Tag Archives: investing

Fixed Income – Now Is Not The Time

The Seeking Alpha ETF Investing Guide I recently reviewed the Seeking Alpha Investing Guide and decided to allocate part of my portfolio to a core portfolio of ETFs, similar to that suggested by the guide. I do not intend to completely switch course from my current allocation but to set up a separate core portfolio of ETFs and to allocate a majority of my investments to this Core ETF portfolio over time. After reviewing the investing guide, I drafted a procedure for implementing the suggestions of the guide. Currently, I am reviewing each of the suggested ETFs to determine which to buy. Readers that have read the articles on the first five recommended ETFs are aware that I plan to invest in the sectors that they represent. This article focuses on the three recommended ETFs from the fixed income portion of the Core ETF portfolio: iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEARCA: LQD ) PowerShares 1-30 Laddered Treasury Portfolio ETF (NYSEARCA: PLW ) Schwab U.S. TIPS ETF (NYSEARCA: SCHP ) At this point, I am not inclined to invest in these ETFs, or the fixed income sectors these represent. I expect to keep funds I have allocated for this portion of my portfolio, invested in shorter-term bank certificates of deposit (cd’s) that offer similar interest rates with what I believe is far less risk of capital loss. Investment synopsis of the three fixed income funds The iShares iBoxx $ Investment Grade Corporate Bond ETF seeks to track the investment results of an index composed of U.S. dollar-denominated, investment grade corporate bonds. LQD provides exposure to a broad range of over 1000 U.S. investment grade corporate bonds. LQD can be used by investors seeking stability and income. The PowerShares 1-30 Laddered Treasury Portfolio is based on the Ryan/NASDAQ U.S. 1-30 Year Treasury Laddered Index. The Fund will normally invest at least 90% of its total assets in securities that comprise the Index. The Index measures the potential returns of the U.S. Treasury yield curve based on approximately 30 equally weighted U.S. Treasury issues with fixed coupons, scheduled to mature in a proportional, annual sequential (“laddered”) structure. The Schwab U.S. TIPS ETF goal is to track as closely as possible, before fees and expenses, the price and yield performance of the Barclays U.S. Treasury Inflation Protected Securities (( OTC:TIPS )) Index (Series L). SCHP provides a convenient, low-cost way to capture the performance of U.S. Treasury Inflation Protected Securities. SCHP provides exposure to a portfolio of treasury securities designed to offer protection from the negative impact of inflation while assuming exposure to interest rate risk. US treasury 10 year interest rate chart – 1962 to present Click to enlarge Source: Yahoo Finance (2/13/2016) The chart above shows US treasury 10 year interest rates since 1962. After peaking in 1981, interest rates have fallen steadily to their current rate of 1.75%. Interest rates were slightly lower for a short period in 2012 but other than that, they are at the lowest point over the 50 plus years shown. While I have felt the same way for some time, as interest rates have continued to fall, I would not be comfortable investing in medium or long-term bonds at current interest rates. In the past, I have found that when I make investments that I am not comfortable with, I have a very hard time holding them. Performance of LQD, PLW and SCHP compared to the S&P 500 since June 2002 Click to enlarge Source: Yahoo Finance (2/13/2016) The chart above shows the performance of the three fixed income ETFs versus the S&P 500. LQD had the longest history going back to 2002 and over this time is up 11% versus the S&P up 103%. The chart does not include interest or dividends, which would improve the relative performance of the fixed income ETFs versus the S&P 500. Performance of LQD, PLW and SCHP compared to the S&P 500 – 5 year chart Click to enlarge Source: Yahoo Finance (2/13/2016) The chart above shows the performance of the three fixed income ETFs versus the S&P 500 over the last five years. Again the S&P 500 has outperformed the 3 fixed income ETFs and again this chart does not include interest or dividends, which would improve the relative performance of the fixed income ETFs versus the S&P 500. ETFs in the US corporate bond category ETFs in the US treasury bond broad duration category ETFs in the US treasury inflation protected category Source: Seeking Alpha (as of 2/13/2016) Above are lists of the top 10 fixed income ETFs in each of the categories represented by the three recommended ETFs. Each category is listed by assets under management (AUM). As the tables show, there are a number of alternatives that interested investors can consider in each category, except the “treasury bond broad duration” category which only lists 2 ETFs on Seeking Alpha’s ETF Hub. Fund characteristics iShares iBoxx $ Investment Grade Corporate Bond ETF PowerShares 1-30 Laddered Treasury Portfolio ETF Schwab U.S. TIPS ETF Weighted average duration (years) 7.98 10.34 7.5 Weighted average