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The WisdomTree Europe Dividend Growth ETF: Timing Is Everything

The fund is heavily weighted with best in class European companies. The fund is dividend weighted with a defensive bias. The poor performance seems to be a result of coming to market at the wrong time. Europe seems to have a split personality, at times somewhat fractious and recalcitrant and at other times cooperative and harmonious. The moribund Medieval Period was followed by a lively Renaissance. Centuries of religious wars were followed by an enlightened scientific revolution. In the 20th century, Europe engaged in decades of warfare not witnessed in all of human history. In the wake of that 20th century dark age, Europe determinedly embarked towards a second enlightenment. The basis for this hopeful new age is founded on equality, solidarity and prosperity, achieved through a unified economy. Europe has created an equitable, cooperative capitalism: carefully regulated and open. This new age has led to the creation of a sizable economy of well founded, well established global companies. An opportunity to participate in the potential growth of these companies may be had through the WisdomTree Europe Dividend Growth ETF (NYSEARCA: EUDG ). According to WisdomTree : … WisdomTree Europe Quality Dividend Growth Fund seeks to track the investment results of dividend-paying companies with growth characteristics in the European equity market … The tracking index is WisdomTree’s own proprietary index [DEFA]: … The Index is comprised of 300 companies from the eligible universe based on their combined ranking of growth and quality factors. The growth factor ranking is based on long-term earnings growth expectations, while the quality factor ranking is based on three year historical averages for return on equity and return on assets. Companies are weighted in the Index based on annual cash dividends paid. .. It seems that WisdomTree’s approach to dividend weighting results in a more conservative passive methodology than weighting by market price. An interesting description written by Mr. Jeremy D. Schwartz, titled “Dividends of a Dividend Approach ” , details the reasoning of the approach and the results. For example, it specifically takes into account, the importance of dividends in determining a stock’s price; the fact that dividends historically have provided the majority of the stock markets real return; dividends are an objective measure; dividends reflect management’s shareholder interest and lastly, the demand for income among baby boomers in retirement. The fund itself is a relative newcomer to the industry, incepted in May of 2014. If the fund is weighted by dividends and the quality of earnings, the top weightings should give a good indication of the risk to the investor. (click to enlarge) First it should be noted that the fund has about 200 holdings as of mid-October, however, just over 50% of the funds weighting is concentrated in its top holdings. There is something to point out in those top holdings. There seems to be a repetition of companies held. For example Roche Holdings ADRs on the OTC are assigned the symbol OTCQX:RHHBY . On the “Swiss-6” exchange, it’s ROG.VTX and on another Swiss exchange it’s Ro.SW. They all represent the same company and the same class of stock, hence Roche Holdings has a combined 8.31% weighting in the fund’s holdings. Similarly, Unilever is listed as UL on the NYSE, on the London exchange UNA, on the Amsterdam exchange as UNC as well as others. The point being that in the fund’s top holdings, Unilever holds a combined 3.98877% weighting and Roche 8.31% in the top fund’s holdings. By combining those ,means that the top 50% is really contained in the top 19 holdings, i.e., 9.5% of the fund. The top 50% of the fund is more heavily weighted in Consumer Staples, Health Care and Telecom Service than the entire fund. On the other hand, the top 50% is ‘lighter’ in Consumer Discretionary, Industrials, IT. Lastly the top half contains neither a Financial nor Material Sector allocation. It then