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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.

Creating Wealth For The Average Joe – An Investment Plan And Model Portfolio

Summary The problems of the $10,000 chart. A plan to micro-invest. Results using three broad market ETFs: The Average Joe Broad Market Portfolio. We’ve all seen the brochures and charts. Almost every ETF, mutual fund, and even portfolios (mock or real) on this website and others show the historical evidence of where we would be today if we had invested $10,000 at some point in the past with whatever financial investment the perpetrators are shilling at the moment. To make matters worse, quite often the comparison is made to one of the large indexes. This is not the real world. In the real world, there are expenses and more often than not, resources far less than $10,000 to invest in any particular method or investment. What we need is a real-world comparison that allows the average Joe know what the “true” benefits of a particular method may be. To that end, I introduce the Average Joe baseline comparison portfolio. This portfolio and methodology can be used by this viewing audience to answer those questions and show the readers that even small investors can create a plan that will provide them with wealth in the long run. Investing in small amounts — the micro-investment plan for the Average Joe The first part of any investment plan is coming up with the money. Most internet-based brokerages allow accounts with as little as $500.00 to open. My first assumption is that most people would be able to justify this level of investment. The second assumption is that people would be able to save and add small amounts each week to keep adding to this investment. For this part of the plan, add small amounts each week and slowly increase these amounts. Learning to save along the way with small incremental jumps will become easier with routine and time. The amounts will start out small, just $5.00 a week, and increase a dollar per week each year as they become accustomed to the savings routine. As time progresses, the amount per week will increase in increments. First jump will be to a $2/year per week jump, then $4, then $6. This is how the fund inflow will look for the first six years: Year Amount Yearly total Cumulative Total Initial $500 $500 1 $5 per wk $260 $760 2 $6 per wk $312 $1072 3 $7 per wk $364 $1436 4 $8 per wk $416 $1852 5 $9 per wk $468 $2320 6 $11 per wk $572 $2892 This continues with increase in weekly amounts every year as follows: Years Annual Increase Weekly Investment Amount Invested Cumulative Amount 1-5 $1 per wk $5-$9 $2320 $2820 6-10 $2 per wk $11-$19 $3900 $6720 11-15 $4 per wk $23-$39 $8060 $14780 16-20 $6 per wk $45-$69 14820 $29600 21-25 $8 per wk $77-$109 24180 $53780 Market representation A lot has been written on the relative merits of the big index funds. But the bottom line is that these funds have increased in value over a long-term span. They are not for the faint of heart (last week for instance) or for the typical trader. Sticking with the market has proven to be the way to go in the past. It is with this concept in mind that I chose the three large funds that represent the S&P 500 (NYSEARCA: SPY ), the NASDAQ (NASDAQ: QQQ ) and the Dow Jones Industrial Avg. (NYSEARCA: DIA ) to test out the real world gains offered by following the Average Joe investment method outlined above. Timeframe and investment rules SPY has been around since early 1993. DIA started in early 1998 and QQQ started in Q1 of 1999. So for this group, I chose a start date of January 1, 2000. I started a mock new fund every January 1 with the same three funds. I continued with each portfolio through the present time and re-invested all dividends. A Buy and Hold/DCA strategy was employed for the portfolios. The initial investment of $500 usually allowed an investment in all three ETFs to start. The investment strategy then allowed for purchase of additional shares as they could be afforded with the input and dividends, rotating the investment through SPY, QQQ and DIA (in that order). In cases where a difference in the number of