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A Peek Inside The Fidelity Contrafund

The Fidelity Contrafund has been an excellent performer, with 12.5% annual returns since inception. It has large positions in companies like Berkshire Hathaway, Google, and Apple, which have $200+ billion in cash between them. The one concern about this fund is the annual turnover rate of 45% which means the average stock is only held for a little over two years. The Fidelity Contrafund Fund (MUTF: FCNTX ) is one of the largest mutual funds in the world, with over $112 billion in assets. For a fund of that size, the stockpickers are unusually active – the Contrafund has an annual turnover rate of 45%, which means that each stock lasts in the portfolio for a little over two years on average. A turnover rate like this explains the difficulty in analyzing mutual funds – even if you like what you see inside the fund, there is no guarantee that those stocks will still be there a few years from now. That said, the Contrafund does deserve some benefit of the doubt due to its excellent performance over the course of its inception. It has given investors 12.5% annual returns since it opened the doors to take clients, and it has beaten the performance of the S&P 500 over the past ten years as well. From 2004 through 2014, the Contrafund has returned 9.6% annually while the S&P 500 has returned 7.6% annually. The expense ratio is around 0.6%, so the difference is narrower: 9.0% to 7.6% (although someone buying an S&P 500 Index Fund may have to pay some fees as well). Still, in an absolute sense, entrusting your money to the Contrafund has made you wealthier than the S&P 500 over the past decade. Why is the Contrafund something that does well? Because it stuffs its portfolio with companies that have great ten-year earnings per share growth rates. Its largest holding is Berkshire Hathaway (NYSE: BRK.B ), and it also has large positions in Google (NASDAQ: GOOG ) (NASDAQ: GOOGL ), Wells Fargo (NYSE: WFC ), Colgate-Palmolive (NYSE: CL ), Apple (NASDAQ: AAPL ), Disney (NYSE: DIS ), and Facebook (NASDAQ: FB ). Surrounding yourself with stocks like that is how you achieve significant growth. Very few funds bother to make Berkshire Hathaway the largest holding, yet the few that do end up richly rewarded (see the Sequoia Fund’s 14% annual returns for a great example of this). Berkshire Hathaway is sometimes regarded as a stock that has been put out to pasture, but the company’s results are much more impressive than you’d think: Book value has increased by 19.0% annually for the past ten years, and the company is sitting on $62 billion in cash. This acts as a coiled spring of sorts, because Berkshire’s profits can increase substantially in short order once it deploys some of that cash to presumably purchase an operating company. Google and Apple also need no introduction, but I’ll add this: Google has been increasing its profits by 20% annually over the past five years, and Apple has been increasing its profits by 57.5% annually over the past five years (the exceptionally high compounding rate that Apple has offered primarily occurred between 2010 and 2012 when Apple grew its profits from $2.16 per share to $6.31 per share). This is something that has often gone unreported in discussions of the Contrafund: the top holdings of Berkshire Hathaway, Apple, and Google are sitting on nearly $250 billion in cash. This is one of the most cash rich mutual funds I have ever studied in my life. Whether those funds will be used for dividends, buybacks, or acquisitions, they represent a great amount of capacity for creating shareholder wealth. It’s also a welcome sight to see Disney and Colgate-Palmolive in a large-cap fund. Colgate is a stock that usually gets ignored because its dividend is in the low 2% range and its P/E ratio usually hovers in the 20s, leading investors to say things like “It’s not cheap right now.” That kind of thinking discounts Colgate’s future cash flows – it is admittedly difficult to think about where a company’s profits will be five years from now rather than where they will be in the immediate future. But yet, Colgate has returned 14% annually since 1977, and tends to grow profits at 12% annually because the company’s retained earnings grow at 15%. Colgate is one of those stocks that can wear both the hats of defense and offense: it has a streak of dividend increases going for over half a century, and it also has a growth rate of over 10%. You could convincingly make the argument that it is an all-weather stock that belongs in every investor’s portfolio. Disney is also a welcome sight to see in a portfolio. It too, tends to get ignored because it spends 4x as much money repurchasing stock as it does paying out dividends and the dividend payment is annual and only around 1%. However, the trailing earnings per share growth rate is 15% annually, since The Great Recession. It