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High Income ETFs Worth Their High Costs

With negative interest rates dominating international headlines and the benchmark 10-year U.S. Treasury yields slipping to below 2%, there is huge demand for income ETFs. Yield-hungry investors have rushed to high-dividend securities and ETFs in search of steady current income. Global growth continues to flounder, and the Fed is in no mood to hike rates frequently this year, suggesting continued outperformance by dividend ETFs. That being said, we would like to note that current income turns futile if you end up paying high expenses for a high-dividend or high income ETF. After all, everybody wants value for money. Also, cheaper funds have the potential to outperform the pricey choices. Keeping capital gains or losses constant and considering an expense ratio of 1%, a fund of $10,000 invested at 8% annual dividend will grow to $19,672 in 10 years, while the same fund invested at an expense ratio of 0.1% will grow to a higher amount of $21,390. But there are a few high income ETFs that can be intriguing picks despite the high costs associated with them. These ETFs have given decent performances so far this year (as of April 15, 2016), overruling the heightened volatility in the market. Also, since these have offered solid yields, their high costs do not hurt investors. Below, we highlight a few of such high dividend ETFs that are worth their high expense ratios. YieldShares High Income ETF (NYSEARCA: YYY ) The fund seeks to provide the performance of the ISE High Income Index. This $81.5 million fund definitely has a high expense ratio of 1.82%, but yields a stupendous 10.71% annually. The fund holds 30 closed-end funds ranked the highest overall by the ISE on the basis of three criteria, namely fund yield, discount to net asset value and liquidity. Around 66% of the fund is targeted at debt securities, while the rest are in equities. The fund is up 2.5% so far this year (as of April 15, 2016). Though the capital gains here are not solid, a 10.71% yield makes up for feeble market performance. AdvisorShares Athena High Dividend ETF (NYSEARCA: DIVI ) This $7.4 million actively managed ETF offers dividend yield of about 4.05% and has an expense ratio of 1.30%. The fund is heavy on North America (55%), followed by emerging Asia (16%) and developing Asia (6%). None of the stocks accounts for more than 4.36% of the portfolio. The fund is up 10.7% so far this year (as of April 15, 2016) – a sturdy performance which makes its dividend-adjusted return sturdier. Guggenheim S&P Global Dividend Opportunities Index ETF (NYSEARCA: LVL ) This ETF follows the S&P Global Dividend Opportunities Index, which focuses on high-yielding securities worldwide. As many as 109 securities are chosen from around the world for inclusion, with heavy exposure going toward finance (26.36%), utilities (22.21%), telecom (16.3%) and energy (12.88%) securities. Australian, American and British stocks account for about 20.6%, 17.1% and 15%, respectively, of total assets. This $52 million fund charges 65 bps in fees. It yields 6.06% annually (as of April 15, 2016) and is up 8.3% so far this year (as of April 15, 2016). First Trust Dow Jones Global Select Dividend Index ETF (NYSEARCA: FGD ) This $352 million fund provides exposure to the 100 high-yielding stocks. None of the securities accounts for more than 1.73% of the assets. From a sector look, financials takes the top spot at 34.33%, while energy, telecom, industrials, consumer discretionary and utilities round off the next five spots with double-digit exposure each. About half of the portfolio is tilted toward large- cap stocks, while mid caps and small caps take the remainder. In terms of country profile, Australia, U.S., Canada and United Kingdom occupy the top four positions. The fund yields 5.16% annually, while its expense ratio comes in at 0.58%. Agreed, an expense ratio of 0.58% is not too steep, but it is way higher than many high dividend ETFs like Vanguard High Dividend Yield ETF (NYSEARCA: VYM ), which charge just 10 bps in fees. The fund is up 5.3% so far this year (as of April 15, 2016). SPDR Income Allocation ETF (NYSEARCA: INKM ) INKM is an actively managed fund of funds that seeks to provide total return by focusing on investment in income and yield-generating assets. The ETF primarily invests in SPDR ETFs, but also includes other exchange-traded products. Investment-grade bonds (31.5%) and equity (27.6%) occupy the top two spots in the portfolio. The expense ratio is 70 basis points, while it yields about 4.13% annually. The fund is up 3.3% so far this year (as of April 15, 2016). Original Post

