Tag Archives: ylco

EZR: Is This A Useful ETF Or Symptom Of Wall Street Excess?

WisdomTree just introduced a new exchange traded fund. The Europe Local Recovery Fund sounds great, but is it? My gut tells me it’s another sign of an overextended ETF industry. Exchange traded funds, or ETFs, are amazing products in many ways. In fact, used properly, ETFs can be the basis for a solid portfolio. However, if you don’t pay close enough attention or make aggressive fund choices, ETFs can be very dangerous. WisdomTree’s (NASDAQ: WETF ) new Europe Local Recovery Fund (BATS: EZR ) falls into the riskier category in my book and is another sign that ETFs are, perhaps, too hot a product. The new fund EZR, WisdomTree’s new fund , is designed to, “…maximize exposure to European companies that may benefit from Europe’s economic recovery…” It goes about this by focusing on companies that generate 50% or more of their revenues from within Europe. According to the fund’s fact sheet, the portfolio gets about 70% of its revenues from this region. So an investment in EZR really does get you focused on Europe. There’s more to it than that, though. EZR’s portfolio excludes telecom, utilities, consumer staples, and health care, which aren’t as impacted by economic recoveries. Instead, it focuses on the industrial, materials, consumer discretionary, IT, finance, and energy sectors. All of which WisdomTree expects to benefit more from a regional upturn. But wait, there’s still more… EZR’s holdings: …are weighted by their correlation to the [European Commission’s Economic Sentiment Indicator]. Those whose returns show higher correlations to monthly changes in the indicator will be tilted toward higher weights-and vice versa. So the most economically sensitive stocks have the highest weight. Is EZR good, bad, or indifferent? Here’s the thing. EZR isn’t exactly a bad ETF. But it is a risky one. If Europe is doing well economically, the fund should perform well. If Europe isn’t doing well economically, EZR is likely to be a dog. Don’t overlook this simple fact. By its basic design, EZR is leveraged to Europe’s economic performance up and down. It’s not your typical European stock fund. You need to understand that very clearly when you buy it, otherwise you could be getting something you didn’t expect. If EZR is exactly what you’re looking for, great. But I consider this a pretty esoteric investment product. It’s highly focused around just one positive outcome. WisdomTree has other European funds, so I’m not sure why this one was needed. Except, perhaps, to bring out a new product so the fund sponsor could bring in more assets. Which is the first thing I thought about when I saw the news release on this ETF. Maybe there are a few highly sophisticated investors out there for which this product would make complete sense. But for most, it’s way too targeted. While WisdomTree suggests pairing it with its more broadly diversified Europe Hedged Equity Fund (NYSEARCA: HEDJ ), EZR is really meant for a trader. Someone who thinks the European economy is going to pick up. But that same investor needs to be savvy enough to sell EZR when he or she thinks the European economy is going to head south. If you aren’t that type of investor than owning EZR is far more likely to be dangerous to your financial health than helpful. Got to make a living This isn’t to suggest that WisdomTree is doing anything bad or wrong. If there’s a market for a niche product like EZR they have every right to fill it. In fact, if they want to keep growing, they pretty much have to find unique products to bring in more and more assets under management because the ETF market is pretty saturated with product at this point. And that’s what worries me. ETFs are a huge business and a relatively new one. We’ve quickly moved past the basics, like broad-based index funds, to increasingly focused and sometimes highly unique investment options. To give you a sense of where we’ve come from and where we are going, the Investment Company Institute’s data shows that there was about $45 billion of ETF issuance in 2002. That number was over $240 billion in 2014. So nearly six times as much money went into ETFs in 2014 as went in in 2002. If you are like me, you like to see new ideas for no other reason than they are interesting. They make you think about things in a different way. And to that extent, EZR is very interesting. But it’s also a product that isn’t appropriate for most investors. It’s also a product that’s taking such a specialized focus that it makes me question if ETFs have grown too far (I’ve long felt this, so it’s really just a symptom of an issue I’ve already been concerned about). It makes me think that ETFs are increasingly more about marketing than creating low-cost, freely traded, and broadly useful investment products. Which is what the goal was when ETFs were first created. The Global X Yieldco Index ETF (NASDAQ: YLCO ) is another fund I’d throw up as questionable so you don’t think I’m picking on WisdomTree. EZR is just a new fund that highlights my concern about increasingly esoteric ETFs. The sad truth is that it wouldn’t take me long to create a substantive list of ETFs that might be more dangerous than they are helpful. (Throw in most of the 2X and 3X ETFs on that score.) If you are an ETF investor you don’t have to run for the hills. But you do need to think carefully about what you own and why. Make sure you understand the ETFs in your portfolio and all of the implications you face from owning them-good and bad. My gut says that ETFs are a product where simple is better, particularly as ETFs get more and more complicated. As for EZR, most investors should avoid it.

