Tag Archives: investing

3 Dividend ETFs With Yields Over 3% And 1 Coming Respectably Close

Summary These four dividend ETFs have similar expense ratios but substantially different holdings. DVY looks like the ETF with the highest chance to go on sale in December if the Fed Funds rate is increased. DVY and DTN have zero exposure to real estate which may be favorable for investors concerned about income taxes on REITs. One of the areas I frequently cover is ETFs. I’ve been a large proponent of investors holding the core of their portfolio in high quality ETFs with very low expense ratios. The same argument can be made for passive mutual funds with very low expense ratios, though there are fewer of those. In this argument I’m doing a quick comparison of several of the ETFs I have covered and explaining what I like and don’t like about each in the current environment. The Four ETFs Ticker Name Index QDF FlexShares Quality Dividend Index ETF Northern Trust Quality Dividend Index DHS WisdomTree Equity Income ETF WisdomTree High Dividend Index DTN WisdomTree Dividend ex-Financials ETF WisdomTree Dividend ex-Financials Index DVY iShares Select Dividend ETF Dow Jones U.S. Select Dividend Index By covering several of these ETFs in the same article I hope to provide some clarity on the relative attractiveness of the ETFs. One reason investors may struggle to reconcile positions is that investments must be compared on a relative basis and the market is constantly changing which will increase and decrease the relative attractiveness. For investors that want to see precisely which assets I’m holding, I opened my portfolio near the end of November. Dividend Yields I charted the dividend yields from Yahoo Finance for each portfolio. The FlexShares Quality Dividend Index ETF is the weakest of the batch on dividend yields, but I wouldn’t consider 2.78% even remotely bad. That is a very respectable dividend yield for an equity portfolio that is not focused on carrying REITs, BDCs, or other very high yield investments. The two WisdomTree funds both come in with very high dividend yields. (click to enlarge) Expense Ratios These funds are all extremely similar on expense ratios. (click to enlarge) Sector Even if an investor was going to focus on dividend yields, there are three funds with yields that are materially above 3%. The expense ratios are also very similar which reinforces that investors need to be looking at the sector allocations to make the determination of which ETF makes the most sense for them. I built a fairly nice table for comparing the sector allocations across dividend ETFs to make it substantially easier to get a quick feel for the risk factors: (click to enlarge) First Glance I imagine most readers looking at that glance first noticed the exceptionally tall purple bar representing the utility allocation for DVY. This is a dividend growth fund that has a fairly huge allocation to the utility sector. DVY DVY uses a very heavy allocation to utilities. For investors that already build their own utility positions in their portfolio, this wouldn’t be a great fit since it would double up on the exposure. On the other hand, for the investor that does not have utility exposure in their portfolio, the ETF could be a great fit. The utility sector often demonstrates some correlation with bonds because investors treat it as an alternative source of income. This may be a fairly volatile sector going into December because investors are expecting the Federal Reserve to raise rates and if a rate increase is confirmed it could send bond yields higher and utility stocks would be expected to fall at the same time so that the dividend yields would increase. I won’t be surprised if the Federal Reserve raises rates in December, but if they manage to raise rates 5 more times within the next year and a half I would be quite surprised. I don’t expect great results on the increase in rates, so I don’t think the following years will see further increases. I wouldn’t be surprised if see the Federal Reserve’s short term rate fall back to 0% before it makes it up to 1%. DTN and DVY In addition to being heavy on utilities, DVY joins DTN in having no allocation to real estate. I don’t mind the exclusion of real estate since I expect many investors may want to use this kind of dividend growth ETF in a taxable account while pushing their REIT exposure into a tax exempt account. For an investor putting a large part of their portfolio in either of these ETFs, it would be reasonable to look for some exposure to REITs somewhere else in the portfolio. I’m using equity ETFs for around 20% to 25% of my portfolio and I may look to increase that in December and going into next year if the REITs are on sale following an increase in the Fed Funds rate. DTN also has virtually no exposure to the financial services sector. Since their name includes “ex-Financials”, I think that makes a great deal of sense. DTN would fit best in a portfolio where the investor was manually choosing their own bank stocks and REITs for the portfolio. QDF QDF offers the lowest dividend yield and when I look at the sector allocations it appears fairly aggressive for a dividend portfolio. The allocation to utilities and consumer defensive are both fairly low and in both cases QDF has the lowest allocation in the portfolio. In my opinion, the best scenario for QDF relative to the other ETFs would be a longer bull market where more aggressive allocations would be rewarded. Compared to an actual aggressive allocation, this would be fairly tame but when compared to other high yield portfolios it is less defensive. What do You Think? Which dividend ETF makes the most sense for you? Do you use DVY to get your utility allocation, or do you pick your own utilities (or use a different ETF)? Is the dividend yield on DVY or DTN enough to bring you into the ETF? The only major weakness I see for this batch of ETFs is that the expense ratios are higher than I would like to see. However, when choosing between these four ETFs the ratios are very comparable.

