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Top Nontraditional Bond Fund Celebrates First Anniversary

The Cedar Ridge Unconstrained Credit Fund (MUTF: CRUPX ) launched on December 12, 2013, and recently celebrated its first anniversary. Ten thousand dollars invested at the fund’s inception would be worth more than $11,092 as of December 22, according to data from Morningstar. This compares very favorably to the non-traditional bond fund category average, which would have seen a $10,000 investment grow to just $10,130 over that same time. Over the past year, the Cedar Ridge Unconstrained Credit Fund’s 11.58% annualized return through December 22 ranks it at the very top of Morningstar’s Nontraditional Bond category, above 319 other funds, including all share classes. The Legg Mason BW Alternative Credit Fund (MUTF: LMANX ) is the only other fund in the category with double-digit returns over the past year, and only one of its five share-classes has that distinction. “With this Fund we have created the opportunity for us to reach a vast audience of investors who are looking for exactly what we have done; deliver superior and uncorrelated investment returns,” said Alan Hart, Cedar Ridge’s CIO and the fund’s portfolio manager, in a December 21 press release . Mr. Hart wanted to thank the fund’s investors for making it a success, but noted that the best way Cedar Ridge can thank its investors is by continuing to deliver superior performance. In addition to Mr. Hart, the Cedar Ridge Unconstrained Credit Fund benefits from the portfolio-management expertise of Jeffrey Rosenkrantz, David Falk, Guy Benstead, and Jeffrey Hudson. The fund’s objective is to provide capital appreciation and current income by employing a credit long/short strategy. As of November 30, the fund was 69% long municipal bonds, 23% long corporate bonds, 23% short U.S. Treasurys, and 11% short corporate bonds, according to its fact sheet . The Cedar Ridge Unconstrained Credit Fund’s shares are available in investor-class (CRUPX) and institutional-class (MUTF: CRUMX ) shares; with net-expense ratios of 2.18% and 1.93%, respectively. The minimum initial investment for the investor-class shares is $4,000; while the minimum for institutional-class shares is $50,000. The 11.37% one-year performance of the investor-class shares trails the 11.58% gains of the institutional shares, but still outdoes all other nontraditional bond funds, regardless of share class. For more information, view the fund’s website .

Buy Europe Without Euro Risk With This New ETF

Euro zone’s celebration of the end of a prolonged recession last year was really short-lived as the region again got itself entrapped in a slowdown and deflation worries from mid 2014. Most of the foremost nations of the continent are presently dragging their feet in terms of economic growth, with some slipping into another recession. To fight these issues, the European Central Bank (ECB) is resorting to every possible step including ultra-low policy rates, negative deposit rates and launch of a program to buy back asset-backed securities and covered bonds. If this was not enough, the ECB indicated that it would implement a broad-based QE measure should the region need it (read: Euro Zone Gets QE Hints, 3 ETFs to Buy on Stimulus Hopes ). While these measures should boost the stock market rally, a flush of liquidity is having an adverse impact on the currency, the Euro. The currency lost about 8% (as of December 12, 2014) against the greenback in the last six months. The plunge was more prevalent given the dollar’s strength during the said phase. Thanks to the Euro slide and the possibility of a strong dollar following the probable hike in interest rates next year, investors are starting to embrace currency-hedged ETFs in droves. There isn’t anything more unfortunate than seeing one’s otherwise impressive portfolio choices fail because of soft foreign currency (read: Hedged European ETFs in Focus: Best Choice for Europe Now? ). Bearing this sentiment, Deutsche Asset & Wealth Management recently rolled out a hedged version focused on Europe recently, DBEZ . Let’s discuss the fund in greater detail below: DBEZ in Detail The fund looks to follow the MSCI EMU IMI U.S. Dollar Hedged Index to provide exposure to more than 600 of the largest European companies. As of November 5, 2014, the index includes 682 securities with an average market cap ranging from about $6.09 billion to about $23.96 million. The product is highly diversified with no stock accounting for more than 2.78% of the portfolio. Among individual holdings, Bayer AG-Reg takes the top spot, followed by Total SA and Sanofi with, respectively, 2.62% and 2.56% exposure. Sector wise, Financials gets the highest exposure with 22.8% of the portfolio. Consumer Discretionary, Industrials, Materials and Consumer Staples also get double-digit investments, while Health Care gets the least exposure with only 4.8% of the basket. As far as country exposure is concerned, Germany (29.55%) gets the top priority while France (29.65%), Spain (11.57%) and Italy (7.86%) take up the next three positions. The fund charges 45 bps in fees. How Does it Fit in a Portfolio? The fund is a good choice for investors seeking exposure to the Euro zone. At the same time, it is a tool to safeguard investors from negative currency translations. Health of the Euro zone companies also appears stable as evident by impressive corporate earnings in Q3. As per Reuters , net earnings for 36% of total market capitalization reported so far are up 7.1% on almost flat revenues with beat ratios of 67% and 59%, respectively. If this was not enough, about 80% of ECB banks cleared the latest stress test. This, coupled with an accommodative central bank, undoubtedly warrants a look at the Euro zone to earn some quick gains. However, this return can be curtailed on repatriation as the U.S. dollar is hovering at multi-year highs on QE taper and rising rate risk for next year. In such a scenario, possessing DBEZ, which is protected from currency translation, in one’s portfolio might be a wise decision (read: 3 European ETFs Worth Considering on ECB Measures ). Competition The European ETF space is pretty competitive, so it could be slightly tough for the new entrant to build up assets. However, we are hopeful as the hedged ETFs space still has room to grow. The issuer itself has a product in the name of Deutsche X-trackers MSCI Europe Hedged Equity ETF (NYSEARCA: DBEU ) which offers exposure to more than 400 European stocks in developed markets while at the same time providing a hedge against any fall in a number of currencies in the region including the Euro, the British pound, and the Swiss franc to name a few. Making a debut last year, DBEU has become a $680 million fund. However, the topper among the hedged ETFs list is WisdomTree Europe Hedged Equity Index Fund (NYSEARCA: HEDJ ) which has generated about $5.2 billion in assets so far. Moreover, there is a flurry of single-country hedged ETFs in this space including ones targeting Germany, which could offer up some competition. However, investors should note that Deutsche Bank has proven its skills in offering successful hedged ETFs lately in different markets. So, the profound knowledge of the issuer on this subject might help the new entrant to garner considerable investor assets.

