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Digging Beneath The Surface Of 2 Concentrated Value ETFs

Summary We have seen a big shift in investor appetite away from traditional value companies and into high flying growth names over the last several years. The August correction may afford an opportunity to purchase value ETFs at attractive prices when compared to broad equity benchmarks. Two relatively new ETFs came across my watch list as potential candidates for investors seeking an outside the box approach to value selection screens. We have seen a big shift in investor appetite away from traditional value companies and into high flying growth names over the last several years. That trend has continued in 2015, yet the recent volatility may have investors reconsidering the fundamental qualities of the stocks in their portfolio. Growth stocks tend to fall harder during corrective phases as investors flock to the safety of defensive or value-oriented sectors. Furthermore, the August correction may afford an opportunity to purchase value ETFs at attractive prices when compared to broad equity benchmarks. Two relatively new ETFs came across my watch list as potential candidates for investors seeking an outside the box approach to value selection screens. Both funds are built using a more concentrated portfolio focused on stocks with solid balance sheets and sound business qualities. ValueShares U.S. Quantitative Value ETF (BATS: QVAL ) QVAL is an actively managed ETF that debuted in late 2014 and has amassed over $50 million in assets spread amongst 40-50 individual holdings. This fund is managed by Wesley R. Gray, Ph.D. who has written extensively on the attributes of quantitative values and behavioral finance. QVAL uses three separate screening criteria to hone in on a focused number of stocks that it believes offer solid value alongside quality long-term business fundamentals. The goal is to invest in the cheapest, high quality stocks in order to try and outperform a more passive index. QVAL benchmarks its performance versus the iShares S&P 500 Value ETF (NYSEARCA: IVE ) and so far this year it has been able to maintain a similar total return. Prior to the recent correction, this actively managed ETF was actually significantly outperforming the passively managed yardstick. It’s worth pointing out that IVE is a market cap weighted index of 359 holdings, while QVAL takes a more equal weighted approach to its portfolio construction methodology. In addition, QVAL charges an expense ratio of 0.79%, compared to 0.18% for its passive counterpart. The significantly higher fees of the actively managed portfolio are to be expected for a unique strategy using proprietary screening and construction methodologies. Nevertheless, QVAL needs to prove that its approach adds value (pardon the pun) to investors that choose to step outside the passive index realm. In my opinion, this fund should warrant consideration for those seeking an alpha generating strategy for the value sleeve of their equity portfolio. Deep Value ETF (NYSEARCA: DVP ) DVP is another value-oriented strategy that debuted in 2014. This fund is based on the TWM Deep Value Index, which is constructed of 20 dividend paying stocks within the S&P 500 Index with solid balance sheets, earnings and strong free cash flow. According to the fund company website, the companies within the index are weighted based on a “rules-based assessment of their valuations so that stocks that are most attractively valued receive a higher weight.” In addition, the index is reconstituted annually. The extremely concentrated nature of the DVP portfolio makes for an interesting study in what is essentially a smart-beta index. The smaller number of holdings will likely create a greater divergence from the benchmark than a more traditional approach. This ETF will be more susceptible to individual business risks and opportunities of the underlying stocks than its peers as well. I would expect that the DVP portfolio will experience pronounced periods of underperformance and outperformance depending on the prevailing market environment . DVP has managed to accumulate over $200 million in total assets and charges a similar expense ratio as QVAL at 0.80%. This ETF is certainly worth a look for investors that like the comfort of a passive index with a stock picker’s mentality. The Bottom Line There are pros and cons to selecting ETFs that fall outside the traditional realm of low-cost and well-diversified benchmarks. However, both of these funds offer a unique approach to value investing that should not be overlooked. They can potentially add value as tactical positions that compliment your core ETF 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. I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: David Fabian, FMD Capital Management, and/or clients may hold positions in the ETFs and mutual funds mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell, or hold securities.

