Tag Archives: brad-kenagy

Creating A Portfolio For Safe Retirement Income

Summary I searched through all ETFs and found six for safe income given the current environment. The portfolio I created generates safe income and has the potential for increasing income if interest rates rise. The six ETFs I found cover: U.S. Equities, International Equities, Bonds, Preferred Stocks and Cash. In this article, I will be creating a simple portfolio that balances steady income with safety for a retirement portfolio. The goal of the portfolio is to hold six ETFs to generate safe income with the potential for income to increase. U.S Equity: ProShares S&P 500 Dividend Aristocrats ETF (NYSEARCA: NOBL ) I chose NOBL because it only holds stocks from the S&P 500 (NYSEARCA: SPY ) that have increased their dividend for at least 25 consecutive years. In addition, what makes NOBL different from other dividend ETFs is that the fund equally weights its holdings, which reduces concentration risk. The chart below from the NOBL fact sheet shows that the dividend aristocrats index that NOBL tracks has outperformed the S&P 500 and done so with lower volatility. [Chart from NOBL fact sheet] International Equity: PowerShares S&P International Developed Low Volatility Portfolio ETF (NYSEARCA: IDLV ) I chose IDLV because it holds mainly large cap companies in other developed markets excluding the United States and overlays a low volatility strategy to select only the stocks with the lowest volatility. The following chart from ETFreplay shows that IDLV has underperformed the largest developed markets ETF, which is the iShares MSCI EAFE ETF (NYSEARCA: EFA ). However, as you can see IDLV has had much lower volatility than EFA and when volatility is factored in IDLV outperforms, which is shown in the table below. IDLV EFA Total Return 29.70% 35.50% Volatility 12.20% 15.20% Return/Volatility 2.43 2.34 [Chart from ETFreplay] (click to enlarge) Short-Term Corporate Bonds: Vanguard Short-Term Corporate Bond Index ETF (NASDAQ: VCSH ) I chose VCSH because the yields for investment grade corporate bonds are higher than corresponding yields on treasury bonds. I did not want to choose just any corporate bond fund; therefore, I decided to select a short-term fund because of the possibility of rising interest rates. The following chart shows a comparison between VCSH, the Vanguard Intermediate-Term Corporate Bond Index ETF (NASDAQ: VCIT ) and the Vanguard Long-Term Corporate Bond Index ETF (NASDAQ: VCLT ). The period I looked at was from February 2nd 2015, which was the low point in interest rates for the year, to June 10th, 2015, which was the high point in rates for the year. As expected VCLT performed the worst because it holds only long-dated corporate bond and VCSH performed the best because it holds only short-term bonds. (click to enlarge) [Chart from Google Finance] Floating Rate Preferred: PowerShares Variable Rate Preferred Portfolio ETF (NYSEARCA: VRP ) I chose to include VRP because of its 5% dividend yield and the fact that it has income upside potential during a rising rate environment. Like VCSH above, I compared VRP and PFF to each other during the rising rate period I described above. As you can see VRP outperformed PFF by just over 1%, which is not a large amount. PFF pays a dividend yield of 5.78%, which is higher than VRP at 5%, however, the 0.78% difference in yield does not make up entirely for the 1%+ in outperformance from VRP. With the upside potential in income during a rising rate environment, I expect VRP to be the superior choice. (click to enlarge) [Chart from Yahoo Finance] Covered Call ETF: Horizons S&P 500 Covered Call ETF (NYSEARCA: HSPX ) As part of my U.S. equity allocation, I chose to include HSPX to increase the income of the portfolio while maintaining income safety. I chose HSPX over the more popular PowerShares S&P 500 BuyWrite Portfolio ETF (NYSEARCA: PBP ) because HSPX pays a monthly dividend where PBP pays a quarterly dividend. HSPX writes out-of-the-money calls on the long positions it holds of all option eligible stocks within the S&P 500. The covered calls, along with dividend income received from individual stocks, makes the current yield based on the average dividend over the last twelve months to be 4.3%. In a declining market, covered call strategies are attractive because of the potential to capture all of the premiums from selling the calls. Cash: PIMCO Enhanced Short Maturity Strategy ETF (NYSEARCA: MINT ) My final selection was MINT because, for retirees, having cash or a cash substitute for an emergency or well-timed purchase of an income generating investment that is trading at depressed values is something to consider. For example, if a retired investor was holding cash during the financial crisis and an opportunity like the bottom of the financial crisis presented itself as a buying opportunity to dividend aristocrats that had been unjustly sold down with the rest of the market. The retired investor having cash available, would have been able to increase their income by buying an ETF with high quality companies at depressed prices. Those high-quality companies have been through ups and downs and still have paid increasing dividends for at least 25 straight years. Portfolio Overview I have provided an example of what the portfolio would look like if each category would be equally weighted. Since NOBL and HSPX both are U.S. equity funds, I split the 20% allocation between the two. Using this allocation, the portfolio yield would be 2.81%, which is not a lot, however it is higher than the rate on treasury bonds. The portfolio has the potential for increasing income in the form of increasing dividend payments from dividend aristocrats and from increasing coupon payments on short-term bonds and variable-rate preferred stocks. Weight Yield W*Y NOBL 10.00% 1.90% 0.19% IDLV 20.00% 3.11% 0.62% VCSH 20.00% 1.92% 0.38% VRP 20.00% 5.00% 1.00% HSPX 10.00% 4.30% 0.43% MINT 20.00% 0.94% 0.19% Portfolio Yield 2.81% Portfolio Composition Stocks 40.00% Bonds 20.00% Other 20.00% “Cash” 20.00% Closing Thoughts While the portfolio I created does not have a large yield, it has exposure to high quality U.S. companies with long a long history of dividend increases, international stocks with low volatility and short-term investment grade corporate bonds and variable rate preferred stocks, both of which should provide safety and increasing income during a rising rate environment. Looking back to my goal, I believe I have created a portfolio that generates safe income and has the potential for increasing income. Disclaimer : See here .

