Tag Archives: ideas

The Vanguard Utilities ETF Is On My Holiday Shopping List

Summary The expense ratio and dividend yield are both great. The dividend yield could be further enhanced by changing the weighting structure to emphasize utility companies with stronger yields. The Federal Reserve meeting on December 16th may include a rate increase that could create some nice sale opportunities on utilities. As we prepare for the holidays, I’m getting my shopping list ready. One of the additions to my list is the Vanguard Utilities ETF (NYSEARCA: VPU ). I’ll take investors through my reasoning for putting this on the list as a potential acquisition for the middle of December or later. Expense Ratio The ETF is posting .12% for an expense ratio. What else is there to say? That is a solid expense ratio and makes this fund one of the cheapest options for exposure here. Largest Holdings The diversification within the ETF is pretty weak. For a very long term holder it might make sense to replicate the ETF by just buying the underlying securities and taking higher trading costs to eliminate the expense ratio. However, an expense ratio of only .12% would be difficult to beat without a fairly long time horizon or a large volume of commission free trades in the account. (click to enlarge) The major holdings here are the same ones I would expect to see. Duke Energy Corporation (NYSE: DUK ) is a fairly huge utility company and frequently at the top of the list for utility ETFs. All around this appears to be a reasonable portfolio for an investor that wants to get more utility companies into their portfolio without having to buy the companies individually. Top Dividend Yields The following chart demonstrates the top 10 utilities for dividend yield that have increased their dividend for at least the last 5 consecutive years: Symbol Company Name Yield Years CNP CenterPoint Energy 5.34% 10 SO Southern Company 4.81% 15 DUK Duke Energy Corp. 4.62% 11 PPL PPL Corp. 4.39% 14 STR Questar Corp. 4.07% 36 ALE Allete Inc. 4.02% 5 DGAS Delta Natural Gas 4.01% 11 ED Consolidated Edison 3.95% 41 AEP American Electric Power Co. 3.95% 6 NWN Northwest Natural Gas 3.91% 60 There is quite a bit of cross over between the list as DUK, PPL, AEP are on the top 10 holdings and the 10 utilities for high yields. Because VPU is using a market capitalization weighting scheme, their top holdings are dominated by the largest capitalization utility companies. Using a market capitalization weighting scheme is great for keeping expenses low and maintaining a passive style, but the strategy does nothing to boost the dividend yield of the portfolio. If the price of shares in a utility is increasing but their dividend is not, that utility will see their ranking within the portfolio increase. While I’d prefer to see a focus on utility companies that offer a strong combination of high yields and expected growth in their dividends over the next several years, I’m still consider VPU as a potential holding due to the very low expense ratio and desire to maintain diversification in my portfolio. Looking For Utilities With the Federal Reserve poised to raise rates in December, it seems like a great time to be fishing for good prices on utility companies with an eye to keep buying as long as rates are going up and prices are going down. Utilities tend to have a significant correlation with bonds and an increase in rates will generally send share prices lower. To put that a different way, an increase in bond yields will drive an increase in utility yields. If the price of the utility is falling simply because bond yields are moving higher and the utility yield needs to move in a similar fashion, that is a fine buying reason for me. VPU or Individual Utilities If my portfolio was large enough to plan on buying 10 individual utilities with material allocations to each, I’d be treating individual utilities as being a superior plan to simply buying into VPU. However, going into December I am also looking to beef up my position in equity REITs with the Schwab U.S. REIT ETF (NYSEARCA: SCHH ), and my international positions with the Schwab International Small-Cap Equity ETF (NYSEARCA: SCHC ) or the Schwab International Equity ETF (NYSEARCA: SCHF ). Since I won’t have a great deal of cash left over, I would be more likely to look at taking VPU rather than buying up the individual securities. Conclusion Utility companies can act as a form of income investment because of their strong dividend yields. Unlike buying into a bond portfolio investors can expect that the level of dividends will be increasing over time which makes up for the portfolio having more risk than a simple bond portfolio. I’ve added VPU to my list of ETFs to keep an eye going through December and into early 2016 as a possible candidate. I won’t make those moves in the next few days, but I’ll be looking to see if shares fall hard after the Federal Reserve meeting on December 16th.

Investing In A Better World… For A Higher Return?

