Tag Archives: stocks

The Global X FTSE Greece 20 ETF: Contrary Investing

The Greek economy is in extremely depressed conditions. The Greek economy has the support and backing of the EU and ECB. The support, and investment of the EU might make the risk of investing well worth the potential rewards. The famous Greek philosopher, Plato, once said ” Courage is knowing what not to fear. ” Although one might first imagine bravery in some frightful situation, the words might have just as much impact for the investor. For example, most investors have been steering clear of Greece, perhaps not understanding what’s not to fear. True, Greece has been through some difficult times since the collapse of the credit market in 2008. However, many other European Union members had also stood at the precipice but have since recovered. As it is now, the European Union is still feeling the effects of the deep recession in the years following 2008, but the worst has passed for every EU member, including Greece. Knowing what is not to fear from investing in Greece, begins with realizing that Greece is still an EU member as well as a Eurozone member. There has been no default on Greek sovereign bonds and importantly, the European Central Bank as well as the European Commission as well as the strongest members of the EU, Germany. True, the Greeks have sacrificed much, even though they’ve twice elected a government opposed to harsh austerity practices that would have worsened the already depressed Greek Economy. Less than a year after the headline making financial drama, Greece is standing shoulder to shoulder with fellow EU members, doing its part offering Humanitarian support for the tide of refugees fleeing the war torn Middle East and North Africa. Greece, it seems, is still as much a part of the EU, as it ever was. Currently, the economy has extraordinary high unemployment, homelessness and a lack of private sector investment. The point is that Greece has hit bottom and yet survived. Right now, the Greek economy is being supported by the Greek government as well as the EU. Eventually, private investments will return but regaining foreign investor confidence won’t be quick, nor will it be easy. However, economic tragedies have occurred throughout the world many times in the past century only to be followed by remarkable turnarounds. With that in mind, an investor having established a well-diversified and well-founded portfolio may wish to risk capital in this contrarian motif. The best and probably only way to buy the Greek investible market is through the Global X FTSE Greece 20 ETF (NYSEARCA: GREK ) . The fund is small, but has surprisingly good volume for an obscure investment. The fund inception was in December of 2011 when Europe, as well as Greece suffered a recovery relapse, yet as the price history chart demonstrates, nearly doubled by March of 2014. From 2014 to the present, the fund has given up those gains, and again trades at its inception price. The fund has had annual distribution since inception resulting in a yield of 1.77% after fees and expenses. (click to enlarge) Some of the fund’s investments are unusual; the total number of holdings is a mere 30 when counting cash, liquid U.S. Treasuries, and ADRs and common of the same holdings, separately. Before looking into a sampling of these holding, the funds sector allocations need to be specified. The fund weights Financials the heaviest. This is a key component of future capital appreciation for this fund as the Greek financial sector has contracted as far as it could without banks actually folding. With this weighting in the Financial Sector, as the economy and banks recover, it will reflect in the fund’s market price. The second heaviest weighted sector is Consumer Staples. In spite of being a defensive sector, Greek consumers have been hard pressed with reduced wages or job dislocations. Again, by being so heavily weight in a