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How To Avoid The Worst Style ETFs: Q3’15

Summary The large number of ETFs has little to do with serving your best interests. Below are three red flags you can use to avoid the worst ETFs. The following presents the least and most expensive style ETFs as well as the worst overall style ETFs per our Q3’15 Style ratings. Question: Why are there so many ETFs? Answer: ETF providers tend to make lots of money on each ETF so they create more products to sell. The large number of ETFs has little to do with serving your best interests. Below are three red flags you can use to avoid the worst ETFs: Inadequate Liquidity This issue is the easiest issue to avoid, and our advice is simple. Avoid all ETFs with less than $100 million in assets. Low levels of liquidity can lead to a discrepancy between the price of the ETF and the underlying value of the securities it holds. Plus, low asset levels tend to mean lower volume in the ETF and larger bid-ask spreads. High Fees ETFs should be cheap, but not all of them are. The first step here is to know what is cheap and expensive. To ensure you are paying at or below average fees, invest only in ETFs with total annual costs below 0.46%, which is the average total annual cost of the 281 U.S. equity style ETFs we cover. Figure 1 shows the most and least expensive Style ETFs. QuantShares provides 2 of the most expensive ETFs while Schwab ETFs are among the cheapest. Figure 1: 5 Least and Most Expensive Style ETFs (click to enlarge) Sources: New Constructs, LLC and company filings Investors need not pay high fees for quality holdings. The i Shares Enhanced U.S. Large-Cap ETF (NYSEARCA: IELG ) earns our Very Attractive rating and has low total annual costs of only 0.08%. On the other hand, the Schwab U.S. Small-Cap ETF (NYSEARCA: SCHA ) holds poor stocks. No matter how cheap an ETF, if it holds bad stocks, its performance will be bad. The quality of an ETFs holdings matters more than its price. Poor Holdings Avoiding poor holdings is by far the hardest part of avoiding bad ETFs, but it is also the most important because an ETFs performance is determined more by its holdings than its costs. Figure 2 shows the ETFs within each style with the worst holdings or portfolio management ratings . Note that there are no ETFs in the All Cap Growth and All Cap Value style under coverage. Figure 2: Style ETFs with the Worst Holdings (click to enlarge) Sources: New Constructs, LLC and company filings Ark, iShares, and Guggenheim appear more often than any other providers in Figure 2, which means that they offer the most ETFs with the worst holdings. Our overall ratings on ETFs are based primarily on our stock ratings of their holdings. The Danger Within Buying an ETF without analyzing its holdings is like buying a stock without analyzing its business and finances. Put another way, research on ETF holdings is necessary due diligence because an ETF’s performance is only as good as its holdings’ performance. PERFORMANCE OF ETF’s HOLDINGs = PERFORMANCE OF ETF Disclosure: David Trainer and Max Lee receive no compensation to write about any specific stock, style, or theme . 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. I have no business relationship with any company whose stock is mentioned in this article.

