Tag Archives: conservative

3 Small-Cap Growth ETFs For Every Kind Of Investor

Small-cap growth stocks can lead to significant outperformance over time. While the selection of ETFs is comparatively thin, there are several choices for each kind of investor. Healthcare and financials tend to make up the largest positions in these ETFs. I’m primarily a value investor, meaning I look for stocks that the market hasn’t discovered yet or that are out of favor for some reason. So why own a small-cap growth ETF? My favorite asset class is small-cap stocks. That’s because it is where you are most likely to find interesting little companies that other people pass over. They may do something unusual or exotic, and that can scare away most investors. Most of all, however, it is where you are most likely to find the stocks that will outperform the market over the long term. That’s just pure common sense – small companies have much more room to grow to become large companies than large companies have to become, well, even larger. You need a small-cap growth ETF to balance out value with growth, because owning a broadly diversified portfolio is essential. Sector outperformance occurs all the time, and the more diversification you have, the better. If you don’t have diversification, then you risk seeing your overall portfolio fall more in bad times by having your money overly concentrated. A small-cap growth ETF also provides exposure to those fast-growing companies that deliver outsized returns. The small-cap sector can provide outsized returns as well, so the combination of stocks that are growing quickly and have the furthest to run because they are small is what gets me interested in this sector. I’ve been hunting down 3 small-cap growth ETFs to share with aggressive investors, conservative investors, and the average investor. So when it comes to small-cap ETFs, I really like to take my time finding the ones that may suit different investors. There are a lot of approaches to small-cap investing, but here are the three small-cap growth ETFs that I think might be most interesting to the average Joe investor, aggressive investor and conservative investor. The best small-cap growth ETF for the conservative investor is the First Trust Small Cap Growth AlphaDEX ETF (NYSEARCA: FYC ). This is a quasi-actively managed fund. It first narrows down the S&P SmallCap 600 Growth Index by selecting stocks based on growth factors including 3-, 6- and 12-month price appreciation, and sales to price and 1-year sales growth. Value stocks are screened out, and of the growth stocks that remain, the top 75% are selected, which leaves 188 stocks. Those are then divided into quintiles based on their growth rankings and the top-ranked quintiles receive a higher weight within the index. The stocks are equally weighted within each quintile. The index is reconstituted and rebalanced quarterly. The resulting sector breakdown is 28% healthcare, 18% consumer discretionary, 17% financials, 15% IT, 14% industrials, 3.5% consumer staples and a smattering of others. Its P/E ratio averages 23, and has returned a solid 16.64% in the past 3 years. With a beta of 1.06, that return has only come with 6% more volatility than the overall market. The risk-adjusted return is reflected in an impressive Sharpe Ratio of 1.24. The average Joe may consider the iShares Russell 2000 Growth ETF (NYSEARCA: IWO ) is a simple, no-frills ETF. It actually only has 1,158 holdings, in which the fund uses a representative sampling indexing approach, meaning it takes those companies that represent the entire index of 2,000 stocks. It has a reasonable average P/E ratio for a small-cap growth funds, at 26.82, and yet has a beta of only 0.95, meaning it is 5% less volatile than the market. Its yield is 0.68%, which is a pleasant bonus as far as far as I’m concerned since so few small-cap stocks have any yield. That yield covers the 0.25% expense ratio as well. The sector breakdown includes 28% healthcare, 1% energy, 12% industrials, 18% consumer discretionary, 23% IT, 7% financials and 3% consumer staples. Finally, aggressive investors should look at the SPDR S&P 600 Small Cap Growth ETF (NYSEARCA: SLYG ) , which is just about the best-performing fund in this asset class, including better than the S&P 500 index from before the financial crisis to the present. It is like the AlphaDEX fund, but it doesn’t trim out other stocks from the index. It keeps all the growth stocks. The fund holds 355 stocks, spread into 24% financials, 18% healthcare, 17% consumer discretionary, 17% IT, 4% materials, and a bit of other sectors in small amounts. It is the fact that it isn’t terribly diversified in terms of sector allocation that makes it more aggressive. This is somewhat balanced by the fact that the PE ratio is lower than the other choices, at 19.5. Its 1.19% yield pays for the 0.15% expense ratio, giving you that extra 100bps in yield to goose your returns. Its 3-year return is 19.54%, making its more aggressive approach pay off. 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.

