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Comparing 6 Of The Top International Equity Options

Summary This group of 6 ETFs offers 3 options from Schwab and 3 options from Vanguard. The ETFs that were selected each have a fairly similar match from the other ETF provider. I’m using modern portfolio theory to assess the impact on portfolio risk. The data favors Schwab at first, but after adding a bond ETF investors can get very similar levels of exposure through either option. My favorite two ETF combinations for international equity are combining either SCHC and SCHF or VSS and VEA. I would base the decision on free trading for frequent rebalancing. As I’ve been working through a comparison of low fee ETFs, it seemed prudent to do a comparison on a batch of ETFs between two of the lost cost leaders in the industry. Vanguard has a very long and proud track record of offering investors excellent diversification with extremely low fees. Schwab decided to compete in that arena and introduced a very respectable group of ETFs that also have very low expense ratios. In this piece I’m running a comparison on the international ETF options for Schwab and Vanguard. In an attempt to keep the comparison reasonable, I’ve selected the Schwab International Small-Cap Equity ETF (NYSEARCA: SCHC ), the Schwab Emerging Markets ETF (NYSEARCA: SCHE ), and the Schwab International Equity ETF (NYSEARCA: SCHF ) for Schwab and the Vanguard FTSE All-World ex-US Small-Cap ETF (NYSEARCA: VSS ), the Vanguard FTSE Emerging Markets ETF (NYSEARCA: VWO ), and the Vanguard FTSE Developed Markets ETF (NYSEARCA: VEA ) for Vanguard. SCHC and VSS invest in international small-cap companies. SCHE and VWO invest in emerging markets. SCHF and VEA invest in developed markets. The Core of the Portfolio To form the core I am using heavy allocations to SCHB and VTI. These two funds represent Schwab’s Broad Market ETF and Vanguards Total Market Index ETF. Each broad market ETF is being allocated 35% of the portfolio value and each international ETF is being allocated 5% of the portfolio value. A quick check for volatility can then be performed in the context of the portfolio by looking at which investments are adding the most risk to the portfolio. The similarity of returns can also be assessed by checking if each pair of international ETFs that I believe to be similar are actually showing high similarity in their returns so far this decade. The chart below shows the results for the sample portfolio. (click to enlarge) The highest annualized volatility measures go to VWO, VEA, and SCHE, but the more important factor is the risk contribution since volatility that is not correlated to the domestic stock market is substantially less relevant in determining how volatile the portfolio will be as a whole. When we look at the “Risk Contribution” column or the “Beta” column we can get a quick feel for which international ETFs are adding more risk than others. As it happens, VWO, VEA, and SCHE are again the three highest in each category. When I run these comparisons with portfolios that include more asset classes there is often a disconnect between the annualized volatility of the individual funds and their contribution to the overall risk profile. Quick Interpretation The notable differences are that VEA seems to be offering more volatility than SCHF and VWO seems to be more volatile than SCHE. When it comes to SCHC or VSS, the volatility has been almost precisely the same. The differences in the amount of volatility are not huge and may be within a reasonable margin of error. If investors were to compare historical returns to simply see how the funds have done, it is clear that SCHC outperformed VSS, but in the other two cases the vanguard funds with more volatility also had better returns. When We Add Bonds I ran the simulation again but this time I added in a 20% allocation to a very high duration bond fund, the PIMCO 25+ Year Zero Coupon U.S. Treasury Index ETF (NYSEARCA: ZROZ ). Using ZROZ gives the portfolio a large dose of negative beta and provides a portfolio that when considered in the aggregate is substantially less risky than the portfolio with no bond exposure. The goal is to see how the risk contribution changes when we start pushing the portfolio to be closer to the efficient frontier by reducing volatility. To keep the comparison focused on the international ETFs, I