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3 Small Cap Value ETFs For Every Type Of Investor

I’ve surveyed the small cap ETF universe and found 3 ETFs I like. I narrowed them down for aggressive investors, conservative investors and average investors. Each ETF has a reasonable expense ratio and is broadly diversified. I am a value investor, meaning I look for stocks that the market hasn’t discovered yet or that are out of favor for some reason. My favorite area for value stocks is the small-cap arena. My best picks over the years have been those that started as small-caps and grew due to their success. It’s these overlooked stocks whose stories I like that I spend most of my time on. However, I can’t spend all my time on them, and that’s why I’ve been hunting down 3 small-cap ETFs to share with aggressive investors, conservative investors, and the average investor. Why own a small-cap ETF? Other than the fact that small-cap stocks have historically outperformed their larger brethren and offer the best chances of obtaining a multi-bagger return, you must have diversification in your portfolio. Sector outperformance occurs all the time, and the more diversification you have, the better. If you don’t have diversification, then you risk seeing your overall portfolio fall more in bad times by having your money overly concentrated. For the aggressive investor, consider the WisdomTree SmallCap Earnings ETF (NYSEARCA: EES ) . This may sound like a silly criteria, but this ETF only invests in earnings generating small-cap companies. Sure, an aggressive investor may not care if a company is generating earnings or not, but I’d argue that’s only true of GROWTH stocks. Value stocks need to be making money to be a value play. EES happens to be a fundamentally weighted index fund, taking the smallest 25% of companies in the universe of profitable small-cap companies, after removing the 500 largest companies. Since the weighting is earnings based, the companies with the largest profits get weighted the most heavily. Now, let’s be sure the ETF is defining “earnings” as what we’d expect it to. The ETF refers to “core earnings,” as defined by Standard & Poor’s, to include expenses, income and activities that reflect the actual profitability of the company. So that’s just fine by me. It’s also broadly diversified with 957 holdings and, as I’d hope for in a small-cap fund, 90% of them are under $2 billion in market cap. Sure enough, even this fund has a 26% weighting in financials, with 18% in industrials, 18% in consumer discretionary, 12% in IT, 9.5% in health care, 6% in energy and 4% in materials. I consider EES to be for the aggressive investor because it is quasi-actively managed. The assumption is that actively managed funds will be a bit more aggressively directed because investors assume management is designed to outperform. That doesn’t necessarily mean there will be greater risk, but that’s often the case. Since its inception on 2/23/07, the fund’s total returns have been 53%, and it has been outperforming its benchmark in the most recent 3-year and under periods. A basic small-cap value ETF choice for the average investor is always going to be found in the Vanguard family of funds. In this case, I look at the Vanguard Small Cap Value ETF (NYSEARCA: VBR ) . Vanguard’s approach toward value securities is to evaluate them based on price-to-book, forward earnings-to-price, historical earnings-to-price, dividend-to-price and sales-to-price ratios. It is a passively managed fund that carries 843 stocks, and the top 10 only account for 4.8% of the total asset base. I like that kind of broad diversification, and like the weighting even more. Financials account for 30.7%, industrials are 20%, consumer services at 13%, technology comes in at 7%, consumer goods is also at 7%, health care at 7%, and energy at 4%. I consider Vanguard for the average investor since it seeks to mirror the benchmark with low fees. Nothing special here. It has essentially matched the Russell 2000 Value index for a 37% return since February 2007. It has a 114% total return over the past ten years, and 104% over the past five years. For the more conservative investor, the iShares Russell 2000 Value ETF (NYSEARCA: IWN ) . This $5.61 billion market cap ETF was launched in 2000, so there’s a long enough track record for me to evaluate it as being appropriate for this class of investor. It is very well diversified with 1,314 holdings. The ETF basically takes the Russell 2000 index and pulls out companies that have value characteristics in the broadest possible sense. The average price-to-earnings ratio is 14.19, which is quite a bit lower than in recent months, making it particularly attractive. Financials account for 43% of the ETF, which is a bit more than I’d like, but the vast number of holdings offsets it to some degree. Industrials account for 12%, consumer discretionary comes in at 10.74%, information technology at 10.25%, utilities at 7%, materials at 3%, energy at 4.6% and the rest falls into health care, consumer staples and derivatives. As a conservative fund, it aims for true value plays so that downside risk is limited, but upside gains can take longer to develop. For example, it only has a 12% return since February of 2007. However, it has a 172% return over fifteen years. As with any article regarding investments, you should never rely on information you read without doing your own due diligence. My articles contain my honest, forthright and carefully considered personal opinion, and conclusions, containing information derived from my own research. This may include discussions with management. I do not repeat “talking points” but may quote management from an interview. I am never influenced by third parties in arriving at my conclusions. Do not solely rely on my articles or anyone else’s when making an investment decision. Always contact your financial advisor before investing in any security. 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.