Conservative Total Return Portfolio- Bends But Doesn’t Break!

Summary Post-market swoon, the CTR portfolio has strong income and good upside potential. HOG was sold for a profit, while SBGI and TUP are new additions. CTR (equal weighing) yields 3.7% with a 9.6x forward PE. I introduced the “Conservative Total Return” or CTR portfolio in August 2014 and try to provide monthly updates. The volatility of the market delayed writing by a week. However, after taken my lumps, and tweaking the portfolio, I actually feel better about the holdings (than in recent months). The general philosophy of my ‘picking’ method has allowed me to cumulatively beat, since 1999, the S&P 500 by a healthy margin. As the market has “evolved”, so have the holdings. While the investments in the CTR are conservative, the portfolio is dynamic (as is the market and its “favorites”). Every single stock owned in July and held into August is down. After reviewing the metrics, forecasts, and upsides I feel good to great about each position. The upside potential of holdings are material (average forward PE is only 9.6x), dividends for most of the portfolio are a very strong (I get paid if I have to wait) average of 3.7%. General Electric (NYSE: GE ), which I believe in, is probably the most vulnerable to being swapped out due to being nearly fully valued. That being said, I am reluctant to exit a stock that is on the verge of executing on management’s strategy (industrial focuses, “smart factory” and Alstom synergies). Since the last update, I added to existing positions in Apple (NASDAQ: AAPL ) and International Business Machines (NYSE: IBM ). I sold Harley Davidson ((NYSE: HOG ) $58.95) for a nice profit, not because I dislike HOG, but because macro changes in China and the emerging markets made me a little less confident about near-term sales. Fortunately, this decision was made prior to the market swoon. I also added three positions to the portfolio, in 1) an attempt to diversify (the recommendation of a number of readers) and 2) take advantage of two great companies with material upside potential. The additions were Goodyear Tire (NASDAQ: GT ), Sinclair Broadcasting (NASDAQ: SBGI ) and Tupperware (NYSE: TUP ). GT is geographically diversified, operationally strong, has a very strong position in the growing US market and is really cheap. SBGI holds leading positions in local broadcast stations throughout the United States and is well positioned to grow through 1) enhanced retransmission fees, 2) cost savings and consolidations, 3) sale/valuation of excess spectrum and 4) the projected doubling of political advertising for the 2016 election cycle. I lamented not buying SBGI after great earnings, when the stock tanked in the downdraft of cable-oriented worries, and pulled the trigger when the stock hit recent lows. TUP was acquired because it offers a stable and logical growth plan supported by macro-demographic trends. The stock pays a huge 5%+ dividend and will benefit from any combination of currency improvement and market execution. Notwithstanding the short-term, this stock should perform well over an extended period as the middle class in emerging markets is growing. Even though I modify my positions, I do not trade on a whim. Therefore, while I may “swap” positions in the near future, the trades will be made more on long-term merit and less on temporary market anomalies. I continue to be interested in increasing financial exposure, but do not want to buy more JPMorgan (NYSE: JPM ) due to a good sized position, but am more concerned about foreign exposure from the other bank I have been stalking – Citigroup (NYSE: C ). The Conservative Total Return Philosophy The essence of the CTR method is to combine a strong value bias with flexibility, opportunism and an ability to assimilate and respond to new information. The core philosophy will always be the same; however, as the economic cycle grows older, identifying the appropriate time to “harvest” becomes increasingly important. In assessing the prospects for all of the portfolio members, I feel good that the risk-reward dynamic is positive and, on a risk-adjusted basis, market beating (taking into account the strong value provided by dividends). Feedback from readers has been a partial motivator in my broadening my market segment exposure. The Individual Stocks The core stocks in the portfolio are (alphabetically): American Airlines (NASDAQ: AAL ), AAPL, Blackstone (NYSE: BX ), Discover Financial Services (NYSE: DFS ), Ford (NYSE: F ), GE, General Motors (NYSE: GM ), GT, IBM, JPM, KKR & Co (NYSE: KKR ), Siemens (OTCPK: SIEGY ), SBGI and TUP. (click to enlarge) Source: Yahoo! and TDAmeritrade As