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What Is In Store For Buyback ETFs Ahead?

Stocks with an increased buyback are usually investors’ favorites. With a low interest environment commanding most developed economies including the U.S., buybacks should surge and the related ETFs should beat out the broader market benchmark. But this did not happen in reality. In the last one year (as of May 3, 2016), buyback ETFs underperformed the S&P 500-based ETF SPY . During this frame, SPY lost 0.08% while buyback-oriented ETFs lost in the range of 6% to 7%. Let’s find out why. Buybacks lower the outstanding share count and thus increase earnings per share. Having said this, if companies are buying back their own shares at steep prices and accessing the debt market to finance that buyback, the move is less likely to be helpful, as indicted by Market Watch . After all, S&P 500 (ex-financials) companies’ cash position remained decent, but probably not great. Cash and short-term investments balance of those companies was $1.44 trillion at the end of Q4 (ended in January 2016), down 0.5% year over year. On a quarter-over-quarter basis, the figure was flat, as per FactSet. Of the nine sectors, seven recorded a year-over-year decline in their cash balances (Utilities sector was flat year over year). Moreover, the market was guilty of overvaluation concerns, forcing companies to repurchase their shares at higher prices than what they are actually worth. Probably this is why a waning momentum was seen in the buyback activity. Dollar-value share repurchases were $568.9 billion on a trailing 12-month basis (TTM), representing a 0.5% decline year over year and flat with Q3 (August-October), as per FactSet. In Q4 (November-January), dollar-value share repurchases were $136.6 billion, up 5.2% year over year but down 13.5% from Q3. The splurge on buyback has been the main driver of the market rally lately. If this activity cools down ahead, the broader market will likely feel the pain. Moreover, the Fed entered the policy tightening era in December 2015. Though the central bank is presently staying dovish on global growth issues, sooner or later the market will see further hikes in rates. And then, financing buybacks through debt would not be an easy task. So, investors should now be cautious while playing buyback ETFs. There are a couple of ETFs that focus on this niche strategy. PowerShares Buyback Achievers Portfolio (NYSEARCA: PKW ) is the most popular fund in the space, managing an asset base of $1.64 billion and trading in good volumes of 210,000 shares a day. PKW tracks the NASDAQ US BuyBack Achievers Index, which comprises companies that have repurchased 5% or more of their common stock in the trailing 12 months. The fund holds a basket of 232 stocks and charges 64 basis points as fees (see Total Market (U.S.) ETFs here ). Another buyback ETF SPDR S&P 500 Buyback ETF (NYSEARCA: SPYB ) tracks the performance of the top 102 stocks with the highest buyback ratio in the S&P 500 over the last 12 months. The fund charges 35 bps in fees. The fund has about $9.4 million in assets. In Conclusion Having said this, we would like to note that both the ETFs outperformed SPY in the last three months (as of May 3, 2016). So, it can be said that the languishing trend has recovered to some extent. Also, both SPYB and PKW have a decent relative strength index, below 50. This indicates these funds are yet to reach the overbought levels. The products can thus be played for a few more days, though with a strong stomach for risks. Original Post

One Size Fits All… If It’s Customized

Portfolio design comes in many flavors, but so do investors. Finding a sensible balance is job one in the pursuit of prudent financial advice. Yet for some folks the idea of keeping an open mind for customizing strategy to match an investor’s goals, risk tolerance and other factors reeks of treachery. There can only be one solution for everyone – all else is deceit. Or so some would have you believe. This biased worldview comes up a lot with the discussion of buy and hold, but the one-size-fits-all argument knows no bounds. The danger is that pre-emptively deciding how to manage assets for all investors is the equivalent of diagnosing illness and recommending treatment before meeting with the patient. Sound financial advice requires more nuance, of course, for two primary reasons: the future’s uncertain and the human species is afflicted with behavioral biases. In other words, a given investment strategy can be appropriate – or not – for different individuals. Consider the concept of buy and hold. By some accounts, it’s all you need to know. Stick your money in, say, the stock market and let the magic of time do the heavy lifting. Sensible? Perhaps. But it may be hazardous. The determining factor is the particulars of the investor for whom the advice is dispensed. Buy and hold – perhaps by focusing heavily if not exclusively on stocks via a handful of equity funds – may be eminently appropriate for a 25-year-old with a budding career, a saver’s mentality, and the behavioral discipline to focus on the long-run future. The same solution can be toxic, however for anyone with a time horizon of 10 years or less. Even for someone who’ll be investing for much longer, may run into trouble with buy and hold if he has a tendency to over-react to short-term events. In that case, buy and hold can be wildly inappropriate for an investor without the discipline to look through market crashes and bear markets. Ah, but that’s where a good financial advisor can help by keeping the client on the straight and narrow: Ignore the short-term volatility and stay focused on the long term. Fair enough, but it doesn’t always work. Some investors will bail at exactly the wrong time no matter how much hand-holding they receive. Deciding who’s vulnerable on that score can be tricky, but not impossible. Perhaps, then, a portfolio strategy with less risk – asset allocation – or the capacity to de-risk at times – some form of tactical – is more appropriate for certain individuals. The flip side of this equation is no less relevant. Forcing every client into a tactical asset allocation strategy simply because that’s your specialty (and/or it pays better for the advisor) is also misguided. Higher trading costs, taxable consequences and the inevitability of timing mistakes can and probably will take a bit out of total return over the long haul relative to buy and hold. The “price” of tactical can still be worthwhile for some folks, if the portfolio has a tamer risk profile. The point is that there’s no way to decide what’s appropriate without first understanding the client. Granted, a 25-year-old investor is more likely to benefit from buy and hold vs. a newly retired 65-year-old client. But there are exceptions and it’s essential to identify where those exceptions arise. The good news is that there’s an appropriate strategy for every client. The great strides in financial research and portfolio design capabilities via computers over the last several decades provide the raw material for building and maintaining portfolios that are suitable for any given client. Buy and hold may still be appropriate, but maybe not. The greatest strategy in the world is worthless if a client jump ships mid-way through the process. As such, the goal for managing money on behalf of individuals isn’t about identifying the strategy with the highest expected return or even the strongest risk-adjusted performance. Rather, the objective is to build a portfolio that’s likely to work for the client. That may or may not lead to a buy-and-hold strategy – or some variation thereof. Such talk is heresy in some corners. But matching portfolio design and management particulars to each client’s time horizon, goals, etc. – and behavioral traits – is the worst way to manage money… except when compared with the alternatives.

