Tag Archives: seeking-alpha

Happy 1-Year Birthday HDLV And Quarterly Rebalance: Altria Out, CME In

Summary HDLV has recently turned one year old and its performance since inception appears adequate, though data sources have been conflicting. The quarterly rebalance removed blue-chip favorites MO, VTR and ED, while introducing newcomers CME, PPL and WY. HDLV currently yields 9.7% on a 2x leveraged portfolio. HDLV: a one year review The ETRACS Monthly Pay 2xLeveraged US High Dividend Low Volatility ETN (NYSEARCA: HDLV ), incepted on Sep. 30, 2014, has recently turned one year old. Since inception, it (12.43%) has slightly underperformed two other 2x dividend ETNs, the Monthly Pay 2xLeveraged Dow Jones Select Dividend ETN (NYSEARCA: DVYL ) (13.66%) and the Monthly Pay 2xLeveraged S&P Dividend ETN (NYSEARCA: SDYL ) (12.72%), while outperforming the Monthly Reset 2xLeveraged S&P 500 Total Return ETN (NYSEARCA: SPLX ) (7.48%). Note that all of the 2x funds mentioned above reset their leverage monthly, rather than daily. The total return performances of the aforementioned fund since the inception of HDLV in Sep. 2014 are shown below, with the unlevered SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) (4.96%) shown for comparison. HDLV Total Return Price data by YCharts In terms of volatility, HDLV appears to have done the worst out of all the 2x leveraged funds. This is disappointing because HDLV purports to hold stocks that show lower volatility than the broader market. Part of this could be due to HDLV’s heavy concentration in interest rate-sensitive sectors such as telecommunications and tobacco (refer to my HDLV update article ” 10%-Yielding HDLV May Be A Good Choice If Interest Rates Remain Low “), which moved together during the significant interest rate gyrations witnessed throughout this year. HDLV 30-Day Rolling Volatility data by YCharts Interestingly, InvestSpy gives different results on both total return and volatility. According to InvestSpy, HDLV has produced both the highest total return and lowest volatility out of the four 2x leveraged funds since inception (note that the high volatility of SPLX may be distorted by its lack of liquidity). Related to this, HDLV also shows the lowest beta and daily variation. Moreover, HDLV produced the lowest maximum drawdown out of the four 2x leveraged funds. Ticker Annualized Volatility Beta Daily VaR (99%) Max Drawdown Total Return HDLV 24.50% 1.19 3.60% -18.00% 17.10% SDYL 26.80% 1.39 3.90% -21.40% 14.10% DVYL 26.60% 1.5 3.90% -22.90% 14.70% SPLX 72.30% 1.46 10.60% -29.20% 10.20% I wanted to confirm the data using a third source of information, but unfortunately Morningstar does not give volatility data or Sharpe ratios on issues less than 3 years old. Therefore, depending on the source of data used, HDLV could either be ranked first or third out of the four 2x leveraged funds for total return, and either first or last in terms of volatility. This could be due to differences in the way that total return and volatility is calculated for the different data providers. HDLV has also recently just paid out its 12th dividend since inception, giving it a TTM yield of 9.7%. HDLV quarterly rebalance: Altria out, CME in As has been described in my previous article ” Higher Dividends With Less Risk (Part 2): A Second Look At ETRACS 2x US High Dividend Low Volatility ETN “, HDLV applies both dividend yield and volatility screens in selecting constituents. The selected constituents are then weighted according to average trading turnover, a factor that correlates closely with market capitalization. The result is a highly focused portfolio, with over 60% of the fund being concentrated in the Top 10 holdings. Given this high concentration of holdings, I believe that it is worthwhile to analyze individual additions and removals to the index when it is rebalanced each quarter in order to give some insight into the nature of the portfolio. The latest quarterly rebalance was performed last week, and allocates 60.21% of the index to the Top 10 holdings. The following table shows the Top 10 constituents of HDLV for the previous quarterly rebalance (Jul. 17, 2015) compared to the most recent rebalance (Oct. 16, 2015). Oct. 22, 2014 Jul. 17, 2015 Name Ticker Weighting / % Name Ticker Weighting Verizon Communications Inc. (NYSE: VZ ) 10.00 Verizon Communications Inc. VZ 10.00 AT&T Inc. (NYSE: T ) 10.00 AT&T Inc. T 10.00 Philip Morris International (NYSE: PM ) 8.87 Philip Morris International PM 9.60 Duke Energy Corp (NYSE: DUK ) 6.61 Altria Group Inc. MO 8.61 Southern Co (NYSE: SO ) 6.16 Duke Energy Corp DUK 6.82 Welltower (formerly Health Care REIT) (NYSE: HCN ) 4.11 Southern Co SO 5.87 CME Group Inc (NASDAQ: CME ) 4.11 Ventas Inc (NYSE: VTR ) 3.92 PPL