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Are ETFs Made Up Of CEFs Worth Owning?

While we are huge proponents of leveraging low cost and liquid ETFs for virtually every asset class ; ETFs that invest in closed-end funds (CEFS) are a different story altogether. The two funds that have garnered the most investor attention in this space are the PowerShares Closed End Fund Composite ETF (NYSEARCA: PCEF ) and the Yieldshares High Income ETF (NYSEARCA: YYY ) . Both contain a seemingly diverse array of underlying asset classes, sectors, and strategies. While both funds’ actual management expense ratio of 0.50% sounds reasonable, the issue is that you’re also paying for active management and leverage borrowing costs on an individual fund level. While that isn’t an immediate red flag, the largest issue I see with ETFs that purely invest in CEFs is that the index construction methodology doesn’t take into account the fundamental propensities of the underlying holdings. For example, these funds may have overlapping strategies spread across multiple managers, which also have varying fundamental views on portfolio strategy . Envision it this way, one manager may love a specific sector of the fixed-income market, such as emerging market bonds, another manager avoids them like the plague. So while one manager may be proven right, the other is wrong, and whatever benefit you would have received is sorely cancelled out. What’s worse is that you continue to pay both managers a fee regardless. When you sum up all the instances where that scenario happens in each individual CEF, all of the exotic portfolio management themes and talent is quickly stripped away. Meaning, your returns are doomed to plod along with the index and ultimately the mean average of the entire asset class. It’s a classic case of over-diversification. Oddly enough, that fact alone is the primary marketing tactic to attract investors to these funds; you remove individual fund risk. However, if an investor simply wants index returns from a complicated asset class they may not fully understand, CEFs are the last place I would suggest they invest in. There are multiple layers of complex derivatives, hedging, and active management strategies in play. On top of individual fund corporate actions, premium and discount analysis, and earnings reports. Lastly, probably the most dangerous element to CEF investing flies under the radar: leverage. Instead, it is my opinion that investors should equip themselves with basic knowledge on evaluating the attractiveness of a group of closed-end funds, and build a cohesive portfolio made of equities and fixed-income. They will have inherent diversification at the fund level, and probably build a better knowledge of how CEFs work in the process. They also stand the chance for better performance and paying lower fees overall. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Best And Worst Q1’16: Information Technology ETFs, Mutual Funds And Key Holdings

The Information Technology sector ranks third out of the ten sectors as detailed in our Q1’16 Sector Ratings for ETFs and Mutual Funds report. Last quarter , the Information Technology sector ranked second. It gets our Neutral rating, which is based on aggregation of ratings of 28 ETFs and 109 mutual funds in the Information Technology. See a recap of our Q4’15 Sector Ratings here . Figures 1 and 2 show the five best and worst-rated ETFs and mutual funds in the sector. Not all Information Technology sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 25 to 397). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Information Technology sector should buy one of the Attractive-or-better rated ETFs or mutual funds from Figures 1 and 2. Figure 1: ETFs with the Best & Worst Ratings – Top 5 Click to enlarge * Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings The PowerShares Dynamic Semiconductors Portfolio (NYSEARCA: PSI ) is excluded from Figure 1 because its total net assets are below $100 million and do not meet our liquidity minimums. Figure 2: Mutual Funds with the Best & Worst Ratings – Top 5 Click to enlarge * Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings The Fidelity Advisor Communications Equipment Fund (MUTF: FDMIX ) is excluded from Figure 2 because its total net assets are below $100 million and do not meet our liquidity minimums. The Market Vectors Semiconductor ETF (NYSEARCA: SMH ) is the top-rated Information Technology ETF and the Vanguard Information Technology Index Fund (MUTF: VITAX ) is the top-rated Information Technology mutual fund. Both earn a Very Attractive rating. The ARK Innovation ETF (NYSEARCA: ARKK ) is the worst-rated Information Technology ETF and the Rydex Internet Fund (MUTF: RYINX ) is the worst-rated Information Technology mutual fund. ARKK earns a Dangerous rating and RYINX earns a Very Dangerous rating. 