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Blanket Equity Coverage Through ETFs

Exchange Traded Funds are a liquid investing tool. Costs per 10,000 dollars index funds are extremely low. Portfolio construction will play the entire U.S. market, and a sweeping international option. Turbulence in the global equity markets has investors reviewing their portfolios. Retail investors subscribe to the belief that the best way to minimize losses is diversity and low fees. I’d like to review my personal holdings with you, as an option for investors seeking a diversified foundation of funds which all have low fees. I invest in the 5 ETFs, with minor overlap, and allocate 20% to each. Holding these index funds will allow you to have sweeping coverage of the U.S. market, including a broad international fund. Vanguard Total Stock Market ETF (NYSEARCA: VTI ) ” The Fund employs an indexing investment approach designed to track the performance of the CRSP US Total Market Index, which represents approximately 100% of the investable U.S. stock market and includes large-, mid-, small-, and micro-cap stocks regularly traded on the New York Stock Exchange and Nasdaq. The Fund invests by sampling the Index, meaning that it holds a broadly diversified collection of securities that, in the aggregate, approximates the full Index in terms of key characteristics. These key characteristics include industry weightings and market capitalization, as well as certain financial measures, such as price/earnings ratio and dividend yield.” Fee – .05% annually. VTI allows investors access to 3,816 stocks of all market caps, and has outperformed the S&P since 2005. Vanguard Small-Cap Growth ETF (NYSEARCA: VBK ) ” The Fund employs an indexing investment approach designed to track the performance of the CRSP US Small Cap Growth Index, a broadly diversified index of growth stocks of small U.S. companies. The Fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the Index, holding each stock in approximately the same proportion as its weighting in the Index.” Fee – .09% annually. Hunting for news on small companies can be can be difficult. This fund gives investors access to this market through a basket of 738 small cap stocks. Vanguard Mid-Cap ETF (NYSEARCA: VO ) “The Fund employs an indexing investment approach designed to track the performance of the CRSP US Mid Cap Index, a broadly diversified index of stocks of mid-size U.S. companies. The Fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the Index, holding each stock in approximately the same proportion as its weighting in the Index.” Fee – .09% annually. Reinforcing your base position in mid-caps through VTI, this is where the high flying stocks are located. The index again protects investors against massive losers, while benefiting from the high fliers. This fund has 369 stocks between 2-10 billion market cap in its portfolio. Vanguard Mega Cap Growth ETF (NYSEARCA: MGK ) ” The Fund employs an indexing investment approach designed to track the performance of the CRSP US Mega Cap Growth Index, which represents the growth companies, as determined by the index sponsor, of the CRSP US Mega Cap Index. The Index is a float-adjusted, market-capitalization-weighted index designed to measure equity market performance of mega-capitalization growth stocks in the United States. The Fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the Index, holding each stock in approximately the same proportion as its weighting in the Index.” Fee – .11% annually. This fund has 150 stocks and contains the big blue chips over 200 billion in market cap. Vanguard Total International Stock ETF (NASDAQ: VXUS ) ” The Fund employs an indexing investment approach designed to track the performance of the FTSE Global All Cap ex US Index, a float-adjusted market-capitalization-weighted index designed to measure equity market performance of companies located in developed and emerging markets, excluding the United States. The Index includes approximately 5,550 stocks of companies located in 46 countries. As of October 31, 2014, the largest markets covered in the Index were Japan, the United Kingdom, Canada, Switzerland, and France (which made up approximately 16%, 15%, 7%, 6%, and 6%, respectively, of the Index’s market capitalization). The Fund invests all, or substantially all, of its assets in the common stocks included in its target index.” Fees – .14% annually. An all in one stop for your international exposure. This fund employs roughly 60% of its assets into industrialized nations, the rest into emerging markets. This portfolio construction will give investors sweeping coverage of the United States, and minor exposure into the international markets. If you’re rebalancing your portfolio, this may be a good place to start. From this portfolio, investors can begin adding individual stocks and sector based ETFs to compliment. Investors being hurt in these multiday declines should consider redesigning their portfolio construction. Begin with these ETFs, branch off slowly, and this recovery will be more than breaking even. Disclosure: I am/we are long MGK, VO, VTI, VXUS, VBK. (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.

