Tag Archives: power

Americas’ Oil Price War Could Boost Refiner-Heavy ETF

Summary Canada and Mexico are competiting to sell to refiners in the Gulf Coast. Greater competition could cause more discounts to the benefit of refiners. An energy-sector ETF with a heavy refiner exposure. As Canada and Mexico compete for oil processing along the U.S. Gulf Coast, West Texas Intermediate oil prices may remain depressed, but oil refiners and sector-related exchange traded funds could come out on top. The new Seaway Twin pipeline could double the amount of heavy Canadian crude oil to the Gulf, pressuring crude from Mexico and Venezuela that have traditionally fed refineries along Texas and Louisiana, Bloomberg reports. The greater competition could cut down costs for oil refiners. For instance, in December, state-owned Petroleos Mexicanos raised its discount for U.S. buyers by the most since August 2013. Now, Valero Energy (NYSE: VLO ) and Marathon Petroleum Corp (NYSE: MPC ), which invested in equipment to refine heavy crude, will benefit the most from the increased Canadian supply. While there are no specific oil refiner ETFs available, the PowerShares Dynamic Energy Exploration & Production Portfolio (NYSEARCA: PXE ) is a refiner heavy ETF , with components like the Occidental Petroleum (NYSE: OXY ), which like Exxon (NYSE: XOM ) and Chevron (NYSE: CVX ) is an integrated oil firm and has refining operations, and PXE features four pure play refiners among its top 10 holdings for a combined 18% of the ETF’s overall holdings. Specifically, VLO is 5.2% and MPC is 5.0%. The U.S. Gulf Coast remains the go-to area for heavy crude oil processing in the Americas. Consequently, Latin American countries will fight to maintain their spot in the U.S. “U.S. refineries built out their capacity to run heavy barrels,” John Auers, executive vice president at Dallas-based Turner Mason & Co, said in the Bloomberg article. “Refineries in the rest of world aren’t built to run heavy barrels.” Consequently, in an attempt to stay competitive, Mexico’s discount to refineries and its reliance on oil revenue could also weigh on the iShares MSCI Mexico Capped ETF (NYSEARCA: EWW ) . While EWW has no exposure to the energy sector, oil sales still accounts for over 25% of Mexico’s government revenue . WTI crude was down 2.5% Monday to $53.4 per barrel. The United States Oil Fund (NYSEARCA: USO ) , which tracks West Texas Intermediate crude oil futures, has plunged 40.9% over the past three months. PowerShares Dynamic Energy Exploration & Production Portfolio (click to enlarge)

