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4 ETFs For Income In Q4

The volatile end to Q3 and flow of soft economic data in the U.S. since then has once again highlighted the importance of income-focused investing. Be it bonds, high dividend equities, or pass-through securities, picks that address higher yielding securities are performing well in the final quarter of year. The Fed lift-off worry which has been a pain in the neck for stocks so far this year has now shifted back to the early 2016, at the earliest. Back-to-back shockers at home including a soft job report, muted manufacturing numbers, subdued inflation and now an eight-month low retail sales in September on top of a revised down sales figure in August marred the optimism surrounding the U.S. growth momentum. To top it all, global growth worries stemming from hard landing fears in China, return of deflationary threats in the Euro zone, a slowdown in Japan and a faltering emerging market that was hit by the commodity market crash persuaded the Fed to stay put. Investors should note that not only the Fed, a half of the globe, specially the developed part is presently pursuing an easy money policy. While it is a decent setting for capital gains, 10-Year Treasury bond yields slumped and are at 1.99% as of October 14, 2015 leading some to believe that a glorious phase for high yielding securities may be near. While the likelihood of more cheap money inflows should cheer up stocks and especially dividend investing all over again, the momentum lost in the U.S. economy also raises questions over how long the Fed-induced optimism can support a stock market rally. So, high-yield dividend investing is needed to ward off capital losses, if there is any in the near future. Moreover, investors can target bond ETFs as income picks. This is truer given the flight to safety amid heightened volatility in the global market. Broader commodities are also helping this trend, with stubbornly-low oil prices putting a cap over inflation. In this type of an environment, investors can count on income picks for Q4. While an individual security pick is always an option, ETFs give options to fairly diversify one’s portfolio. Below, we highlight four intriguing selections which could be just what the doctor prescribed. These options offer up a nice combination of potential capital appreciation and strong yields. In fact, most of the choices have yields in excess of 5%, making them excellent income choices: Global X Super Dividend (NYSEARCA: SDIV ) SDIV represents a compelling product to invest in international markets for high yield. SDIV is an equally weighted basket of 114 high yield stocks from around the world. With 30% exposure in U.S. equities, the fund also provides access to securities in Europe, Australia, Asia, Canada and Latin America. Among sector allocations, real estate, financial services, utilities and telecommunication remain the top four choices for the fund. The fund charges a fee of 58 basis points annually. Furthermore, not only is the product well-mixed from a sector look, it is also well-diversified from an individual holding perspective as no single firm makes up more than 1.89% of assets. The fund yields about 6.91% annually, representing a good opportunity for investors to generate some income by investing overseas. This Zacks ETF Rank #3 (Hold) was up 2.4% in the last one month (as of October 14, 2015). Arrow Dow Jones Global Yield ETF (NYSEARCA: GYLD ) For investors who want exposure to a variety of high yielding market areas, ArrowShares’ GYLD could be an excellent choice. This fund tracks the Dow Jones Global Composite Yield Index, giving access to five key market areas; global equities, global real estate, global sovereign debt, global alternatives and global corporate debt. The fund puts more-or-less 20% in each of the five sectors with no single security taking more than 0.99% in the fund. This ensures that the product is well diversified among 150 total holdings. The fund pays a 12-month Yield of 8.71% (as of October 14, 2015). Over the last one month, the fund was up over 2.2%. The fund’s multi-asset approach and a global footprint should offer decent capital appreciation going forward. High Yield Long/Short ETF (NASDAQ: HYLS ) The fund seeks to provide current income by investing primarily in a diversified portfolio of below investment-grade or unrated high-yield debt securities. Capital appreciation is its secondary motive as evident from the 1.8% loss incurred in the last one month. The 296-holding product thrives on long-short strategies and can be effective in times of market upheaval. Net weighted average effective duration (considering the short positions) is 3.07 years indicating low interest rate risks. The fund is meant for an intermediate term as evident from 6.08 years of weighted