Tag Archives: power

EFA: How Do You Make A Mediocre ETF Sound Exciting?

Summary EFA is a mediocre ETF. The sector allocation is mediocre, the geographic diversification is mediocre and the expense ratio is mediocre. The top holdings make sense, but they don’t reflect the total portfolio. Despite having a heavy portfolio weight towards financials, there is only one in the top ten. There is nothing bad about the ETF to warrant taking a capital gains tax on sale, but if a loss could be taken with proceeds reallocated… that would be nice. There isn’t much to say to make this ETF sound exciting. There are so many international ETFs it can be difficult for investors to choose one. Hopefully I can help with that problem by highlighting some of them and shining a light inside their portfolio. One of the funds that I’m considering is the iShares MSCI EAFE ETF (NYSEARCA: EFA ). 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 the iShares MSCI EAFE ETF is .33%. I’d really prefer to see lower, but that isn’t high enough to remove the ETF from being worthy of further consideration. Geography The map above shows the top 10 countries by the market value of their allocations. This is certainly an international ETF, but the holdings seem more diversified from the list on the left side than from the list on the right side. I’d like to see even more diversification, but at least they have not assigned any single country a weighting higher than 25%. Sector Looking at the sector allocation is fairly interesting. Fortunately this is a fairly diversified group of sectors, but I think I would prefer a smaller allocation to financials. Perhaps I’m being too picky, but I’d rather see more consumer staples and foreign utilities mixed into the portfolio. I’d like to have the benefits of international diversification while overweighting the sectors that I expect to be less volatile. Largest Holdings (click to enlarge) Looking at the individual holdings, you wouldn’t expect that “Financials” would be so overweight. Only one financial company is in the top 10. The concern for me is that a heavy focus on financials in the lower parts of the portfolio suggests to me that the ETF may have a heavier weight on the companies that are easier to research or buy if markets are not sufficiently liquid in some countries. Building the Portfolio The sample portfolio I ran for this assessment is one that came out feeling a bit awkward. I’ve had some requests to include biotechnology ETFs and I decided it would be wise to also include a the related field of health care for a comparison. Since I wanted to create quite a bit of diversification, I put in 9 ETFs plus the S&P 500. The resulting portfolio is one that I think turned out to be too risky for most investors and certainly too risky for older investors. Despite that weakness, I opted to go with highlighting these ETFs in this manner because I think it is useful to show investors what it looks like when the allocations result in a suboptimal allocation. The weightings for each ETF in the portfolio are a simple 10% which results in 20% of the portfolio going to the combined Health Care and Biotechnology sectors. Outside of that we have one spot each for REITs, high yield bonds, TIPS, emerging market consumer staples, domestic consumer staples, foreign large capitalization firms, and long term bonds. The first thing I want to point out about these allocations are that for any older investor, running only 30% in bonds with 10% of that being high yield bonds is putting yourself in a fairly dangerous position. I will be highlighting the individual ETFs, but I would not endorse this portfolio as a whole. 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. Because a substantial portion of the yield from this portfolio comes from REITs and interest, I would favor this portfolio as a tax exempt strategy even if the investor was frequently rebalancing by adding new capital. The portfolio allocations can be seen below along with the dividend yields from each investment. Name Ticker Portfolio Weight Yield SPDR S&P 500 Trust ETF SPY 10.00% 2.11% Health Care Select Sect SPDR ETF XLV 10.00% 1.40% SPDR Biotech ETF XBI 10.00% 1.54% iShares U.S. Real Estate ETF IYR 10.00% 3.83% PowerShares Fundamental High Yield Corporate Bond Portfolio ETF PHB 10.00% 4.51% FlexShares iBoxx 3-Year Target Duration TIPS Index ETF TDTT 10.00% 0.16% EGShares Emerging Markets Consumer ETF ECON 10.00% 1.34% Fidelity MSCI Consumer Staples Index ETF FSTA 10.00% 2.99% iShares MSCI EAFE ETF EFA 10.00% 2.89% Vanguard Long-Term Bond ETF BLV 10.00% 4.02% Portfolio 100.00% 2.48% The next chart shows the annualized volatility and beta of the portfolio since October of 2013. (click to enlarge) Risk Contribution The risk contribution category demonstrates the amount of the portfolio’s volatility that can be attributed to that position. You can see immediately