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Vanguard’s All-World Ex-US Fund Sounds So Good, But Hasn’t Performed

Summary When I’m contemplating funds for my IRA, I like to use Modern Portfolio Theory. The risk level and correlation measured on a daily a basis are unattractive, though the correlation appears much lower in longer scenarios. Despite a great expense ratio and strong dividend yield, I have a hard time getting excited about VEU. It’s a solid ETF, but I’m less excited for it than I usually am for Vanguard funds. Investors should be seeking to improve their risk-adjusted returns. I’m a big fan of using ETFs to achieve the risk-adjusted returns relative to the portfolios that a normal investor can generate for themselves after trading costs. I’m working on building a new portfolio, and I’m going to be analyzing several of the ETFs that I am considering for my personal portfolio. One of the funds that I’m considering is the Vanguard FTSE All-World ex-US Index ETF (NYSEARCA: VEU ). I’ll be performing a substantial portion of my analysis along the lines of Modern Portfolio Theory, so my goal is to find ways to minimize costs, while achieving diversification to reduce my risk level. What does VEU do? VEU uses an indexing approach to track the performance of the FTSE All-World ex-US Index. The first thing I’m looking for is diversification. If the ETF really brings great diversification and can effectively represent all virtually all of the non-US market, then it should be an incredible fit for my portfolio. However, I want to run my own statistics to get a better feel for the performance of the ETF. Does VEU provide diversification benefits to a portfolio? Each investor may hold a different portfolio, but I use the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) as the basis for my analysis. I believe SPY, or another large cap U.S. fund with similar properties, represents the reasonable first step for many investors designing an ETF portfolio. Therefore, I start my diversification analysis by seeing how it works with SPY. I start with an ANOVA table: (click to enlarge) The correlation measured on a daily basis is higher than I would expect. Given that the ETF is expected to represent all of the non-U.S. market, I was hoping for a correlation closer to 70%. There are plenty of REIT ETFs that have lower levels of correlation. I feel like this ETF may be seeing more of a correlation to the U.S. market than it really should. I want to see low correlations, and this doesn’t seem to offer that. Since it feels wrong for there to be such a strong correlation, I decided to test the statistics against eyeballing the chart. Remember that I’m looking at statistics on a daily basis, so the influences can be money flowing in and out of the market. The image below is a 5-year price chart from Google Finance. (click to enlarge) VEU has performed quite poorly if measured over the entire period. However, it appears clear from the graph that while the correlation of daily returns is high, the overall direction of the lines is not impacted as strongly. Therefore, over a long time period, I would expect the diversification benefits to be better than they are over the short term. In the short term, the ETF moves up and down with SPY, but over the longer term, the performance is dictated by other factors. Standard deviation of daily returns (dividend adjusted, measured since January 2012) The standard deviation is higher than I would expect for an ETF that is expected to be so broad. For VEU, it is .905%. For SPY, it is 0.736% for the same period. The higher volatility, combined with high daily correlation and very unimpressive results over the last 5 years aren’t very attractive to me. I looked back at the numbers since inception, and they aren’t very attractive either. A portfolio split half and half between VEU and SPY, which I’m not recommending, would have scored a .793% for the daily standard deviation. Due to the high correlation and high standard deviation, the daily statistics don’t support the ETF offering much in the way of diversification benefits. Clearly, the long-term price chart shows that there is some substantial diversification. However, I’d be concerned if I allocated a large portion of the portfolio to it. Why I use standard deviation of daily returns I don’t believe historical returns have predictive power for future returns, but I do believe historical values for standard deviations of returns relative to other ETFs have some predictive power on future risks and correlations. Liquidity is great The average trading volume is over 2.4 million shares per day. I have absolutely no liquidity concerns. Yield The distribution yield is 3.52%. That is a fairly attractive yield. This ETF could be worth considering for retiring investors. I like to see strong yields for retiring portfolios, because I don’t want to touch the principal. Higher yields imply lower growth rates (without reinvestment) over the long term, but that is an acceptable trade-off, in my opinion. If the long-term diversification benefits and strong distribution yield encouraged retirees to keep their hands out of the portfolio, that would make the ETF substantially more attractive for investors that needed help in that regard. Expense Ratio The ETF is posting .15% for both gross and net expense ratios. For the expected diversity in the equity securities being held and the risk factors affecting the ETF, that is a very attractive expense ratio. In my opinion, .15% is a fairly attractive expense ratio, regardless of what the ETF is doing. Generally, I think anything less than .20% is doing well for expense ratios. Market-to-NAV The ETF is at a .06% premium to NAV currently. That isn’t large enough to matter for a long-term holder. Check before trading, but I wouldn’t expect to see this ETF deviate from the NAV by a meaningful amount. Largest Holdings The diversification within the holdings looks great. (click to enlarge) Conclusion I’m currently screening a large volume of ETFs for my own portfolio. I have a total of five portfolios that I am personally connected to. My wife and I both have Traditional and Roth IRAs. I also have a solo 401K. The 401K is through Schwab, so I have a preference for ETFs on the OneSource list for that account. The four IRA accounts are with a different brokerage that does offer me any incentives to pick certain ETFs. In those accounts, I will have a preference for using a smaller number of ETFs to achieve my diversification, due to trading costs. Vanguard funds are very attractive, in my opinion, for any accounts that don’t already have commission-free trading. In general, they have low expense ratios and solid diversification. I was given the impression that this ETF would be a strong contender for one or two of the IRA accounts, but so far, I’m not convinced. My current IRA uses some mutual funds that were relatively low-fee, with no trading costs. I want to make some fairly substantial changes. Over the course of a few months, the trading commission on buying into some low-fee ETFs should be covered by the lower expense ratios. The trading costs will encourage me to rebalance less frequently. That makes low volatility even more important to me. I’m stuck in a hard situation with assessing VEU. I love the idea of getting exposure to all the foreign markets with a single ETF, because it reduces trading costs. I don’t like the daily correlation values, but the long-term chart shows that the performance of the VEU isn’t as strongly tied to the S&P 500 as it would appear. For my IRAs (non-Schwab, so no OneSource), the strongest contenders so far for major positions are the Vanguard Total Stock Market ETF (NYSEARCA: VTI ) and Vanguard REIT Index ETF (NYSEARCA: VNQ ). If I can’t find an option that really appeals to me as a single ETF to cover foreign exposure in the IRAs, I may accept going without the foreign exposure. 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. The analyst holds a diversified portfolio, including mutual funds or index funds, which may include a small long exposure to the stock.

