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The iShares MSCI Netherlands ETF: A Dutch Treat?

The fund heavily weights Netherlands’ premier global companies. The fund has a consistent positive total returns over its 19 year existence. The main drag on the fund might be due to the strong US Dollar and weak Euro. There’s nothing like getting away to a warm place in the dead of winter. Oh, the idea of heading south to the Caribbean to escape the slush, ice and snarled traffic. Perhaps, Aruba, Curaçao or Sint Maarten? On the other hand, you might get a puzzled look from your co-workers while they’re bundling up for their wintery trek home by announcing that you’re off to the Netherlands for holiday. The fact is you’re actually being quite accurate! Those aforementioned mentioned timeless, carefree, warm, sunny islands are actually autonomously governed members of the Kingdom of Netherlands . The country in northern Europe which might have first come to mind, Netherlands, is actually a forth constituent member of the Kingdom of Netherlands . The Kingdom’s reach doesn’t end there, either! Three other Caribbean islands Bonaire, Sint Eustatius and Saba are special municipalities and its citizens actually have voting rights in Dutch and European election! There’re two details that often confuse people: what’s the difference between Netherlands and Holland ; and who are the people of Netherlands? First, Holland is located in the central region of Netherlands. Second, the people of Netherlands are Dutch ! To put this in perspective, the beautiful cities of Amsterdam, Rotterdam, the Hague, Delft, Leiden and Haarlem are located in Holland, which is in Netherlands. Lastly, Netherlands is governed by a constitutional monarchy, with a bicameral parliament. The monarchy isn’t just a formality, either! King Willem-Alexander actively mediates in Dutch parliamentary politics. At this point there’s a good chance that Netherlands suddenly seems like an interesting place. You might even be asking yourself whether it’s a worthwhile investment. If that is indeed the case, there’s a way you can invest your ‘dollars’ in Netherlands through the BlackRock’s (NYSE: BLK ) iShares MSCI Netherlands ETF (NYSEARCA: EWN ) . According to BlackRock … The iShares (NYSE: MSCI ) Netherlands ETF seeks to track the investment results of a broad-based index composed of Dutch equities. .. The underlying index is Morgan Stanley Capital International’s ( MSCI ) Netherlands Investible Market Index . According to MSCI this index … is designed to measure the performance of the large, mid and small cap segments of the Netherlands market. With 47 constituents, the index covers approximately 99% of the free float-adjusted market capitalization in Netherlands… Although the complete list of holdings and weightings are proprietary information, does indicate the index sector allocation and it is charted below for comparison with the fund’s sector allocation. Data from MSCI The fund’s sector allocations are demonstrated in the pie chart below, and seem to emulate the index quite closely. Data from iShares This fund, like many of the iShares focused funds, has been long established having been incepted in 1996. The fund’s net assets total $169,880,091.00 in US Dollars. It should be noted here that Netherlands is a member of the European Union as well as a Eurozone member; hence the currency of Netherlands is the Euro. This is an important point. Without getting too sidetracked, it suffices to say that it’s likely that the US Dollar will strengthen against the Euro within the next few quarters. This means that the values of individual holdings will decline in dollar terms, even if the individual companies are doing well. This shouldn’t put off the long term investor, but its good practice to be aware of the currency risks, at least in the near term. The fund has 6.8 million shares outstanding, is marginable and has a reasonably good 20 day average volume of over 77,000 shares per trading session. The fund is passively managed and management fees are slight higher than the industry average 0.44%, totaling 0.48%. The present annualized yield is given as 2.47% and the fund is currently trading at a 0.48% premium to NAV. The fund’s P/E ratio is given as 23.64% and a price to book value multiple of 