since this is a simple “equal weight” portfolio that XBI is by far the most risky ETF from the perspective of what it does to the portfolio’s volatility. You can also see that BLV has a negative total risk impact on the portfolio. When you see negative risk contributions in this kind of assessment it generally means that there will be significantly negative correlations with other asset classes in the portfolio. The position in TDTT is also unique for having a risk contribution of almost nothing. Unfortunately, it also provides a weak yield and weak return with little opportunity for that to change unless yields on TIPS improve substantially. If that happened, it would create a significant loss before the position would start generating meaningful levels of income. A quick rundown of the portfolio I put together the following chart that really simplifies the role of each investment: Name Ticker Role in Portfolio SPDR S&P 500 Trust ETF SPY Core of Portfolio Health Care Select Sect SPDR ETF XLV Hedge Risk of Higher Costs SPDR Biotech ETF XBI Increase Expected Return iShares U.S. Real Estate ETF IYR Diversify Domestic Risk PowerShares Fundamental High Yield Corporate Bond Portfolio ETF PHB Strong Yields on Bond Investments FlexShares iBoxx 3-Year Target Duration TIPS Index ETF TDTT Very Low Volatility EGShares Emerging Markets Consumer ETF ECON Enhance Foreign Exposure Fidelity MSCI Consumer Staples Index ETF FSTA Reduce Portfolio Risk iShares MSCI EAFE ETF EFA Enhance Foreign Exposure Vanguard Long-Term Bond ETF BLV Negative Correlation, Strong Yield Correlation The chart below shows the correlation of each ETF with each other ETF in the portfolio. 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. (click to enlarge) Conclusion EFA certainly has some volatility, but the correlation over longer time periods has been significantly lower than the correlation levels created by measuring on a daily basis. All around, this is a decent but not spectacular ETF. The ETF has a respectable but not incredible diversification among countries. The holdings are concentrated on the financial sector, but only one financial firm was able to warrant a large enough allocation to end up in the top 10. When it comes down to the sheer volume of holdings, there are 934 companies in the portfolio. Of course, that could change at any point. I love having extreme levels of diversification like that in international equity allocations, but such high diversification indicates a passive indexing strategy. As you might imagine, I’d rather not pay the .33% expense ratio for a passive index fund. The problems within the ETF aren’t bad enough for investors to have any cause to sell it and incur a capital gains tax, but I’d rather place international equity allocations in other ETFs. If an investor is able to harvest a tax loss on selling, that would be a very solid reason to reallocate to a more appealing ETF. If you’re looking for more appealing options, I put together an article with three of them .

Will Gold Miner ETFs Turn Around In Q4?

The September U.S. jobs data released on Friday signaled a sudden halt in the pace of job growth and has dented the chance of an interest rate hike later this month, which could have been the first in nearly a decade. While this ushered gains on several asset classes, gold mining was among the huge beneficiaries. The metal lost its allure long back, thanks to an increased prospect of an interest rates hike this year, a strengthening dollar, muted inflation across the most developed nations and slowdown in key consuming countries like China. Occasional geopolitical flare-ups and even a risk-off trade sentiment could not save this safe-haven yellow metal. As a result, the biggest gold ETF – the SPDR Gold Trust ETF (NYSEARCA: GLD ) – is off 4% this year. The decline was more pronounced in the gold mining ETF space, which trades as a leveraged play of the underlying metal. The largest gold mining ETF – the Market Vectors Gold Miners ETF (NYSEARCA: GDX ) – is down over 21% this year. However, things appear to be stabilizing at the start of Q4 (read: ETF Winners & Losers Post Dovish Fed Meet ). What Gives Gold Miners a Bounce to Start Q4? The below-par jobs report has raised questions over the health of the U.S. economy and the fate of the looming Fed policy tightening. Headline job gains for September came in at 142K versus estimates of 200K and the prior month’s tally of 136K. The originally reported tally for July was also revised lower to 223K from 245K originally. The year-to-date monthly pace of job gains now averages at 198K, though the pace for the last three months is much lower at 167K. This compares to the monthly average of 260K for 2014. In any case, subdued inflation and a faltering global backdrop were always the deterrents to the looming Fed action. Only solid job numbers kept the likelihood of a sooner-than-expected