Tag Archives: accendo-markets

PMR Vs. RTH: Using Your Discretion

Consumer Cyclicals and Consumer Non-Cyclicals may be invested in separate ETFs. An alternative is to choose a ‘blended’ Consumer Cyclicals and Non-Cyclical funds. Blended funds happen to be top performers in their asset class. Consumers drive the economy of the United States. Household spending accounts for, roughly, 70% of the US economy. Some of that spending is done of necessity: food, clothing, transportation, home heating and medical costs to name a few. These fundamental things of life which one must purchase, as time goes by, are classified as ‘ non-discretionary ‘ items. On the other hand, consumer capital which remains after the bills have been paid may be spent as one chooses: entertainment, travel and leisure, home improvements or durable goods. This is classified as ‘discretionary spending’. So important are the differences between discretionary and non-discretionary spending, investment fund managers carefully delineate the two into different sectors. Further, the non-discretionary sector is considered a ‘defensive’ sector since consumers must continue to spend for goods and services produced by those companies which in that sector; whereas discretionary spending is considered cyclically sensitive , that is to say that consumers will spend less on certain items when the economy slows and consumers are uncertain about jobs and incomes. The question the potential investor might ask, especially in the light of economic global uncertainty, is it prudent to invest in the consumer discretionary sector if the economy might contract a bit? The answer is quite general: it is extraordinarily difficult to pick market tops or bottoms. The best any individual investor might do is to accumulate shares through disciplined investing and dollar cost averaging over both good and bad times. If so, does it make sense to have both types in a portfolio? Fortunately, a third alternative is available. There are retail ETF investment products which offer a blend of both consumer cyclical and non-cyclical companies. Two of these are top performers: the Market Vectors Retail ETF (NYSEARCA: RTH ) and the PowerShares Dynamic Retail Portfolio ETF (NYSEARCA: PMR ) . (click to enlarge) According to Van Eck Global , RTH tracks their own Market Vectors US Listed Retail 25 Index (MVRTHTR) , “… a rules based index intended to track the overall performance of 25 of the largest US listed, publicly traded retail companies …” The fund consists of 25 US listed retailers. According to Invesco , PMR is based on the Dynamic Retail Intellidex Index filtering companies based on “… price momentum, earnings momentum, quality, management action, and value …” The fund consists of 30 US listed retailers. Although the funds come under the heading of ‘Consumer Discretionary’ (using the Seeking Alpha ETF Hub filter ) , they are actually a blend of both. The Market Vectors Retail fund blends 55.8% of Consumer Discretionary, with 34.2% of Consumer Staples and some Health Care 9.9%. The PowerShares Dynamic Retail Portfolio is a blend of 50.09% Consumer Discretionary, 41.95% Consumer Staples, 2.75% Industrials, 2.65% IT and 2.54% Materials. Hence both funds are similar in the number of holdings but differ in the underlying tracking indexes; both funds have comparatively few holdings yet perform rather well. The table below lists four of best performing funds in this sector. Fund Name Number of Holdings 1-Month 1-Year 3 Year Type Market Vectors Retail ETF (RTH) 26 -2.75% 21.63% 75.13% Blend of cyclical, non-cyclical and HealthCare Consumer Discretionary Select Sector SPDR ETF (NYSEARCA: XLY ) 88 -2.71% 14.13% 69.11% Consumer Discretionary PowerShares Dynamic