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SPHB: Is This The Right Time To Go Risk On?

Summary One highly contrarian trade right now is to go high beta. Beta, or β, displays the level of volatility in the price of an asset compared to a certain benchmark. There are several of these ETFs with the PowerShares S&P 500 High Beta Portfolio being the sole high beta ETF that is focused on U.S. stocks. The PowerShares S&P 500 High Beta Portfolio appears quite attractively valued compared to the Russel Mid Cap Index. One highly contrarian trade right now is to go high beta. This theme appears to be unmarketable with ETFs built around it having little to no assets under management. The reverse theme: low volatility or low beta is extremely popular. This tells me it’s probably a good place to look for value and there is no easier way than just buy exposure through an ETF. There are several of these ETFs wit h the PowerShares S&P 500 High Beta Portfolio (NYSEARCA: SPHB ) being the sole high beta ETF that is focused on U.S. stocks. SPHB data by YCharts What is high beta? Beta, or β, displays the level of volatility in the price of an asset as compared to a certain benchmark. The volatility of the benchmark is equal to 1. A more volatile asset has a beta above 1 and a less volatile asset has a price below 1. Whether the price moved up or down doesn’t matter much, it’s movement in either direction that is measured. Bet’s are based on past price data so by definition it’s a form of investing while looking in the rear view mirror as Buffett likes to call it. Portfolio High beta stocks are the race cars of the indexes. These issues can really move and while they will leave your more pedestrian holdings far behind them when going on a run they also are the ones that can crash and burn at every turn. Just take a look at the hair-raising top 10 holdings of this ETF: Freeport-McMoran (NYSE: FCX ) Cameron International Corp (NYSE: CAM ) Marathon Oil Corp (NYSE: MRO ) Newfield Exploration Corp (NYSE: NFX ) Avago Technologies (NASDAQ: AVGO ) First Solar (NASDAQ: FSLR ) Qorvo (NASDAQ: QRVO ) Mallinckrodt (NYSE: MNK ) Harman International Industries (NYSE: HAR ) Vertex Pharmaceuticals (NASDAQ: VRTX ) Price moves lower tend to happen fast and I suspect that is why there are lots of beaten down stocks in this ETF. The energy sector that’s getting crushed in the multi-year bear market is heavily represented taking up 20% of the ETF’s allocation. A stock’s weighting is based on its beta so higher beta stocks are weighted more heavily. The ETF is rebalanced on the third Friday of February, May, August and November. There also is a minimum required volume which excludes really thinly traded issues. Valuation From a valuation perspective it’s quite an attractive basket of stocks, scoring well on a forward earnings basis, price/book ratio, price/sales ratio and especially on a price/cash flow basis. Even on yield it beats the Russel Midcap which is somewhat surprising. PowerShares S&P 500 High Beta Portfolio Russell Midcap Price/Forward Earnings 16.47 18.22 Price/Book 1.37 2.09 Price/Sales 1.2 1.34 Price/Cash Flow 5.14 9.09 Dividend Yield % 2.78 2.05 Data: Morningstar Expenses The ETF’s expense ratio is about 0.25%. Not particularly high and it compares favorably with many mutual funds and thematic ETFs bu t if you are planning to hold on for decades it will not be negligible. Why is this interesting? I started looking at this ETF myself because Murray Stahl’s recent market commentary , which dealt with high beta ETFs made a lot of sense to me. His thesis basically being market flow toward low volatility strategies help to further stabilize their prices and so a virtuous cycle has been born. With high-volatility stocks, the exact opposite virtuous cycle leads to their undervaluation. As a bottom-up stock picker I noticed many of the companies I analyze lately have a lot of debt or have some kind of volatile earnings profile due to cyclicality or something else. I had no idea why, but the explanation of volatility is out of favor makes sense to me. This means two things: 1) High-volatility stocks are fertile ground to search for undervalued securities and 2) it may be possible to benefit from this observation simply by buying an ETF that is relatively attractively valued. If you compare the PowerShares S&P 500 High Beta Portfolio to the Russell Midcap it is clear you are buying a lot more cash flow for your dollar. The downside obviously being that you will need an iron stomach to sit out the ride.