Revisiting Eurozone ETFs As Economic Growth Falters

After a solid start to 2015, growth in the 19-member Euro zone economy lost momentum due to the Greek debt crisis and deterioration in many emerging market economies as commodities saw a slump and China witnessed a turmoil. The economy grew just 0.3% in the second quarter, down from a two-year record growth of 0.4% in the first quarter and well below the market expectation. This suggests that the Euro zone continues to lag recovery in the U.S., which recorded 2.3% growth in the same period. France and Italy – representing 40% of the currency bloc’s growth – were the major setbacks to the region’s growth in the last quarter. This is especially true, as France recorded zero growth in the second quarter after 0.7% in the first and Italy’s growth slowed to 0.2% from 0.3%. On the positive side, Spain once again turned out to be the outperformer with its quarterly growth increasing from 0.9% in the first quarter to 1% in the second. This was the highest growth rate among the Euro zone nations. Growth in Germany accelerated to 0.4% from 0.3%, while Greece unexpectedly grew 3.1% in the last quarter from 0.1% in the first quarter. Outlook Remains Bright It can be said that the Euro zone has shown strong resilience in a tough environment, which was disturbed by Greece, China and the commodity turmoil. The outlook for the region remains solid heading into the second half of the year given the numerous economic tailwinds that the Euro zone is enjoying. These include ultra-cheap money flows, a boost to liquidity from the European Central Bank’s (ECB) quantitative easing program, a weaker euro and lower oil prices. Improving economic and business activity as well as growing consumer confidence is fueling growth in the 19-member economy. The Euro zone successfully emerged out of the four straight months of deflationary spiral in April and inflation is above the zero level. Notably, annual inflation was 0.2% in July. Further, unemployment across the Euro zone has been falling and remained steady at a three-year low of 11.1% as of June. Given several monetary tools in place, the Euro zone is expected to show strength in the coming months providing a boost to the stocks and ETFs in the region. As a result, we have taken a closer look at some of the ETFs that have the largest exposure to the Euro zone economies. These funds have generated decent returns so far in the year and could continue to do so. iShares MSCI EMU Index Fund (NYSEARCA: EZU ) This product provides exposure to the EMU member countries (those European Union members that use the Euro as currency) by tracking the MSCI EMU index. EZU is one of the most popular ETFs in the broader European space with AUM of nearly $10.9 billion and average daily volume of roughly 6.5 million shares. It charges investors 0.48% in annual fees. The fund holds about 243 securities in its basket with none holding more than 3.15% share. The ETF is a large cap centric fund as about 82% of the portfolio is concentrated on this market cap level. The product has a definite tilt toward financials at 24%, followed by consumer discretionary (14.4%), industrials (13.1%) and consumer staples (10.5%). From a country look, France and Germany take the largest share in the basket with 32.4% and 29.2%, respectively, while Spain, the Netherlands and Italy round off the top five. The fund has returned about 7.1% so far this year and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook. SPDR EURO STOXX 50 ETF (NYSEARCA: FEZ ) This fund follows EURO STOXX 50 Index, which measures the performance of some of the largest companies across the components of the 20 EURO STOXX Supersector Indexes. The fund appears rich with AUM of nearly $4.7 billion, and average daily volume of more than 2.5 million shares. Expense ratio came in at 0.29%. Holding 53 securities in its basket, the product is pretty well spread out across components with no firm making up for more than 5.09% of assets. The ETF is skewed toward financials, as it takes about more than one-fourth of the total assets, while the other sectors receive modest exposure. In terms of country allocation, France and Germany are leading with 36.2% and 30.6% share, respectively, followed by Spain (12.7%), Italy (8.0%), the Netherlands (7.6%), Belgium (3.7%) and Finland (1%). The fund is up nearly 5.6% in the year-to-date time frame and has a Zacks ETF Rank of 3 with a Medium risk outlook. SPDR STOXX Europe 50 ETF (NYSEARCA: FEU ) This ETF is quite similar to FEZ having amassed $280 million in its asset base and trading in volume of less than 74,000 shares per day. It charges 29 bps in annual fees and holds 56 stocks in its basket. While the fund tracks the same index, it is slightly different from FEZ in terms of sector and country holdings. Here, financials and health