average maturity. It yields 6.68% annually. Vanguard Extended Duration Treasury ETF (NYSEARCA: EDV ) For a long-term play on the bond market, investors have EDV, a fund that seeks to match the performance of the Barclays U.S. Treasury STRIPS 20-30 Year Equal Par Bond Index. This means that this benchmark zeroes in on fixed income securities that are sold at a discount to face value, and then the investor is paid the face value upon maturity. This is a safer choice with decent current income opportunities. The fund has been a great performer lately, having returned over 5.8% (as of October 14, 2015) on its safe haven appeal. This particular 73 bond basket has an average maturity of 25.1 years, and a yield to maturity of 3%. The fund may yield lesser than other options, but it is still higher than the benchmark yield and is also likely to shower smart gains on investors in the present market condition. The effective duration of the ETF is 24.7 years suggesting high interest rate risks. This Zacks Rank #2 (Buy) ETF has amassed about $371 million in assets. It charges just 12 basis points a year. Original Post

The iShares Core Conservative Allocation ETF: AOK Is A-OK

An atypical fund of funds. An unusual construct containing non-traditional ETF sectors. Surprisingly good capital appreciation and consistent monthly dividends. Any individual investor who might catch equity and bond market news in bits and pieces during the course of the day is most likely feeling a bit of angst. Analyst and economist have seemed to become ‘polarized’ in their thinking. Some argue that impending inflation looms on the horizon; other that a fathomless deflation has already begun. Some argue that the global economy is still growing at an above average pace while others claim we’re on the verge of a deep global recession. Who has time to study markets and also go about the daily routine? Then again, what investor can ignore the change in sentiment over the past year? Well, there’s a way to continue with a well-disciplined, consistent investment strategy without taking undo risks and still do quite well. BlackRock’s iShares Core Conservative Allocation ETF (NYSEARCA: AOK ) ma y be the exact right place to stick with a long term disciplined investment plan and protect those hard earned retirement or future college fund savings until the time is again right to diversify. There are advantages in choosing this ‘fund of funds’ over traditional conservative investments. First, investment dollars are not being locked in as they would be if one had purchased U.S. Treasuries or a major financial institution’s certificate of deposit. Further, its Treasury holdings diversify across the span of all maturities. It’s not exclusively fixed income U.S. Treasuries, but also allocates among equities via other iShares “Core” funds including S&P 500 large, mid and small caps, European and Asia-Pacific core holdings as well as a small emerging market allocations. However, the greatest portion of all of the fund’s asset classes are U.S. focused, or global companies whose business is mostly in U.S. markets. (Data from BlackRock) In order to grasp this fund as a good safe haven play in uncertain times, a closer examination of the allocations, individual components and returns need to be examined in greater detail. For example, a large portion of the fund is classified as ‘ Other ‘ and as ‘ Supranational’ . That’s an unusual name for a sector to say the least! (Data from BlackRock) According to Investopedia, Supranational is: … an international organization, or union, whereby member states transcend national boundaries or interests to share in the decision-making and vote on issues pertaining to the wider grouping … As examples, the European Union, the International Monetary Fund, and World Trade Organization are ‘Supranational organizations’. Indeed, scrolling through iShares comprehensive asset listings, there is indeed a ‘Supranational’ sector. The breakdown is summed up in the following table, and well worth noting. Supranational Organization Fund Symbol Fund Weighting Brief Description African Development Bank Medium Term Notes AFDB 0.06% NGO for economic development in Africa Asian Development Bank Medium Term Notes ASIA 0.13% NGO for economic development in Asia Development Bank of Latin America CAF 0.01% NGO Financing and Technical Assistance Council of Europe Development Bank COE 0.06% NGO Social Investment Projects European Bank for Reconstruction Medium Term Notes EBRD 0.07% NGO for Entrepreneurship European Investment Bank EIB 0.43% Bank of the European Union for EU Member States Inter-American Development Bank IADB 0.17% NGO Financial and Technical Support Latin America and Caribbean International Bank for Reconstruction Medium Term Notes IBRD 0.24% WTO Sponsored for Developing Countries International Finance