2.14. The total number of holding is 48, which includes a small cash/derivatives holding. A quick overview of the major holdings with some key metrics, in order of sector weightings is presented below, starting with Consumer Staples. Although there are several ways to measure a company’s financial stability, the ‘Quick Ratio’ is included when available. In brief, Investopedia defines the ” Quick Ratio ” as … an indicator of a company’s short-term liquidity… …a company’s ability to meet its short-term obligations with its most liquid assets … … a quick ratio of 1.5 means that a company has $1.50 of liquid assets available to cover each $1 of current liabilities… Ah! Before continuing, please note that you will often see the Dutch word ” Koninklijke” preceding the company name or brand. It’s equivalent to “Royal Dutch”, like in ‘ Royal Dutch Shell ‘ (NYSE: RDS.A ) Consumer Staples 32.0171% Exchange and Symbol Fund Weighting Dividend Yield Payout Ratio Market Capitalization (in USD Billions) Quick Ratio Primary business Unilever UL 19.074% 3.05% 41.40% $131.00 0.47 Personal care, foods, refreshments, home care with 400 brand names. Services over 190 countries globally. On par with other global giants, Nestles (OTC: OTCPK:NSRGF ), Proctor and Gamble (NYSE: PG ) and the like. Heineken OTCQX:HEINY 5.439% 1.49% 33.42% $52.321 0.55 Beer brewing with over 50 brand names and global distribution in 75 countries Koninklijke Ahold OTCQX:AHODF 4.7393% 2.50% 50.53% of EPS $14.54 0.65 Food retail brands and Supermarkets in the USA New England area, Netherlands, and Czech Republic; total stores number, approximately, 3200 Heineken Holdings OTCQX:HKHHF 2.0859 1.62% 33.33% $19.11 0.55 Holding 50.005% of Heineken; the holding company segments and manages the Heineken brands by geographical region. There are in addition, three smaller Consumer Staple holdings accounting for 0.6789% of the fund’s total holdings. They are Corbion ( OTCPK:CSNVY ) , 0.3648% of the fund, providing bio-based food additives, emulsifiers, frozen doughs and vitamin premixes; Koninklijke Wessanen ( OTC:KJWNF ) at 0.2069%, which manufactures and markets organic food products, spreads, honeys, cereals, and dietary solutions; Amsterdam Commodities ( OTC:ACNFF ) at 0.1072%, which trades, transports and distributes agricultural products. All three companies contribute to the fund’s overall dividend. There are 9 financial holdings. The smaller holdings: Wereldhave ( OTC:WRDEF ) at 0.6159%; Eurocommercial Properties (Amsterdam: SIPFC) 0.5529% ; Vastned Retail REIT ( OTC:VSNDF ) 0.231%; NSI ( OTCPK:NIUWF ) 0.1405%, all totaling 1.3998% of the fund’s total holdings, are REITS. Delta Lloyd ( OTCPK:DLLLY ) 0.4364% and Binckbank ( OTC:BINCY ) 0.1274% provide traditional banking services, annuities, manage pension funds and online banking. All of the above contribute to the fund’s overall dividends. The lion’s share of financial holdings, at 19.2501%, is summarized below. Financials 21.3515% Exchange and Symbol Fund Weighting Dividend Yield Payout Ratio Market Capitalization (in USD Billions) Quick Ratio Primary business ING Group ING 14.3798% 2.18% 35.20% $48.335 NA A global player in banking, providing global retail service, investing, insurance as well as commercial service Aegon AEG 2.8773% 4.10% 63.78% $11.42% NA Insurance, pension management, Europe, North, Central and South Americas, U.K.; Expanding into Central and Eastern Europe and Asia NN Group OTC:NNGPF 1.9903% 3.49% NA $9.17 NA Insurance, investment management, annuities, reinsurance. Europe and Asia The fund holds 13 industrials, however, the top four account for over 10% of the fund’s holdings and well over 75% of the total industrial holdings. Industrial 13.6886% Exchange and Symbol Fund Weighting Dividend Yield Payout Ratio Market Capitalization (in USD Billions) Quick Ratio Primary business Koninklijke Philips PHG 6.5413% 3.28% 154.09% $23.81 0.86 Called ‘Philips’ in the US: Imaging systems, diagnostic imaging, x-ray equipment. Consumer lighting, appliances personal care products. Randstad Holdings OTCPK:RANJY 1.9134% 2.39% 56.95% $8.963 NA Staffing service, temporary and permanent, payroll services, outplacement, and workforce solutions. Koninklijke Baskalis Westminster OTC:KKWFF 1.0719% 3.60% 27.42% $5.09 0.37 Dredging and earthmoving, maritime