the above chart confirms, my positions have a strong bias toward dividends, reasonable valuation and a moderate (in most cases) PEG. Below are comments summarizing my interest in the equity. The chart also contains the appropriate metrics (valuation, fair value, potential gain). As you can also see, the positions held since the last report are all down (HOG, the only position sold, was sold for a nice profit). Holdings Apple ( AAPL )- AAPL did not thrill during Q2 earnings and was further hit during the market downturn. Atypically in recent times, AAPL has room to run with catalysts being 1) new/exciting products introduced during a recently announced early September meeting, 2) continued confidence on iPhone sales and 3) any positive feeling from payments or the watch (both have been either ignored or derided). Blackstone – BX was sold and re-bought. It is best of breed, well-funded and poised to profit from market distress and volatility (especially in energy and China). The harvest of US residential is viewed by the author as a positive. Discover Financial – DFS should be worth more. The stock has had some execution challenges but is still cheap and poised to benefit from a growing US economy (and the gas tax cut, which got a ‘jolt’ with the recent drop in gas prices). Ford – F is doing very well. The F150 is a hit. Yes China is slowing, but Europe is recovering and the US economy continues to do well. While not quite as cheap as General Motors , F offers nice appreciation potential and is a good “partner” to GM in the portfolio. The ‘market’ must stop hating the autos for F to realize ‘fair value’. General Electric – The recent pullback made GE a better value, however, it is the most ‘fully valued’ of the portfolio holdings. I believe catalysts include a weaker dollar, conclusion of the Alstom deal and longer term include Alstom synergies and the merging of industry and technology (Predix/Brilliant Factory initiative). Goodyear Tire – A new holding. Basically a well-managed company, diversified that is benefiting from an improving US and European economy (more cars, cheaper gas = more miles driven = faster tire replacement). General Motors – Even more than F, GM is the stock everyone loves to hate. GM is down 20% since the last portfolio update. Looking at the numbers, the risk/reward looks very favorable. As with F, China is concerning, but solid progress in Europe and the US should continue. Low gas prices for the foreseeable future put a backstop on highly profitable truck and SUV sales. I believe analysts are too focused on China (less than 10% of profits last quarter) and not focused enough on profitability. Harley Davidson – Sold at a profit. Concerns over China and a bump in price combined to create an environment where I exited at a nice profit. Still love this iconic brand. International Business Machines – IBM continues to disappoint, including a weak second quarter. However, limited China exposure, the US dollar weakening and management continuing to make progress combined with a 3.5% dividend leaves me optimistic about better performance over the next few quarters. JPMorgan – JPM is my favorite bank to own. The stock pulled way back and is in a strong position to regain $70 and perhaps hit $80 after the market stabilizes and the Fed increases rates (now most likely +/- Q1 2016). Siemens – Continues to be a play on recovering Europe and a weak US dollar. After GE and Honeywell (NYSE: HON ) have performed and appreciated, SIEGY remains a “show me” laggard. It may take a while, but SIEGY should deliver appropriate total returns through the investment period. Sinclair Broadcasting – A stock I owned a couple of years ago and am excited to own again. The Company owns TV stations in major markets. Local TV, offering local programming like news, is not subject to the same cord-cutting pressures as an ESPN. The Company owns valuable spectrum, is rationalizing recent acquisitions and will recognize huge profit increases from a record 2016 election season. Independent observers expect advertising to double from the 2012 cycle, with the share devoted to television +/- constant with the previous cycle (social media gains at the expense of direct mail). Tupperware – The Company is well managed and simply is focused on expanding distribution to its core emerging market markets. The emerging markets have a long, strong secular trend of an expanding middle class. TUP will ride that wave for many years. Short-term, a weakening US dollar the successful execution of some management expansion initiatives will grow the stock. The monster 5%+ dividend is sustainable and allows investors to get paid to wait. Position Summary