Tag Archives: stocks

Internet ETF (FDN) Hits New 52-Week High

For investors seeking momentum, the First Trust Dow Jones Internet Index (FDN ) is probably on their radar now. The fund just hit a 52 week high, and FDN is up roughly 110% from its 52 week low price

Central Fund Of Canada: Gold & Silver At A ~10% Discount

Summary Many investors seek to allocate part of their portfolios to precious metals, given the prevalence of “money printing” by central banks around the globe. The Central Fund of Canada is one vehicle that is likely to deliver alpha in addition to metals exposure. It’s currently trading at a 10%+ discount to NAV, with building activist involvement. Background on Closed-End Funds For those that want exposure to a particular sector or asset class, closed-end funds sometimes represent a cheaper vehicle than alternatives like ETFs and traditional mutual funds. This is because ETFs and conventional mutual funds frequently redeem/issue new shares to ensure that the price per share remains in line with the net asset value of the underlying holdings in the funds. This is not the case for closed-end funds. Rather, the share price of closed-end funds is driven by the market forces of supply and demand, which sometimes creates attractive opportunities to buy stakes at big discounts to NAV. This tends to happen when sentiment for the particular sector on which a closed-end fund focuses becomes negative, causing some investors to sell irrespective of price. This is currently occurring in few segments of the closed-end fund universe, including fixed income, emerging markets, and commodities. I previously wrote about one such opportunity to obtain federal tax exempt muni bond exposure at a 10%+ discount and another to buy Asian bond exposure at a 15%+ discount. Here, I’ll cover an opportunity to buy gold/silver exposure at a discount. Central Fund of Canada Overview The Central Fund of Canada (NYSEMKT: CEF ) was established in 1961 by Philip Spicer as a means of providing investors with a safer, more cost effective way of holding gold and silver than individual ownership. In particular, the fund’s mandate is to invest at least 90% of its net assets in gold and silver bullion (today this figure is 99%+), which is stored in the highest security rated treasury vaults at a Canadian chartered bank. Investors are able to avoid the transactions fees and sales taxes that can accompany direct individual ownership of bullion, though the fund does have an annual expense ratio of approximately 0.3%. As shown below, at many times in its history (particularly when precious metals prices were appreciating and sentiment was strong), investors were willing to pay a material premium to net asset value for shares in the fund. Likewise, at several times (when sentiment was weaker) shares have traded at a meaningful discount to NAV. Today, with precious metals having been in persistent decline for the past few years, the shares trade at a ~10.3% discount, which is near its highest historical level. (click to enlarge) Source: CEFConnect Portfolio Composition The fund provides ongoing updated figures for its NAV per share as well as the composition of its portfolio via its website . Currently, 61.4% of the portfolio is in gold bullion, 38.4% is in silver bullion, and 0.2% is in cash and other net assets. Source: CEF NAV Report What will Cause the Discount to Decline? If/when sentiment in the precious metals sector stabilizes, it’s reasonable to expect the discount to decline given the tendency for this to occur many times in the past, as shown above. In the meantime, there’s also another notable potential catalyst. One of the fund’s large shareholders, Sprott Asset Management (including other investors they represent), holds about 5% of outstanding shares and has recently been taking steps to compel the fund’s management to consider actions to narrow the discount (e.g., through offering investors the option of improved redemption terms). For instance, in June they requested that the fund hold a meeting among A share investors to discuss these issues, though management has resisted. Sprott took a similar activist stance with another Central managed fund, Central Gold Trust (NYSEMKT: GTU ), which has been gaining some traction such that this fund’s discount has declined to under 3%. It’s somewhat more difficult for Sprott to unlock shareholder value for the Central Fund of Canada for a couple of reasons. First, this fund is much larger than Central Gold Trust. More importantly, Central Fund of Canada has a dual share class structure that is highly advantageous to management. In particular, the fund has a very small number of voting shares that are majority owned by insiders, whereas the vast majority of outstanding (class A) shares are non-voting and owned by the public. This effectively enables management to retain control without requiring them to maintain a commensurate economic stake in the fund. However, it’s important to note that despite this dual share class structure, the Board still has a legal fiduciary duty to act in the interests of all shareholders. Given this duty, over time Sprott may be successful in its agenda (or management may preemptively take steps to reduce the discount to appease investors). But even in the highly negative scenario where they are completely unsuccessful, management makes no positive changes, and precious metals sentiment languishes further, investors’ downside is constrained due to the fact that since 1989, A share holders have had the option on a quarterly basis to require the company to redeem their shares at 80% of NAV. Conclusion A number of renowned investors (e.g., hedge fund managers Paul Singer and Ray Dalio) espouse the benefits of holding a portion of one’s portfolio in precious metals, particularly given widespread monetary easing around the globe. For those that follow this path, the Central Fund of Canada is a vehicle worth considering given its current large discount to NAV and potential catalysts for convergence. However, U.S. investors should be aware that this fund is considered a Passive Foreign Investment Company or “PFIC.” The tax rules surrounding PFICs are complex, and can subject investors to burdensome reporting requirements particularly if they own more than $25,000 in PFIC securities outside of a qualified/tax-exempt account.