Corporation IFC 0.10% NGO Private Sector Development in Emerging Markets Nordic Investment Bank NIB 0.03 NGO Financial Development for Nordic and Baltic Countries Total 1.3% (Data from BlackRock) Most, if not all of the above mentioned Non-Government Organization (NGO) Banks do receive support from governments, or other supranational organizations but operate mostly independent of governments for the social and economic betterment in developing regions. The point of the matter is that the ‘medium term notes’ or other NGO investments seem reasonably secure since they are ‘backed’ by larger ‘parent’ organizations or part of a government’s foreign aid budget. The second undefined label, ‘ Other ,’ is a bit more complicated, to say the very least. Scrolling through the holdings, it seems that ‘Other’ includes a wide ranging, globally diversified collection of assets. The number of global holdings was quite surprising. There are small holdings of equities, bonds and agency notes allocated in over 52 countries. They are summarized in the Bar chart below. The sum total of ‘other’ holdings is 7.7%. Other Holdings: All less than 1.00%; Total: 7.7% of all holdings. (Data from BlackRock) Hence, there’s a bit more risk in that sector; however to be fair, these other holdings are extremely diverse, and very lightly weighted. What remains to be examined then, are the actual funds in the fund. A little care must be taken here, too. First, when the number of holdings is considered in each of the funds, all part of iShares “Core” ETFs theme, there is bound to be ‘overlaps’. So the fund does lack efficiency. However, with most of the Fund in U.S. Treasuries and S&P large cap equities, it should serve its purpose as a defensive holding in the current global economic environment. The investor should keep in mind, though, that the steady capital appreciation may have much the do with the extraordinary advanced economy bond purchasing programs and flight to quality trade into sovereign bonds. That being said, the fund has, in fact, performed rather well and has consistently paid monthly dividends since inception, November of 2005. (click to enlarge) As noted, the fund is composed mostly of fixed income; about 69%. Investors should also take note that it has become a common practice for corporations or governments to issue bonds denominated in stronger foreign currencies, for example, in Euros, Pound Sterling, Yen or U.S. Dollars. There are many good reasons for this strategy. It might be that two nations share a special trade relationship, for example the U.S. and Mexico. Another is to attract foreign fixed capital investments by having a large foreign currency reserve of the foreign investor. Also, it is a means to make bonds with weak domestic economies more attractive to investors seeking an added measure of security. However, the strategy could backfire if the issuer’s native currency weakens sharply against the stronger currency, thus making it more expensive to service the debt. Bond ETF Funds Symbol Number of Holdings Type of Holdings Distribution Yield Weighted Average Coupon Weighted Average Maturity Premium / Discount Expense Fee Weight in AOK Fund iShares Core U.S. Treasury Bond ETF GOVT 120 1 to 30 year U.S. Treasuries 1.36% 2.24% 7.05 years Premium 0.02% 0.15% 16.18% iShares Core Total USD Bond Market ETF IUSB 1547 Global U.S. Dollar Denominated Bonds 1.68% 3.26% 7.11 Years Premium 0.18% 0.15% after 0.01% waiver 41.93% iShares Core U.S. Credit Bond ETF CRED 2542 U.S. Dollar denominated, sovereign, supranational, corporate, local authority notes and bonds 3.35% 4.17% 10.18 years Premium 0.16% 0.15% 11.49% (Data from BlackRock) Next, the fund extends globally with comprehensive U.S., European and Pacific index equity holdings. It’s also important to keep in mind, as described above, that the “Supranational” and the “Other” holdings have a “theme” all their own as well as a structure just like a sector with merely a skeleton of weightings. However, in total, the ‘Other’ and ‘Supranational’ sectors carry a rather heavy allocation weight: Supranational ranks between Switzerland and China, and the “Other” is the fund’s second largest ‘geographic allocation’. Equity ETF Fund Symbol Number of Holdings Type of Holding Distribution Yield Price / Earnings Price / Book Equity Beta Premium / Discount Weight in AOK Fund iShares Core S&P 500 ETF IVV 505 S&P 500 2.20% 19.13 2.75 1.20 Discount -0.04% 13.83% iShares Core MSCI Europe ETF IEUR 991 Large, Mid and Small Cap Europe 4.02% 17.65 1.83 0.99 Premium 0.49% 7.31% iShares Core MSCI Pacific ETF IPAC 861 Large, Mid and Small Cap Pacific 2.45% 14.31 1.37 0.82 Premium 0.19% 4.62% iShares Core MSCI Emerging Markets ETF IEMG 1787 Large, Mid, Small Cap emerging Market 1.93% 19.21 3.13 0.72 Premium 1.10% 2.81% iShares Core S&P MidCap ETF IJH 401 Mid Cap S&P 