depressed economy, Consumer Staples will be among the first to reflect improvement in the fund’s price as consumers are better able to afford staple products. Consumer discretionary is third in fund weighting. Again, by the logic of economic recovery, as more and more consumers accrue discretionary Euros and once basic needs are met those Euros will eventually find their way back into the discretionary sector. These three sectors, Financials, Consumer Staples and Discretionary accounts for over 65% of the fund. Bank Holdings Symbol Dividend Payout Ratio EPS 5 Year Growth Total Debt to Equity Price/Book Market Cap ( Billions USD) ROI/ROE National Bank of Greece NBG 0.00% 0.00% -70.50% 67.11 0.29 $4.1146 NA/-3.89 Alpha Bank OTCPK:ALBKY 0.00% 0.00% NA 19.38 0.20 $1.346 NA/-4.42 EuroBank Ergasias OTCPK:EGFEY 0.00% 0.00% NA 14.81 0.10 $0.418 NA/-26.24 Piraeus Bank OTCPK:BPIRY 0.00% 0.00% NA 11.56 0.08 $0.521 NA/-24.65 Grivalia Properties Athens:GRIR 3.67% 43.89% of Cash Flow -0.76 7.30 0.59 $0.767 5.15/5.51 Data from Reuters To be sure, it’s difficult to find positive metrics when examining the Greek private banking system. However, the basic premise is ‘knowing what not to fear.’ As long as the ECB is working with the Greek government and is standing behind the private banking sector, there’s little chance that any particular one would default. Further, such an incident would destabilize the already weak economy. It isn’t impossible, but highly unlikely at this point. It could be argued that the private Greek banking system may replicate Japan’s so called ‘Zombie Banks.’ The difference is that Japan has the world’s third largest economy and stands on its own. Greece, with its small struggling economy has the resources and trade partnerships of European Union. There’s no comparison. If there was ever a single ‘Consumer Staple’ company to hold, it would be Coca-Cola (NYSE: KO ) . In this case the fund holds a Switzerland based Coca-Cola franchise producer of non-alcoholic soft drinks, with the well-known Coca-Cola brand soft drinks. Officially it goes by the name Coca-Cola HBC [LSE: CCH]. The licensed franchise pays 1.65% dividend with a 47.86% payout ratio and a market cap of $3.6 billion USD. The company has real earnings at about $0.41 per share resulting in a P/E of 24.31. The fund’s Consumer Discretionary holdings are a little more diverse. Folli Follie ( OTCPK:FLLIY ) is a global fashion and apparel retailer in over 30 countries with over 900 points of sales. Jumbo ( OTCPK:JUMSY ) specializes in toys, baby items, seasonal items books and stationary. The ‘unusual’ holding in the group is OPAP ( OTCPK:GOFPY ) which translates from Greek as Organization of Football Prognostics . The company provides lottery operation services as well as providing feasibility studies for lottery games. Consumer Discretionary Holdings Symbol Dividend Payout Ratio EPS 5 Year Growth Price/Sales Price/Book Market Cap ( Billions USD) ROI/ROE Jumbo SA Athens:BELA 0.00% 0.00% 5.62% 2.06 1.50 $1.098 11.23/13.60 Folli Follie OTCPK:FLLIY 1.56% 3.75% of Cash Flow 2.09 1.10 0.84 $1.124 9.95/11.20 Opap OTCPK:GOFPY 8.50% 18% of Cash Flow -4.71 0.56 2.30 $2.355 20.20/21.50 Data from Reuters The next largest sector holdings are in Telecom, Materials and Utilities. Hellenic Telecommunication ( OTCPK:HLTOY ) is the Telecom Sector at about 12% of holdings. The company has a market cap of $3.81 billion USD, pays a small dividend of 0.94% and has earnings of $0.24 per share resulting in a P/E of 23.15. The company sells at 1.06 times sales and a rather high total debt to equity ratio of over 100. The company has three segments, long distance, land-line and mobile. It should be mentioned that the Greek government held 10% of the company but divested itself of that to Deutsche Telecom ( OTCQX:DTEGY ) . As far as the materials company holdings, Titan Cement ( OTCPK:TITCF ) is, as the name suggest, a cement manufacturer