Retail Portfolio ETF (PMR) 30 -3.64% 12.79% 55.46% Blend of cyclical, non-cyclical, IT, Industrials and Materials Vanguard Consumer Discretionary ETF (NYSEARCA: VCR ) 385 -2.94% 12.67% 68.92% Consumer Discretionary Data from Seeking Alpha ETF Hub Since RTH leads the similarly constructed PMR, it would be interesting to make a side-by-side comparison and perhaps determine what makes the difference. Surprisingly, the funds have few companies in common. With the exception of Home Depot (NYSE: HD ) at 8.57% of RTH vs 4.93% of PMR, the weighting of the other companies in common, are roughly the same. RTH with Weightings RTH with Weightings PMR with Weightings PMR with Weightings Costco (NASDAQ: COST ) 5.07% Ltd Brands (NYSE: LB ) 3.07% Costco 5.033% Ltd Brands 5.41% CVS Caremark (NYSE: CVS ) 6.90% Target (NYSE: TGT ) 4.35% CVS Caremark 4.78% Target 4.913% Home Depot 8.57% Walgreen (NASDAQ: WBA ) 5.69% Home Depot 4.93% Walgreen 5.041% Kroger (NYSE: KR ) 4.43% Whole Foods (NASDAQ: WFM ) 1.47% Kroger 5.274% Whole Foods 2.71% Data from Van Eck and Invesco Next, since the top ten heaviest weighted companies affect the overall performance of a fund, the funds ten heaviest weightings should be compared. The bar charts below, demonstrates that PMR’s top ten heaviest weighted holdings are pretty much evenly distributed, and slightly biased towards Consumer Staples at about 56.253% of those top ten. It should also be noted that about 46.54% of the fund’s total holdings are concentrated in the top ten. Data from Invesco The next table demonstrates that RTH’s top ten heaviest weighted holdings are not as evenly distributed as PMR and has a Consumer Discretionary bias at 54.85% of the top ten. Further a large portion of that is concentrated in the top two holdings Amazon (NASDAQ: AMZN ) and Home Depot , accounting for 33.06% of the top ten and almost 22% of the funds entire holdings. Lastly, 65.63% of RTH’s total holdings are concentrated in those top ten holdings. Data from Van Eck Hence, it seems that RTH has a slightly more bias towards Consumer Cyclicals than PMR and is skewed towards its heaviest weighted holdings (as of September 18), and then towards two of those top ten. On the other hand, PMR has a more even distribution of its top ten holdings and those top ten holdings account for less than half of the portfolio’s total holdings. Lastly, a few ETF technical items need to be compared. Fund and Inception Date 30 day SEC Yield Shares Outstanding Net Assets Net Expense Ratio Price/ Earnings 3 year Beta Open Option Interest RTH 12/20/2011 1.19% (annual Distributions) 2,671,531 $204.2 million 0.35% capped until 2/1/2016 20.00 0.88 Yes PMR 10/26/2005 0.70% 650,000 $25.103 million 0.63% 20.83 0.89 Yes Data from Invesco and VanEck The entire point of the matter is this: for a disciplined investor with limited funds, building a well-diversified concise portfolio of ETFs with the long term in mind, there’s no need to allocate towards Consumer Cyclicals and Non-Cyclicals separately. Instead, by selecting one of the available funds with a blend of Consumer Cyclicals and Non-Cyclical, will result in a far more efficient way to invest, and by needing to allocate into one blended fund instead of two separate funds will save on management fees and commissions over the long term. 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. Additional disclosure: CFDs, spreadbetting and FX can result in losses exceeding your initial deposit. They are not suitable for everyone, so please ensure you understand the risks. Seek independent financial advice if necessary. Nothing in this article should be considered a personal recommendation. It does not account for your personal circumstances or appetite for risk.