simply dropped SCHB and VTI by 10% each. (click to enlarge) Now that the portfolio contains ZROZ, we see that SCHE is contributing more risk than VWO, though the other relationships remain unchanged. The portfolio as a whole, despite using the same time frame, has reduced the annualized volatility from 16.8% to 11.7%, The difference here is fairly dramatic as the portfolio went from being more volatile than the S&P 500 to being substantially less volatile. In this portfolio with bonds it appears that we have one fund for Vanguard winning in the risk comparison, VWO, one fund for Schwab winning, SCHF, and a tie between SCHC and VSS remains. What Does It All Mean? For investors that have free trading on either the Schwab or Vanguard funds, it looks like the best strategy is to use the group of ETFs that the investor can trade without commissions. Neither group is outperforming the other by enough to warrant paying the commissions. Rebalancing Because the annualized volatility on these international investments is so high, an investor should take care to consider a strategy for rebalancing their portfolio regularly to increase their allocations to whichever investments are out of favor with the market. Within Each Group When I’m looking at a comparison between VSS, VWO, and VEA, I’m seeing VSS as a very desirable option. VSS has an expense ratio of .19% which is slightly higher than I want to see on international investments, but it also has 3369 individual holdings within the portfolio and only 3.2% of the total assets are invested in the top 10 holdings. The internal diversification is exceptional. In my opinion, VSS is a world class option for including in diversified portfolios. Within the Schwab fund I’ve shown a slightly preference for SCHF in picking the ETFs for my own holdings, but I’m also attracted to using some SCHC and I’ve got a buy-limit order placed on SCHC to pick it if it falls far enough. With the market being so volatile right now, my cash is simply covering limit orders on a few of the ETFs that I have identified as desirable. That batch currently includes the Schwab U.S. Dividend Equity ETF (NYSEARCA: SCHD ) and SCHF. I already own some of the first two ETFs, but don’t have any SCHC yet. I have not decided if I like SCHC as much as SCHF, but I do appreciate a little bit of extra diversification that can come from using both. If I had free trading on VSS, I would be tempted to use it also. Ideal Allocations The highest total international equity allocation that I would be comfortable holding is around 20% of the portfolio value. I think my ideal allocation level may be closer to 10% to 15% though. One factor that will influence me is the simplicity of rebalancing. When rebalancing is easier, I’m willing to use slightly higher international allocations because the higher volatility can be dealt with more effectively. Current Influences I’ve been a pretty huge bear on China and was calling for some major corrections in that market. On the other hand, while the domestic market felt a little frothy, I wasn’t expecting the drawdown we have seen in August. Because of my views on the performance of China and the correlation of markets during times of stress, I’m inclined to focus my international allocations on developed markets rather than emerging markets. That causes me to see SCHC, SCHF, VSS, and VEA as the more desirable options. On the other hand, if China has a very solid crash and emerging market funds fall hard, then I’d be comfortable working a small emerging markets position into the portfolio. I’m not convinced that those prices will fall far enough for me to decide that I want to add more emerging markets rather than developed markets. If investors want to use emerging markets rather than developed markets for the international portion of the portfolio, I would suggest using a lower limit than 20%. The emerging markets have more inherent risk and a heavy allocation to the sector simply produces too much risk. To find the optimal exposure level, I think investors can use any two of the international ETFs except for combining SCHE and VWO. Going all emerging markets with no developed markets simply does not make sense for risk adjusted returns on a portfolio. Disclosure: I am/we are long SCHF, SCHB, VTI. (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. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.