5 Secure Stocks For The Tough Times Ahead

Many long-term stock market investors are afraid right now, and who’s to blame them? We are entering a very contentious election summer, and the globe seems to be sitting on a powder keg. News of likely “Trump Riots”, Russian planes buzzing U.S. warships, and a host of other tensions have investors extremely nervous about the future. Click to enlarge Time has confirmed that the best way to deal with uncertainty is to get back to the basics when it comes to the stock market. Buying proven, long-term, steady dividend stocks is one tactic that has been proven to work over time, no matter what happens in the short term. Drilling into the stocks that are steady, dividend-paying performers, utilities are always at the top of the list. The question becomes: Which ones make the most sense right now? We looked over the universe of utility stocks and narrowed it down to five that we expect to weather any upcoming storm. Not to mention, make great long-term investments no matter what the future holds. The combination of the steady dividend and stability of utilities creates the ideal stock for nervous long-term investors. Black Hills Corporation (NYSE: BKH ) This $3 billion market cap South Dakota-based utility provides natural gas and electricity to clients in Kansas, Colorado, Nebraska, Wyoming and South Dakota. Black Hills is currently trading in the $58.00 per share zone and has boasted a 13.7% one-year total return. We love the current dividend yield of 2.8%, but the company lost money in 2015 due to the weak oil & gas business. However, true to form, Black Hills hiked dividends in February for the 46th consecutive time. The acquisition of SourceGas, a company that provides natural gas to customers in Arkansas, Colorado, Nebraska and Wyoming and maintains a Colorado-based gas pipeline, adds to the bullish picture. BMO Capital Group analyst Michael Worms ramped up his rating on the company recently due to the Source Gas deal. He called the deal “transformative” due to it slashing Black Hills’ exposure to unregulated businesses and boosting its customer base by about 50%, to 1.2 million. The EPS is expected to move higher, from $3.07 per share in 2016 to $3.47 in 2017. PPL Corp. (NYSE: PPL ) A $25.4 billion market cap, this Allentown, Pennsylvania-based utility returned an impressive 23.6% over the last year. It currently throws off a 4% annual dividend yield at a share price in the $37.50 zone. Through its subsidiaries, PPL delivers electricity to customers in the United Kingdom, Pennsylvania, Kentucky, Virginia and Tennessee; delivers natural gas to customers in Kentucky; generates electricity from power plants in the northeastern, northwestern and southeastern United States; and markets wholesale or retail energy in the northeastern and northwestern parts of the United States. PPL operates in four segments: the U.K. Regulated Segment comprising PPL Global and WPD Ltd.’s (WPD) regulated electricity distribution operations; the Kentucky Regulated segment comprising the operations of LG&E and KU Energy LLC, which owns and operates regulated public utilities; the Pennsylvania Regulated segment comprising PPL Electric Utilities Corporation’s operations; and the Supply segment comprising the activities of PPL Energy Supply, LLC’s subsidiaries. What we like best about this company is two-fold. First, its capital expenditure strategy and growth is expected to lead to rate increases. Secondly, the firm’s diversification overseas. PPL runs a regulated utility in the United Kingdom. Although the U.K. division accounts for around one-third of its revenues, close to 50% of the company’s profits can be traced to the UK. Its EPS is expected to grow to $2.44 per share in 2017 from $2.36 in 2016. NextEra Energy (NYSE: NEE ) A Florida-based utility focused on the production and distribution of clean energy sources. It earned 8% in 2015 and is expected to grow at a 6-8% rate over the next 2 years. It has returned just over 14% over the last year and yields a solid 2.9%. NextEra Energy, Inc. is a holding company. The company operates through its wholly-owned subsidiaries, Florida Power & Light Company (FPL) and NextEra Energy Resources, LLC (NEER). It is an electric power company in North America with electricity generating facilities located in 27 states in the United States and four provinces in Canada. NEE’s segments are FPL and NEER. FPL is an electric utility engaged primarily in the generation, transmission, distribution and sale of electric energy in Florida. NEER owns, develops, constructs, manages and operates electric generating facilities in wholesale energy markets primarily in the United States, as well as in Canada and Spain. We firmly believe clean energy is the future. NEE earns about 40% of its profits from renewable sources and is rapidly expanding in this sector. Duke Energy Corp. (NYSE: DUK ) Duke is a $55 billion market cap utility company based in North Carolina. It conducts its operations in three business segments: Regulated Utilities, International Energy and Commercial Power. The company’s Regulated Utilities segment conducts operations primarily through Duke Energy Carolinas, Duke Energy Progress, Duke Energy Florida, Duke Energy Indiana and Duke Energy Ohio. The company’s International Energy segment principally operates and manages power generation facilities and engages in sales and marketing of electric power, natural gas and natural gas liquids outside the United States. Its Commercial Power segment builds, develops and operates wind and solar renewable generation and energy transmission projects throughout the continental United States. Duke Energy operates in the United States and Latin America primarily through its direct and indirect subsidiaries. We love the fact that Duke has a rapidly growing renewable division. The company is the highest yielder on our list, with a 4.1% annual dividend yield. However, it is important to note that the Latin American division is planned to be spun off the right buyer. This spin-off should help reduce the uncertainty of the emerging market exposure and could be very bullish for the shares when (if) it happens. Portland General Electric Co. (NYSE: POR ) This is a $3.5 billion, Oregon-based utility yielding 3.0% and boasting a 7.8% total return over the last year. Portland describes itself as a vertically integrated electric utility company engaged in the generation, wholesale purchase, transmission, distribution and retail sale of electricity in the state of Oregon. The company also sells electricity and natural gas in the wholesale market to utilities, brokers and power marketers. Its resources consist of six thermal plants, which include natural gas- and coal-fired turbines, two wind farms and seven hydroelectric plants. Portland a resource capacity of approximately 1,389 megawatts ( MW ) of natural gas, 814 MW of coal, 717 MW of wind and 494 MW of hydro. The company has contractual rights for transmission lines that deliver electricity from its generation facilities to its distribution system in its service territory and to the Western Interconnection. It has four natural gas-fired generating facilities: Port Westward Unit 1, Port Westward Unit 2, Beaver and Coyote Springs Unit 1 (Coyote Springs). As you know, utilities are highly regulated and are only allowed to raise rates with permission. Portland has been assigned to ramp up its use of renewable energy sources. This will result in replacement and upgrades of much of its infrastructure. These upgrades will allow the company to hike rates, which, in turn, will be very bullish for the shares!