Health Insurers: If You Can’t Beat Them, Join Them

Summary I believe the iShares U.S. Healthcare Providers ETF is worth considering adding to portfolios. There are three growth drivers for the health insurance industry: Above Market Sales Growth, Potential Cost Controls and less competition. With little chance of Obamacare being significantly changed or replaced anytime soon, health insurers will continue to report record revenues for an extended period of time. In this article, I will be explaining why I believe the iShares U.S. Healthcare Providers ETF (NYSEARCA: IHF ) is worth considering, because IHF has a large exposure to health care insurers. The reason I am focusing on health care insurers is I recently received a letter from my insurer saying my health care insurance plan would canceled and thus I have to find new insurance. The new plan Regence BlueCross BlueShield suggested for me was the “cheapest” premium plan that the company offers, which is what I was looking for. I am a healthy 29 year old and I have not needed to go to the doctor for years, and only for minor items like a sinus infection etc, therefore a cheap plan is ideal for me. However, the new “cheap” plan costs 156% more [yes you read that correctly] than my current plan, and thus is the reason I started looking at IHF because of its large exposure to health insurers. If my wallet is going to be emptied by health insurers, I might as well invest in health insurance stocks to minimize the impact of the significantly higher premiums I would have to pay. This is a massive opportunity for insurers when they are able to cancel plans like mine and charge significantly higher rates to healthy individuals who do not use their health insurance or use it sparingly. Growth Drivers Driver #1: Above market sales growth Health Insurers make up just over 52% of the holdings of IHF and over the last five years IHF has had a total return of just over 155% compared to a nearly 91% total return for the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ). (click to enlarge) [Chart from dividendchannel.com] This outperformance is driven by the above market growth that health insurers have had over the last five years. The average sales growth for Aetna (NYSE: AET ), Anthem (NYSE: ANTM ), Cigna (NYSE: CI ), Humana (NYSE: HUM ) and United Health (NYSE: UNH ) over the last five years has been 10.76% compared to 6.64% for the average of all S&P 500 companies. When health insurers cancel plans like mine, and charge exorbitantly higher rates for new plans as well as continuing to raise rates for everyone else, it is easy to see that sales will continue to grow at a faster pace than the rest of the S&P 500. Driver #2: Prescription drug cost controls Recently Hilary Clinton announced her plan to try to control and lower the costs of prescription drugs. If prescription drug cost controls were to be put into place, health insurers would be the big winner in my opinion. If prescription drug costs are significantly reduced under the type of plan proposed, do you think health insurers would pass that cost savings to consumers? In my opinion there is no way that health insurers would pass these cost savings onto consumers through lower premiums. Therefore, if premiums remain the same and/or continue to grow and insurers have to pay less for prescription drugs their margins would expand significantly. Driver #3: Less competition With Aetna purchasing Humana and Anthem purchasing Cigna both within the last couple months, this will mean even less competition for health insurance at a time when more competition is what is needed. If both these mergers pass regulatory approval, consumers will not have as many choices when it comes to health insurance options. In a recent Forbes article, it quoted supporters of the deal saying: Aetna and Humana and supporters of the deal say the larger insurer would allow the plans to extract price cuts from doctors and hospitals, which would be a good thing. Yes, it would be a good thing if costs came down, but as I noted above, in no way do I believe that insurers would pass those costs savings onto customers through lower premiums. Closing Thoughts In closing, I believe the iShares U.S. Healthcare Providers ETF is worth considering adding to portfolios because of its 50%+ allocation to health insurers, which have strong tailwinds given that it is likely Obamacare is not going anywhere anytime soon. With significantly higher sales growth rates than the rest of the S&P 500, the potential for higher margins because of cost controls and less competition, it is easy to see that health insurers will continue to be highly profitable and a great option for those looking to offset premium increases. The statement from the Aetna CFO says it all: We grew operating revenue to a record quarterly level of over $15.1 billion, driven by higher premium yields and year-over-year growth in medical membership. – AET Transcript Disclaimer: See here .