has been compounding at 13% annually since 1970, so this isn’t especially unusual – like Colgate Palmolive, double-digit growth is simply what it does. The only real headwind is that the valuation is quickly becoming its highest since the dotcom era boom, and that could mean that future returns will trail growth by about two percentage points due to P/E compression. When the earnings per share growth rate is in the double digits, this is only a mild concern. And lastly, there is Wells Fargo. Despite the wild ride through the financial crisis, the ten-year metrics for Wells Fargo are best in breed among the largest banks: Book value has increased by 11.5% annually, and loans have increased by 17.0% annually over the past ten years. This is partially why Warren Buffett loves the stock – it actually grows a robust loan portfolio over time. This superiority doesn’t mean much when interest rates are low, but when interest rates advance the advantage of Wells Fargo becomes more dominant because the interest income will rapidly rise. Furthermore, when you figure the 37% dividend payout ratio has room to increase to 45-50%, there is still room for further price gains if investors respond well to a high dividend growth rate. The Fidelity Contrafund Fund is one of the funds that you want to look for in your 401(k), especially if there is an arrangement to get the 0.64% lowered for tax-advantaged accounts. It is not just the fact that the Contrafund has outperformed the S&P 500 (which it has), but the fact that the fund is filled with some of the most cash-rich companies in the world. It seems to do a good job of selecting those high-quality businesses that have earnings per share growth rates over 10%. The only catch is that the turnover is high at 45% annually, and the worry is that the fund could make a strategic shift that you don’t like in the next few years. Disclosure: The author is long BRK.B. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

ETF Stats For February 2015 – Actively Managed Assets Jump 10%

The ETF industry roared back in February after beginning the year with a negative start in January . Twenty-two new products came to market during the month and seven shuttered operations. Assets jumped 5.3% to $2.1 trillion, which by our calculations allowed month-end assets to close above the $2 trillion mark for the first time. Readers should note that we exclude fund-of-fund assets in our calculations to avoid double counting. As such, our year-end 2014 data put assets just a sliver short of that threshold. February’s net addition of 15 active listings brought the year-to-date count back into positive territory at plus five. The month’s launches were heavily skewed with 21 ETFs and just one ETN coming to market. Additionally, six of the seven closures were ETNs, putting month-end listings at 1,667 consisting of 1,462 ETFs and 205 ETNs. Actively managed ETFs saw four additions and one closure. Their count now stands at 123, which is a decline of two for the year. However, actively managed assets surged 10.6% for the month, are up 13.0% year-to date, and now total $19.5 billion. ETFs with more than $10 billion of assets increased by two and now number 49. Although they represent less than 3% of products, they hold more than 58% of industry assets. Products with $1 billion or more in assets increased by nine to 259 and have a better than 89% market share. The smallest 830 products (nearly half) account for just 1% of assets. Trading activity plunged more than 28% with just $1.3 trillion worth of ETFs and ETNs changing hands. There were only 19 trading days in the month, which only partially accounts for the decline. The quantity of products averaging more than $1 billion a day in trading activity dropped from twelve to eight, yet they still accounted for 48.7% of industry dollar volume. February 2015 Month End ETFs ETNs Total Currently Listed U.S. 1,462 205 1,667 Listed as of 12/31/2014 1,451 211 1,662 New Introductions for Month 21 1 22 Delistings/Closures for Month 1 6 7 Net Change for Month +20 -5 +15 New Introductions 6 Months 98 6 104 New Introductions YTD 34 1 35 Delistings/Closures YTD 23 7 30 Net Change YTD +11 -6 +5 Assets Under Mgmt ($ billion) $2,058 $27.6 $2,085 % Change in Assets for Month +5.3% +5.4% +5.3% % Change in Assets YTD +4.3% +2.7% +4.3% Qty AUM > $10 Billion 49 0 49 Qty AUM > $1 Billion 254 5 259 Qty AUM > $100 Million 765 39 804 % with AUM > $100 Million 52.4% 19.5% 48.2% Monthly $ Volume ($ billion) $1,282 $50.2 $1,333 % Change in Monthly $ Volume -28.6% -28.2% -28.6% Avg Daily $ Volume > $1 Billion 7 1 8 Avg Daily $ Volume > $100 Million 80 3 83 Avg Daily $ Volume > $10 Million 296 12 308 Actively Managed ETF Count (w/ change) 123 +3 mth -2 ytd Actively Managed AUM ($ billion) $19.5 +10.6% mth +13.0% ytd Data sources: Daily prices and volume of individual ETPs from Norgate Premium Data. Fund counts and all other information