Dumb Alpha: Sell In May And Go Away?

By Joachim Klement, CFA Every April, I am asked by clients and fellow investment professionals alike if the old adage, “Sell in May and go away,” still holds true? One of the key advantages of the ideas I present in the Dumb Alpha series is that they allow portfolio managers to rapidly improve their work-life balance. Since I am a naturally lazy person, I am constantly looking for ways to reduce my workload without my boss – or my clients – noticing. The sell-in-May effect, also known as the Halloween indicator , is one of the most well-known calendar effects. It holds that investors can outperform a simple buy-and-hold strategy by selling stocks at the beginning of May and buying them back at the beginning of November. If this were true, I could dramatically improve my work-life balance by going on a six-month vacation in May, just to come back in November and work for six months until the following spring. When I proposed this idea to my boss, he wasn’t very keen on it, arguing that, in largely efficient markets, this effect should not exist after transaction costs are taken into account. In other words, it should surely be arbitraged away by professional investors once widely known. I decided to dig in and look at the scientific evidence. After all, what is a weekend of extra research if one can expect to gain a half year off if proven right? It is indeed correct that many calendar effects do not survive increased scrutiny. Examples like the turn-of-the-month effect or the day-and-night effect require quite a lot of trading in a portfolio. If trading costs are reasonably high, many of these effects become unprofitable. Similarly, some other well-known calendar effects, like the January effect , disappeared once they were described in literature and exploited by professional investors. One of the first rigorous analyses of the sell-in-May effect was done by Sven Bouman and Ben Jacobsen , who looked at 37 international stock markets from January 1970 to August 1998. They found that the sell-in-May effect was present in 36 out of 37 countries and was statistically significant in 20 of them. The effect is not small, either. In the United States, Bouman and Jacobsen document a return in the November-to-April time frame that is 11 percentage points higher than in the May-to-October time frame; for the United Kingdom, the return difference is 24 percentage points – and can be traced back to the year 1694! So the sell-in-May effect has been around for a very long time, and, as it requires only two trades per year, it persists even after trading costs. Efficient market advocates were quick to reply. Edwin Maberly and Raylene Pierce pointed out that the sell-in-May effect disappears in the US stock market once the months of October 1987 and August 1998 are excluded from the data. Could it be that the effect was caused by just two months of awful performance? If the returns were that lumpy, surely it wouldn’t be possible to exploit them, because most investors would have lost their jobs or given up long before the next event materialized. In 2013, three researchers published what I consider the final verdict on the matter in the Financial Analysts Journal . Testing the sell-in-May effect with out-of-sample data from November 1998 through April 2012, they found that in the 14 years since the publication of Bouman and Jacobsen’s original analysis, the indicator did not disappear. In fact, on average, across the 37 markets studied, the out-performance in the winter months was still about 10 percentage points higher than in the summer months. They also found that the effect does not come in lumps. It exists in three out of four years and does not depend on specific industries, countries, or months. It seems clear that the effect is both real and persistent. What causes it is totally unknown, although several hypotheses have been proposed, tested, and rejected. Here we have a Dumb Alpha generator that defies logic and explanation. But, as a mentor of mine used to say, “Truth is what works” – and, even though the underlying causes of the effect are unknown, it does seem like a true investment anomaly. Now, I think I need to have a chat with my boss about my next vacation. Disclaimer: Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.