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My Favorite Low Fee ETFs And Mutual Funds For Domestic Equity

Summary Investors should be comparing several options when picking the ETFs or mutual funds they want to use. I’ve collected several of the ETFs that I think are very strong contenders for best of breed status. These ETFs tend to have low expense ratios and offer very diversified domestic exposure. I’m concerned that the market prices are relatively high. While I expect long term prices to go up, I want to protect against short term weakness. Because I’m concerned about weakness in the market, I see SCHD as a top contender among equity non-REIT investments in the domestic market. One of the areas I frequently cover is ETFs. I’ve been a large proponent of investors holding the core of their portfolio in high quality ETFs with very low expense ratios. The same argument can be made for passive mutual funds with very low expense ratios, though there are fewer of those. In this argument I’m doing a quick comparison of several of the ETFs I have covered and explaining what I like and don’t like about each in the current environment. By covering several of these ETFs in the same article I hope to provide some clarity on the relative attractiveness of the ETFs. One reason investors may struggle to reconcile positions is that investments must be compared on a relative basis and the market is constantly changing which will increase and decrease the relative attractiveness. For investors that want to see precisely which assets I’m holding, I opened my portfolio about a week ago. The ETFs (and two mutual funds) I want to cover are indicated below. ETFs and mutual funds for consideration Vanguard Total Stock Market ETF (NYSEARCA: VTI ) Fidelity Spartan® Total Market Index Fund (MUTF: FSTVX ) –I am long every investment above this line– Schwab U.S. Broad Market ETF (NYSEARCA: SCHB ) iShares Russell 3000 ETF (NYSEARCA: IWV ) Schwab U.S. Dividend Equity ETF (NYSEARCA: SCHD ) Vanguard Dividend Appreciation ETF (NYSEARCA: VIG ) When I’m contemplating investing in an ETF, I don’t want to buy a short term holding. At heart, I am a buy and hold investor that is willing to sell most investments only when I become sufficiently bearish. I generally handle rebalancing slowly through allocating new investments to the asset class that needs more strength. However, I don’t rebalance to exact ratios. I follow general rules for the allocation but within reasonable boundaries I will overweight or underweight sectors based on their relative attractiveness. When the market appears overvalued across the board, I reduce my rate of purchase. I still dollar cost into major indexes and I still will allocate some new funds, however I’m also more willing to spend money on doing major projects around the house rather than adding to my investment portfolio. I don’t cut off purchases entirely because I believe the markets will trend to move upwards over time by at least the rate of inflation, which will be much higher than my savings account will pay. Currently I consider the market to be slightly overvalued. Not as overvalued as it was before Greece (which I consider overblown), but the high P/E ratios make domestic investment riskier and the high correlations of international markets combined with the problems in Greece and the problems I expect in China make me concerned about short term international performance. Total and Broad Market VTI and SCHB are total and broad market ETFs. They have a correlation running 99% or higher on returns, so I consider them to be interchangeable. The same can be said for FSTVX though it is a mutual fund. I use mutual funds for an employer sponsored retirement account that is limited to investment in certain mutual funds. I consider these investments to be the best of breed for investors seeking exposure to the total or broad U.S. equity market. Despite my very high opinion of these investments, I feel the market is pushing on being valued too highly and see potential for problems with increases in interest rates expected in September. I’m expecting to see an increase in inflation over the next year or so with higher velocity of money and an increase in inflation may reinforce the decision to slightly increase rates. IWV holds very similar investments and also has very high correlation to the other ETFs listed here, but I expect it to outperform the other options over the long term because of a higher expense ratio. When the assets are very similar, I expect the expense ratios to be a significant factor in the relative performance. Dividend Focused (non-REITs) One of my favorite dividend investments is the Schwab U.S. Dividend Equity ETF. I expect it is one area where I’ll be adding some cash over the rest of the year. SCHD offers an extremely low expense ratio and free trading in Schwab accounts make it an ideal way for an investor to add incremental small levels of exposure. Large cap companies with solid dividends have shown some relative strength in corrections historically and I see the potential for that trend to continue. Aside from funds going into FSTVX for dollar cost averaging, SCHD is easily the strongest contender for receiving additional investments. I’m not long SCHD yet, but I expect to be long on it later this year. Lately SCHD has been weaker than the broad market ETFs, but I think the difference in performance reflects a bullish view by the market. Another solid option for investors wanting diversification in their dividend growth investments is VIG. In my personal rankings VIG has to come below SCHD due to a meaningfully higher expense ratio and a lack of free trading in my accounts. For investors using accounts that have free trading on VIG, it would make more sense for small incremental additions to the portfolio to use VIG rather than SCHD. Conclusion I believe I have selected several best of breed ETFs for investment in the domestic equity market, but I’m becoming less bullish due to high P/E ratios, historically high earnings relative to GDP (raising the denominator in the P/E ratio), and the potential for higher interest rates combined with inflation. While equities do serve as a decent hedge against low rates of inflation, I would be compelled to buy inflation adjusted bonds if they had decent yields. I believe there are plenty of other investors that would also like to be holding more bonds for risk reduction and if decent yields become available I expect it will weigh on stock prices as investors adjust allocations. Some investors may feel that such a situation would hurt dividend stocks and thus dividend ETFs more than other sectors. I’ll take the risks there because a little weakness from raising rates is acceptable to me in exchange for having investments that may not fall as hard if the situation with China and Greece starts hitting the U.S. equity market harder. Disclosure: I am/we are long VTI, FSTVX. (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. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.

