Tag Archives: seeking

Creating A Quality Growth Portfolio For Millennials

Summary I searched through all ETFs and found five for building a quality growth portfolio given the current environment. The five ETFs I found cover: U.S. Mega-Cap growth, biotechnology, International Growth, High Yield Bonds and Cash. The portfolio is weighted 70% stocks, 20% bonds, 10% cash. In this article, I will be creating a simple growth oriented portfolio for millennial investors. The goal of the portfolio is to hold five ETFs to gain exposure to high quality growth stocks as well as targeting specific high growth areas. U.S Equity: Vanguard Mega Cap Growth ETF (NYSEARCA: MGK ) I chose MGK because it only holds the largest market-cap growth stocks. I wanted to be more conservative with my main growth selection because the second part of my U.S. equity allocation consists of a high growth/high risk segment of the market, therefore for balance, I chose MGK. When looking for large-cap growth ETFs, I narrowed my search down to MGK and the iShares Russell Top 200 Growth ETF (NYSEARCA: IWY ). I chose MGK over IWY because of the lower cost and exposure to health care. MGK charges 0.11% and IWY charges 0.20%, which is not a huge difference, however when taken in combination with the data table below MGK stood out as the superior choice. My second ETF selection is a health care ETF, therefore, I did not want a lot of exposure to health care from my main selection. I looked at the health care allocations of IWY and MGK and found that MGK has a lower allocation to health care. Health Care Allocation MGK 14.00% IWY 17.95% [Table Data from IWY & MGK websites] Targeted Sector Growth Equity: ALPS Medical Breakthroughs ETF (NYSEARCA: SBIO ) I chose SBIO because of its exposure to small & mid cap high growth biotechnology companies. SBIO only holds companies with a market cap between $200 million and $5 billion. Most importantly, SBIO only holds those stocks with a sustainable cash burn rate and companies with at least one product in phase 2 or phase 3 of development. This distinguishes SBIO from other biotech ETF offerings because it is targeting companies that have moved passed the initial stage of development and have the cash available to be able to fund continued clinical trials. It is widely know that many biotechs with promising drugs build hype when they are in phase 2 or phase 3 because of the potential to go from zero or very little revenues to a significant amount. A complete picture of the selection process can be seen in the image below. (click to enlarge) [Chart from SBIO Fund page ] International Equity: iShares MSCI EAFE Growth ETF (NYSEARCA: EFG ) I chose EFG because it holds mainly large cap companies in developed markets excluding the United States and then selects those companies whose earnings are expected to grow at an above-average rate relative to the market. The following chart shows that growth oriented stocks in the EAFE have significantly outperformed the broad iShares MSCI EAFE ETF (NYSEARCA: EFA ) and value oriented stocks of the iShares MSCI EAFE Value ETF (NYSEARCA: EFV ). (click to enlarge) [Chart from Google Finance] Short-Term High-Yield Corporate Bonds: First Trust Tactical High Yield ETF (NASDAQ: HYLS ) I chose HYLS because of its high-yield and superior performance during the most recent run up in interest rates. I believe all investors; even millennials should have an allocation to fixed income even though it is not growth oriented. With the potential for rising rates aggressive bond ETFs will most likely suffer, which is why when I searched through all the high-yield ETFs available, HYLS stood out among its competitors. HYLS stood out because of its structure, 6%+ dividend yield and its performance. HYLS is actively managed and uses a fundamental process to select long positions and has the ability to short treasury bonds or corporate bonds. According to the HYLS fact sheet: The team uses a combination of a rigorous fundamental credit selection process with relative value analysis and believes that an evolving investment environment offers varying degrees of investment risk opportunities in the high-yield, senior loan, derivative and fixed-income instrument markets. The second reason I chose HYLS was because it performed very well during the most recent rising rate period from February 2nd 2015 until June 10th 2015. As you can see HYLS [Yellow Line] outperformed both major broad high yield bond ETFs including the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA: HYG ) and the SPDR Barclays Capital High Yield Bond ETF (NYSEARCA: JNK ). In addition, HYLS also outperformed short-duration high yield bond funds including the iShares 0-5 Year High Yield Corporate Bond ETF (NYSEARCA: SHYG ), the SPDR Barclays Capital Short Term High Yield Bond ETF (NYSEARCA: SJNK ) and the PIMCO 0-5 Year High Yield Corporate Bond Index ETF (NYSEARCA: HYS ). (click to enlarge) [Chart from Google Finance] Cash: PIMCO Enhanced Short Maturity Strategy ETF (NYSEARCA: MINT ) My final selection was MINT because I believe all portfolios either should have cash for safety or available to use for strategic purchases of quality growth stocks/ETFs. Millennials have a long-term horizon and if there is an opportunity to pick up a quality growth ETF or stock that is trading unjustly lower, having the cash available to do so is desirable. Portfolio Overview I have provided an example of what the portfolio would look like. As you can see, I allocated 30% to each main equity selection and 10% to SBIO, which made the total equity allocation to be 70%. Allocation MGK 30% SBIO 10% EFG 30% HYLS 20% MINT 10% Portfolio Composition Stocks 70% Bonds 20% “Cash” 10% Closing Thoughts The portfolio I created has exposure to quality growth companies in the U.S. and internationally. With the added allocation to target biotechnology, the portfolios growth should be enhanced by this high growth area of the market. In addition, by moving out on the credit risk spectrum for fixed income, the portfolio would generate some income, which instead of being reinvested into more HYLS, could be used to purchase more growth stocks/ETFs. Disclaimer : See here .

