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Top And Flop ETFs Of October

After a rocky Q3, the fourth quarter started off on a decent note, with the first month of the quarter – October – stepping up on gas. The U.S. markets were in green, thanks to a delayed Fed lift-off possibility at the end of September, no more economic shockers from China (the root cause of the Q3 massacre of the global market) and solid tech earnings. U.S. stocks delivered the largest monthly returns in four years. Among the top ETFs, investors saw the S&P 500-based SPY gain about 8.5%, Dow Jones-based DIA advance 8.6% and Nasdaq-based QQQ have a stellar rally and pop about 11.4% in October. While QQQ surged from superb tech earnings, DIA got positive cues from the oil price recovery, though for a shorter period. Though the bullish sentiments eased later in the month on the return of Fed-related worries, moderate corporate earnings and hopes for further policy easing across the globe (especially by the ECB) maintained the upbeat momentum. That being said, below we highlight the best and worst ETF performers of October (returns are mentioned as per xtf.com ). Global X MSCI Argentina ETF (NYSEARCA: ARGT ) – Up 25.1% Argentina stocks were a surprise winner in October on election euphoria. The election on October 25 did not however succeed in bringing out a victor and led to a runoff. In fact, Conservative opposition’s pro-business candidate Mauricio Macri’s unexpected strength in the poll box set the stage for a second round on November 22 . Hopes of a pro-growth leader and the ongoing election-related spending fueled Argentina’s stocks and the related ETF. KraneShares CSI China Internet ETF (NASDAQ: KWEB ) – Up 20.7% Overall, the Chinese stocks are back with a bang after the horrendous sell-off in the August-September period, on compelling valuation and the government accommodative policies. Of the whole set, the Chinese Internet stocks deserve a special mention as these are soaring on solid earnings. Be it Alibaba Group (NYSE: BABA ) or Baidu (NASDAQ: BIDU ), most stocks witnessed jump in its share prices post earnings release and helped KWEB gain over 20% in the month. Several other China-based ETFs including Guggenheim China Technology ETF (NYSEARCA: CQQQ ), PowerShares Golden Dragon China Portfolio (NYSEARCA: PGJ ), and KraneShares CSI China Five Year Plan ETF (NYSEARCA: KFYP ) returned over 19% in the month. Global X Copper Miners ETF (NYSEARCA: COPX ) – Up 19.0% Copper prices held up well in October on the possibility of an easing supply glut, fresh Chinese rate cuts as well as Beijing’s pro-growth reforms. Announcements by Freeport-McMoRan (NYSE: FCX ) and Glencore ( OTCPK:GLNCY ), the second and third largest copper producing companies worldwide, for considerable output cuts, boosted the price of the red metal. Moreover, China matters the most for this metal as the country is the world’s biggest consumer of this industrial metal, making up roughly 40% of global copper demand. All these tailwinds lifted the copper mining stocks and ETFs in October. Notably, mining ETFs generally trade as a leveraged play on the underlying metal and thus see a higher jump. C-Tracks on Citi Volatility Index ETN (NYSEARCA: CVOL ) – Down 45.2% Volatility products lost the most in October, as these tend to underperform when markets are rising or fear levels over the future are low, both of which were the flavors of October, though the trends began to alter at end the month. The Fed-induced bounce was behind the volatility crash in October. As such, CVOL linked to the Citi Volatility Index Total Return, plunged about 45% last month. iPath Dow Jones-UBS Natural Gas ETN (NYSEARCA: GAZ ) – Down 25.8% Natural gas prices fell through the floor in October on higher inventory and the buzz that this winter might be milder than the prior two. El Niño, a warm-water phenomenon that blows off the Pacific coast of South America, is likely to be stronger and keep the Northern Hemisphere relatively warmer. As almost 50% of Americans use natural gas for heating purposes, these fundamentals dented the pricing of the commodity. As a result, the product shed about 25.8%. iShares Currency Hedged MSCI ACWI ETF (NYSEARCA: HACW ) – Down 8.3% Since the U.S. dollar dipped early in October, the currency-hedging technique fell out of investor favor. As a result, this ETF lost about 8% in the month. However, investors should note that with the Fed rate hike talks on the table again, and China, Euro zone and Japan mulling over further policy easing, the flair for currency hedging is brightening up. Original Post

