Tag Archives: loader

CWI Has Solid Diversification In Every Way, If Investors Will Pay For It

Summary I’m taking a look at CWI as a candidate for inclusion in my ETF portfolio. The expense ratio is high for my taste, but the diversification is great. The correlation to SPY is based on high trade volumes and a long sample period. I’d be cautious about entering at a premium to NAV since I don’t expect those premiums to be maintained indefinitely. I’m not assessing any tax impacts. Investors should check their own situation for tax exposure. 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 SPDR MSCI ACWI ex-US ETF (NYSEARCA: CWI ). 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 CWI do? CWI attempts to track the total return (before fees and expenses) of the MSCI All Country World Index ex USA. At least 80% of the assets are invested in funds included in this index, or in ADRs representing the assets in the index. CWI falls under the category of “Foreign Large Blend”. Does CWI provide diversification benefits to a portfolio? Each investor may hold a different portfolio, but I use (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 is moderate at 86.6%. I’d like to see a lower correlation on my international investments, but this is still low enough to provide some diversification benefits. Extremely low levels of correlation are wonderful for establishing a more stable portfolio. I consider anything under 50% to be extremely low. However, for equity securities an extremely low correlation is frequently only found when there are substantial issues with trading volumes that may distort the statistics. Standard deviation of daily returns (dividend adjusted, measured since January 2012) The standard deviation is moderately high. For CWI it is .8916%. For SPY, it is 0.7300% for the same period. SPY usually beats other ETFs in this regard, so this isn’t too absurdly high for another ETF. The combination of the high standard deviation and correlation being at 75% mean I probably won’t consider this ETF for anything more than 5% to 10% of my ETF portfolio. Liquidity looks fine Average trading volume has been high enough that I’m not concerned. The average was around 300,000 shares per day. Mixing it with SPY I also run comparisons on the standard deviation of daily returns for the portfolio assuming that the portfolio is combined with the S&P 500. For research, I assume daily rebalancing because it dramatically simplifies the math. With a 50/50 weighting in a portfolio holding only SPY and CWI, the standard deviation of daily returns across the entire portfolio is 0.7835%. With 80% in SPY and 20% in CWI, the standard deviation of the portfolio would have been .7438%. If an investor wanted to use CWI as a supplement to their portfolio, the standard deviation across the portfolio with 95% in SPY and 5% in CWI would have been .7325%. 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. Yield & Taxes The distribution yield is 3.12%. The SEC yield is 2.22%. That appears to be a respectable 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. By investing in ETFs I’m removing some of the human emotions, such as panic. Higher yields imply lower growth rates (without reinvestment) over the long term, but that is an acceptable trade off in my opinion. I’m not a CPA or CFP, so I’m not assessing any tax impacts. Expense Ratio The ETF is posting .34% for an expense ratio. I want diversification, I want stability, and I don’t want to pay for them. The expense ratio on this fund is higher than I want to pay for equity securities, but not high enough to make me eliminate it from consideration. It is pushing that way though. I view expense ratios as a very important part of the long term return picture. Market to NAV The ETF is at a 1.09% premium to NAV currently. Premiums or discounts to NAV can change very quickly so investors should check prior to putting in an order. I wouldn’t want to pay this premium unless I could find a solid accounting justification for it. The ETF is large enough and liquid enough that I would expect the ETF to stay fairly close to NAV. Generally, I don’t trust deviations from NAV and I will have a strong resistance to paying a premium to NAV to enter into a position. Largest Holdings The diversification is fairly solid in this ETF. My favorite thing about the ETF is easily the diversification. If I’m going to be stuck with that expense ratio, I expect it to buy a fairly strong level of diversification and in this case it appears to do just that. (click to enlarge) Conclusion I’m currently screening a large volume of ETFs for my own portfolio. The portfolio I’m building is through Schwab, so I’m able to trade CWI with no commissions. I have a strong preference for researching ETFs that are free to trade in my account, so most of my research will be on ETFs that fall under the “ETF OneSource” program. I like the correlation and the diversification in the holdings, but the expense ratio is a bit high and I wouldn’t want to enter into a position at a significant premium to NAV. In my opinion, 1% is a fairly significant premium to pay with no assurance that I could exit the position at the same premium. This looks like an ETF to keep on my list as an option for international exposure. If selected, I would wait for an entry price with a much smaller (or non-existent) premium to NAV.

First Energy: The Hidden Gem Of Marcellus Shale?

