Tag Archives: etf-long-short-ideas

Solid Holdings And Growing Dividends Are On Sale? I’d Like To Buy Those

Summary The Schwab U.S. Equity Dividend ETF offers investors very solid growth in dividends. Looking at the combination of yield and growth rate makes SCHD look like a very compelling long term investment. SCHD has been slightly less volatile than the S&P 500. I don’t want to stop buying equity when prices drop, so I’m buying the slightly less volatile equity. The holdings are a solid batch of companies with strong dividend histories and established market positions. Lately I’ve been looking for ETFs that offer investors more safety. We are seeing macroeconomic issues with corporate profits after tax making up record percentages of GDP and a stock market that, at least measured by the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) is getting quite expense when we measure price to earnings or price to sales. That creates a real problem for investors looking for investments that have respectable yields without absurd levels of risk. In my opinion, one of the better shelters for the potential volatility is the Schwab U.S. Dividend Equity ETF (NYSEARCA: SCHD ). How expensive is the market? To demonstrate the relatively high prices, I grabbed the following chart: (click to enlarge) I try not to focus too much on any single measure. However, it is worth noting that price to sales levels are fairly high and that is enough to concern me and encourage me to focus on using more conservative allocations. Some sectors such as telecommunications are seeing substantial pricing wars that will drive down both sales values and profit levels. That makes me fairly bearish about the outlook for that sector. In the same way, we have seen mining companies facing very high fixed costs. Rather than respond to lower prices by cutting production, many initially attempted to increase production so the fixed costs could be spread over more units of production. From a macroeconomic perspective, I think thinner profit margins stemming from fierce competition are very healthy for the long term economy. More intense competition drives more efficient allocation of resources and lower costs are a very material benefit for consumers. Despite those gains, I want to be careful not to overextend my portfolio in buying up companies with deteriorating earnings. I’ve had quite enough of that pain from Freeport-McMoRan (NYSE: FCX ) when I didn’t predict that copper prices would get smashed by hedge funds shorting copper futures contracts to express a bearish view on China. That was an interesting lesson to learn. It encouraged me to be more careful about firms that are susceptible to seeing declining pricing power. Why SCHD is great While SCHD offers investors some appealing characteristics, like a .07% expense ratio, I’m finding more to love than the low holding costs. SCHD is offering some pretty great dividend growth history. 2011 was an incomplete year and is not a fair comparison. The full year data begins in 2012. The impressive thing is that 2015 is also an incomplete year but it is already matching the distributions for 2013. This is a dividend ETF with a respectable yield and it is a solid choice as a core portfolio holding. Holdings The following chart shows the top 10 holdings: (click to enlarge) This is a pretty good batch. I can’t help but notice that they are putting heavy weights on some of the companies that seem to be out of favor right now. Verizon Communications (NYSE: VZ ) is an example of one of the companies that I’m concerned about as Sprint (NYSE: S ) wages a massive price war. On the other hand, I’m left wondering how long the fierce competition will last. In a market that is so heavily concentrated, it seems like a reduction in intensity of competition would immediately benefit all companies. You might wonder who would move first to calm the battle. My guess is Sprint, if they stopped battling I think Verizon and AT&T (NYSE: T ) would both quickly drop back into a more complacent strategy. I have to admit that I’m pretty big on seeing the heavy allocations to Exxon Mobil (NYSE: XOM ) and Chevron (NYSE: CVX ) because I expect those mammoths to get back on track. Investors may believe that cheaper gas is here to stay, but I think money in politics is here to stay for much longer. Don’t expect XOM and CVX to go quietly into the night. One way or another, the major gas companies will put up a fight for their shareholders. The Coca-Cola Company (NYSE: KO ) and Pepsi (NYSE: PEP ) have both trailed the S&P 500 dramatically over the last five years. I’ll take that risk because they have a great distribution system in place. While junk food may be on the way out and healthier food is on the way in, these companies still have an incredible economic moat. They can still acquire the more attractive products and utilize their system of delivery to add substantial value to the process. Remember KO wasn’t too shy about taking a major position in Monster Beverage Corp. (NASDAQ: MNST ) when they recognized that MNST had a very desirable product that needed a stronger global distribution channel. Conclusion When the volatility in the market gets ugly, I’d rather not sit on the sidelines. This great dividend ETF is just what I need to keep acquiring the kind of dividend champions I want to hold for decades. Now if the price would just drop a little further and trigger my latest buy order… Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SCHD, FCX over 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 in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.