The SPDR Dow Jones Industrial Average ETF: Crash Course

Summary The component of the Dow Industrials, as a group, has a proven successful investment over a century. Optimizing long term returns may be achieved by dollar cost averaging and dividend reinvestments. A steep stock market selloff will be an opportunity for those just entering into equity investing. Equity markets are hardly predictable. At times they’ll relentlessly trend upward, fundamentals notwithstanding. At other times they’ll cascade downward like an avalanche, trashing every investor who tries to call a bottom. In the short term, price fluctuations border on chaotic. However, if an investor takes a moment to stand back and look at equity market behavior over many, many decades, it’s sure to boost confidence. Here’s a price history of the Dow Jones Industrial Average (DJIA) from 1900 until August of 2015. Only a very few of the many notable historic, economic, national and global events are highlighted. There are numerous recessions of varying degrees, panics, wars, market crashes. There simply isn’t enough room to point out every headline event which had occurred over 115 years. Not highlighted are dozens of revolutions, coups, cold war standoffs, massive above ground thermo-nuclear tests and unimaginable natural disasters. The Dow simply shrugged it all off. (click to enlarge) Depending on your age, you might imagine investing in the Dow Jones Industrial Average when you were just starting out. To put a little icing on the cake, suppose further you’ve reinvested all your dividends. There are several “Dow Jones Return Calculators” which may be found with a little browsing. A few example returns are noted in the table below. Time Period Return (Inflation adjusted) Annualized 1960 – 2014 2069.783% 5.754% 1970 1608.424% 6.510% 1983 1317.406% 8.639% 1987 511.084% 6.678% 2002 98.870% 5.431% 2009 84.618 10.759% Calculator at “Don’t Quit Your day Job”.net The point being that in spite of wars, recessions, disasters and market debacles, a consistent, steady and disciplined approach to investing is a proven road towards building a substantial nest egg. To be sure, the road is not paved smooth. However, as long as the investor sets a minimum monthly or quarterly allocation, called dollar cost averaging, and reinvests the dividends, the end result will be well worth the effort. New investors are fortunate because it hasn’t been until relatively recently when an individual investor was able to invest in an entire index, let alone with deeply discount commissions and fractional shares. ‘Back in the day’ commissions may have cost upwards of $150.00 for a small ’round-lot’. ‘Odd-lots’, (less than 100 shares) or fractional shares were handled by specialized brokerage houses for an additional fee, of course. Those days are long gone! Now, with deeply discounted commissions and a technology with which round lots, odd lots, fractional shares are traded with a single mouse click, the door is open to everyone with the ambition to go-it-alone. Further, automatic purchases and automatic dividend reinvestments are pretty much a standard option and make the entire process ‘forget proof’. It should be noted that the Dow Jones Industrial Average was created in 1896 in order to provide investors with a reasonably accurate measure of the overall market direction and it served well for nearly a century. There are only 30 members of ‘the Dow’ industrials and although it’s the market number that catches everyone’s ear, it is no longer the very best indication of equity market ups and downs. However, what it still does represent is an exclusive club of well-established blue chip American companies. It is the ideal venue for those just entering the market that might yet to have gained the experience and understanding of market analysis or the implications of macroeconomic data. In other words, an investor may start with very little experience or knowledge with the Dow. In fact, there is a straight forward, plain vanilla Exchange Traded Fund (ETF) offered by State Street Global Advisors : the SPDR Dow Jones Industrial Average ETF (NYSEARCA: DIA ). DIA sometimes called the ‘Dow Diamonds’: … seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Dow Jones Industrial