ETF Issues: What You Don’t Know Might Hurt You

ETFs can be great options for investors. But you have to know what you are buying. iShares, for example, isn’t making that easy, though it’s doing the best it can. Exchange traded funds, or ETFs, are an incredible work of human ingenuity. They are pooled investment vehicles that trade close to net asset value while being traded all day long. And while there are good reasons to like these hot products, there are also reasons to dislike them. And a single data point provided by iShares shows one of those reasons. I don’t hate ETFs To start, I don’t hate ETFs. I just don’t like them as much as most investors seem to. And certainly not as much as Wall Street does, based on how many ETFs have been brought to market in recent years. Yes, they are cheap to own and provide quick and easy diversification. But it’s so easy to buy an ETF that people aren’t looking closely enough at what they are buying. That may not matter much if you pick up the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ), a clone of the S&P 500 Index. But with more and more esoteric ETF product being created by rabid Wall Street salesmen, taking the time to get to know what you own is starting to matter more and more. For example, I recently wrote about the fine print in the prospectus of the Global X Yieldco Index ETF (NASDAQ: YLCO ). Essentially, this ETF is focused on buying 20 stocks in a new and niche sector that doesn’t really have 20 stocks to buy. YLCO is all about the story, not so much about the substance, in my eyes. Maybe YLCO will be a great ETF at some point, but right now it’s a risky proposition that all but the most aggressive investors should avoid. So, yes ETFs can be good. But Wall Street has been perverting this goodness in an attempt to make a buck. iShares isn’t evil But don’t think it’s only exotic fare about which you need to be concerned. Even more “normal” stuff can lead you astray. For example, the iShares NASDAQ Biotechnology ETF (NASDAQ: IBB ) has some problems of its own. Now iShares is the ETF arm of giant asset manager BlackRock (NYSE: BLK ). And, for the most part, BlackRock is a stand up company. But that doesn’t mean every product it sells is a good investment option. For example, a quick look at IBB’s overview page shows a P/E ratio of 25. That might not be too surprising given that biotech companies are high growth. You wouldn’t expect a P/E of 10 for this group. In fact, you might even say it’s on the low side for the sector, which is known for housing money losing companies looking for a big score via the creation of new drugs. Which is why you should click the little information icon next to that P/E stat. That’s where you’ll learn that the P/E ratio doesn’t include companies that don’t have earnings. So, essentially, the P/E really tells you less about the ETF’s portfolio than you might at first believe. Interestingly, the same issue pops up throughout iShare’s data on P/E. For example, the iShares U.S. Oil & Gas Exploration & Production ETF (NYSEARCA: IEO ) has a P/E that’s listed at a little over 8. With 70% of its assets in the oil and gas exploration sector, where companies are bleeding red ink, you have to step back and wonder what’s going on. A low P/E makes sense for an out of favor sector, but does that average really tell you the whole story? The thing is the warning about P/E is a standard disclosure on the iShares site and holds true for everything from a niche biotech fund to the company’s S&P 500 Index clone. And iShares really isn’t doing anything malicious. It’s a database issue. You can’t calculate a meaningful P/E if a company doesn’t have any E to work with. So in order to get the job done, in this case calculating an average P/E, you toss the garbage numbers. And, thus, you create a P/E by using only those companies with earnings. Which, unfortunately, biases the number you have just created so that it may offer a misleading picture of the portfolio. So I’m not hating on iShares, there’s not much else it could do to provide site-wide data. And at least it goes the extra step of disclosing this little problem. But it should make you step back and take pause. If you own that biotech fund or the oil and gas fund, the stats you are using to validate your purchase may, in fact, not be reliable. This issue can be found at open-end mutual funds, too, so don’t think ETFs are the only problem child. The best example comes from Morningstar. This research and data house is very open about the way it calculates most of its data, you just have to look. And when it comes to average P/E, they have a workbook available that explains, “If a stock has a negative value for the financial variable (EPS, CPS), the stock will be excluded from the calculation.” EPS is earnings per share and CPS is cash flow per share. So any site that uses Morningstar data will be impacted by this issue… like Fidelity (read the fine print at the bottom of the data page). The question is to what degree is there a problem. In some cases it’s a minor issue. In the case of IBB, roughly half of the ETF’s holding don’t make any money and are excluded from the P/E calculation, according to The Wall Street Journal . That makes the P/E figure provided by iShares pretty much useless in my eyes. And it points out yet another problem that ETF investors may not realize when they buy what is currently a hot Wall Street product. Know what you own For many investors ETFs are seen as a short cut. A punt option that doesn’t require much thinking. In many cases that’s true, but in many others it isn’t. Which is why knowing what you own is so important. Can you accept the average P/E for an S&P 500 Index fund at face value? Yeah, probably. But what about an ETF honed in on an industry that’s filled with money-losing companies, like biotech? I don’t think that passes the sniff test. You’d be better off doing a little more digging into the portfolio to get a good understanding of what’s in there. Again, I don’t hate ETFs. But they are so popular and have been pushed so hard by Wall Street that I fear investors don’t have any clue what they own. Too many people have been lulled into complacency by slick marketing and an avalanche of new products. I don’t think that’s a story that ends well. If you own an ETF, I recommend taking a deeper dive just to make sure you really own what you think you own.