DON: A Typical Mid-Cap ETF Presented As A Dividend ETF

Summary DON offers a dividend yield of 2.45%. It just isn’t high enough to make me think of this as a compelling dividend investment. The individual company allocations are reasonable for preventing diversifiable risk. The expense ratio is simply too high for my tastes. The sector allocation strikes me as being too volatile. Looking at historical performance confirms the higher volatility of the fund. It delivered great performance, but it was compensation for risk. The WisdomTree MidCap Dividend ETF (NYSEARCA: DON ) is a weird fund that doesn’t quite seem to go together for me. I’ve seen quite a few good dividend ETFs lately and started to wonder if my standards were simply slipping. It seems I was just due for finding one that didn’t work for me. Expenses The expense ratio is a .38%. This is quite a bit too high for my tastes. Dividend Yield The dividend yield is currently running 2.45%. Is that really a dividend ETF? I’m not convinced so far. Am I just having a grumpy night? Who knows, but I’m expecting dividend yields to exceed 2.5% even in this low interest rate environment. Some of my ETF holdings have yields over 2.5% without any emphasis on the dividend yield. Holdings I put grabbed the following chart to demonstrate the weight of the top 10 holdings: (click to enlarge) The thing I do love about these allocations are that the diversification across individual companies is excellent. There are very few companies with a weight higher than 1%, so any scandal event would be unlikely to cost an investor a substantial portion of their portfolio. I do like seeing Coach (NYSE: COH ) as a top holding and I certainly don’t mind their dividend yield being greater than 4%. The question may be how many low dividend holdings are included in the fund to drive the fund yield below 2.5%? Mattel, Inc. (NASDAQ: MAT ) has a dividend yield greater than 6%. I’ll have to admit that when the dividend yield gets that high I have to start questioning the sustainability of the dividend. I prefer dividend growth to always be positive. Negative growth just doesn’t offer the same appeal. Darden Restaurants (NYSE: DRI ) is another solid yielding stock at 3.55% and they recently delivered a solid earnings beat from their “OG TO GO” program which allows customers to pick up food from Olive Garden to go. The program is excellent because it allows the company to expand the volume of sales without requiring substantial capital expenditures in new seating areas. Lately quite a few of the restaurants I cover have been trying to figure out how to deal with increased traffic because they just don’t have enough seating room. Of course, it is possible to handle that problem by raising prices but the competitive nature of the casual restaurant industry is incredibly fierce to companies that opt to give customers less value for their money. Sectors (click to enlarge) I don’t like it. That’s got to be one of the most frank assessments you’ve heard on sector allocations and it is precisely accurate. I really don’t like this sector allocation whatsoever for a dividend ETF. There is a very heavy emphasis on financials and consumer discretionary. The allocation to utilities is nice at 13%, and I don’t mind industrials at 14.04%, but I’d rather see financials and consumer discretionary at the bottom of the list. I’d like to see consumer staples and health care with heavy allocations. Neither of them got the nod. There is nothing wrong with this sector allocation for a typical mid-cap ETF , but I’d rather see it named along those lines. Generally speaking I find the mid-cap space to be more volatile than the large cap space and I’d rather feel that the holdings within that part of the market were going to be safer holdings. That makes me double down on the importance of using heavy allocations to consumer staples. This portfolio is designed in such a manner that makes it simply feel too risky for investors that are focused on dividends and growing their portfolio. I wouldn’t mind it as a simple “mid-cap” ETF, but it doesn’t work as a dividend ETF for me. When I ran a regression on the returns for DON with the returns for the S&P 500 as measured by the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ), with a sample period going back to June 2006, the results were great for returns but bad for risk. DON returned a very impressive 119% in that period while SPY returned 101%. Clearly that strong performance is great, but the max drawdown was almost 62% compared to 55% for SPY and the annualized volatility for DON was higher. Simply put, I believe the excess returns here are strongly correlated to the excess risk. There is nothing wrong with a higher risk portfolio, but it doesn’t match the typical expectation of an investor hoping to drop their cash in and get a fairly safe and growing stream of dividend income. Conclusion This is a fine mid-cap ETF but it doesn’t make sense as a dividend ETF. The yield, the sector allocations, and the risk level demonstrated over the last 9 years or so are indicative of a more typical mid-cap ETF that is appropriate for aggressive investors with very bullish expectations about the future path of the economy. This is the kind of allocation I would be interested in buying when the market had crashed and already lost 40% of the total market value. If shares get that depressed, then this allocation would be much more acceptable for trying to catch the ride back up in equity prices. In my opinion, our market would have to fall quite a ways before I would want to start grabbing up those highly aggressive allocations. I can’t argue with the past returns, but the risk just doesn’t match up with my desires.