In my opinion, the positions provide an increasingly diverse balance of innate conservatism, multiple and earnings driven appreciation potential and exposure to a more mature stock market. The recent market drops creates buying opportunities and additional reward given the risk (reduced by the lower stock prices). Please keep in mind that my portfolio also consists of actively managed real estate, index funds (international, emerging markets and domestic) and bond proxies. This is shared for readers who previously thought the noted stocks were 100% of my investments and lacked diversity (if that were the case, I would agree). The CTR is a portfolio of stocks that in my opinion are conservative (strong reward vs. risk bias) and well positioned to outperform with below-average risk. I own all of the stocks in the CTR (I also own other positions which I consider speculative or otherwise inappropriate to recommend). I appreciate any feedback on individual securities and recommendations on equities to add to the CTR. This article reflects the personal opinions of the author and should not be relied upon or used as a basis in making an investment decision. Investors should always do their own due diligence prior to making an investment decision. 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 AAPL, AAL, BX, KKR, SBGI, GE, GM, F, FT, IBM, DFS, SIEGY, JPM. (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.

Are Investors Choosing The Right Indices And ETFs?

Summary ETFs are financial instruments that add an extra layer of risk that may not be suitable or ideal for all investors. Interestingly, since 2000, the S&P 600 has significantly outperformed it’s counterpart, the Russell 2000. Subconsciously, fund managers may be hurting their returns by stating they are “overweight” or “underweight” a stock, especially if using an easy to beat benchmark. Individual investors can gain an edge on professional fund managers by simply investing in indices and ETFs with a superior long-term track record. It’s conceivable that “brand names” will start to matter, as ETFs and Index Funds become more popular over the next decade. Introduction Warren Buffett has famously stated that Americans are better off investing in a simple index fund like the Vanguard S&P 500 ETF (NYSEARCA: VOO ). Investing in the S&P 500 exposes investors to American businesses and allows them to reap the benefits of an expanding and capitalistic economy. Branching away into different indices and ETFs introduces investors to varying degrees of risk and fall empty handed on the returns advertised. For example, an ETF that is composed of 30 securities is not only priced based on its underlying portfolio of securities, but also in accordance to the supply and demand of the ETF itself. This double jointed structure introduces several liquidity and volatility risks to investors in times of market turbulence and downturns. Furthermore, there are all sorts of differentiated structures that provide for excessive risk in hopes to achieve higher returns. Notably, all levered bull and bear ETFs. These structures introduce another layer of unknowns and risks for investors, with the speculative potential to increase returns. However, an investor is likely to achieve not only a lower risk profile, but higher returns by simply scrutinizing their portfolio with a careful eye– looking for an edge. The Russell 2000 vs The S&P 600 For the conservative investor, a seemingly simple question of investing in an ETF covering the Russell 2000 (like the iShares Russell 2000 ETF ( IWM)) or the S&P 600 (like the SPDR S&P 600 Small Cap ETF ( SLY)) can yield dramatically different results. As reported by the Financial Times on Monday August 17, 2015, the S&P 600 has outperformed its counterpart the Russell 2000 since year 2000–by a significant margin. Specifically, since the beginning of 2000, the S&P 600 would have turned a $100 investment into a little over $360 and a $100 investment in the Russel 2000 would have turned into approximately $250. Image Sourced from Finanical Times Hence, the framework on an underlying index can have a profound influence on an index’s performance, the related ETF’s performance, and an investor’s overall return. The S&P 600 may cover a slimmer portion of the small cap universe, but this may be for good reason. After all, an investor only needs to own 30 stocks to be amply diversified from systemic market risk. According to the Financial Times, the S&P 600 index requires companies to have a record of making profits before it is included in the index. Furthermore, it sets a far higher standard for liquidity (compared to Russell 2000). It’s no wonder then