Corp (NYSE: PPL ) 3.98 Health Care Reit Inc (now Welltower) HCN 3.72 HCP Inc (NYSE: HCP ) 3.51 Consolidated Edison Inc (NYSE: ED ) 3.44 Weyerhaeuser Co (NYSE: WY ) 2.86 HCP Inc 3.17 Top 10 total 60.21 65.15 What are the major changes in this rebalance? Key additions. CME, PPL and WY have entered the top 10, and were newly added to the fund this quarterly rebalancing review. Key removals. MO, VTR and ED were removed from the top 10, and from the fund altogether this quarterly rebalancing review. The removal of MO is particularly significant because this constituted 8.61% of the total weight of the fund. As an owner of HDLV, I was interested to find out why MO was removed while peer PM was not, why VTR was removed but peers HCN and HCP were not, and why ED was removed by peers DUK and SO were not. MO vs. PM Over the past 3 months, MO has significantly outpaced PM on a price basis. MO data by YCharts This has caused MO’s dividend yield to drop to around 3.5%. Thus, I believe that MO was excluded from the index because it was not among the top 80 names by dividend yield (amongst the top 200 largest US companies). MO Dividend Yield (TMM) data by YCharts VTR vs. HCN and HCP On a price only basis, VTR has performed comparably with HCN and HCP over the past 3 months. Its yield also sits between that of HCP and HCN. VTR Dividend Yield (TTM) data by YCharts Moreover, VTR’s volatility over the past 12 months has been similar to its peers – recall (from my previous article) that HDLV selects 40 of the lowest-volatility stocks out of the aforementioned 80. VTR 30-Day Rolling Volatility data by YCharts When considering market cap, VTR’s market cap is smaller than HCN’s, but larger than HCP’s, thus I do not think that this was the factor for exclusion. Therefore, I do not know why VTR was excluded from the newest edition of HDLV, while HCN and HCP were not. My suspicion is that Solactive, the index provider, did not account for VTR’s spin-off of Care Capital Properties (NYSE: CCP ) properly, leading to aberrant yield or volatility statistics that disqualified it for inclusion. If so, that is a disappointment because I feel that VTR deserves to be included in this fund, according to my analysis of the index guidelines. ED vs. DUK and SO ED has outperformed DUK and SO over the past 3 months. Similar to the situation with MO, ED could have been removed from its index due to its declining dividend yield. ED Dividend Yield (TMM) data by YCharts The new Top 10 additions, CME, PPL and WY have TTM yields of 4.3%, 4.3% and 4.1%, respectively, all higher than ED. Summary While the removal of blue-chip favorites such as MO and ED from the index can be disappointing to some, investors may be somewhat comforted by the fact that the fund is simply “selling high and buying low” as it removes companies whose price has appreciated to such an extent that their yield falls below the threshold, while replacing these with higher-yielding companies whose recent fortunes may not have been as auspicious. At the same time, the fact that only the top 200 U.S. companies by market cap are considered for selection may limit, but not entirely prevent, “falling knife” situations in which an incredibly high yield can be a predictor for an imminent dividend cut. While HDLV does not screen for dividend growers, it is noteworthy that all companies in their Top 10 have positive year-on-year dividend growth (PPL squeaks by with 0.3% 1-year DGR). Moreover, the decision to exclude MLPs from the index, in spite of the massive MLP bull market that occurred until collapse in late 2014, appears to be brilliant in hindsight. On the other hand, the removal of VTR appears, as far as I can tell, to be a mistake. In terms of portfolio concentration, I feel that this quarterly rebalance has improved the diversification of HDLV. The Top 10 holdings account for 60.21% of the portfolio, down from 65.15%. In the Top 10, there is now only 1 tobacco company instead of 2, and only 2 healthcare REITs instead of 3. This leaves room for the addition of CME, one of the largest options and futures exchanges, and WY, one of the world’s largest private owners of timberlands. Meanwhile, the addition of PPL to the Top 10 at the expense of ED would be considered a wash. In terms of performance since inception just over one year ago, HDLV has done either better or worse than two other 2x dividend ETNs, SDYL and DVYL, depending on whether YCharts or InvestSpy is used, while it has performed better than SPXL according to both data sources. Its volatility has either been the best or the worst among the four funds, depending again on which data is considered. Finally, HDLV’s TTM dividend yield is 9.7%, which is significantly higher than SDYL at 5.8% and DVYL at 7.6%.

