Tag Archives: stocks
My Favorites Things About SCHD
Summary I love the low expense ratio, but that is no reason to hold an ETF in itself. The sector allocation is great for picking companies that will show up to work on creating dividends in both good and bad markets. The individual holdings may not be popular with investors at the present time, but I don’t need the company to be a source of conversation. I love seeing mature dividend paying companies that have fallen on weaker prices. I’m holding some shares of the Schwab U.S. Dividend Equity ETF (NYSEARCA: SCHD ) in my personal portfolio and it is one holding that I expect to keep adding to over the years. There are quite a few reasons to like this fund, but I want to highlight some of the things that really stand out to me. The fund has an expense ratio of .07%, which is absolutely outstanding. Even for a passive ETF that is great, but a poorly designed fund with a low expense ratio wouldn’t get me excited. The Sector Allocation At heart my major area for analysis is REITs and a great deal of that time is spent on mREITs. These are high yield holdings that can be fairly volatile and the last thing I want to do is combine high volatility in mREITs with high volatility in the rest of my portfolio. Therefore, I want to be overweighting sectors that are designed to survive weakness in the economic environment. SCHD delivers: (click to enlarge) The largest weighting is consumer staples. I love the sector because I want to own companies that provide the goods and services that are necessary in bad times as well as good. Share prices can get hammered in recessions, but I want to know that I have allocations to companies that won’t see their earnings get hammered as hard. Those companies are out there to earn money for the shareholders. Their purpose is to create earnings that can be used to pay dividends. I wouldn’t want an employee that only showed up to earn money for me on good days, so why would I want my portfolio allocated to companies that won’t show up with dividend payments when things get bad? Total return is a very important part of the picture, but don’t forget the importance of a solid dividend. Utilizing total returns means selling off shares, which is fine when the market is placing a high premium on companies. I just don’t want to ever be in a situation of having to sell off my shares when equity prices are falling. If you rely on the portfolio, what else are you able to do if dividends are cut? The Unpopular Kids I don’t have any need to have the cool stock in my portfolio. My portfolio is not in high school, it does not care about popularity. I’m perfectly happy to have the uncool stocks. If those uncool stocks are available at great prices, why wouldn’t I want them? Wal-Mart (NYSE: WMT ) is now “uncool”. Their stock has fallen from near $90 to under $60. Who wants to brag about owning Wal-Mart? They have ugly box-shaped stores and sell cheap products on thin margins. They do very little that is considered “exciting”, but their shares have been thoroughly punished since they announced a plan to raise wages for employees. This is a great example of an “uncool” stock, and I’m certainly happy to get some of it through my holdings in SCHD. Do you care, even a tiny bit, if their stores are ugly? I’m far more interested in their ability to grow EPS over the next two decades and how much money they can pay out in dividends while they do it. The company may see share prices struggle for a couple years as earnings will be depressed by the impact of wages , but my investing horizon is far longer than a few years. Wal-Mart serves as about 2.19% of the portfolio. That is just fine with me. Exxon Mobil (NYSE: XOM ) was previously a cool kid. They were huge and in the sexy oil industry. Well, perhaps it would be more accurate to call it the crude oil industry. With oil prices getting hammered, it seems no one wants Exxon Mobil anymore. Shares are down from $100 to about $80. Sure, there are problems with the oil industry such as weak pricing. How will Exxon Mobil survive? They may be uncool now, but they have experienced being uncool before. It seems unlikely to impact them in the long run. How long do you think oil will be incredibly cheap without Exxon Mobil finding a way to profit from the situation? Am I being too cynical in suggesting that big oil owns enough senators to fix whatever problems come up for the industry? Money in politics is here to stay and Exxon Mobil won’t be kicked to the curb anytime soon. The same can be said for Chevron Corp. (NYSE: CVX ). This is a longstanding oligopoly and I find it highly unlikely that either company will ever see a macroeconomic environment where they are unable to function. XOM may be classified as being “on sale”, but it would be fair to classify CVX as being in the clearance bin. They are down to $90 from over $130. These two companies combine to make up nearly 10% of the portfolio. 3M (NYSE: MMM ) is another classic stock for being “uncool”. The company produces more products than any investor would care to count. Walking around your house you see tons of them and probably don’t know how many of them can be traced back to 3M. If you don’t believe, just take a look at this: (click to enlarge) From the 3M website, a simple search for “tapes and adhesives” results in 2,494 matching products. Who wants to own a company that makes boring stuff like tape? No one is getting excited by the business, but this company has a great history of paying out increasing dividends and an extremely diversified product pool. They may not be a great source of conversation at a party, but they are a great source of dividends. 3M is 2.24% of the portfolio. The List The top holdings can be seen below: (click to enlarge) This list, from the Schwab website, shows a great collection of stocks that will rarely come up in discussion at any boring social event that you or I might attend. Is that a reason not to hold them? Too often new investors become focused on holding a company because they like something about it, but the thing they should be looking at is the valuation and the expected stream of future income. Conclusion I love this ETF. If an investor doesn’t hold it, they might as well use the list of holdings as a starting point for finding the next company that would fit in their portfolio. The expenses ratios are cheap and allocations are excellent for building a portfolio that is unlikely to just quit on us when the market gets tough. I want those dividends in the bad years even more than I want them in the good years, because the last thing I want to do is be forced to sell off my shares when prices are depressed.