Dividend Growth Stock Overview: UGI Corporation

About UGI Corporation UGI Corporation (NYSE: UGI ) is a holding company that through its subsidiaries distributes, stores, transports and markets energy products to customers across the United States and Europe. UGI distributes liquefied petroleum gases (LPGs), provides natural gas and electric service, and generates electricity to retail customers. The company is also a regional marketer of energy commodities, and HVAC, refrigeration and electrical contracting services. UGI has several subsidiaries through which they do business. UGI’s domestic propane business is primarily conducted through AmeriGas Partners (NYSE: APU ), which supplies LPGs to over 2 million customers across all 50 states. UGI Utilities serves about 600,000 natural gas utility customers in eastern and central Pennsylvania and western Maryland. In fiscal year 2014, UGI Utilities sold or transported over 192 billion cubit feet of natural has through its gas main distribution system. UGI Energy Services markets and distributes natural gas, electricity and liquid fuels to about 19,000 customers in the mid-Atlantic region of the United States. UGI serves the international market through UGI International, which serves the European market through three subsidiaries: Antargaz, Flaga, and AvantiGas. Antargaz serves France and the Benelux countries; the company sold over 300 million gallons of LPG through retail outlets to customers in these markets. Antargaz has over 230 thousand customers across these countries. Flaga ditributes LPGs throughout the Eastern European and Nordic markets and sold over 230 million gallons of LPGs to 70 thousand customers. AvantiGas serves the United Kingdom LPG market and sold over 145 million gallons of LPGs in fiscal year 2014. Each of these subsidiaries is either the leading or one of the leading LPG distributors in their respective markets. UGI also has a small LPG distribution business in China through a majority-owned partnership. UGI has stated that it is committed to delivering 6 to 10% EPS growth and 4% annual dividend growth. For UGI’s 2014 fiscal year (which ended Sept. 30, 2014), revenues were $8.28 billion and operating income was $1.01 billion, up 15.0% and 21.0% from FY2013, respectively. Earnings per common share were $1.92 in FY2014, up 20.0% from FY2013. UGI is also meeting its dividend growth objectives; see below for more details. The company is a member of the S&P Mid Cap 400 index and S&P’s High Yield Dividend Aristocrats index, and trades under the ticker symbol UGI. UGI Corporation’s Dividend and Stock Split History (click to enlarge) UGI has increased dividends at an average annual rate of over 9% for the last five years. UGI has paid dividends since 1885 and increased its dividends since 1988. UGI pays dividends on the first day of January, April, July and October. The company traditionally increases its dividend in the second quarter of the calendar year, announcing the increased dividend at the end of April and with the stock going ex-dividend in mid-June. In 2014, UGI announced two dividend increases; the first, a 4.5% increase, came in the second quarter and the second, a 10.6% increase, came in the third quarter. UGI paid a total of 74.5 cents per share in 2013 and 82 cents in 2014 – a net increase of 10.07%. I expect UGI to announce their next increase at the end of April 2015. UGI’s dividend growth year-to-year has fluctuated greatly. Between 1992 and 2002, UGI increased its dividend very slowly, with annual growth in the low-to-middle single digit percentages. Offsetting this were large dividend increases from 1987-1991 and 2003-2006. The net result is that as you over greater periods of time, the compounded dividend growth rates decrease. UGI’s 5-year compounded annual dividend growth rate (CADGR) is 9.19%, its 10-year CADGR is 7.24%, its 20-year CADGR of 5.08%, and its 25-year CADGR is 4.92%. UGI has split its stock 5 times since 1987. The most recent stock split was a 3-for-2 split in August 2014. Prior to that, UGI split its stock 2-for-1 in September 1987, May 1990 and May 2005, and 3-for-2 in February 2003. For each share of stock you owned in 1987, you would now have 18 shares of UGI stock. Over the 5 years ending on December 31, 2014, UGI stock appreciated at an annualized rate of 22.50%, from a split-adjusted $13.77 to $37.98. This significantly outperformed both the 13.0% annualized return of the S&P 500 and the 14.9% annualized return of the S&P Mid Cap 400 index during this time. UGI’s Direct Purchase and Dividend Reinvestment Plans UGI has both direct purchase and dividend reinvestment plans. The plans are very favorable to investors, as UGI covers all the fees when you buy shares, whether through direct purchase or dividend reinvestment. If you’re a new investor, the minimum initial purchase is $1000. For additional direct purchases, the minimum is $25 for purchases by either check or automatic debit. When you sell your stock, you’ll pay a sales fee of either $15 or $25 (depending on the type of sell order) plus a processing fee of 12 cents per share. Helpful Links UGI Corporation’s Investor Relations Website Current quote and financial summary for UGI Corporation (finviz.com) Information on the direct purchase and dividend reinvestment plans for UGI Disclosure: I do not currently have, nor do I plan to take positions in UGI.

