Tag Archives: etf-hub

What Small-Cap Blend Funds Can Strengthen Your Portfolio?

Small-cap blend funds are a type of equity mutual funds which holds in its portfolio a mix of value and growth stocks, where the market capitalization of the stocks are generally lower than $2 billion. Blend funds are also known as “hybrid funds”. Blend funds aim for value appreciation by capital gains. It owes its origin to a graphical representation of a fund’s equity style box. In addition to diversification, blend funds are great picks for investors looking for a mix of growth and value investment. Meanwhile, small-cap funds are a good choice for investors seeking diversification across different sectors and companies. Investors with a high risk appetite should invest in these funds. Below we will share with you 5 buy-ranked small-cap blend mutual funds. Each has earned either a Zacks Mutual Fund Rank #1 (Strong Buy) or a Zacks Mutual Fund Rank #2 (Buy) as we expect these mutual funds to outperform their peers in the future. SSgA Enhanced Small Cap N (MUTF: SESPX ) seeks maximum return. SESPX invests a lion’s share of its assets in equity securities of small-cap companies having market capitalizations similar to those included in the Russell 2000 Index. SESPX primarily focuses on acquiring common stocks of companies and may also invest in IPOs, fixed-income securities and money market funds. The SSgA Enhanced Small Cap N fund has returned 8.6% over the past one year. SESPX has an expense ratio of 0.75% compared to a category average of 1.24%. Fidelity Stock Selector Small Cap (MUTF: FDSCX ) invests a large chunk of its assets in common stocks of companies having market capitalizations within the universe of the Russell 2000 Index or the S&P SmallCap 600 Index. FDSCX seeks capital growth by investing its assets across a wide range of sectors. The Fidelity Stock Selector Small Cap fund has returned 10.1% over the past one year. As of April 2015, FDSCX held 197 issues, with 1.35% of its total assets invested in Bank of the Ozarks Inc. Thrivent Small Cap Stock A (MUTF: AASMX ) seeks capital appreciation over the long term. AASMX invests a majority of its assets in securities of companies having market capitalizations similar to those listed in the S&P Small Cap 600 Index or the Russell 2000 Index. AASMX primarily focuses on acquiring common stocks of domestic companies. The Thrivent Small Cap Stock A fund has returned 9.4% over the past one year. Matthew Finn is one of the fund managers and has managed AASMX since 2013. Vanguard Strategic Small-Cap Equity Investor (MUTF: VSTCX ) invests a major portion of its assets equity securities of small-cap firms that are located in the US. VSTCX invests in securities of companies that are expected to have an impressive growth potential and favorable valuation as compared to its industry peers. VSTCX evaluates the holdings of the MSCI US Small Cap 1750 Index in order to maintain a similar risk profile. The Vanguard Strategic Small-Cap Equity Investor fund has returned 10.1% over the past one year. VSTCX has an expense ratio of 0.38% compared to a category average of 1.24%. Fidelity Series Small Cap Opportunities (MUTF: FSOPX ) seeks capital growth over the long run. FSOPX invests a large share of its assets in securities of companies having market capitalizations within the range of the Russell 2000 Index or the S&P SmallCap 600 Index. FSOPX uses a “blend” strategy to invest in companies throughout the globe across a large number of sectors. The Fidelity Series Small Cap Opportunities fund has returned 8.8% over the past one year. As of April 2015, FSOPX held 196 issues, with 1.39% of its total assets invested in Bank of the Ozarks Inc. Original Post

5 Reasons To Lower Your Allocation To Riskier Assets

Fewer and fewer components are holding up the Dow, the S&P 500 and the NASDAQ. If foreign stocks are faltering at a time as when half of U.S. stocks are in their own downtrends, it may reasonable to assume that the major U.S. benchmarks could buckle. There are a number of headwinds that are likely to bring about a substantive correction to the Dow, S&P 500 and NASDAQ in the near-term. For months, I have been discussing the likely implications of deteriorating market breadth. For instance, fewer and fewer components are holding up the Dow, the S&P 500 and the NASDAQ. Only a small number of industry sectors are keeping the popular benchmarks in the plus column. Similarly, half of the stocks in the S&P 500 currently demonstrate bearish downtrends. And declining stock issues are significantly pressuring advancing stock issues for the first time since July of 2011. Historically, when a handful of stocks like Amazon (NASDAQ: AMZN ), Apple (NASDAQ: AAPL ), Facebook (NASDAQ: FB ), Gilead (NASDAQ: GILD ), Google (NASDAQ: GOOG ) and Walt Disney Co (NYSE: DIS ) account for all of the gains for a major index like the S&P 500 – when 250 of the index constituents show bearish patterns – the narrow breadth tends to drag the benchmark’s price downward. To be fair to the bull case, the major indices have held up so far. Nevertheless, U.S. equities in the Dow and the S&P 500 have been churning sideways for the