Sell UVXY: It’s Still A Busted ETF Heading Lower

UVXY is a widow-maker of an ETF, down more than 99.9% over the past five years. A recent trebling in its share price is irrelevant to longer-term investors. UVXY is still a terrible product, sell it or short it. It’s going to drop further. Volatility ETFs are one of the worst inventions to hit retail investors in the past decade. These products that are literally designed to go to zero if you read the fine print in the prospectus. And yet thousands of small-time investors and speculators get sucked into them, thinking this is a good way to bet on, or even prudently hedge against volatile markets. The iPath S&P 500 VIX Short-Term Futures ETF (NYSEARCA: VXX ) is still the gold standard for the space. And it’s a very lousy product. Short it or avoid it. However, with the dark magic that is a leveraged fund, you can take the inherent terribleness of VXX and cube it. Enter the ProShares Ultra Vix Short-Term Futures (NYSEARCA: UVXY ). The Velocity Shares Daily VIX 2x (NASDAQ: TVIX ) is basically the same functional product as UVXY in a slightly different wrapper and with less trading volume, but the same analysis applies. VXX, UVXY, TVIX and other such long volatility instruments are designed to benefit when the VIX rises. However, since VIX – somewhat inaccurately known as the “fear gauge” — is a mathematical construct rather than an actual investable instrument, no ETF tracks VIX properly. What you’re investing in when you buy VXX or UVXY isn’t the VIX you see scrolling across the CNBC ticker but rather a blended combination of futures contracts (derivatives) that aim to predict where VIX will be at a later date. There’s usually a large disconnect because VIX today and VIX in the future, leading to the returns on VXX and UVXY not coming close to what you’d expect just looking at spot VIX changes on the day. The general case against VXX and UVXY is rather simple. Volatility in the future is generally projected to be higher than volatility today. Since traders fear unknown future events more than the present knowable situation in most cases, traders will pay up more for protection farther into the future. Traders are usually more fearful of a crash farther along the horizon than in the short-term. Since VXX, UVXY and others own a mix of current month VIX futures and next month VIX futures, they tend to lose value when they have to rollover contracts. Say spot VIX as quoted on CNBC is 14, VIX futures for September are 16, and VIX for October is 18. Every day, VXX and UVXY have to sell some of their September contracts at 16 and buy Octobers at 18. They lose more than 10% of their net asset value (NAV) every month rolling over. Once October comes, October futures will be down to 16, Novembers at 18, and they’ll lose another 10% rolling again. VXX tends to lose about 70% of its value every year, and it’s largely driven by this effect. The long term impact of this effect, named contango, is most difficult. It’s why these funds always go down over the longer term, and why they make for poor investments. VXX is down from a peak of 7,000 (split-adjusted various times) in 2009 to 29 today. A drop of 99.6% since inception. UVXY’s done even worse, given the 2x leverage, falling from almost 500,000/share (yes, you read that right) to 64 just since 2011! (click to enlarge) Ouch! These are very-poor performing investments that most folks should steer clear of. However, now that the market is dropped and UVXY has tripled off the lows, everyone’s all excited about volatility products again. Now the talk of the town is that volatility is in “backwardation” meaning the usual value-destroying albatross that hits these investments is no longer in play. Backwardation, explained simply, is that now this month’s futures are worth more than next. If you can sell Septembers at 18 and buy Octobers at 16, your (NAV) rises 10% a month. If that state is maintained for awhile, particularly with UVXY’s leverage, you get some fat upside. And yes, that’s all true. But no, it doesn’t generally play out like that. Look at the long-term log chart of UVXY posted above. There were two periods of relatively long-lasting backwardation, during both the 2011 and 2012 market sell-offs. And UVXY and TVIX did indeed benefit from rising volatility and backwardation… however, the increases were very small compared to the larger downward trend. These instruments are so poorly constructed that brief periods of backwardation don’t move the needle. Backwardation almost never persists for a lengthy period of time because the market is almost always more fearful for the future than the present. Unless you’re actively seeing markets go through the floorboards right now, like during the recent Monday’s flash crash festivities, volatility expectations are almost always higher at a later date than what you see at present. While UVXY got to 90 during the current panic, it sold back off to 60 in just two days on a rather modest market recovery. And Tuesday, it dumped 19% again in a single day. Any instrument where you lose 33% of your money in two days or 19% overnight during a fairly routine market recovery is best avoided by most market participants. When you’re long UVXY, you are playing with fire. September VIX futures are currently at 26. Around 15 has been normal during this bull market. So just a reversion to normal wipes out more than a third of VXX’s value, and UVXY will suffer losses greater than that due to the leverage. The lottery ticket type upside in a crash scenario just isn’t worth the near certainty of an 50-75% loss in UVXY in coming weeks as the market and volatility stabilize. Even if you manage to time a sell-off correctly, you’re almost undoubtedly better off just buying puts on the market, through an ETF such as SPY. UVXY may go up 6x-8x if you hit a sell-off just right. Getting that, or a whole lot more, from SPY puts is no more difficult. In a perverse sort of way, it’s nice that these ETFs’ lives have dragged on as long as they have, as they are among the best short sales in the market. It will be a sad day when these sources of easy alpha are taken away from the short-selling arsenal. Disclosure: I am/we are short UVXY, VXX. (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.