The SPDR Global Allocation ETF: A Comprehensive Fund Of Funds

Although it seems simple at first glance, it is a complex and comprehensive fund of funds. Generally, the fund is extremely well diversified with both domestic and international assets. An ideal fund which requires a minimum attention for investors with a long term view. Quite often investors shy away from a ‘fund of funds’. True, some individual investors have the experience, skill, knowledge and time to filter through and analyze the multitude of funds available. However, for those investors who are just starting out, whose time is consumed by careers and family, a ‘fund of funds’ might be the ideal solution for a foundational investment. These generalized investment vehicles require little attention during those ‘busy years’ and an automatic, disciplined investment routine can be set up with most retail/online brokers. There are plenty of ETFs to choose from, no doubt. The State Street Global Advisors’ Global Allocation ETF (NYSEARCA: GAL ), from State Street Corporation’s (NYSE: STT ) SPDR portfolio of ETFs, is one of the better performing funds in this asset class. The fund is relatively new, having launched in April of 2012 with a 5.38% return since then. However, over the past year the fund has return -2.59% and year to date, -4.60% . So is this an opportunity to buy a good fund at a low price? In order to make that determination, a closer inspection of the fund is necessary. The first important question the investor needs to ask is whether the fund is appropriate in terms of risk and time horizon. According to State Street, the fund “… seeks to provide capital appreciation …” In other words, the fund is more focused on the market ETF gains than only dividend returns or combined ‘total returns’. Next: …The Fund invests in exchange traded funds… …that seek to track the performance of a market index; exchange traded commodity trusts; and exchange traded notes … Another important factor is that the fund tracks the respective fund’s underlying index. Usually, when a fund of funds is actively managed, it indicates a high expense ratio: that means the annual percentage of assets the management charges shareholders for their efforts. This fund’s management fees are 0.35%, well below the industry average of 0.44%. The next important factor is the way the fund allocates its invested capital. Data from State Street Global The heaviest weighted allocation is in International Equities, followed by Fixed Income, Cash, U.S. Equities, High Yield Funds, U.S. REITs, U.S. Treasury “Inflation Protected Securities”, called TIPS, and lastly International REITS. Although a ‘fund of funds’ might seem simple enough, they can be quite complex. It seems that the best way to dig a little deeper into the fund is by asset sector: Equity, Fixed Income, High Yield and REITs. Interestingly, GAL is not comprised of exclusively State Street Global funds but also includes two WisdomTree (NASDAQ: WETF ) Hedged Equity Funds and SPDR-Barclays and SPDR-Dow Jones assets. Equity Funds Symbol GAL Weighting Type Gross Expense Ratio Return Since Inception Premium/ Discount Number of Holdings Trailing 12 Month Yield SPDR S&P World ex-US ETF GWL 14.42% International Equity 0.34% -0.53% 4/20/2007 Premium 0.90% 1406 2.78% WisdomTree Europe Hedged Equity ETF HEDJ 9.16% Europe Equity USD Hedged 0.58% 6.14% 12/31/2009 Premium 0.54% 129 0.21% WisdomTree Japan Hedged Equity ETF DXJ 8.67% Japan Equity USD Hedged 0.48% 2.27% 6/16/2006 Premium 1.68% 313 3.16% SPDR S&P 500 Trust ETF SPY 6.04% S&P 500 0.1098% with waiver 8.75% 1/22/1993 Premium 0.01% 507 2.01% SPDR S&P International Small Cap ETF GWX 3.03% International Equity Small cap 0.40% 0.58% 4/20/2007 Premium 1.06% 2238 1.07% Consumer Discretionary Select Sector SPDR ETF XLY 2.02 S&P US Consumer Cyclical 0.14% 8.05% 12/16/1998 0.00% 88 1.37% Industrial Select Sector SPDR ETF XLI 2.02% S&P 500 Industrials 0.14% 