Tag Archives: management

USMV: It Lives Up To The Name, This Is One Durable Fund

Summary USMV offers investors fairly low volatility and a low beta that make it easy to fit into a portfolio. The holdings start with a heavy position in telecommunications, but less than 5% of the portfolio is in the sector. The exposure to consumer staples, health care, and utilities look nice. Having seen USMV get hit by the absurd sell off on 8/24/2015, investors should avoid using stop loss orders. 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 iShares MSCI USA Minimum Volatility ETF (NYSEARCA: USMV ). 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. Expense Ratio The expense ratio on USMV is .15%. It isn’t as cheap as many of the Schwab or Vanguard funds, but this is still well within reason for an investor trying to control the amount of their wealth that flows out to expense ratios each year. Largest Holdings The iShares MSCI USA Minimum Volatility ETF has a fairly diversified group of holdings. When I pulled the numbers nothing was over 1.7% of the portfolio. This internal diversification is great for reducing any idiosyncratic risk from concentrated positions. Looking through the portfolio investors may notice that there appears to be a bias towards companies that pay high dividends. Since those companies are rapidly returning money to shareholders, they have an easier time maintaining a solid valuation since their values are tied to dividends that are more predictable than future growth which may require more estimation. I’ve been fairly bearish on telecommunications since it became clear Sprint (NYSE: S ) intended to create a price war that I expected to drag down profits for AT&T (NYSE: T ) and Verizon (NYSE: VZ ). However, these are huge companies with a long track record, high dividend yield, and solid business model. I’m not completely sold on them, but with the level of diversification in the portfolio I don’t see it as a big problem. If they were combining to be 10 to 15% of the portfolio, I wouldn’t find USMV so attractive. Sectors The following chart breaks down the sector holdings for the fund. The first thing I was checking was for any other exposure to telecommunications. While there are two major telecommunications firms in the top 3 holdings, the total weight in the portfolio is only 4.23% which reassures me that the portfolio wouldn’t be heavily exposed to the price based competition in the telecommunication arena. On the other hand we do see some solid weights for healthcare, consumer staples, and utilities. These are three sectors that I expect to have very solid demand over the next decade. These sectors are simply very hard to replace. Even if we see substantial changes in the economy as technology changes, these sectors remain highly relevant due to the impacts of an aging population, a need for basic supplies, and a desire to keep our homes heated (or cooled). Building the Portfolio This hypothetical portfolio has a slightly aggressive allocation for the middle aged investor. Only 30% of the total portfolio value is placed in bonds and a third of that bond allocation is given to emerging market bonds. However, another 10% of the portfolio is given to preferred shares and 10% is given to a minimum volatility fund that has proven to be fairly stable. Within the bond portfolio, the portion of bonds that are not from emerging markets are high quality medium term treasury securities that show a negative correlation to most equity assets. The result is a portfolio that is substantially less volatile than what most investors would build for themselves. For a younger investor with a high risk tolerance this may be significantly more conservative than they would need. The portfolio assumes frequent rebalancing which would be a problem for short term trading outside of tax advantaged accounts unless the investor was going to rebalance by adding to their positions on a regular basis and allocating the majority of the capital towards whichever portions of the portfolio had been underperforming recently. (click to enlarge) A quick rundown of the portfolio The two bond funds in the portfolio are the iShares J.P. Morgan USD Emerging Markets Bond ETF (EBM) for higher yielding debt from emerging markets and for medium term treasury debt. The iShares 7-10 Year Treasury Bond ETF (NYSEARCA: IEF ) should be useful for the highly negative correlation it provides relative to the equity positions. EMB on the other hand is attempting to produce more current income with less duration risk by taking on some risk from investing in emerging markets. The iShares U.S. Preferred Stock ETF (NYSEARCA: PFF ) gives investors a respectable current yield in a period of very weak interest rates. The position in the iShares MSCI USA Minimum Volatility ETF offers investors substantially lower volatility with a beta of only .7 which makes the fund an excellent fit for many investors. It won’t climb as fast as the rest of the market, but it also does better at resisting drawdowns. It may not be “exciting”, but there are plenty of other areas to find “excitement” in life. Wondering if your retirement account is going to implode should not be a source of excitement. The position in the PowerShares Buyback Achievers Portfolio ETF (NYSEARCA: PKW ) makes the portfolio overweight on companies that are performing buybacks. The strategy has produced surprisingly solid returns over the sample period. I wouldn’t normally consider this as a necessary exposure for investors, but it seemed like an interesting one to include and with a very high correlation to the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) and similar levels of volatility it has little impact on the numbers for the rest of the portfolio. The core of the portfolio comes from simple exposure to the S&P 500 via SPY, though I would suggest that investors creating a new portfolio and not tied into an ETF for that large domestic position should consider the alternative by Vanguard’s Vanguard S&P 500 ETF (NYSEARCA: VOO ) which offers similar holdings and a lower expense ratio. I have yet to see any good argument for not using or another very similar fund as the core of a portfolio. In this piece I’m using SPY because some investors with a very long history of selling SPY may not want to trigger the capital gains tax on selling the position and thus choose to continue holding SPY rather than the alternatives with lower expense ratios. Risk Contribution The risk contribution category demonstrates the amount of the portfolio’s volatility that can be attributed to that position. To make it easier to analyze how risky each holding would be in the context of the portfolio, I have most of these holdings weighted at a simple 10%. Because of IEF’s heavy negative correlation, it receives a weighting of 20%. Since SPY is used as the core of the portfolio, it merits a weighting of 40%. Correlation The chart below shows the correlation of each ETF with each other ETF in the portfolio and with the S&P 500 . Blue boxes indicate positive correlations and tan box indicate negative correlations. Generally speaking lower levels of correlation are highly desirable and high levels of correlation substantially reduce the benefits from diversification. Conclusion The USMV fund has a solid correlation to the S&P 500, coming in around 90%, but the low annualized volatility allows it to achieve a beta of only .69 which makes the required returns on the ETF substantially lower than the required returns on pure equity positions. While the performance of the portfolio trailed the S&P 500 and may regularly trail it, it is also more resilient to selling pressure. Perhaps there should be one caveat stated. During the panic on 8/24/2015 the ETF sold off dramatically and hit an absurd low of $26.41 before bouncing back to close at $39.25. The biggest message there is that investors seeking stability may want to look at USMV, but they shouldn’t be eager to put in stop losses. During the selling that impacted many stocks and ETFs, USMV was not immune to the sudden and absurd price drop. Simply using USMV as a large allocation should be enough to materially decrease portfolio risk. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (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.

