Tag Archives: nreum

New ETF Takes A Sophisticated Approach To Equal Weighting

A different approach to equal-weight, index-based ETFs. Highlight the recently launched PowerShares Russell 1000 Equal Weight Portfolio. How the equal weight portfolio stacks up against traditional market-cap and equal weight methodologies. By Todd Shriber & Tom Lydon Equally-weighted exchange traded funds are the least complex and the oldest of the non-cap weighted ETF group. Investors have poured billions of dollars into various equal-weight ETFs over the years, but there can be more to equal-weight ETFs than merely assigning the same allocation to each of the fund’s holdings. The PowerShares Russell 1000 Equal Weight Portfolio ETF (NYSEArca: EQAL ) , which is less than a month old, offers investors an evolved approach to the prosaic equal-weight ETFs that currently populate the market. EQAL tracks the Russell 1000 Equal Weight Index, which applies an equal weight to nine sectors and then assigns an equal weight to each security from those sectors, according to PowerShares . As Russell Investments notes, the traditional equal-weight methodology, like cap-weighting has flaws and biases of its own. According to Russell : This simple approach can result in notable sector biases, since the weight of each sector is determined solely by the number of companies in the sector. For example, with a simple equal-weighted-constituent methodology, if the Technology sector has 100 stocks and the Health Care sector has 50, Technology’s weight would be twice that of Health Care, regardless of the relative size of the companies within each of the two sectors. By addressing sector weights first, EQAL and its Russell index mitigate the flaws found in other equal-weight funds . EQAL, which charges 0.2% per year, has sector weights ranging from 2.3% for telecom up to 13% for technology. Six other sectors – industrials, health care, consumer staples, consumer discretionary, financial services and energy – receive double-digit allocations in the new ETF. Russell’s pre-screening methodology, which includes a mandate that the share portion of a potential constituent in a notional $5 billion portfolio cannot exceed 5% of the company’s float, ensures liquidity and that the benchmark remains investable. EQAL’s top four sector weights combine for about 48% of the new ETF’s weight. By comparison, the iShares Russell 1000 ETF (NYSEArca: IWB ) , the cap-weighted ETF that tracks the Russell 1000, allocates a combined 50.6% to its top three sector weights. Adds Russell: Equal-weighted indexes, first introduced more than a decade ago, may be one of the earliest examples of a ‘smart beta index.’ Their straightforward methodology has at times resulted in performance superior to that of their market-cap-weighted counterparts, albeit with an uptick in volatility. Other ETFs tracking Russell equal-weight indexes include the Guggenheim Russell 1000 Equal Weight ETF (NYSEArca: EWRI ) and the Guggenheim Russell 2000 Equal Weight ETF (NYSEArca: EWRS ) .