infrastructure; management of oil and gas terminals TNT Express OTCPK:TNTEF 1.0647% 1.04% NA $3.827 1.20 Express carrier for documents, parcels and freight. Offices in 60 countries with a delivery reach in 200 countries globally Four companies comprise the Information Technology allocation. The topmost are most significant ASML (AMSL) and Gemalto ( GTOFF) accounting for 9.8634% of the fund and over 90% of the IT holdings. The smaller holdings are ASM International, (ASMIY) at 0.5154%, a manufacturer of wafer processing equipment and BE Semiconductor ( OTC:BESVF ) at 0.1657%, a manufacturer of semiconductor back-end and packaging equipment. All four holdings pay dividends. Information Technology 10.5445% Exchange and Symbol Fund Weighting Dividend Yield Payout Ratio Market Capitalization (in USD Billions) Quick Ratio Primary business ASML Holdings ASML 8.5177% 0.79% 21.65% $41.945 1.77 Semiconductor lithography systems for integrated device manufacturing, flash and DRAM memory. Gemalto GTOFF 1.3457% 0.69% 19.53% of EPS $4.897 1.20 Digital security: mobile, machine to machine, transactions There are three significant holdings for the Consumer Discretionary and two smaller holdings. The smaller holdings are TomTom (TOMAF) , the well-known navigation equipment manufacturer, at 0.2914% and Accell Group ( OTCPK:ACGPF ) at 0.1167% of the fund, manufactures exercise equipment, particularly bicycles and bicycle components. Consumer Discretionary Exchange and Symbol Fund Weighting Dividend Yield Payout Ratio Market Capitalization (in USD Billions) Quick Ratio Primary business Relx RELX 4.5121% 2.62% 65.37% $17.592 NA Information Solutions for science, medical and technical for professionals and students Wolters Kluwer OTCPK:WTKWY 2.7013% 1.68% 48.17% $8.73 0.69 Information software and services legal, business, accounting, medical and healthcare Altice (classes A and B) OTC:ALLVF 2.1537% 0.00% 0.00% $15.92 0.56 Media provider and services, cable TV, broadband internet, telephony Only four companies comprise the Materials Sector holdings, the two most significant are Akzo ( OTCQX:AKZOF ) and Koninklijke DSM ( OTC:KDSKF ) . The two smaller holdings are OCI ( OTCQX:OCINY ) 0.5894% which seems to be as much an industrial by way of its infrastructure construction and project management as well as manufacturing materials, particularly fertilizers. It is a subsidiary of Orascom Construction (Cairo: OCIC) . The second is Koninklijke Ten Cate ( OTC:KNKCF ) 0.1908% manufactures advanced textiles and composite materials. Materials 7.71% Exchange and Symbol Fund Weighting Dividend Yield Payout Ratio Market Capitalization (in USD Billions) Quick Ratio Primary business Akzo Nobel AKZOF 4.4598% 2.24% 36.27% $14.74 0.90 Paints, coatings, specialty chemicals, marine coatings, metal coatings, vehicle finishes. Also food additives, detergents, cosmetics. Koninklijke DSM KDSKF 2.47% 3.32% 366% of EPS $8.21 0.97 Nutrition, vitamins and nutrients, carotenoids. Also performance materials plastics, resins, polymer materials There’s only one telecom holding, Koninklijke KPN (OTC: OTC:KKPNF ) at 2.9527%. KPN has a $12.61 billion market cap and pays a 3.51% dividend. The company is pretty much a broad based telecom service provider whose primary business is integrated information and communication technology for mobile, residential and business. The least weighted sector is in energy with three holdings each has a weighting of less than one percent. Energy 1.7472% Exchange and Symbol Fund Weighting Dividend Yield Payout Ratio Market Capitalization (in USD Billions) Quick Ratio Primary business Vopak VOPLY 0.7454% 2.29% 43.5% of EPS $4.57 NA Storage of oil products, liquid chemicals, bio-fuels and vegetable oils as well as shipping terminal to terminal. SBMO OTCPK:SBFFF 0.6601% 0.00% 0.00% $2.52 2.02 Offshore energy, floating production and mooring systems, terminals and service Fugro OTCPK:FURGF 0.3417% 0.00% 0.00% $1.37% 1.49 Geotechnical Interpretation services providing information of the Earth’s surface and subsurface. Geosciences and Surveys for the oil and gas industry The fund has a respectable track record, with a consistent distribution as well as positive annual returns since inception, the only exception to that is the -1.59% negative return over the past 52 