401(k) Fund Spotlight: American Funds New Perspective Fund

Summary The New Perspective Fund is the largest global growth oriented mutual fund in the world. The managers’ long-term approach has consistently resulted in outperformance within its category. Despite the fund’s strengths, investors should avoid it in an environment of a rising U.S. dollar. I select funds on behalf of my investment advisory clients in many different defined contribution plans, namely 401(k)s and 403(b)s. I have looked at a lot of different funds over the years. 401(k) Fund Spotlight is an article series that focuses on one particular fund at a time that is widely offered to Americans in their 401(k) plans. 401(k)s are now the foundational retirement savings vehicle for many Americans. They should be maximized to the fullest extent. A detailed understanding of fund options is a worthwhile endeavor. To get the most out of this article it is helpful to understand my approach to investing in 401(k)s . New Perspective Fund The New Perspective Fund has the following share classes: If the fund is an option in your 401(k), it will most likely come in the form of the A shares or one of the R share classes. The expense ratio for the A shares is .76%. The expense ratios for the R shares vary widely, from as low as .45% to as high as 1.55%. For the purposes of this article I will assume the A shares are the available option and evaluate the fund based on the .76% expense ratio. The fund invests primarily in blue chip , multinational companies from anywhere in the developed world. Its stated focus is that of companies with strong growth prospects related to changes in global trade and economic relationships. It may also hold convertibles, preferred stocks, and bonds. At present, about half the fund’s holdings are U.S. companies. The fund has about $61 billion in total assets and is the largest global growth mutual fund available. Given its size, it tends to (indeed has to) focus on large capitalization stocks. As of June 30, 2015, the weighted average market capitalization (“cap”) of its 316 equity holdings was $52 billion. Simply put, the fund is a large (or more specifically, “mega”) cap global growth fund. Consistent Long Term Performance American Funds compares the New Perspective Fund’s performance to the MSCI World Index, which is a market capitalization weighted index that combines the stock markets of all the developed nations in the world (20+ countries). As far as I can tell, American Funds uses this index, because it is really the only one available that is comparable. As of June 30, 2015, the fund has outperformed this index in the past 1-year (+4.6%), 3-year (+2.2%), 5-year (+2.0%), and 10-year (+2.5%) periods. Using the Barron’s fund screener and looking at the universe of global, large cap growth funds with at least $3 billion in assets, I found the fund to be the top performer over the last one, five, and ten year periods. The fund’s managers (there are eight of them) take a long term approach to investing. This is reflected by the fact that the fund’s portfolio turnover was only 25% in 2014. The fund clearly adds value for investors wanting to invest in the growth dynamic of the entire developed world. An Important Consideration I think the most important consideration for 401(k) investors who have this fund as an option is whether or not they want to be invested in large cap growth companies of the international developed world. Currency fluctuations are an important consideration. The following chart shows the performance of the U.S. dollar index going back to the early 90’s: ^DXY data by YCharts In 2014, the U.S. dollar began a sharp move higher, which looks similar to the move back in 1997. In line with my forecast , I expect the present move higher of the U.S. dollar to be temporarily stalled by a spike in oil prices, before resuming a multi-year move higher. In this timeframe I also expect the Japanese Yen to outright crash and the Euro to also suffer. Given this, I prefer to stay exclusively in domestic U.S. stocks. The following chart shows how the total return of the New Perspective fund lagged the S&P 500 total return from January 2014 through February 2015 when the U.S. dollar was rising sharply: ANWPX Total Return Price data by YCharts I don’t know how the New Perspective Fund was invested during the second half of the 1990’s, but the following chart reveals how its total return severely lagged the total return of the S&P 500 during this period. Recall from the first chart above that this was the period of time when the U.S. dollar was rising significantly. My guess is that this underperformance was due to the fund’s foreign holdings at the time. ANWPX Total Return Price data by YCharts I suppose an argument could be made that the fund will not lag in such an environment because most of its holdings are multinationals, however, I expect global capital, fleeing falling domestic currencies, to migrate to U.S. stocks. Low Dividend Yield Could Hurt The