appears that the more defensive sectors comprise the heaviest dividend weights. The more cyclical sectors are less weighted and more widely distributed among the fund’s 200 holdings. Below is a summary table of the top 50%, containing 19 companies with a relevant few metrics. Company Fund Weighting Yield Cash Flow Multiple Payout Ratio ROI/ROE Price/Earnings Price/Book Sector Roche [RHHBY] 8.31031% 3.06% 18.10 73.94% 20.07/48.00 23.37 10.96 Health Care British American Tobacco ( OTCPK:BTAFF ) 4.19366% 3.98% 14.71 46.50% 22.57/70.15 17.50 11.74 Consumer Non-Cyclical Anheuser-Busch (NYSE: BUD ) 4.02124% 3.11% 26.58 29.15% 10.25/19.29 19.38 3.77 Consumer Non-Cyclical Unilever [UL] 3.98877% 3.14% 17.37 41.40% 17.63/33.21 22.16 7.00 Consumer Non-Cyclical Novo Nordisk (NYSE: NVO ) 3.16913% 1.39% 21.09 41.30% 75.61/82.48 29.94 23.78 Health Care Bayer ( OTCPK:BAYRY ) 3.09927% 1.95% 14.14 53.35% 7.40/16.71 26.38 4.13 Health Care SAP (NYSE: SAP ) 2.35035% 1.79% 17.35 42.76% 11.82/16.66 23.46 3.47 IT Daimler ( OTCPK:DDAIF ) 2.32166% 3.41% 5.63 32.51% 6.82/17.81 9.62 1.98 Consumer Cyclical Diageo (NYSE: DEO ) 2.18663% 2.99% 15.88 59.43% 13.56/32.63 19.30 5.91 Consumer Non-Cyclical Telefonktiebolasget Ercsso [ERIC] 1.95709% 3.72% 13.59 109.29% 5.73/7.55 27.43 2.07 Telecom Service Inditex ( OTCPK:IDEXY ) 1.79386% 1.67% 26.14 29.56% 26.31/29.39 35.37 9.78 Consumer Cyclical Louis Vuitton ( OTCPK:LVMUY ) 1.73739% 1.92% 15.88 46.08% 9.29/12.71 24.76 3.02 Consumer Cyclical Hennes & Mauritz ( OTCPK:HNNMY ) 1.6948% 3.14% 16.43 *51.54% 41.57/44.71 23.82 9.98 Consumer Cyclical L’Oreal ( OTCPK:LRLCY ) 1.6825% 1.65% 23.28 *37.86% 11.80/12.90 31.27 3.99 Consumer Non-Cyclical Reckitt Benckiser ( OTCPK:RBGLY ) 1.66167% 2.14% 24.96 59.49% 16.66/24.90 28.23 6.90 Consumer Non-Cyclical ABB LTD (NYSE: ABB ) 1.62665% 3.12% 11.23 72.54% 9.54/15.73 16.94 2.90 Industrials Schneider Electric ( OTCPK:SBGSY ) 1.44748% 3.61% 11.19 *40.34% 6.20/9.03 17.64 1.50 Industrials Airbus Group ( OTCPK:EADSY ) 1.4196% 2.08% 9.04 *18.83% 5.61/32.83 16.54 7.94 Industrials Syngenta (NYSE: SYT ) 1.41046% 3.57% 14.77 *52.75% 10.39/15.68 20.92 3.42 Industrials Totals/Averages 50.07% 2.707368% 16.731 49.40% *estimated % of cash flow per share 17.30/28.55 22.84 22.84 The returns are anything but stellar, however, there’s an important reason for this. Returns 1 Month 3 Months 1 Year Since 5/7/2014 Inception WTEDG Index -2.87% -6.18% -6.28 -8.76 EUDG Fund -2.49% -6.56 -5.96 -9.21 The fund is not currency hedged. A comparison with the Euro vs the U.S. Dollar tells the story. (click to enlarge) The fund came to market precisely on the same day the Euro peaked in this time interval at $1.37 per Euro. From there it steadily trended lower to its current $1.12; just over an 18% decline. The fund closed its first day of trading at about $25.25. An 18.25% decline of the shares from that point works out to $20.64, just above its September 29 low of $20.05. Hence, when translated back to USD dollars, the value of the fund ‘shrank’ even though the top line companies continued to perform well. The currency translation is a very important point for the investor to keep in mind. When the European currencies weaken vs the U.S. Dollar, the NAV will decline, even if the companies in the fund are doing well . Hence, purchasing when the U.S. Dollar is strong is like purchasing the fund at a discount. Eventually, Europe will regain its economic footing and European currencies will appreciate against the U.S. Dollar, hence the potential for capital appreciation on a ‘dollar cost averaged’ investment. The same is true of European denominated dividends and distributions. The whole point of the matter is that for investors with risk capital, and the willingness to be patient while gradually accumulating a position knowing that the top 50% of the fund has an average yield of over 2.7% and the fund is defensively allocated, then it’s reasonable to assume that over a longer time horizon the future returns will outweigh current risk. The current poor returns are a matter of having a good idea, but extraordinarily bad timing.