weeks. Since inception the fund has a total return of 4.98%; over the past ten years, 4.74%; five years, 4.98% and three years, 9.98%. Hence, the fund has a pretty consistent positive return, over different time frames, over the life of the fund, with the exception of the past year. (click to enlarge) The fund has several real global heavy-weight champs with distribution in the world’s best performing economies, like the USA, the U.K. and Germany. Further, the fund is smartly structured to top-weight these premier companies. Hence, it’s not unreasonable to assume that the poor performance over the past year may be currency related , particularly when it comes to US Dollar strength combined with Euro weakness. Should the US Fed raise its benchmark rate, or the ECB weaken the Euro in the coming months this might present an excellent buying opportunity for the investor with a long term outlook.

Are Currencies An Asset Class And Do Currency Managers Deserve Their Fees ?

Home Portfolio News Articles StockTalk Marketplace PRO Seeking Alpha WHERE DO YOU WANT TO GO? Seeking Alpha home page » My portfolio page » Latest Financial Analysis & Opinion » TOP NEWS Averages add to losses Apple’s iPad Pro goes on sale on Wednesday Retail names lead declines Match Group aims for $3B+ valuation at IPO Priceline beats estimates, but guidance is weak Regulators set out new rules for SIFIs Weyerhaeuser acquiring Plum Creek to make $23B timber giant See latest news » TOP ARTICLES Top Authors | RSS Feeds | Sitemap | About Us | Contact Us Terms of Use | Privacy | Xignite quote data | © 2015 Seeking Alpha

Expanding The Smart Beta Filter: Does It Help?

Summary iShares factor ETFs provide a source of well tested algorithms for factor-based stock selection. Previous examination of QUAL, MTUM and USMV have shown that this approach can produce actionable investing ideas. Can adding other, well-documented, factors improve the selective powers of this approach?. I continue to think about mining the iShares smart beta ETFs for investing ideas. In this article, I want to discuss expanding the source of data to include ETFs for risk premium factors beyond those I looked at previously. Let me start by reviewing some recent results from this exercise. My starting premise is that the set of ETFs offered by Blackrock iShares emphasizing individual risk-premium factors provides a rich source of securities that have passed their quantitative filters for the target factors. Previously I looked at three of these ETF focused on low volatility, quality and momentum factors. My goal was to find stocks that appeared in the holdings from more than one of these ETFs with the idea that such stocks have passed the MSCI index screen for more than one factor. I identified 14 stocks that occur in all three ( A Quest for the Smartest Beta ) and 60 more that occur in at least two ( Can We Find Smarter Beta From 2 Factor Portfolios? ). I found the results intriguing. First, The ETFs all beat the market, as represented by the SPDR S&P 500 Trust ETF ( SPY), as does the equal-weighted portfolio of ETFs. By analyzing a hypothetical portfolio, I was able to show that the 14 holdings from the set occurring in all three ETFs has soundly beaten all of the ETFs as well as the equal-weighted portfolio of the ETFs. This is fully documented in the second article referenced in the previous paragraph. Readers commented on my omission of two of the classic risk-premium factors and offered suggestions on incorporating them into the models. The missing factors, value and size, are, of course, important, and I’m going to look at how much, if anything, they add to the exercise as I go on. But first, let me digress here for a paragraph or two and consider why I felt these factors could, or should, be left out. Let’s start with the objective: It is to mine the quantitative algorithms of MSCI’s factor indexes for high-potential stocks. As I explained in the second article, I wanted to keep this exercise to a manageable number of funds and holdings. I thought three was optimal. Also, value and size are much less straightforward to deal with in this context. These factors form the basis for the traditional classifications of stocks: Value vs Growth and Large-, Mid-, Small-Cap. It’s the Morningstar style box. Value is variously