compiled by Invest With An Edge. New products launched in February (sorted by launch date): RevenueShares Global Growth Fund (NYSEARCA: RGRO ) , launched 2/2/15, holds about 100 securities based on two main selection criteria. First, 5 developed and 5 emerging countries will be chosen by selecting those with the highest percentage growth of their year over year GDP from the prior 2 quarters, with each country getting a 10% weighting. Second, the top 10 revenue-producing companies in each country are weighted by revenue, but they are limited to a 5% portfolio allocation. The expense ratio will be capped at 0.70% until 11/25/15 ( RGRO overview ). ETRACS Monthly Pay 2xLeveraged US Small Cap High Dividend ETN (NYSEARCA: SMHD ) , launched 2/4/15, is an exchange-traded note that provides 2x (200%) leveraged exposure (reset monthly) to an index of small-cap stocks having dividend yields that are relatively high compared to other small-cap stocks in the U.S. market. The ETN pays a variable monthly coupon linked to two times the cash distributions paid by index constituents. SMHD has an estimated yield of 16.8% and sports an expense ratio of 0.85% ( SMHD overview ). Fidelity MSCI Real Estate Index ETF (NYSEARCA: FREL ) , launched 2/5/15, is designed to represent the performance of the real estate sector in the U.S. equity market. The fund will not hold all of the positions in the underlying index, MSCI USA IMI Real Estate Index, but will instead select a representative sample of securities that collectively has an investment profile similar to the index. Investors will pay 0.12% annually to own this fund ( FREL overview ). ProShares Russell 2000 Dividend Growers ETF (NYSEARCA: SMDV ) , launched 2/5/15, invests in the companies of the Russell 2000 Index with at least 10 consecutive years of dividend growth. The fund will hold a minimum of 40 stocks equally weighted, and right now it holds 55. The top sectors represented in the fund are Financials and Utilities, each at about 23%. SMDV has an estimated yield of 2.4% and expects to pay dividends quarterly. The fund’s expense ratio will be capped at 0.40% until 9/30/16 ( SMDV overview ). ProShares S&P MidCap 400 Dividend Aristocrats ETF (NYSEARCA: REGL ) , launched 2/5/15, will invest in the companies of the S&P 400 MidCap Index that have at least 15 consecutive years of dividend growth. The fund will hold a minimum of 40 stocks equally weighted, and right now it holds 47. Financials leads the sector lineup at nearly 30%, and the next closest is Materials at 17%. The estimated yield for REGL is 1.8%. The fund’s expense ratio will be capped at 0.40% until 9/30/16 ( REGL overview ). SPDR S&P 500 Buyback ETF (NYSEARCA: SPYB ) , launched 2/5/15, provides exposure to companies in the S&P 500 that have high buyback ratios compared to other stocks. The fund may either hold all of the positions in the underlying index, S&P 500 Buyback Index, or it could instead select a representative sample of securities that collectively has the same risk and return characteristics of the Index. The Index provides exposure to the 100 companies in the S&P 500 that have the highest buyback ratio in the last 12 months, and currently the fund holds 101 positions. The fund sports a 0.35% expense ratio ( SPYB overview ). Guggenheim S&P High Income Infrastructure ETF (NYSEARCA: GHII ) , launched 2/11/15, invests in 50 high-yielding securities of companies in developed markets that engage in various infrastructure-related industries. Sector representations in the fund include Utilities 50.2%, Industrials 33.2%, and Energy 16.7%. Investors will pay 0.45% annually to own this fund ( GHII overview ). KraneShares FTSE Emerging Markets Plus ETF (BATS: KEMP ) , launched 2/13/15, invests in large- and mid-cap companies in emerging market countries and weights the country allocations by gross domestic product. As of the end of 2014, the largest markets represented were China (43.5%), India (17.7%), Brazil (5.2%), Mexico (4.5%), and Russia (3.9%). The fund’s largest holding at 17.5% is KraneShares Bosera MSCI China A ETF (NYSEARCA: KBA ), and it has a 0.68% expense ratio ( KEMP overview ). ProShares Ultra Gold Miners (NYSEARCA: GDXX ) , launched 2/13/15, seeks a daily return that is 2x (200%) the daily performance of an index made up of publicly traded companies involved in gold and silver mining. Companies whose revenues lean toward silver mining are limited to 20% of the holdings. Canada has the largest geographic allocation at 60%. The expense ratio will be capped at 1.11% until 9/30/16 ( GDXX overview ). ProShares Ultra Junior Miners (NYSEARCA: GDJJ ) , launched 2/13/15, seeks a return that is 2x (200%) the daily performance of an index made up of micro- and small-cap companies involved in gold and silver mining that generate at least 50% of their revenues from those activities. Companies whose revenues lean toward silver mining are limited to 20% of the