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Should You Buy Housing ETFs Now?

The housing industry is steadily picking up pace as evident from the numbers released recently. Housing starts rose 0.2% in July to a seasonally adjusted annual rate of 1.21 million last month, the highest since October 2007. Starts on single-family houses surged 12.8% last month. This morning, the National Association of Realtors reported that its pending home sales index increased 7.4% year over year in July. Sales of new homes surged 26% last month, compared with July last year. Last week, the National Association of Home Builders reported that homebuilder sentiment rose to its highest level since November 2005. The housing market has been attracting many buyers and renters of late, thanks mainly to steady gains in the job market and low mortgage rates. In fact, even though builders have ramped up construction, the demand still exceeds supply, pushing up prices. Homeowners are also willing to spend more on upgrades and improvements as evident from Home Depot’s (NYSE: HD ) strong results last week. The company raised its guidance for the second time this year. Even with strong gains of late, the housing market is nowhere near bubble levels as housing starts of about 1.5 million are considered “normal” by economists. Further, despite low rates, mortgage originations have seen weak growth in 2015, mainly due to tight credit standards and low levels of refinancing. With improving economy and labor markets, banks could loosen their standards for homebuyers. Lastly, the Fed may keep rates unchanged this year in view of the recent market turmoil. All these factors are likely to support the housing market in the coming months. In the short video below, we have discussed three housing ETFs – the iShares Dow Jones US Home Construction ETF (NYSEARCA: ITB ), the SPDR S&P Homebuilders ETF (NYSEARCA: XHB ) and Etracs ISE Exclusively Homebuilders ETN (NYSEARCA: HOMX ) – which are actually very different in terms of their exposure to homebuilding and related sub-industries. Original Post Share this article with a colleague

Head-To-Head: S&P 500 ETFs Vs. Dow ETFs

Fears of a hard landing in China slaughtered the global markets last week. China itself saw all its gigantic gains recorded this year going down the drains, and logged the largest one-day plunge since 2007 on August 24 daring all government-backed measures to contain the slide. Back-to-back shockers from China, be it currency devaluation or a six-and-half-year low manufacturing data for August spurred this panic-induced sell-off. The benchmark Shanghai Composite Index dropped 8.5% on Monday. Though China sought to restrain the rout by allowing the pension funds to invest about $97 billion in the market, there was hardly any relief in store. Also, lack of precision by the Fed on the policy tightening timeline roiled the market momentum. The fright among investors was so acute that other global markets followed the footsteps of China. The otherwise steadier U.S. stocks hurtled down, European markets crashed and the Asian stocks fell to a three-year low. Meanwhile, commodities plunged to a 16-year low level while the infamous oil touched a fresh six-and-a-half year low of below $40/ barrel. Emerging markets raised panic alarms leading to an exorbitant exodus in capital. Thanks to this massacre, the U.S. stocks futures logged their largest weekly decline since 2011 in the week ended August 21 and are expected to remain southbound until this jittery market calms down. All major U.S. indices remained in deep red and went into the correction zone , per analysts. The S&P 500 index is lost 12.5% from its May high on a broad-based global slowdown. Dow Jones Industrial Average plummeted about 14.6% (as of August 25) since it hit a high in May thanks mainly to a free fall in oil prices and now both have entered the correction mode. However, Dow was a relatively worse performer than the S&P 500. Momentum Gain However, to contain this slide, China slashed the one-year lending rate by 25 bps to 2.75%, the deposit rate by 25 bps to 1.75% and the reserve ratio by 50 bps to 18%. This, along with a bargain hunt, showered the much-needed gains on Wall Street. As a result, both S&P and Dow advanced close to 4% and captured the highest single-day gain in about four years. Below we highlight four S&P and Dow-based ETFs and analyze their performance and outlook. S&P 500 ETF SPDR S&P 500 ETF (NYSEARCA: SPY ) SPY seeks to track the S&P 500 Index before fees and expenses. The performance of the S&P 500 Index is considered a mirror image of the U.S. equities, as the index represents stocks of the 500 most-valued companies in the U.S. The $171.5 billion SPY has proportionate exposure in almost all sectors with maximum emphasis on Information Technology (20.0%). The sectors like Financials (16.8%), Health Care (15.5%), Consumer Discretionary (12.8%) and Industrials (10.0%) also make up double-digit allocation. The fund is highly liquid trading with over 115 million shares daily. It charges 9 bps in fees. The fund has very low company-concentration risk with no firm accounting for more than 3.6%. SPY is down about 5.3% this year and lost 6% in the last five trading sessions (as of August 26, 2015). The fund has a Zacks ETF Rank #3 (Hold). iShares Core S&P 500 (NYSEARCA: IVV ) This fund also looks to track the S&P 500 index and has AUM of around $68.5 billion. The fund is well spread out across sectors and security. IT, Financials, Health Care and Consumer Discretionary have double-digit exposure in the fund. The product is also devoid of company-specific concentration risks. The fund trades in volume of about 4.1 million shares a day while charges 7 bps in fees and expenses. The ETF lost about 5.7% in the last five trading sessions and 5.3% so far this year. The fund has a Zacks ETF Rank #3. DOW ETFs SPDR Dow Jones Industrial Average ETF (NYSEARCA: DIA ) DIA seeks to match the performance of the Dow Jones Industrial Average Index. The index is price weighted and measures the performance of 30 large cap stocks traded in the U.S. markets. Industrials, Financials, IT, Consumer Discretionary and Health Care all hold double-digit exposure in the fund. However, it is subject to company-specific concentration risks as it invests more than half of its portfolio in the top 10 holdings. This $11.1 billion-fund trades in large volumes of over 5 million shares daily and charges 17 bps in fees. It has lost over 8% so far this year and 6.1% in the last five trading sessions (as of August 26, 2015). The fund has a Zacks ETF Rank #3 with a Medium risk outlook. iShares Dow Jones U.S. ETF (NYSEARCA: IYY ) This $935 million-ETF also tracks the Dow Jones U.S. total market index. This fund has a proportionate exposure in almost all sectors with maximum emphasis on IT (19.0%), Financials (18.1%), Health Care (14.8%), Consumer Discretionary (13.4%), and Industrials (11.0%). Unlike DIA, this 1,255 stocks – fund invests less than 15% share in the top 10 holdings. Probably this is why the fund lost less than DIA. IYY charges 20 basis points as fees and shed 5.9% in the last five trading sessions and over 5.3% so far this year. Outlook Overall, the market may be a little uncertain, but such a sharp sell-off will open up the doors for future gains in the U.S. All four products went into an oversold territory indicating a turnaround. Moreover, latest rate cuts by China should also provide some boost to these equity indices. However, investors should also not that the current prices of the aforementioned ETFs are below their short- and long-term moving averages hinting at further bearishness. So, edgy investors might stay on the sidelines as of now and especially exercise caution when it comes to the Dow ETFs as this spectrum appears more volatile than the S&P 500. Original Post