Inside The New Target Factor ETFs From iShares

Deflationary fear and a slowdown have started to trouble developed international markets, and most investors in the ETF world are looking out for quality exposure in the area. In fact, some aggressive investors are hunting for high momentum stocks presuming that these might outperform in the days ahead in the prevailing easy money era. Their search looks justified. After all, the Fed withdrew its gigantic QE program last year and might start walking the way of policy tightening later this year. Thanks to such policy differential in the developed world, iShares – the largest ETF issuer in the world – brought about two products targeting the developed international economies probably to quench investors’ thirst. We have detailed the two newly launched funds below. iShares MSCI International Developed Momentum Factor ETF ( IMTM) : For a broad foreign market play with a focus on large-and-mid cap companies, investors could consider IMTM which focuses on 12 developed countries for exposure. Stocks that exhibit a higher price momentum will be included in the fund. This product follows the MSCI World ex USA Momentum Index, holding 269 securities in its basket and charging a pretty low fee of 30 basis points a year for this relatively unique exposure. Though the fund holds about 28% exposure in the defensive health care sector, it is more inclined toward higher beta sectors like financials, industrials companies and consumer discretionary. Top nations include Japan (29.6%), Canada (18.0%), and Switzerland (12.9%) while the U.K. (8.8%) and Germany (4.7%) round out the top five for this well-diversified fund. The fund does not have much company concentration risk with no stock accounting for more than 5.34% of the fund. Novartis (NYSE: NVS ), Roche and Bayer ( OTCPK:BAYRY ) are the top-three holdings of the fund. IMTM Competition: Momentum strategy is not yet popular in the ETF world. Though the domestic economy has a couple of ETFs including the $1.46 billion-First Trust Dorsey Wright Focus 5 ETF (NASDAQ: FV ), $1.61 billion-PowerShares DWA Momentum Portfolio (NYSEARCA: PDP ) and $515 million-iShares MSCI USA Momentum Factor ETF (NYSEARCA: MTUM ), the international arena is relatively less penetrated. Global Momentum ETF (NYSEARCA: GMOM ) made an entry late last year in the international space and has amassed about $26 million in assets so far. Given GMOM’s high expense ratio of 94 bps and iShares’ own product MTUM’s considerable success in a short span, we expect the issuer to replicate the success on its global version as well. However, the issuer should take note of Cambria’s active approach to the momentum theme which might give it an edge over IMTM in volatile markets. iShares MSCI International Developed Quality Factor ETF ( IQLT) : This fund gives investors exposure to quality stocks (excluding U.S.) by identifying companies that have the highest quality scores based on three main fundamental variables – high return on equity, stable earnings year-over-year growth and low financial leverage. The product charges investors 30 basis points a year in fees and tracks the MSCI World ex USA Sector Neutral Quality Index. The fund holds about 289 securities in its basket with a focus on financials (26.9%). Industrials (12.1%), Consumer Discretionary (11.5%), Health Care (10.8%) and Consumer Staples (10.6%) occupy the next four spots. The fund is heavy on the U.K. with about one-fourth of the exposure followed by Switzerland (15.6%). Roche takes the top-most allocation in the portfolio with about 5.2% exposure followed by Novo Nordisk (2.7%) and Nestle (2.31%). IQLT Competition: There are currently a few products operating in the space including PowerShares S&P International Developed High Quality Portfolio (NYSEARCA: IDHQ ), SPDR MSCI World Quality Mix ETF (NYSEARCA: QWLD ) and Market Vectors MSCI International Quality ETF (NYSEARCA: QXUS ). While neither has developed a huge following so far and IDHQ charges a bit high at 55 bps, IQLT has scope for outperformance.