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The WisdomTree Europe Dividend Growth ETF: Timing Is Everything

The fund is heavily weighted with best in class European companies. The fund is dividend weighted with a defensive bias. The poor performance seems to be a result of coming to market at the wrong time. Europe seems to have a split personality, at times somewhat fractious and recalcitrant and at other times cooperative and harmonious. The moribund Medieval Period was followed by a lively Renaissance. Centuries of religious wars were followed by an enlightened scientific revolution. In the 20th century, Europe engaged in decades of warfare not witnessed in all of human history. In the wake of that 20th century dark age, Europe determinedly embarked towards a second enlightenment. The basis for this hopeful new age is founded on equality, solidarity and prosperity, achieved through a unified economy. Europe has created an equitable, cooperative capitalism: carefully regulated and open. This new age has led to the creation of a sizable economy of well founded, well established global companies. An opportunity to participate in the potential growth of these companies may be had through the WisdomTree Europe Dividend Growth ETF (NYSEARCA: EUDG ). According to WisdomTree : … WisdomTree Europe Quality Dividend Growth Fund seeks to track the investment results of dividend-paying companies with growth characteristics in the European equity market … The tracking index is WisdomTree’s own proprietary index [DEFA]: … The Index is comprised of 300 companies from the eligible universe based on their combined ranking of growth and quality factors. The growth factor ranking is based on long-term earnings growth expectations, while the quality factor ranking is based on three year historical averages for return on equity and return on assets. Companies are weighted in the Index based on annual cash dividends paid. .. It seems that WisdomTree’s approach to dividend weighting results in a more conservative passive methodology than weighting by market price. An interesting description written by Mr. Jeremy D. Schwartz, titled “Dividends of a Dividend Approach ” , details the reasoning of the approach and the results. For example, it specifically takes into account, the importance of dividends in determining a stock’s price; the fact that dividends historically have provided the majority of the stock markets real return; dividends are an objective measure; dividends reflect management’s shareholder interest and lastly, the demand for income among baby boomers in retirement. The fund itself is a relative newcomer to the industry, incepted in May of 2014. If the fund is weighted by dividends and the quality of earnings, the top weightings should give a good indication of the risk to the investor. (click to enlarge) First it should be noted that the fund has about 200 holdings as of mid-October, however, just over 50% of the funds weighting is concentrated in its top holdings. There is something to point out in those top holdings. There seems to be a repetition of companies held. For example Roche Holdings ADRs on the OTC are assigned the symbol OTCQX:RHHBY . On the “Swiss-6” exchange, it’s ROG.VTX and on another Swiss exchange it’s Ro.SW. They all represent the same company and the same class of stock, hence Roche Holdings has a combined 8.31% weighting in the fund’s holdings. Similarly, Unilever is listed as UL on the NYSE, on the London exchange UNA, on the Amsterdam exchange as UNC as well as others. The point being that in the fund’s top holdings, Unilever holds a combined 3.98877% weighting and Roche 8.31% in the top fund’s holdings. By combining those ,means that the top 50% is really contained in the top 19 holdings, i.e., 9.5% of the fund. The top 50% of the fund is more heavily weighted in Consumer Staples, Health Care and Telecom Service than the entire fund. On the other hand, the top 50% is ‘lighter’ in Consumer Discretionary, Industrials, IT. Lastly the top half contains neither a Financial nor Material Sector allocation. It then