Tag Archives: stocks

Head-To-Head: S&P 500 ETFs Vs. Dow ETFs

Fears of a hard landing in China slaughtered the global markets last week. China itself saw all its gigantic gains recorded this year going down the drains, and logged the largest one-day plunge since 2007 on August 24 daring all government-backed measures to contain the slide. Back-to-back shockers from China, be it currency devaluation or a six-and-half-year low manufacturing data for August spurred this panic-induced sell-off. The benchmark Shanghai Composite Index dropped 8.5% on Monday. Though China sought to restrain the rout by allowing the pension funds to invest about $97 billion in the market, there was hardly any relief in store. Also, lack of precision by the Fed on the policy tightening timeline roiled the market momentum. The fright among investors was so acute that other global markets followed the footsteps of China. The otherwise steadier U.S. stocks hurtled down, European markets crashed and the Asian stocks fell to a three-year low. Meanwhile, commodities plunged to a 16-year low level while the infamous oil touched a fresh six-and-a-half year low of below $40/ barrel. Emerging markets raised panic alarms leading to an exorbitant exodus in capital. Thanks to this massacre, the U.S. stocks futures logged their largest weekly decline since 2011 in the week ended August 21 and are expected to remain southbound until this jittery market calms down. All major U.S. indices remained in deep red and went into the correction zone , per analysts. The S&P 500 index is lost 12.5% from its May high on a broad-based global slowdown. Dow Jones Industrial Average plummeted about 14.6% (as of August 25) since it hit a high in May thanks mainly to a free fall in oil prices and now both have entered the correction mode. However, Dow was a relatively worse performer than the S&P 500. Momentum Gain However, to contain this slide, China slashed the one-year lending rate by 25 bps to 2.75%, the deposit rate by 25 bps to 1.75% and the reserve ratio by 50 bps to 18%. This, along with a bargain hunt, showered the much-needed gains on Wall Street. As a result, both S&P and Dow advanced close to 4% and captured the highest single-day gain in about four years. Below we highlight four S&P and Dow-based ETFs and analyze their performance and outlook. S&P 500 ETF SPDR S&P 500 ETF (NYSEARCA: SPY ) SPY seeks to track the S&P 500 Index before fees and expenses. The performance of the S&P 500 Index is considered a mirror image of the U.S. equities, as the index represents stocks of the 500 most-valued companies in the U.S. The $171.5 billion SPY has proportionate exposure in almost all sectors with maximum emphasis on Information Technology (20.0%). The sectors like Financials (16.8%), Health Care (15.5%), Consumer Discretionary (12.8%) and Industrials (10.0%) also make up double-digit allocation. The fund is highly liquid trading with over 115 million shares daily. It charges 9 bps in fees. The fund has very low company-concentration risk with no firm accounting for more than 3.6%. SPY is down about 5.3% this year and lost 6% in the last five trading sessions (as of August 26, 2015). The fund has a Zacks ETF Rank #3 (Hold). iShares Core S&P 500 (NYSEARCA: IVV ) This fund also looks to track the S&P 500 index and has AUM of around $68.5 billion. The fund is well spread out across sectors and security. IT, Financials, Health Care and Consumer Discretionary have double-digit exposure in the fund. The product is also devoid of company-specific concentration risks. The fund trades in volume of about 4.1 million shares a day while charges 7 bps in fees and expenses. The ETF lost about 5.7% in the last five trading sessions and 5.3% so far this year. The fund has a Zacks ETF Rank #3. DOW ETFs SPDR Dow Jones Industrial Average ETF (NYSEARCA: DIA ) DIA seeks to match the performance of the Dow Jones Industrial Average Index. The index is price weighted and measures the performance of 30 large cap stocks traded in the U.S. markets. Industrials, Financials, IT, Consumer Discretionary and Health Care all hold double-digit exposure in the fund. However, it is subject to company-specific concentration risks as it invests more than half of its portfolio in the top 10 holdings. This $11.1 billion-fund trades in large volumes of over 5 million shares daily and charges 17 bps in fees. It has lost over 8% so far this year and 6.1% in the last five trading sessions (as of August 26, 2015). The fund has a Zacks ETF Rank #3 with a Medium risk outlook. iShares Dow Jones U.S. ETF (NYSEARCA: IYY ) This $935 million-ETF also tracks the Dow Jones U.S. total market