shares purchased initially in each fund occurred, shares of the three funds were equalized before beginning the plan laid out in the chart below. As funds became available through the input of cash and dividends collected, shares in each fund were increased per the following plan: 1 purchase of 1 share, 2 purchases of 2 shares, 4 purchases of 4 shares, 8 purchases of 8 shares, etc. A retail commission of $7.00 per transaction was applied to all purchases. Current positions (shares) Fund Start Shares- SPY 8/24/15 Value Shares-QQQ 8/24/15 Value Shares-DIA 8/24/15 Value Cash on Hand Total Value 1/1/00 54 $10,758.96 55 $5,809.10 46 $7,648.42 $1,201.08 $25,417.56 1/1/01 46 $ 9,165.04 46 $4,858.52 46 $7,648.42 $ 313.11 $21,985.09 1/1/02 38 $ 7,571.12 38 $4,013.56 38 $6,318.26 $ 465.20 $18,368.14 1/1/03 39 $ 7,770.36 31 $3,274.22 31 $5,154.37 $ 101.40 $16,300.35 1/1/04 31 $ 6,176.44 23 $2,429.26 23 $3,824.21 $ 455.68 $12,885.59 1/1/05 23 $ 4,582.52 23 $2,429.26 19 $3,159.13 $ 498.35 $10,669.26 1/1/06 19 $ 3,785.56 19 $2,006.78 15 $2,494.05 $ 329.73 $ 8,616.12 1/1/07 15 $ 2,988.60 15 $1,584.30 11 $1,828.97 $ 634.48 $ 7,036.35 1/1/08 11 $ 2,191.64 11 $1,161.82 11 $1,828.97 $ 647.01 $ 5,829.44 1/1/09 11 $ 2,191.64 11 $1,161.82 7 $1,163.89 $ 519.69 $ 5,037.04 1/1/10 7 $ 1,394.68 7 $ 739.34 7 $1,163.89 $ 366.12 $ 3,664.03 1/1/11 7 $ 1,394.68 5 $ 528.10 5 $ 831.35 $ 24.84 $ 2,778.97 1/1/12 5 $ 996.20 5 $ 528.10 3 $ 498.81 $ 70.62 $ 2,093.73 1/1/13 4 $ 796.96 2 $ 211.24 2 $ 332.54 $ 150.61 $ 1,491.35 1/1/14 2 $ 398.48 2 $ 211.24 2 $ 332.54 $ 25.32 $ 967.58 1/1/15 1 $ 199.24 1 $ 105.62 1 $ 166.27 $ 164.47 $ 635.60 The gain or loss as well as other pertinent data on these funds is in the chart below. Fund Start Total $ Input Total Dividends Total Invested Gain/Loss Expenses Avg. Annual Expenses 1/1/00 $15,871.00 $2,006.55 $17,877.55 $7,540.01 $238.00 $15.11 1/1/01 $13,618.00 $1,650.44 $15,268.44 $6,716.65 $231.00 $15.66 1/1/02 $11,662.00 $1,375.10 $13,037.10 $5,331.04 $196.00 $14.25 1/1/03 $ 9,897.00 $1,204.07 $11,101.07 $5,199.28 $189.00 $14.82 1/1/04 $ 8,354.00 $ 914.52 $ 9,268.52 $3,617.07 $182.00 $15.49 1/1/05 $ 7,019.00 $ 721.47 $ 7,740.47 $2,928.79 $168.00 $15.63 1/1/06 $ 5,892.00 $ 558.19 $ 6,450.19 $2,165.93 $147.00 $15.08 1/1/07 $ 4,932.00 $ 425.41 $ 5,357.41 $1,678.94 $133.00 $15.20 1/1/08 $ 4,082.00 $ 328.14 $ 4,410.14 $1,419.30 $119.00 $15.35 1/1/09 $ 3,337.00 $ 273.66 $ 3,610.66 $1,426.38 $ 98.00 $14.52 1/1/10 $ 2,696.00 $ 184.04 $ 2,880.04 $ 783.99 $ 91.00 $15.83 1/1/11 $ 2,159.00 $ 118.80 $ 2,277.80 $ 501.17 $ 84.00 $17.68 1/1/12 $ 1,708.00 $ 78.07 $ 1,786.07 $ 307.66 $ 70.00 $18.67 1/1/13 $ 1,310.00 $ 41.44 $ 1,351.44 $ 139.91 $ 49.00 $17.82 1/1/14 $ 959.00 $ 17.36 $ 976.36 ($ 8.78) $ 42.00 $24.00 1/1/15 $ 665.00 $ 4.55 $ 669.55 ($ 33.95) $ 21.00 $28.00 As you can see, using this methodology, the Broad Market portfolios gain consistently except for the last two fund starts. Every other start since 2000 is profitable, averaging 7%-9% gains per year. The last two starts have obviously been hurt not only by the ongoing late August/early September topsy-turvy ride of the markets, but also by the heavy expense ratio seen at the early stages of this method. We now have a real-world comparison for the Average Joe to measure various other investments against: the Average Joe Broad Market Portfolio. 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: Long AAPL, IVR, PSEC, REM, ORC, LMLP, ECT, GOOD, SMHD, BDCL, MORL, CEFL, CYS, DVHL, ETV, GGE, and NSC

A $23 Billion Potential Shortfall For 27 Utilities With Nuclear Power Plants