Comparing 6 Of The Top International Equity Options

Summary This group of 6 ETFs offers 3 options from Schwab and 3 options from Vanguard. The ETFs that were selected each have a fairly similar match from the other ETF provider. I’m using modern portfolio theory to assess the impact on portfolio risk. The data favors Schwab at first, but after adding a bond ETF investors can get very similar levels of exposure through either option. My favorite two ETF combinations for international equity are combining either SCHC and SCHF or VSS and VEA. I would base the decision on free trading for frequent rebalancing. As I’ve been working through a comparison of low fee ETFs, it seemed prudent to do a comparison on a batch of ETFs between two of the lost cost leaders in the industry. Vanguard has a very long and proud track record of offering investors excellent diversification with extremely low fees. Schwab decided to compete in that arena and introduced a very respectable group of ETFs that also have very low expense ratios. In this piece I’m running a comparison on the international ETF options for Schwab and Vanguard. In an attempt to keep the comparison reasonable, I’ve selected the Schwab International Small-Cap Equity ETF (NYSEARCA: SCHC ), the Schwab Emerging Markets ETF (NYSEARCA: SCHE ), and the Schwab International Equity ETF (NYSEARCA: SCHF ) for Schwab and the Vanguard FTSE All-World ex-US Small-Cap ETF (NYSEARCA: VSS ), the Vanguard FTSE Emerging Markets ETF (NYSEARCA: VWO ), and the Vanguard FTSE Developed Markets ETF (NYSEARCA: VEA ) for Vanguard. SCHC and VSS invest in international small-cap companies. SCHE and VWO invest in emerging markets. SCHF and VEA invest in developed markets. The Core of the Portfolio To form the core I am using heavy allocations to SCHB and VTI. These two funds represent Schwab’s Broad Market ETF and Vanguards Total Market Index ETF. Each broad market ETF is being allocated 35% of the portfolio value and each international ETF is being allocated 5% of the portfolio value. A quick check for volatility can then be performed in the context of the portfolio by looking at which investments are adding the most risk to the portfolio. The similarity of returns can also be assessed by checking if each pair of international ETFs that I believe to be similar are actually showing high similarity in their returns so far this decade. The chart below shows the results for the sample portfolio. (click to enlarge) The highest annualized volatility measures go to VWO, VEA, and SCHE, but the more important factor is the risk contribution since volatility that is not correlated to the domestic stock market is substantially less relevant in determining how volatile the portfolio will be as a whole. When we look at the “Risk Contribution” column or the “Beta” column we can get a quick feel for which international ETFs are adding more risk than others. As it happens, VWO, VEA, and SCHE are again the three highest in each category. When I run these comparisons with portfolios that include more asset classes there is often a disconnect between the annualized volatility of the individual funds and their contribution to the overall risk profile. Quick Interpretation The notable differences are that VEA seems to be offering more volatility than SCHF and VWO seems to be more volatile than SCHE. When it comes to SCHC or VSS, the volatility has been almost precisely the same. The differences in the amount of volatility are not huge and may be within a reasonable margin of error. If investors were to compare historical returns to simply see how the funds have done, it is clear that SCHC outperformed VSS, but in the other two cases the vanguard funds with more volatility also had better returns. When We Add Bonds I ran the simulation again but this time I added in a 20% allocation to a very high duration bond fund, the PIMCO 25+ Year Zero Coupon U.S. Treasury Index ETF (NYSEARCA: ZROZ ). Using ZROZ gives the portfolio a large dose of negative beta and provides a portfolio that when considered in the aggregate is substantially less risky than the portfolio with no bond exposure. The goal is to see how the risk contribution changes when we start pushing the portfolio to be closer to the efficient frontier by reducing volatility. To keep the comparison focused on the international ETFs, I simply dropped SCHB and VTI