maturity (years) 12.28 15.84 8.3 SEC yield (%) 3.73 2.49 0.02 Expense ratio (%) 0.15 0.25 0.07 Source: iShares by BlackRock, Powershares and Schwab (as of 12/31/2015) The fund characteristics are shown in the table above. I consider these characteristics versus a bank certificate of deposit (cd). Bankrate.com currently shows a one year cd at 1.30% and a five year cd at 2.27%. I do not feel that the potential yield improvement justifies the additional risk associated with the additional time to maturity, duration and the default risk of the corporate bonds. Other investors may be in a different position and see this differently. Conclusion Readers that have read the articles reviewing the first five recommended ETFs from Seeking Alpha’s ETF Investment Guide are aware that I plan to invest in the sectors that these ETFs represent, either in the recommended ETF or a very similar ETF. I do not feel the same way about the recommended fixed income ETFs, iShares iBoxx $ Investment Grade Corporate Bond ETF, PowerShares 1-30 Laddered Treasury Portfolio ETF and Schwab U.S. TIPS ETF. After peaking in 1981, US ten year treasury bond interest rates have fallen steadily to their current rate of 1.75%. Although others may feel differently, I would not be comfortable investing in ETFs made up of medium or long-term bonds at current interest rates. In the past, I have found that when I make investments that I am not comfortable with, I have a very hard time holding them. At this point, I am not inclined to invest in the three recommended fixed income sectors or ETFs: iShares iBoxx $ Investment Grade Corporate Bond ETF PowerShares 1-30 Laddered Treasury Portfolio ETF Schwab U.S. TIPS ETF I expect to keep funds I have allocated for this portion of my core ETF portfolio, invested in shorter-term bank certificates of deposit (cd’s) that offer similar interest rates with what I believe is far less risk of capital loss. I expect to review this periodically and consider investing in these ETFs and sectors when long-term interest rates have increased from current levels. Addendum Seeking Alpha’s Investment Guide Core ETF Portfolio ETF Ticker Fund Name Fund Description Expense Ratio VOO Vanguard S&P 500 ETF Large cap US stocks 0.05% IJH iShares Core S&P Mid Cap ETF Mid cap US stocks 0.12% VTWO Vanguard Russell 2000 ETF Small cap US stocks 0.15% IEFA iShares Core MSCI EAFE ETF Multi cap foreign developed market stocks 0.12% IEMG iShares Core MSCI Emerging Markets ETF Multi cap emerging market stocks 0.18% LQD iShares iBoxx $ Investment Grade Corporate Bond ETF US investment grade corporate bonds 0.15% PLW PowerShares 1-30 Laddered Treasury Portfolio ETF US Treasuries 0.25% SCHP Schwab U.S. TIPS ETF US TIPS 0.07% VNQ Vanguard REIT Index ETF US REITs 0.10% DBC PowerShares DB Commodity Index Tracking ETF Broad commodities 0.85% Simply Investing – Philosophy Establishing a core portfolio in well-diversified, low expense ETFs, held for the long term, is a good idea for most all investors. The core of a small portfolio can start off as simple as one well diversified global ETF with a low expense ratio, like Vanguard Total World Stock ETF (NYSEARCA: VT ). Typically, as the portfolio grows, the core of the portfolio would include exposure to the ten asset classes listed above. There are four steps needed to set up an efficient investment plan. The decisions and actions required to set up the plan and purchase the ETFs can be done in about 4 hours (see the further reading section below for more details): Decide on an asset allocation plan among the ETFs in the core portfolio. Open an online brokerage account with a linked online bank account. Determine if you will invest all your investment funds at once or over a period of time. Determine which investments to buy in your taxable and tax deferred accounts. The core ETF portfolio outlined above, after tax, should significantly outperform either individual stock picking or a portfolio managed by a financial advisor. Over the typical investors time horizon of 40+ years, the expected advantage of this core ETF portfolio is staggering. Investors that enjoy the investment analysis process and are willing to spend the time to analyze and invest in individual stocks or sectors can still do this. I believe, the majority of these investors should still set up a core ETF portfolio, but can allocate a small, fixed percentage of their portfolio to “edge” positions, which offer additional risk and opportunity. Further reading ETF Investing Guide – Written by Seeking Alpha’s Founder in 2006 is a great guide for setting up a portfolio of ETFs. Set Up A Core ETF Portfolio Now – Describes the four steps required to implement the suggestions in the ETF Investing Guide. The ETF Investing Guide is made up of 54 articles and takes some time to read and assimilate the information. This article condenses the information from the guide down to four steps that can be completed to set up a core ETF portfolio in around four hours. Disclosure: I am/we are long VT. 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. 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.