ALFA: A Market-Beating ETF About To Go Market-Neutral

Summary ALFA allows the retail investor to “invest with the best”. ALFA has shown market-beating performances since inception, with superior upside and downside capture ratios, but also higher volatility. Barring a final-day rally, ALFA is about to go into market-neutral mode. The AlphaClone Alternative Alpha ETF (NYSEARCA: ALFA ) is an ETF that tracks the AlphaClone Hedge Fund Long/Short Index. This index contains U.S.-listed equity securities to which hedge funds and institutional investors have disclosed significant exposure. An interesting feature of the index is that it uses AlphaClone’s proprietary “Clone Score” methodology to aggregate the ideas of hedge funds for which historically it has made the most sense to follow based on their disclosures. Additionally, index constituents are equal weighted but have an overlap bias (i.e., securities held by twice the number of managers have twice the weight). In a recent article entitled ” The AlphaClone Alternative Alpha ETF May Be The Safest Equity Ticker ,” Seeking Alpha author Fred Piard elegantly summarizes the methodology of ALFA as thus: ALFA selects fund managers based on their past performances after publication of their holdings…In other words, past performances must be good, and also replicable. Investing in ALFA therefore allows the retail investor to “invest with the best” (while avoiding 2 and 20 fee structure associated with investing in hedge funds). Only holdings from top managers are chosen for inclusion in the index – holdings from mediocre managers are not considered. ALFA was incepted in May 2012, and charges an expense ratio of 0.95%. Another hedge fund-duplicating ETF is the Global X Guru Index ETF (NYSEARCA: GURU ). Performance The following chart shows the total return performance of ALFA and the U.S. market (NYSEARCA: SPY ) since inception of ALFA. ALFA Total Return Price data by YCharts We can see from the chart above that ALFA has pretty much led SPY wire-to-wire since inception. However, the higher return of ALFA has been accompanied by higher volatility. The following chart shows the 3-year annualized standard deviation (volatility), return, Sharpe and Sortino ratios for ALFA and SPY (source: Morningstar ). We can see from the above chart that ALFA has been about 30% more volatile than SPY over the past three years. This has led to ALFA’s Sharpe ratio of 1.78 being lower than SPY’s at 1.93. Interestingly, however, the Sortino ratio, which unlike Sharpe ratio only takes into account downside (and not upside) volatility, slightly favors ALFA at 4.36 vs. SPY at 4.26. This is consistent with ALFA’s impressive upside and downside capture ratios over the past 1 and 3-year periods, as shown in the chart below (source: Morningstar ). The chart above shows that over the past 3 years, ALFA has managed to return an extra 7% over the S&P 500 in positive months for the market, while decreasing 18% less than the S&P 500 in negative months for the market. Its 1-year upside and downside capture ratios are even more impressive, at 130% and 52% respectively. Obviously, SPY captures 100% of both the upside and downside of the S&P 500. Additionally, ALFA has had a 0.84 correlation with SPY since inception (source: InvestSpy ). Holdings The higher volatility of ALFA compared to SPY may be partially attributed to the fact that ALFA’s portfolio is quite concentrated, with the top 10 holdings accounting for 31.85% of assets, compared to only 173.03% for SPY. Moreover, ALFA currently holds only 73 stocks, compared to the 500 in the S&P 500. The following table shows the top 10 stocks held in ALFA and SPY. ALFA SPY Stock Ticker % Assets Stock Ticker % Assets Apple Inc. (NASDAQ: AAPL ) 7.25 Apple Inc. AAPL 3.75 Valeant Pharmaceuticals (NYSE: VRX ) 7.19 