U.S. is due for a recession in the next few years. I think we are still at least a year away, but soon enough, one will be here. In an environment of slower growth and low interest rates, I would prefer to hold stock funds with higher dividend yields. As of July 31, 2015, the New Perspective Fund’s dividend yield over the previous 12 months was a weak .56%. That doesn’t cut it for me, especially considering the fact that a good portion of historical equity returns have come from dividends. Investors who want growth do not have to sacrifice good dividend yields . Moreover, 401(k) plans are tax deferred so it is a good place to be receiving ample dividend payouts. Conclusion The New Perspective Fund is a strong performer within its category, but its category is not well positioned in an environment of a rising U.S. dollar. Investors are better off sticking with domestic U.S. funds with high dividend yields. Investing Disclosure 401(k) Spotlight articles focus on the specific attributes of mutual funds that are widely available to American’s within employer provided defined contribution plans. Fund recommendations are general in nature and not geared towards any specific reader. Fund positioning should be considered as part of a comprehensive asset allocation strategy, based upon the financial situation, investment objectives, and particular needs of the investor. Readers are encouraged to obtain experienced, professional advice. Important Regulatory Disclosures I am a Registered Investment Advisor in the State of Pennsylvania. I screen electronic communications from prospective clients in other states to ensure that I do not communicate directly with any prospect in another state where I have not met the registration requirements or do not have an applicable exemption. Positive comments made regarding this article should not be construed by readers to be an endorsement of my abilities to act as an investment adviser. 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.

Investments In Renewable Energy One Reason Among Many For A Bullish View On Duke

Summary Company has accelerated efforts to get a large regulated asset base in order to secure long-term growth. DUK is investing heavily in its solar and gas-run operations. Company’s future cash flows will improve, which will back its dividend growth. Duke Energy (NYSE: DUK ) is a leading electric power company in the U.S. The company’s financial performance remains satisfactory, and it has been making aggressive efforts to further improve its performance. DUK’s constant efforts to better its financial numbers by making growth investments in renewable energy generation projects have placed it on a growth track. Given the correct growth efforts backed by its healthy capital investments, I expect DUK’s revenues, cash flows and earnings base will get better over time. Moreover, as the company’s future performance will improve, it will continue to share its success with shareholders in the form of cash returns, which will positively affect its stock price; the stock offers a dividend yield of 4.6%. DUK’s Efforts to strengthen its Power Generation Fleet In the recent past, the U.S. government has increased its efforts to lower carbon dioxide emission rate from energy generation fleets of utility companies by imposing heavy taxes and fines. In order to save themselves from taxes and the fine burden, utility companies have increased their focus on the expansion of renewable energy generation resources, such as solar, wind, geothermal, liquid biofuels and hydropower. Owing to the increase in scale of capital investments made by utility companies in renewable energy generation projects, the EIA projects that the U.S. renewable energy supply will steadily grow in the coming years, as shown in the chart below. (click to enlarge) Source: eia.gov As far as DUK is concerned, in the light of strict environmental regulations, the company like all other utility companies has started investing in the expansion of its renewable energy generation portfolio; year-to-date, DUK’s renewable business has attained a capacity of around 2000MW and it is making continuous strides to increase it further. In fact, the company is seeking all possible growth opportunities to increase its renewable energy generation capacity. DUK has recently filed two RFPs with Carolina state regulators; one of the RFP is to seek permission for running 53MW of utility solar capacity in the region, in order to ensure proper supply of energy to customers of the region, least by the end of 2016. And in a separate RFP, the company has mentioned that it is looking for a solar capacity of 5MW for the Shared Solar Program. DUK believes that the Shared Solar Program will be beneficial for those customers who can’t install solar panels in their homes, but still want to enjoy benefits of renewable energy resources. The deadline for approval of both RFPs is mid-October 2015; I believe that with the approval of these RFPs, the company’s process of adapting solar