but also related building materials such as aggregates, cement blocks and dry mortar. Viohalco, [Brussels: VIOH] on the other hand, is a cross border merger of Belgium based Cofidin with Hellenic Copper and Aluminum. Materials Symbol Dividend Payout Ratio EPS 5 Year Growth Price/Sales Price/Book Market Cap ( Billions USD) ROI/ROE Titan Cement OTCPK:TITCF 1.55% 24.30 -24.27 1.22 1.06 $1.411 2.29/3.55 Viohalco Brussels:VIOH 0.00% 0.00% NA 0.17 0.54 $0.490 -1.30/-2.33 Data from Reuters It should be noted in the above two examples that the advantage of EU membership has attracted larger, stronger commercial EU entities willing to risk investing in Greece. Public Power Corp ( OTCPK:PUPOF ) is an electric service provider, generating electricity from Hydro, fossil fuel and renewables. It has two subsidiaries: Hellenic Electricity Transmission System and Hellenic Electricity Distribution Network. Athens Water and Sewer ( OTCPK:AHWSF ) is exactly as its name suggests. The interesting holding is Terna Energy ( OTCPK:TREAF ) specializing in renewables, generating power from biomass, wind farms and also provides energy management services. Utility Holdings Symbol Dividend Payout Ratio EPS 5 Year Growth Price/Sales Price/Book Market Cap (Billions USD) ROI/ROE Service Public Power PUPOF 0.00% 0.00% -0.56 0.20 0.20 $1.115 0.71/1.72 Electric Athens Water & Sewer Athens: EYDR 3.47% 0.2% -3.31 1.88 0.67 $0.562 2.99/4.71 Water & Sewage Terna Energy TREAF 0.00% 0.00% -17.46 1.81 0.91 $0.289 1.52/4.26 Renewable Energy Data from Reuters The major Energy holding is Motor Oil Hellas ( OTCPK:MOHCY ) . The company refines oil to lubricants, aviation fuel, gasoline heating oil, LPG and asphalt. Its market cap $1.137 billion USD and does not pay a dividend. Its EPS is about $0.64 resulting in a P/E of 16.50. Its price to sale multiple is 0.15, price to book 2.24 and to cash flow, 7.06. Hellenic Petroleum is essential a petroleum and petrochemical refiner and producer. The company also pursues oil and gas exploration, power generation and energy trading. Ellaktor ( OTCPK:ELLKY ) is a construction company providing buildings, infrastructure, waste treatment, industrial and quarry mining. Metka ( OTCPK:MTKAY ) is an abbreviation for ‘Metal Construction in Greece’ and services the Energy, Infrastructure and Defense industries with metal fabrication products. Industrial Holdings Symbol Dividend Payout Ratio EPS 5 Year Growth EPS Price/Book Market Cap (Billions USD) ROI/ROE Hellenic Petroleum ELPE:GA 4.89% NA NA $ -0.69 0.94 $1.485 -5.84/-11.30 Ellaktor ELLKY 0.00% 0.00% NA $ -0.31 0.36 $0.288 -1.39/-6.06 Metka MTKAY $ 1.15 $0.417 12.06/13.21 Data from Reuters To sum up, the fund has the same structure as any general single country focused fund. The difference being is that the fund covers a small, depressed economy. The metrics in the tables clearly show projected negative growth for most of these companies for the next several years. On the other hand, the nation of Greece is as economically depressed as a nation might possibly become in modern Europe; however, the EU put the brakes on a complete collapse. So the significant difference is that Greece has the support as a member of the much more advance, wealthier, diverse and resource rich EU economy. Further, as noted above, larger more stable European companies are willing to invest capital in Greece. According to Global X, there’s a 0.06% custodial fee and a management fee of 0.55%, hence fees exceed the industry average of 0.44%. The distribution is annual, with a 30 day SEC yield of 1.77%. The return on equity is 2.10%, a P/E of 26.17 and price to book of 0.55. Once again, this is investment will take patience and is best suited for a high risk tolerant portfolios. However, an experienced investor might realize that in the bigger picture, knowing the support Greece receives from its fellow EU members, that there’s little to fear and much to gain.