SPY Vs. Dividend Growth Portfolio

A couple of weeks ago, I asked you why you think you can beat professionals? This led to an interesting conversation about the difference between beating the market and reaching your goals. I think the most important thing is to reach your financial goals. It’s like registering for a run; when you register for a 10K, you don’t mind if you win the run or not; you focus on your own running objective. As long as you reach that goal, your run is a success. This is also a good mentality to apply when investing. After writing this article, I received an email from a reader asking the question about the difference between buying SPY (Spider S&P 500 ETF index) yielding nearly 2% and building a dividend growth stock portfolio: More often than not, I choose not to buy individual stocks when I compare their yield to SPY, which is a core holding in my account. Can you perhaps do a write-up of SPY? It has all the same advantages a good dividend stock has. It has dividend growth, it has a reasonable yield, dividends reinvested in SPY will have the same snowball effect. But, it has a KEY advantage that individual stocks do not – diversification. So how can I determine if an individual stock is a better buy than SPY? When is the decision to to buy an individual stock for its dividend better than my default position of “keep it in SPY”? What return should an individual stock give me for the risk of abandoning SPY’s diversification? What risk premium? I found his question quite interesting as it positioned a global well-diversified and dividend paying investment vehicle trading with very little effort vs. a handpicked dividend growth stock portfolio requiring continuous management. Let’s dig deeper to see what both strategies have to offer… SPY is Not a Dividend Growth Portfolio First, let’s be honest, SPY is not a dividend growth portfolio. This is not its function, regardless if the members of the S&P 500 pay enough dividends to have a yield around 2%. When you look at its past 10 year dividend history payment, you understand better why SPY can’t really replace a dividend growth portfolio: As you can see, dividend payments are quite hectic. This is normal as within the group of the 500 biggest companies, you will have a little bit of everything: Strong growth companies not paying dividend Classic dividend growth companies Companies going through troubles and cutting their dividend Etc. Being a “big company” is not a gauge of success and it is also far from an indication you will see your dividend payments growing. It becomes obvious when you compare the dividend growth in % over the past 10 years compared to a classic dividend growth company such as Johnson & Johnson (NYSE: JNJ ): JNJ dividend payments increased steadily year after year and offer double the dividend growth payment than SPY over this period. Besides the dividend growth test fail, there are many other reasons why I’m not a big fan in investing in SPY as a dividend growth investor: It doesn’t follow my dividend growth investing philosophy. Dividend payments are hectic. SPY includes too many “bad companies” I wouldn’t pick. The overall market is not what I want to buy. In the end, there are very limited similarities between a dividend growth portfolio and SPY. The dividend yield may confuse investors, but don’t fall in the trap; if you are looking for a dividend growth investing vehicle, SPY is not the one . What About a Dividend ETF Then? One question leading to another, I wanted to finish this article with a comparison of a dividend growth ETF vs. a handpicked dividend growth portfolio. I’m all about efficiency in life and if I could spend a big three minutes to initiate a transaction in a dividend growth ETF and forget about my investing strategy for the rest of my life, I would gain several hours each year to do other things than manage my portfolio and reading about the stock market. Let’s take the Vanguard Appreciation ETF (NYSEARCA: VIG ) dividend growth and compare it to JNJ again: I’ve taken the five-year view as there were unrealistic increases back in 2007 (dividends doubled within three quarters) and it wasn’t giving a good comparable. Still, even by using the five-year dividend growth period, we can see how JNJ shows a pure and systematic dividend increase while the VIG payment increase is quite hectic. Nonetheless, VIG dividend payment growth is double that of JNJ, one of the most appreciated dividend growth companies on the market. As far as stock price goes, we are at the same pace: In other words; while VIG dividend growth is hectic, any investor would have been better with the ETF than with JNJ. However, it is unfair to compare a diversified ETF with a single company. This is why I did the exercise with my top 10 dividend growth stocks as a portfolio vs. the same ETF: Unfortunately, I can’t perfectly compared this growth portfolio with the VIG as not all data can be used in 2011 and Disney (NYSE: DIS ) decided to pay dividends twice per year instead of once a year explaining the virtual drop on the graph (but it will go back up once the year ends as a second dividend payment will be issue. One thing you can see is that the dividend payment for most companies is steadily increasing without any big jump (besides BlackRock (NYSE: BLK ) in 2011). However, I can compare the price evolution of the portfolio: The average stock price gain is 114.65%, more than double the VIG. Conclusion The conclusion of using ETFs vs. handpicked dividend stocks is similar to the conclusion of my previous post: First and foremost; as long as you reach your financial goals – you probably have the right method, Second; market index ETFs such as SPY are too wide to represent a dividend growth investing strategy. They are good products, but not for dividend investors, Third; similar to market index ETFs, dividend ETFs often includes a too wide number of companies. Handpicked dividend growth stocks, if done wisely, can beat such products. In order to make sure my investment strategy works, I use the VIG as a benchmark. So far, I’m very happy with my results and they justify the efforts I make to manage my portfolio. I think dividend ETFs can help you achieve your financial goals as well if you are not interested in taking the time to manage your own portfolio but still wish to invest in a vehicle paying dividends. Then again; there are no right answers besides the one that makes you comfortable with your financial objectives!