by 10% each. (click to enlarge) Now that the portfolio contains ZROZ, we see that SCHE is contributing more risk than VWO, though the other relationships remain unchanged. The portfolio as a whole, despite using the same time frame, has reduced the annualized volatility from 16.8% to 11.7%, The difference here is fairly dramatic as the portfolio went from being more volatile than the S&P 500 to being substantially less volatile. In this portfolio with bonds it appears that we have one fund for Vanguard winning in the risk comparison, VWO, one fund for Schwab winning, SCHF, and a tie between SCHC and VSS remains. What Does It All Mean? For investors that have free trading on either the Schwab or Vanguard funds, it looks like the best strategy is to use the group of ETFs that the investor can trade without commissions. Neither group is outperforming the other by enough to warrant paying the commissions. Rebalancing Because the annualized volatility on these international investments is so high, an investor should take care to consider a strategy for rebalancing their portfolio regularly to increase their allocations to whichever investments are out of favor with the market. Within Each Group When I’m looking at a comparison between VSS, VWO, and VEA, I’m seeing VSS as a very desirable option. VSS has an expense ratio of .19% which is slightly higher than I want to see on international investments, but it also has 3369 individual holdings within the portfolio and only 3.2% of the total assets are invested in the top 10 holdings. The internal diversification is exceptional. In my opinion, VSS is a world class option for including in diversified portfolios. Within the Schwab fund I’ve shown a slightly preference for SCHF in picking the ETFs for my own holdings, but I’m also attracted to using some SCHC and I’ve got a buy-limit order placed on SCHC to pick it if it falls far enough. With the market being so volatile right now, my cash is simply covering limit orders on a few of the ETFs that I have identified as desirable. That batch currently includes the Schwab U.S. Dividend Equity ETF (NYSEARCA: SCHD ) and SCHF. I already own some of the first two ETFs, but don’t have any SCHC yet. I have not decided if I like SCHC as much as SCHF, but I do appreciate a little bit of extra diversification that can come from using both. If I had free trading on VSS, I would be tempted to use it also. Ideal Allocations The highest total international equity allocation that I would be comfortable holding is around 20% of the portfolio value. I think my ideal allocation level may be closer to 10% to 15% though. One factor that will influence me is the simplicity of rebalancing. When rebalancing is easier, I’m willing to use slightly higher international allocations because the higher volatility can be dealt with more effectively. Current Influences I’ve been a pretty huge bear on China and was calling for some major corrections in that market. On the other hand, while the domestic market felt a little frothy, I wasn’t expecting the drawdown we have seen in August. Because of my views on the performance of China and the correlation of markets during times of stress, I’m inclined to focus my international allocations on developed markets rather than emerging markets. That causes me to see SCHC, SCHF, VSS, and VEA as the more desirable options. On the other hand, if China has a very solid crash and emerging market funds fall hard, then I’d be comfortable working a small emerging markets position into the portfolio. I’m not convinced that those prices will fall far enough for me to decide that I want to add more emerging markets rather than developed markets. If investors want to use emerging markets rather than developed markets for the international portion of the portfolio, I would suggest using a lower limit than 20%. The emerging markets have more inherent risk and a heavy allocation to the sector simply produces too much risk. To find the optimal exposure level, I think investors can use any two of the international ETFs except for combining SCHE and VWO. Going all emerging markets with no developed markets simply does not make sense for risk adjusted returns on a portfolio. Disclosure: I am/we are long SCHF, SCHB, VTI. (More…) 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. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.