index. This fund has a proportionate exposure in almost all sectors with maximum emphasis on IT (19.0%), Financials (18.1%), Health Care (14.8%), Consumer Discretionary (13.4%), and Industrials (11.0%). Unlike DIA, this 1,255 stocks – fund invests less than 15% share in the top 10 holdings. Probably this is why the fund lost less than DIA. IYY charges 20 basis points as fees and shed 5.9% in the last five trading sessions and over 5.3% so far this year. Outlook Overall, the market may be a little uncertain, but such a sharp sell-off will open up the doors for future gains in the U.S. All four products went into an oversold territory indicating a turnaround. Moreover, latest rate cuts by China should also provide some boost to these equity indices. However, investors should also not that the current prices of the aforementioned ETFs are below their short- and long-term moving averages hinting at further bearishness. So, edgy investors might stay on the sidelines as of now and especially exercise caution when it comes to the Dow ETFs as this spectrum appears more volatile than the S&P 500. Original Post

Fidelity Equity Dividend Income: I’d Rather Own A CEF

FEQTX changed managers in 2011 looking to spruce up performance. Although there has been improvement, the results have been middling. If you are looking for income, you might be better off with a CEF. Mutual funds are generally the top-of-mind way for investors to quickly gain access to professional management. However, the Fidelity Equity Dividend Income (MUTF: FEQTX ) shows why you need to be cautious when you go down this route. In the end, if you are looking for dividend income, there are better options out there. Turning to a new leader FEQTX changed managers in late 2011 with the goal of shaking things up at a fund that had been lagging and, generally, not living up to its name. That means that 2011 and part of 2012 were really a transition period as new manager Scott Offen put his mark on the fund. So he’s got about three years of performance under his belt with a portfolio he created. The fund’s objective is reasonable income and capital appreciation. Reasonable income is defined as a yield above that of the S&P 500 Index. FEQTX’s trailing yield is roughly 2%. For comparison, the SPDR S&P 500 ETF Trust’s (NYSEARCA: SPY ) yield is about 1.9%. So I guess it lives up to its definition of reasonable yield, but that may not be your definition. Searching for stocks, Offen looks for , “…companies that deliver attractive, above-market dividend income and provide exposure to conservative earnings-growth potential with relatively low volatility.” He likes companies with, “…high or improving returns on capital and companies with strong balance sheets, including cash on hand…” As a shareholder, these are the types of things you’d like a manager to look for. The fund tilts toward value stocks, which isn’t surprising since Offen’s last gig was at a value fund. The interesting thing here is that the manager cautions that focusing too much on yield is dangerous. He highlights the banking sector during the 2007 to 2009 recession as a cautionary tale. And while that’s a worthy warning, 2% isn’t a material yield and it certainly isn’t much more than an index is offering, so income investors looking at, or in, this fund have a right to wonder if they are getting their money’s worth. Performance is so-so The problem is that performance relative to the S&P isn’t all that great. Over the trailing three years through July, FEQTX’s annualized return, which includes reinvested distributions, is around 14.7%. The SPY’s annualized return over that span is nearly 17.6%. Both have roughly similar standard deviations and FEQTX’s Beta is nearly 0.95, meaning it moves roughly in line with the S&P. (SPY, as you might expect, moves in lock step with the S&P.) So there’s little yield advantage, no performance advantage, and the same amount of risk. Although the expense ratio of around 0.60% is low for a mutual fund, the extra expense isn’t worth it when you could by SPY, get better performance and a similar yield, and pay just 10 basis points or so in expenses. A better alternative? This is why you shouldn’t get sucked in by a fund name. I’m not suggesting that FEQTX is a bad fund, per se, just that it isn’t compelling enough compared to other options. That said, I don’t believe it lives up to the words “dividend income,” which are found in its name. If you own the fund or are looking at it, you’ll basically be getting something on an index clone at greater cost. Why not shift gears and look at a completely different space? For example, you might consider the Nuveen