5 Questions On Risk In Concentrated Equities Today

By Mark Phelps & Dev Chakrabarti As equity markets cope with fresh volatility from China to Europe, managing risk is a top priority. In our view, concentrated portfolios stand up to scrutiny on risk – even in today’s complex market conditions. Concentrated portfolios are a popular way to capture high conviction in equities. But many investors worry that by focusing on a small number of stocks, they may be more vulnerable when volatility strikes. These five questions can help gauge whether that’s really true. 1. Is a concentrated equity portfolio more vulnerable to a market correction than a diversified portfolio? Not necessarily. Based on our experience – and academic studies – we believe that concentrated portfolios can actually cushion the damage in a market correction. Since concentrated managers have much more to lose than managers of diversified portfolios if a single stock underperforms, they tend to be much more focused on the earnings risk of individual holdings and of the portfolio. Our research on US equity strategies supports this notion. We followed up on the famous study by Cremers and Petajisto* and found that the median concentrated US equity manager, with 35 or fewer stocks in a portfolio, incurred less severe losses than diversified portfolios in down markets. This made it easier to recoup losses on the way back up. As a result, concentrated strategies posted stronger three-year returns than traditional active and passive strategies over the 10-year period studied (Display). And during the worst three-year period, the portfolios of concentrated managers declined less than other active and passive portfolios. 2. Why isn’t a concentrated portfolio more vulnerable to market surprises? Portfolios with small numbers of stocks by definition have a high active share and diverge from the benchmark substantially. This can be a good thing when surprises rattle the market. Benchmarks give investors exposure to volatile sectors, especially in down markets. For example, both energy and financials are sectors that are notoriously unstable. So constructing a portfolio that is less exposed to those sectors would tend to protect against vulnerability in those markets. In the oil-price shock of the last year, a diversified portfolio with weights that are closer to the benchmark is more likely to have greater exposure to the energy sector than a concentrated portfolio. And in financials, many pure banks are too risky for a concentrated portfolio, in our view, because it’s simply too difficult to forecast earnings that are tied to the uncertainties of the future rate environment. 3. Does that mean a concentrated portfolio will miss out on a big sector recovery? It’s true that volatile sectors do lead the market at times. But over the long term, we believe it’s better to focus on a few select holdings that provide alternative ways to gain selective exposure to a sector recovery. For example, some financial exchanges or asset management firms have much lower capital intensity than pure banks – and offer better return potential driven by secular trends in their industries, in our view. Focusing on stocks that have shown consistency of earnings through good and bad periods is a more prudent path to generating long-term returns than taking big sector overweights, which may be prone to instability. 4. How can regional risk be managed in a global portfolio with so few stocks? While concentrated managers always focus primarily on stock-specific issues, monitoring regional exposure is important. Stock-picking decisions must also ensure that the sum of a global portfolio’s parts is balanced and appropriately positioned for macroeconomic conditions. Today, the US is enjoying a relatively strong demand environment while coping with the effects of a stronger dollar on exports. Conversely, Japan is deliberately weakening its currency in an effort to kick-start the economy and spur wage inflation. A concentrated portfolio can reflect these trends by focusing only on those US companies exposed to a consumer recovery with solid revenue growth and Japanese exporters that are putting their cash to work for shareholders. This can help create a natural currency hedge – without using derivatives or shorting. And when currencies shift, a concentrated portfolio can take advantage of changing dynamics by tilting a portfolio with a few strategic changes instead of turning over large numbers of holdings. 5. What’s the biggest risk to a concentrated portfolio today? Turmoil in the Chinese markets along with the recent escalation of the Greek debt crisis and the potential for contagion across Europe are, of course, the most significant risks for any global equity manager today. However, we think one of the largest challenges for concentrated allocations today, is how to incorporate downside protection, given the market moves earlier in the year. Defensive segments of global equity markets, such as consumer-staples and income stocks, are expensive. So they may not be as effective in protecting performance during a down market. In concentrated portfolios, where a small number of defensive companies play a vital role in risk management, this could erode the buffers against volatility. Identifying defensive growth companies can help resolve this problem. For example, business services or companies supplying consumer staples have more attractive valuations and can deliver long-term growth – and downside protection, in our view. Similarly, we’d prefer stocks with stable and consistent growth that have attractive policies on returning cash to shareholders as an added feature over pricey stocks that offer income as a primary feature. *Cremers, K.J. Martijn and Petajisto, Antti. “How Active Is Your Fund Manager? A New Measure That Predicts Performance,” March 31, 2009 The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. AllianceBernstein Limited is authorized and regulated by the Financial Conduct Authority in the United Kingdom.