Industrial Metals ETFs Investing 101

A stronger greenback, falling oil prices and an economic slowdown in China have lately emerged as major headwinds for the global metal industry. Moreover, excess supply has been a perennial problem for the industry. Iron ore has lost 50% of its value in 2014, the biggest annual decline in at least five years, impacted by excessive inventory along with abundant supply and slow economic growth in China. Global steel production has also been weak, mainly dragged down by a slowdown in China’s output, which affected demand for iron ore, its main ingredient. The low prices have squeezed margins of iron producers leading to the cancellation or suspension of mining projects. Moreover, softness in China amid an oversupply had led to a decline in copper prices in 2014. Copper prices further dipped to a four-year low in November end to $2.861 per pound on falling oil prices. Overall, copper fared the worst among all industrial metals, with prices declining 11% through the year. On the other hand, during 2014, the global aluminum industry went through a substantial change to correct the supply-demand imbalance. Major aluminum producers like Rusal and Alcoa Inc. (NYSE: AA ) cut their aluminum production, resulting in tightening of aluminum supply, which sent the metal’s prices northward. However, in the last months of 2014, falling oil prices and weak industrial data from China have led to a drop in aluminum prices. Aluminum is an energy intensive industry, with energy costs accounting for nearly 30% of the total cost of production. Falling oil prices tend to have a deflationary effect on aluminum. Nevertheless, aluminum prices ended the year with a 13% gain, higher than January levels. What’s in Store? Iron : The threat of oversupply looms large over the iron ore industry as major producers, Rio Tinto, BHP Billiton Ltd. (NYSE: BHP ), Vale S.A. (NYSE: VALE ) and Fortescue Metals Group Ltd. ( OTCQX:FSUGY ), continue to ramp up production. Australia, the world’s top exporter, cut its iron ore price estimate for next year by 33% as the surging output will outpace Chinese demand growth, leading to a supply glut. Global apparent steel use is expected to grow 2% in 2015 to reach 1,594 Mt. Softness in steel demand in China will continue to be a drag on the same. China is the largest consumer of iron ore, accounting for around 60% of the global seaborne market. Thus, the mismatch between the excess supply and demand for iron ore will keep iron ore prices subdued in the near term. Aluminum : Aluminum consumption is expected to improve on a global basis spurred by the automotive and packaging industries, its key consumer markets. The airline industry is also expected to boost demand for the metal. Following China, which accounts for over 40% of the global aluminum consumption, India appears promising given its current low level of aluminum consumption and high urban population growth. With demand remaining strong and the industry pulling in the reins on supply, the aluminum market is likely to witness deficits for a prolonged period. This will support high aluminum prices going forward. Copper : The copper market seems to be shifting into supply surplus. In the near term, prices will be influenced by economic activity in the U.S. and other industrialized countries. Revival in demand from China will also act as a catalyst. Notwithstanding the current volatility in prices, we have a long-term bullish stance on copper, supported by its widespread use in transportation, manufacturing and construction, limited supplies from existing mines and the absence of new significant development projects. To Sum Up A revival in the Chinese economy on the back of policy support and correction of the supply-demand imbalance will be instrumental in driving growth in the industry, while projected earnings growth for 2015 instills optimism in the same. ETFs to Tap the Sector An ETF approach can help spread out assets among a variety of companies and reduce company-specific risk at a very low cost. There are currently two ETFs available to play this sector. SPDR S&P Metals & Mining ETF (NYSEARCA: XME ) Launched in Jun 2006, XME seeks to replicate the S&P Metals and Mining Select Industry Index. The S&P Metals & Mining Select Industry Index represents the metals and mining sub-industry portion of the S&P Total Market Index. The fund currently has AUM of $390.4 million. XME has a trading volume of roughly 1.6 million shares a day, suggesting little or no extra cost in the form of bid/ask spreads. The ETF is a low-cost choice, charging a net expense ratio of 35 basis points a year, while the dividend yield is 2.30% currently. The fund currently holds 35 stocks in its basket, with only 38.12% of assets in the top 10 holdings. From a commodities perspective, the product is heavily weighted toward steel with 41% sector weightage, followed by coal and consumable fuels (17%), diversified metal and mining (13%), aluminum (11%), silver (7%), gold (7%) and precious metals and minerals (4%). Among individual holdings, top stocks in the ETF include Hecla Mining Co. (NYSE: HL ), TimkenSteel Corporation (NYSE: TMST ) and Compass Minerals International Inc. (NYSE: CMP ) with asset allocation of 4.19%, 4.14% and 3.88%, respectively. iShares MSCI Global Metals & Mining Producers ETF (NYSEARCA: PICK ) The ETF seeks to match the price and yield performance of MSCI ACWI Select Metals & Mining Producers Ex Gold & Silver Investable Market Index. This index measures the equity performance of companies in both developed and emerging markets that are primarily involved in the extraction and production of diversified metals, aluminum, steel and precious metals and minerals, excluding gold and silver. Launched in Jan 2012, the fund has so far attracted AUM of $158 million. It has a trading volume of roughly 16,257 shares a day. The ETF is currently charging a net expense ratio of 39 basis points a year, with a dividend yield of 2.91%. The fund currently holds 209 stocks with 98% sector weightage toward basic materials. The fund allocates nearly 50% of the assets in the top 10 firms, which suggests that company-specific risk is somewhat high, as the top 10 holdings dominate half of the returns. Among individual holdings, top three stocks in the ETF include BHP Billiton Limited ( BHP ), Rio Tinto plc (NYSE: RIO ) and Glencore Plc (GLEN.L) with asset allocation of 10.81%, 8.4% and 6.76%, respectively. The fund is widely diversified across various countries, and Australia tops the list, holding 24.7% of the fund, followed by the United States (10.9%) and United Kingdom (9.96%). These three nations make up for nearly 46% of the assets.