holdings. Canada takes top billing in the geographic allocation at 64%. The expense ratio will be capped at 1.12% until 9/30/16 ( GDJJ overview ). ProShares UltraShort Gold Miners (NYSEARCA: GDXS ) , launched 2/13/15, seeks a daily return that is 2x inverse (-200%) the daily performance of the same index underlying GDXX. The expense ratio will be capped at 0.95% until 9/30/16 ( GDXS overview ). ProShares UltraShort Junior Miners (NYSEARCA: GDJS ) , launched 2/13/15, seeks a daily return that is 2x inverse (-200%) the daily performance of the same index underlying GDJJ. The expense ratio will be capped at 0.95% until 9/30/16 ( GDJS overview ). AdvisorShares Pacific Asset Enhanced Floating Rate ETF (NYSEARCA: FLTR ) , launched 2/19/15, is an actively managed ETF designed to produce a high level of current income. The ETF invests in senior secured and unsecured floating rate loans, secured second lien floating rate loans, and other floating rate debt securities of domestic and foreign issuers. The portfolio manager can choose to invest as little as 80% of the fund or can leverage the portfolio up to 130%. Although the fund is focused on income, an estimated yield is not currently provided on the fund’s website. The expense ratio will be capped at 1.10% until at least 2/13/16 ( FLTR overview ). Sit Rising Rate ETF (NYSEARCA: RISE ) , launched 2/19/15, has an objective to profit from rising interest rates by using futures contracts and options on futures on 2-, 5-, and 10-year U.S. Treasury securities. The underlying index targets a negative 10 year duration, making it an inverse bond fund. The weighting of the instruments are expected to be from 30% to 70% for the shorter duration securities and 5% to 25% for those with 10 year maturities. RISE will issue K-1 tax reports instead of the easier to use 1099. It has an expense ratio of 1.64% based on the breakeven analysis in the prospectus ( RISE overview ). Greenhaven Coal Fund (NYSEARCA: TONS ) , launched 2/20/15, is designed to track the daily price movements of coal futures. The fund will hold an equal number of futures contracts in each of the three months making up the closest calendar quarter. The positions will be rolled over to the next calendar quarter four times a year. TONS will issue K-1 tax reports instead of the more investor friendly 1099. Based on the breakeven analysis in the prospectus, the expense ratio will be 1.23% ( TONS overview ). SPDR DoubleLine Total Return Tactical ETF (NYSEARCA: TOTL ) , launched 2/24/15, is an actively managed income fund designed to provide investors with maximum total return. The fund’s manager, Jeffrey Gundlach, invests in fixed income securities of any credit quality and may include mortgage-backed securities, high yield securities, foreign-denominated instruments, and securities tied to emerging market countries. TOTL characteristics include a current yield of 4.8% and a duration of 3.1 years. The fund’s expense ratio will be capped at 0.55% until 10/31/16 ( TOTL overview ). Tuttle Tactical Management U.S. Core ETF (NASDAQ: TUTT ) , launched 2/25/15, is an actively managed fund-of-funds seeking to deliver relative returns during market uptrends and capital preservation during market downtrends. The fund will combine multiple, uncorrelated tactical strategies. The top two holdings are iShares 7-10 Year Treasury Bond (NYSEARCA: IEF ) at 26.6% and Pimco Enhanced Short Maturity (NYSEARCA: MINT ) at 20.0%. TUTT sports a 1.34% expense ratio ( TUTT overview ). iShares U.S. Fixed Income Balanced Risk ETF (BATS: INC ) , launched 2/26/15, is an actively managed ETF investing in U.S. dollar denominated investment-grade and high-yield fixed-income securities. The portfolio will be designed so that, in the aggregate, the fund’s exposure to credit spread risk and interest rate risk should be equal. In order to achieve the balanced goal, the fund may take short or long positions in U.S. Treasury futures. The fund is currently leveraged with a 25% short position in cash and/or derivatives. The expense ratio will be capped at 0.25% until 2/29/16 ( INC overview ). Lattice Developed Markets (ex-US) Strategy ETF (NYSEARCA: RODM ) , launched 2/26/15, invests in a broad range of companies showing favorable valuation, momentum, and quality characteristics that are located in major developed markets of Europe, Canada, and the Pacific Region. There are currently about 340 holdings. Japan leads the country allocation at 18.6%, and the U.K. follows with 13.7%. Investors will pay 0.50% annually to own this fund ( RODM overview ). Lattice Emerging Markets Strategy ETF (NYSEARCA: ROAM ) , launched 2/26/15, strives to balance risk across emerging market countries, currencies, and companies. It will provide increased exposure to smaller, more locally driven emerging economies and enterprises that have encouraging valuation, momentum, and quality characteristics. ROAM sports a 0.65% expense