YLCO – Leveraging On The Growth Of The YieldCo Investment Class

Summary YieldCos are an emerging asset class of yield vehicles, providing stable and growing dividend income from renewable energy assets. The ETF portfolio consists of high quality yieldco securities. The Global X YieldCo Index ETF is a low risk way to play the high growth renewable energy. The Global X YieldCo Index ETF (NASDAQ: YLCO ) is a new ETF investing in yieldcos as the underlying asset. It was formed by the Global X Funds, one of the largest issuers of ETFs providing investment opportunities across the global markets. This ETF provides a good opportunity for investors looking to invest in the renewable energy sector including solar and wind companies. YieldCos are becoming important especially in the solar industry. Many big solar companies have made plans to form a yieldco. YieldCos are dividend growth oriented public companies, providing stable cash flows and distributing the cash amongst its shareholders as dividends. YLCO will be the first YieldCo ETF available to U.S. investors. ETF Details The fund started on May 27, 2015 and has an expense ratio of 0.65%. The ETF follows the Indxx Global YieldCo Index, which is the underlying index. It will have to invest at least 80% of its total assets in the securities of the underlying index. It follows a replication strategy, where investment in securities will be done in the same proportion as the underlying asset; not trying to outperform or underperform. Since the Global YieldCo Index focuses on the energy sector, the new ETF will also concentrate on the energy sector. The Global YieldCo Index currently has a yield of over 3%. This fund is different from the rest as it seeks to invest in yieldcos. Why should you invest in a Renewable Energy YieldCo 1) Renewable Energy is growing rapidly Renewable energy usage has been scaling up in recent times. With solar energy reaching grid parity in a number of places, it is now becoming more economical to use solar power rather fossil fuels. Countries are focusing on reducing their carbon footprint by using more renewable energy. Developing countries like China and India have made aggressive plans to shift their energy mix from coal to more cleaner and efficient energy sources like wind and solar. Energy companies are bound to benefit in the future from these long term trends. According to Solar PV roadmap by IEA, solar energy capacity will grow to 3000 GW by 2050 up from 184 GW now. 2) YieldCos are becoming popular YieldCos are fast gaining traction in the renewable energy space. It is created by a parent company to lower the cost of capital, as renewable energy projects are capital intensive. Green energy does not require fuel and most of the cost is front loaded. The capital cost is the most crucial variable in determining the levelized cost of electricity (LCOE). The income from these yieldcos is considered reliable and some of the yieldcos are also growing rapidly e.g. Terraform Power (NASDAQ: TERP ). YieldCos distribute the cash amongst investors in the form of dividends. YieldCos have become extremely popular in this industry today. They enter into long term contracts and thus provide stable cash flows. This industry currently has a combined market capitalization value of $39 billion currently and 11 more IPOs are in the pipeline. 3) Top 10 Fund Holding The fund holds 20 securities with the top holding Terraform Power Inc. accounting for as much as 12%. TERP was the first yieldco formed by SunEdison (NYSE: SUNE ) in the solar energy space, which revolutionized the whole industry. The company’s portfolio has grown from 808 MW since its IPO in July 2014 to 1,675 MW. It has plans to diversify into natural gas, geothermal and hydro power. The CAFD guidance more than doubled to $225 million for 2015 . Another big holding is Brookfield Renewable Energy Partners which owns $20 billion in renewable power assets and is a leading operator of renewable projects across North America, Latin America and Europe. It has installed more than 7GW capacity predominantly in the hydroelectric space. The 3rd largest holding is NextEra Energy Partners (NYSE: NEP ) which owns clean energy projects particularly wind and solar energy in North America with stable, long-term cash flows. It declared $100-120 million as its CAFD guidance for 2015 and is expecting a 12-15% annual growth in dividend distribution over the next five years. Data from Global X Funds 4) Geographic Diversification Though the fund has a global footprint, the focus in mainly on the developed countries. The main reason for this concentration is the fact that yieldcos have been launched mainly in these regions. Emerging markets do not have major yieldcos as of now. As time passes, I expect yieldcos to emerge in the developing markets as well. Data from Global X Funds Index Characteristics (click to enlarge) Source: Indxx Risks One of the concerns of investing in this ETF could be the fact that the underlying assets are not fully under the control of its management. They are dependent on their sponsors. For example, if the sponsors do not have a healthy project pipeline, they will be unable to transfer the assets to their underlying yieldco which may adversely affect the yieldco’s performance and in turn the ETF’s. Other than this, it is a relatively new concept in the industry and like any other new venture there is this risk of whether it will be a success or a failure. But given the high quality stocks in the Global X YieldCo portfolio, I do not think it should be a major concern. Stock performance The Global X YieldCo Index ETF was launched on May 27, 2015 at $15.35 and is currently trading at ~$15. Conclusion Investing in renewable energy stocks is sometimes regarded as risky given the volatile nature of the sector. ETFs are a good way to diversify individual stock risks and are regarded as less risky. The Global X YieldCo Index ETF is a good and balanced way to stay invested in the green space, giving exposure to the growing yieldco market. It is a relatively new concept in the market now and has been launched by one of the fastest growing issuers of ETFs. I think it’s a smart way of investing in the renewable energy space as it is less risky and involves a portfolio of growing stocks. 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.