Higher Dividends With Less Risk (Part 3): Global X SuperDividend U.S. ETF

Summary This is the third piece in this series of articles looking at high-dividend low-volatility funds. DIV tracks the INDXX SuperDividend U.S. Low Volatility Index. How does the composition of DIV compare to other high-dividend low-volatility funds HDLV and SPHD, and to the popular “quality” ETF DVY? Introduction High-income strategies and funds have exploded in popularity in recent years as the low-interest rate environment has prodded yield-starved investors to seek richer, and perhaps more risky, sources of income. Earlier this month, investors who sought higher yields in junk bonds and emerging market debt experienced a mini-correction as the crash in oil prices sparked fears that energy or energy-related companies (or countries!) could become insolvent. High-yielding securities can also be found within the realm of equities. Several classes of stocks have historically paid out high distributions, such as real estate investment trusts [REITs], mortgage REITs, business development companies [BDCs] and master limited partnerships [MLPs]. Similar to bonds, higher-yielding companies are often perceived to carry higher risk. In the first two articles of this series, we examined the PowerShares S&P 500 High Dividend Portfolio ETF (NYSEARCA: SPHD ) (article here ) and UBS’s ETRACS 2xLeveraged U.S. High Dividend Low Volatility ETN (NYSEARCA: HDLV ) (article here ) and compared these with each other and with popular “quality” dividend ETFs such as Vanguard Dividend Appreciation ETF (NYSEARCA: VIG ), Vanguard High Dividend Yield ETF (NYSEARCA: VYM ) and Schwab U.S. Dividend Equity ETF (NYSEARCA: SCHD ). We found that SPHD and HDLV were able to meet their dual objectives of higher dividends with lower volatility by favoring more defensive sectors such as utilities, telecommunications, and REITs. In what is likely to be the final article of this series, we will examine the Global X SuperDividend U.S. ETF (NYSEARCA: DIV ) and compare it with the other funds of its class, HDLV and SPHD. Additionally, the iShares Select Dividend ETF (NYSEARCA: DVY ) will represent a “quality” dividend ETF for comparative purposes. Global X SuperDividend U.S. ETF DIV debuted in March 2013, and tracks the INDXX SuperDividend U.S. Low Volatility Index, which was launched in February, 2008. Meanwhile, HDLV tracks the Solactive U.S. High Dividend Low Volatility Index and SPHD tracks the S&P 500 Low Volatility High Dividend Index. DVY tracks the Dow Jones U.S. Select Dividend Index. Fund details Details for the four dividend funds are shown in the table below (data from Morningstar ). Note that HDLV is a 2X leveraged ETN and the yield listed is the 2X leveraged yield. DIV HDLV SPHD DVY Yield 5.59% 9.31%* 3.30% 2.52% Payout schedule Monthly Monthly Monthly Quarterly Expense ratio 0.45% 0.85%^ 0.30% 0.39% Inception Mar 2013 Sep 2014 Oct 2012 Nov 2003 Assets $299M $28M $255 $15.7B Avg Vol. 80K 20.6K 45K 745K No. holdings 50 40 50 100 Annual turnover 20% (unknown) 47% 22% *Estimated yield from 2X the weighted average yield of constituents (4.66%). ^Does not include financing fee (LIBOR + 0.60%). DVY is one of the oldest dividend ETFs on the market. It has a massive $15.7B in assets, would be large enough to qualify it as a large-cap company. DIV, SPHD and HDLV are much smaller funds, with DIV being the largest at $299M. The liquidity for DIV is respectable, at 80K shares. DIV has a reasonable expense ratio of 0.45%, which is slightly higher than DVY’s (0.39%). SPHD has the lowest expense ratio of 0.30% while HDLV’s is the highest at 0.85% (does not include financing fee). DIV also has the highest dividend yield of 5.59% out of the four dividend funds. HDLV’s 1X yield is 4.66% while SPHD has a 3.30% yield. DVY has the lowest yield of 2.52%. Methodology The methodology for the INDXX SuperDividend U.S. Low Volatility Index is shown in the steps below (source: INDXX ). Select U.S. companies that trade on the U.S. stock exchanges that fulfill the following requirements: market cap > $500M, daily turnover > $1M, public float > 10%, beta 50% dividend cut in the previous year. MLPs and REITs are included but BDCs are excluded. Rank eligible stocks by dividend yield. The top 200 yielding companies form the “selection pool”. The 50 companies with the highest yields are chosen for inclusion into the index and are equally weighted. Every quarter, remove companies with dividend cuts or negative dividend outlooks and replace with another company in the selection pool (weightings are unchanged). Every year, reconstitute the index using the above methodology. How does this methodology compare to the other two high-dividend low-volatility ETFs? For easier comparison, I have put the data into a table. DIV HDLV SPHD Universe U.S. companies on U.S. exchanges with market cap > $500M, trading volume > $1M, public float > 10%, beta 50% dividend cut in the previous year. BDCs are excluded. Top 200 market cap names for U.S. companies on U.S. exchanges with market cap > $1B and trading volume > $15M. MLPs are excluded. S&P 500 Primary screen (yield) Select top 50 companies with the highest dividend yield Of those 200, select top 80 with the highest forward distribution yield Of those 500, select top 75 stocks with highest 12-month trailing yields, with the number of stocks from each GICS sector capped at 10 Secondary screen (volatility) (Beta