care take the top two spots in terms of sectors with over 24% share each while consumer staples and energy round off the top four with double-digit exposure each. Country weights for the top three are United Kingdom (35.4%), Switzerland (23.1%) and Germany (14.7%). The product is up 6.1% so far this year and has a Zacks ETF Rank of 3 with a Medium risk outlook. iShares Currency Hedged MSCI EMU ETF (NYSEARCA: HEZU ) For investors looking to manage currency risk while remaining invested in the Euro zone stocks, HEZU might be a good option. The fund follows the MSCI EMU 100% USD Hedged Index and is a play on the popular unhedged fund ( EZU ) with a hedge to strip out the euro currency exposure. The fund holds 263 well-diversified securities in its basket dominated by financials (24.4%) and followed by consumer discretionary (14.7%), industrials (13.3%) and consumer staples (10.7%). The ETF has amassed $1.8 billion in its asset base since its debut a year ago and trades in good volumes of more than 941,000 shares a day. The fund charges 50 bps in annual fees from investors and has delivered impressive returns of over 15% so far this year. It has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating. Bottom Line Given the encouraging trend, Euro zone will likely get a boost in the coming months. So investors could jump into this space and could ride out the strength with any of the above-mentioned ETFs. Original Post

Navigating Water ETFs

There is an impending water shortage, resulting in investment opportunities. Water ETFs provide a safer, albeit expensive, way to invest in the fragmented water industry. FIW has the best holdings, but a potentially very expensive fee structure. CGW offers nice global exposure to water investments and is my favorite of the four ETFs. PHO and PIO have a surprisingly strong emphasis on alternative energy. THE WATER OPPORTUNITY For several years I have followed an investing thesis I believe will significantly outperform the broader market: water. Water is essential to all forms of known life. Humans are particularly dependent on water. Without it we die within a week, and most die in three or four days. However, humankind’s uses for water extend way beyond drinking, or even household consumption such as cooking, bathing, or cleaning. Agriculture accounts for an impressive 70% of global water use; other vital industries such as mining , oil and gas , hydroelectric power, and general manufacturing are all highly water intensive. The dire water situation becomes even more evident when the future is taken into account. For one, shifting weather patters associated with climate change will likely cause dry areas to face more frequent and persistent droughts. Even more importantly, today’s global population is expected to jump from the current 7 billion people to 9 billion by 2040 . The extra 2 billion people on the planet, along with a rapidly growing global middle-class , will increase demand for water and the vital goods (food, energy, materials, and technology) it produces. With these facts in mind, let’s consider the global water situation . 97.5% of water is salt water in the oceans. Of the remaining 2.5% of water that is fresh, over half (~69%) is locked up in glaciers and snowpack. If global temperatures increase as expected over the next 85 years (between 2° and 11.5° F) , we can expect a significant amount of this fresh water to melt, flow into oceans, and become salt water. Of the ~0.8% of Earth’s water that is fresh and liquid, a significant amount is also polluted, especially in developing countries. So despite all the blue that you see on a picture of Earth from space, a generous estimate would render only about 0.67% of it immediately ready for human use, with several trends working to reduce that percentage even further. HOW TO GO ABOUT INVESTING IN WATER The water industry is very fragmented, meaning that investors should tread with caution-there is no “Exxon” of the water industry, where you can simply park your money with a dominant player. While there are many companies in this sector that I am very bullish on, the fragmented nature of the water industry makes it a prime candidate for ETF investments. In this article I will give my thoughts on the four water ETFs: First Trust Water Index (NYSEARCA: FIW ), Guggenheim S&P Global Water Index (NYSEARCA: CGW ), PowerShares Water Resources Portfolio (NYSEARCA: PHO ), and PowerShares Global Water Portfolio (NYSEARCA: PIO ). MEET THE ETFs FIW: This ETF is by far my favorite in terms of holdings and organization. First Trust gave FIW a strong weighting towards industrials (60%); Utilities account for 25% of the ETF, and IT, materials, and healthcare comprise the other 15% of the portfolio. I am particularly partial to this fund because Lindsay (NYSE: LNN ), my favorite play in the water