S&P 500 Buy-Write Income Fund (NYSE: BXMX ). This fund was created through the merger of two older Nuveen closed-end funds late last year and now has the goal of tracking the S&P while writing index options to generate current income. It doesn’t have a long track record, to be sure, but it has put up decent results so far. First off, the distribution is around 7.6%, well above that offered by the index and FEQTX. And year to date through July, BXMX’s return is nearly 6.2% while SPY is about 3.4% and FEQTX is just 1.3%. A big difference, however, is in the expense ratio, which is just under 1%. But based on performance so far under the new investment strategy, you are being rewarded for that. The biggest risk, of course, is that the new strategy is untested. Which is a legitimate concern. That said, writing options should mute downside risk since in a falling market option income will offset capital losses. At least that’s the theory, anyway. Time will be the true test of this, meaning that you’ll need a little faith if you choose to own BXMX. But with a discount of nearly 7%, you are getting a little protection built in by buying below the actual value of the portfolio. Looking at that a little closer at recent performance, since the last few months have been pretty rough, BXMX’s trailing daily return over the last three months through August 26th was a loss of almost 4.2%. The S&P over that same span fell just under 7.3%. Over the trailing month through August 26th, BXMX was down about 5.1% and the index was down nearly 6.5%. So, through the current turmoil anyway, BXMX seems to be holding its own. Note, too, that upside performance should be muted in a roaring bull market because of the use of options. This year’s sideways market is really a good space for option writing. So the strong out of the gate performance really shouldn’t be taken as an indication of future performance. But income should always be notable. Not the only option That said, BXMX is just one option. It seems like a compelling one compared to FEQTX, but there are other closed-end funds with compelling yields and performance histories. That said, the real point here is to make sure you understand what you own. That’s particularly true of mutual funds where a fund may not be living up to its name. If you find you are an income-oriented investor stuck in such a fund, consider shifting to closed-end funds. You might find you are willing to pay a little more for a higher level of income-that’s especially true when the fund you own is simply tracking a broader index. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Are You Selling The Drama Or Buying The Rally?

The critical concern at this juncture is to address whether or not new information genuinely makes risk taking more desirable. Have prospects for the global economy truly improved? If history teaches us that benchmarks tend to retrace half of their losses before retesting their lows – if you feel like you’ve been here before and you don’t choose to be scarred like that again – perhaps you might anticipate better buying opportunities in the weeks ahead. Mini-crash for equities ignites panic selling? Check. The commodity super-slump, ever-widening credit spreads, corporate sales recession and rapid deterioration in market internals throughout June and July assured a reassessment of risk. The brutality and swiftness of that risk reassessment was less destructive for those who respected the dozens of warning signs and acted proactively. Extremely oversold conditions and short covering spark panic buying? Check. As I explained on Tuesday after six days of relentless price depreciation, the S&P 500 had only closed on the lowest end of its 3-standard-deviation range (0.13% probability) on two other occasions – at the tail end of the eurozone sell-off (10/3/2011) and on Tuesday, 8/25/2015. That’s why I wrote in Tuesday’s article, ” Yes, you’re going to see higher prices in the immediate term. Relief rallies happen . ” On the other hand, corrections in other key historical periods (e.g., 1987, 1998, 2010, 2011, etc.) suggest that relief rallies are likely to be short-lived. Typically, stock prices bounce significantly off potential lows, then retest those lows a few weeks later. The S&P 500 SPDR Trust ETF (NYSEARCA: SPY ) plunged 16% in late July-early August of 2011. The exchange-traded index tracker went on to recover one-half (nearly 8%) in late August and September, but ultimately broke to new lows in early October. Similarly, the current correction for SPY came close to 12%. Should anyone be surprised in the vehicle’s ability to reclaim one-half (approximately 6%) of