Average… The Dow Jones Industrial Average (DJIA) is a price weighted average. This means that the price of each component is added up and then divided by the number of components. Now, to be sure, changes were made as time went by and companies were removed or added as their relevance to the economy changed. In order to preserve the continuity of the average, the Dow divisor must be adjusted along with new components. The current divisor is 0.14967727343149. Indeed, the sum of the prices of each component as of the close of trading on Friday, September 4th works out to 2410.16. Dividing that sum by the divisor results in: (2410.16)/ (0.14967727343149) = 16,102.386; precisely Friday’s closing average! According to the prospectus the weight of each stock in the fund’s portfolio ‘substantially corresponds’ to the weight of each Dow component; the fund distributes dividends monthly. The fund itself first traded in January of 1998. Its Gross Expense ratio is low, at 0.17%. The fund notes 31 holdings, the Dow 30 plus a cash position (as do most funds). It might seem frivolous to the experienced investor, but for the sake of completeness each component is tabled below and since price matters in this average, the September 4th closing price is included. Name Close, 9-4-2015 Name Close, 9-4-2015 Name Close, 9-4-2015 Goldman Sachs (NYSE: GS ) $108.38 McDonald’s (NYSE: MCD ) $94.85 JP Morgan Chase JPM $61.50 IBM (NYSE: IBM ) $143.70 Johnson & Johnson (NYSE: JNJ ) $91.13 Merck (NYSE: MRK ) $51.59 3M (NYSE: MMM ) $139.84 United Technologies (NYSE: UTX ) $90.68 Du Pont (NYSE: DD ) $48.60 Boeing (NYSE: BA ) $129.76 Chevron (NYSE: CVX ) $76.67 Verizon (NYSE: VZ ) $44.82 Home Depot (NYSE: HD ) $114.42 American Express (NYSE: AXP ) $74.08 Microsoft (MST) $42.61 UnitedHealth (NYSE: UNH ) $112.36 Caterpillar (NYSE: CAT ) $73.10 Coca-Cola (NYSE: KO ) $38.52 Nike (NYSE: NKE ) $109.69 Exxon Mobil (NYSE: XOM ) $72.46 Pfizer (NYSE: PFE ) $31.37 Apple (NASDAQ: AAPL ) $109.42 Visa (NYSE: V ) $69.16 Intel (NASDAQ: INTC ) $28.52 Disney (NYSE: DIS ) $100.97 Proctor & Gamble (NYSE: PG ) $68.76 Cisco (NASDAQ: CSCO ) $25.52 Travelers (NYSE: TRV ) $97.76 Wal-Mart (NYSE: WMT ) $63.89 General Electric (NYSE: GE ) $24.00 Closing Prices Dow Components, September 4th CNNMoney Since this is a price weighted average, it’s interesting to see at a glance heaviest to least weighted by price in the chart below. (click to enlarge) ( Data from State Street Global Advisors) It’s also worth noting that the DJIA yield is 2.69%, the fund yield is 2.48% and the fund yield less expenses is 2.46%. Since its inception in January of 1998, the fund has an annualized yield of 7.08%. As mentioned above, the fund closely replicates the DJIA; hence the sector allocation of the fund demonstrated in the chart below is nearly identical to the sector allocation of the DJIA. The fund’s net assets are approximately $11 billion. The current index P/E is 15.44, about average and the price of the index is 10.15 times its cash flow. The ETF is currently trading at a discount to its Net Asset Value; i.e., the ETF market cap is slightly less than the Net Asset Value (NAV) of its holdings. The key point to keep in mind is that the Dow Jones Industrial Average no longer serves as the ‘must have market indicator’ but it does reflect the essential composition of the U.S. economy by premier U.S. companies in each market sector. Recently, equity markets have been unraveling because of uncertainty in global growth expectation. For those who, in the course of the day might happen to catch a word about the “Dow Industrials” having lost some frightening number of ‘points’, and hearing market pundits casting dire warnings about days to come, then that should serve as a signal that this is the day to start investing for the future. 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. Additional disclosure: CFDs, spreadbetting and FX can result in losses exceeding your initial deposit. They are not suitable for everyone, so please ensure you understand the risks. Seek independent financial advice if necessary. Nothing in this article should be considered a personal recommendation. It does not account for your personal circumstances or appetite for risk.

Does X Mark The Spot?

