Tag Archives: seeking-alpha

Peer Inside The Vanguard High Dividend Yield ETF

Summary VYM offers a solid dividend yield of 3.28% to go with a low expense ratio and a reputable firm backing the fund. The holdings are solid overall, but a few of the top allocations concern me. The sector allocations show that the portfolio changes quite a bit as we get out of the top 10. I love seeing stocks like JNJ and Wal-Mart in a dividend growth portfolio. The Vanguard High Dividend Yield ETF (NYSEARCA: VYM ) looks great. After readers suggested I take a look at the portfolio, I decided it was time to dive inside and see what I could find. This is a great ETF. Investors may quibble on whether the allocations are perfectly or merely good, but there is far more to like than to hold against the fund. Quick Facts The expense ratio is a mere .10%. That is very appealing for the cost conscious long term investor. When it comes to investing, who wants to throw away their capital on high expenses ratios or trading costs? This fund looks like a great long term choice. Holdings Of course simply having a low expense ratio and the name “Vanguard” is not enough to establish a fund as a great investment. Those two aspects are a great starting point, but investors should always look to the holdings in making their decision. I put together the following chart to demonstrate the weight of the top 10 holdings: (click to enlarge) I love seeing Exxon Mobil (NYSE: XOM ) as a top holding. Investors may be concerned about cheap gas being here to stay, but I think money in politics will be around decades (centuries?) longer than cheap gas. Bet against big oil at your own peril. Johnson & Johnson (NYSE: JNJ ) is another great dividend company to hold. They have an effective R&D team and a global market presence. Just look at their dividend history and try to come up with a reason that this company shouldn’t be in a dividend growth portfolio: (click to enlarge) All around Telecommunications I’ll admit that allocations to Verizon (NYSE: VZ ) and AT&T (NYSE: T ) are enough to concern me. I have been staunchly opposed to investing in the telecommunications sector since Sprint (NYSE: S ) appointed a new CEO that knew how to wage a war based on pricing. Sprint immediately ditched their terrible marketing plans and started emphasizing price. Since I had switched from Verizon to the Sprint network within the last few years, I was keenly aware of how difficult it was to find any reliable information on price comparisons. The difficulty of getting quality information about pricing was a deliberate plan to avoid price-based competition. When Sprint decided to wage a war on prices, margins across the sector were put in jeopardy. Outside the Top 10 The beauty of this ETF, in my opinion, lies on the entire portfolio more than the simple top 10. The portfolio has large allocations just outside the top 10 to major dividend champions like Altria Group (NYSE: MO ). They also have heavy positions in some of the big players that have recently fallen out of favor such as Wal-Mart (NYSE: WMT ) and McDonald’s (NYSE: MCD ). I love these positions for their ability to stabilize the portfolio if the market turns south. While few investors may think of Wal-Mart as a stabilizing force after their declines over the last year, I think investors are simply showing far too much fear about margin compression. Wal-Mart has been hammered by a fear of higher wages eliminating their already thin operating margins. It is true that those higher wages will slam earnings over the next year or two, but who will stop Wal-Mart from passing on higher prices to customers? Seriously, ask yourself who is going to grab their market share. Is it Target (NYSE: TGT )? Target is also raising wages and has the same incentive to boost prices and protect their operating margins. Target is also in the portfolio and weighted at about .7% of the total value. Sectors The sector composition looks fairly reasonable as well. The positions are highly diversified and I love to see that telecommunications only comes in at 5.3%. I really wouldn’t want any more exposure with the problems I mentioned before. This portfolio is structured in a fairly solid manner with heavy weights on companies that have solid yields and a solid history of maintaining and growing their dividends. What to Add If an investor wants to use VYM as the core of their dividend portfolio, I would look to enhance the utility allocation. The allocations within the ETF are reasonable but investors focused on getting a reliable dividend year after year that grows with inflation would be wise to consider keeping a strong allocation to the utilities. Conclusion VYM has the right name and the right expense ratio. The top 10 holdings are a mixed bag in my eyes because of sector specific concerns. When we look further into the portfolio and examine the sector allocations I find the portfolio becoming more attractive. Currently the ETF is yielding 3.28% and I would expect distributions to increase in most years. For an investor looking to build a simple and solid portfolio that creates reliable income for them to live on, this looks like a great core holding. For investors going through TD Ameritrade, this option excels even more because it is on their “free to trade” list.