What Lies Ahead For Dollar ETFs?

Although the Fed rate hike hearsay continues to dominate the headlines, investors haven’t really seen this speculation shift to huge gains for the U.S. dollar, at least not in the recent time frame. In fact, the greenback – as represented by the U.S. dollar Index – has lost its value in the last one month and five-day period (as of September 15, 2015). One of the reasons for this unexpected move was an extremely dour trading scene throughout August and the start of September. Maddening economic issues in China – a currency devaluation and a six-and-half-year low manufacturing data for August – took the global market in its grip, and crushed the global equities in the last one month. Yet the U.S. dollar has held firm in 2015 (so far), as many investors remain long-term bulls on the world’s reserve currency due to a recovering American economy. This was truer as the most developed and emerging nations are dragging their feet currently, leaving the U.S. as the lone star. The U.S. economy underwent an upward GDP revision for the second quarter of 2015, from 2.3% reported earlier to 3.7% upgraded later on strong domestic demand. If this was not enough, the unemployment rate dropped to 5.1% in August, the lowest since April 2008. This more-than-seven-year low unemployment rate should bolster the case for an imminent policy tightening. Additionally, average hourly wages rose 0.3% sequentially and 2.2% year over year. The average work week also nudged up to 34.6 from 34.5 in the prior and the year-earlier months. All these made September lift-off a heightened possibility that should have bolstered the greenback, but kept it range-bound due to global market rout. Can Greenback Gain Post Fed? Things are at a critical juncture at this moment. Two ETFs offering exposure to U.S. dollar (USD) against a basket of world currencies – PowerShares DB US Dollar Bullish Fund (NYSEARCA: UUP ) and WisdomTree Bloomberg U.S. Dollar Bullish Fund (NYSEARCA: USDU ) – are up 4.1% and 5.8% so far this year (as of September 15, 2015) but retreated about 1.3% and 0.2% in the last one month, respectively. While many may view the recent dip in the greenback as a setback, we believe that this fall led the U.S. dollar and the related ETFs toward the fair valuation. These dollar-related products surged from the latter part of last year due to the diverging monetary policies between the U.S. and other developed and some emerging markets. The U.S. wrapped up its QE measure late last year while Japan boosted its gigantic asset-buying program and the Euro zone initiated a QE launch in early 2015. This policy differential made the U.S. dollar a king among its peer currencies while other developed currencies started to lose out on economic stimuli. As a result, the U.S. dollar index surged over 13% in the last one year (as of September 14, 2015). Thus, a certain pull-back will now help the U.S. dollar to better prepare for a rally if the Fed hikes rates this week). And even if the Fed opts for a December lift-off or sometime in early 2016, the U.S. dollar should prevail in the coming days as inflows of ultra-cheap money in Europe, Japan and some emerging economies will continue to weaken their respective currencies against the greenback, which is still stronger. Which ETF is a Better Bet? Given this, investors could definitely play the U.S. dollar by considering either UUP or USDU. UUP looks to track the U.S. dollar against a basket of six world currencies – the euro (57.6%), Japanese yen (13.6%), British pound (11.9%), Canadian dollar (9.10%), Swedish krona (4.20%) and Swiss franc (3.60%). USDU tracks the U.S. dollar against a basket of 10 developed and emerging market currencies. It allocates higher to the Euro zone currency at 32.5%, closely followed by Japanese yen (19.25%) and Canadian dollar (11.21%). Other currencies like Mexican peso, British pound, Australian dollar, Swiss franc, South Korean won, Chinese yuan and Brazilian real receive single-digit allocation each in the fund’s basket. Since, UUP is mostly exposed to the developed economies’ currencies; things are less likely to improve post Fed tightening. On the other hand, USDU gives exposure to a broader basket consisting developed and emerging currencies. Notably, most of the emerging market currencies are tumbling presently and are expected to fall out of favor post-Fed tightening. This should give USDU a scope for outperformance over UUP. Bottom Line Having said this, we would like to note that any resumption in the greenback rally should not be as great as it was late last year. This is because the market has mostly priced in the favorable outcome of the impending Fed lift-off and protracted easing in other developed nations like the Euro zone and Japan and their effects on the exchange rate. Original Post

