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3 Large Cap Value ETFs For Every Kind Of Investor

Large Cap Value ETFs offer great balance to go-go growth stocks. Patience is rewarded with value stocks. The market often beats down great companies to levels below intrinsic value. Most Large cap value ETFs offer familiar names trading at discounts. 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. The large-cap sector can provide outsized returns with reduced risk, by not buying stocks that are even close to being fairly valued. These value stocks require patience that is often rewarded, and comes without the handwringing that goes along with growth stocks. I’ve been hunting down 3 large-cap ETFs to share with aggressive investors, conservative investors, and the average investor. Why own a large-cap ETF? As mentioned, value stocks give you a hedge against taking on too much risk, and they are necessary to offset the increased risk that comes with investing in small-cap stocks that offer higher rewards but higher risk. Also 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 conservative investors, have a look at the Vanguard Value ETF (NYSEARCA: VTV ). One of the cheapest ETFs in the category, it carries an expense ratio of 0.09%. Vanguard asserts that similar funds have a 1.11% expense ratio. That expense ratio is easily covered by its 2.52% yield, so you get a little spending money along with this ETF. With 318 holdings and a median market cap of $85.5 billion, you are getting the top-of-the-line companies in this ETF. The top 10 holdings only account for 25.8% of the total asset base, and they are safe and reliable investments with all the premier names you recognize. The sector diversity of the Vanguard Value ETF is impressive. It has 22% of assets invested in financials, 18% in consumer goods and services, 15% in health care, 11% in industrials, 10% in technology and 10% in energy. The rest is divided between basic materials, telecom and utilities. What I really like here is the fund has a beta of 0.98, meaning is to 2% less volatile than the broad market. However, with a Sharpe Ratio of 1.85, it has significantly enhanced risk-adjusted return compared to a risk-free investment. Here we find the kind of famous names you’d expect: ExxonMobil (NYSE: XOM ) , Microsoft (NASDAQ: MSFT ) , Johnson & Johnson (NYSE: JNJ ) , Berkshire Hathaway ( BRK ) , and Wells Fargo (NYSE: WFC ). This is a buy-and-hold fund, with only 5.5% of stocks turned over in the past year. That’s as it should be. The point is that value stocks require patience, not switching in and out of stocks. Its average price-earnings ratio is 17.9. It has a 96% total return over the past ten years. Aggressive investors should have a look at the First Trust Large Cap Value AlphaDEX ETF (NYSEARCA: FTA ) . It has 204 holdings, so it isn’t highly concentrated and therefore too risky, but it isn’t spread too thin, either. The top 10 stocks only make up 10% of the asset base, so you don’t have too much concentration risk, either. That’s why I like it – its more aggressive approach is tempered by these moves.. The expense ratio is a bit high at 0.64%, but still 47 bps below the average fund, if Vanguard is to be believed. Since inception, it has only returned 30%. However, coming off the low of the financial crisis, it is up almost 260%. The top holdings are from several different sectors. They include Tesoro (NYSE: TSO ), Edison International (NYSE: EIX ), PPL Corp. (NYSE: PPL ) and Traveler’s Companies (NYSE: TRV ). The fund has concentrated itself into six sectors: 18.5% utilities, 16% energy, 15% financials, 5% consumer discretionary, 14% industrials, and 11% IT. It carries a 3-year beta of 1.05, meaning it is only 5% more volatile than the market and comes with a Sharpe Ratio of 1.51 – meaning enhanced risk-adjusted returns compared to risk-free investments. A solid large-cap value ETF choice for the general investor is the Guggenheim S&P 500 Pure Value ETF (NYSEARCA: RPV ) . At 199 holdings, it’s a bit too concentrated that I would like, but that’s still a lot of stocks to give you diversification that you need. The top 10 stocks account for 19% of the asset base. Its expense ratio is only 0.35%. Looking at risk, its 3-year beta is 1.2, meaning it has 20% more volatility than the broad market. However, the reason I like it for average investors is that the additional volatility comes with a Sharpe Ratio of 1.92 – meaning it has an excellent risk-adjusted return. Diversification is pretty good, with 25% energy, 33% allocationin financials, 4% health care, 4% technology, 5% industrial and 16% consumer holdings. Top names include Assurant (NYSE: AIZ ), Velaro (NYSE: VLO ), Gamestop (NYSE: GME ) , and Phillips 66 (NYSE: PSX ). 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.