Value And Momentum In Sports Betting

By Jack Vogel As noted through our previous posts, we are big proponents of Value investing and Momentum investing strategies. We even highlight the best way to combine value and momentum . However, there is a new paper by Toby Moskowitz, titled “ Asset Pricing and Sports Betting ,” which examines how size, value and momentum affect sports betting contracts: I use sports betting markets as a laboratory to test behavioral theories of cross-sectional asset pricing anomalies. Two unique features of these markets provide a distinguishing test of behavioral theories: 1) the bets are completely idiosyncratic and therefore not confounded by rational theories; 2) the contracts have a known and short termination date where uncertainty is resolved that allows any mispricing to be detected. Analyzing more than a hundred thousand contracts spanning two decades across four major professional sports (NBA, NFL, MLB, and NHL), I find momentum and value effects that move betting prices from the open to the close of betting, that are then completely reversed by the game outcome. These findings are consistent with delayed overreaction theories of asset pricing. In addition, a novel implication of overreaction uncovered in sports betting markets is shown to also predict momentum and value returns in financial markets. Finally, momentum and value effects in betting markets appear smaller than in financial markets and are not large enough to overcome trading costs, limiting the ability to arbitrage them away. Some Interesting Points The figure below explains the different price movements which are studied in the paper: The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request. Here are the T-stats for the momentum betas in the figure below: (click to enlarge) The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request. Analysis from the paper: A consistent pattern emerges for the Spread and Over/under contracts in every sport, where the momentum betas exhibit a tent-like shape over the three horizons—near zero from open-to-end, significantly positive from open-to-close, and significantly negative from close-to-end, with the initial price movement from open-to-close related to momentum being fully reversed by the game outcome. The patterns for the Moneyline contracts exhibit the same tent-like shape, but are less pronounced, consistent with the Moneyline perhaps being less affected by “dumb” money and more dominated by “smart” money. Then the paper shows the T-stats for the value betas in the figure below: (click to enlarge) The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request. Analysis from the paper: A consistent pattern is evident from the plots: a value contract’s betting line declines between the open and close and then rebounds between the close and game end, reaching the same level it started at the open. These patterns are consistent with an overreaction story for value, where value contracts, which measure “cheapness”, continue to get cheaper between the open and the close, becoming too cheap and thus rebounding positively when the game ends. This picture is the mirror image of momentum, where value or cheapness is negatively related to past performance, and hence the pictures for momentum and value tell the same story. (Though, recall the measures for value and momentum were only mildly negatively correlated.) Conclusion from the paper: Examining momentum, value, and size characteristics of these contracts, analogous to those used to predict financial market security returns, I find that momentum exhibits significant predictability for returns, value exhibits significant but weaker predictability, and size exhibits no return predictability. The patterns of return predictability over the life of the betting contracts—from opening to closing prices to game outcomes—matches those from models of investor overreaction. The results suggest that at least part of the momentum and value patterns observed in capital markets could be related to similar investor behavior. The magnitude of return predictability in the sports betting market is about one-fifth that found in financial markets, where trading costs associated with sports betting contracts are too large to generate profitable trading strategies, possibly preventing arbitrage from eliminating the mispricing. Our Thoughts: An interesting paper, showing that Value and Momentum work within the sports betting market, but the cost of trading on the signals is too large for profitable trades. This is probably why the “house always wins.” It’s a good thing I watch countless hours of sports to form my own “expert” opinions! Original post