Global investment and business community is increasingly incorporating ESG principles. Remarkably, investors are limited in their choice in passive and active instruments to play the sustainability-theme. This may have a reason, since returns are not (yet) competitive. In a world driven by cold hard yields, the consequences of the operations of companies is sometimes neglected. Investors could well forget the values they believe in when investing for a secure retirement. We often are quite firm in our discussions in how we view the world, politics and society, but do not always incorporate our believe in our portfolios. Yes, we search for trends and reflect on how different technologies could shape the world and therefore future profits, but do we also consider whether companies and products can shape a world in which we want to live? Sustainable investing is the investment approach that considers global social and environmental challenges while building a portfolio. To be fair, there’s an increasing amount of consideration for ESG-policies (Environmental, Social and Governance). Even Harvard Business Review’s list of the Best Performing CEOs considered ESG-criteria, often making or breaking a CEO’s ranking in the list. Yet, there’s still some reservations against sustainable and ESG investing among investors. There might be some prejudice against ESG and sustainability. Surely complying at ESG and sustainable criteria will cost companies money? Being more aware of waste, a more diverse working force and higher transparency (to name a view) would come at the cost of yield, some investors may think. But is this really true? Let’s find out! There are a number of ways to approach sustainability. According to US SIF (The Forum for Sustainable and Responsible Investment), “sustainable, responsible and impact investing is an investment discipline that considers ESG criteria to generate long-term competitive financial returns and positive societal impact. I put long-term competitive in italics here, since that is what we want to find out. Note that returns are put ahead of social impact. When looking at ESG-criteria, a number of company policies are identified. For example, focus on Environment means that the company has policies related to resource management and reduction of emissions i.e. reducing ‘footprint’. Social-criteria point to diversity, health, human rights, safety and community impact. Governance stands for shareholder rights, board accountability and disclosure, to name a few. The items mentioned above indicate that a company doesn’t need to be a second Greenpeace or Amnesty International to comply in order to be considered for a sustainable investment approach. For instance, Microsoft’s (NASDAQ: MSFT ) goal to go carbon neutral would make the shares of the company attractive for investment. Since a large number of S&P 500 companies are stepping up their commitment to ESG-criteria, the investment universe is quite large. Remarkably, there are not a lot of ETFs with a sustainable or ESG-based approach on the US market. Currently there are only two (relatively small) ETFs which have a multiple year track record: iShares MSCI USA ESG Select ETF (NYSEARCA: KLD ) and iShares MSCI KLD 400 Social ETF (NYSEARCA: DSI ). Early last year, ALPS launched its Workplace Equality ETF (NYSEARCA: EQLT ), which is very small however with only a little less than USD 10 million AUM (assets under management). Passive investors are therefore limited in their choice. However, the number of actively managed products is a bit larger, with US investors able to choose from 7 mutual funds. Unfortunately, not all of them have a track record of more than three years. In addition, the investment mandate may be global or restricted to a specific ESG-theme. Therefore, only 3 mutual funds are selected for a performance check, bringing the total to 5 instruments. Let’s first start with the ETFs. iShares MSCI USA ESG Select KLD seeks exposure to socially responsible U.S. companies and excludes tobacco companies. It tracks the MSCI USA ESG Select Index. The underlying index is designed by MSCI’s propriety ESG rating framework. Companies are reviewed by MSCI analysts on more than 500 data points and scores on 100 indicators. Companies get a rating that falls on a nine-point scale (AAA to CCC). The index is reviewed on a quarterly basis. KLD has an expense ratio of 0.5% and thus is more expensive than a regular US market ETF, such as the popular SPDR S&P 500 ETF (NYSEARCA: SPY ) (expense ratio of 0.09%). iShares MSCI KLD 400 Social DSI is based on the more restrictive MSCI KLD 400 Social Index. This index not only excludes tobacco, but also securities from companies involved in nuclear power, alcohol, gambling, weapons, GMOs (genetically modified organisms) and adult entertainment. In addition, companies should have a ESG-rating of above BB. DSI is therefore the ‘purest’ sustainability ETF on the US market. The performance of both ETFs are compared to SPY. A direct comparison to the S&P 500 as the broader market doesn’t make sense, since we’re looking for an evaluation of passive investments. (click to enlarge) The table leads to a clear conclusion: on the longer term, sustainability or ESG ETFs do not offer a competitive return. Although all three ETFs show a small positive return this year, over a 5-year period we see a significant underperformance. What is even more disturbing: a stricter interpretation i.e. better compliance to ESG values seems to lead to lower returns. But there’s a glimmer of hope: on a 3year basis, KLD beat the market. All three ETFs have a similar development over time, as the chart below shows. For neutral ETF-investors, there hardly seems an incentive to switch to more ESG-friendly instruments. (click to enlarge) Can active management provide a reason to move to sustainability? Let’s look at our mutual fund selection: Touchstone Sustainability and Impact Equity Fund (MUTF: TEQAX ) One of the older sustainability-themed mutual funds is managed by Touchstone Investments. The fund is active since December 1997 and therefore has a long track record. The asset manager is sub-advised by Rockefeller & Co. Inc. since May 2015. The investments are selected based on an evaluation of company’s ESG-practices. The investment process follows a bottom-up approach. DFA US Sustainability Core Portfolio (MUTF: DFSIX ) Dimensional Fund Advisors offers two mutual funds in the SRI-category: DFA US Sustainability Core Portfolio and DFA International Sustainability Core Portfolio (MUTF: DFSPX ). On top of that, it offers the DFA US Social Core Equity Portfolio which has a social oriented mandate. For comparison with the US market, DFSIX is included in our check. Northern Global Sustainability Index (MUTF: NSRIX ) The last product in our check is actually not an actively managed fund. NSRIX seeks to replicate the MSCI World ESG Index. Surprisingly, it has a lower expense ratio (net 0.31%) compared to the ETFs described earlier. Asset manager Northern Trust offers this mutual fund for the ‘socially conscious’ investor. The fund and its underlying MSCI index seek to track the performance of companies that comply to widely accepted sustainability principles. This instrument is included in the comparison to see how a global ESG-oriented allocation performs compared to the US market. Investors should be aware of the restrictions that come with investing in above mentioned instruments. The instruments are not available by all brokers and do have a minimum investment threshold which can run up to USD 2500. Also fees for redemptions may apply. As always, consult your financial advisor before making any investment. In our performance analysis, we ignore the indicated benchmarks of the mutual funds. Since we want to see if actively managed ESG-based strategies are competitive, the performance is compared to the broader market measured by the S&P500 Index. Neutral investors who look for an incentive may be less interested in specific benchmarks, but look for an outperformance on the broader market. This is of course arbitrary, but a comparison to different benchmarks would be of lesser use. Since the S&P 500 Index is a price based index, we should also look at the S&P 500 Total Return Index (SPTRX). All three mutual funds distribute dividends. (click to enlarge) The table above doesn’t give reason to become enthusiastic about sustainable and ESG investments. The underperformance compared to the broader market can’t be explained by higher costs, although a part can be contributed to (higher) expense ratios. When we look at the more recent yields and the return since the start of the bull market, actively managed instruments are performing slightly better that their passive counterparts. It should be highlighted that the DFA US Sustainability Core Portfolio is able to outperform the market on several timeframes. But this could be explained by good management and isn’t necessarily attributable to ESG-criteria, as its peers show. For now, the available instruments for sustainable and responsible investing do not show the competitive returns we hope to see. Neutral investors which are only interested in return are not offered an incentive to switch. Unfortunately, this leaves the investment category only interesting for a specific group of investors.