Nigeria’s Diversified GDP Offsets Oil Price Risk

Summary Nigeria’s GDP is extremely diversified, offsetting the risks of the current low price of oil, which has attributed to a sharp decline in the Global X MSCI Nigeria ETF. The main strengths of the ETF include the construction and banking industries, while the consumer products industry is characterized by high valuation and low growth. The sharp drop in the fund’s price since late November has created low valuation, and consequently a buy opportunity. I remain optimistic about Nigeria’s economic future, despite the fact that oil has plunged to a 6.5 year low. Citigroup even says that there is a 90% chance that oil will drop closer to $30/barrel soon . The impact of the declining price of oil has resulted in a significant decline of the Global X MSCI Nigeria ETF’s(NYSEARCA: NGE ) stock price, and this trend is certain to continue if the price of oil declines further. As 70% Nigeria’s government revenue and 90% of its export earnings come from oil exports , its struggle in a low price oil environment is inevitable. This can be seen historically in the decline of this ETFs price since late 2014, as well as examining Nigeria’s economic development since 1999 , when oil prices began to increase to an all time high by 2008. Moreover, Boko Haram can be seen as a threat to the fund’s performance, as it has previously also been responsible for a decline in the fund’s price. NGE data by YCharts However, I still take a bullish view on Nigeria on the basis of a newly emerging diversified GDP, that is not completely dependent on oil revenue; oil exports account for only 14% of the country’s GDP. The country’s Annual GDP growth is projected to increase from its current level of 2.57 to 3.61 by the 2nd quarter of 2016. The key strength of Nigeria is its banking industry, which is the second largest, only outsized by South Africa. Recent financial performance of the holdings in this industry, as well as their extremely low valuation, further edifies the value of this fund. The growth, financial performance, and current valuation of the construction industry can also be seen as a positive driver for this fund, as Nigeria is one of two countries that is projected to have higher construction growth than China. The consumer products industry is a hot topic in Nigeria, as consumption in Nigeria has been on the rise. I am, however, concerned with the future outlook of this industry, due to its relative high valuation and slowed growth in net income. Overall, a low oil price environment has created a buy opportunity for Nigeria, and the new diversified economy is strong enough to continue thriving. However, an increase in the price of oil in the future is necessary for full reconciliation of the fund’s price. Industry Specific Performance Each industry achieved the following level of growth in net income between 2012 and 2014 ; these calculations are based on the average growth of the fund’s top 10 holdings: Consumer Products Industry: 5.3% decline Construction Industry: 65.8% growth Banking Industry: 57% growth As of June this year, the average valuation for the industry was as follows: Consumer Products Industry: P/E=50.5 Construction Industry: P/E=14.9 Banking Industry: P/E=5.8 Therefore it is easy to make the following industry generalizations: The consumer products industry can be characterized as being in a bubble, and having disappointing financial growth. Its high valuation and low growth presents a minor threat to the fund’s performance. The construction industry can be characterized as having attractive valuation and substantial growth. It can be considered one of the positive drivers of the fund. The banking industry had substantial growth and has extremely low valuation. It can be considered the core competency of the fund. If there were Nigerian banking ADRs, then I would recommend solely investing in them rather than investing in this ETF. Consumer Products Industry 2015 Outlook: High Valuation with Moderate Growth Projected 1. During the 2nd quarter of 2015 , Nigerian Breweries PLC’s net revenue grew by 13% YoY and it also had 24% growth in EPS. Consequently, the company is now more attractively valued, as its P/E is now 21.7; its P/E in June was 26.3. 2. Nestle Nigeria’s net revenue declined by 17.6% YoY in March 2015, and the company’s profit decreased by 103% during this time as well. Its current P/E is 39.7 , which is slightly higher than its P/E of 35.9 in June. 3. Guinness Nigeria PLC’s net income declined by 12.2% YoY in March of 2015. Its current P/E is 61.2 , a drastic improvement from its P/E of 89.3 during June. Overall the consumer products industry can be considered a weakness of this fund, with an average P/E of 40.9, and disappointing growth during 2015. (click to enlarge) Source: Trading Economics The appeal of the consumer products industry in Nigeria is very obvious, given the substantial increase in consumer spending since 2012. The consumer products industry does have an overall favorable outlook between now and the 2nd quarter of 2016 : Consumer confidence most recently decreased by 12.4%, but is projected to decrease by 10% YoY during the 2nd quarter of 2016. Consumer spending is projected to increase at a modest rate of 2.3% during the next twelve months. Disposable personal income is projected to increase by 9.5% Overall the consumer products industry holdings are not ideal, but do not offset the appeal of the fund as a whole. Approximately 30% of the fund’s assets invest into this industry, providing the opportunity for the fund to benefit from the relative strengths of other industries. Despite disappointing growth and high valuation of these holdings, they