PXE: An Outperforming Energy Exploration And Production ETF

Summary Energy, particular exploration and production stocks, have slid over the past year. PXE has thoroughly crushed its competitor XOP and has also outperformed XLE over the past five years. PXE contains a number of refining companies as top holdings which might help it weather this period of low oil prices. Introduction To state that energy-related sectors have done poorly recently would be an understatement. Since the recent high reached on Jun 23., 2014, the benchmark Energy Select Sector SPDR ETF (NYSEARCA: XLE ) has fallen by a good -34.0%. The JPMorgan Alerian MLP Index ETN (NYSEARCA: AMJ ), a basket of midstream MLPs, has performed slightly worse, at -43.0%. However, the worst-performing energy-related stock class over this time period has undoubtedly been those whose main business is focused on the exploration and production (E&P) of oil and gas, with the SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA: XOP ) falling by a whopping -58.0% since mid-June last year. This price action occurred over a time period in which the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) actually rose by 9.69%. Obviously, the woes in the energy sector have been due to the collapse in oil prices that transpired over the past year. Moreover, it is not difficult to understand why XOP has performed so much worse than the other two energy funds, XLE and AMLP. The two top holdings of XLE, Exxon Mobil (NYSE: XOM ) and Chevron (NYSE: CVX ), both have significant downstream businesses that could, in some circumstances, actually benefit from lower oil prices, and they also possess exceptional balance sheets that could aid them through this difficult time. Meanwhile, the midstream MLPs of AMJ, the largest of which are Enterprise Products Partners (NYSE: EPD ) and Energy Transfer Partners (NYSE: ETP ), are considered to be relatively less impacted by price of the commodity itself as their profit is mainly derived from the fee-based transport and distribution of fuels. On the other hand, the fortunes of the E&P, also known as upstream, companies in XOP are more or less directly tied to the price of crude oil. So is XOP a good buy right now? Clearly, if you believe that oil prices will remain low, then XOP would be an ETF to avoid. On the other hand, given that E&P companies have been among the most beaten-up stocks in the energy sector, any reversal in crude oil prices could send these XOP soaring like a compressed spring. What this article intends to do is actually to introduce an ETF that is related to XOP, but has historically performed much better. Introducing the PowerShares Dynamic Energy Exploration & Production Portfolio ETF (NYSEARCA: PXE ) PXE does not appear to be a well-known ETF on Seeking Alpha. Only 784 Seeking Alpha users have PXE in their portfolio, compared to 5,597 for XOP. The last focus article on PXE was in Dec. 2014. However, the lack of following for PXE is undeserved. Despite the recent turmoil in the energy sector, the five-year total return performance for PXE is still positive at +23.47%, absolutely crushing XOP at -28.2%. Notably, PXE still returned significantly greater than XLE (+8.42%). PXE Total Return Price data by YCharts Some funds outperform in bull markets because they take greater amounts of risk, and thus these same funds will underperform on the downside as well. Is this true for PXE? As can be seen from the chart below, its total return since the XLE peak on Jun 23rd. 2014 (-35.8%), while negative, is still superior to that of XOP (-58.0%) and AMJ (-43.0%) and only slightly worse than that of XLE (-34.0%). The investment mandate of PXE is explained on the fund website : The PowerShares