National Grid Offers Both Capital Appreciation And A Steady Stream Of Dividends

Summary Utility companies are usually in the spotlight whenever dividends are mentioned. National Grid is one of those rare companies that offers a steady dividend stream and a slice of capital appreciation for investors. With a footprint in the U.K. and U.S., this company has a very extensive network of transmission wires and gas pipelines. The company’s financial position definitely warrants a consideration for investors who are in search of both security and income. This hidden gem has been missed out by the majority of the market. Investors who come on board today stand to profit greatly. Introduction With what is happening lately in the market, it is very easy to get distracted by all the noise that is surrounding the business world and lose track of the great businesses that are serving people. As I combed the market for bargains, I picked up on one that will not only offer investors a good return on its capital appreciation but also delivers a steady and growing dividend. National Grid (NYSE: NGG ) is just that kind of a company. This is a business that has a solid balance sheet and is delivering a steady stream of cash flow to investors. Business Overview National Grid owns electric transmission wires and gas pipelines. Its stock offers a better risk to return proposition for the long-term investor. Most investors in today’s market would prefer a stock that dishes out a 5% dividend, brings about a moderate amount of risk and the chance to profit on capital appreciation as uncertainty plagues the global market. The company’s competitive advantage lies largely in its extensive network of transmission wires in the U.K. and Northern U.S. Although this business sounds like a typical utility company, there is more than meets the eye for investors as the company starts to dig deeper into what it owns and how it operates. Transmission and Distribution National Grid functions coordinates and enables the flow of electricity in both England and Wales but not in the U.S. Consumers simply pay a fee to the company in order to have the rights to use the system. This revenue structure enables National Grid’s income to be not only very stable but also predictable. Although it does not possess the toll-like characteristics in the U.S., the company has some very valuable assets and serves nearly 4 million customers. Transmission grids are often linked to one another so that electricity can flow from one state to another. Right now, the company is planning on expanding its network into Iceland, Belgium and other parts of Europe as well. As the assets of the company grow, it will be able to fetch more revenue which will allow it to expand even more, and the positive cycle repeats itself. In the U.K., National Grid owns and operates the National Transmission System, which is a gas infrastructure. The company has a distribution network that serves at least 11 million customers, along with a collection of liquefied natural gas importation terminal and storage facilities. Despite being known by many as a utility company that generates power (with the exception from the power plants in New York), National Grid earns a buck whenever power is being transmitted through the lines it owns. This toll-like business model should give investors seeking a predictable return some comfort and certainty as the majority of risk is now shifted to the power producers. What investors need to keep in mind is that much of its transmission grids are wearing out and it is almost time for the company to reinvest and repair its infrastructure. Knowing that this would be a very capital-intensive project, the company charges a high price to consumers so as to generate sufficient revenue to finance new projects and repair old ones. Most of National Grid’s revenue is fixed and dependent on the amount of assets we are looking at here. As the business and its infrastructure grows, so will the predictable stream of income. As the energy arena keeps progressing, changes are blind to happen. The U.K. has determined that utilities would need at least $300 billion in order to keep up with that change. The company has laid out an 8-year plan to invest in its assets and currently, it is in the second year of that plan. As a result of this, the company is expecting that its regulated assets will grow by approximately 5% to 6% in the U.K. over the next few years. I think that the company has made a wise move in investing in its U.K. assets as it churns the lion’s share of its operating income. In the U.S., the company is upgrading its gas and electricity systems and that will ensure that it will keep turning a steady stream of profit in the long run. Financial Position If one were to look at the balance sheet of any utility company, he or she would realize that it is more or less the same in terms of the amount of debt it has and the margins it generates. Over the coming years, I would not expect to see a drastic change in finances for the company. With expansion plans on the line, the company should be able to grow steadily at a low single-digit pace. Lastly, the dividend would likely hold steady and shareholders can sleep well at night as the company will continue to dish out dividends with a 5% yield. Potential Short Circuit In a utility business, there are two key factors investors need to keep an eye on to know whether or not the company is able to scale: demographic growth and regulation. In terms of demographic growth, it isn’t very robust in either U.S. or the U.K. On the regulatory aspect, the relationship between National Grid and regulators isn’t a bad one. However, if the relationship sours, investors might have a reason to worry. For now, investors can remain comfortable as the business is financially strong and that it can withstand the market’s volatility. Over the long run, I do not foresee people using lesser electricity. Even if solar power was to come into play, it would still require the grid and transmission lines (to a certain extend) to run on. I believe the company has ample time to adjust to the changing market and temporary hiccups should not cause a knee-jerk reaction for long-term investors. Conclusion In a market where interest rates are almost negligent, most investors would be thrilled to find a company that yields a 5% dividend while offering a chance for capital appreciation at the current price. I would recommend investors take a close look at National Grid and see how it can charge up your portfolio. Disclosure: I am/we are long NGG. (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.