better part of seven months. What about the prospect for underperforming sectors of the economy contributing to widespread market gains? I wouldn’t hold my breath on the possibility of wider breadth in the near term. Materials and resources-related companies continue to be plagued by slumping oil and weak commodity demand around the globe. Most economists believe that while the rout in commodities may conceivably abate, a significant increase in global demand or a sharp decline in global supply is unlikely. In the same manner, the manufacturing segment’s pullback may be structural, not cyclical. Miners, industrial conglomerates and utilities probably won’t be getting wind at their back anytime soon. For better or worse, the primary hope for continued appreciation in the U.S. indices rests atop the shoulders of the healthcare juggernaut, dot.com usage and the iPhone-oriented consumer. Indeed, investors have been remarkably willing to pay almost any price for the growth of the “Facebooks” and “Gileads” of the world. On the flip side, can the market-cap behemoths do any wrong? Of course they can. It wasn’t so long ago that Facebook shares face-planted for a 50% loss out of the IPO gate? Similarly, Apple tumbled 45% at the tail-end of 2013. Even at this moment, questions about the viability of the iWatch and the corporation’s ability to grow at a rapid pace in future quarters is keeping the shares of the largest company on the planet from breaking through resistance. For the time being, however, let’s assume that the “Big Six” identified earlier maintain their proverbial cool. And let’s assume that the narrow breadth in the U.S. benchmarks (as well as sky-high stock valuations) are not enough to dent the positive impact provided by health care and retail/consumer stocks. Is it possible that waning enthusiasm for foreign equities might couple with the weakness in U.S. market internals and sky-high valuations to eventually topple the major U.S. benchmarks? Looking back to the last stock market smack-down might provide some clues. Specifically, in 2009 and 2010, stocks throughout the world staged a revival. What’s more, in the same manner as they had in the previous decade, foreign stocks significantly outpaced U.S. stocks in 2009 and 2010. In fact, the global growth theme that dominated the initial decade of the 21st century remained in the driver’s seat. The dominance ended in October of 2010, however. Not only were the “emergers’ emerging at a slower pace, particularly China, but central bank stimulus supplanted the global growth story altogether. Consider the Vanguard FTSE All-World ex-US ETF (NYSEARCA: VEU ): SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) price ratio below. VEU:SPY began descending in the 4th quarter of 2010. The fading relative strength for VEU:SPY cemented itself early in 2011, when 200-day trendline support shifted to resistance. Not only did the weakness in U.S. market internals matter in July 2011 via the NYSE Advance Decline (A/D) Line, but relative weakness in foreign stocks also mattered. Fewer and fewer U.S. stocks were participating in the rally by July of 2011 and fewer and fewer international stocks were participating in the worldwide equity rally. It is worth noting that the deterioration of the VEU:SPY price ratio over the last three months of 2015 may be another headwind to U.S. benchmark gains. Historically, all stock assets typically exhibit positive correlations. It follows that, if foreign stocks are faltering at a time as when half of U.S. stocks are in their own downtrends, it may reasonable to assume that the major U.S. benchmarks could buckle. By way of review, there are a number of headwinds that are likely to bring about a substantive correction to the Dow, S&P 500 and NASDAQ in the near-term: Federal Reserve and the Rate Hike Quagmire . By itself, a bump up in overnight lending rates may not be a big deal. Conversely, participants may perceive inaction (an unwillingness to do anything) or too much activity (back-to-back rate hikes on wishy-washy data) as a major policy mistake. Extremely High Valuations and Eroding Domestic Internals . High valuations alone can always move higher; excitement can turn to euphoria. Yet history has rarely been kind to the combination of stock overvaluation and narrowing leadership (i.e., bad breadth). Fading Effects Of Quantitative Easing/Other Stimulative Measures In Foreign Stocks . Both Europe and Japan had seen their prices surge shortly after confirmation of asset purchases. Over the last three months, those fortunes have cooled relative to the U.S. In some instances, as has been the case in China, stimulative measures that didn’t work eventually turned to direct (as opposed to indirect) market manipulation. Is the world losing faith in its central banks? The Return of Credit Risk Aversion In Bonds . Seven months into 2015 and the widely anticipated jump in 10-year yields is nowhere to be seen. In fact, the 10-year at 2.25% is roughly in the exact same place as it was when the year started. It has been lower (much lower); it has been higher, not far from 2.5%. Yet the bottom line is that treasuries via the iShares 7-10 Year Treasury