Heavily weighted towards cyclically sensitive sectors. The fund has holdings in top Asia-Pacific companies, excluding Japan. The exclusion of the Japanese economy doesn’t seem to serve any purpose. From its recovery after an ill-conceived, devastating global conflict, Japan underwent a complete restructuring under the leadership of Prime Minister Hayato Ikeda in the 1950s. The constitution was rewritten and modernized, heavy industry and infrastructure was reconstructed, bank regulations were eased and protectionist policies were instituted in order to focus on rebuilding the economy, organically. By the 1960s, referred to by economist as Japan’s ‘golden 60s’, the economy took off and continue to expand, from about $91 billion in 1965 to well over an astonishing $1 trillion by 1985. However, as often happens when left unchecked, growth became unsustainable leading to an asset bubble, which collapsed in 1989. For the next 25 years the economy was trapped in deflationary stagflation, during which time, plan after plan failed to re-inflate the economy. During this same period, the People’s Republic of China was in the process of transitioning from a communist agrarian economy to a more global free market industrial economy with great success. Other countries in the region benefited from the commodity demand generated; Australia, India, Korea, Taiwan, Singapore, India and New Zealand, to name a few. Indeed, Japan still plays a leading role on the Asia Pacific stage, but is no longer the sole regional super-economy. In our present time the Asia-Pacific region has developed into an astonishingly productive and efficient contributor to the entire global economy, with several regional trillion dollar economies. So the question becomes, how well do the Asian Pacific funds perform when Japan is removed from the equation? First, using the Seeking Alpha ETF Hub, and filtering Global/Intl Equities by positive one-year performance results with several ‘ex-Japan’ funds. Excluding ‘specialized’ funds, like ‘Ultras’, ‘Small Cap’, ‘Enhanced’ and the like leaves a few plain vanilla, Asia ex-Japan funds summarized in the table below. ( Data from respective fund websites ) In this category, the Deutsche X-Tracker MSCI Asia Pacific ex Japan Hedged EquityETF ( DBAP ) , as the name suggests includes Asia Pacific economies, excluding Japan. Although hedged, this does not entirely eliminate currency risk, but will dampen currency volatility. (Data from X-Trackers) The fund is most heavily weighted in Financials, 30%, followed by Information Technology, 25%; Industrials, 6%; Materials, 5%; Telecom Services, 4%; Consumer Discretionary, 5%; Consumer Staples, 4%; Energy, 4%; Utilities, 3% and Healthcare at 13%. (Data from X-Trackers) It’s also interesting to note the heaviest sector weightings by country. Australia has the heaviest weightings in Consumer Staples, Financials, Health Care and Materials. China holds the heaviest weightings in Energy, Industrials, Telecom, and Utilities. Hong Kong leads the way in Consumer Discretionary and Korea weights most in the IT sector. This is important to note. China and Australia are major trade partners. Slowing demand in China means a slower Australian economy. Australia has its heaviest weightings are mostly defensive with just one very cyclical sector, Materials. (Data from X-Trackers) At this point, a few words need to be said for the trade dynamic in the region. Japan’s major export partners in the region are China, South Korea, Thailand, Hong Kong, Indonesia, Australia, Singapore and Malaysia. Top export products include Cars, Vehicle Parts, Industrial Printers, Specialized Machinery, Construction Equipment and numerous other industrial products. Hence, by omitting Japan, a major industrial manufacturer, supplier and regional economic contributor, that is to say, a potential major contributor to the fund’s performance is omitted. Excluding the Asia-Pacific region, Japan’s second largest import partner is the United States. Even a slow US economy will conduct sizable trade with Japan, particularly in durable goods. Hence, by omitting Japanese industry from the fund, a major factor is omitted. (It should be noted that other non-Asia-Pacific top export partners include Germany, Mexico, Russia, Canada and the U.K.). (click to enlarge) (Data from OEC) Japan is an integral part of the Asia-Pacific region. Even if the Japanese economy is excluded, its presence implicitly impacts the region, hence the fund, to some extent. China, Australia, Singapore, Hong Kong, New Zealand, South Korea and Indonesia, are developed or recently emerged economies. So excluding Japan does not make this an ’emerging market’ fund, nor can it be really be considered a ‘regional economy’ fund without Japan. The fund seems to be structured on the premise that Japan is the leading economy in the region, whose metrics overwhelm the other regional economies. However, by any measure, Japan fits right in with the locals. The point being is that when compared to its regional neighbors, there is nothing overly exceptional nor detracting about the Japanese economy which dominates the region, necessitating its exclusion. (click to enlarge) The fund trades in a rather strong premium to NAV range: mostly 0.5% to 1.0% and at times as much as 1.5% to 2.0% of NAV, rarely trading at a discount to NAV. Also, management fees are slightly on the high side with a net expense ratio of 0.60%. The fund has been trading since October of 2013. Naturally, before making any investment, it’s always worth reading the fund’s prospectus . 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. Additional disclosure: “CFDs, spread betting and FX can result in losses exceeding your initial deposit. They are not suitable for everyone, so please ensure you understand the risks. Seek independent financial advice if necessary. Nothing in this article should be considered a personal recommendation. It does not account for your personal circumstances or appetite for risk.”