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ETFs To Hideout In While New Trends Take Shape

Summary Uncertainty in the markets can be a scary thing and often prompt ill-timed moves that set your portfolio back from achieving your goals. The unknown is how long will it take for new opportunities to develop and where the most rewarding setups may ultimately materialize. You may be better off seeking out conservative strategies that give you some measure of correlation to stock or bonds. Uncertainty in the markets can be a scary thing and often prompt ill-timed moves that set your portfolio back from achieving your goals. The initial days of trading in 2015 have certainly shown an increase in volatility that may prove to setup new trends in the near future. The SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) is more than 4% off its all-time highs and initiating the worst start to a New Year since 2008. The unknown is how long will it take for new opportunities to develop and where the most rewarding setups may ultimately materialize. Patience and discipline may be your best allies when stalking new trends. Instead of just languishing in cash that is paying nothing, you may be better off seeking out conservative strategies that give you some measure of correlation to stock or bonds. These short-term holdings using diversified ETFs that will give you the opportunity for some income , capital appreciation, or both. Short Term Bonds Investors that favor short-term bond ETFs as temporary hideouts may want to check out the iShares 1-3 Year Credit Bond ETF (NYSEARCA: CSJ ) or the Vanguard Short-Term Bond ETF (NYSEARCA: BSV ). CSJ is made up of over 900 investment grade credit securities from both domestic and foreign issuers with an effective duration of less than 2 years. The fund has a yield of approximately 1% and charges an expense ratio of just 0.20%. In addition, the net asset value has been very stable over the last several years. BSV has a similar yield with more government related fixed-income and a slightly higher duration as well. Depending on your broker, you may be able to purchase one or both of these ETFs commission-free in order to be able to trade in or out when needed without eating into income or principal. Asset Allocation Funds If you are looking for a fund that is designed to take less risk than the overall market, you may want to consider an asset allocation fund such as the iShares Conservative Allocation ETF (NYSEARCA: AOK ). This ETF takes a “fund of funds” approach to allocate among stocks, bonds, and cash with the goal being low volatility. AOK is primarily weighted towards investment grade bonds with some select domestic and foreign equities. This provides conservative market correlation with a decent 2% yield. Income is paid on a monthly basis, which is an attractive quality as well. Another new entrant in the asset allocation space with more international exposure is the Cambria Global Asset Allocation ETF (NYSEARCA: GAA ). This ETF is unique in that it takes wider exposure to global asset classes and doesn’t charge an overriding management fee. The fund is currently weighted with 50% bond exposure, 43% stocks, and 7% commodities. GAA can provide heavy diversification in a single low-cost investment vehicle . What’s not to like? The Bottom Line Implementing a plan to navigate a market crossroads, while avoiding too much risk, can be a prudent portfolio management technique for most investors. Having too much cash for long periods of time can breed indecision and lead to a state of paralysis. With these ETFs you can still enjoy some participation in market dynamics with less overall exposure to draw down than a traditional equity or bond fund. They can ultimately be a stepping stone to a more conventional trend or strategy when conditions prove to be more favorable. 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.

When Picking Stocks, It’s Good To Be Lucky.

