Tag Archives: industry

Inside The Recent Surge In Clean-Energy ETFs

Thanks to the oil price collapse and global slowdown concerns, the renewable energy space has performed appallingly this year. But positive trends have started building up in the space lately, especially after the historic Paris climate deal and the U.S. tax credit extension. This has started pushing the stocks and the ETFs higher, reflecting strong momentum and bullish sentiments going into the New Year. Paris Climate Deal About 195 countries agreed to a landmark treaty in Paris to curb global warming to a maximum limit of two degrees Celsius with a goal of lowering it further to about 1.5 degrees as soon as possible. Per the pact, the rich countries like the U.S. and those in Europe pledge to provide $100 billion per year to poorer nations to help them to eliminate greenhouse gasses by 2020. This is expected to bring an end to the fossil fuel era and alleviate global climatic conditions. The Paris deal will invariably motivate renewable energy companies to step up their investments in new technologies, boosting the industry’s future growth prospects. Tax Credit Extension Last week, the U.S. government surprisingly approved a five-year extension to the Investment Tax Credit (ITC) and Production Tax Credit (PTC) for solar and wind companies. It also approved a one-year extension for a range of other renewable energy technologies. Under the new plan, the 30% solar tax credit (ITC), which was due to expire on January 1, 2017, has been extended for another three years. But after that ITC will decline steadily to 10% in 2022. Subsequently, the credit for residential solar installations will be abolished, while commercial installers would continue claiming the credits at 10%. Additionally, the wind credit (PTC) of 2.3%, which had already expired at the end of 2014, has been extended for another year for the new projects that came online this year. However, PTC will start declining 20% each year until it expires in 2020. Further, other renewable energy sources like geothermal, landfill gas, marine energy, and incremental hydro also receive a one-year PTC extension. The extension has been a huge boon to the entire renewable energy space, as it will reduce project financing costs and increase profit margins in the sector. As per GTM Research, the extension of the ITC would result in a 54% jump in U.S. solar installations through 2020 and add 25 gigawatts of additional solar capacity over the next five years. On the other hand, the American Wind Energy Association expects the PTC extension to drive tens of gigawatts of new wind projects through 2020. Sound Industry Fundamentals Depletion of fossil fuel reserves, global warming and high fuel emission issues, new and advanced technologies, and more efficient applications are making clean power more feasible. Rising demand for renewable sources for electricity generation across the globe has added to the sector’s strength. According to the International Energy Agency (IEA), green energy will be the largest source of electricity growth over the next five years buoyed by declining technology cost and aggressive expansion in the emerging economies. Notably, global power generation through clean energy would rise to more than 26% by 2020 from 22% in 2013. Most of the growth will especially come from higher demand in China, India and Brazil. Given the bright outlook, the recent bullish run in the space is likely to continue into 2016. As such, investors seeking to ride out this booming trend want to tap the space in the ETF form. For those investors, we have highlighted five ETFs that could be worth a look given increasing green energy efficiency. Guggenheim Solar ETF (NYSEARCA: TAN ) This ETF targets the solar corner of the broad clean energy space by tracking the MAC Global Solar Energy Index. Holding 31 stocks in the basket, the fund is concentrated in the top two firms – First Solar (NASDAQ: FSLR ) and SolarCity (NASDAQ: SCTY ) – with 10% and 7.8% shares, respectively. Other firms hold no more than 6.02% of assets. American firms dominate the fund’s portfolio with nearly 50.9% share, followed by Hong Kong (19.8%) and China (17.5%). The product has amassed $299.5 million in its asset base and trades in solid volume of around 221,000 shares a day. It charges investors 70 bps in fees per year. The fund gained 19% in the past week. PowerShares WilderHill Clean Energy Portfolio Fund (NYSEARCA: PBW ) This product provides exposure to companies engaged in the business of advancement of cleaner energy and conservation. It follows the WilderHill Clean Energy Index and holds about 45 stocks in its basket, which are pretty well spread out across various securities as each makes up for less than 6.9% of total assets. Information technology takes the top spot at 50%, while industrials takes a quarter share. The fund has amassed $113.5 million in its asset base and sees moderate volume of nearly 90,000 shares a day. Expense ratio came in at 0.70%. PBW was up 11.9% last week. Market Vectors Global Alternative Energy ETF (NYSEARCA: GEX ) This ETF provides global exposure to about 31 stocks that are primarily engaged in the business of alternative energy by tracking the Ardour Global Index. The fund holds about 31 stocks in its basket with AUM of $89.6 million, while charging 62 bps in fees per year. Average daily volume is paltry for this fund. The product is highly concentrated in the top two firms – Vestas Wind Systems ( OTCPK:VWDRY ) and Eaton Corp (NYSE: ETN ) – with 12.1% and 10.4% of assets, respectively, while other firms make up for single-digit allocation. From a sector perspective, industrials takes the largest share at 47%, while information technology (28.1%) and utilities (13.5%) round off the next two spots. In terms of country exposure, the fund is skewed toward the U.S. with 49.2% share, followed by Denmark and China. The ETF has gained 8.6% in the same period. First Trust NASDAQ Clean Edge Green Energy Index Fund ( QCLN ) This fund provides exposure to the U.S. clean-energy companies across a wide range of industries, including solar power, biofuels, advanced batteries, as well as the installation of new technological systems. It tracks the Nasdaq Clean Edge Green Energy Index and manages assets worth $65.5 million. It charges 60 bps in fees per year, while volume is light at nearly 23,000 shares. In total, the product holds 46 securities with none holding more than 8% share in its basket. From a sector look, technology firms dominate this ETF, accounting for nearly 30% of the assets while oil and gas companies take another one-fourth share. QCLN added 8.6% over the past week. Original post

