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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

Target Date Funds As Aid In Retirement Portfolio Design

Summary Investors in or near retirement should be aware of portfolio design that leading fund sponsors suggest as appropriate. Leading target date funds appear to generally have less severe drawdowns than a US 60/40 balanced fund. The funds have slightly higher yields than a US 60/40 balanced fund. Target date funds have underperformed a US 60/40 balanced fund in part due to a cash reserve component and non-US stocks. Non-US stocks drag on historical performance could become future boost to performance. INTENDED AUDIENCE This article is suitable for investors who are in retirement or nearly so, and who are or will rely heavily on their portfolio to support lifestyle. It is not suitable for those with many years to retirement, or those with a lot more money in their portfolio than they will need to support their lifestyle. SHORT-TERM and LONG-TERM We have been writing about the short-term recently ( here and here and here ), because we are in a Correction, that may become a severe Correction, and possibly a Bear. For our clients who fit the profile of being in or near retirement and heavily dependent of their portfolio to support lifestyle in retirement, we have tactically increased cash in the build-up to and within this Correction, as breadth and other technical have deteriorated. However, we don’t want to lose sight of long-term strategic investment. This article is about asset allocation for investors that fit that retirement, pre-retirement, portfolio dependence profile. WHERE TO BEGIN ALLOCATION THINKING We think it is a good idea to begin thinking about allocation by: reviewing the history of simple risk levels ( see our homepage ) from very conservative to very aggressive to get a sense of where you would have been comfortable reviewing what respected teams of professionals at leading fund families believe is appropriate based on years to retirement (they assume generic investor without differentiated circumstances). This article is about the second of those two important review – basically looking at what are called “target date” funds. Generally, portfolios should have a long-term strategic core, and may have an additional tactical component. We think some combination of risk level portfolio selection and/or target date portfolio selection can make a suitable portfolio for many investors. You may or may not want to follow target date allocations, but you would be well advised to be aware of the portfolio models as you develop your own. In effect, we would suggest using risk level models and target date models as a starting point from which you may decide to build and deviate according to your needs and preferences, but with the assumption that the target date models are based on informed attempts at long-term balance of return and risk appropriate for each stage of financial life. For example, an investor might deviate one way or the other from more aggressive to less aggressive based on the size of their portfolio relative to what they need to support their lifestyle, and the size of non-portfolio related income sources; or merely their emotional comfort level with portfolio volatility. There no precise allocation that is certain to be best, which is revealed by the variation in models among leading target date fund sponsors. Their allocations are different, but similar in most respects. FUND FAMILY SELECTION For this article, we identified the 7 fund families with high Morningstar analyst ratings for future performance (those ranked Gold and Silver, excluding those ranked Bronze, Neutral or Not Rated). Those 7 families are: Fidelity Vanguard T. Rowe Price American Funds Black Rock JP Morgan MFS Fidelity, Vanguard and T. Rowe Price have about 75% of the assets in all target date funds from all sponsoring families combined. ASSET CATEGORIES CONSIDERED We then used Morningstar’s consolidated summary of their detailed holdings to present and compare the target date funds from each family. The holdings were summarized into: Net Cash Net US Stocks Net Non-US Stocks Net Bonds Other While we have gathered that data for retirement target dates out 30 years. This article is just about target date funds for those now in retirement or within 5 years of retirement. PROXY INVESTMENT FUNDS USED We simulated the hypothetical past performance of those target date funds using these Vanguard funds: Admittedly, this is a gross proxy summary of the holdings of the subject target date funds The funds may hold individual stocks or bonds, may hold international bonds, may use some derivatives, and may have some short cash or short equities. Nonetheless, we think these Vanguard funds are good enough to serve as a proxy for the average target date funds, and as a baseline model for you to examine target date funds and to plan your own allocation. THE BENCHMARK As a benchmark for each allocation, we chose the Vanguard Balanced fund (MUTF: VBIAX ) nwhich is 60% US stocks/40% US bonds index fund. Figure 1 shows the best and worst periods over the last 10 years for that fund, as well as its current trailing yield. FIGURE 1: So, let’s keep the 2.10% yield in mind as we look at the models, and also the 19.7% 3-month worst drawdown, the 27.6% worst annual drawdown, and 7.3% worst 3-year drawdown. FOR THOSE CURRENTLY RETIRED Figure 2 shows the allocation from each of the fund families for those currently in retirement. It also averages their allocations for all 7 and for the top three (Fidelity, Vanguard, T. Rowe Price). ( click image to enlarge ) (click to enlarge) You will note substantial ranges for allocations from fund family to fund family. For example, MFS using about 19% US stocks while Fidelity uses about 38%; and MFS uses about 64% bonds and Fidelity uses about 36%. The average bond allocation for the 7 families is about 54%, but the top three by assets average about 42%; and their average cash allocation is about 9% versus the top 3 average of 5%. Figure 3 shows how a portfolio using Vanguard index funds would have performed over the past 10 years with monthly rebalancing if it was based on the average of the top 3 families. We recalculated the allocations to exclude “Other” which is undefined, but which is relatively minor in size in each fund. We also note that the Vanguard index funds have a small cash component, so that the effective cash allocation is higher than the model. FIGURE 3 – Backtest Performance: (retired now: average of top 3 families) Observations: Yield is somewhat higher (2.28% versus 2.10%). Worst 3 months were somewhat better (-18.4% versus – 19.7%) Worst 1 year was somewhat better (-26.2% versus -27.6%) Worst 3 year drawdown was better (-5.7% versus -7.3%) Underperformed benchmark over 10, 5, 3 and 1 year and 3 months (10 years underperformed by annualized 1.05%). Reasons For Underperformance: Inclusion of non-US equities may be the biggest contributor to underperformance versus the balanced fund with 100% US securities. Another part of the underperformance is maintenance of a cash reserve position that is over and above any cash position within the benchmark balanced fund. Part is also due to a higher bond allocation. Those factors probably account most of the performance difference. We did not try to determine the exact contributions of each attribute to performance differences. The historical underperformance due to non-US stocks could possibly turn out to be a long-term reason for future outperformance. FIGURE 4 – Backtest Performance: (retired now: average of top 7 families) Observations: Yield is somewhat higher (2.19% versus 2.10%). Worst 3 months were significantly better (-12.6% versus – 19.7%) Worst 1 year was somewhat better (-17.7% versus -27.6%) Worst 3 year drawdown was a lot better (-2.3% versus -7.3%) Underperformed benchmark over 10, 5, 3 and 1 year & outperformed over the last 3 months (10 years underperformed by annualized 1.32%). Incurred less drawdown in exchange for lower cumulative return. FOR THOSE EXPECTING TO RETIRE WITHIN 5 YEARS FIGURE 5 – Allocation: (expected retirement within 5 years) ( click image to enlarge ) (click to enlarge) Again, we see substantial variation between fund families, and also between the averages for the top 3 by assets and for all 7 of the Gold or Silver rated target date families. The average bond allocation for the 7 families is about 44%, but for the top 3 it is only about 34%. For the 7 families the average non-US stocks are about 15%, but for the top 3 families it is about 21%. FIGURE 6 – Backtest Performance: (up to 5 years to retirement: average of top 3 families) Observations: Yield is higher (2.30% versus 2.10%). Worst 3 months were somewhat worse (-21.1% versus – 19.7%) Worst 1 year was somewhat worse (-30.1% versus -27.6%) Worst 3 year drawdown was the same (-7.3% versus -7.3%) Underperformed benchmark over 10, 5, 3 and 1 year and 3 months (10 years underperformed by annualized 0.95%). FIGURE 7 – BacktestPerformance: (up to 5 years to retirement: average of top 7 families) Observations: Yield is somewhat higher (2.19% versus 2.10%). Worst 3 months were better (-16.2% versus – 19.7%) Worst 1 year was better (-22.9% versus -27.6%) Worst 3 year drawdown was better (-4.4% versus -7.3%) Underperformed benchmark over 10, 5, 3 and 1 year & slightly outperformed over the last 3 months (10 years underperformed by annualized 1.19%). PERFORMANCE OF INDIVIDUAL PROXY FUNDS Figure 8 presents the current yield and rolling returns of the five individual proxy funds used in this review. FIGURE 8: (click image to enlarge) (click to enlarge) PERFORMANCE OF THE TARGET DATE FUNDS FIGURE 9: (click image to enlarge) (click to enlarge) Symbols for funds mentioned in this article are: VMMXX, VTSAX, VGTSX, VBTLX, VBIAX, TRRGX , AABTX , JSFSX , LFTDX , VTXVX , FLIFX, BAPBX , TRRUX , AACFX , JTTAX , MFLAX, VTWNX , FPIFX , BAPCX Disclosure: QVM has no positions in any mentioned fund as of the creation date of this article (October 4, 2015). We certify that except as cited herein, this is our work product. We received no compensation or other inducement from any party to produce this article, and are not compensated by Seeking Alpha in any way relating to this article. General Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions. This article is presented subject to our full disclaimer found on the QVM site available here .

