Tag Archives: alt-investing

Apple Teaches Another Lesson In ETF Weighting

Summary Apple’s stock price fell in response to disappointing numbers. Due to its large market capitalization, the company’s moves will affect sector ETFs, notably those that track the tech industry. Alternatively, investors can use ETFs that track equal-weight methodologies to diminish the effect AAPL has on a tech sector investment. By Todd Shriber & Tom Lydon Shares of Apple (NASDAQ: AAPL ) fell 4.3% Wednesday, and at one point during the session, the iPhone maker was lighter by $60 billion in market value, after the company “disappointed” Wall Street by reporting that fiscal third-quarter profit rose “slightly” to $10.7 billion from $7.74 billion on revenue of “just” $49.61 billion. Apple’s Wednesday woes are, predictably, having a dour effect on the exchange traded funds that feature heavy allocations to the iPad maker. For example, the Technology Select Sector SPDR ETF (NYSEARCA: XLK ), the largest technology ETF by assets, has an almost 18% weight to Apple, enough to have the fund trading lower by 1.5% today. XLK’s Wednesday decline, and those of rival technology ETFs with significant Apple weights, reminds investors of the potential dangers of owning a fund with large weights to just one or two stocks. “Apple is a top-10 holding in 98 equity ETFs according to S&P Capital IQ. Besides being the largest stock, ETFs tied to the S&P 500 index like Vanguard S&P 500 ETF (NYSEARCA: VOO ) and the Russell 1000 like the iShares Russell 1000 ETF (NYSEARCA: IWB ), the technology giant is more heavily weighted in popular tech-laden products,” according to S&P Capital IQ. The PowerShares QQQ Trust ETF (NASDAQ: QQQ ), the NASDAQ-100 (NDQ) tracking ETF, entered Wednesday with a roughly 14% weight to Apple, enough to send that ETF lower by more than 1%. The $2.9 billion iShares U.S. Technology ETF (NYSEARCA: IYW ) is perhaps the epitome of an “Apple ETF” with a 20.9% weight (as of July 21) to the stock. That big Apple weight was enough to drag IYW lower by almost 2% yesterday. As S&P Capital IQ notes, there are ways to maintain tech sector exposure via ETFs while mitigating Apple or any other single stock risk. The First Trust NASDAQ-100 Equal Weight Index ETF (NASDAQ: QQEW ) and the Direxion NASDAQ-100 Equal Weighted Index Shares ETF (NYSEARCA: QQQE ) are equal-weight alternatives to QQQ. No stock accounts for more than 1.2% of QQEW’s weight and QQQE had 1% weight to its constituents at the end of the second quarter, according to issuer data . Those ETFs lost about a third of a percent yesterday. The rub is that when Apple performs well, QQQE and QQEW will lag QQQ. Even with Wednesday’s slide, Apple is up more than 13% this year, helping QQQ to a 9% gain, better than double the returns of QQQE and QQEW. The $954.2 million Guggenheim S&P Equal Weight Technology ETF (NYSEARCA: RYT ) has a weight of less than 1.6% to Apple. That is less than the ETF’s weight to Facebook (NASDAQ: FB ), eBay (NASDAQ: EBAY ) and Visa (NYSE: V ). S&P Capital IQ has market weight ratings on QTEW and RYT. Direxion NASDAQ-100 Equal Weighted Index Shares ETF (click to enlarge) Tom Lydon’s clients own shares of Apple, Facebook and QQQ. Disclosure: I am/we are long QQQ, AAPL, FB. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Income ETFs, Funds And MLPs: Tide Going Out