The FlexShares Global Quality Real Estate ETF Is As Much Domestic As Global

Summary GQRE has a fairly high expense ratio for half of the holdings being domestic equity. I don’t see a benefit to using one global REIT ETF when investors can combine a lower expense ratio domestic fund with an international REIT ETF. The ETF has more concentration to individual company weights than I would want to see. 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. One of the funds I am researching is the FlexShares Global Quality Real Estate Index ETF (NYSEARCA: GQRE ). 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. Expense Ratio GQRE sports an expense ratio of .45%. In any event, that falls short of being “excellent”. When we consider that around half of the positions are domestic equity, it looks even less appealing. I would favor getting a pure domestic equity REIT ETF for any diversified domestic exposure that is desired. There are several options with dramatically lower expense ratios for the domestic equity position. International equity REITs are a very small niche, and the sector generally has higher expense ratios, but there is no need to pay it on the domestic assets. Country Allocations I grabbed the following chart from the FlexShares website: If we look past the enormous domestic allocation, the next major weights are Hong Kong, Japan, United Kingdom and Japan. Those four are usually the top 4 countries for international REIT ETFs. I’ve looked at enough of them to simply know that off the top of my head. The interesting thing here is that they weighted Hong Kong at the top and Japan in the second place. Most international REIT ETFs, in my experience, are prone to overweighting Japan. If the fund were designed to have a heavier weight on the other countries that are traditionally underweighted, it would provide a nice bright spot in the portfolio. Holdings I grabbed the following chart to represent the top 10 holdings. (click to enlarge) Unlike most international REIT ETFs, the top holdings here should be recognizable to many investors. The top 10 holdings include 6 that are from the United States and fall under “large cap”. There is a benefit to large-cap REITs, because larger-capitalization companies tend to have more coverage, which results in more efficient pricing, and thus, a lower level of volatility. A Bright Spot in the Holdings While I’d like to see lower weights for individual holdings, I can still appreciate the sector exposure. The top holding is Public Storage (NYSE: PSA ). If you don’t remember them off the top of your head, I bet you will when you look at the photo below. I retrieved it from a piece by Michael Hooper on PSA : If you want some diversification in your exposures, then PSA makes great sense, since it operates in the storage sector of the REIT market. I have no problem with this being a major holding for any domestic equity REIT, and it frequently is one of the top holdings in domestic REIT ETFs. Moving down the list, we see that Simon Property Group (NYSE: SPG ) is another major holding. The downside here is that SPG is literally the #1 holding of most domestic equity REIT ETFs. If you are holding domestic equity REIT ETFs, you already have SPG in your portfolio. Seriously, check the holdings for your ETF and you’ll probably see SPG near the top. I have nothing against investors holding SPG. I hold domestic equity REIT ETFs, and the top position is Simon Property Group. However, my domestic REIT ETFs have expense ratios of .07% and .12%. As a sector, commercial REITs are being given a very heavy weighting. Because the fund is holding so many commercial REITs, I’m glad to see a storage REIT and two residential REITs near the top. However, I do wonder why they aren’t including established champions like Realty Income Corp. (NYSE: O ) if the goal is to establish a portfolio of REITs that are efficiently operating large operations. If the focus is on the “quality” of the underlying holdings, it is hard to argue against a triple net lease REIT with over 80 dividend raises to-date and a focus on only renting to customers with high credit quality and business that are likely to survive any moderate depressions. They do have National Retail Properties (NYSE: NNN ), which is a triple net lease REIT that I find very attractive. I like it enough that I bought shares of NNN for my portfolio to complement my position in REIT ETFs. Unfortunately, the position is only about 1% of the total portfolio. Liquidity The liquidity is bad. If investors want to take a position, only use limit orders to trade the ETF. Conclusion The fund offers heavy weightings to domestic equity that could be more efficiently purchased through domestic equity REIT funds. The fund appears to have a large bias towards buying large-cap REITs and their exclusion of one very high-quality net lease REIT leaves questions about how “quality” is the factor influencing selections. To be thorough, I downloaded the entire list of holdings to ensure that O was not simply positioned outside of the top 10. I didn’t see it anywhere in the fund. Overall, I’m not impressed with the fund. It could be an interesting play if the shares were deviating from NAV, but that would really put the investor in the place of trying to play as a market maker rather than an investor. If the expense ratio was low enough, I could see investors using this as a way to get global REIT exposure. In that case, I would want the domestic allocations to be even higher. Since international REITs move with international stocks, I don’t see the point of combining international REITs with domestic REITs. Yes, they are both REITs. That does not mean they need to be in the same fund.