QUAL: Fundamental Weighting Produced A Surprisingly Reasonable Portfolio

Summary This ETF has a lower expense ratio than I would have predicted for fundamental weighting. The individual holdings look fairly appealing. I was concerned about the presence of a “fundamental weighting” strategy, but I can’t argue with the holdings. The sector allocations are remarkably similar to a total market ETF ran by the same sponsor. Investors should be seeking to improve their risk adjusted returns. I’m a big fan of using ETFs to achieve the risk adjusted returns relative to the portfolios that a normal investor can generate for themselves after trading costs. One of the funds that I’m researching is the iShares MSCI USA Quality Factor ETF (NYSEARCA: QUAL ). I’ll be performing a substantial portion of my analysis along the lines of modern portfolio theory, so my goal is to find ways to minimize costs while achieving diversification to reduce my risk level. Expense Ratio The expense ratio for QUAL is only .15%. I tend to be very frugal with my expense ratios, so I like to see those low levels. When I’m looking at a simple market cap weighted broad market or total market ETF I would expect to see single digit expense ratios. I’m not saying that fundamental weighting strategies are inherently superior, but I sure don’t mind seeing a strategy that is different from the typical market capitalization weights. Comparing this only to other ETFs that are using fundamental weighting strategies, the expense ratio feels fairly reasonable. Largest Holdings The following chart shows the largest holdings for the fund: (click to enlarge) While I’m not entirely sold that fundamental weighting strategies are the perfect answer, I can’t argue with the portfolio produced by those strategies. I’m looking at this portfolio and I see quite a few companies that I like to see in the top holdings. Microsoft Corp. (NASDAQ: MSFT ) is the top weighting and it gets a fairly heft allocation with more than 5% of the portfolio. I’m not huge on Microsoft because I was hoping to be blown away by Windows 10. My machines are still running Windows 7. I don’t want the latest product at a price of “Free upgrade”, which concerns me. On the other hand, I’m still using their operating systems on all of my computers and have not even considered changing, so that is a highly favorable sign. Going down the other holdings I see several companies that I love to see with heavy weights. Johnson & Johnson (NYSE: JNJ ) is an incredible dividend aristocrat and a leader in the health care sector. I’d like to have that kind of exposure so that higher profit margins for the health care sector would at least lead to higher dividends for me to offset higher prices on the products I would need to buy. I’m a little surprised that Wal-Mart (NYSE: WMT ) is not on the list after their share prices fell so hard. Margins are razor thin in the retail industry but if the ratios included price as a factor I would think WMT would get a nod. One very interesting choice in here is Monster Beverage Corp (NASDAQ: MNST ). I am a big fan of Monster and I think they may regularly be undervalued because of the target market for their product not matching up with the section of the population that will own the majority of the stock market. Monster is a young brand. With Coca-Cola Company (NYSE: KO ) helping Monster grow the brand I expect Monster to have some solid international growth. I just wouldn’t expect Monster to still be on this chart after their price soared after Coca-Cola announced their acquisition of part of the company. Sectors The following chart breaks down the allocation by sector: This allocation is interesting to me because it is remarkably similar to the sector allocation of another ETF ran by the same parent company. Below I have a chart of the sector allocation for the iShares Core S&P Total U.S. Stock Market ETF (NYSEARCA: ITOT ). Interesting similarity huh? I would expect that similarity in funds that were simply using market cap weighting, but it is interesting when the fund is using a fundamental weighting. Note that the individual company holdings are substantially different between the two funds, it is just the sector allocations that are remarkably similar. Conclusion I haven’t been entirely sold on the system of fundamental weightings since it suggests that a simple computerized model of large companies would be outperforming the market as a whole. I have a hard time swallowing that pill and prefer to use a somewhat defensive equity allocation for my index funds while focusing my individual security selection on very small companies in sectors that have seen severe market failings because I believe it will be easier for me to beat the market there. Despite my not being entirely sold on the system, the expense ratio isn’t bad and the system produced a group of very respectable companies to lead the portfolio. Over the years I may find my opinions on factors like fundamental weighting to be shifting given the companies that were selected.