appears that the more defensive sectors comprise the heaviest dividend weights. The more cyclical sectors are less weighted and more widely distributed among the fund’s 200 holdings. Below is a summary table of the top 50%, containing 19 companies with a relevant few metrics. Company Fund Weighting Yield Cash Flow Multiple Payout Ratio ROI/ROE Price/Earnings Price/Book Sector Roche [RHHBY] 8.31031% 3.06% 18.10 73.94% 20.07/48.00 23.37 10.96 Health Care British American Tobacco ( OTCPK:BTAFF ) 4.19366% 3.98% 14.71 46.50% 22.57/70.15 17.50 11.74 Consumer Non-Cyclical Anheuser-Busch (NYSE: BUD ) 4.02124% 3.11% 26.58 29.15% 10.25/19.29 19.38 3.77 Consumer Non-Cyclical Unilever [UL] 3.98877% 3.14% 17.37 41.40% 17.63/33.21 22.16 7.00 Consumer Non-Cyclical Novo Nordisk (NYSE: NVO ) 3.16913% 1.39% 21.09 41.30% 75.61/82.48 29.94 23.78 Health Care Bayer ( OTCPK:BAYRY ) 3.09927% 1.95% 14.14 53.35% 7.40/16.71 26.38 4.13 Health Care SAP (NYSE: SAP ) 2.35035% 1.79% 17.35 42.76% 11.82/16.66 23.46 3.47 IT Daimler ( OTCPK:DDAIF ) 2.32166% 3.41% 5.63 32.51% 6.82/17.81 9.62 1.98 Consumer Cyclical Diageo (NYSE: DEO ) 2.18663% 2.99% 15.88 59.43% 13.56/32.63 19.30 5.91 Consumer Non-Cyclical Telefonktiebolasget Ercsso [ERIC] 1.95709% 3.72% 13.59 109.29% 5.73/7.55 27.43 2.07 Telecom Service Inditex ( OTCPK:IDEXY ) 1.79386% 1.67% 26.14 29.56% 26.31/29.39 35.37 9.78 Consumer Cyclical Louis Vuitton ( OTCPK:LVMUY ) 1.73739% 1.92% 15.88 46.08% 9.29/12.71 24.76 3.02 Consumer Cyclical Hennes & Mauritz ( OTCPK:HNNMY ) 1.6948% 3.14% 16.43 *51.54% 41.57/44.71 23.82 9.98 Consumer Cyclical L’Oreal ( OTCPK:LRLCY ) 1.6825% 1.65% 23.28 *37.86% 11.80/12.90 31.27 3.99 Consumer Non-Cyclical Reckitt Benckiser ( OTCPK:RBGLY ) 1.66167% 2.14% 24.96 59.49% 16.66/24.90 28.23 6.90 Consumer Non-Cyclical ABB LTD (NYSE: ABB ) 1.62665% 3.12% 11.23 72.54% 9.54/15.73 16.94 2.90 Industrials Schneider Electric ( OTCPK:SBGSY ) 1.44748% 3.61% 11.19 *40.34% 6.20/9.03 17.64 1.50 Industrials Airbus Group ( OTCPK:EADSY ) 1.4196% 2.08% 9.04 *18.83% 5.61/32.83 16.54 7.94 Industrials Syngenta (NYSE: SYT ) 1.41046% 3.57% 14.77 *52.75% 10.39/15.68 20.92 3.42 Industrials Totals/Averages 50.07% 2.707368% 16.731 49.40% *estimated % of cash flow per share 17.30/28.55 22.84 22.84 The returns are anything but stellar, however, there’s an important reason for this. Returns 1 Month 3 Months 1 Year Since 5/7/2014 Inception WTEDG Index -2.87% -6.18% -6.28 -8.76 EUDG Fund -2.49% -6.56 -5.96 -9.21 The fund is not currency hedged. A comparison with the Euro vs the U.S. Dollar tells the story. (click to enlarge) The fund came to market precisely on the same day the Euro peaked in this time interval at $1.37 per Euro. From there it steadily trended lower to its current $1.12; just over an 18% decline. The fund closed its first day of trading at about $25.25. An 18.25% decline of the shares from that point works out to $20.64, just above its September 29 low of $20.05. Hence, when translated back to USD dollars, the value of the fund ‘shrank’ even though the top line companies continued to perform well. The currency translation is a very important point for the investor to keep in mind. When the European currencies weaken vs the U.S. Dollar, the NAV will decline, even if the companies in the fund are doing well . Hence, purchasing when the U.S. Dollar is strong is like purchasing the fund at a discount. Eventually, Europe will regain its economic footing and European currencies will appreciate against the U.S. Dollar, hence the potential for capital appreciation on a ‘dollar cost averaged’ investment. The same is true of European denominated dividends and distributions. The whole point of the matter is that for investors with risk capital, and the willingness to be patient while gradually accumulating a position knowing that the top 50% of the fund has an average yield of over 2.7% and the fund is defensively allocated, then it’s reasonable to assume that over a longer time horizon the future returns will outweigh current risk. The current poor returns are a matter of having a good idea, but extraordinarily bad timing.