Homebuilding ETFs In Focus Following U.S. Home Resale Data

The recent home resale data from National Association of Realtors (“NAR”) indicated that the U.S. homebuilding sector still faces weaknesses. The data showed a 3.4% decline in existing home sales in the U.S. to an annual rate of 5.36 million units in October from 5.55 million units in September. The decline is blamed on the shortage of properties that pushed up prices and discouraged buyers of existing homes. Per NAR, the number of unsold homes for October ebbed 2.3% over the previous month to 2.14 million units. Unsold homes inventory was down 4.5% from the prior year. The tight inventory caused median home price to increase 5.8% from the year-ago level to $219,600, marking the 44th straight month of a year-over-year rise (read: Homebuilder Stocks and ETFs Gain on Solid Data ). Last week, U.S. Commerce Department also revealed disappointing housing starts data for October. Groundbreaking dipped 11% to a seasonally adjusted annual pace of 1.06 million units during the month, the lowest level in the past 7 months. The decline was attributed to slowdown in the construction of multi-family homes. Groundbreaking data for the largest housing market segment indicated a 2.4% fall in single-family home projects for October. Much of the decline has been contributed by a 6.9% downfall in groundbreaking activity in the South, the most active region for the homebuilding sector. Meanwhile, housing starts for the multi-family segment slumped 25.1% to the annual pace of 338,000 units. Notably, new single-family home sales in the U.S. tumbled 11.5% to a seasonally adjusted annual rate of 468,000 units in September from August. This has led to 5.8 months’ supply of new homes in September, the highest since July last year. The U.S. homebuilding sector already faces a major threat from the strong possibility of an interest rate hike by Fed in December. A higher interest rate environment heavily weighs on the affordability of homes. On the other hand, it raises the mortgage rates that could fend off existing homeowners from upgrading to luxury and expensive homes (read: Is it the Right Time for Homebuilder ETFs? ). However, some have predicted that the decline in housing activities during October could be short-lived, particularly when the labor market is improving and the broader market is recovering. Further, industry experts argue that Fed’s lift-off could send a positive signal about the economy and boost consumer confidence. ETFs in Focus The depressing homebuilding reports for October turns our attention to the ETFs tracking the performance of the sector. Although the two major homebuilding ETFs (discussed below) delivered good performance both in the one-month and year-to-date time frames, investors should remain cautious about them given the adverse developments and the threat of an impending rate hike by the Fed (read: Two Homebuilder ETFs & Stocks Set to Soar ). iShares U.S. Home Construction ETF (NYSEARCA: ITB ) This most popular homebuilding fund provides a pure play on the home construction sector by tracking the Dow Jones US Select Home Builders Index. It holds a basket of 41 stocks, with double-digit allocation going to both D.R. Horton (NYSE: DHI ) and Lennar Corp. (NYSE: LEN ). The product has amassed more than $2 billion in its asset base and trades in heavy volume of more than 3.7 million shares per day, on average. The ETF charges 43 bps in annual fees, and has added about 2.9% in the past one month and 10.4% in the year-to-date period (as of November 24, 2015). It has a Zacks ETF Rank #2 (Buy) with a High risk outlook. SPDR S&P Homebuilders ETF (NYSEARCA: XHB ) XHB follows the S&P Homebuilders Select Industry Index, representing the homebuilding sub-industry portion of the S&P Total Markets Index. The fund holds 36 securities in its basket, with none accounting for more than 3.87% of the assets. It has garnered about $1.9 billion in its asset base and exchanges a heavy volume of roughly 3.4 million shares per day, on average. XHB charges 35 bps in annual fees and returned 0.6% in the last one-month and 6.9% so far this year. It has a Zacks ETF Rank #2 with a High risk outlook. Original Post