Tracking The Sequoia Fund – Q2 2015 Update

Summary For the second quarter of 2015, the fund was up 1.96% versus 0.28% for the S&P 500. Top 10 holdings (65.5% of the fund): Valeant Pharmaceuticals, Berkshire Hathaway, TJX Companies, O’Reilly Automotive, Fastenal, MasterCard, Precision Castparts, Mohawk Industries, IDEXX Laboratories, and Google. During the second quarter, the fund cut its position in Qinetiq Group and Novozymes A/S and trimmed its third largest holding, TJX Companies. Since its inception on 7/15/1970, an investment in the Sequoia Fund (MUTF: SEQUX ) has returned 14.61% annually versus 10.88% for the S&P 500. The fund is noted for its long-term value investing style, portfolio concentration, and outperforming in down years. For more background on the fund, you can check out my original article here . The fund noted in the second quarter that it doesn’t know which way the market is going and trying to predict its direction is futile. The fund continues to look for market-leading companies that earn high returns on capital, boast strong balance sheets and self-fund their growth. The fund also likes to invest alongside motivated, ethical management teams. With over 15% of the fund in cash, the fund has plenty dry powder for when opportunities arise. Valeant Pharmaceuticals (NYSE: VRX ) continues to be the largest position in the fund by far, accounting for nearly 29% of the fund. If you’re interested in learning Sequoia’s thought process for owning the stock, check out the investor day presentation from May, you can find the link here . Valeant continues to keep busy on the acquisition front and recently acquired the “female Viagra,” a new FDA approved drug called Addyi. Here’s the fund activity for the second quarter of 2015. New Stakes: None Stake Disposals: Qinetiq Group ( OTCPK:QNTQY ) is a British multinational defense technology company. The fund acquired 23 million shares back in 2010 for a roughly 1% stake in the portfolio. The ADR traded between $6 and $8 at the time. The fund maintained its position through 2013. During the fourth quarter of 2014, the fund sold over 43% of its position. Prices ranged from $11.50 to $14.75. In the annual report, the fund noted how it has been disappointed in the results of its European companies, including Qinetiq. The selling continued in the first quarter of 2015. The fund sold 27% of its position, just over 3.5 million shares. Prices ranged from $11 to $12.50. The job was finished in the second quarter of 2015 as the fund disposed of its remaining 9.4 million shares while prices traded between $11.25 and $15.00. Novozymes A/S ( OTCPK:NVZMY ) produces and sells industrial enzymes, microorganisms, and biopolymers worldwide. The fund bought just over 2 million shares in the second quarter of 2012 when prices ranges from $25.50 to $29.50. The fund likes Novozymes for its industrial enzymes, animal nutrition, and corn ethanol enzymes businesses. It estimates the company has a dominant market share in industrial enzymes and a 60% market share in corn ethanol enzymes. It also likes that there are high barriers of entry for these businesses due to the time, expertise, and resources needed to produce its products and operate efficiently. In the first quarter of 2015, the fund sold 221k shares, or 10.7% of its position, when prices ranged from $40 to $50. The fund sold its remaining stake in the second quarter of 2015. Prices ranged from $45.50 to $49.50. Stake Increases: None Stake Decreases: Rolls Royce ( OTCPK:RYCEY ) designs, develops, manufactures, and services integrated power systems worldwide. The company is known for its expertise in making engines for