do have a positive outlook throughout 2016. This fact, coupled with the positive industry outlook for the next 12 months, provides a somewhat favorable future outlook for these holdings. Reuters projects that Nestle Nigeria PLC’s EPS will increase by 7.6% between December 2015 and December 2016. Reuters projects that Guinness Nigeria PLC’s EPS will increase by 13.8% between December 2015 and December 2016. Reuters projects that Nigerian Breweries PLC’s EPS will increase by 8.9% between December 2015 and December 2016. Construction Industry 2015 Outlook 1. Lafarge Africa’s net income grew by 22% YoY during the 2nd quarter of 2015, reflecting a continued growth trend, although the growth has been slowed when compared to 2014. Consequently it is more undervalued at the moment, with a P/E of 11.42 ; the company’s P/E was 13.3 in June. 2. During June 2015, Dangote Cement’s net revenue rose by 15.94% YoY, and its operating profit grew by 9.3% YoY. Its current P/E is 15.33 , slightly lower than its P/E of 16.5 in June. Overall, the holdings in the construction industry have become cheaper, and were able to achieve substantial growth during 2015. The construction industry can now be viewed even more so as a positive driver for this fund, with a consistent demonstration of high growth and low valuation. However, these companies only account for around 11% of the fund’s total assets. Banking Industry: A Gem for Value Investors 42.16% of the fund’s assets are invested into the banking industry, which is the strongest segment of this fund, due to exceptional financial performance and incredibly low valuation. It is the strength of this industry in particularly that leads me to strongly justify investment into this ETF, amidst the risks associated with low oil prices and politics. Moreover, it is a strong complement to the relatively slower growth and higher valuation of the consumer products industry. 1. Guaranty Trust Bank PLC increased its net income by 34.1% YoY during the 2nd quarter of 2015, which is a substantial improvement from the growth experienced between 2012 and 2014. This has consequently created even lower valuation, as the company currently has a P/E of 5.45 . 2. Zenith Bank PLC increased its profit after tax by 12.1%, which is significant to note as its net income fell by -0.9% between 2012 and 2014. Its valuation is also substantially more attractive, as its P/E is currently 4.13 . 3. FBN Holding PLC had a 4.9% YoY increase in its profit after tax during the 1st quarter of 2015. Its P/E has now dropped even lower to 2.25 . 4. Stanbic IBTC Holdings PLC did not fare well during 2015, with a 52% YoY decline in Profit after tax during June 2015. Its net income previously grew by 230.3% between 2012 and 2014. This company is no longer listed in the top 10 fund holdings, indicating that less than 4% of the fund’s assets invest in this company. The company’s P/E is currently 7.98. 5. Ecobank Transnational Inc.: During the 1st quarter of 2015 , the company’s profit after tax rose by 65% YoY. The company’s P/E is currently 5.12 . Four out of five of the holdings in the banking industry were able to drastically increase their bottom line, and now consequently have substantially lower valuation; the average P/E for these five holdings is 5. This industry has demonstrated consistent financial performance, and is clearly being unfairly harmed by the low oil price environment. Therefore, it can be said that the low price of oil has created a substantial buy opportunity for the banking industry in Nigeria, and consequently the Global X MSCI Nigeria ETF, which invests 42.16% of its assets in the industry. What if Oil Prices Drops Further? The fund’s price has consistently declined from its 52 week of 15.56, due to the decline of oil prices beginning in late 2014. Consequently, the fund now currently has a P/E of 8.8, a far cry from the valuation of other ETFs. It is clear to see that the financial performance of the companies that the fund invests into has been exceptional, and that Nigeria has developed a new economy that is not entirely oil dependent. While it appears that oil may drop closer to $30/barrel in the future, this should not be viewed as a long term threat. Waiting for a further drop in the fund’s price, when the price of oil declines further, would be a wise endeavor. However, the takeaway is that this fund has massive upside potential once oil prices recover, and that most of the companies have fared well amidst low oil prices. The consequent irrational drop in the fund’s price has created a valuation paradise situation, for investors willing to risk investing in Nigeria. I first published an article stating my bull thesis for Nigeria when the fund was trading at 9.73; its price is lower now, but so is its valuation. Conclusion Nigeria is an excellent long term buy at the moment, with an inevitable rebound once oil prices recover. However, the country’s GDP is now diversified, and company’s in the construction and banking industry particularly have had exceptional financial performance amidst low oil prices. A further drop in the fund’s price due to declining oil prices would create even more attractive valuation. Regardless of the timing or price of the buy, a long term approach to Nigeria would be a wise endeavor for investors. My main concern is the high valuation and low growth of the consumer products industry, but this can not be avoided since the none of the fund’s holdings are listed on US exchanges. The Global X MSCI Nigeria ETF is holistically an excellent pick for investors who are willing to hold it long term, and profit from Nigeria’s economic growth. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.