that small-cap investment firms use the Russell 2000 to track their performance against. It’s easier to beat! It’s amazing how two simple rules can create significant long-term value for clients and investors. As such, it appears reasonable to assume that an index’s brand and portfolio construction will have even more of an impact on investors’ decisions going forward. How robot advisors and, to an extent, human advisors, will account for these seemingly minute details remains to be seen. Regardless, a wise and enterprising investor will have an edge. A passive minded investor, with an enterprising spirit, would be able to increase their returns by sacrificing a small amount of time to discover discrepancies such as this-especially long-term investors who have 15+ year time horizons. Index Business Growing In Size and Power Building ETFs based on indexes has become a huge business, with hundreds of billions riding on the skirts of simple structures. The owners of these indexes, whether it’s MSCI (NYSE: MSCI ), FTSE Russell, or the S&P (NYSE: MHFI ) will continue to have more and more power and influence on the financial markets-along with their clients like Vanguard and Blackrock (NYSE: BLK ). Whether or not they use this power wisely is another question, one that I’m not overly optimistic about. Furthermore, transparency can be a double-edged sword. For instance, the Russell 2000 follows very transparent rules by alerting investors in advance which stocks will move in and out on the day each June when the index is reshuffled (making it easier to beat). The S&P 500 Index has discretion to include companies that have a history of recording a profit, maintaining a balance between sectors, and typically only includes new companies when a vacancy is created (often through a merger). Invariably this causes the stock to pop as it is added to the S&P 500 Index, creating agony among fund managers attempting to beat it. Psychology of the Index Behavior psychology (or anything to do with human behavior) continues to have a heavy influence on the performance of fund managers. It’s well-known that investors and fund managers must account for self-bias and over-confidence once they buy a particular security, otherwise their judgment may become impaired and make mistakes. Recently, there has been a change in the way fund managers and analysts talk about their portfolios. For instance, they often speak of being “overweight” or “underweight” a particular stock, rather than stating they “own” a stock. By stating that they are “overweight” or “underweight,” fund manager’s are subconsciously increasing the influence a benchmark index has on their portfolio allocation and investment returns. It’s well known that the majority of actively managed mutual funds fail to beat their benchmarks. Therefore, it stands to reason that individual investors should outperform fund manager’s who chose the Russell 2000 as their benchmark–by simply investing in the S&P 600! While past performances do not guarantee future returns, it’s hard to argue the long-term track-record of the S&P 600 compared to the Russell 2000 over the past 15 years. In essence, investors who look at a stock as a fractional ownership of an underlying business will have both a psychological and fundamental advantage over other investors during a long-term time horizon. Fund managers that state they “own” a stock are still subject to subconscious self-bias and overconfidence; however, it’s likely they would focus more of their time on the fundamentals of the business, rather than the makeup of a particular benchmark. A stock’s total return, after all, is proportional to the company’s long-term operating performance and returns on capital, not because of its weighting in a particular index. Conclusion Just like it’s never wise to ask your barber if you need a haircut, investors shouldn’t accept over-simplified financial products and investments, especially from Wall Street. A little bit of research and passion to find an edge can go a long way. Remember that in a group of 100 investors, only 49 can be better than average-despite everyone’s opinions that they are in the top 20%. Managing your time wisely and performing diligent research has the potential to add a percentage or two to your total returns over your lifetime. In addition, you will incur fewer trading and tax expenses due to mistakes and disappointments. Apply diligent research, patience, and a long-term time horizon to maximize the benefits you receive from the miracles of compound interest. Don’t let sloppy benchmark indices get in your way–invest in the best ones. 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.