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ALPS Adds New Twist To Equal-Weighted ETF Products

By DailyAlts Staff ALPS Holdings has been a leader in providing innovative investment products and customized solutions since its founding in 1985. On July 1, the firm added two new products to its repertoire: The ALPS Sector Leaders ETF (NYSEARCA: SLDR ) and the ALPS Sector Low Volatility ETF (NYSEARCA: SLOW ), both of which are equal-sector weighted, to avoid the loss of diversification benefits associated with over- or under-weighting particular sectors. Equal-Weighted Investing One of the major knocks against market capitalization-weighted indexes is that they inherently overweight overvalued stocks, and underweight undervalued stocks. In addition, they have a significant bias toward the largest companies in their respective universe. For instance, if the S&P 500 Index were equal-weighted, Apple would account for just 1/500 of the index’s total, as opposed to the roughly 4% it constitutes on a cap-weighted basis. Smart beta products provide an alternative approach to weighting investments. Most smart beta strategies use “factors” such as value, momentum, quality or low volatility to determine their investment weights, but a simpler approach is to weight all investments within an index or fund equally. Thus, equal weighting ends up avoiding the large-cap, or even mega-cap bias that many capitalization weighted indices have. The ALPS ETF Approach The new ALPS ETFs are part of the ALPS Factor Series. They’re “smart beta” products in that they select investments according to fundamental factors, including growth, quality, and low volatility. But investments held by the ETFs are weighted so that each business sector has equal representation – this mitigates the risk of being overly concentrated in an overheated sector, or being underweight an undervalued sector. “Rather than investing in pure market-cap indexes, which are usually tilted towards specific sectors, our equal sector weighting methodology may provide a better foundation for building diversified portfolios,” said portfolio manager Michael Akins, in a recent statement. “As a result, investors and advisors may achieve better risk adjusted returns.” Both ETFs will track S-Network indexes, which are designed to provide equal-weight exposure of selected investments across sectors and across securities. Both funds exclude REITs, and when evaluating sectors, combine the telecommunications sector with the information technology sector to form a single sector of the two. The ALPS Sector Leaders ETF will track the S-Network Sector Leaders Index – this index picks the 5 stocks from each of nine GICS sectors which, per the prospectus, demonstrate the best growth potential based on key characteristics associated with growth and quality, then equal weights all 45 stocks in the portfolio. The ALPS Sector Low Volatility ETF will track the S-Network Sector Low Volatility Index – this index picks the 5 stocks from each of nine GICS sectors that that have the lowest trailing twelve-month volatility as of the last trading day of November, then equal weights all 45 stocks in the portfolio. “It’s become clear that there’s an important place for the equal sector weighting strategies in most investment portfolios, particularly in volatile markets,” said Mr. Akins, who is also a Senior VP at ALPS Advisors and its Director of ETFs. “We’re excited at the prospect of applying the approach toward these historically proven factors and markets.” The management fee and expense ratio for each fund is 0.40%. For more information, visit alpsfunds.com .