Don’t Forget About Time

Mutual Fund and ETF investors need to match their time horizons to the assets they hold. Hedge Fund and Venture Capital investors give their managers the time to invest in distressed assets. Retail investors’ time horizons are shorter and more volatility sensitive than they realize. Can you teach me ’bout tomorrow And all the pain and sorrow running free ‘Cause tomorrow’s just another day And I don’t believe in time – Hootie & The Blowfish – Time Just a few days after writing our last letter about the warning sign that the high-yield market was flashing, Third Avenue went and closed an open-ended mutual fund to redemptions because it, essentially, couldn’t find reasonable bids for its bonds. In the aftermath, some commentators have noted that this fund was an exception, because its portfolio was particularly risky, made up of really low quality bonds, and that it wasn’t symptomatic of larger issues in high-yield. I kinda agree and disagree. The issue was clearly that what they owned was a bunch of dreck, bottom of the barrel-type stuff, in a structure that really shouldn’t own such things. They forgot one of the key risk-factors in managing money – time. The issue of time is often recast as one of a liquidity mismatch – owning assets that are less liquid than the liquidity terms offered to the investors in the structure. Mutual funds offer daily liquidity, which is great for assets like stocks and government bonds that have deep and liquid markets. Low quality junk bonds aren’t quite as good a fit – a much better fit would be closed-end funds, where there are no redemptions, or in a private equity type fund of the sort that Oaktree and others run. But owning them in a regular retail mutual fund? Not a good idea. Is this going to be a systemic problem? Probably not. It appears that a lot of the mutual funds that own high-yield bonds only have portions of their funds in them, or, even better, are closed-end. Interestingly, many closed-end funds run by decent managers are trading for extremely deep discounts to NAV currently, and probably are good buys here. Our fund has been buying a few of these in the past week. Closed-end funds don’t have to worry about this liquidity element of time. However, another asset that is often confused with closed-end funds definitely does – ETFs. Time the past has come and gone The future’s far away And now only lasts for one second, one second – Hootie & The Blowfish – Time ETFs have been hailed as the savior of retail investors. Some claim ETFs eliminate the risks in investing alongside other investors whose time horizons may not match your own. In the case of Third Avenue, this issue was made clear by the fact that those who sold early realized a much better return than those who sold later, because Third Avenue was able to sell its better quality bonds to redeem them. But ETFs suffer from the same problem. They have investors who can not only redeem daily, they can redeem at any time throughout the day as well. Amazingly, the Wall Street Journal published an article on the front of its Business and Finance section yesterday that is 100% wrong. Very wrong. Incredibly, I can’t believe this got published wrong. In it, Jason Zweig, who writes their weekly Money Beat column, states that ETF managers don’t have to sell their holdings to meet redemptions. Instead, they give a prorata share of those holdings to ETF dealers called authorized participants (APs) who in return gives the ETF back some of its shares. This part is correct. But what Zweig misses completely, and I really don’t know how he does, is that the APs then turn around and sell those securities. APs are not in the business of just holding onto whatever the ETF manager gives them. Zweig says “The ETF doesn’t have to fan the flames of a fire sale by dumping its holdings into a falling market.” Well, actually, it does. APs are in the business of arbitraging, for very small amounts of money, the differences between the price at which the ETF trades and the underlying value of its assets. That is why ETFs have to publish their holdings daily. It is why ETFs that invest in less liquid assets will trade with a higher bid-ask spread. Its why – oh man, its why a lot of things. But one thing ETFs are not are closed-end funds with an unlimited time horizon. They are a fund with an even shorter redemption time period than regular mutual funds. And yet, the Wall Street Journal has it completely backwards. Amazing. Time why you punish me Like a wave bashing into the shore You wash away my dreams – Hootie & The Blowfish – Time But there is a more subtle, and more pernicious, aspect of the time factor in investing. That is the mismatch between investor expectations and time-horizons for returns on the underlying investments. Different investors have different time horizons of course, but I’ve found in the more than 20 years I’ve been investing that what people say their time horizon is and what it really is are very different things. For all of its smug insularity and inability to hire women or minorities , one thing venture capital has gotten right is matching the duration of its investors with the duration of its investments. Investors in venture capital funds are conditioned to expect the investments to both take a long time to payoff and often not work out. It is a lesson that most retail investors miss. Instead, retail investors say they are “long-term” investors, when in reality they are generally uninterested investors. Until, suddenly, they are very interested – at which point they usually panic. This panic creates a selloff that punishes those investors who thought they had a lot