VT: A Simple Choice For Getting Global Exposure

Summary The ETF has a good expense ratio, but investors can get a lower ratio by combining VEU and VOO. Investors need to remember the importance of international diversification even as domestic equity as thoroughly outperformed during the latest bull market. While I support having some international diversification, this fund offers almost 45% of the holdings as international equity. That is a bit too high for me. I see this fund as being maximized by investors that want to add it to their domestic allocations or investors with a long time horizon. The Vanguard Total World Stock ETF (NYSEARCA: VT ) is a great ETF for getting exposure across the world. The holdings are about 55% domestic and around 45% international. Expenses The expense ratio is a .17%. Vanguard regularly sets the bar for creating low fee investment vehicles for investors to gain solid diversification with low costs. My one concern in this area is that investors could use the Vanguard FTSE All-World ex-US ETF (NYSEARCA: VEU ) for international allocations with a .14% expense ratio and the Vanguard S&P 500 ETF (NYSEARCA: VOO ) for domestic equity with an expense ratio of .05%. You could average those in any way you wanted since both parts offer lower expense ratios than the Vanguard Total World Stock ETF. Aside from that potential strategy to lower ratios, this is a very solid fund and a viable option for one stop shopping on equity exposure. Holdings I grabbed the following chart to demonstrate the weight of the top 10 holdings: For a total world ETF, I think investors had to expect Apple (NASDAQ: AAPL ) to be the top weight. The company is simply huge and their sheer size makes it necessary to give them a significant weight in any index attempting to replicate the entire world of equity securities. We have only stock that I think of as an international allocation within the top holdings. That, of course, is Nestle S.A. ( OTCPK:NSRGY ). As an international company, their sales are providing even further diversification as they rely on both developed and emerging markets for growth in sales. Nestle is the kind of dividend machine that SA Author Dividends Are Coming has suggested investors should buy and hold forever . The company is not always considered as a perennial dividend champion by domestic investors because their dividends appear to have suffered in a few years due to the currency exchange impacts. In their domestic currency, they are a great dividend growth company. Sectors (click to enlarge) If I was going to use a single ETF as the primary source of equity for my entire portfolio, I think I would prefer to see a slightly more defensive allocation strategy. For investors willing to go with the more aggressive allocations, such as having around 38% of the portfolio in the cyclical sectors, this is the kind of fund investors should consider for automatic investing. To avoid excess risk, that is a strategy for investors with a long enough time horizon to make up for losses as there should be both bull and bear markets over the next few decades. Region Domestic equities get a heavier weighting than international equities, but the international weights are fairly high. I must admit that as an investor I have a significant home country bias and I would not be comfortable with having even close to 45% of my equity in the form of international investments. For me the limit on international equity is closer to 30% and I prefer to run it closer to 15% to 20% of the total portfolio. I do feel compelled to point out that the allocation to emerging markets is within reason, so my concern would be coming from the strength of the allocations to developed markets. Generally developed markets are going to be less volatile than emerging markets but in this case the allocation to the developed markets is substantially larger and thus it is capable of generating more volatility at the portfolio level because of the weighting. Conclusion This is a solid ETF though the more attractive traders that don’t mind a more complex allocation may want to consider combining VEU and VOO if they really want to chase their expense ratios down to be as low as possible. In my opinion, this ETF should be combined with additional domestic allocations because the international allocations are simply a little too high for my taste. For investors that don’t mind the heavy international allocation and have a long time horizon to recover from any bear markets, this fund should be considered for regular purchasing.