Summary Electricity companies are the major beneficiaries of growing investment in the Marcellus and Utica Shale. First Energy is making investments in order to take advantage of the growth opportunity in the region. Cracker plants will substantially increase the demand for electricity in the region. The U.S. shale boom has come under threat due to the consistent fall in crude oil prices. And fracking was already controversial due to the environmental hazards — the state of New York has banned the practice due to the environmental issues. The fall in crude prices, however, has really impacted companies with oil-heavy portfolios while companies with gas-heavy portfolios continue to grow production. The main reason behind the increase in production is that the demand for natural gas, natural gas liquids, and the components remains high. Marcellus and Utica shale are natural gas rich areas and companies continue to invest in these natural gas rich areas to grow their production. These natural gas players have gained a lot from this boom in production. However, there are some other players that have been benefiting from this boom and have been relatively anonymous. First Energy (NYSE: FE ) is one of these players. The company has been providing electricity to the facilities in the region and it has been growing impressively. Over the last year, the stock has gained about 22%. First Energy has changed its strategy and the company is now focusing on transmission and regulated distribution business. The company has become a major supplier to the oil and gas companies operating in these regions. Drilling is still done through the diesel generators, but the gas processing plants use electricity and their demand is constantly increasing. The process of separating liquids and the natural gas process needs a lot of electricity. As the investment in natural gas drilling has been increasing, the demand for electricity has also been increasing. Since July 2011, First Energy’s usage for shale-related activities has increased by 70 megawatts. By 2019, this region is expected to create further demand of about 1,100 megawatts due to the increased developments in the area. In order to capture this growth opportunity, the company is planning to invest in a number of transmission projects. First Energy is going to invest $100 million in new transmission projects to increase supply to the operators in the Marcellus shale. Natural gas processing is a multi-stage process, and the rising demand for polyethylene and other feedstock components for the petrochemical industry have prompted the natural gas players to invest in cracker plants. These plants turn liquid ethane in polyethylene and other feedstock components. As the natural gas and natural gas liquids production continues to rise from the Marcellus shale, it is likely that these companies will want to build cracker plants in order to manufacture these feedstock components from liquids ethane and natural gas. As a result, demand for electricity will further rise as these cracker plants need substantial electricity to operate. First Energy will stand to benefit from this rise in demand, and the investment in better transmission will pay off for the company. First Energy is currently serving 12 natural gas processing plants in Pennsylvania, Ohio, and West Virginia. The company previously announced a $4.2 billion project, which will run through 2017. Most of these investments are focused in these states and the Marcellus shale area. One of the planned cracker plants is the project by Royal Dutch Shell (NYSE: RDS.A ) — the company is going to build a plant in Monaca Beaver County and this facility will process over 100,000 barrels of liquid ethane every day. The plant will use between 300 and 400 megawatts of electricity. The Bottom Line A growth opportunity is present for First Energy and it is already making efforts to capture this opportunity. Timely investment in the transmission network will position the company nicely to provide electricity to the new natural gas processing plants as well as cracker plants. Despite the overall poor conditions of the energy industry, the demand for natural gas liquids and feedstock components remains high, which bodes well for the company. Natural gas players will continue to grow production of natural gas, natural gas liquids and other feedstock components in order to meet the rising global demand for these products. As a result, demand for electricity will continue to grow. In my opinion, First Energy is well-positioned to grow and the company’s investment is targeted at a high-growth area of its business mix. I believe that despite a healthy gain (22%) during the current year, First Energy will continue to grow and will have a solid 2015. Disclaimer : This article is for informational purposes only and it should not be taken as an investment recommendation. Investing in stock markets involves a number of risks and readers/investors are encouraged to do their own due diligence and familiarize themselves with the risks involved.

Pigs In China – A Longer-Term Reason To Like Corn

The Teucrium Corn ETF finally seems to be bottoming although technical challenges remain overhead at the 200-day moving average. China’s massive consumption of pig meat creates tremendous demand for imported soy beans and corn to feed these pigs. Assuming this demand for pigs is sustainable, it promises to support corn prices, and thus dip-buying in Teucrium Corn ETF, over the longer-term. After an additional dip, my thesis for playing another bottom in Teucrium Corn ETF (NYSEARCA: CORN ) seems to finally be working. Since that article in mid-August, CORN is up 5.3% versus a 6.0% gain in the S&P 500 (NYSEARCA: SPY ). However, on the way to this gain, CORN first lost as much as 13%…so the ETF has a lot of work to do to balance out risk and reward. The next challenge for Teucrium Corn ETF : a downtrending 200-day moving average (DMA) Source: FreeStockCharts.com As I continue to patiently wait for this trade to unfold, I occasionally check in on relevant news to support or refute the thesis of a supply correction coupled with on-going strength in demand. One of the more fascinating pieces I have read along these lines comes from the Economist on December 20, 2014 titled ” Swine in China: Empire of the pig .” Before reading this piece, I had almost no understanding of the pig’s importance in Chinese history and diet. China’s increase in wealth in recent decades has simultaneously encouraged a massive increase in the consumption of pig meat: Since the late 1970s, when the government liberalised agriculture, pork consumption has increased nearly sevenfold in China. It now produces and consumes almost 500m swine a year, half of all the pigs in the world. This increase has brought a whole host of challenges to China’s government, farmers, and society as a whole. There are even environmental threats reaching into other countries. Since pig feed mainly consists of soy beans and corn (food scraps off the family table have long ceased being sufficient!), China’s demand for these crops has soared along with pig consumption. China cannot feed all its pigs and thus relies on imports. The International Institute of Social Studies in The Hague estimates… …more than half of the world’s feed crops will soon be eaten by Chinese pigs. Already in 2010 China’s soy imports accounted for more than 50% of the total global soy market. The kicker for corn comes from the trade organization, the US Grains Council: …by 2022 China will need to import 19m-32m tonnes of corn. That equates to between a fifth and a third of the world’s entire trade in corn today. China’s need for pig feed is so great that the International Institute for Sustainable Development claims China has (discreetly) purchased 5m hectares in developing countries for farming purposes. The Economist notes that, when Shuanghui, China’s largest pork producer, bought Smithfield Foods, an American firm, in 2013, it acquired huge stretches of Missouri and Texas. While the sustainability of China’s pig consumption is far from clear, it appears that China will imminently help pressure corn markets over the long-term. Along with this strength comes support for prices over time – the kind of support that makes dip-buying particularly attractive. The China/pig factor provides additional (and important) context to the on-going insistence from Deere’s CEO that corn prices will come back. Be careful out there!