According to Callan Investment Institute, underfunded decommissioning costs could amount to $23 billion from investor-owned utilities. The industry has already set aside $50 billion to fund specific trust funds designated exclusively for decommissioning expenses, mostly collected from ratepayers. While decommissioning costs have an upward sloping cost curve over time, utility contributions to NDTs have the opposite – a downward sloping trend line. A newsletter subscriber emailed me a question concerning the decommissioning cost for nuclear power operators, specifically what is Entergy (NYSE: ETR ) exposure to the costs to shut down and dismantle their nuclear power plants. ETR recently announced the closing of the nuclear plant in Vermont and there have been concerns about this cost. I thought this question warranted and deserved a bit of research and a response. An additional 26 publicly traded companies have similar exposure to various degrees. As part of the Nuclear Regulatory Commission commissioning and licensing of a power plant, the plant owners establish a trust fund, known as the Nuclear Decommissioning Trust, or NDT. The sole purpose of this trust fund is to provide funds for the cost to decommission the facility when that time comes. The owners contribute annually to the fund, in relationship to the percent ownership, based on projected costs and length of the license. The companies are the final backstop to shortfalls in funding to these trusts. The origin of the capital for fund contributions is from customer rate cases – in other words, NDT funding is part of our monthly electric bills. Owners are required to review annually and submit every two years to the NRC both the fund balance and cost estimates for decommissioning. The NRC provides a formula of costs for operators to compare with the balances on the NDT, or the companies can file site-specific cost projections for each facility. For more than a decade, Dodge and Phelps compiled nuclear power industry figures on trust fund balances, annual contributions and projected costs. In 2013, this annual study was transferred to Callan Investment Institute, a research and data firm. Their 2014 study can be found here . NDT sums are not small potatoes. As of the end of 2013, the fund balances for investor-owned utility’s NDT total $50.4 billion. While the funds value increased from $44.5 billion in 2012, annual contributions from both public and private owners decreased from $560 million in 2007 to $333 million in 2013. Investor-owned utilities are contributing 70% of their 2007 level while public owners like the TVA are contributing just 16% of their 2007 levels. However, costs for decommissioning are increasing and are up 44% since 2008. The total industry-wide decommissioning costs are estimated by Callan to be $80 billion. Below are tables outlining fund balances, annual contributions, and total estimated decommissioning costs from 2007 to present: Source: callan.com Source: callan.com Source: callan.com According to Callan cost projections, investor-owned utilities could have a current decommission funding shortfall of $23 billion, or an underfunding of 25%. Callan’s cost estimates are based on either the NRC approved rate per KW capacity as provided by the company or an industry-wide average of all decommissioning cost estimates at $798 per KW, whichever is higher. In many instances, companies use an estimate that is substantially below the industry average. Callan offers an interesting table by company. They produced the following table for the 27 investor-owned utilities with nuclear power plants, and includes average years remaining for their plant licenses; MW nuclear capacity across the company; total decommission costs, in millions, as offered by the company; the average decommission cost per KW; projected cost at either the industry average or the company cost, whichever is higher; company specific fund balance; the potential shortfall in total dollars; 2013 fund contribution; and the pro forma annual amount of the shortfall to make up the difference based on the average license expiration. (click to enlarge) To answer the immediate question concerning Entergy, according to the study, their NDT could be short by about $2 billion and to make up this difference over the average life remaining of their licenses, management should be setting aside $186 million a year rather than the $39 million currently. However, ETR is not alone in the study. The industry contributed $315 million in 2013 when Callan calculates the amount should be closer to $1.6 billion. Below are some shortfall numbers for the five largest nuclear power generators, Exelon (NYSE: EXC ), Duke Energy (NYSE: DUK ), Entergy , Dominion Resources (NYSE: D ), and