the erosion in price? If history teaches us that benchmarks tend to retrace half of their losses before retesting their lows – if you feel like you’ve been here before and you don’t choose to be scarred like that again – perhaps you might anticipate better buying opportunities in the weeks ahead . The critical concern at this juncture, however, is to address whether or not new information genuinely makes risk taking more desirable. For instance, have prospects for the global economy truly improved? Are corporations actually going to post top-line revenue increases in the 3rd quarter or blockbuster profitability in the 3rd quarter? Will the Federal Reserve’s timeline for tighter borrowing costs be compatible with real prospects for the U.S. economy? If the answers to these questions are “affirmative,” then stocks may be off to the races. Let’s start with the macro-economic backdrop. Is it possible that the seasonally adjusted, revised-and-re-revised GDP of 3.7% for the U.S. in Q2 is a game changer? Probably not. For one thing, the economic growth for the year is at 2.2% – the same low annualized rate that it has been throughout the six-year recovery. Second, the most respected forecasting arm of the Federal Reserve, the Atlanta Fed, anticipates 1.4% 3rd quarter GDP, which means decelerating activity. Last, but hardly least, the global economy is reeling, from debt-slammed Europe to commodity dependent Latin America to recession-wracked China. It follows that prospects for the global economy do not look substantially better, other than the hope and faith that investors may place in China’s multi-faceted stimulus efforts. Perhaps there is new data to suggest that corporations are growing their bottom line earnings per share that would justify a sustainable bullish stock uptrend. This does not look to be the case. According to S&P data compiled by the web log, Political Calculations, trailing 12-month earnings per share for the S&P 500 have declined from S&P analyst projections throughout 2015 from the projections analyst made three months ago (May 20, 2015), six months prior (February 15, 2015) and nine months earlier (November 13, 2014). Top-line revenue? The revenue recession began at the start of 2015 as the Dow Industrials posted sales declines in Q1 (-0.8%) and Q2 (-3.5%); analyst projections for sales declines are coming in at -4.0% for Q3. So new information on the global economic expansion is not particularly compelling. Meanwhile, companies do not appear to be enhancing their top or bottom lines, which does not help price-to-sales (P/S) or price-to-earnings (P/E) valuations. Why, then, would stock investors become enchanted by anything that has taken place in the last few days? Granted, President of the New York Fed, Bill Dudley, helped send stocks rocketing on Wednesday (8/26) with commentary that hiking the Fed’s overnight lending rate in September is looking “less compelling.” Anything that pushes off the possibility of higher debt servicing costs or higher financing costs excites stock bulls. Keep in mind, of course, nobody at the Fed has suggested that they would not raise interest rates here in 2015. It follows that the hope for a continuation of Fed accommodation – hope for a rate hike delay, a slower pace for rate hikes (e.g., every other meeting), and/or smaller increments (one-eighth of a point) – remains the best bet for stock bullishness. We are still proceeding with caution. Most of our clients have 50% exposure to domestic equity ETFs such as the iShares S&P 100 ETF (NYSEARCA: OEF ), the Health Care Select Sect SPDR ETF (NYSEARCA: XLV ), the iShares MSCI USA Minimum Volatility ETF (NYSEARCA: USMV ), the Vanguard Mid-Cap Value ETF (NYSEARCA: VOE ) and the Vanguard High Dividend Yield ETF (NYSEARCA: VYM ). In some instances, we have bought the dips on accidental high yielding dividend aristocrats like Wal-Mart (NYSE: WMT ). Investment grade bonds make up 25% of most portfolios with funds like the iShares 3-7 Year Treasury Bond ETF (NYSEARCA: IEI ) and the Vanguard Total Bond Market ETF (NYSEARCA: BND ). Most importantly, in May and June, when the S&P 500 regularly sat near the 2100 level, we raised our money market cash account levels . Those cash levels are still at 25%. The purpose? Cash reduces portfolio volatility during periods of market stress, limits the downside loss during sell-offs and provides opportunity to buy quality assets at lower prices. Even if I am wrong about the S&P 500 retesting its lows, we are unlikely to miss the bull train as we await a definitive confirmation of improving market internals . Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.