Retail ETFs To Watch Ahead Of Q4 Results

The Q4 earnings season has been weak across all sectors with growth harder to come by in a slowing global economy, a stronger U.S. dollar, and weakness in oil. In fact, Q4 may be the third quarter in a row of negative earnings growth. However, with about half of the Q4 reports yet to come, retail is faring better than many other sectors. Total earnings for the retail sector that has reported so far are up 6.8% on 11.8% revenue growth. Notably, revenue growth of this sector has been the best so far this season. This is especially true given the robust numbers from retailers like Whole Foods Market (NASDAQ: WFM ), Yum! Brands (NYSE: YUM ) and Michael Kors (NYSE: KORS ). The strength is likely to continue when the big retailers like Wal-Mart (NYSE: WMT ) and Nordstrom (NYSE: JWN ) reports earnings results tomorrow. Other major retailers such as Home Depot (NYSE: HD ), Macy’s (NYSE: M ), Lowe’s (NYSE: LOW ), Target (NYSE: TGT ), Gap Inc. (NYSE: GPS ), and Kohls (NYSE: KSS ) release earnings reports next week. Solid Trends Though consumer spending, which accounts for more than two-thirds of U.S. economic activity, moderated in the final quarter of 2015 buoyed by more savings, it started regaining momentum lately as consumers began to reap the benefits of a slow but recovering economy, better job and wage prospects, and a lower oil price. As a result, retail sales edged up 0.2% in January, better than the market’s expectation of 0.1% growth. Further, U.S. consumer confidence is improving, as measured by the Conference Board. The Consumer Confidence Index jumped to 98.1 in January from a revised 96.3 in December while the index of consumer expectations for the next six months climbed to 85.9 in January from 83. Moreover, the upside to this segment could be confirmed by the Zacks Industry Rank, as three-fifths of the industries falling under this segment have a solid Rank in the top 42% at the time of writing. ETFs to Buy Given encouraging fundamentals and a spate of earnings releases this week and in the next, investors should carefully watch the movement in retail stocks and could consider a broad play via ETFs in order to take advantage of the power-packed earnings releases seen so far and solid trends. For this, looking at some of the top-ranked retail ETFs having a Zacks ETF Rank of 1 (Strong Buy) or 2 (Buy) could be excellent picks as these funds have potentially superior weighting methodologies, which could allow them to outperform in the coming months. SPDR S&P Retail ETF (NYSEARCA: XRT ) This product tracks the S&P Retail Select Industry Index, holding 100 securities in its basket. It is widely spread across each component as none of these holds more than 1.48% of total assets. Small cap stocks dominate nearly three-fifths of the portfolio while the rest have been split between the other two market cap levels. In terms of sector holdings, apparel retail takes the top spot at one-fourth share while specialty stores, automotive retail and Internet retail also have double-digit allocations each. XRT is the most popular and actively traded ETF in the retail space with AUM of about $404.5 million and average daily volume of more than 4.3 million shares. It charges 35 bps in annual fees and gained 3.8% over the past one month. The fund has a Zacks ETF Rank of 1. Market Vectors Retail ETF (NYSEARCA: RTH ) This fund tracks the Market Vectors US Listed Retail 25 Index and holds about 26 stocks in its basket. It is a large cap centric fund and is heavily concentrated on the top 10 holdings with 64.1% of assets. The largest allocations go to Amazon.com (NASDAQ: AMZN ), Home Depot and Wal-Mart. Sector wise, specialty retail occupies the top position with less than one-third share, followed by double-digit allocation to Internet and catalogue retail, hypermarkets, drug stores, departmental stores and healthcare services. The fund has amassed $151 million in its asset base while average daily volume is moderate at about 77,000 shares. Expense ratio came in at 0.35%. The product lost 0.7% over the past one month and has a Zacks ETF Rank of 2. PowerShares Dynamic Retail Portfolio ETF (NYSEARCA: PMR ) This retail fund provides a diversified exposure across various market caps with 45% in large caps, 43% in small caps and the rest in mid caps. This is easily done by tracking the Dynamic Retail Intellidex Index. The fund has accumulated just $21.4 million in its asset base while it trades at a light volume of under 5,000 shares a day. The ETF charges 63 bps in fees per year. In total, the product holds 29 securities with none accounting for more than 6.12% of assets. In terms of industrial exposure, specialty retail takes the top spot at 48%, while food retail (19%) and drug stores (12%) round off the top three positions. PMR is relatively flat over the past one month and has a Zacks ETF Rank of 2. Original Post

Insurance ETFs Benefiting From Decent Q4 Earnings