Couch Potato Model Portfolios For 2015

Call off the hounds: I have finally updated my model Couch Potato portfolios for 2015. Full details appear on the permanent Model Portfolios page , but here are the new versions in downloadable PDF format: You’ll notice some significant changes this year: I have dropped the Complete Couch Potato and Über-Tuber from the lineup. All of the model portfolios now include only traditional index funds tracking the major asset classes: no REITs, real-return bonds, value stocks or small-cap stocks. The new lineup presents three options, with the key difference being the type of product. Option 1, from Tangerine , is a one-fund solution that’s ideal for investors who value simplicity. Option 2, the TD e-Series funds , offers more flexibility and lower cost. Option 3, built from Vanguard ETFs , is the cheapest option, but also the most difficult to manage for new investors. None of the options include ETFs traded on U.S. exchanges. Each option now includes several different asset allocations, ranging from a conservative (70% bonds and 30% stocks) to a aggressive (10% bonds and 90% stocks). The older model portfolios were all 40% bonds and 60% stocks, the traditional mix in a balanced portfolio. For each option and asset mix, we present performance data going back 20 years (1995 through 2014), compiled by Justin Bender . Since none of the funds has a track record that long, we have filled in the gaps using index data minus the MER of the fund in question. This is an imperfect but reasonable proxy for how an index fund would have performed. I thought long and hard about these changes, because I know many readers currently use one of the older model ETF portfolios. But it has now been more than five years since I launched this blog, and I have corresponded with hundreds of investors during that time. I’ve also worked directly with dozens more through PWL Capital’s DIY Investor Service . That depth of experience has given me a few insights. First, simple is usually better than complex. You can now build a portfolio that includes hundreds of bonds and thousands of stocks in some 40 countries using just three ETFs, all for a cost of less than 0.20%. No one needs to diversify more broadly than that. A skilled portfolio manager may be able to boost returns slightly by moving beyond traditional index funds in the core asset classes. But many DIYers make costly mistakes when they try to juggle too many funds. Meanwhile, there are exactly zero investors in the universe who failed to meet their financial goals because they did not hold global REITs or small-cap value stocks. Using U.S.-listed ETFs is a another example: the management fees and withholding taxes may be lower, but the steps involved in currency conversion can be complicated and it’s easy to make errors that wipe out any potential savings. If you don’t believe me, try explaining Norbert’s gambit to your mom. These model portfolios are not intended to reduce MERs and taxes to an absolute minimum. The suggested asset allocations were not created using Markowitz’s efficient frontier or portfolio optimization software. They are simply designed to provide broad diversification and low cost while remaining easy to manage on your own. So try not to agonize over the small details: just choose one of the model portfolios with an appropriate amount of risk and get started. It’s OK if convenience trumps cost, especially for young investors with small portfolios: remember, an additional cost of 0.10% works out to $0.83 a month for every $10,000 in your account. The cost of sitting in cash and scratching your head is much higher. And the peace of mind that comes with a simple investing strategy is priceless. Now that you’ve read this, are you Bullish or Bearish on ? Bullish Bearish Sentiment on ( ) Thanks for sharing your thoughts. Why are you ? Submit & View Results Skip to results » Share this article with a colleague