Summary There are very few human endeavors that do not involve any element of luck. Investing is no exception luck plays a role. When judging the luck vs. skill ratio in a game an interesting test is to try to lose. The harder it is to intentionally lose, the less skill the game requires. The same test can be applied to investing. I suggest we give it a try. Have you ever played a game with a young child and tried to lose, only to find yourself having to cheat to allow the toddler to win? That’s because most games for very young children have a very low skill component. A few years later perhaps you’re teaching the child to play checkers or chess. Now it is very easy to lose intentionally. The more skill a game requires the easier it is to lose intentionally. (Being competitive I find it very difficult to lose intentionally to anyone over six – a sad but true commentary on my personality.) This can also be applied to stock picking. If stock picking is mostly based on skill, it should be easy to pick stocks that trail the market. I propose we put the theory to the test by having a contest to see who can pick a portfolio that will trail the market over the next year. Let’s start February 1st, to give everyone a chance to select their stocks and to give me a chance to find a place to post and share the portfolios. Before I give the rules of the contest I want to discuss skill and luck a little. First, let’s look at the definition of skill from Merriam-Webster: Skill: The ability to use one’s knowledge effectively and readily in the execution of performance. Skill is not based only on the outcome. The outcome can be the result of luck. I have known investors who have made a lot of money by making large bets on a small number of stocks and letting those bets ride. Was it skill? It’s hard to know. I do know that if enough investors participate in the market in that manner some of them will get rich even if no skill is involved. If we have a coin flipping contest and define flipping heads as winning: If you flip a coin 10 times the chances that you end up with 60% heads or greater are approximately: 38%. If you flip a coin 20 times the chances that you get 60% heads or greater is about 25%. If you flip the coin 100 times the chances of getting 60% heads or greater is approximately 3%. If at least part of investment returns are based on luck, an investor who does not make a lot of bets has a better chance of out performing the market by a large amount. An investor can limit his bets by only selecting a limited number of stocks. An investor can also limit his number of bets by investing only in a single industry, sector, market cap etc. Of course, making fewer bets also means you have a better chance of under performing the market by a large amount. Which is why my portfolio is diversified; it is not that important to me to have outsized gains, but it’s very important to me to avoid outsized losses. I will also note that the reason the market involves so much luck is actually because most of the participants are highly skilled. If you sit down at a poker table with a bunch of rubes your skill at poker will almost guarantee you win. If everyone at the table has the same skill level, skill evens out and luck becomes a much larger factor. Now back to our contest.. Each contestant should select a portfolio of twenty stocks from the S&P 500. The stock must be diversified with two stocks from each sector: Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecommunications Services Utilities Each stock gets equal weighting and the entire portfolio is invested in these equities – no bonds no cash. The portfolio is created in La-La land where there are no expenses and no taxes. The goal is to select a portfolio that will trail the S&P 500 in total return over the next year. Send me a message with your selections. I will post the selections somewhere where we can monitor our progress. I will post the location on an insta-blog. The contest will start Feb. 1 2015 and end Feb. 1 2016. Is this a perfectly formulated study? No, far from it. Even I, who am not a researcher can point out a lot of flaws, but I think it will be interesting and challenging, and in spite of its flaws, we may learn something. Conclusion It is difficult to tell luck from skill when judging investment returns. Portfolios that lack diversification have a better chance of either greatly outperforming or greatly underperforming the market. If we account for this, by forcing the selection of a diversified portfolio, a skilled stock picker should still be able to create a portfolio that will under perform the market. Let’s give it a try and see how we do.

How To Find The Best Sector ETFs

With so many ETFs to choose from, finding the best can be a daunting task. You cannot trust ETF labels, only due diligence on the holdings allows an investor to understand an ETF. Low costs and quality holdings, not past performance, is the best indicator of an ETF’s future success. Why ETF Labels are Confusing There are at least 44 different Financials ETFs and at least 188 ETFs across all sectors. Do you need that many choices? How different can the ETFs be? Those 44 Financials ETFs are very different. With anywhere from 22 to 541 holdings, many of these Financials ETFs have drastically different portfolios, creating drastically different investment implications. The same is true for the ETFs in any other sector, as each offers a very different mix of good and bad stocks. The Consumer Staples sector ranks first. Financials ranks last. How to Properly Assess a Sector ETF I firmly believe ETFs for a given sector should be similar. I think the large number of Financials (or any other) sector of ETFs hurts investors more than it helps because too many options can be paralyzing. It is simply not possible for the majority of investors to properly assess the quality of so many ETFs. Analyzing ETFs, done with the proper diligence, is far more difficult than analyzing stocks because it means analyzing all the stocks within each ETF. To be a smart investor, you understand analyzing the holdings of an ETF is critical to finding the best ETF. Figure 1 displays the best ETF in each sector. Figure 1: The Best ETF in Each Sector (click to enlarge) Sources: New Constructs, LLC and company filings How to Avoid “The Danger Within” Why do you need to know the holdings of ETFs before they buy? You need to know to be sure you do not buy a fund that might blow up. Buying a fund without analyzing its holdings is like buying a stock without analyzing its business and finances. No matter how cheap, if it holds bad stocks, the ETF’s performance will be bad. PERFORMANCE OF FUND’S HOLDINGS = PERFORMANCE OF FUND New Constructs covers over 3000 stocks and is known for the due diligence we do for each stock we cover. Accordingly, our coverage of ETFs leverages the diligence we do on each stock by rating ETFs based on the aggregated ratings of the stocks each ETF holds. The PowerShares KBW Property & Casualty Insurance Portfolio ETF (NYSEARCA: KBWP ) is the top-rated Financials ETF and the overall top ranked fund of the 188 sector ETFs that I cover. The worst ETF in Figure 1 is State Street’s Utilities Select Sector SPDR ETF (NYSEARCA: XLU ), which gets a Neutral (3-star) rating. One would think ETF providers could do better for this sector. Kyle Guske II contributed to this post. Disclosure: David Trainer Kyle Guske II receive no compensation to write about any specific stock, sector, or theme.