Microsoft Corporation (NASDAQ: MSFT ) 2.03 Celgene Corporation (NASDAQ: CELG ) 2.55 Exxon Mobil Corporation Common (NYSE: XOM ) 1.78 Horizon Pharma plc (NASDAQ: HZNP ) 2.53 Johnson & Johnson Common Stock (NYSE: JNJ ) 1.49 Allergan PLC (NYSE: AGN ) 2.41 Wells Fargo & Company Common St (NYSE: WFC ) 1.46 The Priceline Group Inc. (NASDAQ: PCLN ) 2.36 General Electric Company Common (NYSE: GE ) 1.41 Transdigm Group Incorporated Tr (NYSE: TDG ) 2.22 Berkshire Hathaway Inc. Class B (NYSE: BRK.B ) 1.4 Oracle Corporation Common Stock (NYSE: ORCL ) 2.05 JPMorgan Chase & Co. Common St (NYSE: JPM ) 1.37 Biogen Idec Inc. (NASDAQ: BIIB ) 1.79 Pfizer, Inc. Common Stock (NYSE: PFE ) 1.19 Skechers U.S.A., Inc. Common St (NYSE: SKX ) 1.5 AT&T Inc. (NYSE: T ) 1.15 Besides AAPL, which constitutes 7.25% and 3.75% of ALFA and SPY, respectively, the two funds do not have any top-10 holdings in common. Hedging mechanism ALFA has an interesting hedging mechanism, which when enforced shorts the S&P 500 in an amount equal to the value of the fund’s long holdings. In other words, ALFA becomes market neutral when the hedge is activated. The trigger for the activation is simple – almost too simple, at first glance – it’s when the S&P 500 falls below its 200-day simple moving average [SMA] at month’s end. Why month’s end, which seems like an arbitrary day to choose? Why not the 15th of each month, or the 19th? Surprisingly, choosing the end of each month as the trigger was more effective than the seemingly more logical “5 consecutive days below 200 SMA” rule on data from 1950 to 2014, presumably because the portfolio was hedged less in a long-term secular rising market. Which brings us to the main purpose of this post, which is to inform investors that, unless the S&P 500 gains in excess of 4.35% (from 1988.87 to 2075.41) on the last trading day of August, i.e. in one trading day’s time, ALFA’s hedging mechanism is about to be activated for the first time . Interestingly, this is not the first time that the S&P 500 has dipped below its 200 SMA since ALFA’s inception. As can be seen from the chart below, this has happened at least twice since May 2012. But now let’s take a closer look at each of those two instances. The first event took place in November 2012, around the time of the “fiscal cliff” negotiations. We can see from the above chart that the S&P 500 dipped below the 200 SMA in mid-November, but then recovered above the 200 SMA by month’s end. Hence, ALFA’s hedge was not activated. A similar phenomenon was observed in October 2014: Takeaway What does this mean for investors? If you already own ALFA, you have two basic choices (assuming that the S&P 500 does not rally 4.35% over the weekend). HOLD . You prefer to take a “passive” approach to market timing (an oxymoron, perhaps), and are comfortable with ALFA’s hedging strategy. You understand that ALFA will probably return close to flat in the month of September, plus or minus ALFA’s alpha, and then for every month after that until the S&P 500 breaks above its 200 SMA at month’s end. SELL . You have a strong conviction that the market will resume its uptrend in September and in the months beyond. You do not want to have part of your holdings invested in a market-neutral position, so you sell ALFA and replace it with SPY or another long-only instrument. You will only rotate back into ALFA when the S&P 500 breaks above its 200 SMA at month’s end. For investors who do not yet own ALFA and are considering whether or not to buy this fund, they should be aware that the ETF, if purchased in September, will be a market-neutral fund for at least that month, and then for every month after that until the S&P 500 breaks above its 200 SMA at month’s end. Disclosure: I am/we are long ALFA. (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.