Tag Archives: consumer

4 ETFs I’m Planning To Buy Over The Next Few Months

Summary I’m watching VNQ, SCHH, SCHC, and SCHF over the next few months. The equity REIT indexes could see some weakness with the Federal Reserve trying to stimulate higher rates. I think they are more bark than bite. If equity REIT indexes sell off, I’d love to boost my allocation to them at attractive prices. My international allocations are too low. SCHC and SCHF look like great options to fix that. With only two months left to go in the year I’m looking at which ETFs I may want to give a higher weighting in my portfolio. These are ETFs that I already hold, but I am contemplating putting a little more cash in them over the next few months. The List Name Ticker Vanguard REIT Index ETF VNQ Schwab U.S. REIT ETF SCHH Schwab International Small-Cap Equity ETF SCHC Schwab International Equity ETF SCHF These four ETFs are on my watch list for different reasons. VNQ / SCHH I’ve got VNQ and SCHH on the list as attractive funds because I expect long term yields on debt securities to remain fairly low. I don’t expect to see a sustained 3% yield on 10 year treasury notes within the next year or two. There may be some spikes where it happens, but I wouldn’t expect to see those yield levels maintained. With the Federal Reserve constantly talking about raising interest rates, I see the potential for some pricing weakness in the equity REIT indexes. They might raise rates slightly, but I’m not sure that such an increase in rates would even be maintained let alone that they could build on increases to raise rates in each year for the next few years. Since I expect rates to remain weak, I like the equity REITs as a nice source of yield and SCHH and VNQ are two well diversified REIT index ETFs with very low expense ratios. If the Federal Reserve ramps up their talk about raising interest rates it could cause the interest rates to increase in the market for a while. When the rates go up the prices on bonds will fall and I would expect the prices on VNQ/SCHH to drop during that time period. That would be a great opportunity for me to buy more shares before the prices rebounded. I’m holding both of these already and wanting more equity REIT exposure in my portfolio. My current weighting is getting a bit heavy on domestic equity and mortgage REITs. The mortgage REITs are substantially different from the equity REITs, but I’m overweight on the sector because I feel there are some attractive values being presented. SCHC / SCHF These two international plays offer low expense ratios for extremely diversified international exposure. I would classify these as my two my favorite international funds currently. My international equity exposure is dramatically underweight right now. I was holding the Vanguard Global ex-U.S. Real Estate ETF (NASDAQ: VNQI ) for a substantial portion of my international exposure but decided to sell it so I could act on a high conviction play in the mREIT sector. Over the next few months I want to bring the international exposure on my portfolio higher. I don’t want a very heavy weighting to the international equity sectors, but I should probably be putting at least 10% or so of my portfolio there. My most likely method for getting that position will be something similar to dollar cost averaging with quite a few small purchases driving up the allocations. Why I like Them So Much When I first started looking into SCHC, I wasn’t entirely sold on the fund. The expense ratio of .18% is low for international equity but still higher than quite a few of my allocations. As I looked through the fund I became very attracted by it being a play on small-cap equities and holding over 1,600 individual securities and less than 5% of the total fund being in the combined weight of the top 10 holdings. This is a beautiful ETF for getting exposure to a portion of the market that would often be ignored and the diversification within the fund is strong enough that individual securities won’t be creating a large impact on value. If the top holding of the fund suddenly saw the stock price double, the value of the fund would be up less than half of one percent. The top sector weightings for the fund are industrials (21.2%) and financials (20.4%). I would prefer to see those lower and the consumer staples weighting (5.0%) higher, but on the whole I think this is one of the top options for getting this exposure. Currently they are trading around $29.70 to $29.90. If they dip down towards $29 to $28.50 it would be push me to put in a little cash sooner rather than later. For SCHF the expense ratio is only .08%, which is exceptional for international equity, and the fund has over 1,200 holdings. The heaviest sector weight is the financial sector at 26.3%, but consumer staple comes in at 10.9% which is fairly nice. One of the ways my risk aversion manifests itself is having a preference for the consumer staples sector which I consider safer from potential negative events. Conclusion Those are the four ETFs I’m looking at over the rest of the year. I already own all four and due to dividend reinvestment, I can be fairly certain that I will be buying at least a few more shares in each. It is very highly likely that during the next few months I will add some cash to buy up more shares. Due to free trading on the Schwab funds I’m more likely to use allocations to SCHH for building my equity REIT allocation. Investors with free trading on VNQ may find it preferable. The yield on VNQ is over 4.1% per Yahoo Finance while the yield on SCHH is only around 2.4%. Since I’m buying these ETFs into a tax advantaged account and just reinvesting the income the difference in their payouts is not a significant factor for me. Due to dividend reinvestment, my share count in VNQ is likely to grow slightly even though allocations towards SCHH are more likely. SCHC and SCHF are my favorite options for international equity and that is an area where my portfolio could use some additions. The huge factors going in their favor are the very rare exposure for SCHC to the small-cap side and the extremely low expense ratio for SCHF.