Why The Drop In Stocks Feels So Painful

Summary The last week and a half has certainly been a roller-coaster ride of emotions in the stock market. Many investors may be surprised at how deeply their accounts fell, despite the intention of having a relatively balanced or even conservative asset allocation. One of the most underwhelming asset classes during this sell-off in stocks has been the lack of performance in high-quality bonds. The last week and a half has certainly been a roller-coaster ride of emotions in the stock market. After a 3-day sell-off that culminated in extreme levels of fear, broad-based equity benchmarks managed to stage a sharp rally that has alleviated (some) feelings of panic. By the numbers, the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) fell 12% from its all-time July high to the depths of the August lows. It has subsequently rebounded half of that decline as we head into the first days of September. While there is still a great deal of work to be done in order to recoup the full extent of those losses, examining how your portfolio performed in the midst of the chaos can be a helpful exercise. Many investors may be surprised at how deeply their accounts fell, despite the intention of having a relatively balanced or even conservative asset allocation . The Shock Absorber Is Missing In Action One of the most underwhelming asset classes during this sell-off in stocks has been the high-quality bonds. Since SPY peaked on July 20, the iShares U.S. Aggregate Bond ETF (NYSEARCA: AGG ) has gained just 0.39%. This weak follow-through was mirrored in the iShares Investment Grade Corporate Bond ETF (NYSEARCA: LQD ) and the iShares 7-10 Year Treasury Bond ETF (NYSEARCA: IEF ), which gained a timid 0.19% and 1.57% respectively. Typically, during periods of extreme stock market volatility, we see a flight to quality in bonds that helps cushion the drawdown in our portfolios. This is one of the primary benefits of multi-asset diversification, and helps alleviate overwhelming conviction in a single high-risk outcome. Those who have come to rely on the strength of bonds during a sell-off have been let down over the last several weeks. Put simply, if your bonds aren’t marginally offsetting the losses in stocks, you are going to feel the pain of those losses more acutely. In my opinion, most of this indecision in the bond market is due to three factors: We had a strong sell-off in Treasury yields (jump in bond prices) during June and July that left fixed-income investors near the high end of relative valuations. This put the bond market in a precarious spot right as the mini-stock storm descended. Many investors in stocks are wary about transitioning to high-quality bonds in front of a near-term interest rate hike by the Federal Reserve. After 6 years of zero interest rate policy, there is no way to know exactly how the fixed-income markets will react to this first adjustment. The CBOE 10-Year Treasury Note Yield (TNX) jumped sharply higher as stocks staged a comeback late last week. This may point towards an opportunistic rotation out of bonds and back into stocks for those that were looking for a spot to buy well off the recent highs or feared missing out on a V-shaped recovery. The Bottom Line Most aggregate bond funds are sitting near the flat-line for the year and have yet to participate in a meaningful way for 2015. Nevertheless, I’m not looking to reduce my overall exposure for clients at this juncture. In my opinion, this asset class still represents a solid foundation for balanced or conservative investors to bolster their income and lower total portfolio volatility. I prefer the risk management and security selection that comes with an actively managed ETF, such as the SPDR DoubleLine Total Return Tactical ETF (NYSEARCA: TOTL ). Now more than ever, it is important to be flexible with respect to credit and interest-rate positioning as the Fed transitions to a new fiscal policy phase. I pointed out last week that it’s important to make changes on the stock side of the portfolio that are based on rational intermediate or long-term strategy, rather than short-term fear. This may include lightening up overexposure into a rally or taking advantage of new opportunities from your watch list during a correction. Above all, don’t let these periods of uncertainty get the better of you. Make sure you have a game plan for what you are going to hold or when it makes sense to fold . That way you are prepared for multiple outcomes and able to implement a decisive investment strategy to improve your long-term results. Disclosure: I am/we are long TOTL. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: David Fabian, FMD Capital Management, and/or clients may hold positions in the ETFs and mutual funds mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell, or hold securities.