Why BND Is The Only Bond Fund I Own

Summary Bonds provide diversification away from stocks. Yields on bonds beat out a bank account. Rising rates are an obvious risk, but how much risk is there really? Finding a fund that’s “not too hot, not too cold”. The Vanguard Total Bond Market ETF (NYSEARCA: BND ) is the only bond fund I own, and that’s probably how it will stay. “Why own bonds at all?” some investors might be asking. I’d like to clarify why I personally have a small allocation to them, despite being relatively young at 28 years old. Markets look expensive, even after a correction While I like the valuations of the individual equities I already own, I’ll also acknowledge that the market as a whole looks expensive relative to historical valuations. According to Multpl.com , the S&P 500 is currently trading at a tick under 19 times earnings versus a historical multiple of around 15-16 times earnings. The Shiller Cyclically Adjusted PE Ratio is at around 24 times earnings, versus a historical average of around 16-17 times earnings. I think that the collapsing earnings of oil-related companies (as well as strong currency-related headwinds) could be weighing down earnings, making the market look more expensive than it really is, but I don’t think it hurts to be cautious, either. The most obvious reason I own bonds, therefore, is for diversification. Simply put, in terms of corrections and even bear markets, bonds traditionally hold up better than equities: SPY data by YCharts The majority of my individual investment portfolio and retirement accounts will remain in equities, but I do maintain a small position in the BND fund. I plan to continue to dollar cost average into it going forward, and I think it’s a better idea than holding cash while waiting for bargains to appear if markets continue to correct. Yield starvation and the lack of savings I have a tough time saving cash in excess of an emergency account right now, largely because there really isn’t any place to put it where it won’t be eaten up by inflation over time. The best place I can currently find (and where I keep my savings at) is Synchrony Bank’s high yield savings account . It only pays 1.05% APY, however, and CDs aren’t much better. Plus, with a CD, my money is locked up for a couple of years at less-than-attractive rates. So opting out of a savings account for yield, there’s short-term treasuries (NYSEARCA: SHY ) as well. These usually don’t come close to the above-mentioned savings account in yield, however, so I don’t see a reason to favor them over cash. I could also consider buying longer dated treasuries (NYSEARCA: TLT ), but then there’s substantial rate risk, as the Federal Reserve still might raise rates this year or even next year. The Fed, rates, and the “bond bubble” While I’ve often heard that there’s a bubble in bonds, and that they’re very risky due to rates being at zero for six years, I think that this talk is somewhat superficial. I’m not so sure that being 100% in equities at this point in time is for me. Long-dated treasuries offer decent yield, but they’re also very sensitive to rates. Usually to get any kind of decent yield out of a bond fund, you’d have to buy a fund with a long duration with lots of risk if rates rise. The alternative is to buy a fund with low credit quality, which pushes up yields. Either way, it seems most bond funds are either risky credit-wise or risky rising rate-wise. Here’s where The Vanguard Total Bond Market ETF starts to make sense. It yields 2.21% with an average duration of just 5.7 years. So with a 1% increase in rates, the fund would lose approximately 5.7% of its value. That’s pretty good for a bond fund in my opinion, because if the Fed does raise rates, I highly doubt it will be more than 0.25% or 0.5%. Even if it does, the yield on this fund should increase along with the bump in rates, as higher yielding bonds are added to the index. Credit wise, the BND also stands out, with the majority of the bonds held within the fund being high grade: (click to enlarge) Source: Vanguard I think that this is one of the best bond funds out there right now, especially considering its expense ratio is just 0.07%. The duration is also reasonable enough to largely prevent dramatic price drops in principal if the Fed does raise rates by the end of the year. Conclusion The BND is a “not too hot, not too cold” holding in my opinion. It’s not likely going to give investors much capital appreciation, or enough yield to get them excited about it. I’m personally holding it, however, largely because I think it’s a better alternative to cash, and I think it will hold up better than equities if the market continues to head south. I can then liquidate some (or even all) of my stake to go shopping for bargains. If markets don’t continue to correct, I don’t see that much downside, and at least I’m getting paid some income along the way. I’ll continue to be overweight equities at this point, but I don’t think it hurts to maintain a small position in the BND as an insurance measure, either.