Homebuilding On Sustained Growth: ETFs In Focus

After a sizzling summer, the U.S. housing market showed signs of losing some momentum, indicating that the China-led global growth worries might have spoiled the industry’s growth last month. This is especially true as new home construction dropped 3% in August to a seasonally adjusted annual rate of 1.13 million homes, much higher than the market expectation of 1.16 million. Despite the fall, housing starts remained above the one-million-unit mark for the fifth straight month. This suggests that recovery is still on the way and will keep coming. The positive sentiments were driven by growing demand for homes, accelerating job growth, rising wages, affordable mortgage rates, and increasing consumer confidence. Additionally, new applications for building permits, a construction bellwether for the coming months, rebounded last month as it rose 3.5% to an annual rate of 1.17 million after falling 15.5% in July. Another data showed that homebuilder confidence jumped to the highest level since November 2005 as indicated by the National Association of Homebuilders/Wells Fargo Sentiment Index that rose one point in September. The optimism is also reflected in number of homebuilder stocks and ETFs. In particular, the iShares U.S. Home Construction ETF (NYSEARCA: ITB ) and the SPDR Homebuilders ETF (NYSEARCA: XHB ) gained about 0.8% each on Thursday’s trading session despite the disappointing housing starts data. This was followed by a modest 0.04% gain for the PowerShares Dynamic Building & Construction Portfolio ETF (NYSEARCA: PKB ) . From a year-to-date look, ITB, XHB and PKB have respectively risen 10%, 9.4% and 14.3%, and are easily outpacing the broad sector and broad market funds. XLB lost nearly 10.3% while SPY shed 1.74% in the same time frame. All the three ETFs have a decent Zacks ETF Rank of 3 or “Hold” rating with a High risk outlook. The outperformance in the homebuilding space is likely to continue in the coming months given that the residential and commercial building industry has a solid Zacks Rank in the top 38%. Further, S&P Capital IQ expects homebuilding revenues to increase 15% this year and 11% in the next, thanks to encouraging industry fundamentals and an improving U.S. economy. Investors seeking large profits in a short span could also take a look at the leveraged plays – the ProShares Ultra Homebuilders & Supplies ETF (NYSEARCA: HBU ) and the Direxion Daily Homebuilders & Supplies Bull 3x Shares ETF (NYSEARCA: NAIL ) . HBU provides double exposure while NAIL offers triple exposure to the index of ITB. However, the fund is relatively new in the space and has low trading activity, making it a riskier and a high-cost choice. Link to the original post on Zacks.com Share this article with a colleague