Bond ETF (NYSEARCA: IEF ) is rising in relative strength when compared with a high yield bond proxy like the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA: HYG ). Economic Weakness in the U.S. and Across the Globe. Latin America, Asia, Europe . Name the region and the economic deterioration is palpable. In contrast, many portray the U.S. economy in a positive light. Headline unemployment is low, home prices are high and Q2 GDP at 2.3% is faster than what we witnessed in Q1. Yet labor force participation (employment) is at 1977 levels, home ownership is at the lowest levels since 1967 and GDP has grown at an anemic 2% over the last six years. That’s not what a recovery typically looks like. It is no wonder that revenue (sales) at U.S. corporations will be negative for the second consecutive quarter. And when both the quality of job growth as well as the weakness in revenues are tallied, nobody should be surprised at the snail’s pace of wage growth either (2%). In spite of parallels that one can draw between the previous correction and/or prior bear markets (e.g., eroding domestic market internals, extremely high domestic stock valuations, near-term foreign stock weakness, etc.), the observations are not synonymous with prediction of disaster; rather, the observations lead me to conclude that a reduction of risk asset ownership is warranted for tactical asset allocation strategists. Practically, then, if you typically have 65% in equity (split between foreign and domestic, large and small) and 35% in income (investment grade and high yield), you might want to reduce the overall exposure to riskier assets until a significant correction transpires. How might I do it? I might have 55% in equity (mostly large-cap domestic), 25% allocated to income (mostly investment grade) and 20% cash/cash equivalents. Not only will you have reduced the amount of equity, you will have reduced the type of equity. Not only will you have reduced the income, but you will reduced the type of income. The efforts should assist in weathering the probable storm, as well as allow one to raise risk exposure at more attractive pricing. Is it possible that a tactical asset allocation shift might move further away from riskier assets? Like 35% equity, 25% income and 40% cash/cash equivalents? Yes. However, one would need to see a further breakdown of technicals and fundamentals beforehand. Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.

MUB: Is This Large ETF A Safe Haven During Rising Rates?

Summary This is the largest muni ETF in the marketplace with a tremendous amount of institutional assets. Will they stay put with rising rates? What is the exposure for the long end of the yield curve and various states? We answer these questions and provide our recommendation on whether it is worth the risk. The iShares National AMT-Free Muni Bond ETF, MUB , is the largest muni ETF in the marketplace. Since the beginning of the year over $700 million in new assets have been added. With all of the bonds rated investment grade or equivalent, we decided to analyze this ETF to determine if it would be a safe haven, if and when interest rates move higher. We also wanted to determine what exposure there is to recent public pension problems in states such as Illinois and New Jersey. With 2,748 holdings this ETF is a comprehensive ETF. According to the fund’s sponsor BlackRock (NYSE: BLK ): The iShares National AMT-Free Muni ETF seeks to track the investment results of an index composed of investment-grade U.S. bonds. The index Blackrock is referring to is the S&P National AMT-Free Municipal Bond Index or {SPMUNUST}. Currently the index has 10,310 issues versus the 2,748 in the ETF, as mentioned above. U.S. territories, including Puerto Rico are excluded from the index. The index is rebalanced monthly and the fund is rebalanced on a monthly basis as well. With such a large quantity difference between the index and ETF the indexing strategy of “Representative sampling” is the most appropriate here. According to the prospectus, this involves simply investing in a representative sample of securities that collectively has an investment profile similar to that of the underlying index. According to S&P, the overall index is designed to track the larger more liquid bonds in the marketplace. Investment grade general obligation, (GO) and essential purpose revenue bonds are included, while high yield bonds are excluded. In terms of a breakdown of the credit quality of the ETF it is not as simple as our past analysis. In most of our previous analysis we would go over each and every issue in an ETF and break down the credit quality and weight the ratings for both S&P and Moody’s. Unfortunately, with over 2,700 issues we decided to defer to the sponsor. iShares by Blackrock uses ratings from S&P, Moody’s and Fitch and converts them to the equivalent S&P major rating category. MUB Credit Quality S&P Ratings&Equivalent Weight Cash and/or Derivatives 0.33% AAA Rated 21.47% AA Rated 56.86% A Rated 20.05% BBB Rated 1.29% According to Morningstar , they cite a .04% in BB rated debt as of June 30, while Fidelity cites .02% in high yield, as of July 20. We attribute