KBWY: Small-Cap REIT ETF Has Attractive Yield

Summary FRI offers similar exposure to VNQ, but at five times the cost. Small-cap KBWY delivers a full percentage point more in yield. KBWY has outperformed large-cap REITs when interest rates increased in the past. There are two more ETFs to cover on the domestic side. The first is the First Trust S&P REIT Index ETF (NYSEARCA: FRI ). This one of the smaller REIT ETFs on the market, but has amassed nearly $300 million since inception in 2007. Index & Strategy FRI tracks the S&P United States REIT Index. The index covers U.S. REIT shares, including some specialty REITs such as prisons, but holds no timber REITs. Due to criteria that the companies own properties, the index also excludes mortgage REITs. The holdings are weighted by market cap. The holdings and the weightings in FRI are most similar to those of the Vanguard REIT Index ETF (NYSEARCA: VNQ ), which tracks the MSCI US REIT Index. Performance FRI has slightly trailed other pure real estate REIT ETFs over the past five years. (click to enlarge) The fund most similar to FRI is VNQ. Since FRI costs 0.40 percent more to hold, it has consistently underperformed VNQ. The line is almost perfectly straight, reflecting the extremely tight correlation between the funds. (The dip at the end of the chart is due to FRI going ex-dividend today.) (click to enlarge) Expenses FRI charges 0.50 percent versus the 0.10 percent charged by VNQ. Income FRI has a 30-day SEC yield of 3.23 percent. The yield is solid, but its payouts have been more erratic than VNQ (data from Yahoo Finance). (click to enlarge) Conclusion Investors should stick with Vanguard REIT Index ETF, which delivers almost exactly the same exposure, but at a lower cost and steadier income stream. A more attractive REIT ETF is an offering from PowerShares with a portfolio heavily tilted towards small-caps, the PowerShares KBW Premium Yield Equity REIT Portfolio ETF (NYSEARCA: KBWY ). Index & Strategy KBWY tracks the KBW Premium Yield Equity REIT Index, which is “a dividend yield weighted methodology that seeks to reflect the performance of approximately 24 to 40 small- and mid-cap equity REITs in the United States.” The portfolio is currently about 75 percent invested in small-caps, 22 percent in mid caps and 3 percent in large-caps. The portfolio is diversified, but has only 31 holdings. The largest holding, Government Properties Income Trust (NYSE: GOV ), has 5.14 percent of assets, and the smallest holding, STAG Industrial (NYSE: STAG ), has 1.20 percent. Similar to other REIT ETFs, retail makes up the largest slice of assets at about 27 percent, but healthcare is close behind, with nearly 26 percent of assets as of September 30. Diversified REITs make up 20 percent of assets, followed by 14 percent of assets in office REITs. Performance KBWY has kept pace with other REIT ETFs over the past five years, but trailed from 2011 through 2012. (click to enlarge) KBWY has shown some sensitivity to rates, but it has generally under performed as rates decreased, as shown in this comparison with VNQ. The 10-year Treasury yield is in black. (click to enlarge) Expenses KBWY charges 0.35 percent. It is a relatively low expense ratio adjusting for the fact that the portfolio is in small-caps. Income KBWY has a 30-day SEC yield of 4.74 percent, making it the highest-yielding non-mortgage REIT ETF we’ve covered. KBWY pays monthly dividends. Payouts have been consistent from month to month, and have been generally rising since the end of 2011. Conclusion KBWY has been a consistent performer. It has been more volatile than REIT ETFs which fall in the large-cap category, but its performance hasn’t deviated widely from the pack. KBWY has a three-year standard deviation of 14.64 versus VNQ’s 13.42 standard deviation. The big difference so far has been that more of KBWY’s return comes in the form of income. Investors interested in higher income or monthly payouts can pair KBWY with a fund such as VNQ to up the total payout from their REIT exposure. It remains to be seen if KBWY can outperform when interest rates increase. If it can, it would make the fund a compelling option in a rising rate environment.