500 1.51% 20.08 2.29 1.09 At NAV Par 0.00% 1.21% iShares Core S&P SmallCap ETF IJR 602 Small Cap U.S. Equities 1.30% 20.57 1.96 0.97 Premium 0.02% 0.51% (Data from BlackRock) Lastly, just a few quick facts about the fund in the table below. iShares AOK Symbol Number of Holdings Type of Holding Distribution Yield 12 Month Trailing Yield Expense Ratio Equity Beta Premium / Discount Average Volume iShares Core Conservative AOK 9 ETFs plus Supranational and Diversified Global Assets Mostly Equities plus Government, Agency, Corporate Fixed Income 1.46% 2.10% 0.39% 0.25% Discount -0.08% Appx 6000 daily; Recent 11,000 Appx (Data from BlackRock) All said and done, on the surface the fund seems rather simple: nine ETF holdings mostly in U.S. assets. However, when the details are examined, there’s nothing small nor simple about this fund, at all. Although a core conservative fund of funds, it’s quite diversified, global, comprehensive and complex! The main point being that either for short term safety or in terms of long term performance, the fund is, without a doubt, A-OK!

UGI Corporation: Little Bit Of This, Little Bit Of That

Summary UGI Corporation has its hands in many pots, with businesses all around the world. Peeling back the onion reveals that management has maintained control of operations. With manageable debt, high profitability, and below average valuation multiples, investors could pick much worse in the utility sector. UGI Corporation (NYSE: UGI ) is a holding company that operates a variety of businesses involved in the transportation and distribution of energy products. The company has been on an acquisition spree, spending over $2B over the past five years acquiring a vast swath of business lines. Shareholders have rewarded the exuberant spending with outsized returns over the broader utility index. Are more returns set to come or has the company lost direction? What Does UGI Corporation Do? As mentioned, the company owns a substantial interest in a variety of businesses: General Partner of AmeriGas Partners (NYSE: APU ), prior research by me found here International liquid petroleum gas businesses Midstream & Marketing operations (energy services and electric generation businesses) An electric generation segment (ownership interests of approximately 250MW of power generation) A gas utility business (serving nearly a million customers in Pennsylvania and Maryland) Phew. Simple this company is not. The above five operating segments actually simplify a variety of businesses that really don’t deserve to be comingled (revenue from co-ownership of power plants and pipeline building are intertwined in the Midstream & Marketing segment as an example). The AmeriGas’ ownership interest constituted just under half of 2014 revenue and profit, so the importance of this interest to operating results cannot be understated. AmeriGas is a propane distributor, with operations across the vast majority of the United States. Through its distribution network, AmeriGas provides propane to customers who have no real alternative for heating and cooking in their homes and businesses. 2014 was a stellar year for propane due to a colder than average year that drove operating margins due to scarcity of supply – 12.7% operating margins compared to 5.8% operating margins in 2012. Investors should be careful and consider that 2014 should not be a base case scenario for AmeriGas and is rather unlikely to be repeated. 2015 has been shaping up to be an average year in regards to operating results. This weakness year/year is part of the reason why earnings per share are set to fall in fiscal 2015 compared to fiscal 2014 for UGI Corporation. I’d highly recommend reading my prior article on AmeriGas for a deeper understanding, but as an overview, there are quite a few headwinds facing AmeriGas going forward. UGI highlights the main risk in its form 10-K: “Retail propane industry volumes have been declining for several years and no or modest growth in total demand is foreseen in the next several years. Therefore, the Partnership’s ability to grow within the industry is dependent on its ability to acquire other retail distributors and to achieve internal growth, which includes expansion of the Propane Exchange program and the National Accounts program (through which the Partnership encourages multi-location propane users to enter into a supply agreement with it rather than with many suppliers), as well as the success of its sales and marketing programs designed to attract and retain customers.” Retail propane is AmeriGas’ core business and has been declining slowly. This is due to a variety of factors, such as the expansion of natural gas further into rural territories (on a BTU/price basis, propane cannot compete and that is unlikely to change) and shrinking demand from customers due to milder