Tag Archives: power

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.

TAN Vs. YLCO: Which Is The Better Solar ETF?

With the recent update from the Obama administration regarding the allocation of more than $120 million for clean energy programs developing solar power and other renewable technology, ETFs focusing on top solar firms are definitely on our radar. The fund will be deployed across 24 states to help Americans gain access to cleaner and low-cost energy sources. Although solar stocks have got a beating due to plunging oil prices and the meltdown in the Chinese stock market, they hold greater promise. Surging demand for solar power, massive panel installations, advanced technologies, global warming issues and Obama’s ‘Climate Action Plan’ will ensure that the solar boom is not fizzling out anytime soon. The good news is that solar energy systems have increasingly become affordable, indicating its potential for wide acceptance among the masses. According to the White House report, solar energy is now cost-competitive with conventional energy, such as coal or natural gas, in 14 states. According to a report by GTM Research and Solar Energy Industries Association, solar photovoltaic installations are expected to go up to 7.7 gigawatts (“GW”) this year from 6.2 GW in 2014, where a GW represents 1 billion watts, enough to power roughly 164,000 homes. Here we will discuss two ETFs, Guggenheim Solar ETF (NYSEARCA: TAN ) and only a few months old Global X YieldCo ETF (NASDAQ: YLCO ). Both focus on the renewable energy sector expecting to ride on the bullish trend in solar space. Though TAN and YLCO have similar exposures, there are certain key differences between the products. Below, we have highlighted the products in greater details. TAN Launched in April 2008, this ETF follows the MAC Global Solar Energy Index, holding 27 stocks in the basket. First Solar Inc. (NASDAQ: FSLR ) and SolarCity Corp. (NASDAQ: SCTY ) take the first and second positions with a combined 15.3% share. The U.S. firms dominate the fund’s portfolio with 34%, followed by China (28%). The product has amassed over $264 million in its asset base and trades in solid volume of around 260,000 shares a day. It charges investors 70 bps in fees per year. The fund shed around 10.3% in the year-to-date time frame (as of Sep. 16, 2015) and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a High risk outlook. YLCO Launched this May, the fund targets a unique segment of the market, namely the YieldCo. A Yieldco is a dividend growth-oriented public company that bundles renewable and/or conventional long-term contracted operating assets. It is often compared to MLPs as they are both energy-related assets, created by their parent company, in order to deliver stable cash flows to investors. To attain its objective, the fund tracks the Indxx Global YieldCo index. The ETF holds only 20 securities with Brookfield Renewable Energy Partners (NYSE: BEP ) and TerraForm Power Inc. (NASDAQ: TERP ) (formerly a SunEdison (NYSE: SUNE ) Yieldco) taking up the first and second spots. Both account for an 18.3% share in the basket. The fund has a global footprint as well with the U.S. occupying the top spot at 39%, followed by Canada with 28%. YLCO has gathered a meager $3.4 million in assets and charges 65 bps in fees. It trades at an average volume of more than 4,600 shares. The product was down 26% since its inception. The Verdict Both funds charge comparable fees and are a tad expensive. However, TAN is widely diversified as it holds more securities and is less concentrated in its top 10 holdings compared to YLCO. Further, TAN is higher in AUM and relatively more liquid as it trades in a higher volume compared to YLCO. The higher volume of TAN also suggests that bid ask spreads should be relatively tight for this fund and total trading costs shouldn’t be much higher than the explicit 0.70% expense ratio. Notably, TAN has higher yield compared to YLCO. Both the funds have higher exposures to U.S. stocks with TAN lagging behind YLCO. However, the good thing about YLCO is that it has no exposure to Chinese firms, which could be affected by the economic turmoil in the world’s second largest economy. Further, YLCO is expected to be less volatile in nature than TAN as it tracks companies that have spun off their more steady power producing operations as Yieldco. Though YLCO doesn’t look bad, we pick TAN as the winner due its higher exposure to top solar firms, diversified nature, higher liquidity and better yield. Data Point TAN YLCO Expense Ratio 0.70% 0.65% Total Holdings 27 20 Top 10 Holdings 54.9% 66.7% Assets in the U.S. 34% 39% Dividend Yield 2.2% 1.2% AUM $264 Million $3 Million Average Volume 260,000 4,600 Original Post

What Lies Ahead For Dollar ETFs?