A New ETF In Town: The PowerShares S&P 500 Value Portfolio
Summary The value portfolio offers an academically proven investment model for investors. P/E, P/B and P/S are well known and commonly used financial metrics. Even though this ETF seems a bit boring, based on an abundance of academically proven factors I would prefer this ETF over an index ETF following the S&P 500. Invesco recently launched new ETFs, one of them I covered in an earlier article: ” A New ETF In Town: The PowerShares S&P 500 Momentum Portfolio (NYSEARCA: SPMO )”. This is part 2, discussing the PowerShares S&P 500 Value Portfolio (NYSEARCA: SPVU ), which is an interesting addition to the S&P 500 momentum portfolio. Both momentum and value are 2 investment strategies which have received wide coverage in the academic world and the world of finance practitioners. The SPVU tracks the S&P 500 enhanced value index which is focusing on 100 S&P 500 companies with the greatest value score calculated based on fundamental ratios: book value/price ratio, earnings/price ratio and sales/price ratio. SPVU: The Value Portfolio Source: ETFdb The issuer of this new ETF is Invesco, a large independent investment management company incorporated in Bermuda which has many other ETFs to offer. The expense ratio of 0.25% is a very reasonable number . With 2.5 million assets under management it’s not a large ETF. Value Portfolio: Selection Strategy This ETF is a so called smart-beta ETF and will spend at least 90% of its total assets in the S&P 500 Enhanced Value Index. The selection process for 100 stocks is based on the book value/price ratio, earnings/price ratio and sales/price ratio: The book value to price ratio is calculated by using the company’s latest book value per share divided by its price. The earnings to price ratio is calculated by using the company’s 12-month earnings per share divided by its price. The sales/price ratio is calculated by using the company’s 12-month trailing 12-month sales per share divided by its price. A value score is then calculated. The best 100 stocks are selected for the underlying index. Value: A much covered topic in the world of academia The book value to price ratio is an asset factor which has been widely covered in academics. For example, a P/B of 2 means that the stock is priced twice as much as it could sell for. It is also used to explain the portfolio return of portfolio managers, in for example academic models such as the Fama and French asset model . Generally, a firm with a lower book value to price ratio outperforms a firm with a higher book value to price ratio. A reason for this could be that a firm with a lower ratio indicates a distressed stock which makes it look cheap. Yet, if you believe in the efficient market hypothesis , a cheap stock could only be a cheap stock because investors consider it risky. The price to earnings ratio (the inverse of the earnings to price ratio) is one of the most widely used fundamental ratios in the financial markets. For example a P/E of 20 can indicate that you pay $20 for $1 of earnings. If then compared to numerous other investments, commonly it seems like a better deal if you pay the least for $1 of earnings. It has been proven, time and time again, that investment in a lower P/E related firm outperforms investments which yield a higher P/E ratio . Nevertheless, the world of academia has further expanded on price/earnings ratios recently, for example, in the discrepancy between negative P/E firms and positive P/E firms. Athanassakos (2014) concluded in his research that certain negative P/E firms indicate high forward stock returns, even though past price/earnings ratio research most of the time excluded negative P/E firms. I believe future research in the world of financial academia will continue in this path. The price to sales ratio is the third metric which is used in this ETF to value stocks. A lower P/S is preferable over a higher P/S ratio. Furthermore, it’s one of the best metrics used for companies which are a in a so called ‘turnaround’ modus, where the firm has lost earnings (negative P/E and no dividend for example), the P/S ratio offers the opportunity to compare firms. Additionally, the P/S also has been covered numerous of times in the world of academia where the outcome and conclusion is often very similar to each other. The price to sales ratio offers a good (to sometimes even better) explanatory power in explaining stock returns in comparison to for example the book-market value of a stock. All in all, this ETF follows 3 well known financial metrics which have been proven in the world of academics, decade after decade. Conclusion In addition to the momentum strategy ETF I consider it highly likely that this ETF will outperform the stock market as a whole over an extended period of time. This assumption is based on the abundance of research on the book/price, price/earnings and sales/price ratio in the world of academics. Yet, as the world of academia is moving forward, I would not be surprised to see updated Value ETFs where new metrics/findings will be implemented. I assume based on the current findings in academia that they will offer better risk/reward premiums to investors in comparison to this ETF. The world of negative P/E firms has yet to be uncovered to the same extent as positive P/E firms. Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions. This information is not a recommendation or solicitation to buy or sell securities, nor am I a registered investment advisor.