Fed rate hike alive. So, the latest bit of employment information did magic for the gold and the related ETFs, and the demand for the metal seems to have returned with the start of the fourth quarter on a weakening dollar. On Friday, dollar ETF – the PowerShares DB USD Bull ETF (NYSEARCA: UUP ) – lost about 0.24% while GLD and GDX were up over 2.1% and 8.1%, respectively. Gold miners delivered two successive years of losses in 2013 (down 50%) and 2014 (down 16%) and are on their way to imitate the prior performances this year too. It goes without saying that such huge sell-offs have made the metal’s valuation so cheap that any single driver would easily take it to new heights. Moreover, an unsteady global macroeconomic backdrop will likely keep the market rocky throughout Q4 and brighten the appeal for safe investments. Since gold serves this purpose efficiently, Q4 can essay a turnaround story for gold this year (read: Short-Term Respite for Gold ETFs? ). Time to Buy Gold Miners ETFs? Despite the great start to the quarter, the fundamentals are still not strong. Investors should note that this job data induced leap is likely to be short-lived. Sooner or later, the Fed will start tightening policies. Basically, gold miner ETFs are presently sitting on the fence with possibilities and perils on each side. The bullish trend for gold mining ETFs could continue in the weeks ahead if more choppy economic data comes in, the rate hike possibility keeps getting delayed, or some political issue creeps in. Thus, investors who go by the belief that “the trend is your friend” might take a look at these gold mining ETFs to make some quick bucks. GDX in Focus This is the most popular and actively traded gold miner ETF with an AUM of $4.7 billion and average daily volume of around 65 million shares. The fund follows the NYSE Arca Gold Miners Index, holding 36 stocks in its basket. Canadian firms account for 55.1% of the assets, followed by the U.S. (13.2%) and South Africa (10.4%). The fund charges 53 bps in annual fees and returned over 8% on October 2 (see: all the Material ETFs here ). Sprott Gold Miners ETF (NYSEARCA: SGDM ) This fund follows the Sprott Zacks Gold Miners Index, holding over 25 stocks in its basket. The product is skewed toward mid caps at 56% while the rest goes to small caps. The fund has amassed $108.3 million in its asset base and trades in a good volume of over 90,000 shares a day. It charges 57 bps in annual fees from investors. SGDM added about 8.2% on October 2. iShares MSCI Global Gold Miners ETF (NYSEARCA: RING ) This fund is the cheapest choice in the gold mining space, charging just 0.39% in fees and expenses. The fund has been able to manage assets worth $44 million while it trades in moderate volume of 105,000 shares. The ETF follows the MSCI ACWI Select Gold Miners Investable Market Index and holds 29 securities in its portfolio. Country holdings are also similar, with Canada as the top country, followed by South Africa and the U.S. The fund was up over 7.4% On October 2. Original post

Solid Income Company With A Dividend Increase Coming Soon: American Electric Power

Summary American Electric Power has an excellent total return over the last 33-month test period. American Electric Power’s dividend is 3.9% and has been increased nine of the last ten years. American Electric Power can continue its steady upward trend of approximately 4% as it focuses on its $12.2 billion plan for regulated transmission and distribution assets. This article is about American electric Power (NYSE: AEP ) and why it’s an income company that’s being looked at in The Good Business Portfolio. American Electric Power Company is a utility holding company. The Good Business Portfolio Guidelines, total return, earnings and company business will be looked at. Good Business Portfolio Guidelines. American electric Power passes 10 of 10 Good Business Portfolio Guidelines. These guidelines are only used to filter companies to be considered in the portfolio. There are many good business companies that don’t break many of these guidelines but will still not be considered for the portfolio at this time. For a complete set of the guidelines, please see my article ” The Good Business Portfolio: All 24 Positions .” These guidelines provide me with a balanced portfolio of income, defensive and growing companies that keeps me ahead of the Dow average. American Electric Power is a large-cap company with a capitalization of $26.4 billion. AEP provides electric utility services to about 5.348 million customers in 11 states over a total area of 197,500 square miles. The company derived 25% of its consolidated system retail revenues in 2014 from its utilities in Ohio, 14% from Texas, 13% from Virginia, 11% from West Virginia, 11% from Oklahoma, 10% from Indiana, 5% from Louisiana, 5% from Kentucky and the remainder from other states. American Electric