The Best Companies To Work For Provide The Best Returns

Summary I use employee review site Glassdoor to find the best companies to work for in America. Companies with high employee satisfaction seem to provide less volatile returns. The best company to work for in 2015 was Google. Do you work for a great company? Does it take care of your needs? Does it have a happy workforce overall? If so, are you tempted to invest in its share program? Maybe you should. In this article, I look at some of the best and worst-rated companies in America in order to see which companies give the best investment returns. Introduction When it comes to analyzing stocks, many investors focus on traditional measures of valuation such as company finances, financial ratios , or earnings projections. But one problem with this is that all investors are looking at the same things. I believe that there is sense in looking at some other, more qualitative, factors too. After all, there is more to a company that just a set of numbers on a piece of paper. Companies are made up of individual people and as English philosopher Alain De Botton said: To write up the goings-on in businesses only in economic terms, to sum up an entire company as being +1.20 or to compress the experiences of 8,000 people into a turnover of 375,776 seems as limited as reducing a novel of the complexity of Price and Prejudice to a ledger of the characters’ bank accounts. – The News, Alain De Botton . Knowing this, I believe it is important to not only analyze the financials of a business but also the manner in which the company treats its employees. And in my view , a company that treats its employees well is likely to perform more reliably and make better returns for investors. To analyze this concept, I decided to gather data from the employee review site Glassdoor . If you haven’t heard of Glassdoor, it’s basically a site that allows employees to leave anonymous reviews of employers. By storing up this data, Glassdoor has been able to rate companies across the globe based on levels of employee satisfaction. I therefore took the best and worst companies (as rated on Glassdoor) and analyzed which companies had performed the best over the subsequent few years. Best Companies To Work For In 2012 In 2012, Glassdoor released a list of the best 50 companies to work for in America and gave top place to Bain & Company. The highest publicly listed company was Facebook (NASDAQ: FB ), which was praised for its “attractive salary and friendly employees.” The following table shows 2012’s best 11 companies to work for in America and the subsequent share price of those companies, beginning 8/11/2012: (Note, I only included companies on the list that were publicly listed on one of the major US exchanges). As the table indicates, the best publicly listed company in 2012 according to Glassdoor ratings was Facebook. The stock went on to give a 77% one-year return and a 240% three-year return. Investing $1000 into each of the 11 best-rated companies would have made a 20.28% return on investment over one year and a 61.62% return over three years. Worst Companies To Work For In 2012 Turning now to the companies that were rated worst. This data was gathered from 24/7 Wall Street , originally from Glassdoor. The table below shows the worst rated 11 companies and their subsequent share performance: As shown in the table, the worst company to work for in America was Dish Networks (NASDAQ: DISH ). However, investing in DISH would have produced an excellent one-year return of 47.57% and a 3-year return of over 100%. Moreover, investing $1000 into each of the worst-rated companies would have returned 67.46% over one year and 110% over three years, sharply outperforming the return for the best-rated companies. RadioShack (NYSE: RSH ) It’s also worth noting though, that one company on this list (RadioShack) would have been a very bad choice for your portfolio. Users on Glassdoor criticized RadioShack for its “poor management, below average pay, and strenuous hours.” And if you’d invested in RadioShack alone, you would have lost 81% of your capital. In fact, the company was later forced into liquidation in February 2015. Best Companies To Work For In 2013 In 2013, the highest rated public company on Glassdoor was Facebook again. And following is the top 9 companies to work for in 2013 and their subsequent share performance from 7/20/2013: As is clear, investing in the best-rated companies would have been a good strategy in 2013. The top rated company, Facebook, produced a 166% return over the first year and a 276% return over two years. Investing $1000 into each stock would have returned 29.84% in the first year and 49.73% over two years. Worst Companies To Work For In 2013 In 2013, there were some new entries into the worst-rated companies to work for in America including businesses such as NCR Corp. (NYSE: NCR ) and Dollar General (NYSE: DG ). As you can see from the following table, the worst 9 companies to work at in 2013 produced poor returns over the next one and two-year time horizon: Investing $1000 into each of the worst-rated companies in August 2013 would have produced just a 0.75% return on investment in the first year and a 6.84% return over two years. (click to enlarge) So what can we make of these results? The goal of this piece was to try and find a link between employee satisfaction and share price performance, and on first glance, our findings are not completely compelling. In 2012, the worst places to work actually turned out to be the best stocks to invest in. This suggests that a contrarian type strategy, where investors look for businesses on the verge of turnaround could be worthwhile. However, this finding was reversed in 2013 where the worst-rated companies significantly underperformed. Less volatility One interesting insight to be culled from this study is the case of RadioShack. The stock ended up in bankruptcy in 2015 with its stock price going to zero. And the inclusion of the company in the worst-rated list in both 2012 and 2013 is telling. So, using this data on its own might not be particularly wise. But it does seem likely, that the best companies to work for give less volatile, more reliable, stock returns overall. In general, companies should be evaluated not just on their finances but based on the individuals that make up the business as a whole. Personally, I would rather invest in those companies with the most content employees. – As of 2015, the best company to work for in America was Google ( GOOG ). – Dates chosen to reflect release of the worst companies list in order to avoid look-ahead bias – Number of companies used chosen in accordance with the number available on the worst companies list. 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.