The Fed’s Delay On Rates Makes SDY A Good Buy

The Federal Reserve has delayed raising rates, giving a boost to dividend funds. Rates are likely to remain at historically low levels well into 2016. SDY is heavily weighted towards the financial sector, providing a nice hedge against any rising rates. The purpose of this article is to evaluate the attractiveness of the SPDR Dividend ETF (NYSEARCA: SDY ) as an investment option. To do so, I will evaluate recent market performance, its unique characteristics, and overall market trends in an attempt to determine where the fund may be headed going into 2016. First, a little about SDY. The fund seeks to closely match the returns and characteristics of the S&P High Yield Dividend Aristocrats Index. This index is designed to measure the performance of the highest dividend-yielding companies in the S&P Composite 1500 Index that have also followed a policy of consistently increasing dividends every year for at least 20 consecutive years. This is unique in that many dividend ETFs focus solely on high-yielding companies while SDY has a focus on high yield, but also a track record of a raising payment. Currently, SDY is trading at $77.04 and pays a quarterly dividend of $.49/share, which translates to an annual yield of 2.54%. Year to date, SDY is down 2.2%, not accounting for dividends, which lags the Dow Jones Index’s return of (1.5%) year to date. However, once dividends are accounted for, SDY has slightly outperformed the Dow for the year. There are a few reasons why I feel SDY is a good buy at current levels. The main reason has to do with the Fed’s unwillingness to raise rates from historically low levels. At the beginning of 2015, investors were fairly confident that rates would rise at some point this year, some believed as early as June. This negatively affected dividend ETFs, as investors had piled into funds such as SDY at record levels in search of a higher yield in a low rate environment. Because of this, SDY, along with similar funds, underperformed the Dow and other investment options. However, as we near the end of the year and an official rate hike has yet to be announced, investors are beginning to buy back into SDY as they realize that the low rate environment is here to stay for a little while longer. This is apparent in SDY’s recent rise, as the fund is up almost 7% in the last month. I believe the ETF will continue to move higher, as investors are continuously pushing back their expectations for a rate hike. According to data compiled by the Chicago Mercantile Exchange, “traders now put just a 7 percent chance of a rate move at Wednesday’s Fed meeting and a 36 percent probability for the final one of the year in December”. Traders now give a 59 percent chance of a rate hike during the March 2016 meeting, almost six months away. If that expectation turns in to a reality, SDY could be a very profitable bet in the short term. A second reason I prefer SDY over other funds has to do with its exposure to the financials sector, at roughly 25% of its total portfolio. Below is a breakdown of the sectors, by weighting, that make up SDY’s holdings : Financials 25.47% Consumer Staples 14.95% Industrials 13.54% Utilities 11.83% Materials 11.15% Consumer Discretionary 7.56% Health Care 5.92% Energy 3.41% Telecommunication Services 3.05% Information Technology 2.88% Unassigned 0.22% As you can see from the chart, financials are the top sector weighting in SDY’s portfolio. I view this as a positive, because it provides the fund with a nice hedge against rising rates, when they do eventually rise. General logic will say that these dividend funds will take a large hit once rates rise, because investors will now be able to command higher yields from less risky assets. However, SDY’s exposure to the financials sector will continue to make this fund attractive as financial companies, such as banks and insurance companies, tend to perform better in a rising rate environment. This occurs for a few reasons. One, banks will typically increase the amount they charge for loans at a faster rate than what they pay for deposits, which widens their spread and overall profit. Additionally, these firms typically have to write-off fewer bad loans, as rates generally rise during a time of economic growth. This means companies are performing better and are more likely to meet their debt obligations, and thus, no default on their loans. Therefore, SDY should experience capital appreciation from this exposure, which would cater to investors who are more concerned with the overall return, (stock price and yield), as opposed to just the yield. Of course, investing in SDY is not without risk. Investors could be wrong and interest rates could rise at a much quicker-than-anticipated pace. If this occurs, the market could move sharply lower, or investors could flee dividend funds. SDY’s yield, at only 2.50%, does not provide much of a cushion if the fund were to move rapidly lower. Additionally, SDY also has a strong weighting towards the US consumer, with weightings of 15% and 8% towards the consumer staples and consumer discretionary sectors, respectively. If the US consumer stops spending, or US job growth weakens, these sectors could be dragged lower and take SDY down with them. However, neither of these scenarios are what I expect to occur. Even if rates do rise, Yellen has made it clear that the increases will be slow and gradual. She does not intend to spook the market, and the past few years have showed investors that the Fed is being extremely cautious with regards to rates. Additionally, consumer spending continues to increase, with a 0.6 percent rise last month (September) according to the Commerce Department. Therefore, I expect SDY to perform strongly despite these headwinds. Bottom line: SDY has had a lackluster year, but has rallied recently as the Fed has delayed raising rates. With this scenario continuing, the fund continues to provide investors with an above-average yield in a low-rate environment. Until rates do rise, dividend ETFs will continue to be profitable for investors. With a fee of only .35% and exposure to the financials sector, which will serve as a hedge when rates do rise, SDY provides investors with a cheap way to profit in the short and long term. Going into 2016, I would encourage investors to take a serious look at this fund.