these small figures in the below investment grade category to a few recent downgraded and split credit ratings. As such, we can categorically state that the underlying holdings are higher investment grade issues and as noted, almost 25% are AAA rated. Our first point of analysis was the sectors of the ETF. We needed to examine which sectors of the ETF represent exposure in the marketplace. We were expecting only a small divergence between informational sources. What we found was a little confusing. iShares breakdown is quite broad based, while Morningstar is narrower in scope. We elected to use Morningstar’s sector weightings. Sectors of MUB holdings Sector Weight State and Local General Obligation (GO) 31.81% Transportation 23.31% Education 13.39% Water & Sewer 10.68% Advance Refunded or Escrow 8.67% Utilities 5.32% Industrial 1.65% Health 0.06% Housing 0.05% While Morningstar’s breakdown seems thorough it is confusing when compared to iShares. iShares uses: State Tax-Backed: 39.49%, Utility (which makes sense in aggregate with water & sewer): 16.56%, Transportation: 14.82%, Local Tax-Backed: 10.91%, Pre-refunded/Escrow (almost in agreement):8.96%, School Districts: 5.26%, Education: 3.11% and Other Utilities: .52%. As such, in any event the sector risks here are limited to only industrial and health. The primary reasons are the GO’s are backed by the full faith and credit (i.e. taxes), while the “WET” (water, electricity and transportation) are backed by fees and are unlikely to be terminated at any cost. The not so recent Detroit Ch. 9 bankruptcy is a key example of this facet of “WET” issues. The municipality continued to provide these essential services after filing for Chapter 9. The advanced refunded or escrow bonds at 8.67% are AAA and backed by US treasuries (actually, what are termed “slugs”) and are not an issue whatsoever. In terms of the maturity breakdown there is a divergence again in information from iShares and other providers. In this case, we strictly use iShares information. The main reasons is that iShares uses a “Weighted Average Life” or WAL to determine their average length of time to repayment of principal for the securities in the ETF. They use this metric due to the fact that many, if not all, of the high coupon bonds in the ETF will be called. The other information providers do not consider it. MUB Maturity breakdown (WAL) Maturity Weight Cash and/or Derivatives 0.64 0-3 years 19.40 3-6 years 12.71 6-8 years 7.18 8-10 years 5.96 10-12 years 5.98 12-15 years 7.83 15-20 years 13.24 20-25 years 14.04 25+ years 13.03 Morningstar states the maturities using actual dates with a different scale as well. As such an actual comparison is difficult on almost all categories. For information here are Morningstar’s maturity breakdown: 1-3 years: 8.71%, 3-5 years: 8.69%, 5-7 years: 8.67%, 7-10 years: 10.84%, 10-15 years: 16.45%, 15-20 years: 16.21%, 20-30 years: 26.71%, and over 30 years: 3.71%. Fidelity’s maturity breakdown is far simpler: Short Term: 12.65%, Intermediate Term: 26.90%, and Long Term: 60.17%. We interpret the WAL structure from iShares as what is termed a “barbell approach” with heavy weighting on the short end, in terms of callable and pre-refunded issues and a good sized weighting on the long end to take advantage of the higher coupons in term bonds. A key determinant here is of course, not just maturity but duration. We will examine this shortly after reviewing the top 15 issues and their geographic locations. For information purposes here are the top 15 issues with description, coupon and maturity, ratings (Moody’s and S&P), duration, modified duration and yield to the worst and the underlying weight in the ETF: MUB top 15 holdings Unlike many other ETFs, (in terms of its top 15 weightings) the top 15 holdings represent only 3.986% and the balance of 2,736 holdings and negative (settlement) cash balance represents 96.034%. No holdings here represent even .50%, excluding the AAA rated muni money market fund sponsored by Blackrock. As such, we can categorically state this ETF is as close to a full spectrum of diverse issues. In terms of exposure in terms of maturity or duration, it is clear that if rates do go higher the value of the bonds will fall as their modified duration indicates a significant move from the current duration. In terms of a basic understanding, for those investors new to the concept of duration, from Investopedia: Modified duration is the approximate percentage change in a bond’s price for a 100 basis points change in yield, assuming that the bond’s expected cash flow does not change when the yield changes. As such, there is obviously exposure on the long end in this ETF, if and when rates rise. What this simply means is the bonds in the ETF will not be called if rates rise, the cash flow will stay the same and the value of the debt and underlying ETF will fall in price, accordingly. There is a way to determine weightings on a more in depth analytical level and this would be to examine the ETF on the state level. In terms of state geographic breakdown, the weightings are informative. Here are the top 15 states by weightings: MUB Geography top 15 States State Weight