NextEra (NYSE: NEE ). Source: callan.com According to Callan, EXC has potential net deficiencies of $7.7 billion including Constellation Energy; DUK has a potential net deficiency of $2.3 billion; ETR of $2.0 billion; D of $1.3 billion; and NEE has a potential surplus of $208 million. Combined, the largest five producers of nuclear power have a potential decommissioning deficit of $13.1 billion, or 57% of the projected total industry-wide. It is extremely difficult to calculate decommissioning costs for projects that not only span 15 to 20 years but also do not begin for an additional 10 to 15 years or more. There are currently three basic types of decommissioning with three distinct cost structures. A large portion of decommissioning budgets is directed to the cost of long-term storage of spent fuel, which in its own right is unsettled. Waste disposal can cost upwards of 30% of the entire decommissioning budget. It is easy to criticize the study’s methodology as being simplistic, but it has value for investors. The importance of the study is to bring awareness of the potential downside to the decommission process for certain utilities. For example, ETR could have a potential unfunded liability of $146 million a year, or about $2 billion. On a per share basis, this could represent about $0.44 to $0.60 a share in after tax earnings and at a valuation of a PE of 15, could equate to $6.50 to $9.00 a share. However, it is important to understand the timeframe for the realization of these potential shortfalls. The shortfall would be experienced towards the end of the decommissioning process. Using ETR as an example, with their average license expiration of 14 yrs. and a project life cycle of 10 to 20 yrs., the potential shortfall may not be material until 2050 to 2060. The industry will become more adept at projecting decommissioning costs and cost controls as these projects progress. As an operating cost, increasing NDT funding through rate relief may be an avenue in states where the regulatory environment is more favorable. There are currently 17 nuclear decommissioning projects in various stages. Costs associated with these range from several hundred million to $4.4 billion for the San Onofre facility in southern CA . The San Onofre facility begins its decommissioning process in 2016, and could take 20 years to complete. In 1996, Connecticut Haddam Neck nuclear facility began the decommissioning process with a budget of $720 million, but the process actually cost $1.2 billion. In an innovative approach Exelon transferred the operating license at its Zion 1 and 2 facilities to a third party for the decommission phase, and will take back the facility once it is completed. The NDT associated with the Zion plant started the decommission phase in 2010 with a balance of almost $800 million and it has been depleted to around $280 million as of Dec 2014. The decommissioning firm projects a surplus of $13 million in the NDT after completion in around 2020. According to documents from the state of Vermont, at present, Entergy’s NDT contains $642 million of the $1.24 billion in 2014 dollars that the Site Assessment Study believes could be required to fully decommission the Vermont Yankee site. Of immediate need is almost $400 million to begin the fuel storage process in 2016. However, decommissioning will not be completed until 2073. While incoming cash flow from customers’ bills ceases, the fund will continue to grow with higher interest income over the next 57 years. Utility investors should be aware of the fuel breakdown of each of their electric utilities. In turn, shareholders in utilities with nuclear power plants should feel comfortable with the potential higher costs associated with decommissioning. Personally, I am more concerned about the state of utilities over the next 10 years than in 2050 and beyond. While NDT exposure should be a factor in weighing the desirability of owning companies with nuclear power plants, it should not be the determining factor. Author’s Note: Please review disclosure in Author’s profile. Disclosure: The author is long D, ETR, EXC. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.