Dynamic Energy Exploration & Production Portfolio (NASDAQ: FUND ) is based on the Dynamic Energy Exploration & Production IntellidexSM Index (Intellidex Index). The Fund will normally invest at least 90% of its total assets in common stocks that comprise the Index. The Intellidex Index thoroughly evaluates companies based on a variety of investment merit criteria, including: price momentum, earnings momentum, quality, management action, and value. The Underlying Intellidex Index is composed of stocks of 30 U.S. companies involved in the exploration and production of natural resources used to produce energy. These companies are engaged principally in exploration, extraction and production of crude oil and natural gas from land-based or offshore wells. These companies include petroleum refineries that process the crude oil into finished products, such as gasoline and automotive lubricants, and companies involved in gathering and processing natural gas, and manufacturing natural gas liquid. The Fund is rebalanced and reconstituted quarterly in February, May, August and November. Further information regarding the proprietary Intellidex methodology can be found here . Fund statistics The following table shows some of the pertinent fund details for PXE, XOP and XLE. Data are from Morningstar unless otherwise noted. PXE XOP XLE Yield 1.95% 1.97% 2.92% Expense ratio 0.64% 0.35% 0.14% Inception Oct. 2005 Jun. 2006 Dec. 1998 AUM $106M $1.66B $11.73B Avg. Volume 36.5K 10.8M 19.7M Morningstar rating **** ** ***** No. holdings 30 63 40 Annual turnover 140% 44% 5% We can see from the table above that PXE is by far the smallest fund, with only $106M in assets. This makes is less than one-tenth of the size of XOP and less than one-hundredth of the size of XLE. It’s liquidity of 36.5K is also far less than XOP and XLE, although it should be still be sufficient for small or medium investors. The final statistic that sticks out is that PXE has a much higher annual turnover of stocks at 140% than XOP at 44%, which in turn has a much higher annual turnover compared to XLE at only 5%. Holdings So why do I consider XOP to be PXE’s closest benchmark? Notwithstanding the fact that both ETFs have “Exploration & Production” in their names, ETF Research Center indicates that the two funds have 42% of their holdings by weight in common. Notably, 25 out of 30 of PXE’s constituents are also found in XOP. In contrast, PXE and XLE have only 27% overlap by weight, while XOP and XLE have 31% overlap. Thus, PXE and XOP are more similar to each other than either of them are to XLE. The top 10 holdings of PXE are shown in the table below. Company Ticker % Assets EOG Resources Inc (NYSE: EOG ) 5.28 Valero Energy Corp (NYSE: VLO ) 5.27 Phillips 66 (NYSE: PSX ) 5.23 Occidental Petroleum Corp (NYSE: OXY ) 5.13 Marathon Petroleum Corp (NYSE: MPC ) 5.11 Hess Corp (NYSE: HES ) 5.00 Apache Corp (NYSE: APA ) 4.98 Devon Energy Corp (NYSE: DVN ) 4.86 CVR Refining LP (NYSE: CVRR ) 2.93 Northern Tier Energy LP (NYSE: NTI ) 2.87 46.66 As can be seen from the table above, PXE runs a relatively concentrated portfolio, with 46.66% of its holdings in the Top 10. This compares to 19.35% for XOP and 63.41% for XLE, as depicted graphically below. Notably, the three of the top five holdings of PXE, namely MPC, VLO and PSX, are all heavily involved in the downstream refining segment, and whose fortunes are more closely associated with the refining crack spread rather than the price of crude oil itself. As can be seen from the chart below, these three stocks have actually posted positive price returns since the Jun. 23, 2014 peak for XLE. On the other hand, EOG and OXY have been obvious detractors of the fund. EOG Total Return Price data by