ratio ( ROAM overview ). Lattice U.S. Equity Strategy ETF (NYSEARCA: ROUS ) , launched 2/26/15, will invest in large-cap U.S. equities that have solid valuation, momentum, and quality characteristics. Financials leads the sector allocation at 19.2%, and Information Technology comes in second at 16.1%. ROUS has an expense ratio of 0.35% ( ROUS overview ). Arrow QVM Equity Factor ETF (NYSEARCA: QVM ) , launched 2/27/15, consists of 50 equally weighted domestic equities selected based on a combined ranking score of their quality, value, and momentum characteristics. To be considered, stocks must have daily dollar volume above $1 million for the last three months and at least a $5 share price. The portfolio is constructed at the end of January and July and is rebalanced quarterly to maintain equal weighting. The expense ratio will be capped at 0.65% until 5/31/16 ( QVM overview ). Product closures/delistings in February : WisdomTree Euro Debt (NYSEARCA: EU ) PowerShares DB 3x Italian T-Bond Futures ETN (NYSEARCA: ITLT ) PowerShares DB 3x Long USD Index Futures ETN (NYSEARCA: UUPT ) PowerShares DB 3x Short USD Index Futures ETN (NYSEARCA: UDNT ) PowerShares DB Italian T-Bond Futures ETN (NYSEARCA: ITLY ) PowerShares DB US Deflation ETN (NYSEARCA: DEFL ) PowerShares DB US Inflation ETN (NYSEARCA: INFL ) iShares moved its four allocation ETFs to its Core lineup effective February 2. Deutsche Bank and Invesco ended their agreement to market DB issued ETNs under the PowerShares brand. The 26 ETNs were renamed effective 2/24/15. The role of “managing owner” for 11 PowerShares DB ETFs transferred from Deutsche Bank to Invesco effective 2/25/15 resulting in the temporary suspension of creation units on the affected funds. Creations were resumed by the following day. The only disruption we noted was PowerShares DB Oil Fund (NYSEARCA: DBO ) traded with about a 3.5% premium for a few hours the morning of 2/25/15. Previous monthly ETF statistics reports are available here . Disclosure covering writer, editor, publisher, and affiliates: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.

A More Tempered Global Equity Fund

By Patricia Oey Low-volatility strategies, such as the iShares minimum volatility family of exchange-traded funds, can be attractive options for long-term investors. This is because these ETFs’ underlying MSCI indexes generally exhibit less-dramatic declines in bear markets . Over the long term, these muted drawdowns explain much of the strategy’s outperformance versus its cap-weighted benchmark. iShares MSCI All Country World Minimum Volatility (NYSEARCA: ACWV ) tracks an index that is designed to be less volatile than its market-cap-weighted parent index–the MSCI All Country World Index (MSCI ACWI). Low-volatility strategies seek to exploit the observed phenomenon that portfolios with smaller price fluctuations tend to outperform portfolios with larger price fluctuations over the long term. This strategy has had a good track record–as measured by the back-tested performance of this fund’s benchmark index (the index’s live performance commenced in November 2009). Over the trailing 15 and 10 years through Dec. 31, 2014, this fund’s underlying index beat the cap-weighted MSCI ACWI by 393 and 202 basis points annualized, respectively. The risk-adjusted returns were also relatively strong, with 15-year Sortino ratios of 0.73 for the minimum-volatility index and 0.22 for the cap-weighted index. However, low-volatility strategies can underperform for long periods of time and tend to lag in bull markets. This fund is suitable for use as a core holding for long-term investors. Typically, global-equity funds are more volatile than U.S. equity funds, as the former have exposure to both international equities and the associated foreign currency fluctuations. But because global equities are a heterogeneous asset class, there is greater diversity (as evidenced by lower correlations) among its constituents, which allows for greater reduction in overall volatility in a fund that employs a minimum-variance strategy such as ACWV. In fact, the trailing five-year standard deviation of returns for this fund’s index of 9% was significantly lower than the S&P 500’s 13% during that same span. Part of this is due to the benchmark’s lower drawdowns during bear markets. For example, in 2008, when the MSCI ACWI fell 42%, this fund’s benchmark declined 25%. This fund does not hedge its currency exposure, so its returns reflect both asset-price changes and changes in exchange rates between the U.S. dollar and other currencies. In the 10-year period through December 2012, a rising euro, followed by a rising yen (against the U.S. dollar), helped boost the performance of this fund. However, more recently, the rising dollar has hurt the fund’s performance. Fundamental View Historically, low-volatility stocks have outperformed high-volatility stocks over the long term. This “volatility