Consider Adding Some CRAK To Your Portfolio.

Summary The Market Vectors Oil Refiners ETF launched this week is a compelling play in the energy sector. I conduct a review of the ETF itself and the opportunities & risks associated with the ETF. I believe CRAK is worth considering because of its strong performance in comparison to other energy segments. In this article, I will be reviewing the new Market Vectors Oil Refiners ETF (Pending: CRAK ), which launched yesterday. I believe investors should consider adding some CRAK to their portfolio because the refiners have been the lone bright spot over the last year when oil prices have collapsed. The following chart from the CRAK fund profile page shows that refining and marketing stocks are the only sub-segment of the energy sector (NYSEARCA: XLE ), which has posted a positive return over the last year. Crack Spread One of the most important things to consider when looking at refining stocks is to look at the crack spread. The crack spread is the difference between the cost purchasing the crude oil and the price of the products that the crude oil is refined or “cracked” into. I created the following chart using the ThinkorSwim platform that has the crack spread plotted over the last two years, as well as the performance of Valero (NYSE: VLO ), which is one of the largest holdings in CRAK. The chart shows that over the last two years Valero’s performance [Blue Line] has been highly correlated to the crack spread. (click to enlarge) [Chart from ThinkorSwim Platform] Opportunity The opportunity for refining stocks is promising because crack spreads are higher than a year ago, which will show up in the form of year/year earnings growth. In a troubled energy environment where oil companies/drillers etc cannot earnings, the refiners stand out above other energy segments. Using Valero as an example, you can see in the chart below for the last four quarters, EPS has been trending upward, even as oil prices had fallen to near $40, went back to $60 and are now back at $40. As long as the crack spread remains somewhat stable at these elevated levels, the refiners will continue to outperform the rest of the energy sector. (click to enlarge) Risks The primary risk of CRAK is that it is highly concentrated within its top 10 holdings. The top 10 holdings account for nearly 65% of the portfolio, therefore when considering CRAK investors should be comfortable with this fact and the underlying companies that are in the top 10 holdings. Second, another item to watch for is currency risk. As the following chart from the portfolio analytics section of the CRAK fund page shows, CRAK has a large international currency exposure. With nearly 50% of CRAK priced in foreign currencies investors who are also, bullish on the dollar could potentially pair a purchase of CRAK with the small-hedged position in the PowerShares DB USD Bull ETF (NYSEARCA: UUP ) or the WisdomTree Bloomberg U.S. Dollar Bullish ETF (NYSEARCA: USDU ) to mitigate the foreign currency risk. Closing Thoughts In closing, because CRAK just launched this week and I believe it should be added to investors watch lists for a period to make sure there is interest in the product. If there is adequate volume and CRAK attracts assets the refiners are a compelling choice when considering investing in energy because they have performed very well during this tough energy environment in comparison to other energy sector segments. Disclaimer: See here . 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. Share this article with a colleague