industry, is its top holding. For those interested, last fall I wrote an article about Lindsay. PICO Holdings (NASDAQ: PICO ), which accounts for 1% of the fund, may raise some eyebrows because it is labeled as a financial. PICO is technically a financial (it is an insurance company), but it owns valuable water rights in Arizona and Nevada, hence its inclusion in the ETF. Source: First Trust I favor water ETF’s with strong industrial weightings, along with IT, materials, and health care, because these companies generally have reasonable OpEx and face very little regulatory oversight, meaning they are in prime condition to profit from investment in water infrastructure. On the other hand, water utilities have high OpEx and must have regulatory approval for rate increases. Granted, utilities provide income and stability, but my goal for water stocks is growth, rather than a bond substitute. This said, FIW’s organization provides some risk mitigation. Of FIW’s 37 holdings, none account for more than 4.5% of the portfolio, and none account for less than 1% of the portfolio (top 10 assets account for 41% of the fund). Almost all are American companies, and all trade on the NYSE or NASDAQ. (click to enlarge) Source: First Trust While there is a lot to like about FIW, it does have some flaws. For one, its dividend yield is only 0.74%. As I mentioned, I expect little in the ways for yield when investing in water, but a yield between 1%-2% would be better. FIW’s average daily trade volume of 57.5K is another potential red flag for investors, though PHO is the only other water ETF with a higher average volume. Finally, and most disappointingly, FIW will very likely assume a very high expense ratio. For the moment, its 0.59% expense ratio is actually the lowest of the four ETFs. However, the prospectus states that the true expense ratio is 0.84%, but that First Trust has agreements to keep the fees at or below 0.60% “at least through April 30, 2016.” Though it seems the fee reimbursement could continue beyond this date, investors need to be prepared for an almost 50% increase in the expense ratio within the next year. FIW trades 0.13% below its net asset value, so maybe the market has already factored in some degree of a discount. CGW: Guggenheim’s water ETF truly provides global exposure: only 38% of the fund is based in the US. The top domestic holdings are Pentair (NYSE: PNR ), Danaher (NYSE: DHR ), American Water Works (NYSE: AWK ), and Xylem (NYSE: XYL ). Global utility behemoths such as Veolia SA ( OTCPK:VEOEY ), United Utilities Group PLC, Severn Trent PLC, and Suez Environnement SA account for some of the top foreign assets. Although CGW has 50 holdings, it is weighted quite heavily towards the top holdings, as the top 10 account for 52% of the fund. I would prefer the allocation to be more diversified, but the majority of the top holdings fit the water theme very well (I consider IDEX a bit of a stretch, but understand Guggenheim reasoning of wanting to give water metering meaningful inclusion). Source: Guggenheim 40% of CGW’s holdings are in utilities, which is a higher percentage than I would prefer. However, the weighting towards utilities provides a nice counterbalance to the volatility that comes with investing in foreign companies. The utilities also strengthen the yield, which, for what amounts to a growth investment, comes out to a very respectable 1.75%. Unfortunately the dividend is paid yearly (on the last business day of the year), so the compounding power is reduced to annual compounding rather than quarterly. Another disappointing aspect to CGW is its low trading volume-it only averages 25.7K a day, so investors must be prepared for a relatively illiquid investment. CGW’s expense ratio of 0.65% is only slightly higher than FIW and PHO’s, but unfortunately it trades at 0.3% premium to its net asset value. This is cause for concern, but I do think that CGW deserves a premium due to its foreign holdings. Anyone who has owns foreign securities knows there is quite often an ADR fee and, quite possibly, taxes on foreign dividends. Finally, CGW owns securities that are otherwise difficult for Americans to own. For example take Guangdong Investments, which is a major provider of water in Hong Kong and China, but only trades on Hong Kong’s exchange. Finally, Schwab investors interested in water investments should give CGW a particularly close look. This is because CGW trades for free. I use Schwab, and the feature is wonderful-I have legitimately bought one share of CGW and it worked as advertised. This makes it easy to buy a few shares every payday without having to worry too much about trading fees or market timing. Out of all the options, I believe CGW to be the best. PHO: On the surface, PowerShares’ domestic water ETF seems to share a great deal in common with FIW. It has