DLN: A Perfectly Adequate Dividend ETF

Summary DLN offers a dividend yield of 2.74%. It’s acceptable, but nothing to write home about. The top several holdings are a mix of established dividend champions, except for the allocation to Apple which is really hanging on the company paying out their cash. The ETF has a moderate expense ratio, but there are so many options I’ve seen lately with ratios that are excellent. I’d really prefer to see consumer staples as an overweight allocation or a higher allocation to utilities. The WisdomTree Largecap Dividend ETF (NYSEARCA: DLN ) looks quite adequate. Ironically, there seems to be no better way to sum up the fund in a single sentence. Expenses The expense ratio is a .28%. When it comes to investing, who wants to throw away their capital on high expenses ratios or trading costs? This is fairly middle of the road for expense ratios in my estimation, but there have been quite a few funds coming up lately with expense rates that are downright excellent. Dividend Yield The dividend yield is currently running 2.74%. That isn’t too bad if the universe of comparable securities is all ETFs, but as far as dividend ETFs go this is running a bit low. Based on current valuations throughout the industry I would expect to see dividend ETFs running closer to 2.9% with some high yield dividend ETFs exceeding 3.5%. Holdings I put grabbed the following chart to demonstrate the weight of the top 10 holdings: (click to enlarge) Apple (NASDAQ: AAPL ) being the top holding makes sense for an ETF that wants to more closely track the market since Apple is such a large part of the market. They certainly have the cash to pay out great dividends but a yield below 2% doesn’t seem like a great fit for the top holding in a dividend ETF. I love seeing Exxon Mobil (NYSE: XOM ) as a top holding. Investors may be concerned about cheap gas being here to stay, but I think money in politics will be around decades (centuries?) longer than cheap gas. Bet against big oil at your own peril. I can say the same about liking Chevron (NYSE: CVX ) as a top holding. These companies offer investors a good way to benefit from high as prices which would generally be a drag on the rest of the economy and on their personal expenditures. Seeing AT&T (NYSE: T ) and Verizon (NYSE: VZ ) with heavy weights is one area where I tend to feel conflicted. The dividend yields are great but the sector is becoming more competitive. On the upside any technology that actually makes them obsolete or at least incapable of growing earnings would be indicative of the investor having a lower cell phone bill, so there is another benefit to aligning the portfolio to match an investor’s individual expenditures. Honestly, is there any better way to pay your phone bill than with a dividend check from the phone company? This is a difficult one to come down on because I love the strategy of covering a cost with dividend income from the company, but I’m also concerned that Sprint (NYSE: S ) is offering a very viable competitive product. Their reception may be terrible in some cities, but they are great in Colorado Springs. Johnson & Johnson (NYSE: JNJ ) is another great dividend company to hold. They have an effective R&D team and a global market presence. Sectors (click to enlarge) The sector composition is fairly balanced. On one hand, a balanced portfolio seems positive. However, I think it comes down to the individual investor. I have more risk tolerance than many investors because I have a fairly long time to recover from negative events, but my portfolio is also missing traditional bond exposure so I tend to prefer the less risky equity allocations. That puts me in a position to favor consumer staples, equity REITs, energy (only in the context of large companies like XOM), and utilities. Occasionally equity REITs are included in the “financials” category, but I’d rather get my REIT exposure through a separate ETF because I want to shove all my REITs into tax advantaged accounts. Therefore, I tend to use large equity REIT allocations in those accounts and would prefer a dividend champion ETF to be underweight on equity REITs. When “financials” simply means banks, then I prefer to see the allocation limited to around 10 to 15% of the portfolio. This allocation is reasonable as a balanced portfolio, but I would really rather see information technology swapping place with utilities and wouldn’t mind seeing financials trade place with either health care or energy. I think those areas offer investors a safer income stream as it relates to the expenses they will face in their life. What to Add Clearly my first area to increase the allocations would be utilities or consumer staples. The utilities offer investors a solid dividend yield while being moderately correlated with interest rates which allows them to serve a purpose that is somewhat similar to bonds in the portfolio while still having the dividend income grow over time. The consumer staples allocation is already almost 15%, but I’d rather see it running closer to 20%. For my risk tolerance, I wouldn’t mind seeing it be even more overweight. Conclusion This is a fairly interesting fund in that it doesn’t stand out from the crowd, but it also doesn’t make have any glaring problems. Overall, I’d have to say that it is perfectly adequate but nothing that really gets me excited. This seems to be a dividend growth fund that just tries to remain reasonable. That makes it an acceptable investment for many investors but it doesn’t stand out as being anything great for my desired allocations.