A Peek Under The Hood Of The New O’Leary Dividend ETF

Summary Kevin O’Leary, of Shark Tank fame, recently released his first U.S.-listed dividend ETF. The fund selects approximately 142 stocks based on factors that include quality, volatility, and yield. This passive index approach underscores a unique dividend oriented portfolio with solid fundamentals. Kevin O’Leary, of the Shark Tank fame, has morphed into one of the most polarizing investment figures on reality TV. Now he is taking his talents off-camera by releasing his first U.S.-listed exchange-traded fund focused on dividend paying stocks. The O’Shares FTSE U.S. Quality Dividend ETF (NYSEARCA: OUSA ) debuted this week to a great deal of intrigue by the financial media. Whether you love or hate O’Leary for his no-nonsense criticism and direct business style, this new ETF is certainly worth a look for serious income investors . According to the fund company’s website , “The Fund is designed to be a core investment holding that seeks to provide cost efficient access to a portfolio of large-cap and mid-cap high quality, low volatility, dividend paying companies in the U.S. selected based on certain fundamental metrics.” To achieve that end result, OUSA follows the FTSE U.S. Qual/Vol/Yield Factor 5% Capped Index. This fundamentally driven methodology selects stocks based on three core factors – quality, volatility and yield. The final portfolio is made up of 142 dividend paying companies with an average yield of 3.20%. Top holdings include well-known names such as Johnson & Johnson (NYSE: JNJ ) and Exxon Mobil (NYSE: XOM ). In addition, each of the underlying constituents is capped at a maximum 5% allocation so as not to significantly overweight a single position . I think it’s an important distinction to make that O’Leary is essentially the face of this company and not involved in any direct investment recommendations. This ETF is designed to follow a strict passively managed index without worrying over deviating into uncharted waters as some active funds can do. The current next expense ratio of OUSA is listed at 0.48%, which is on the high side for a passive ETF. Nevertheless, the fundamental selection criteria (read: smart beta) is one of the reasons that the fund company may feel justified to charge more for its ETF versus its peers. After analyzing the top 10 holdings of OUSA, my initial conclusion is that this ETF falls closest in nature to the iShares Core High Dividend ETF (NYSEARCA: HDV ). Both funds share 8 of their top 10 holdings and are dedicated to a more concentrated mix of high quality dividend stocks. HDV currently has $4.5 billion in assets, an expense ratio of 0.12%, and a 30-day SEC yield of 3.90%. It’s worth noting, however, that although there are similarities between the two funds, there are also significant differences too. HDV has very high asset concentrations in its top holdings, which currently make up 59% of the portfolio. The top 10 holdings in OUSA make up just 38% of its asset allocation. In addition, HDV has a great deal more energy and telecom exposure that is supplanted by technology and health care in OUSA. These portfolio weightings are likely to change over time as market factors and other conditions evolve. Vanguard investors can breathe easy that the Vanguard High Dividend Yield ETF (NYSEARCA: VYM ) shares 7 of the same top 10 holdings in OUSA as well. However, VYM covers a much broader spectrum of over 400 stocks. The Bottom Line Despite its higher expense ratio, OUSA appears to be constructed of a very solid mix of dividend paying stocks through a dependable index provider. Currently, this ETF does offer enough differentiating factors to make it worthy of your consideration when comparing equity income funds . It will be interesting to follow how much initial attention is generated in OUSA based on fund flow data, as well as how the portfolio adapts over time. The market for dividend ETFs is certainly filled with many beloved products and attracting attention may prove to be a difficult battle. According to prospectus filings, O’Shares is set to debut four additional international-focused dividend ETFs in the near future as well. That will help round out the fund family and offer strategies designed to excel under differentiating circumstances. Disclosure: I am/we are long VYM, HDV. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: David Fabian, FMD Capital Management, and/or clients may hold positions in the ETFs and mutual funds mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell, or hold securities.