What Will Get Hit Worst When Rates Rise

Summary John Authers argues the assets that will be worst affected by the Fed raising rates are ones paradoxically considered lower risk. These assets are high quality corporate bonds and municipal bonds, particularly those of longer duration. We highlight two bond ETFs that may fit those criteria and offer ways for investors to limit their risk. The Paradox Of Risk In his Long View column in Saturday’s Financial Times (“Dress rehearsals set stage for how assets will react to rate rise”), John Authers pointed out a paradox of risk: Generally, risks are greatest when there are not perceived. People who have bought a security believing it to be high-risk tend to guard themselves against the risk; those who think they have a low-risk investment do not. This could therefore amplify the chance of a full-blown financial “accident.” The putatively low-risk assets Authers has in mind are bonds, specifically higher-quality corporate and municipal bonds of longer duration, and the threat he sees is of the Fed raising rates. How Rising Rates will Hit High Quality Corporates and Munis Although Authers thinks a rate rise this week is unlikely, he sketches out the potential consequences of an eventual series of rate hikes: Higher target rates set by the Fed will send bond yields higher, which means bond prices must go down. With yields already low, the proportionate falls in prices need to be that much greater. Why would high-quality corporate bonds and munis fare worse than other types of bonds? Authers believes that Treasuries will benefit from a flight-to-quality in the event of a rate rise, and junk bonds will be less sensitive to interest rates because they carry greater credit risk. That leaves higher quality corporate bonds and municipal bonds. Authers notes a difference in market structure for bonds that makes the credit market “lumpier” than the stock market: rather than trading on an exchange, most bonds are sold through dealers; and since banks have, since the financial crisis, cut back on the capital they allow their dealers to spend on bonds, there may be fewer institutional buyers to support flagging bond prices. Duration and Interest Rates Bonds vary in their sensitivity to interest rate movements according to factors including their time to maturity. The finance term used to express interest rate sensitivity is duration, and it is expressed as a number of years. The longer a bond’s (or bond ETF’s) duration, the more sensitive it will be to interest rate movements. Two Bond ETFs that May Be at Risk In his column, Authers warned about longer duration bonds, but didn’t quantify what he meant by longer duration. According to Fidelity though, the average duration for fixed income ETFs is 4.43 years. Two ETFs that invest in high quality corporate bonds and municipal bonds, respectively, and have effective durations higher than that are the iShares National AMT-Free Muni Bond ETF (NYSEARCA: MUB ) and the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEARCA: LQD ). Both ETFs invest in higher quality bonds. According to its fact sheet , only 0.04% of MUB’s bonds are non-investment grade (BB-rated). The rest are BBB-rated (1.25%), A-rated (28.89%), AA-rated (48.81%) or AAA-rated (21.82%). Its effective duration is 4.75 years. According to LQD’s fact sheet , the bulk of its bonds are either BBB-rated (39.52%) or A-rated (47.68%). The rest are AA-rated (10.8%) or AAA-rated (1.7%). Its effective duration is 8.04 years. Ways For ETF Investors To Limit Their Risk If you own these ETFs, agree with Authers’ thesis, and expect a rate rise sometime in the next several months, there are a couple of ways you can limit your risk. The simplest way is to sell them. If you’d rather not keep your money in cash after selling them, we looked at a low-risk alternative to cash in a recent article (“An Alternative to Cash for a Risk-Averse Investor). Another way to limit your risk if you own these ETFs is to hedge them. You can hedge them by buying optimal puts on the ETFs to limit your downside risk. Puts (short for put options) are contracts that give you the right to sell a security for a specified price (the strike price) before a specified date (the expiration date). Optimal puts are the ones that will give you the level of protection you are looking for at the lowest cost. This page offers more detail on how optimal puts can limit your downside risk. Below are sample hedges for both of the ETFs we’ve discussed here. Hedging LQD against a > 15% decline by March 17th These were the optimal puts, as of Friday’s close, to hedge 1000 shares of LQD against a greater than 15% drop between now and March 17th. As you can see at the bottom of the screen capture above, the cost of this protection, as a percentage of position value, was 0.56%. Note that, to be conservative, this cost was calculated using the ask price of the put options. In practice, you can often purchase put options for less, at some point between the bid and the ask prices. Hedging MUB against a > 15% decline by February 18th These were the optimal puts, as of Friday’s close, to hedge MUB against a greater-than-15% decline between now and February 18th. The cost of protection for the MUB hedge above is 0.41% of position value (calculated in the same conservative manner as above for LQD). It’s not surprising that the LQD hedge is a little more expensive; all else equal, you’d expect it to be a little more expensive because it expires a month later than the MUB hedge. What’s a bit surprising is that it’s not more expensive relative to MUB, given LQD’s lower average credit quality and its significantly higher effective duration. Perhaps the answer is in the paradox of risk offered by Authers: most LQD investors don’t see it as a risky investment, so they haven’t bid up the cost of hedging it. 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.