YCharts Valuation and growth The table below shows various value and growth metrics for PXE, XOP and XLE. Data for all funds are from Morningstar (value metrics including dividend yield are forward looking). PXE XOP XLE Price/Earnings 10.39 16.77 19.07 Price/Book 0.89 0.89 1.42 Price/Sales 0.43 0.48 0.80 Price/Cash Flow 2.54 2.36 5.09 Dividend Yield % 4.26% 2.32% 3.45% Projected Earnings Growth % 10.33 8.62 9.98 Historical Earnings Growth % 13.48 17.56 3.04 Sales Growth % 3.34 5.34 2.82 Cash-flow Growth % 6.60 11.50 7.44 Book-value Growth % 5.48 7.71 6.06 While aggregate metrics for ETFs sometimes have to be taken with a grain of salt (for example, aggregate P/E calculations usually ignore stocks with negative earnings), a first glance reveals that PXE scores highly on its valuation and growth metrics compared to peers XOP and XLE. It has the lowest P/E, P/B (tied), P/S and highest dividend yield compared to the other two funds, and its P/CF is only slightly higher than XOP’s. In terms of growth metrics, all three funds have had healthy growth numbers over the past year (although this is likely to change as lower oil prices begin to drag), and while PXE has lower CF% and BV% growth than the other two funds, its other three growth metrics are comparable. Size In terms of size distribution, PXE is quite similar to XOP except that it has more large-cap stocks and fewer stocks in the other four size categories. Both PXE and XOP contain smaller-capitalization stocks compared to XLE. PXE XOP XLE Giant (%) 0 3.52 38.32 Large (%) 34.99 17.02 42.95 Mid (%) 26.78 32.33 17.71 Small (%) 30.19 33.44 1.02 Micro (%) 8.04 13.68 0 This data is also shown graphically below. Discussion and conclusion The impressive total return performance of PXE relative to its peers suggests that the Intellidex methodology has worked very well for this ETF. Given the Intellidex’s focus on factors including price momentum, earnings momentum, quality, management action, and value, PXE could easily be considered to be a “smart beta” fund, although its inception (in 2005) took place long before this marketing label became popular. The outperformance of PXE over XOP could be potentially attributed to several factors. First, by running a concentrated portfolio of 30 stocks (compared to 63 for XOP), PXE could avoid exposure to stocks that score less highly in its ranking model. On the other hand, XOP applies no filters other than market capitalization and liquidity for inclusion into the fund. Secondly, PXE applies a two-tier weighting system whereby 8 “large” stocks each receive 5% of the total fund weight and 22 “small” stocks each receive 2.73% of the total fund weight. In contrast, XOP basically run an equally-weighted portfolio. This is reflected in XOP’s greater tilt towards smaller-cap stocks compared to PXE (see data above). Given that large-cap energy stocks have generally performed better than small-cap stocks during this energy bear market, it stands to reason that XOP would suffer more than PXE during this time period, all other things being equal. However, the use of factor screening in conjunction with quarterly rebalancing means that PXE has a much higher annual turnover (140%) compared to XOP (44%). So is PXE a good investment right now? Without a crystal ball able to tell the future price of oil and gas, I cannot say with certainty. However, what this analysis does suggest is that if one were to choose an E&P-focused energy ETF, then PXE would be a better bet than XOP. Moreover, with 5 of the fund’s top 10 holdings currently invested in refining stocks (VLO, PSX, MPC, CVRR, NTI), which are less directly affected by commodity prices compared to E&P companies, PXE might weather the storm better than expected.