6.07% Premium 0.03% 66 2.08% Health Care Select Sect SPDR ETF XLV 1.97% S&P 500 HealthCare 0.14% 7.69% 12/16/1998 0.00% 57 1.46% Data From SPDR and WisdomTree Each of the international funds has diverse global allocations; the only ‘straight-forward’ one is the WisdomTree DXJ which is 100% Japan. The bar chart below summarizes the total national allocations of the international equity funds. (click to enlarge) Data From WisdomTree and SPDR Similarly, each of these international Equity Funds allocates capital differently among economic sectors as summarized in the chart below. (click to enlarge) Hence, what initially seemed like a simple fund of funds has so far proven itself to have an extraordinary amount of complexity. The international funds have over 4000 holdings in total, with capital distributed over 25 countries. It’s worth noting here that the average expense ratio of the international funds alone is 0.45% which is about the average ETF industry expense ratio. The average yield of the international funds is 1.805%. The US Equity based funds are not as straight forward as they seem, either. SPY is essentially the comprehensive and widely followed S&P 500 index [SPX]. However, GAL includes three SPDR select sector funds . Briefly, Select Sector SPDRs : …divide the S&P 500 into eleven index funds… …with the objective of matching the price and yield performance of their underlying sector indexes.. . The important factor here is the sector allocations. It’s important because each sector is already a component of the S&P 500 Trust! So the effect of the three SPDR Select Sector Funds along with SPY creates a ‘multiplier’ of the three included sectors: Consumer Discretionary , Industrials and Health Care . As it is SPY is allocated as in the chart below: Data From SPDR To see this visually, the pie chart slices in bright green are already sectors in the SPY fund and also separate SPDR Select Sector holdings XLV, XLY and XLI, (noted by the red lettering). The point being is that a change in one sector affects all four holdings, not by much, but pointing this out helps the investor understand the structure of a fund of funds. In this case, Health Care is a ‘defensive sector, while Consumer Discretionary and Industrials are more biased towards ‘capital appreciation’ which is the fund’s stated objective! Before going on to fixed income, a few definitions are necessary. From Investopedia, investment grade is: … A rating that indicates that a municipal or corporate bond has a relatively low risk of default. Bond Rating firms such as Standard & Poor’s, use different designations consisting of upper- and lower-case letters ‘A’ and ‘B’ to identify a bond’s credit quality rating ‘AAA’ and ‘AA’ (high credit quality) and ‘A’ and ‘BBB’ (medium credit quality) are considered investment grade. Credit Ratings for bonds below these designations (‘BB’, ‘B’, ‘CCC’, etc.) are considered low credit quality … Fixed Income Symbol GAL Weighting Type Gross Expense Ratio Return Since Inception Premium/ Discount Number of Holdings Average Yield ETF Hub 3 Year Return Position SPDR Barclays Capital High Yield Bond ETF JNK 9.91% 40% BB Grade, 40% B Grade 13.87% C 0.40% 5.07% 11/28/2007 Premium 0.27% 783 7.03% 12th of 109 Corporate High Yield SPDR Barclays Long Term Treasury ETF TLO 7.03% Avg 25 Years to Maturity UST 0.10% 7.97% 5/23/2007 Premium 0.06% 45 3.22% 10th of 18 US Long Term Treasuries SPDR Barclays Capital Long Term Corporate Bond ETF LWC 6.03% 5% Aa Grade 42% A Grade 49% Baa Grade 0.12% 9.59% 3/10/2009 Premium 0.58% 1768 5.10% 2nd of 3 long Duration Corporates SPDR Barclays Capital TIPS ETF IPE 3.94% Avg 9.18 Years to Maturity TIPs 0.15% 4.40% 5/25/2007 Premium 0.09% 36 0.86% 12th of 13 US Treasury TIPS SPDR Barclays Aggregate Bond ETF LAG 2.98% Mix of UST, MBS, ABS, CMBS, Corporates 0.10% 4.79 5/23/2007 Premium 0.22% 2438 2.83% 81st of 295 Fixed Income SPDR Barclays Capital Intermediate Term