KBWY: Small-Cap REIT ETF Has Attractive Yield

Summary FRI offers similar exposure to VNQ, but at five times the cost. Small-cap KBWY delivers a full percentage point more in yield. KBWY has outperformed large-cap REITs when interest rates increased in the past. There are two more ETFs to cover on the domestic side. The first is the First Trust S&P REIT Index ETF (NYSEARCA: FRI ). This one of the smaller REIT ETFs on the market, but has amassed nearly $300 million since inception in 2007. Index & Strategy FRI tracks the S&P United States REIT Index. The index covers U.S. REIT shares, including some specialty REITs such as prisons, but holds no timber REITs. Due to criteria that the companies own properties, the index also excludes mortgage REITs. The holdings are weighted by market cap. The holdings and the weightings in FRI are most similar to those of the Vanguard REIT Index ETF (NYSEARCA: VNQ ), which tracks the MSCI US REIT Index. Performance FRI has slightly trailed other pure real estate REIT ETFs over the past five years. (click to enlarge) The fund most similar to FRI is VNQ. Since FRI costs 0.40 percent more to hold, it has consistently underperformed VNQ. The line is almost perfectly straight, reflecting the extremely tight correlation between the funds. (The dip at the end of the chart is due to FRI going ex-dividend today.) (click to enlarge) Expenses FRI charges 0.50 percent versus the 0.10 percent charged by VNQ. Income FRI has a 30-day SEC yield of 3.23 percent. The yield is solid, but its payouts have been more erratic than VNQ (data from Yahoo Finance). (click to enlarge) Conclusion Investors should stick with Vanguard REIT Index ETF, which delivers almost exactly the same exposure, but at a lower cost and steadier income stream. A more attractive REIT ETF is an offering from PowerShares with a portfolio heavily tilted towards small-caps, the PowerShares KBW Premium Yield Equity REIT Portfolio ETF (NYSEARCA: KBWY ). Index & Strategy KBWY tracks the KBW Premium Yield Equity REIT Index, which is “a dividend yield weighted methodology that seeks to reflect the performance of approximately 24 to 40 small- and mid-cap equity REITs in the United States.” The portfolio is currently about 75 percent invested in small-caps, 22 percent in mid caps and 3 percent in large-caps. The portfolio is diversified, but has only 31 holdings. The largest holding, Government Properties Income Trust (NYSE: GOV ), has 5.14 percent of assets, and the smallest holding, STAG Industrial (NYSE: STAG ), has 1.20 percent. Similar to other REIT ETFs, retail makes up the largest slice of assets at about 27 percent, but healthcare is close behind, with nearly 26 percent of assets as of September 30. Diversified REITs make up 20 percent of assets, followed by 14 percent of assets in office REITs. Performance KBWY has kept pace with other REIT ETFs over the past five years, but trailed from 2011 through 2012. (click to enlarge) KBWY has shown some sensitivity to rates, but it has generally under performed as rates decreased, as shown in this comparison with VNQ. The 10-year Treasury yield is in black. (click to enlarge) Expenses KBWY charges 0.35 percent. It is a relatively low expense ratio adjusting for the fact that the portfolio is in small-caps. Income KBWY has a 30-day SEC yield of 4.74 percent, making it the highest-yielding non-mortgage REIT ETF we’ve covered. KBWY pays monthly dividends. Payouts have been consistent from month to month, and have been generally rising since the end of 2011. Conclusion KBWY has been a consistent performer. It has been more volatile than REIT ETFs which fall in the large-cap category, but its performance hasn’t deviated widely from the pack. KBWY has a three-year standard deviation of 14.64 versus VNQ’s 13.42 standard deviation. The big difference so far has been that more of KBWY’s return comes in the form of income. Investors interested in higher income or monthly payouts can pair KBWY with a fund such as VNQ to up the total payout from their REIT exposure. It remains to be seen if KBWY can outperform when interest rates increase. If it can, it would make the fund a compelling option in a rising rate environment.