TerraForm Will Survive, But Needs To Slow Down

Summary TerraForm Power’s stock has plunged 70% year to date. The market value was high due to its aggressive expansion plan. The company will survive, but needs to slow down. If you’ve believed in SunEdison (NYSE: SUNE ) and TerraForm Power Inc.’s (NASDAQ: TERP ) growth story and have been a shareholder of either company, you’ve probably had a hard time falling asleep at night. It’s been devastating for TerraForm’s shareholders, as the shares have plunged over 70% year to date. So, what makes investors worried even when the company has been able to grow its CAFD (cash available for distribution) and raise dividends consistently since it went public in July 2014? (click to enlarge) (Source: TerraForm Power Investor Presentation) TerraForm only had 808 MW in projects generating $107 million in CAFD initially. After only one year, the company now has over 1900 MW in assets, with a projected $225 CAFD in 2015. The project pipeline and cash flow distribution growth are impressive, but not the stock price. Expansion comes at a price. Clearly, the market now focuses on TerraForm’s liquidity and balance sheet, believing the company’s rapid expansion is sustainable. First of all, I would like to estimate how much money the company is obligated to pay (up to December 2016), based on its scheduled debt repayment, projected dividend distribution and committed funds for acquisitions. Current portion of long-term debt and lease obligation: $115 million (to be paid by September 2016) Invenergy acquisition: $2.05 billion Vivint Solar (NYSE: VSLR ) deal: $962 million Payments (2016) on maturities of long-term debt as of September 30: $58 million Dividend payment: $112 million (based on 80 million class A common stock outstanding) Interest payment and some other payments, based on its agreement with SunEdison (IDRs) In total, TerraForm needs to come up with approximately $ 3.3 billion for its acquisitions, debt repayment, lease obligations, dividend payment and other payments in the next 12 months. To put it in perspective, the company generated $105 million cash from operating activities in the first nine months, and it expects to generate $225 million of CAFD for 2015. So, the question is: Has TerraForm addressed funding shortfalls, if there are any? Let’s take a look at the company’s current financing plan: Unrestricted cash: $821 million (including $160 million in UK refinancing proceeds) Revolver: $725 million Project debt (CA Ridge): $174 million TERP Holdco Capital: $388 million Assumed project debt: $358 million (subject to lender consent) Project debt/Term loan/Holdco bonds/Warehouse facilities: $1.27 billion (in progress) Including the $1.27 million financing options in progress, TerraForm has about $3.6 billion available to fund its commitments and fulfill other obligations, if needed. The management is quite confident that all financing will be made available by Q1 2016. This seems quite desperate, as the company plans to deplete all its cash and most likely its revolver for acquisition and debt repayment. TERP’s unrestricted cash on-hand is approximately $800 million and our liquidity available is approximately $1.5 billion. We have earmarked this cash and liquidity to fund our existing commitments, including the pending Invenergy and Vivint acquisitions. – TerraForm Power Q3 Earnings Call Transcript While TerraForm is capable of funding its obligations and acquisitions given listed options, this will further bury the company in heavy debt. Let’s not forget, the company still has about $2.4 billion long-term debt outstanding as of September 30, 2015. Senior debt 2023 – $950 million (Issued for First Wind and previous revolver repayment) Senior debt 2025 – $300 million (issued for Invenergy) Other project debt and construction financing – $1.28 billion After its acquisition of Vivint and Invenergy assets, TerraForm will have over $4 billion in debt, with little cash on hand. It will be difficult for the company to further grow its pipeline given its highly leveraged balance sheet and the current market sentiment. Even if TerraForm can obtain the needed capital in the near future, it will likely pay a much higher interest rate. Debt is usually cheaper than equity, but only to a certain point. Investors may argue that TerraForm will add another 1.4GW to its pipeline once the acquisition is completed. However, for companies like TerraForm, the payback does not happen overnight. If the company grows its CAFD 70% in 2016 (management refuses to provide a guidance for 2016, saying it will focus on closing deals first), it should generate approximately $95 million CAFD each quarter to pay dividend, interest expense and other obligations. Conclusion Financially and strategically, TerraForm Power went too far, too fast (following SunEdison’s path), and it needs to slow down. Corporate governance is another issue given its connection with SunEdison. As I am writing this, David Tepper, the founder of Appaloosa Management, just sent a letter raising concerns regarding conflict of interests between TerraForm and SunEdison. This is another important issue that investors need to pay attention to. TerraForm had financing lined up for its committed acquisitions, and should not have problems paying liabilities in the next few years. But it will have little room to grow in the short term given its highly leveraged balance sheet and depressed stock price. Clearly, investors now focuses more on the company’s financial strength rather than how fast it can grow its dividend and pipeline. Going forward, TerraForm should focus on the profitability of projects rather than blindly expanding by acquiring assets regardless of project quality. Sometimes we need to take a break and slow down, and I hope TerraForm has learnt this lesson.