511 stocks of the 3000+ we cover are classified as Information Technology stocks. Applied Materials (NASDAQ: AMAT ) is one of our favorite stocks held by SMH and earns an Attractive rating. Going back to 1998, the earliest year in our model, Applied Materials has grown after-tax profit ( NOPAT ) by 10% compounded annually. AMAT currently earns a 12% return on invested capital ( ROIC ) and has generated over $2.8 billion in free cash flow over the last three years. Despite the nearly two decades of strong business operations, AMAT shares are significantly undervalued. At its current price of $16/share, AMAT has a price to economic book value ( PEBV ) ratio of 1.1. This ratio means that the market expects Applied Materials to grow profits by only 10% over its remaining corporate life. If Applied Materials can grow NOPAT by just 5% compounded annually (half its historical rate) over the next decade , the stock is worth $20/share today – a 25% upside. Trimble Navigation (NASDAQ: TRMB ) is one of our least favorite stocks held by ARKK and earns a Dangerous rating. In five of the past six years Trimble has generated negative economic earnings . In fact, the only time TRMB generated consecutive years of positive economic earnings was during the economic boom from 2004-2008. Since then, the company’s ability to create shareholder valued has deteriorated. Since 2008, the company’s ROIC has declined from 10% to 6%. Investors have taken notice of the downward trend in Trimble’s operations as the stock has fallen 26% over the past year, but shares remain overvalued. To justify its current price of $21/share, Trimble must grow NOPAT by 15% compounded annually for the next 17 years . This expectation seems highly optimistic given the recent history of deteriorating business operations at Trimble. Figures 3 and 4 show the rating landscape of all Information Technology ETFs and mutual funds. Figure 3: Separating the Best ETFs From the Worst ETFs Click to enlarge Sources: New Constructs, LLC and company filings Figure 4: Separating the Best Mutual Funds From the Worst Mutual Funds Click to enlarge Sources: New Constructs, LLC and company filings D isclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, sector or theme. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Telecom ETFs To Watch After Lukewarm Earnings

This year has been rather mediocre for the telecom industry, with lukewarm results coming up amid turbulent economic conditions. The industry has emerged as an intensely contested space, where success depends largely on technical superiority, quality of services and scalability. Cut-throat pricing competition has put pressure on margins this earnings season. However, mixed results and global market concerns notwithstanding, the overall sentiment for the U.S. telecommunications industry in 2016 is positive. Telecommunications is one of the few industries to have managed to undergo rapid technological improvement even during depression. In this era of digitization and technology, the ever-growing demand for technologically superior products should see the sector through. Quite expectedly, investors will keep an eye on telecom earnings for the rest of this season to assess industry dynamics and future growth prospects, with several big names like T-Mobile US, Inc. (NASDAQ: TMUS ), Dish Network Corp. (NASDAQ: DISH ) and Cincinnati Bell Inc. (NYSE: CBB ) yet to report. Telecom Earnings in Details U.S. telecom behemoth Verizon Communications Inc. (NYSE: VZ ) reported impressive results, beating on both the top and the bottom line. Adjusted earnings per share of 89 cents beat the Zacks Consensus Estimate by a penny and year-ago earnings of 71 cents. Quarterly total revenue increased 3.2% year over year to $34,254 million, outpacing the Zacks Consensus Estimate of $34,132 million. Apart from earnings, the company was also in the news because of other developments. According to a recent Bloomberg report , Verizon has assigned its chief executive officer of its AOL unit, Tim Armstrong, a key role, exploring options to bid for the core assets of tech giant Yahoo Inc. (NASDAQ: YHOO ). However, neither company has confirmed the news as yet. Verizon has gained 11.2% since reporting earnings (as of February 11, 2016). In contrast U.S. telecom giant AT&T Inc. (NYSE: T ) reported weak financial results, wherein both the top and bottom line lagged the Zacks Consensus Estimate. AT&T’s adjusted earnings per share moved up 14.5% year over year to 63 cents, missing the Zacks Consensus Estimate by a penny. Quarterly revenue increased 22.3% year over year to $42,119 million, but missed the Zacks Consensus Estimate of $42,781 million. AT&T’s weaker-than-expected earnings were primarily attributable to disappointing postpaid wireless subscriber addition of 