California 23.04% New York 19.17% Texas 9.27% Massachusetts 4.99% New Jersey 4.51% Illinois 3.97% Florida 3.42% Pennsylvania 3.24% Washington 3.24% Georgia 2.50% Maryland 2.38% Arizona 1.67% North Carolina 1.46% District of Columbia 1.24% Connecticut 1.19% Our top three geographic holdings of California, New York and Texas make up 51.48% of the ETF. We expected the high tax states of California and New York to be represented but am a little surprised at the 9.30% weighting of the low,(or zero income) tax state Texas. We expected a higher weighting from Massachusetts and New Jersey. Investors concerned about the fiscal condition of Puerto Rico and its credit exposure will have no issues with this ETF. There are no Puerto Rico issues in this ETF as U.S. territories are excluded from the underlying index. Fees, Performance and Recommendation With an inception date 09/07/2007, the fund has an established track record that has encouraged institutional ownership. Unlike other fund sponsors, we were actually able to obtain detailed information on the underlying index as well. Many readers have appreciated the table format, and we have decided to provide one for this section. The index ticker of the S&P National AMT-Free Municipal Bond Index is {SPMUNUST}. Category {MUB} {SPMUNUST} Net Expense Ratio .25% – Weighted Average Yield to Maturity 1.98% – Weighted Average Maturity 5.49 years 13.53 years 12-Month Yield 2.63% 2.98% SEC 30-Day Yield 1.81% NA Distribution Yield 2.63% 3.07% (YTM) Weighted Average Coupon 4.69% 4.61% Effective Duration/Modified Duration 4.71 years/NA N/A/4.69 years 12-Month Total Return 2.26% 2.98% YTD Total Return .23% .60% Shares Beta/Holdings Beta -0.11/NA NA Annual Portfolio Turnover 5.00% NA Reviewing each of the categories beginning with the Net Expense Ratio of .25%, shows little surprises. The asset class median is .30%. In terms of the yields, they are quite attractive with a reasonably short duration attributed to the call schedule of the issues in the ETF. This is in spite of a weighted average maturity of 13.53 years on the index. The ETF has almost 60% less in terms of the index weighted average due to calls and pre-refunded issues. This attribute lowers the weighted average significantly. In terms of returns the 12 month yield has been consistent and iShares states a tax equivalent distribution yield of 4.65% which is considered quite attractive for high rated municipal bonds. The Year to date return is quite low. This is attributed to the intermittent sell offs in the overall bond market and concerns about rising rates in fixed income markets. There have also been concerns about pension exposure in various states. A few states in the past, such as Kansas in 2014, were charged by the SEC for securities fraud regarding their pension liabilities. While Schwab has warned of possible defaults, downgrades are still possible but mostly in local municipal issues and cities, i.e. Chicago. The exposure to downgrades in the issues in this ETF would be light at best. In any event, with the holdings extremely broad based with state diversification we do not consider this a concern for this particular ETF. The share turnover of 5% is quite low compared with the asset class median of 25%, and the Beta of the shares indicates an extremely low risk investment as compared to equities and almost close to the beta of T-bills (0). The ETF has been and continues to be a stable “cash cow” vehicle for many funds with an increase of 12.83% in the current quarter alone. Some of the largest institutional owners include PNC Financial Services (NYSE: PNC ) (with 7.37% ownership), Bank of America (NYSE: BAC ), UBS Group AG (NYSE: UBS ), and Morgan Stanley (NYSE: MS ). Though, mutual funds have been net sellers for the past few quarters we attribute this to investor concerns over rising rates and further changes to asset allocation models. In any event, overall net flows for the month of June indicate an increase of $108.46M. With a 52-week high of $112.20 and a 52-week low of $107.58, the shares closed at $109.07 -.10 on July 28. Our Recommendation With a very low price range and low beta we do like this ETF as a very low cost way to invest in Municipals in the ETF space during a possible rising rate environment. As many advisors and institutions have decided, this leader of the muni ETFs is an excellent place to invest funds for both the short and long term. As we stated in our analysis on other ETFs, we feel this ETF will continue to provide an attractive yield in a stable-to-slowly rising rate environment. We do expect slight price erosion in a rising rate environment but far less than other municipal funds and ETFs in the marketplace. We do not expect a decrease in yields in this ETF, bearing a large scale default and lower yields going forward. Overall, it is an attractive investment for stable yield-hungry institutions and individual investors alike. 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. Additional disclosure: Information obtained from: ishares.com, morningstar.com, us.spindices.com,fidelity,com, yahoofinance.com, standardandpoors.com, moodys.com, wolfstreet.com,xtf.com, and our own analysis