Solar Energy ETFs – Decent Way To Stay Invested In The Volatile Solar Industry

Summary The top holdings in the portfolio are good companies with decent performances. The ETFs have considerably reduced their Chinese market exposure to tide the current downturn. The solar industry is set to grow at a rapid pace. I was sceptical about investing in solar ETFs earlier, mainly because of the fact that they included Hanergy Thin Film Power Group Ltd. (OTC: HNGSF ) among their top holdings. Since the Hanergy bubble has burst, the two ETFs have now minimized their exposure in that stock. The Guggenheim Solar ETF (NYSEARCA: TAN ) and the Market Vector ETF (NYSEARCA: KWT ) have also considerably reduced their exposure to Chinese stocks to avoid volatility. I think it should be a good opportunity to invest in these ETFs now, as they have increased their exposure to top quality solar stocks. The solar industry being a relatively new industry sees rapid changes in business models and technology – top companies (e.g. Hanwha Q Cells (NASDAQ: HQCL ) ) can go bankrupt in a matter of months due to changes in the supply chain/technology. Solar ETFs are a better way for retail investors to stay invested in the volatile solar industry to avoid company specific risks. They can also take advantage of the long term double digit secular growth of the industry using these ETFs. Top Holdings Then & Now – Portfolio looks decent now TAN Top Holdings As on 24th Apr-2015 29th Sep-2015 Hanergy Thin Film Power Group 11.45% – SunEdison Inc. (NYSE: SUNE ) 8.43% 5.15% First Solar Inc. (NASDAQ: FSLR ) 6.99% 8.06% GCL-Poly Energy Holdings LTD (OTCPK: GCPEF ) 6.45% 7.52% SolarCity Corp. (NASDAQ: SCTY ) 6.27% 7.01% SunPower Corp. (NASDAQ: SPWR ) 4.56% 5.01% Terraform Power Inc – A (NASDAQ: TERP ) 4.39% 4.27% Canadian Solar Inc. (NASDAQ: CSIQ ) 4.35% 4.22% Xinyi Solar Holdings LTD. 4.17% 5.88% Trina Solar LTD. (NYSE: TSL ) 3.93% 4.86% SMA Solar Technology (OTCPK: SMTGF ) – 4.19% Source: Guggenheim Solar ETF KWT Top Holdings As on 24th Apr-2015 31st Aug-2015 Hanergy Thin Film Power Group 8.16% – SunEdison Inc. 8.03% 4.06% First Solar Inc. 6.85% 8.90% SolarCity Corp. 6.46% 8.84% GCL-Poly Energy Holdings LTD 6.13% 5.66% Terraform Power Inc. – A 5.62% 6.91 Shunfeng International Clean Energy Ltd (OTCPK: SHUNF ) 5.32% – Trina Solar LTD. 4.71% 4.53% SunPower Corp. 4.65% 4.97% Canadian Solar Inc. 4.56% 3.72% Sino-American Silicon Products Inc. 4.11% – Xinyi Solar Holdings LTD. 3.10% 5.35% SMA Solar Technology – 4.85% Source: Van Eck Global Both the ETFs have removed Hanergy Thin Film from their respective portfolios. This is in line with my thoughts expressed earlier, that when the Hanergy bubble bursts – the ETFs will also suffer. Reducing exposure in the Chinese market makes sense now The ETFs had a considerable exposure in the Chinese market which made them vulnerable to low returns at the time of crisis. However, both the ETFs have reduced a considerable amount of their exposure in the Chinese market. KWT’s exposure in the Chinese market stands at 31% from 38% previously. For TAN the Chinese presence has been reduced from 48% previously to ~38% currently. All this shows that the ETFs are trying to reduce the volatility