Corporate Bond ETF ITR 1.01% 8% Aa Grade 45% A Grade 45% Baa 0.12% 5.44% 2/10/2009 Premium 0.23% 2882 3.71% 2nd of 4 Intermediate Corporates SPDR Barclays Intermediate Term Treasury ETF ITE 0.99% Avg 4.02 Years to Maturity UST 0.10% 3.92% 5/23/2007 0.00% 207 1.78% 10th of 19 Intermediate US Treasuries Data From SPDR The fixed income funds comprise US Treasuries: long term, intermediate term and ‘inflation protected’ bonds; a ‘high yield’ fund consisting mostly of the lowest rated investment grade bonds; Long and Intermediate term corporates and an interesting ‘aggregate’ bond fund. All of the bond funds are pretty much straight forward; however the aggregate bond fund is worth a closer look. The SPDR-Barclays Aggregate bond fund contains a diversified mixed of fixed income securities, ranging from ultra-safe US Treasuries to more risky ‘Asset Backed Securities’. The chart below gives a quick visual of the LAG fund’s capital allocation. Again, it’s worth noting that since LAG holds US Treasuries, there’s an overlap with the US Treasury only funds, hence, there’s slightly more US Treasuries imbedded within the fund. Data from SPDR Also, it’s important to note the quality allocation: Data from SPDR The last significant type of holding is the Real Estate Investment Trusts, (REITS). The fund has two, one domestic and one international. Both REITS are from the SPDR-Dow Jones portfolio of funds. Some of the key metrics are summarized in the table below: REIT Symbol GAL Weighting Type Gross Expense Ratio Return Since Inception Premium/ Discount Number of Holdings Average Yield ETF Hub 3 Year Return Position SPDR Dow Jones REIT ETF RWR 4.06% Storage, Residential, Community, Groups and Trusts 0.25% 10.82% 4/22/2001 Discount -0.03 97 3.12% 6th out of 39 REITS SPDR Dow Jones International Real Estate ETF RWX 1.01% Groups, Shares, Companies, REITs, 0.59% -0.14% 12/15/2006 Premium 0.66% 134 2.99% 21st out of 39 REITS Without going into deep detail, it’s well worth taking a look at the returns over specific periods of time summarized in the next table. It should be pointed out that the poor performance of the international RWX over the past year coincides with the contracting economies in the Asia-Pacific region, indirectly affecting Europe, whereas the strong performance of the domestic RWR over this period coincides with a strengthening US economy. RWR outperforms RWX over 3 and 5 years, however, the RWX returns over 3 and 5 years are well positive, too. REIT Symbol 1 Month Quarter to Date Year to Date 1 Year 3 Year 5 Year 10 Year Since Inception SPDR Dow Jones REIT ETF RWR 3.38% 3.07% -3.02% 11.56% 9.66% 12.03% 6.55% 10.82% SPDR Dow Jones International Real Estate ETF RWX 0.44% -5.12% -3.15% -2.14% 4.87% 6.07% NA -0.10% The last notable difference between these two funds is the very different asset allocations: (click to enlarge) Data from SPDR; Getty Images To sum it all up, a fund of funds is an incredibly useful investment vehicle particularly for those who know the importance of having an investment plan, but perhaps do not have the time or knowledge to construct a well-diversified portfolio from scratch, nor perhaps, employ a personal investment advisor. A fund of funds, such as the SPDR Global Allocation ETF is an excellent starting point. As always, dollar cost averaging and distribution reinvestment over the long term is perhaps the most certain way to build a nest egg for retirement or college fund. (click to enlarge) There’s an even more subtle point to be gained from the foregoing narrative. Although a fund of funds is an excellent ‘starting point’ foundation investment which does not require a great deal of time and attention once it’s set up, it should not absolve the investor of occasionally taking the time to examine the funds one at a time, understand the terms and language, making comparisons and thus acquiring the knowledge to build upon a good foundation in coming years.