energy will speed up, and will help it meet the growing demand for energy in Florida. Moreover, the Indiana Utility Regulatory Commission has approved DUK’s 20-year purchase agreement to buy up to 20MW of energy from two solar developers in Indiana. Given the fact that solar projects are part of the company’s regulated asset base, I believe that by investing in its solar asset base, DUK will be able to file regular rate increase cases with regulators, which will ultimately better its future revenues, cash flows and earnings base. And as far as its gas-based energy generation operations are concerned, being an important part of its regulated asset base, the company has been making capital investments in its gas-based operations. DUK had previously filed an application to acquire 599MW of combined cycle-gas plant from Calpine, in Florida, which was recently approved by the FERC. Also, the company has announced the acquisition of a 7.5% stake in Sabal Trail gas pipeline for $225 million; with the commencement of its operation by the end of 2017, the Sabal Trail pipeline will serve DUK’s 1640MW Citrus County combined-cycle gas plant, which will begin its operations in 2018. Moreover, the company had announced $1.1 billion Western Carolina Modernization project in 2Q’15, under which coal plants in Asheville will be soon retire and will be replaced with a new 650MW combined gas plant. Moreover, the project will positively affect the company’s performance, as the electricity generated from the combined gas plant will be 35% less expensive than traditional coal plants. I believe that all of the abovementioned investments by DUK for the expansion of gas operations will serve as an important source of generating strong and stable revenues and cash flows in the years ahead. Furthermore, the company has given an update on its plan to excavate coal ash basins in North Carolina in the 2Q’15 earnings conference call; according to the announcement, 12 additional coal ash basins will be removed in North Carolina, which brings the total number of ash basins to be removed to 24. DUK’s management has estimated that additional cost to close these basins will remain in a range of $700 million to $1 billion; however, the timing for incurring this cost has not been announced yet, which perhaps the company’s management will announce in 3Q’15. I recommend investors to wait for the upcoming call to get a clear picture on this issue. Investors Remain rewarded at DUK The company has a promising history of making regular cash returns to its shareholders. As a matter of fact, DUK’s wider regulated asset base helps the company generate stable cash flows. The company recently raised its quarterly dividend by 3.8% to $3.30 share and the stock currently offers a dividend yield of 4.60% , well above the industry average of 4%. I believe that the company will continue to increase its dividends at a healthy pace, which will portend well for the stock price. Given the strength of DUK’s strategic growth investments, analysts are also expecting consistent growth in the company’s book value per share and cash flow per share, in 2016 and 2017, as shown in the chart below. (click to enlarge) Source: 4-Traders.com Price Target I have calculated a price target of $76 for DUK, using dividend discounting method. In my price target calculation, I have used cost of equity of 7.3% and nominal growth rate of 4%. Based on the target price, the stock offers a potential price appreciation of 8%.   2015 2016 2017 Terminal Value DPS (In-$) 2.91 3.01 3.52 84.2 Present Value Of DPS (In-$) 2.7 2.6 2.85 68 Source: Equity Watch Calculations & Estimates Total present value of DPS = Price Target = $2.7 + $2.6 + $2.85 + 68 = $76/share Risks The company continues to face the risk of changes in regulatory restrictions. Also, the challenging Brazilian business environment remains an overhang on DUK’s earnings growth potentials due to the company’s international business operations. In addition, any laxness exhibited by the company’s management during the execution of its strategic growth plan will result in failure to grow sales as expected. Furthermore, unforeseen negative economic changes, foreign currency headwinds and growing carbon dioxide emission-related charges are key risks that might hamper DUK’s future stock price performance. Conclusion I reaffirm my bullish stance on DUK; the company has accelerated its efforts to get a large regulated asset base in order to secure its long-term growth. In this regard, DUK is investing heavily in its solar and gas-run operations, which portrays a positive picture of the company’s future sales, cash flows and earnings growth. Given the strong growth potentials, I believe the company’s future cash flows will improve, which will back its dividend growth. Also, analysts have projected a healthy next five-years earnings growth rate of 4.67% for DUK, as shown in the chart below. (click to enlarge) Source: Nasdaq.com 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.