Although the Fed rate hike hearsay continues to dominate the headlines, investors haven’t really seen this speculation shift to huge gains for the U.S. dollar, at least not in the recent time frame. In fact, the greenback – as represented by the U.S. dollar Index – has lost its value in the last one month and five-day period (as of September 15, 2015). One of the reasons for this unexpected move was an extremely dour trading scene throughout August and the start of September. Maddening economic issues in China – a currency devaluation and a six-and-half-year low manufacturing data for August – took the global market in its grip, and crushed the global equities in the last one month. Yet the U.S. dollar has held firm in 2015 (so far), as many investors remain long-term bulls on the world’s reserve currency due to a recovering American economy. This was truer as the most developed and emerging nations are dragging their feet currently, leaving the U.S. as the lone star. The U.S. economy underwent an upward GDP revision for the second quarter of 2015, from 2.3% reported earlier to 3.7% upgraded later on strong domestic demand. If this was not enough, the unemployment rate dropped to 5.1% in August, the lowest since April 2008. This more-than-seven-year low unemployment rate should bolster the case for an imminent policy tightening. Additionally, average hourly wages rose 0.3% sequentially and 2.2% year over year. The average work week also nudged up to 34.6 from 34.5 in the prior and the year-earlier months. All these made September lift-off a heightened possibility that should have bolstered the greenback, but kept it range-bound due to global market rout. Can Greenback Gain Post Fed? Things are at a critical juncture at this moment. Two ETFs offering exposure to U.S. dollar (USD) against a basket of world currencies – PowerShares DB US Dollar Bullish Fund (NYSEARCA: UUP ) and WisdomTree Bloomberg U.S. Dollar Bullish Fund (NYSEARCA: USDU ) – are up 4.1% and 5.8% so far this year (as of September 15, 2015) but retreated about 1.3% and 0.2% in the last one month, respectively. While many may view the recent dip in the greenback as a setback, we believe that this fall led the U.S. dollar and the related ETFs toward the fair valuation. These dollar-related products surged from the latter part of last year due to the diverging monetary policies between the U.S. and other developed and some emerging markets. The U.S. wrapped up its QE measure late last year while Japan boosted its gigantic asset-buying program and the Euro zone initiated a QE launch in early 2015. This policy differential made the U.S. dollar a king among its peer currencies while other developed currencies started to lose out on economic stimuli. As a result, the U.S. dollar index surged over 13% in the last one year (as of September 14, 2015). Thus, a certain pull-back will now help the U.S. dollar to better prepare for a rally if the Fed hikes rates this week). And even if the Fed opts for a December lift-off or sometime in early 2016, the U.S. dollar should prevail in the coming days as inflows of ultra-cheap money in Europe, Japan and some emerging economies will continue to weaken their respective currencies against the greenback, which is still stronger. Which ETF is a Better Bet? Given this, investors could definitely play the U.S. dollar by considering either UUP or USDU. UUP looks to track the U.S. dollar against a basket of six world currencies – the euro (57.6%), Japanese yen (13.6%), British pound (11.9%), Canadian dollar (9.10%), Swedish krona (4.20%) and Swiss franc (3.60%). USDU tracks the U.S. dollar against a basket of 10 developed and emerging market currencies. It allocates higher to the Euro zone currency at 32.5%, closely followed by Japanese yen (19.25%) and Canadian dollar (11.21%). Other currencies like Mexican peso, British pound, Australian dollar, Swiss franc, South Korean won, Chinese yuan and Brazilian real receive single-digit allocation each in the fund’s basket. Since, UUP is mostly exposed to the developed economies’ currencies; things are less likely to improve post Fed tightening. On the other hand, USDU gives exposure to a broader basket consisting developed and emerging currencies. Notably, most of the emerging market currencies are tumbling presently and are expected to fall out of favor post-Fed tightening. This should give USDU a scope for outperformance over UUP. Bottom Line Having said this, we would like to note that any resumption in the greenback rally should not be as great as it was late last year. This is because the market has mostly priced in the favorable outcome of the impending Fed lift-off and protracted easing in other developed nations like the Euro zone and Japan and their effects on the exchange rate. Original Post