a small utility component (13%), is comprised of 35 holdings (vs. 37 for FIW), and is generally composed of industrial, life science, and materials companies. Because of this, like FIW, PHO is weighted more towards growth stocks, and has a very low dividend (0.60%). Source: Invesco However, a shallow dive into the holdings reveals a strong emphasis on energy. PHO has 15% of its assets in First Solar (NASDAQ: FSLR ) and SunEdison (NYSE: SUNE ); all together over 20% of the fund is devoted to renewable energy. Overall, I understand what PowerShares is aiming for-hydroelectric is entirely reliant on water, and oil and gas use and pollute water during extraction and refinement. Of course, PHO does have significant holdings in companies more closely related to water, such as Pentair, Ecolab (NYSE: ECL ), American Water Works, Xylem, and Valmont (NYSE: VMI ). That said, a 20% weighting in alternative energy seems like overkill to me. I would prefer to have higher weightings in desalination, filtration, pumping, irrigation, and metering, with 5-10% devoted to alternative energy. Additionally, given that the top 10 holdings account for 61% of the fund, I would favor a more balanced allocation to lower volatility and risk. Source: Invesco On the plus side, PHO’s expense ratio is a relatively reasonable 0.61%, which is slightly higher than FIW’s, but would be the lowest if/when FIW’s new fee program kicks in. As of now, PHO does not trade at any premium or discount to its net asset value. Perhaps most importantly, PHO’s daily trading volume averages 121K shares, giving it a huge advantage over FIW, CGW, and PIO in terms of liquidity. PIO: PIO is PowerShares’ international water ETF , and its 39 holdings resemble a blend of PHO and CGW. Like PHO, PIO has significant holdings in alternative energy, though the asset are limited to FSLR and SUNE, which account for 10% of the fund. Pentair, Veolia, Suez, and Severn Trent are a few major holdings in common with CGW’s. Source: Invesco Similar to CGW, PIO holds 33% of its assets as domestic companies; additionally, many of the foreign holdings overlap with CGW’s, though PIO’s exposure to the United Kingdom and France are noticeably higher. With utilities accounting for 45% of PIO’s holdings, it has the largest utility weighting of the group. Like CGW, this is a bonus for volatility, though given that people often view water as a fundamental right, I would be wary about putting too much money in utilities operating in left leaning countries. Fortunately for holders of CGW and PIO, many of these utilities, especially Veolia and Suez, are global companies that do business around the world, including the United States. Source: Invesco Despite PIO’s heavy utility holdings, it only yields 1.27%, though the strong dollar could be somewhat to blame for the muted dividend. PIO’s 0.76% expense ratio is very high, and it currently trades at a 0.1% premium to its assets. Additionally, PIO has very low liquidity, as its volume averages only 18.8K a day. Source: Investco CONCLUSION Much like individual water stocks, there are advantages and disadvantages to each of the ETFs. FIW’s holdings are by far my favorite, but if the new expense ratio rolls out, it will difficult to justify paying a 0.84% fee. Water ETFs already have high costs, and I would shy away from paying any more than necessary. At 0.76% cost ratio, PIO isn’t much better, leaving CGW and PHO as the “low fee” water ETFs. For me, PHO’s solar presence is too strong for my liking, though I may eventually buy some shares. PHO has strong liquidity, and I do like their thought processes behind the solar investments. CGW’s holdings are my second favorite behind FIW’s, and it pays an almost 2% dividend. That said, its current 0.3% premium is somewhat concerning, especially given that these specialty ETFs come with high expense ratios. Since I have a Schwab account, and can trade CGW for free, I have decided to pair CGW with individual water stocks. I will likely continue to slowly add to CGW until I reach a full position. I have no immediate plans to buy PHO, but will probably open a moderate position at some point. While there is no absolute winner, I think CGW is the best option. It offers both domestic and international exposure, is very “water focused,” has a reasonable fee structure, and pays the best dividend. That said, despite their underwhelming performance since their inceptions, I expect all of these ETFs to outperform the broader market over time. However, the high costs, low liquidity, and occasional bizarre holdings leave much to be desired. Hopefully as more investors look to invest in water, additional water ETFs with lower fees and higher liquidity will stream into the market. Disclosure: I am/we are long CGW, PNR, VEOEY, LNN, VMI. (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.