in their returns. Though the performance was slightly below the broader Dow Jones index, it was better than most of the individual stock returns. (click to enlarge) As on 12 th Oct 2015 Source: Google Finance YTD Performance of some of the stocks as on 12th Oct 2015 SPWR -2.9% SCTY -9.2% SUNE -52% TERP -34% CSIQ -10.7% Performance was better than individual Stock returns Investors look to invest in ETFs to guard themselves from the volatility in the sector. The solar industry is volatile and is facing a downturn currently. Other than Trina Solar and First Solar stock who returned ~22% and 15% YTD (as on 12th October 2015), other stocks have been battered. Both these ETFs have also suffered due to the recent selloff seen in the broader energy market. ETFs average the returns from all the stocks for investors. The investor will not unduly suffer if his one solar stock holding is punished. The Guggenheim Solar ETF has a total asset base of $225 million with an expense ratio of 0.7% and Market Vector ETF has a total asset base of $15 million with an expense ratio of 0.65%. Solar Energy has have a very bright future Though the Chinese stock market looks weak at the current time, the Chinese solar industry has a bright solar future. It is expected that China will be the largest solar market globally. The country is expecting to install 18 GW of new capacity this year. China and other major carbon emitters such as India and Europe have to considerably reduce its carbon emissions as part of the INDC. Solar energy is expected to be the biggest source of capacity expansion among all energy sources in the next 20 years, as per major forecaster (Bloomberg and others). Global solar installation are expected to increase by 40% y/y to 55 GW and continue to increase in the double digit range in the long term as well. USA solar energy is booming as well, with 22.7 GW of total installed capacity by the end of Q2’15. Downside Risks Staying invested in the solar industry through an ETF makes more sense if the investor is not very well acquainted with the market trends. However for someone who follows the industry closely, I think a better way to stay invested should be through individual stock holdings. If an investor believes in any particular stock(s) and stays invested, he should end up making more money than the ETF. For example, Trina Solar stock was up ~22% during the time the ETFs were seeing their values decline. Conclusion Solar ETFs have also been hurt by the decline in the energy sector, even though the industry is seeing strong growth and well run companies are showing good profitability and revenue growth. Solar ETFs were a bad bet earlier because of the heavy weighting being given to highly risky companies. But they have become a better investment, with the pruning of such stocks from their portfolios. The solar industry is an extremely dynamic and volatile one. It carries both high risks and rewards and for normal investors ETFs may be a good choice to take advantage of the long term secular growth of the industry. They represent a good investment now, as they have fallen unduly due to the oil price decline. Currently, both TAN and KWT represent good investment options in my view.

