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XLG Doesn’t Belong On The Efficient Frontier, I Can Name 3 Superior ETFs

Summary I’m taking a look at XLG as a candidate for inclusion in my ETF portfolio. The expense ratio relative to the diversification is simply poor. The high correlation with other major funds (like SPY) limit the uses for the ETF. I can’t see any way to include XLG in a portfolio on the efficient frontier. I’m not assessing any tax impacts. Investors should check their own situation for tax exposure. Investors should be seeking to improve their risk adjusted returns. I’m a big fan of using ETFs to achieve the risk adjusted returns relative to the portfolios that a normal investor can generate for themselves after trading costs. I’m working on building a new portfolio and I’m going to be analyzing several of the ETFs that I am considering for my personal portfolio. One of the funds that I’m considering is the Guggenheim Russell Top 50® Mega Cap ETF (NYSEARCA: XLG ). I’ll be performing a substantial portion of my analysis along the lines of modern portfolio theory, so my goal is to find ways to minimize costs while achieving diversification to reduce my risk level. What does XLG do? XLG attempts to track the total return of the Russell Top 50® Mega Cap Index. At least 90% of funds are invested in companies that are part of the index. XLG falls under the category of “Large Blend”. Does XLG provide diversification benefits to a portfolio? Each investor may hold a different portfolio, but I use (NYSEARCA: SPY ) as the basis for my analysis. I believe SPY, or another large cap U.S. fund with similar properties, represents the reasonable first step for many investors designing an ETF portfolio. Therefore, I start my diversification analysis by seeing how it works with SPY. I start with an ANOVA table: (click to enlarge) The correlation is almost 97.5%. That high correlation will limit the potential for benefits through diversification and puts XLG in a difficult situation where it may have to be considered as an alternative to SPY rather than as a complimentary holding. Standard deviation of daily returns (dividend adjusted, measured since January 2012) The standard deviation is excellent. For XLG it is .6868%. For SPY, it is 0.7300% for the same period. SPY usually beats other ETFs in this regard, so having a lower standard deviation is excellent. Mixing it with SPY I also run comparisons on the standard deviation of daily returns for the portfolio assuming that the portfolio is combined with the S&P 500. For research, I assume daily rebalancing because it dramatically simplifies the math. With a 50/50 weighting in a portfolio holding only SPY and XLG, the standard deviation of daily returns across the entire portfolio is 0.7038%. If an investor wanted to use XLG as a supplement to their portfolio, the standard deviation across the portfolio with 95% in SPY and 5% in XLG would have been .7270%. Why I use standard deviation of daily returns I don’t believe historical returns have predictive power for future returns, but I do believe historical values for standard deviations of returns relative to other ETFs have some predictive power on future risks and correlations. Yield & Taxes The distribution yield is 1.91%. The yield is almost 2%, which I think is about the minimum yield for a large position in a portfolio if the investor is retiring. It’s close enough to that arbitrary cut off that it could certainly be used, though I don’t find it very attractive for that. I’m not a CPA or CFP, so I’m not assessing any tax impacts. Expense Ratio The ETF is posting .20% for an expense ratio. I want diversification, I want stability, and I don’t want to pay for them. The expense ratio on this fund is higher than I want to pay for an ETF that invests in U.S. equity securities. I understand some ETFs will need higher expense ratios because of their operations, but I have not found any justification for this expense ratio. I’ll touch on this again in the part on holdings. Market to NAV The ETF is at a .11% premium to NAV currently. Premiums or discounts to NAV can change very quickly so investors should check prior to putting in an order. I wouldn’t want to pay a premium greater than .1% when investing in the ETF, though there could be arguments for various accounting issues which may justify the premium. Largest Holdings Consider me unimpressed by the holdings here. It’s not that I don’t like the individual holdings of the ETF, but I want diversification in an ETF. Diversification costs money. If the expense ratio is going to be .20%, I would want substantially better diversification. If an investor has a fairly large pool of money, they could just buy all of the underlying securities and eliminate the expense ratio. If the holding period was long enough, their costs may end up being lower. I’m picking ETFs based on diversification at cheap prices. This is the opposite of that. (click to enlarge) Conclusion I’m currently screening a large volume of ETFs for my own portfolio. The portfolio I’m building is through Schwab, so I’m able to trade XLG with no commissions. I have a strong preference for researching ETFs that are free to trade in my account, so most of my research will be on ETFs that fall under the “ETF OneSource” program. I’m not impressed with XLG. I like the low standard deviation of returns, but the fairly high correlation means I’m not able to diversify away much of the remaining risk. It could be used as a replacement for SPY because of the low standard deviation of returns, but there are other ETFs with lower expense ratios that can be used for those purposes. For instance, I would use (NYSEARCA: SCHD ) or (NYSEARCA: SCHV ) before XLG if I was looking for exposure to huge U.S. Companies with slightly less volatility. If I was willing to pay higher expense ratios than those two funds, I’d look at (NYSEARCA: SPLV ) with an expense ratio of .25% but a significantly lower standard deviation of returns. In my opinion, XLG is suffering from high expense ratios that cause the ETF to be slightly less efficient than competitors. I might come back and analyze XLG further at some point, but with so many great ETFs to choose from I’m not sure I’ll find time to spend one that was weak in my first pass. 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. The analyst holds a diversified portfolio including mutual funds or index funds which may include a small long exposure to the stock.