Inside Vanguard’s New Muni Bond ETF

Vanguard Group, known for its low-cost offerings, has been making great strides in recent times in launching products on varied themes. At present, it is offering around 70 U.S. listed ETFs, and has managed to secure the second position (with about $457.1 billion market cap) among the top 10 fund sponsors list, following BlackRock (NYSE: BLK ). Most recently, the issuer stepped into the muni bond market. The fund trades under the name of Vanguard Tax-Exempt Bond ETF (NYSEARCA: VTEB ). Let’s look into the fund. The Proposed Fund in Focus As per the prospectus , the fund looks to track the performance of the investment-grade U.S. municipal bond market. The goal will be achieved by tracking the S&P’s National AMT-Free Municipal Bond Index. The basket is long-duration in nature. The fund charges 12 bps in fees, and the expense ratio is 86% less than the average expense ratio charged by funds with similar constituents. How Does it Fit in a Portfolio? Municipal bonds are great picks for investors seeking a steady stream of tax-free income. Usually, the interest income from munis is exempt from federal tax, and sometimes even state taxes, making these especially attractive to investors in the high tax bracket looking to reduce their tax liability. The proposed fund also looks to follow munis that have their interests excused by U.S. federal income taxes and the federal Alternative Minimum Tax (AMT). However, investors should note that tax-free bonds have lower yields than taxable bonds. With the increase in the U.S. taxes, the demand for municipal bonds has grown by leaps and bounds among high earners. The best part of the fund is that it includes high-quality muni bonds. Recently, the sentiment about the creditworthiness of some munis like Puerto Rico soured. Also, a gradually improving U.S. economy will provide relief to investors, as the credit quality of the municipal bonds could improve, thereby reducing default rates. Though yields will likely rise in the coming days, as the Fed is set to hike rates sometime in 2015, the tax benefit will look more promising with rising yields. For example, a 10% yield translates into 18% (for high tax payers) after considering the tax exemption as noted by Bloomberg . Probably this is why Vanguard has endorsed the idea of tax exemption the most. ETF Competition The fund has managed to amass about $50 million in assets within just 10 days of launch, which can be considered as a benchmark of its success. After all, Vanguard is known as a low-cost producer. VTEB is the lowest-cost product in the muni bond ETF space (see all muni bond ETFs here ). Still, this new fund has big competition in the form of the iShares National AMT-Free Muni Bond ETF (NYSEARCA: MUB ). MUB is the highest-grossing muni ETF, with about $5.2 billion assets. Plus, this fund also tracks the same index, i.e. the S&P National AMT-Free Municipal Bond Index, to provide exposure to a basket of 2,782 investment-grade securities. The average maturity for MUB stands at 5.54 years, while the duration is 4.74 years. The fund has a 30-day SEC yield of 1.73% and charges 25 basis points as expenses per year. In a nutshell, though Vanguard made a late entry to this thriving space, it is off to a strong start. Going forward, it should not face hurdles in garnering investors’ money, despite iShares’ presence with an ultra-popular product. Original Post

Plan And Act, Don’t React

An investor can and should learn from the past. He should never react to the recent past. Why? The past can’t be changed, but it can be known. Reacting to the recent past leads investors into the valleys of greed and regret – good investments missed, bad investments incurred. We’ve been in a relatively volatile environment for the last two weeks or so. Markets are down, with a lot of noise over China, and slowing global growth. Boo! The markets were too complacent for too long, and valuations were/are higher than they should be, given current earnings, growth prospects and corporate bond yields. It’s not the best environment for stocks given those longer-term valuation factors, but guess what? The market often ignores those until a crisis hits. The FOMC is going to tighten monetary policy soon. Boo! The things that people are taking on as worries rarely produce large crises. They could mark stocks down 20-30% from the peak, producing a bear market, but they are unlikely of themselves to produce something similar to 2000-2 or 2008-9. Let’s think about a few things supporting valuations and suppressing yields at present. The overarching demographic trend in the market leads to a fairly consistent bid for risky assets. It would take a lot to derail that bid, though that has happened twice in the last 15 years. Ask yourself, do we face some significant imbalance where the banks could be impaired? I don’t see it at present. Is a major sector like information technology or healthcare dramatically overvalued? Maybe a little overvalued, but not a lot in relative terms. There are major elections coming up next year, and a group of politicians harmful to the market will be elected. This is a bad part of the Presidential Cycle. Boo! Take a step back, and ask how you would want your portfolio positioned for a moderate pullback, where you can’t predict how long it will take or last. Also ask how you would like to be positioned for the market to return to its recent highs over the next year. Come up with your own estimates of likelihood for these scenarios, and others that you might imagine. We work in a fog. We don’t know the future at all, but we can take actions to affect it, and our investing results. The trouble is, we can adjust our risk profile, but our ability to know when it is wise to take more or less risk is poor, except perhaps at market extremes. Even then, we don’t act, because we drink the Kool-aid in those ebullient or depressed environments. We often know what we should do at the extremes, but we don’t listen. There is a failure of the will. This is a bad season of the year. September and October are particularly bad months. Boo! I often say that there is always enough time to panic. Well, let me modify that: there’s also always enough time to plan. But what will you take as inputs to your plan? Look at your time horizon, and ask what investment factors will persistently change over that horizon. There are factors that will change, but can you see any that are significant enough for you to notice, and obscure enough that much of the rest of the market has missed it? Yeah, that’s tough to do. So perhaps be modest in your risk positioning, and invest with a margin of safety for the intermediate-to-long term, recognizing that in most cases, the worst-case scenario does not persist. The Great Depression ended. So did the 70s. Valuations are higher now than in 2007. (Tsst… Boo!) The crisis in 2008-9 did not persist. That doesn’t mean a crisis could not persist, just that it is unlikely. Capitalist systems are very good at dealing with economic volatility, even amid moderate socialism. Go ahead and ask, “Will we become like Greece? Argentina? Venezuela? Russia? Spain? Etc.?” Boo! It would take a lot to get us to the economic conditions of any of those places. Thus, I would say it is reasonable to take moderate risk in this environment if your time horizon and stomach/sleep allow for it. That doesn’t mean you won’t go through a bear market in the future, but it will be unlikely for that bear market to last beyond two years, and even less likely a decade. Disclosure: None.