4 Key Reasons To Consider Market Neutral Investing

Summary The Invesco Quantitative Strategies team believes one way to buffer the effects of market downturns, volatility and rising interest rates is to add market neutral equity strategies to traditional portfolios. The strategies may offer several potential benefits to investor portfolios, including diversification from traditional asset classes, ability to dampen volatility, cushion against equity market declines and boost from rising rates. We believe a market neutral equity strategy can be an excellent diversification tool that enables investors to pursue increased returns from assets that respond differently to changing markets. Low correlation, downside protection and rising rate performance among key benefits By Kenneth Masse, Client Portfolio Manager The market downturn and ensuing volatility in the third quarter of 2015 is a timely reminder about the benefits of diversifying your portfolio with investment strategies that are expected to exhibit little-to-no correlation with the broad equity and bond markets. Moreover, as the US enters the late innings of its current economic growth cycle, many professional and individual investors are expecting lower returns from equities going forward than they’ve enjoyed over the last few years. These lowered expectations are on top of concern about what will happen to investors’ bond holdings when today’s historically low interest rates eventually rise. The Invesco Quantitative Strategies team believes one potential way to buffer the effects of market downturns, volatility and rising interest rates is to add market neutral equity strategies to traditional portfolios, as they potentially offer a unique approach to generating return regardless of the general movements of the equity and bond markets. In this blog, I outline four of the top reasons to consider market neutral equity strategies: 1. They have very low levels of correlation to other asset classes One of the ways investors attempt to manage and mitigate risk is by combining strategies that differ within and across asset classes to help diversify their return pattern over time. Using this approach, investors’ wealth creation is not tied to the fortunes of just one or a few investment options. Since market neutral strategies typically seek to eliminate exposure to the broader market, these strategies have also delivered attractively low levels of correlation, not only to the equity markets, but to other broad asset classes as well. As shown in Figure 1, from January 1997 to August 2015, market neutral strategies had only a 0.18 correlation to equities and a 0.04 correlation to bonds. Market neutral also had low correlation to another popular asset class, commodities, as well as to other segments of the fixed income market, such as leveraged loans and high yield. As investors seek to diversify their holdings in order to lower overall volatility, we believe market neutral strategies should be considered as a way to achieve that goal. Sources: Invesco and StyleADVISOR. (January 1997 – August 2015) BarclayHedge Alternative Investment Database. Past performance is not a guarantee of future results. Investments cannot be made directly into an index. 2. They may offer lower levels of total volatility Another way to potentially mitigate risk across an investment lineup is to include strategies that may offer lower levels of total volatility (variation in portfolio returns). Even if these strategies were perfectly correlated with other investments, their potentially lower total volatility profile could help lower the overall average volatility of the full lineup. Market neutral strategies also may be appealing to investors from this total volatility perspective, as their volatility has tended to be less than the broader equity markets, and in some cases, similar to broad fixed income indexes (see Figure 2). Furthermore, since market neutral returns are expected to be independent of the broader equity market, a spike in market-level volatility may not necessarily mean a spike in market neutral volatility. Sources: Invesco and StyleADVISOR. (January 1997 – August 2015). BarclayHedge Alternative Investment Database. Past performance is not a guarantee of future results. Investments cannot be made directly into an index. 3. They have a history of attractive downside protection during extreme market stress Another often-cited potential benefit of market neutral is that the strategies may offer investors a way to mitigate severe losses during a sharp equity market sell-off. Because these strategies typically have beta exposure to the market that hovers around zero, a big drop (or surge) in equities should not influence the performance of the strategy. This contrasts sharply with traditional, benchmark-centric strategies, which typically have very high levels of market exposure and tend to vary similarly to the broader market. Sources: Invesco and StyleADVISOR. January 1997 – August 2015. BarclayHedge Alternative Investment Database. Past performance is not a guarantee of future results. Investments cannot be made directly into an index. 