of time to let their investments grow and generate the returns they expected, at least on a marked-to-market basis. This sell-off then triggers fear of further losses in investors who thought they owned “safe” assets, or “liquid” assets, so they sell too, which leads to a downward spiral. This is the contagion effect we’ve discussed here previously. It’s being exacerbated by the destruction occurring in many retail investors portfolios, because they, despite all the clear warning signs, chased yield instead of total return in recent years. In a world of low interest rates, they looked at the yields being paid by MLPs, private REITs, BDCs, and other yield vehicles and decided that getting a high current income was so important that they invested in companies or funds they didn’t really understand. They were happy, so long as prices were going up and they were getting paid. But now that prices are going down, often dramatically, they are realizing that there is no such thing as return without risk, that their tolerance for volatility is lower than they thought, and that their time horizon for their investments is shorter than they thought. Not a good combination. Time why you walk away Like a friend with somewhere to go You left me crying – Hootie & The Blowfish – Time In my experience, mutual fund boards are no different in their short-termism than retail investors, and in some ways are worse. They get regular reports showing how the funds under their purview have performed on monthly, quarterly, yearly and 3-5 year time horizons. Usually there is a 10 year comparison as well, but it is routinely ignored as not relevant, as most investors ignore it too. These fund boards will harshly question any manager that dares to deviate from their benchmark, even for good reasons, and even if it is just to hold more cash during times of market excess. A mutual fund manager may well believe that the bonds or stocks it holds are overvalued, but be unable to do anything about it since they are, for the most part, supposed to be fully invested at all times. This means that even if the manager fully believes that the most prudent course of action would be to sell and hold cash, he or she generally won’t, because making a market bet is a quick way to find yourself looking for another job. Therefore, when markets do selloff, mutual funds are generally not a good source of buying support – they have to sell something to buy something. Twenty or thirty years ago, fund managers had a lot more flexibility to use their judgment about markets and fund positioning, but today much of that flexibility is gone. Similarly, another source of market buying during times of panic used to be the investment banks and bond dealers, but Dodd-Frank has killed that off. Today, dealers are just middle-men – they are not allowed to position securities on their books. When I interviewed at Goldman Sachs after business school, the interview took place on the equity trading floor, where I was surrounded by hundreds of traders and salesmen. Today, Goldman has less than 10 traders making markets in U.S. stocks. Think they are making a big two-way market anymore? I don’t think so either. Time without courage And time without fear Is just wasted, wasted Wasted time – Hootie & The Blowfish – Time One of them main advantages of hedge funds is that their investors, for the most part, understand that in order to make money you need to be willing to tolerate some volatility and wait out the markets recurring cycles. (Full disclosure: I manage a hedge fund, and am biased toward the structure). Another advantage is that, because their managers are granted flexibility to go both long and short, and to hold cash, they can take advantage of these market dislocations to buy good assets at distressed prices. They can cover shorts, sell one asset to buy another, or use leverage to buy when others panic. Granted, some managers will get their markets wrong, and fail spectacularly, but that doesn’t mean that overall the industry is flawed. It’s simply part of being in the markets – not everyone can be right all the time, and those that fail to manage their leverage and risk exposures will be carried out of the arena accordingly. But the impression that hedge funds are all the same, that they all are rapid day traders (some are, some aren’t) misses the point that they are one of the few sources of buying support left in the markets today. They are, as a group, the only ones that have both the time and ability to step into falling markets and buy when others are panicking. ______________________________________________________________________________ This week’s Trading Rules: If you’re going to panic, panic early. Retail investors often panic later, and for longer, than market professionals expect, creating larger crashes than fundamentals dictate. Match your investment time horizons to those of your investors. “Forever” is not a choice. The Fed hiked rates by 25 basis points for the first time in 7 years, and after initially popping higher, stocks have begun to fall again. Retail investors have seen most of the asset classes they flooded into in recent years decimated in the past 6 months. Large cap stocks have massively outperformed small caps over the past 6 months, with the Russell 2000 Index falling 12.7% versus a 4.9% decline in the S&P 500. This is inflicting pain on active fund managers and forcing performance chasing in the few winning stocks. Time ain’t no friend of these markets. SPY Trading Levels: Support: 200, 195, then 188/189. Resistance: 204.5/205, 209/210, 213 Positions: Long and short U.S. stocks and options, long CEFs, long SPY Puts.