wide-body jets. The fund has been in Rolls Royce since 2007. It built up the position to over 12 million shares by the end of 2008. Since then it’s held, save very minor selling. Despite continuing to hold, the fund is very concerned over the position. While it admires its jet engine business, it questions the board of directors’ recent decisions to diversify into marine engine and power generation businesses. It’s also concerned the company is abandoning its Total Care service contract selling model which was very successful under the former CEO. As for the current CEO, John Rishton, the fund says, “… in our meetings with him, has shown minimal awareness of the returns on capital his acquisitions have generated.” The fund was selling in the second quarter, trimming the position by 437k shares when prices traded between $13.75 and $16.00. The stock is now trading below $12. Perrigo Company (NYSE: PRGO ) is a developer and manufacturer of over-the-counter consumer goods and pharmaceutical products. The fund picked up just over a half million shares in the third quarter of 2010. The stock traded between $55 and $66.50. In April of this year Mylan N.V. (NASDAQ: MYL ) made an unsolicited $29 billion bid for Perrigo. At the same time, Teva (NYSE: TEVA ) made a $40 billion offer for Mylan. That eventually fell through. Mylan has since upped its bid for Perrigo to $33 billion and then again to nearly $36 billion. Mylan shareholders recently approved the transaction and the company will be taking the deal directly to Perrigo shareholders. We’ll see what happens. The fund trimmed its Perrigo position by about 13% during the second quarter. Prices traded between $183 and $215 after Mylan’s original offer. TJX Companies (NYSE: TJX ) is a discount apparel and home furnishing retailer operating under the T.J.Maxx, Marshalls and HomeGoods brands. The fund has been in TJX since 2000, when it held nearly 7.9 million shares. The position was built up to over 15 million shares by the end of 2002. The fund steadily decreased its position between 2003 and 2007, and by 2008, it was down to 4.9 million shares. The fund added significantly in 2011, increased the position size from 5.1 million to 10.2 million shares. Prices ranged from $21.50 to $32.69 in 2011. The fund still holds 10.2 million shares and the position makes up 7.88% of the portfolio. Three quarters ago, the fund sold approximately 400k shares, or 4% of the position. It sold another 1% of its position last quarter. And the selling accelerated in the second quarter as the fund sold over 3.1 million shares at prices between $64 and $70. TJX is still a top three holding for the fund, but its percentage of the portfolio has gone from 8% to 5%. Kept Steady: Omnicom (NYSE: OMC ) , Precision Castparts (NYSE: PCP ), Compagnie Financiere Richemont SA ( OTCPK:CFRUY ) , Constellation Software ( OTCPK:CNSWF ), O’Reilly Automotive (NASDAQ: ORLY ) , Jacobs Engineering (NYSE: JEC ) , Canadian Natural Resources (NYSE: CNQ ) , Sirona Dental Systems (NASDAQ: SIRO ) , Berkshire Hathaway (NYSE: BRK.A ) (NYSE: BRK.B ) , Danaher (NYSE: DHR ) , EMCOR Group (NYSE: EME ) , Trimble Navigation (NASDAQ: TRMB ) , Mohawk Industries (NYSE: MHK ) , Expeditors International (NASDAQ: EXPD ) , Valeant Pharmaceuticals (VRX) , West Pharmaceuticals (NYSE: WST ) , Zoetis (NYSE: ZTS ) , Fastenal Company (NASDAQ: FAST ) , Praxair (NYSE: PX ) , IMI plc ( OTCQX:IMIAY ) , MasterCard (NYSE: MA ) , Brown & Brown (NYSE: BRO ) , Google (NASDAQ: GOOGL ) (NASDAQ: GOOG ) , Goldman Sachs (NYSE: GS ) , International Business Machines (NYSE: IBM ) , Waters Corporation (NYSE: WAT ) , Admiral Group ( OTCPK:AMIGY ) , Hiscox Ltd. ( OTC:HCXLY ), Verisk Analytics (NASDAQ: VRSK ) , Costco Wholesale (NASDAQ: COST ) , Tiffany & Co. (NYSE: TIF ) , Wal-Mart (NYSE: WMT ) , Croda International ( OTCPK:COIHY ) , Cabela’s (NYSE: CAB ), and IDEXX Laboratories (NASDAQ: IDXX ) saw no changes from the first quarter of 2015 to second quarter of 2015. Here’s a snapshot of the activity from the first quarter of 2015 to the second quarter of 2015: (click to enlarge) Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. Disclosure: I am/we are long GOOGL, OMC, FAST, WMT. (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.