VFINX/VBLTX Power-Up: Replace VFINX With UPRO Or SPXL

Summary I recently wrote about VFINX/VBLTX portfolios, and how to choose an asset allocation to maximize returns for the level of volatility you can tolerate. Swapping VFINX for a leveraged S&P 500 ETF makes the maximization game much more profitable. You can achieve a greater expected return for any particular level of volatility. You lose the benefit of completely free trades in a Vanguard account, but the improvement in expected returns is definitely worth it. Mathematically, using a leveraged version of VFINX allows you to increase your allocation to VBLTX, capturing a greater percentage of its alpha. I believe UPRO/VBLTX (or SPXL/VBLTX) can be an excellent core portfolio for many investors. VFINX and VBLTX In a recent article, I looked at the performance of various two-fund “stocks and bonds” portfolios comprised of Vanguard mutual funds. I paired the Vanguard 500 Index Fund Investor Shares (MUTF: VFINX ) with Vanguard bond funds of various durations, and found that the long-term bond fund, the Vanguard Long-Term Bond Index Fund (MUTF: VBLTX ), was generally the best choice in terms of maximizing expected returns for a particular level of volatility. Here is a slightly modified version of a graph from that article (curves for the other bond funds removed): (click to enlarge) To get you up to speed, the upper-right point on the curve shows that for a portfolio comprised of 100% VFINX, and 0% VBLTX, the mean and standard deviation of daily gains going back to 1994 are 0.042% and 1.192%, respectively. The next point, which represents 90% VFINX and 10% VBLTX, results in a slightly lower mean (0.041%) and considerably lower standard deviation (1.061%), making it arguably the better portfolio. You can see how mean and standard deviation vary as VFINX allocation increases in 10% increments all the way to 0% VFINX, 100% VBLTX. Notably, standard deviation is minimized for 25.8% VFINX, 74.2% VBLTX. So if you were a relatively conservative investor who wanted to take on no more than 75% of the S&P 500’s volatility, you would look at the second-from-the-right vertical line, and see that to maximize expected return you would need to be just below the 3rd data point from the right, or a VFINX allocation slightly below 80%. A nice aspect of a two-fund strategy based on Vanguard mutual funds is that trading costs are very low. The mutual funds have very low expense ratios and can be traded commission-free in a Vanguard account. 3x VFINX and VBLTX Something magical happens when you swap VFINX for a hypothetical 3x daily version of it: you get a drastically better expected returns for any given level of volatility. Take a look: (click to enlarge) (Note: Data points represent 10% allocation steps for VFINX/VBLTX, and 5% allocation steps for 3x VFINX/VBLTX. Also, daily gains for the hypothetical 3x VFINX fund were calculated by simply multiply VFINX gains by 3 and then subtracting a fixed value corresponding to a 1% annual expense ratio.) You can see that the blue curve offers drastically better mean returns than the red curve. For example, 90% VFINX/10% VBLTX (second point from the right on the red curve) has a standard deviation of 1.061% and a mean of 0.042%; 30% 3x VFINX/70% VBLTX (7th point from the bottom on the blue curve) has a very similar standard deviation of 1.064, with a much greater mean of 0.058%. In addition, with 3x VFINX/VBLTX you have the option of taking on more volatility than the S&P 500, and getting an excellent additional return. For example, if you can tolerate up to 50% more volatility than the S&P 500, you can achieve an 84.3% greater mean return (51.2% 3x VFINX/48.8% VBLTX: standard deviation 1.788%, mean 0.077%). CAGR vs. MDD I think the mean vs. SD plot best describes the performance of various VFINX/VBLTX portfolios. But CAGR vs. MDD is also very interesting, and highlights the huge improvement you get with 3x VFINX. (click to enlarge) You see drastically better raw returns for various maximum drawdowns with 3x VFINX/VBLTX compared to VFINX/VBLTX. One interesting special case, 35% 3x VFINX/65% VBLTX has about the same