Though the financial sector has been on a rough ride this year, especially on plunging oil prices, global growth concerns and reduced likelihood of frequent interest rate hikes, Q4 earnings are faring well so far. Total earnings for 77.9% of the sector’s total market capitalization are up 5.3% on 0.7% higher revenues. This is better than earnings growth of 3.6% and revenue decline of 1.3% for the group of the same companies reported in Q3. As much as 66.2% of the companies beat earnings estimates and 60.8% beat on the top line compared with earnings and revenue beat ratios of 55.4% and 44.6%, respectively in Q3. In particular, earnings from the insurance industry have been strong with most players managing to beat either our earnings or revenue estimates. Earnings at Chubb Corp (NYSE: CB ) surpassed our estimates while Prudential Financial (NYSE: PRU ) and American International (NYSE: AIG ) topped revenues. Aflac Inc. (NYSE: AFL ), Allstate (NYSE: ALL ) and Travelers (NYSE: TRV ) surpassed our estimates for both the top and the bottom lines while MetLife (NYSE: MET ) missed on both (read: Buy the Dip in These Undervalued Sector ETFs & Stocks ). Insurance Earnings in Focus Earnings at one of the leading property and casualty insurer – Chubb – outpaced our estimate by 4.39% but decreased 3.6% from the year-ago quarter. However, revenues of $4.73 billion missed the Zacks Consensus Estimate of $4.77 billion. Another property and casualty insurer and an industry bellwether, Allstate , topped the Zacks Consensus Estimate by 27 cents reporting earnings of $1.60, which declined 7% from the year-ago quarter. Revenues declined 0.8% year over year to $8.94 billion and edged past the Zacks Consensus Estimate of $8.01 billion. Aflac , the seller of supplement health insurance, posted earnings per share of $1.56, beating our estimate by 8 cents and improving 20.9% year over year. Revenues declined 3.5% year over year to $5.32 billion but were ahead of our estimate of $5.24 billion. Earnings of $2.93 per share reported by personal property and casualty insurer Travelers trumped the Zacks Consensus Estimate by 19 cents but decreased 6% from the year-ago quarter. Revenues slid 2% year over year to $6.7 billion and were well ahead of our estimate of $6.63 billion. However, MetLife , the U.S. life insurer behemoth, reported disappointing earnings of $1.23 per share, which lagged the Zacks Consensus Estimate of $1.36 and declined 11% from the year-ago quarter. Revenues also fell 6% year over year to $17.11 billion and were well below our estimated $17.45 billion. On the other hand, PRU , the second-largest U.S. life insurer, also missed our earnings estimate by a huge 33 cents and declined 8.5% year over year. Revenues plunged 16.3% year over year to $13.2 billion but surpassed our estimate of $11.6 billion. The largest commercial insurer in the U.S. and Canada, AIG lagged the earnings estimate but beat on revenues. Loss per share of $1.10 is wider than the Zacks Consensus Estimate of a loss of 90 cents. In the year-ago quarter, the company had reported earnings of 97 cents per share. However, revenues of $13.49 billion came above our estimate of $12.84 billion. ETFs in Focus Given decent Q4 earnings, insurance ETFs have fared well, losing less than the other corners of the financial space from a one-month look. This is especially true as these funds lost in the range of 2.5-4% compared to the loss of 6.5% for the Financial Select Sector SPDR ETF (NYSEARCA: XLF ) and 8% for the SPDR S&P Bank ETF (NYSEARCA: KBE ) . Investors looking to gain exposure to the insurance corner of the market segment in a diversified way may consider the following ETFs. SPDR S&P Insurance ETF (NYSEARCA: KIE ) This fund follows the S&P Insurance Select Industry Index and offers an equal weight exposure to 49 stocks, suggesting no concentration risk. None of the securities holds more than 2.61% of total assets. More than one-third of the portfolio is allocated to the property and casualty insurance sector while life & health insurance accounts for 21.4% share. The ETF has managed $412.7 million in its asset base and trades in a moderate average daily volume of about 134,000 shares. The product has an expense ratio of 0.35% and lost nearly 2.5% over the past one month. It has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook. iShares U.S. Insurance ETF (NYSEARCA: IAK ) With AUM of $97.3 million, this product tracks the Dow Jones U.S. Select Insurance Index and charges 44 bps in annual fees. Volume is light, trading in roughly 31,000 shares per day. In total, the fund holds 61 securities in its basket with the largest allocation going to American International at 12.1%, closely followed by Chubb at 10.4%. Other firms hold less than 7.8% of assets. From an industry look, property & casualty insurance accounts for 46.7% share while life & health insurance and multiline insurance round off the top three with double-digit exposure each. IAK is down 3.8% from a one-month look and has a Zacks ETF Rank of 3 with a Medium risk outlook. PowerShares KBW Insurance Fund (NYSEARCA: KBWI ) This fund tracks the KBW Nasdaq Insurance Index and holds 24 securities in its basket. Each firm holds less than 8.8% share with TRV, AIG, MET, PRU and ALL being among the top 10 holdings. While insurance makes up for 96% of the portfolio, consumer finance and banks take the remainder. The product has amassed about $11.9 million in AUM while volume is paltry with about 1,000 shares exchanging hands a day. The ETF charges an annual fee of 35 bps and shed 3.5% in the trailing one-month period. It has a Zacks ETF Rank of 3 with a High risk outlook. Link to the original post on Zacks.com