4. They can provide an opportunity for higher returns in a rising interest rate environment. We believe an increase in the federal funds rate from the US Federal Reserve is inevitable; at this point it’s simply a matter of when and by how much. For market neutral equity strategies, a rise in interest rates – specifically short-term interest rates – can potentially provide a boost to returns. This occurs when market neutral equity strategies short a stock and receive proceeds from that sale. Those proceeds typically earn a rate of return tied to the prevailing short-term interest rate, such as the fed funds rate. When that rate increases, so does the interest earned by market neutral equity strategies on their short sale proceeds Key takeaway We believe a market neutral equity strategy is a valuable complement to a traditional portfolio of stocks and bonds, as well as an excellent diversification tool that enables investors to pursue increased returns from assets that respond differently to changing market conditions. Such characteristics may be important to today’s investors given the recent market downturn, volatility and expectation of rising interest rates. Important information Beta is a measure of risk representing how a security is expected to respond to general market movements. Correlation is the degree to which two investments have historically moved in relation to each other. Volatility measures the amount of fluctuation in the price of a security or portfolio over time. The S&P 500® Index is an unmanaged index considered representative of the US stock market. The S&P/LSTA US Leveraged Loan 100 Index is representative of the performance of the largest facilities in the leveraged loan market. The S&P GSCI Index is an unmanaged world production-weighted index composed of the principal physical commodities that are the subject of active, liquid futures markets. The BofA Merrill Lynch US High Yield Index tracks the performance of US dollar-denominated, below-investment-grade corporate debt publicly issued in the US domestic market. BarclayHedge Alternative Investment Database is a computerized database that tracks and analyzes the performance of approximately 6800 hedge fund and managed futures investment programs worldwide. BarclayHedge has created and regularly updates 18 proprietary hedge fund indices and 10 managed futures indices. BarclayHedge indexes reflect performance of hedge funds, not of retail investment strategies, and are used for illustrative purposes only solely as points of reference in evaluating alternative investment strategies. Please note: BarclayHedge is not affiliated with Barclays Bank or any of its affiliated entities. Performance for funds included in the BarclayHedge indices is reported underlying fees in net of fees. About risk Commodities may subject an investor to greater volatility than traditional securities such as stocks and bonds and can fluctuate significantly based on weather, political, tax, and other regulatory and market developments. Fixed-income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating. Most senior loans are made to corporations with below investment-grade credit ratings and are subject to significant credit, valuation and liquidity risk. The value of the collateral securing a loan may not be sufficient to cover the amount owed, may be found invalid or may be used to pay other outstanding obligations of the borrower under applicable law. There is also the risk that the collateral may be difficult to liquidate, or that a majority of the collateral may be illiquid. Junk bonds involve a greater risk of default or price changes due to changes in the issuer’s credit quality. The values of junk bonds fluctuate more than those of high quality bonds and can decline significantly over short time periods. Derivatives may be more volatile and less liquid than traditional investments and are subject to market, interest rate, credit, leverage, counterparty and management risks. An investment in a derivative could lose more than the cash amount invested. Short sales may cause the fund to repurchase a security at a higher price, causing a loss. As there is no limit on how much the price of the security can increase, the fund’s exposure is unlimited. The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE All data provided by Invesco unless otherwise noted. Invesco Distributors, Inc. is the US distributor for Invesco Ltd.’s retail products and collective trust funds. Invesco Advisers, Inc. and other affiliated investment advisers mentioned provide investment advisory services and do not sell securities. Invesco Unit Investment Trusts are distributed by the sponsor, Invesco Capital Markets, Inc., and broker-dealers including Invesco Distributors, Inc. PowerShares® is a registered trademark of Invesco PowerShares Capital Management LLC (Invesco PowerShares). Each entity is an indirect, wholly owned subsidiary of Invesco Ltd. ©2015 Invesco Ltd. All rights reserved. Four key reasons to consider market neutral investing by Invesco Blog