ETF Update: 5 New Funds To Be Thankful For

Summary Every week, Seeking Alpha aggregates ETF updates in an effort to alert readers and contributors to changes in the market. There were 5 ETF launches over the last 2 weeks, a slowdown from the 17 launches in the first half of November. Have a view on something that’s coming up or a new fund? Submit an article. Welcome back to the SA ETF Update. My goal is to keep Seeking Alpha readers up to date on the ETF universe and to gain some visibility, both for the ETF community, and for me as its editor (so users know who to approach with issues, article ideas, to become a contributor, etc.). Every weekend, or every other weekend (depending on the reader response and submission volumes), we will highlight fund launches and closures for the week, as well as any news items that could impact ETF investors. I hope all my American readers had a delicious Thanksgiving and a great holiday weekend. Mine is always a great event with +20 family members converging upon Chicago (I’m still celebrating the fantastic Bears/Packers upset from Thursday). However, every Thanksgiving since the beginning of my career has inevitable involved the following vague question: “So, what do you think of the market?” My solution last year was to sign questioners up for Seeking Alpha’s Wall Street Breakfast , and I must say the conversations about the economy were much more rewarding this time around. Now if only we could skip “so, who are you voting for in 2016?” Always my cue to get seconds of sweet potatoes. Fund launches for the week of November 16th, 2015 Fund launches for the week of November 23rd, 2015 Deutsche Bank (NYSE: DB ) launches a pair of multifactor smart-beta ETFs (11/24): The Deutsche X-trackers FTSE Developed ex US Enhanced Beta ETF (NYSE: DEEF ) and the Deutsche X-trackers Russell 1000 Enhanced Beta ETF (NYSE: DEUS ) track benchmarks derived from their indexes, but with a smart beta twist. According to the press release , “both FTSE Russell Comprehensive Factor indexes weight each stock within their respective underlying benchmark based on five academically-proven characteristics that influence the risk and performance of stocks: Value, Quality, Momentum, Volatility and Size.” FlexShares rolls out a fund of funds ETF (11/24): Northern Trust’s (NASDAQ: NTRS ) FlexShares Real Assets Allocation Index Fund (NASDAQ: ASET ) seeks to achieve optimal exposure to the three underlying ETFs while limiting volatility by investing in three FlexShares ETFs. This are the FlexShares Morningstar Global Upstream Natural Resources Index ETF (NYSEARCA: GUNR ), the FlexShares STOXX Global Broad Infrastructure Index ETF (NYSEARCA: NFRA ) and the FlexShares Global Quality Real Estate Index ETF (NYSEARCA: GQRE ). According to its homepage, the fund will “provide investors with a core real assets allocation that helps address their inflation-hedging, diversification, and income needs.” There were no fund closures for the weeks of November 16th and 23rd, 2015 Have any other questions on ETFs or ETNs? Please comment below and I will try to clear things up. As an author and editor I have found that constructive feedback is the best way to grow. What you would like to see discussed in the future? How can I improve this series to meet reader needs? Please share your thoughts on this first edition of the ETF Update series in the comments section below. Have a view on something that’s coming up or a new fund? Submit an article.