True Management Excellence Is Reasserting Its Power And Importance

Summary A weak market environment reveals weaknesses in companies that would go unnoticed in good or moderate times. Management excellence becomes critically important as economic stresses emerge. Excellence is achieved by integrity in relationships with three key constituencies. Only when the tide goes out do you discover who’s been swimming naked. –Warren Buffett A weak market environment reveals weaknesses in companies that would go unnoticed in good or moderate times. –David Merkel Would you rather invest your hard earned dollars with the best-run companies in the world or the worst? The answer may seem obvious but there are millions of people have their money invested with managers who are plainly bad. I have been one of them in the past and perhaps you have been as well. Over the past 6 years investors haven’t had to give quality of management much thought, as rising stock prices and profits have allowed us to overlook mistakes and bad decisions. This happy time has already begun to change. Regardless of what the economic future holds, it’s undeniable that stresses have developed in the global economic system. Quality of management is about to become a much more important factor in company fortunes. For years it is been reasonably easy for management to keep shareholders happy with regularly increasing stock prices and higher profits. As the quotes above suggest, in times of stress management becomes critically important. Quality of management could soon become the differentiator between success and failure — even life and death — on the corporate level. Identifying Excellence In Management With widespread improvements in common metrics like profits and stock prices, how do we differentiate? How do we tell where the truly excellent (and truly bad) management is? A more comprehensive approach is required. The vast majority of managements will fall in the middle range of quality, and time is best spent identifying the very best and worst. After all, these are the managements that will produce the most consequences for us as investors. In addition, sustained excellence does not flow from a single great leader. No one can deny the importance of Steve Jobs at Apple, Alan Mulally at Ford, or Jack Welch at General Electric, but great leaders aren’t forever and their performance is not often repeated by their successors. In fact, it is dangerous to trust your money to a single individual no matter how talented, as Apple after Jobs’s first departure and GE after Welch demonstrated. True excellence is a culture that endures over generations of executives. Superior management is identified by integrity in relationships with its three main constituencies: customers, shareholders, and employees. All three of these “pillars of excellence” are essential – none can be ignored. In times of stress deficiencies in any one will be magnified and threaten the success of the enterprise. Excellence in each area, however, will support the others and the entire company. They provide a complete and robust assessment of management when added to standard measures like return on equity, share prices and dividend growth. The Three Pillars Customers Excellence in the customer relationship starts with high quality products and services that are valued by customers. Well-known examples are Nike, Tesla, Google, Tiffany, Johnson & Johnson, Caterpillar, Deere, Union Pacific, Apple, and Boeing. A different example is Family Dollar (NYSE: FDO ) which, although the products it sells are ordinary, has a combination of selection and price that fills an important customer need. Another aspect is customer service, and there are many studies of the best and worst companies in this regard. A recent study by 24/7 Wall Street rated these at the top. Best: Amazon (NASDAQ: AMZN ) Chick-fil-a Apple (NASDAQ: AAPL ) Marriott (NASDAQ: MAR ) Kroger (NYSE: KR ) Fedex (NYSE: FDX ) Trader Joes Sony (NYSE: SNE ) Samsung ( OTC:SSNLF ) UPS (NYSE: UPS ) And these rated worst: Comcast (NASDAQ: CMCSA ) DirectTV (NASDAQ: DTV ) Bank of America (NYSE: BAM ) Dish Network (NASDAQ: DISH ) AT&T (NYSE: T ) AOL (NYSE: AOL ) Verizon (NYSE: VZ ) T-Mobile (NYSE: TMUS ) Wells Fargo (NYSE: WF ) Walmart (NYSE: WMT ) Obviously, customer service is more challenging in some industries than others. The survey recognizes this and has two sets of rankings: from all executives and experts within each industry. Employees Who better to say which are the best companies to work for than the employees themselves? Fortune and the Great Place To Work Institute have been doing comprehensive surveys of employees for 25 years produce an annual list of the 100 Best Places to Work . Their model is based on five dimensions: Credibility, Respect, Fairness, Pride and Camaraderie. The top ten public companies (fourteen of the top twenty-four are private) in 2015 are: Google (NASDAQ: GOOG ) Salesforce (NYSE: CRM ) Genentech ( OTCQX:RHHBY ) Camden Property Trust (NYSE: CPT ) Klimpton Hotels and Restaurants (NYSE: IHG ) NuStar Energy (NYSE: NS ) Stryker (NYSE: SYK ) Ultimate Software (NASDAQ: ULTI ) Workday (NYSE: WDAY ) Twitter (NYSE: TWTR ) In times of economic distress investors want to a part