5 Strong Buy Technology Mutual Funds To Bet On

More often than not the technology sector is likely to report above-par earnings than other sectors, as the demand for technology and innovation remains high. However, technology stocks are considered to be more volatile than other sector-specific stocks in the short run. In order to minimize this short-term volatility almost all tech funds adopt a growth management style with a focus on strong fundamentals and a relatively higher investment horizon. Investors having an above-par appetite for risk and fairly longer investment horizon should park their savings in these funds. Below, we will share with you 5 top-rated technology mutual funds. Each has earned a Zacks #1 Rank (Strong Buy) as we expect these mutual funds to outperform their peers in the future. Fidelity Select Software & Comp Portfolio (MUTF: FSCSX ) seeks capital growth. The fund invests a lion’s share of its assets in companies whose primary operations are related to software or information-based services. Investments are made in both domestic and foreign companies. The fund uses fundamental analysis to select companies for investment purposes. The non-diversified technology mutual fund has a one year return of 10.5%. This fund has an expense ratio of 0.78% as compared to category average of 1.55%. T. Rowe Price Science & Technology Advisor (MUTF: PASTX ) invests a large portion of its assets throughout the world in the common stocks of companies that benefit from the development and use of technology. It may sell securities in order to secure gains, curtail losses and reinvest assets. The technology mutual fund has a one year return of 14%. Kennard W. Allen is the fund manager and has managed the fund since 2009. Columbia Global Technology Growth A (MUTF: CTCAX ) seeks capital growth. The fund invests a major share of its assets in companies from the technology sector that benefit from advancement and the development of technology. It invests a minimum of 40% of its assets in foreign companies. It may invest in companies irrespective of their market capitalizations. The non-diversified technology mutual fund has a one-year return of 19.8%. As of October 2014, this fund held 123 issues with 5.52% invested in Apple Inc. (NASDAQ: AAPL ) Fidelity Advisor Electronics A (MUTF: FELAX ) invests heavily in companies involved in manufacturing, designing and distribution of electronic components. The fund invests in firms throughout the world. Factors such as financial strength and economic conditions are considered for investment decisions. The non-diversified technology mutual fund has a one-year return of 40.3%. Stephen Barwikowski is the fund manager and has managed the fund since 2009. Columbia Seligman Communications & Information A (MUTF: SLMCX ) seeks capital growth over the long run. The fund invests a lion’s share of its assets in companies engaged in operations related to communications and information sector. It may also invest in sectors such as information technology and media. It invests a maximum of 25% of its assets in non-U.S. companies. The non-diversified technology mutual fund has a one-year return of 29.6%. This fund has an expense ratio of 1.41% as compared to category average of 1.55%. Now that you’ve read this, are you Bullish or Bearish on ? Bullish Bearish Sentiment on ( ) Thanks for sharing your thoughts. Why are you ? Submit & View Results Skip to results » Share this article with a colleague

ValueShares Launches Global Version Of Quantitative Value ETF

Not too long ago, ValueShares launched its active value ETF in the U.S. market, namely the U.S. Quantitative Value ETF (BATS: QVAL ) . The product has seen decent success so far having amassed about $21 million in assets within just 1.5 months. Probably encouraged by this strong response, the issuer has introduced another value based ETF targeting the international market on December 17, 2014. Below we have highlighted the fund in greater detail for investors seeking a new way to play value stocks in international markets: The ValueShares International Quantitative Value ETF (BATS: IVAL ) in Focus The newly launched ETF is actively managed in nature. The fund provides exposure to about 50 international stocks with strong value characteristics. As such, the fund provides an opportunity to invest in some of the cheapest and quality stocks of abroad on long-term valuation metrics. To do so, the issuer uses a systematic technique. The fund manager initially selects a group of mid-to-large cap international stocks, then analyses financial statements and finally identifies stocks which boast lower enterprise values with respect to operating earnings as well as dirt cheap valuations before considering those as investment targets. The fund charges 99 bps in fees for this exposure. How Could it Fit in a Portfolio? The fund could be a good choice for value investors targeting the international market. In fact, value investing has become extremely necessary for investors with a global market focus given deflationary concerns in the Euro zone, Japan and the world’s second largest economy China. A recent boost to Japan’s already accommodative policies, QE talks in the Euro zone and expectations for further easing in Chinese monetary policy in the wake a prolonged downbeat business environment triggered the need for value investing in the foreign markets. So, it is almost certain that volatility will remain high in the coming months. In such a scenario, value products like IVAL should protect investors from market volatility. Notably, a value investing strategy gives investors exposure to stocks that are trading below their intrinsic values and are considered cheaper than other stocks. Value stocks usually have low price-to-earnings ratios, low price-to-book ratios and high dividend yields, as compared to their growth counterparts. Can it Succeed? The road ahead should not be easy for the newly launched fund as there are quite a number of funds already prevalent in the global value equities space. Vanguard FTSE All-World ex US Index Fund (NYSEARCA: VEU ) dominates the global equities ETF space with assets worth $12.0 billion. The fund has a value focus too with a dividend yield of 3.57% (as of December 18, 2014). The fund gives investors exposure to a basket of 2,460 stocks of more than 45 countries, from both developed and emerging markets around the world. The fund charges 15 basis points as fees. There are several other quality and value ETFs in the global equities space namely the FlexShares International Quality Dividend Index Fund (NYSEARCA: IQDF ) , FlexShares International Quality Dividend Defensive Index Fund (NYSEARCA: IQDE ) , MSCI International Quality Dividend ETF (NYSEARCA: QDXU ) , Cambria Global Value ETF (NYSEARCA: GVAL ) and lots more. Investors should note that IVAL is costlier than most of the well-known funds in this space. The product’s actively managed nature might have led to such hefty fees. So, to amass investors’ money in the long run, we believe that IVAL needs to sell its actively managed nature and methodical stock-selection technique, and show some level of outperformance when compared to ETFs built on relatively on relatively similar themes in this space that do not cost as much.