Power has a dividend yield of 3.9% and its dividend has been increased for nine of the last ten years. The payout ratio is moderate at 60%. American Electric Power therefore is not a growth story at this time but may be as the steady growth of the company continues. The dividend is expected to be increased at the end of October and is estimated to be increased $0.02/quarter or a 4% increase. American Electric Power income is good at $3.54/share which leaves AEP plenty of cash flow, allowing it to pay its high dividend and have a enough left over for its capital campaign I also require the CAGR going forward to be able to cover my yearly expenses. My dividends provide 2.8% of the portfolio as income and I need 2.2% more for a yearly distribution of 5%. American Electric Power has a three-year CAGR of 5% just meeting my requirement. Looking back five years $10,000 invested five years ago would now be worth over $18,255 today (from S&P IQ). This makes AEP a good investment for the income investor with its steady 4% dividend and earnings growth. American Electric Power’s S&P Capital IQ has a three-star rating or Hold with a price target of $55.0. This makes AEP fairly priced at present and a good choice for the income investor. Total Return and Yearly Dividend The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of the Good Business Portfolio. American Electric Power did better than the Dow baseline in my 33.0 month test compared to the Dow average. I chose the 33.0 month test period (starting January 1, 2013) because it includes the great year of 2013, the moderate year of 2014 and the losing year of 2015 YTD. I have had comments about why I do not compare the total return to the S&P 500 average. I use the Dow average because the Good Business Portfolio has six Dow companies in it and is weighted more to the Dow average than the S&P 500. Modeling the Dow average is not an objective of the portfolio but just happened by using the 10 guidelines as a filter for company selection. The total return makes American Electric Power appropriate for the growth investor with the 4% dividend good for the income investor. The dividend is lower than average and covered and has been paid and increased each year for eight years of the last ten years. DOW’s 32.5-month total return baseline is 25.71% Company Name 33.0 Month total return Difference from DOW baseline Yearly Dividend percentage American Electric Power 42.15% 16.44% 3.9% Last Quarter’s Earnings For the last quarter (July 2015) American Electric Power reported earnings that beat expected at $0.88 compared to last year at $0.80 and expected at $0.80 and revenue missed by $180 million. This was a good report. Earnings for the next quarter are expected to be at $0.95 compared to last year at $1.01. The steady growth in AEP should provide a company that will continue to have slightly above average total return and provide steady income for the income investor. Business Overview American Electric Power Company, Inc. is a utility holding company. It operates in five segments. The vertically integrated utilities segment generates, transmits and distributes electricity through AEP Generating Company, Appalachian Power Company, Indiana Michigan Power Company, Kingsport Power Company, Kentucky Power Company, Public Service Company of Oklahoma, Southwestern Electric Power Company and Wheeling Power Company. The Transmission and Distribution Utilities segment transmits and distributes electricity through Ohio Power Company, AEP Texas Central Company and AEP Texas North Company. The Generation and Marketing segment’s subsidiaries consist of non-utility generating assets, a wholesale energy trading and marketing business and a retail supply and energy management business. AEP Transmission Holdco is a holding company for AEP’s transmission joint ventures and AEP Transmission Company, LLC. The AEP River Operations segment transports liquid, coal and dry bulk commodities. With electric usage increasing in the United States the diversity of American Electric Power assets should allow the company to continue its growth and safely pay a moderately increasing dividend. Takeaways and Recent Portfolio Changes American Electric Power is a income company. Considering AEP’s steady slow growth and its total return better than the Dow average, AEP is a buy for the income investor. The only negative for AEP is when the Fed starts raising interest rates that will cause rising interest expense, giving AEP a headwind for a couple of years. AEP is not being added to The Good Business Portfolio right now since there are no open slots in the portfolio the Good business Portfolio is limited to 25 positions and AEP will be considered when there is an open slot. Of course this is not a recommendation to buy or sell and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account and the opinions on the companies are my own.