Low interest rates, relentless central bank confidence pumps and a runaway investment sales machine have all served to herd income-searching investors into income-producing assets over the past 3 years. In the process, unit valuations that were already high in 2012 moved to outrageous by 2014. The trouble is that capital risk rises in lock step with price, even as income products have been sold to those who can least tolerate losses. The marketing mantra is that income/dividend paying securities are ‘defensive,’ ‘stable’ places to park savings. Just as in previous investment cycles, fund cos and issuers ramped up sales campaigns as prices rose, rolling out an ungodly barrage of artfully wrapped products. Sadly many customers who had bitten similar baits in 2005-08, lost heavily and swore off the risk-sellers for a few years after that. Then in the past couple of years as finance trolled for suckers, many hopefuls have been lured back in, just as the price cycle crested once more. Some of the most reckless financial advisers and firms (unfortunately, there’s lots of them) have been looking after their own sales targets by recommending that their customers borrow to “invest.” With loan rates so low, they argue it’s a no-brainer to use a lender’s money to increase buying power. In truth, the strategy is more typically a recipe for financial disaster. The fall out of this cycle is just starting to show as high yield debt, preferred shares and MLPs (Master Limited Partnerships) concentrated on the energy sector, have been selling off over the past 9 months. See: MLPs yield headaches for advisers who bought them for income. The capital tide is retreating. As usual it starts slowly at first; then all at once, as losses shock the hearts and minds of holders. See: Is this the beginning of the end for dividend funds? Dividend ETFs are on fire, and not in a good way. Exchange-traded funds that employ a variety of strategies to invest in dividend-paying stocks have been a no-brainer since the financial crisis, as income investors have confronted artificially low interest rates. But after years of inflows that swelled assets to $100 billion, dividend ETFs have seen an outflow of $2 billion this year.1 If that isn’t quite apocalyptic, it is scary, and if it keeps up, this will be the first year of outflows ever. The outflows aren’t from just one ETF or the result of one massive trade. It’s a slow and steady burn from most of the largest and most beloved dividend ETFs. (click to enlarge) When dividend products from the Big Three in ETFs – Vanguard, BlackRock, and State Street – are hurting, it shows that no product is safe when investors anticipate a big change in the markets. Not even dividend ETFs.

Get 7% Yield From Just Energy

Summary The company’s business model does not depend on commodity prices. Energy demand is quite inelastic, providing consistent returns for Just Energy. Strong cash flows can support the dividend going forward. Just Energy (NYSE: JE ) is a retailer of electricity, natural gas and green energy. It is headquartered in Canada, but has operations in the United States, Canada, and the U.K. Utility companies like Just Energy are usually shielded from commodity volatility. This enables them to deliver superior returns even when commodities underperform. Despite this characteristic, the shares slid 35% from its 2014 high to a price of $5.23 today. This is providing you with the opportunity to snatch up the shares at a yield of 7.4%. Of course, a higher yield often means that investors are apprehensive about the viability of future distributions. Today we are going to analyze whether you should share this concern. The Business Just Energy was able to grow its revenue by 11% and operating profit by 7% in FY 2015. This follows a trend of steady growth since 2012. The factor contributing to the stable growth is the company’s business model. The company essentially earns a margin on its “products,” much like a typical retailer. It purchases energy from suppliers, and then profits from the difference between the purchasing price and what customers are willing to pay. Hence, commodity fluctuations do not play a huge role in the company’s operation. Because demand for energy is relatively inelastic from a consumer’s perspective, Just Energy should be able to consistently deliver returns in the future. The Financials Currently the company has 146.6 million shares outstanding, which translates to roughly C$73 million in expected dividends annually. High cash flows are critical for dividend investors. In FY 2015, the company generated C$96 million from operations, meaning that the coverage ratio is 1.32x. This is fairly decent, but there are better news. The company’s working capital accounts increased by C$44 million in FY 2015, while this eroded operating cash flow for the year, typically the same changes will not occur next year, sometimes they can even be reversed. For example, in FY 2014, the working capital accounts decreased by C$46 million, resulting in an inflated operating cash flow; this year the opposite has occurred. I estimate that the long-run average cash flow from operations should be C$140 million when it is adjusted for working capital changes. This will comfortably cover the current level of distribution. If we turn our attention to capital expenditure, we will find a positive number for FY 2015. Of course, this is not the norm. What caused the “negative” capital expenditure is the sale of its water heater unit in 2014. The core capital expenditure was only C$43 million, which was amply covered by the operating cash flow. Conclusion Given Just Energy’s stable business model, the company should be able to generate consistent returns in the future. Due to its strong cash flow, it is unlikely that dividends will go away any time soon. If you are an income investor looking to add a long-term holding, Just Energy may be worth your consideration. 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.