TAN Vs. YLCO: Which Is The Better Solar ETF?

With the recent update from the Obama administration regarding the allocation of more than $120 million for clean energy programs developing solar power and other renewable technology, ETFs focusing on top solar firms are definitely on our radar. The fund will be deployed across 24 states to help Americans gain access to cleaner and low-cost energy sources. Although solar stocks have got a beating due to plunging oil prices and the meltdown in the Chinese stock market, they hold greater promise. Surging demand for solar power, massive panel installations, advanced technologies, global warming issues and Obama’s ‘Climate Action Plan’ will ensure that the solar boom is not fizzling out anytime soon. The good news is that solar energy systems have increasingly become affordable, indicating its potential for wide acceptance among the masses. According to the White House report, solar energy is now cost-competitive with conventional energy, such as coal or natural gas, in 14 states. According to a report by GTM Research and Solar Energy Industries Association, solar photovoltaic installations are expected to go up to 7.7 gigawatts (“GW”) this year from 6.2 GW in 2014, where a GW represents 1 billion watts, enough to power roughly 164,000 homes. Here we will discuss two ETFs, Guggenheim Solar ETF (NYSEARCA: TAN ) and only a few months old Global X YieldCo ETF (NASDAQ: YLCO ). Both focus on the renewable energy sector expecting to ride on the bullish trend in solar space. Though TAN and YLCO have similar exposures, there are certain key differences between the products. Below, we have highlighted the products in greater details. TAN Launched in April 2008, this ETF follows the MAC Global Solar Energy Index, holding 27 stocks in the basket. First Solar Inc. (NASDAQ: FSLR ) and SolarCity Corp. (NASDAQ: SCTY ) take the first and second positions with a combined 15.3% share. The U.S. firms dominate the fund’s portfolio with 34%, followed by China (28%). The product has amassed over $264 million in its asset base and trades in solid volume of around 260,000 shares a day. It charges investors 70 bps in fees per year. The fund shed around 10.3% in the year-to-date time frame (as of Sep. 16, 2015) and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a High risk outlook. YLCO Launched this May, the fund targets a unique segment of the market, namely the YieldCo. A Yieldco is a dividend growth-oriented public company that bundles renewable and/or conventional long-term contracted operating assets. It is often compared to MLPs as they are both energy-related assets, created by their parent company, in order to deliver stable cash flows to investors. To attain its objective, the fund tracks the Indxx Global YieldCo index. The ETF holds only 20 securities with Brookfield Renewable Energy Partners (NYSE: BEP ) and TerraForm Power Inc. (NASDAQ: TERP ) (formerly a SunEdison (NYSE: SUNE ) Yieldco) taking up the first and second spots. Both account for an 18.3% share in the basket. The fund has a global footprint as well with the U.S. occupying the top spot at 39%, followed by Canada with 28%. YLCO has gathered a meager $3.4 million in assets and charges 65 bps in fees. It trades at an average volume of more than 4,600 shares. The product was down 26% since its inception. The Verdict Both funds charge comparable fees and are a tad expensive. However, TAN is widely diversified as it holds more securities and is less concentrated in its top 10 holdings compared to YLCO. Further, TAN is higher in AUM and relatively more liquid as it trades in a higher volume compared to YLCO. The higher volume of TAN also suggests that bid ask spreads should be relatively tight for this fund and total trading costs shouldn’t be much higher than the explicit 0.70% expense ratio. Notably, TAN has higher yield compared to YLCO. Both the funds have higher exposures to U.S. stocks with TAN lagging behind YLCO. However, the good thing about YLCO is that it has no exposure to Chinese firms, which could be affected by the economic turmoil in the world’s second largest economy. Further, YLCO is expected to be less volatile in nature than TAN as it tracks companies that have spun off their more steady power producing operations as Yieldco. Though YLCO doesn’t look bad, we pick TAN as the winner due its higher exposure to top solar firms, diversified nature, higher liquidity and better yield. Data Point TAN YLCO Expense Ratio 0.70% 0.65% Total Holdings 27 20 Top 10 Holdings 54.9% 66.7% Assets in the U.S. 34% 39% Dividend Yield 2.2% 1.2% AUM $264 Million $3 Million Average Volume 260,000 4,600 Original Post