Rebutting Bogle On International Investing

John Bogle recently stated that he does not invest overseas. Much of Bogle’s good fortune is luck and has to do when he was born. Some of the best companies in the world are international. John Bogle, founder of Vanguard and major proponent of index funds, recently stated that he does not invest overseas. This article will discuss why it is a bad idea to follow this particular piece of advice and lay out why an investor should hold stocks and funds based in foreign countries. There is no doubt that the Vanguard S&P 500 Index (MUTF: VFINX ) has worked well for Mr. Bogle. According to this handy little calculator that I found, the S&P has averaged 11.217%, with dividend reinvested, over the last forty years. I’ll use 40 years for two reasons: that was when Vanguard was founded and that was the year I was born. You’ll see why I added myself into this equation pretty soon. A few years ago, I heard Mr. Bogle speak to the CFA Society in Los Angeles. He stated that an attorney for Vanguard invested in the fund back then. According to my calculations, $10,000 would now be worth $212,000. With that type of return, you’d be beating your chest too. I started my career at Merrill Lynch (NYSE: BAC ) in Naples, Florida, in the summer of 1998. Since then, the S&P 500 has averaged 5.813%, with dividends reinvested. Pretty dismal. I’ve been in the business for a little over 17 years. $10,000 invested in the S&P 500 would now be worth $16,130. I wonder if anyone would have done business with me had I told them that I thought they get a little over 5% a year? Back then, the famous Merrill Lynch Cash Management Account (CMA) was paying 5% in its money market. So why would I be bold enough to interject my own experiences with the great John Bogle? To prove a point. Much luck in life depends upon when you were born. Mr. Bogle was born on May 8, 1929. Mr. Bogle’s life went something like this: he was born during the stock market crash of ’29 and was brought up during the Great Depression, was a teenager during World War II, attended college in the late 1940s and early 1950s, and then went to work when the U.S. was booming. In John Bogle’s investing life, he hasn’t really experienced a bad market. Sure, he lived through the 1973/1974 crash but it quickly recovered in 1975. Sure, he lived through the 2008/2009 crash but it too recovered. For the last 30 years, interest rates have been falling, Baby Boomers have been driving the economy, and the stock market has exploded. I’d put all of my money into an S&P 500 fund too. In the interview with CNBC mentioned above, Mr. Bogle stated that he did not like investing in international funds. Why would he? If you can make 11% returns investing domestically, why do anything else. However, the world has changed and it would be foolish to eschew foreign stocks. What company is the number one beer manufacturer in the world? Anheuser-Busch InBev (NYSE: BUD ), which is based in Belgium and denominated in the euro. What is arguably the number one food manufacturer in the world? Nestle ( OTCPK:NSRGY , OTCPK:NSRGF ), which is based in Switzerland and denominated in the franc. How about automotive? Toyota ( TM or Volkswagen ( OTCQX:VLKAY , OTCQX:VLKAF , OTCQX:VLKPY ). Or tractors? CNH Industrial (NYSE: CNHI ). Distilled spirits? Diageo (NYSE: DEO ) or Pernod Ricard ( OTCPK:PDRDF , OTCPK:PDRDY ) are the undisputed leaders in liquor. Mining? There are too many miners to mention and the U.S. has none of them. The U.S. is number one in only a few categories: technology, finance, oil and gas, entertainment, and maybe real estate. Sounds like a pretty lopsided portfolio. Many of the industries above like beer and liquor have long track records of dividends and high profit margins. Tech companies on the other hand come and go. Name a tech company that has been around since the 1960s other than IBM (NYSE: IBM ) and Hewlett-Packard Co. (NYSE: HPQ ). I will give Bogle one thing. At this point when comparing international funds to domestic, domestic funds win. Of course, we are measuring at a high point. The American markets are close to an all-time high and the US dollar has been very strong. Go back a few years and it’s a different story. Go forward a few years and it may be different too. There are many text book reasons to invest internationally. One is to reduce volatility. When your US funds are zigging, your foreign funds will be zagging. John Bogle has had a storied investing career but has had substantial tail winds. Folks born in my generation have witnessed nothing but mediocre returns and view the financial markets with a jaundiced eye. I love the stock market and truly feel that there are better years ahead (just not for the next 10 or 15). I feel that the Millennials will be buying my stocks as I am getting into retirement. If you are an index fund person, consider the Vanguard Global Equity (MUTF: VHGEX ) or add an international fund like Vanguard International Explorer (MUTF: VINEX ).

The Investment Landscape

As an addition to my Optimal Asset Allocation post on October 20 , I thought I’d share this graph which helps explain how I view the current investment landscape. Principle #1: The goal of investment is to beat inflation over the time period which the investment is held. To paraphrase a Warren Buffett article from 2012 – “investing is the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power in the future. More succinctly, investing is forgoing consumption now in order to have the ability to consume more at a later date. From this definition there flows an important corollary: The riskiness of an investment should be measured by the probability – the reasoned probability – of that investment causing its owner a loss of purchasing power over his contemplated holding period. Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period.” Principle #2: Again to paraphrase Buffett – investors should put more money into their best ideas – those which offer a higher risk-adjusted return. And the corollary to this principle is “Wait for the fat pitch”, i.e. be patient, ignore the daily market moves, and then load up when the market offers a bargain. With these two principles in mind, the graph below presents my projected asset class returns compared against the expected future inflation rate. Then I allocate among assets using 1) the Standard Deviation and Sharpe Ratio of returns – as risk measures, and 2) the Kelly Formula – to make sure the best ideas get more money applied to them. (click to enlarge) The results of my calculations are displayed in the chart on the Optimal Asset Allocation page.