Long The S&P 500 But Feeling A Little Uneasy? PUTX May Be Your Answer

Summary Investors in the broad U.S. equity market feeling uneasy or anticipating a correction may buy put options on the S&P 500 for protection. If the timing is right this “insurance” can be valuable. A better way to provide downside protection while also providing upside potential returns is by selling cash collateralized puts on the S&P 500. Investors in the broad U.S. equity market feeling uneasy or anticipating a correction may buy put options on the S&P 500 for protection. If the timing is right this “insurance” can be valuable. However, more often than not, we see the cost of this insurance, buying these puts, reduces returns. A better way to provide downside protection while also providing upside potential returns is by selling cash collateralized puts on the S&P 500. This is exactly the strategy of the recently launched ALPS Enhanced Put Write Strategy ETF (NYSEMKT: PUTX ). PUTX was spearheaded and developed by Rich Investment Solutions, which is a sub-adviser to the new fund. Kevin Rich, founder and CEO of Rich Investment Solutions, came from Deutsche Bank where he created and launched the commodity and currency-based ETFs: the PowerShares DB Commodity Index Tracking Fund (NYSEARCA: DBC ), the PowerShares DB Agriculture Fund (NYSEARCA: DBA ), the PowerShares DB U.S. Dollar Index Bullish Fund (NYSEARCA: UUP ), and the PowerShares DB U.S. Dollar Index Bearish Fund (NYSEARCA: UDN ), among others. In 2013 ALPS and Rich launched the first put writing ETF called the ALPS U.S. Equity High Volatility Put Write Index Fund (NYSEARCA: HVPW ). For many years CBOE has published two benchmark indices on at-the-money monthly put and call writing: the CBOE S&P 500 Put Write Index (PUT), and the CBOE S&P 500 BuyWrite Index (BXM). There have been ETFs in the market tracking BXM for some time but not on PUT. As PUT has shown historically superior returns compared to BXM, there is recent renewed interest and new products coming to market offering investors access via ETFs. With that in mind, we asked Kevin Rich a few questions about their new fund they just launched with ALPS. Dave Fry: Good to talk with you again Rich, can you please tell us a about PUTX? Kevin Rich: Thanks. PUTX is the first broad based put write strategy ETF. PUTX will sell one month at-the-money put options on the S&P 500 every month, or twelve times a year. It’s designed for investors looking for a defensive investment in the in the S&P 500. Selling monthly, at-the-money puts on the S&P 500 has historically generated 18% – 21% option premium per year. While this premium represents close to the maximum upside return of the PUTX strategy, it represents the possible downside protection over the course of a year in a declining market. Dave Fry: Interesting, so is it tracking the CBOE PUT index, which hypothetically sells puts monthly as I understand? Kevin Rich: No, PUTX is not a passive index tracking fund, so it will not replicate the PUT index or strategy. PUTX will look to sell options on a monthly basis not only on the SPX am settled options that the PUT index uses, but PUTX but will also be able to sell options on the SPX pm settled options or on the American style options on the S&P 500® Trust ETF (NYSEARCA: SPY ). PUTX should be able to pick up additional premium over the benchmark index by expanding the underlying options it uses. Dave Fry: Any other differences between PUTX and the CBOE PUT index? Kevin Rich: Yes, PUTX will not simply go long short term U.S. T-bill like the PUT index; rather PUTX will its cash in short duration investment grade fixed income securities. Further, PUTX will have the ability to bring in additional premium intra-month when we see there is an opportunity to roll some strikes up without taking material additional risk for the fund. Dave Fry: Not to harp on the comparison, but do you expect PUTX to track the CBOE PUT index closely? Kevin Rich: Yes, our expectation is we will have a high correlation and beta to the PUT index, but with the strategy differences described earlier we believe PUTX should be able to generate additional returns over the benchmark. Dave Fry: I would expect to have seen the BXM and PUT indices have identical returns over time but PUT has outperformed. Why do you feel selling puts offers and advantage over selling calls? Theoretically they should be the same, but there are 2 main reasons why PUT has outperformed. First, PUT sells ATM or slightly OTM of the money puts, while BXM sells ATM or slightly OTM calls. OTM puts not only provide some additional downside protection to a declining market (OTM calls by definition do not), they also tend to be priced more richly than OTM calls providing more premium. Second, PUT collateralizes its short put position by investing in TBills, while BXM covers its short call positions by investing in the S&P 500. As a result, PUT performance benefits from interest income while BXM only benefits from dividend income. Dave Fry: I know you have just launched, but who do you expect to use PUTX and where might it fit in a portfolio? Kevin Rich: Initially we would expect RIAs, funds and institutions familiar with the mechanics and benefits of broad based put writing strategies to adopt PUTX. Really any holder of the S&P 500 should consider diversifying into PUTX because of its defensive potential. Others may hold PUTX in their liquid alternative bucket. Advisers in the larger wire house firms will recognize the potential for PUTX to diversify and add returns over their existing buy write investments, so we expect pick up form these firms; some initially, and others over time. Dave Fry is founder and publisher of ETF Digest and has been covering U.S. and global ETFs since 2001. ETF Digest was named one of the most informative ETF websites in the 10th Annual Global ETF Awards. 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. I have no business relationship with any company whose stock is mentioned in this article.