defined and it’s not at all unusual to see the same securities turning up in growth and value funds from the same group. Size is easy, but pairs poorly with other factors depending on how one makes size cuts. By contrast, quality, momentum and low volatility are less rigorously defined (even considering the vagueness of how value is defined) and, in my view, more amenable to quantitative analysis that can produce unique, actionable results. So, I went with quality, momentum and low volatility. Quality is something I’ve been thinking about a lot, and I like the algorithm QUAL is using to define the factor (discussed here ). Momentum is another factor that can add serious alpha. I’ve been maintaining some momentum-based investing strategies in moderate-size portfolios using commission-free ETFs for several years to modest success. A problem with momentum is it tend to generate volatility and I’ve tried to modulate that in my own investing by adding a weighting for volatility (some day I may write an article on this). This reflects my appreciation for low volatility and the thinking that led me to include USMV in this project. The Factor ETFs All this is a bit subjective and intuitive, which is always something to guard against in an evidence-based approach, so I’ve decided to take readers’ advice and look at two more of iShares MSCI factor-index funds. I wanted to see if adding value and size to the analyses can improve the results. To this end, I’ll be deconstructing five ETFs looking for common holdings. The list of five, starting with the three considered earlier: iShares MSCI USA Minimum Volatility ETF (NYSEARCA: USMV ), iShares MSCI USA Momentum Factor ETF (NYSEARCA: MTUM ) iShares MSCI USA Quality Factor ETF (NYSEARCA: QUAL ) iShares MSCI USA Value Factor ETF (NYSEARCA: VLUE ) iShares MSCI USA Size Factor ETF (NYSEARCA: SIZE ) One problem right off the bat is the size of SIZE. At 636 holdings, it’s nearly four times the size of the next largest fund (USMV with 165). Perhaps as a consequence, it adds little value to the analysis, although, despite having 636 holdings, it is the least correlated with the broader market of the five ETFs. (click to enlarge) Pay particular attention to the last column in that table. SIZE is the least correlated with SPY, much lower than I would have anticipated. Note too, that VLUE is less correlated with SPY than any of the other three ETFs. I’ll start by looking at the performance of these ETFs and ask if the two new additions look likely to add any value. (click to enlarge) For the past year, they have lagged the previously considered three. But this has not been a good year for value stocks, and SIZE may add an advantage from that low correlation coefficient that will only become evident when it becomes an important variable. Deconstruction the ETF Portfolios As I did previously, I downloaded the full holdings of each of the ETFs into a spreadsheet and analyzed all five for stocks that appeared in more than one of the funds. Here’s a summary of the results. As anticipated, it quickly gets unwieldy. Only a single stock is in all five funds, and there are 20 that appear in four of the ETFs. Beyond that, there are too many to be useful for my purposes. What’s interesting is the 14 stocks that formed the basis of the earlier analysis by occurring the holdings of QUAL, MTUM and USMV, are all included in the 21 four- or five-fund stocks here. Thirteen of the 14 occur in either VLUE or SIZE; only one is in both. So, if we take the top 22 stocks here, i.e. those occurring in at least four funds, we have added eight to the previous list. So far, so good, we have increase our candidate pool; but not excessively, it’s still a manageable number. Here, for the record, are the 22 stocks with the 14 from MQLV set in italics: Axis Capital Holdings Ltd (NYSE: AXS ), Accenture Plc (NYSE: ACN ), Ace Ltd (NYSE: ACE ), Arch Capital Group Ltd (NASDAQ: ACGL ), Assurant Inc (NYSE: AIZ ), AT&T Inc (NYSE: T ), Chevron Corp (NYSE: CVX ), Chipotle Mexican Grill Inc (NYSE: CMG ), Chubb Corp (NYSE: CB ), Eli Lilly (NYSE: LLY ), Home Depot Inc (NYSE: HD ), Nike Inc Class B (NYSE: NKE ), O’Reilly Automotive Inc (NASDAQ: ORLY ), Partnerre Ltd (NYSE: PRE ), Reynolds American Inc (NYSE: RAI ), Sigma Aldrich Corp (NASDAQ: SIAL ), Starbucks Corp (NASDAQ: SBUX ), Target Corp (NYSE: TGT ), Travelers Companies Inc (NYSE: TRV ), United Health Group Inc (NYSE: UNH ), Visa Inc Class A (NYSE: V ), WR Berkley Corp (NYSE: WRB ). The first entry, Axis Capital, is the single name in all five ETFs. Sector representation is dominated by Financials and Consumer Discretionary, but it is more diverse than the set of 14 derived from three ETFs. (click to enlarge) Here is how these 22 stocks are allocated among the ETFs. As we see, all are in SIZE. SIZE is therefore acting as a binary filter to select among funds that are in three of the four funds but do not pass the size-factor filter. This is potentially a useful filter. USMV holds all but one, so it’s a similar filter. VLUE is a stronger filter. Less than half the funds are in VLUE’s holdings. I find this interesting and would have expected a result like this from MTUM, which only misses four, none of which is likely to be mistaken for a momentum stock in the current market. As I refine my thinking on this whole exercise, I have to spend more time considering how VLUE affects results. Portfolio Analysis As previously, I wanted to see the results of this filtering process. There is only one record to analyze. The funds rebalance at the end of May and November and, to my knowledge, do not publish past index allocations. Thus, there is only one analyzable record, that for the current cycle which is about 5 months old. We can see how various permutations of these results have fared since the last rebalance. I ran analyses on Portfolio Visualizer for equal-weighted portfolios comprising the following with the coding I’ve used in the tables: Five ETFs: 5ETFs EW QUAL, USMV, MTUM: 3ETFs (QVM) EW Stocks present in holdings of at least 4 of the ETFs: VQMVS(4+) VQMVS(4+) stocks in QUAL and MTUM only: QxM VQMVS(4+) stocks in QUAL and VLUE only: QxV VQMVS(4+) stocks in MTUM and VLUE only: MxV I pulled out the last three sets because USMV and SIZE were doing little more than serving as a final filter for the other three ETF holdings’ overlaps, so I thought it useful to see how those components were contributing to the results. Here are those results. (click to enlarge) As we can see, the five ETFs as an equal-weighted portfolio beat SPY, but lagged the subset of three ETFs. Let’s not forget, however, that this is only a five-month result. Longer term results can show benefit to holding all five factor ETFs, or at least four of them. For this we do have a longer record. The full record is still limited as the youngest fund only dates to July 2013. From July 2013, equal-weighted portfolios, rebalanced semiannually, of combinations of five, four and three of the ETFs turned in the following performance results. (click to enlarge) Removing either SIZE or VLUE added return and reduced maximum drawdown. Removing both, i.e. going to only QUAL, MTUM and USMV, as previously considered, improved both metrics. Volatility did increase slightly, but in all cases it remained lower than the S&P 500. These results indicate that there has been no advantage to adding VLUE or SIZE to a factor-based ETF portfolio. I’d like to say this validates my decision to use only MTUM, QUAL and USMV in my analyses, but the fact remains that the data set is too limited to draw such a conclusion. Let’s return to the previous table – and our main topic – and see how stocks filtered from the ETFs on the basis of their presence in four or more funds fared. Over the past five months, the combined ETFs returned 1.40% CAGR for all five, and 5.75% CAGR for the MQLV three. A portfolio of the 22 stocks found in four or more ETFS 29.67% CAGR and did so with a max drawdown of only -3.35% vs. -6.52% for the better performing of the two ETF portfolios. Separating out the component ETFs we see that the combination of QUAL an MTUM added a remarkable level of value, far outpacing a combination of either of the two factors with value as represented by VLUE. Yet again, I must emphasize the limited data available. But the results certainly begin to suggest that these ETFs, especially MTUM, QUAL and USMV, are attractive sources for filtered lists of stocks that rank strongly for risk-premium factors which can be further filtered for having been selected by the quite different quantitative criteria by multiple funds.