owner in companies with employees who support and have confidence in management, and are invested in the company’s success. This is achieved when management does the same for their employees. Shareholders This is perhaps the most complex of the three “pillars” of excellence. Continuing the survey theme, Fortune and the Hay Group compile an annual list of the most admired companies in America. There are some methodological issues with and it includes only the largest companies, but healthy financials and stock performance are major factors so it is useful in this regard. The full list is here . The top ten “All Stars” for 2015 are: Apple Google Berkshire Hathaway ( BRK ) Amazon Starbucks (NASDAQ: SBUX ) Walt Disney (NYSE: DIS ) Southwest Airlines (NYSE: LUV ) American Express (NYSE: AXP ) General Electric (NYSE: GE ) Coca Cola ( K O) Institutional Shareholder Services has been assessing corporate governance for over 30 years. They examine over 200 factors to rate boards of directors in four areas: board structure shareholder rights compensation audit risk & oversight It addresses important questions like Is the board of directors independent or controlled by the chairman? Is compensated reasonable or detrimental to shareholders? Is there overboarding — do they sit on so many boards that they have excessive time commitments and may be unable to fulfill their duties? The rankings are interesting. Apple scores near the top in three of the four areas, but is in the bottom decile in compensation. Companies like Google and Groupon (GRP) that have dual stock classes generally rate poorly. Shareholder input An important aspect of this pillar comes from the shareholders themselves. Shareholders are very vocal on sites like Yahoo and Seeking Alpha about their relationship with management. When unhappiness is expressed, it can be an important sign that management is not aligned with shareholder interests. Dissatisfaction can occur whenever a company is underperforming, so it’s important to distinguish between general grumbling and more specific concerns. Questions about things like management compensation, risk, dilution, and conflicts of interest merit attention. Recent examples of serious red flags include: Prospect Capital (NASDAQ: PSEC ): Many investors have criticized management compensation, honesty about nonperforming assets, and other issues. This comment is typical: Leopards don’t lose their spots. Those of us who owned in the 10 dollar range remember Mgt. sold more shares, raised their mgt. fees, then cut the dividend. Leaving us stockholders holding the bag. I’m out and staying out. American Realty Capital Properties (ARCP): Minor accounting issues blew the top off a company with excessive compensation, conflicts of interest, excessive risk-taking and more. Management and the company name have been changed to Vereit (NYSE: VER ), but the point is that big losses were avoided by investors who heeded problems which were well known before the blowup. The entire medical marijuana industry: Marijuana has attracted more serial fraudsters, incestuous management and shareholder abuse than any industry in living memory. For an unfortunately common example, see this article on Medical Marijuana ( OTCPK:MJNA ), trading at three cents a share and a long history of issuing new shares to insiders like Halloween candy. To see how pervasive shareholder abuse is in the industry, see this article and others by Anthony Cataldo. Standard Metrics of Effectiveness Standard metrics that directly affect the bottom line are still the most important area of management assessment. They show how skilled executives are as businesspeople and are clearly related to the shareholders relationship. Revenues and profits matter. Metrics like return on assets (ROA) and return on equity (ROE) show how efficiently management utilizes the resources available to them. Debt/equity and debt/earnings can show the degree of risk that management is exposing shareholders to. Conclusion Complacency is deadly. For six years investors have been lulled into a sense that picking investment winners is easy, or at least something they have largely mastered. Conditions are changing however, in ways that will make successful management more challenging and will separate the good from the bad. Recognition of excellent management will be more critical to investment success and in some cases company survival. Standard measures of management effectiveness like return on assets and return on equity are still the first place to go, but they don’t tell the complete story. Excellent management is also identified by the relationships with three key constituencies: customers, employees, and shareholders. Excellence is defined by integrity, respect, and fairness with these three groups. A few examples of how to identify the best and worst companies are given here – there are many others. Choosing investments based on a comprehensive determination of excellence will enable us to be successful in even the challenging times. In addition, we can have the satisfaction of knowing we are associating with individuals that are not only talented, but act honorably and ethically towards others. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.