High Dividend Portfolio ETF (NYSEARCA: SPHD ) and the Global X SuperDividend U.S. ETF (NYSEARCA: DIV ). Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in HDLV over the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.