Millennials: Here’s Your Best 2016 Investment Portfolio

Congratulations! Here you are. A successful millennial. For the sake of argument, we are going to put you in the middle of this group, generally described as being born roughly between 1980 and 2000. We’ll stipulate that you are born in 1990, so graduated college in 2012 and are now four years into your working career. At 26 years of age, you have a long and bright working future ahead of you. You are clever enough to know that you should start investing now. At the same time, you are not all about money. You don’t want to be a slave to your investments, you want your investments to be a slave to you, and give you both the time and freedom to devote to the things that are important to you. Click to enlarge I’ll cut right to the chase. There are a ton of investment strategies from which you can choose. Here is the one I would suggest. First, open a brokerage account at Fidelity Investments. Second, buy these six ETFs, in the weightings shown: 45% – iShares Core S&P Total U.S. Stock Market ETF (NYSEARCA: ITOT ) 10% – iShares Core High Dividend ETF (NYSEARCA: HDV ) 30% – iShares Core MSCI EAFE ETF (NYSEARCA: IEFA ) 5% – iShares Core MSCI Emerging Markets ETF (NYSEARCA: IEMG ) 5% – iShares Core U.S. Aggregate Bond ETF (NYSEARCA: AGG ) 5% – iShares TIPS Bond ETF (NYSEARCA: TIP ) Third, set up a schedule to rebalance regularly back to these weightings. That’s it. We’re done. I told you I would keep this brief. You can simply stop right here and implement the plan that I suggest. I’m guessing, though, that you won’t. You’d like to know a little more. OK, then. Feel free to read as little or much of what comes next as you wish. I’ll share a few basic thoughts, and then provide some links to yet further reading if you so desire. What’s So Great About This Portfolio? Simplicity: Containing only six ETFs, this portfolio will be extremely simple to both maintain and track. However, simple does not mean simplistic. I’ll talk about this a little more in the “diversification” section below. Low Costs: The cost, or overhead, is extremely small. Simply put, the greater the expenses your portfolio incurs, the less that makes it into your pocket. If you follow the links to the ETFs I provided above, you will notice that they sport expense ratios of between .03% and .20%. At the allocations I suggest, I calculate that your overall weighted expense ratio comes out to .0835%. That’s right. About eight hundredths of one percent. The rest? Into your pockets, to compound and grow. Zero Commissions: This is an important one. Likely, you will want to set up a regular investment plan, investing small incremental amounts on a regular basis. While ETFs are a great investment vehicle, if you have to pay $8-10 for every transaction, you lose the benefits very quickly. The ETFs I suggest are included in the 70 iShares ETFs that Fidelity allows you to trade commission-free. Diversification: Within the portfolio, you will gain exposure to both domestic and foreign stocks (including a modest allocation to emerging markets), bonds, and TIPS (Treasury Inflation Protected Securities). The weightings I suggest are relatively aggressive; appropriate for someone in their mid-20s to approximately 30. At the same time, I am including an element of defensiveness in the portfolio by including a small weighting directed at quality, dividend-paying stocks, as well as bonds and TIPS. These selections will both generate a little income that you can reinvest over time as well as offer a measure of protection should the market experience a steep decline; allowing you to rebalance the portfolio. Background and Further Reading Finally, let me share a little background information regarding how I came to this specific recommendation, as well as links to some further reading. Late last year, as part of my work as a contributor for Seeking Alpha, I researched the 2016 investment outlooks of several respected investment houses. Using that research as a guide, I created The ETF Monkey 2016 Model Portfolio . Next, I set up and tracked three iterations of the portfolio: Vanguard , Fidelity , and Charles Schwab . While, as I will explain below, I chose to feature Fidelity, you could follow the basic principles set out in this article and set up your portfolio at either Vanguard or Charles Schwab. The key, of course, would be to select ETFs that you could trade commission-free in each case. When I set up the portfolio, I must admit that my initial bias was in favor of Vanguard. Vanguard is a legendary provider, and offers a large selection of ETFs with some of the most competitive expense ratios in the marketplace. However, as I reported in my Q1 update , the Fidelity implementation was actually the top performer of the three. This slight outperformance has continued as of the date I sat down to write this article. Therefore, I decided to use Fidelity as my provider of choice. Finally, here is a little more detail on some recent changes to the iShares Core S&P Total U.S. Stock Market ETF , the largest component of my recommended portfolio, as well as some thoughts on portfolio rebalancing . I hope this brief article has offered a helpful starting point. Feel free to drop your questions and comments below, and I will do my best to answer them. Disclosure: I am not a registered investment advisor or broker/dealer. Readers are cautioned that the material contained herein should be used solely for informational purposes, and are encouraged to consult with their financial and/or tax advisor respecting the applicability of this information to their personal circumstances. Investing involves risk, including the loss of principal. Readers are solely responsible for their own investment decisions.