temperatures and customer energy conservation. AmeriGas’ management believes that a propane exchange program (i.e., swapping out bottles for your grill) might help plug the slow leak of lost customers, which I find a stretch. Neither does consolidating the industry more, which isn’t going to stem the demand problem. The UGI International segment is another large contributor to revenue. The division sells LPG products throughout portions of Europe such as France, Belgium, the Netherlands, Austria, etc. Like AmeriGas, these sales are primarily to residential and small businesses that use the gas for heating and cooking. Unfortunately, LPG prices are much higher in Europe than in the United States. This has made electricity, which is immensely more expensive on a BTU basis than LPGs in the United States, a viable competitor to European LPG for heating and cooking in Europe, especially in France. So just like in the United States, customer demand is on a slow, marginal decline barring cold weather spikes: “The LPG markets in France and the Benelux countries are mature, with modest declines in total demand due to competition with other fuels and other energy sources… due to the nuclear power plants, as well as the regulation of electricity prices by the French government, electricity prices in France are generally less expensive than LPG. As a result, electricity has increasingly become a more significant competitor to LPG in France than in other countries where we operate. In addition, government policies and incentives that favor alternative energy sources can result in customers migrating to energy sources other than LPG in both France and the Benelux countries.” As a bright spot, the gas utility segment bears promise. I’m a fan of gas utilities; the environmental risk is much lower but allowed rates of return are generally similar to electric utilities. Gas utilities also have a steady stream of capital expenditures (replacement of pipe) that are easy to pass along to consumers, on which gas utilities are entitled to their fair rate of return. Additionally, being located in Pennsylvania, UGI’s gas utility business is located near many heavy industries such as metal and paper manufacturers. This allows better diversification of revenue away from the residential consumer that some utilities do not benefit from. From a sourcing perspective, being next to Marcellus and Utica shale formations provides a readily available and cheap source of natural gas to sell along to consumers. Being able to provide cheap natural gas prices for local consumers means higher relative demand compared to other areas of the United States. Midstream & Marketing is a growing but convoluted segment. Bundled up in operational results here are the operating results from natural gas liquefaction, LPG storage, energy peaking business (selling stored gas to utilities during times of high demand), pipeline construction, and partial ownership in coal, natural gas, and solar power plants (250MW worth). This makes our jobs as investors incredibly difficult as it becomes tedious to analyze and project future earnings potential. In general, however, this segment is like the others in that it benefits from cold weather spikes in the Northeast, such as during 2014. Peaking businesses can be highly profitable but can also sit on stored LPGs for some time waiting for the opportunity to sell. Cash Flow With all these businesses, how has operational cash flow performed? You might be as surprised as I was to see a fairly healthy cash flow statement. Operational cash flow has been growing and capital expenditures light (which makes sense given the asset-light nature of the retail LPG businesses). Because of strong operational cash flow, UGI would have actually been generating net cash balances excluding its acquisitions, a rarity for companies operating in the utility industries that have been running through cash in a cheap debt, low interest rate environment. At 3x net debt/EBITDA, UGI has much less leverage than most utility peers. Conclusion Trading at a ttm EV/EBITDA of less than 8x, shares appear cheap from that valuation perspective. The variety of businesses here appear to still be well run despite the amalgamation of holdings that management has collected over the past few years. While the company still relies heavily on propane/butane sales, worldwide geographical diversity does limit some of the risk. While I don’t think operating income can expand much from here outside of boosts from cold weather events, management still has plenty of room to bump the dividend to reward shareholders without getting themselves into cash flow problems. If you’re interested in AmeriGas, this might be a safe way to get exposure to the company while getting some worldwide exposure and regulated utility business diversification as well.