Why I’m Reiterating Income Investors Buy Consolidated Edison Instead Of Southern Company

Summary Southern Company’s 4.8% dividend yield beats many of its sector peers. But that is mostly because of Southern’s declining stock price in 2015. Fundamentally, Southern is struggling. Its revenue and core earnings are declining, due to major cost overruns at its Kemper project. Meanwhile, ConEd allows investors to sleep well at night, which should be the main concern when buying utility stocks. As a result, I continue to favor ConEd over Southern. Income investors are likely drawn to Southern Company (NYSE: SO ) and its 4.8% dividend yield. But Southern has given investors a number of headaches over the past year related to its massive Kemper project. Repeated completion delays and cost overruns have negatively affected Southern’s earnings over the past year. This has caused Southern to underperform many of its peers like Consolidated Edison, Inc. (NYSE: ED ) so far this year. Even though Southern Company’s dividend yield beats ConEd’s, I think ConEd is the better utility stock to buy. ConEd’s 4% dividend yield slightly trails Southern’s yield, but that is only because Southern’s stock price has declined this year. Investors should think about total return, and not just dividend yield, when evaluating an investment opportunity. ConEd has much smoother earnings growth, while Southern’s earnings are unusually volatile, especially for a utility. For these reasons, I recommend income investors consider ConEd instead of Southern. Trouble Lurks On the surface, there doesn’t seem to be anything wrong with Southern. Earnings per share grew 1% last quarter , and 15% in the first six months of 2015, year over year. That looks quite strong at first glance. But there are a number of caveats that make Southern’s true underlying earnings much less impressive than they appear. First and foremost, Southern is benefiting from a very easy comparison. Last year’s quarterly results were heavily weighed down by huge charges against earnings, due to the Kemper project. This has made Southern’s 2015 earnings results show solid growth, but that is only because last year’s numbers were so badly depressed. If you strip out the excess charges throughout 2014, Southern’s adjusted earnings are actually down 4.4% through the first six months of 2015. Therefore, investors looking at the headline reported numbers only may get a distorted image of Southern. The fact that excess cost overruns at Kemper have moderated somewhat this year is not exactly cause for celebration. Southern’s operating revenue declined 6.5% over the first six months of 2015, year over year, which is a disturbing indicator of the company’s shaky underlying fundamentals. This is why Southern’s stock price is down 8% year-to-date. Plus, the forward-looking picture is cloudy at best. Southern now anticipates the Kemper project will not be placed into service until after April of 2016. This will result in $15 million in additional total costs. Moreover, the company expects to incur $25 million-$30 million in additional costs each month for deferring the start-up beyond March, and another $20 million per month in financing and operating costs. If that weren’t bad enough, because the project will be delayed beyond April 19, Southern would be required to return $234 million to the IRS, which is what the company had received in prior tax credits for the project. In its press release, Southern vowed that its customers will not foot the bill for the added costs. Since there are no free lunches, someone has to foot the bill, and that someone will be Southern and its shareholders. As a result, while things are “less bad” this year than last year, it appears there is more trouble in store for future quarters. Reiterating My Preference For Consolidated Edison Income investors may see Southern’s higher dividend yield and stop there. But dividend growth is a consideration as well, and if Southern’s revenue and core earnings continue to decline, the company may not be able to maintain dividend growth that meets inflation. Southern has paid a dividend for 271 consecutive quarters, dating back to 1948. For its part, ConEd is no dividend slouch. It has increased its dividend for 41 years in a row. This makes ConEd a Dividend Aristocrat, while Southern is not. More importantly, Southern is struggling to grow revenue and earnings consistently, and Kemper is only exacerbating the problem. Meanwhile, ConEd gives investors stable revenue and earnings growth, as the company has not had nearly as many operating issues as Southern. For example, ConEd grew EPS by 3% last year, and is off to another good start to the current year. ConEd’s core earnings per share are up 11% through the first six months of 2015, year over year. Going forward, investors should continue to enjoy stable earnings growth. The company expects full-year earnings to reach $3.90 per share-$4.05 per share. At the midpoint of its forecast, that would represent 6.5% earnings growth from 2014, which would be a very solid earnings growth rate for a utility. I last wrote about my preference for ConEd over Southern in this article , dated June 15. Since the day that article was published, ConEd has outperformed Southern by 10 percentage points. Given Southern’s inability to get things right at Kemper, and ConEd’s solid growth, I expect ConEd’s outperformance to continue. Disclaimer : This article represents the opinion of the author, who is not a licensed financial advisor. This article is intended for informational and educational purposes only, and should not be construed as investment advice to any particular individual. Readers should perform their own due diligence before making any investment decisions.