SCHD: A Natural Core Holding For Dividend Growth Investors

Summary SCHD offers a great portfolio for dividend investors to build around. During previous recessions (and corrections) the dividend paying companies of the S&P 500 held up better than those without dividends. With the high P/E ratios climbing over the last few years we have seen the market become more dangerous. Dividend stocks underperformed the last few years as the market became more bullish (expensive). A more bullish market makes me prefer SCHD over SPY. The holdings offer some great stocks and exposures that create natural hedges to the macroeconomic challenges. Dividend growth stocks offer investors a solid combination of current income and growth, but some investors still don’t understand their power. One of my favorite ETFs for this sector is the Schwab U.S. Dividend Equity ETF (NYSEARCA: SCHD ). Some investors will point out that they can pick and choose which individual dividend stocks offer the most compelling investments and there is nothing wrong with that plan. If an investor feels comfortable picking out individual stocks, they are welcome to do so. However, every investor needs to remember to stay diversified and that is where a low fee dividend ETF comes in. The Schwab U.S. Dividend Equity ETF has an expense ratio of only .07, is free for trading in Schwab accounts, and offers investors a yield of 2.88%. That isn’t a great yield, but it isn’t bad when considering how many companies the ETF needs to provide solid diversification. In this area I favor enhanced indexing. SCHD doesn’t need to be the only dividend investment in the portfolio, but it provides a solid piece to build around. Dividend Growth Performance Investors looking at returns over the last few years may feel like SCHD is failing to keep up with the market, but that is a natural consequence of the market getting bullish on stocks that don’t pay dividends. I prefer stocks with solid dividends. While investors should consider total return, I see no reason to move away from dividend stocks. Instead, I see the recent underperformance as making them more attractive. Since early November 2011, right after SCHD was formed, it has delivered returns of 64.6% compared to the SPDR S&P 500 Trust ETF ( SPY) delivering 79.13%. That weakness for SCHD has been a reflection of the large dividend stocks underperforming the index as shown in the chart below. (click to enlarge) Dividend stocks are out of favor and appeared to be going out of favor since 2012. As the P/E ratios climb to dangerously high levels, I would rather invest in the companies that are paying out dividends and delivering a meaningful portion of their earnings. I would rather invest in industries with strong dividend payouts. During the weakest markets, these stocks have held up better. If this market overheats, then SCHD looks like a great option to survive the weakness. If investors want to avoid losing by selling out at the bottom of a market, they would be wise to hold an investment where they can focus on the dividends rather than the panic. Holdings The following chart shows the top holdings of the Schwab U.S. Dividend Equity ETF ranked by their values. (click to enlarge) What dividend growth investor doesn’t like these companies? In my opinion, this is precisely the kind of diversification a dividend investor should be seeking. Who doesn’t like Procter and Gamble (NYSE: PG )? Some analysts can get bearish on it or argue that it is over-valued, but the point of the diversification is to protect investors from overpaying for a few companies. Verizon Communications Inc. (NYSE: VZ ) is one of the high yielding stocks (4.66%) that concern me because the telecommunications industry looks far less attractive when Sprint (NYSE: S ) is waging a price war that could severely damage earnings throughout the industry. I love the yield, but I have tried holding companies that in highly competitive industries marked by excessive growth of capacity and battles to deliver the lowest price. That was the investment where I had my worst losses and it taught me to be very wary of price based competition with excessive building of capacity. Exxon Mobile Corp. (NYSE: XOM ) is a great play on the oil industry and either it or another major oil company belongs in every dividend growth investor’s portfolio. The beauty of oil is that crashing prices on oil mean more income for middle class and lower class consumers. Cheap oil means lower costs for transporting materials. Cheap oil is good for most of the portfolio. On the other hand, expensive oil is a headwind for many major companies and a tailwind for the big oil players like XOM. This should be a natural holding for dividend growth investors. Conclusion SCHD is a solid way for investors to get a core holding for their dividend growth portfolio. It offers an excellent selection of major dividend growth champions which allows investors to build their portfolio around those champions by overweighting the companies that best align with their risk tolerance and goals. 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: 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.