VCDAX: So Good It Turns Skies Blue

Summary This mutual fund great for investing long term and short term potential for a bullish market. The fund is focused on cyclical market exposure. Features a low expense ratio and a passively managed index. Mutual funds are a great way to improve an investor’s risk adjusted returns. Investing in sectors of the market which sell goods and services is great if it’s indexed. It’s difficult to predict which sectors are going to outperform others and still be able to get a return higher than just diversifying. The fund I will be looking at is the Vanguard Consumer Discretionary Index (MUTF: VCDAX ) which tracks the performance of the MSCI US Investable Market Consumer Discretionary 25/50 Index. Expense Ratio The expense ratio for VCDAX is .12% which makes sense for being passively managed. If I wanted to go the route of active management then I’d go with specific companies in sectors that have a high sensitivity to economic cycles. In this mutual I’m happy to have it passively managed and just mimic a cyclical index. Yield This index has a distribution yield of 1.44%. If you’re looking for funds with a high yield to live on there are better mutual funds. From a performance point of view for yield plus capital appreciation this fund has been top notch. Diversification The following chart gives the top ten holdings: There are 384 holdings in total and normally I wouldn’t want the top ten to be 38.6%, but with so many power house companies showing up I could make an exception. Initially when I was looking into this index I was worried that Walt Disney (NYSE: DIS ) and Time Warner (NYSE: TWX ) were both in the top ten holdings. After seeing Walt Disney at 5.72% and Time Warner at 1.97% I disregarded my hesitation. Disney has been on an incredible streak and I can’t see it doing anything but continuing with their future plans. Specifically, I’m bullish on the Star Wars franchise and opening a new theme park in China. I’m excited to see just how well the $5.5 billion project will perform. Hong Kong Disneyland in 2014 hit record attendance and had a net profit of $42.3 million. When Hong Kong first opened there were issues with long lines and lack of food supply. Executives said they learned valuable lesson in Hong Kong, which had issues with long lines and food supplies at the start. There’s also some fantastic news about the environment. China plans on clearing more than 150 factories for the Shanghai Disneyland; how many they will close down or just plan to move still isn’t clear. This is great news for Disneyland as it wouldn’t be as magical without blue skies. Time Warner is a good stock to invest in, especially with the stock drop recently giving a good buy-in point. My main reason for massively preferring Disney is Warner Bros.’ notorious ability to make films that flop. Even though Time Warner will do well in the long run I don’t like the anxiety I feel wondering if the movie I’m about to see is going to be amazing or praying Johnny Depp will pull off a miracle. Movies aside, Time Warner has also been making plays in the international markets. Turner Broadcasting and HBO are the majority of Time Warner’s total revenue; expanding the two internationally has shown great profit. Here’s a compelling article showing Time Warner’s continued success internationally. Sector exposure Following chart shows the top ten subsectors of the index: Index is well diversified with no sector over 12%. The goal of this mutual fund is to follow the most cyclical industries within the consumer discretionary sector. The current weightings are well placed to achieve the index’s goal. The industry subsectors may be cyclical as a whole but the top subsectors in the fund are representative of the top ten holdings. These companies will take a bump here and there but they mostly have one thing in common and that’s continued performance. The following graph shows just how well this fund has performed: Conclusion Over the past several years VCDAX has performed well. There’s a lot of upside especially if the market continues to do well. I like the diversification in subsectors and the companies chosen to represent a large portion of the holdings. For a long term investment the fund has a decent correlation to the S&P500. As long as you’re not hunting for funds with high yields this fund has great potential. With all the international exposure the top ten holdings already have and are expanding on, I expect this index to be a good investment. There are some arguments for a short term investment here, but if I wanted to make short plays they wouldn’t be in the consumer discretionary sector unless it was a specific company.