Persistent Solar And Oil Correlation Presents Huge Opportunities

Summary Solar continues to be heavily correlated with oil in the stock market despite the fact that these two industries are not in competition with each other. The solar market’s recent downturn, likely influenced by falling oil prices, offers investors a huge chance to profit given that solar fundamentals have been stronger than ever. The solar industry has been recording record growth numbers and improving margins, of which have not been fully reflected in the stock market. No matter how many times it has been stated/proven that solar and oil have almost no real world connection, a large stock market correlation continues to exist between these two industries. The solar sector has followed the price movements of oil rather closely over the past year, which has not be pleasant for solar investors. In fact, the Guggenheim Solar ETF (NYSEARCA: TAN ), which captures the broader solar market, experienced a precipitous drop last year at almost exactly the same time that oil began its decline. The ETF then subsequently experienced an upsurge at around the time when oil prices started recovering. Oil prices have collapsed once again over the past few months, which has pushed solar stocks down once again. While solar and oil are not in direct competition, the market correlation between these two stocks is surprisingly strong. This irrational coupling of solar and oil presents some enormous investment opportunities, as the general solar market is incredibly undervalued at the moment. Despite the fact that solar fundamentals are stronger than ever, with leading solar companies generally reporting record growth numbers and growing margins, the solar sector continues to experience downward pressure. Although solar and oil have very little real world connection, oil prices continue to influence solar company valuations to an extremely high degree. This chart depicts the Guggenheim Solar ETF’s price movements along with those of crude oil. Massive Opportunity The recent drop in leading solar names like SunPower (NASDAQ: SPWR ), SunEdison (NYSE: SUNE ), SolarCity (NASDAQ: SCTY ), and Trina Solar (NYSE: TSL ), represents a large investment opportunity. Given that a sizable percentage of these stock declines are likely due to the solar market’s irrational correlation with oil, there is still significant room for growth. In fact, the stock price movements of these companies have almost nothing to do with their actual fundamentals. Trina Solar and SolarCity, for instance, continue to report record growth numbers and yet have declined by ~one-third since oil price started declining again. Even First Solar (NASDAQ: FSLR ), which blew out expectations in its last earnings report, has experienced a slight decline in this period. It is clear that this solar-oil coupling is not going away anytime soon, which makes for great buying opportunities in the solar sector. The Guggenheim Solar ETF represents a good investment choice for those who are not committed to any single solar company. As this solar and oil correlation will likely eventually disappear as investors becomes more astute, this buying opportunity should be short-lived. Improving Fundamentals The solar PV industry continues to fall precipitously on both the utility-scale and distrbuted fronts. As solar is becoming more economical in a growing number or regions and as world leaders increasingly recognize the long-term potential of solar, global demand is soaring to unprecedented heights. The enormous downward pressures faced by solar stocks this past year would suggests that demand is slowing, and yet the exact opposite has been happening. On top of this, leading solar companies are also experiencing rising gross margins, with number one module manufacturer Trina Solar recently reporting quarterly margins of 20%. Given that all cylinders are firing for both the utility-scale and rooftop solar industries, the solar PV space has never been more exciting. Investors should continue to expect rapid growth in the solar PV arena, especially on the distributed side. While it is easy to place solar and oil in the same market category as they are both forms of energy, it must be remembered that solar has almost nothing to do with oil. Ironically, solar market movements have seen far less correlation with natural gas, which does indeed compete directly with solar. Costs continue to fall on every major solar segment. Source: GTM Research, SEIA Conclusion As long as the irrational solar and oil correlation persists, investors will have large opportunities to profit. With the Guggenheim Solar ETF at a two-year low, the solar sector is set for a turnaround. Despite the fact that the solar industry was still recovering from the industry’s most devastating solar glut two years ago, solar companies during that time had comparable valuations to those of present day solar companies. Investors can clearly profit from the current solar environment given the psychological link between solar and oil. In the inevitable scenario in which solar and oil decouple, solar stocks will likely surge. Disclosure: I am/we are long SCTY. (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.