MDD as VFINX (55.4% vs. 55.3%), but with a much greater CAGR (14.7% vs. 9.1%). Also noteworthy, the CAGR for 3x VFINX/VBLTX portfolios starts to decrease once the allocation to 3x VFINX reaches about 70%. How to Invest in 3x VFINX Vanguard does not offer a leveraged version of VFINX (or any leveraged funds for that matter), but there are several 3x daily S&P 500 ETFs to choose from. The ProShares UltraPro S&P 500 ETF (NYSEARCA: UPRO ) and the Direxion Daily S&P 500 Bull 3x Shares ETF (NYSEARCA: SPXL ) are two options. They both have expense ratios right around 1%, and both have done an excellent job tracking 3x daily S&P 500 gains over their 6-7 year lifetimes. I know some readers will take issue with the fact that my results are based on sort of “fake” data, as I just multiplied daily VFINX gains by 3 to simulate a leveraged version of the fund (or, equivalently, the performance of UPRO or SPXL before they were around). I wouldn’t worry about this too much. All signs indicate that daily leveraged ETFs like UPRO and SPXL have very minimal tracking error. Mathematical Basis Intuitively, the reason 3x VFINX/VBLTX provides better mean returns for a given level of volatility is that it allows for a greater allocation to the alpha-generating VBLTX. Suppose you can achieve a volatility of 1% with either 90% VFINX/10% VBLTX or 40% 3x VFINX/60% VBLTX. Which will have greater expected returns? The second, because it retains 40% of VBLTX’s alpha rather than only 10%. Now for a more mathematical approach (feel free to skip). Consider a VFINX/VBLTX portfolio where C represents the proportion allocated to VFINX, and (1-C) the allocation to VBLTX; and a 3x VFINX/VBLTX portfolio where D represents the proportion allocated to 3x VFINX, and (1-D) the allocation to VBLTX. Suppose we start at the top-right part of the first figure (i.e. C = D = 1) and decrease both C and D to the point where both portfolios have the same volatility. It is easy to see that D will be less than C, i.e. you will have to allocate less to 3x VFINX than to VFINX to achieve a certain portfolio volatility. So the two portfolios have the same volatility, and D < C. Let's compare their expected returns. Let X = daily VFINX return and Y = daily VBLTX return. The first portfolio's daily return, say Z 1 , is given by Z 1 = C X + (1-C) Y. The second portfolio's daily return, say Z 2 , is given by Z 2 = 3D X + (1-D) Y. How do Z 1 and Z 2 compare? Let's subtract their expected values, and see if we can figure out if the difference favors one or the other. E(Z 2 ) - E(Z 1 ) = [3D E(X) + (1-D) E(Y)] - [C E(X) + (1-C) E(Y)] = [3D - C] E(X) + [(1-D) - (1-C)] E(Y) We know E(X) and E(Y) are both positive (otherwise we wouldn't invest in stocks or bonds). The coefficient [(1-D) - (1-C)] is also positive since D < C. Thus the entire expression will be positive as long as 3D > C, or equivalently D is greater than one-third of C. I’m sure there’s some way to prove this is true under certain circumstances. But it’s good enough to just look at a plot of C and D vs. volatility, and observe that indeed 3D > C (i.e. dotted black line is above blue line), except at the very left side of the graph. (click to enlarge) Conclusions The more I think about leveraged ETFs, the more valuable I realize they are. Here, I show that you can drastically improve performance of a S&P 500/long-term bonds portfolio by simply replacing the S&P 500 fund with a 3x version. Whatever level of volatility you are willing to tolerate, you can achieve higher expected returns by simply using a leveraged S&P 500 fund. The reason is positive alpha. Using a leveraged stocks fund lets you achieve a particular level of volatility while allocating a greater percentage of your assets to an alpha-generating bond fund. More capital generating more alpha means greater returns. The results here are shown for VBLTX, but the main points should also hold for other long-term bond mutual funds or ETFs. Additionally, for those wary of investing in long-term bonds given that interest rates are about to rise, I would suggest considering a similar approach with a short or intermediate-term bond funds.