526,000, down a significant 38.4% year over year. The stock has gained 2.3% since reporting earnings (as of February 11, 2016). CenturyLink Inc. ‘s (NYSE: CTL ) solid quarterly performance was buoyed by increased revenues from the acceptance and recognition of Connect America Fund (CAF) phase II funds, along with strength in high-bandwidth data services and consumer strategic revenues. The telecom company’s fourth-quarter 2015 adjusted earnings per share of 80 cents surpassed the Zacks Consensus Estimate of 65 cents and were up 33.3% year over year. Quarterly total revenue of $4,476 million rose 0.9% from the prior-year quarter and surpassed the Zacks Consensus Estimate of $4,427 million. The stock climbed 11% since reporting earnings (as of February 11, 2016). ETFs in Focus Thanks to mixed results, telecom ETFs with considerable exposure to the three stocks above were all in the red in the last 10 trading sessions (as of February 11, 2016). Below, we discuss four of these that are in focus in the coming days (see all Telecommunication ETFs here ). iShares U.S. Telecommunications ETF (NYSEARCA: IYZ ) IYZ tracks investment results before fees and expenses corresponding to the price and yield performance of the Dow Jones US Select Telecommunications Index. The fund manages assets worth nearly $416.6 million and has an average trading volume of roughly 438,000 shares a day. It charges an expense ratio of 43 basis points a year. IYZ holds 25 stocks and has a concentrated approach in the top 10 holdings, with almost 63% of the asset base invested in them. Among individual holdings, top stocks in the ETF include AT&T, Verizon and CenturyLink, with asset allocation of 13.3%, 13.1% and 6.03%, respectively. The four major sectors of this ETF include Integrated Telecom, Wireless Telecom, Alternative Carriers and Communications Equipment, with asset holdings of 56.1%, 23.3%, 18.1% and 2.5%, respectively. The product lost 2.1% in the past 10 days and currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook. Fidelity MSCI Telecommunications Services Index ETF (NYSEARCA: FCOM ) This ETF tracks investment results before fees and expenses corresponding to the performance of the MSCI USA IMI Telecommunication Services 25/50 Index. The fund manages assets worth nearly $89 million and has an average trading volume of roughly 56,000 shares a day. It charges an expense ratio of 12 basis points a year. FCOM holds 33 stocks and has a concentrated approach in the top 10 holdings, with 73.5% of the asset base invested in them. Among individual holdings, AT&T, Verizon and CenturyLink number among the top five, with asset allocation of 25.8%, 25.4% and 4.1%, respectively. Diversified Telecommunication Services and Wireless Telecommunication Services are the two major sectors of this ETF, with asset holdings of 88.2% and 11.8%, respectively. The product lost 0.5% in the past 10 days and currently has a Zacks ETF Rank #3 with a Medium risk outlook. iShares Global Telecom ETF (NYSEARCA: IXP ) This ETF tracks investment results before fees and expenses corresponding to the price and yield performance of the S&P Global 1200 Telecommunications Sector Index. The fund has nearly $356.7 million of assets under management and an average trading volume of roughly 41,000 shares a day. The fund charges an expense ratio of 47 basis points a year. IXP holds 31 stocks in its portfolio and has a concentrated approach in the top 10 holdings, with approximately 74% of the asset base invested in them. Among individual holdings, top stocks in the ETF include AT&T and Verizon, with asset allocation of 18.9% and 17.3%, respectively. Integrated Telecommunication Services, Wireless Telecommunication Services and Alternative Carriers are the three major sectors, with asset holdings of 77.5%, 21.2% and 1.2% respectively. It fell almost 0.6% in the last 10 days and currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook. Vanguard Telecom Services ETF (NYSEARCA: VOX ) This ETF seeks to track the performance corresponding to the benchmark MSCI US Investable Market Telecommunication Services 25/50 Index. It has assets under management of nearly $1 billion and an average trading volume of roughly 96,000 shares a day. The fund charges an expense ratio of 10 basis points a year. VOX holds 31 stocks in its portfolio and has a concentrated approach in the top 10 holdings, with 71.1% of the asset base invested in them. Among individual holdings, top stocks in the ETF are AT&T and Verizon, with a combined share of almost 50%. Integrated Telecommunication Services, Alternative Carriers and Wireless Telecommunication Services are the three major sectors, with asset holdings of 63.1%, 20.8% and 16.1%, respectively. The fund lost 0.7% in the last 10 days and currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook. Original Post