anomaly” was first discovered in 1968 by Bob Haugen, who theorized that behavioral factors were behind this phenomenon. More specifically, investors tend to chase risky stocks, expecting these companies to deliver higher returns. This drives up stock prices of riskier names, which ultimately results in weaker future returns, relative to less-volatile names. Generally, this fund had been heavy in less-volatile sectors including consumer staples, health care, telecoms, and utilities, and light in cyclical sectors including financials, technology, energy, and materials, relative to its parent index (MSCI ACWI). In 2013, the fund’s greater exposure to less-volatile names in the United States and Japan weighed on its performance (relative to the MSCI ACWI), as higher-beta names outperformed in those markets. However, in 2014, the fund’s underweighting in the energy sector boosted this fund’s performance (relative to MSCI ACWI). At this time, dividend-oriented sectors such as consumer staples and utilities have been bid up in the recent low-rate environment, and sectors such as materials and energy are trading at low valuations. This fund’s tilt toward more-expensive sectors and tilt away from cheaper sectors may weigh on future performance. About 50% of this fund’s assets are invested in U.S. equities. As of the first quarter of 2015, the U.S. economy appears to be on stable footing. However, now that the U.S. Federal Reserve’s quantitative-easing program has ended, there is uncertainty on how monetary policy will be managed and how it might ultimately affect asset prices–especially considering that valuations across most major asset classes appear to be somewhat stretched. This fund’s second-largest country allocation is Japan, at 12%. After two “lost decades,” Japan’s equity markets responded very enthusiastically to Prime Minister Shinzo Abe’s programs to jump-start the Japanese economy. At the start of 2013, Japan’s Central Bank unleashed an aggressive monetary easing program. This move provided the foundation for improving macroeconomic fundamentals and corporate earnings growth. Japanese equities may also benefit as Japan’s $1.2 trillion public pension raises allocations in domestic equities and away from low-yielding government bonds. However, any sustainable growth in Japan will require difficult-to-implement structural reforms to address Japan’s inefficient labor market and protected private sector. In addition, Japan’s aging population and massive 200% debt/gross domestic product ratio are two issues that likely will weigh on Japan’s growth in the years to come. European equities comprise 10% of this fund’s portfolio. Many European large caps are high-quality, multinational corporations that have benefited from improving productivity, cheap financing, and exposure to faster-growing emerging markets during the past few years. Most of these firms are in good financial shape. This fund’s largest European country allocations are Switzerland and the United Kingdom, and it has an underweighting (relative to the cap-weighted benchmark) in eurozone countries, such as France and Germany. Portfolio Construction This fund employs full replication to track the MSCI ACWI Minimum Volatility Index, which attempts to create a minimum-variance (or lowest-volatility) portfolio of 350 holdings selected from its parent index, MSCI All Country World Index. It does this using an estimated security covariance matrix (the Barra Global Equity Model) and a number of constraints to limit turnover, ensure investability, and maintain sector and country diversification. This index methodology is somewhat of a black box, as data are not available regarding the estimated risk inputs used for the covariance matrix. The index (and fund) is rebalanced twice a year in May and November. ACWV’s portfolio represents about 20% of its parent index, which includes about 2,400 securities. During the past decade, this minimum-volatility index had a correlation of 0.92 to its parent index. But during the past three years, this correlation was lower, at 0.79. This index was launched in November 2009, so data prior to the initial calculation date reflect hypothetical historical performance. Fees This fund charges an annual expense ratio of 0.20%, which is composed of a management fee of 0.33% and a fee waiver of 0.13%. According to iShares, the fee waiver may be reduced or discontinued at any time without notice. During the past three years, the fund outperformed its benchmark by 16 basis points annualized. This is partly due to the fact that the fund’s benchmark incorporates aggressive foreign tax withholding assumptions. In practice, the fund has had lower foreign tax withholding relative to the estimates incorporated in its benchmark. Dividends are paid out quarterly, and in 2013 and 2012, 86% and 71% of this fund’s dividends were classified as qualified by the Internal Revenue Service, respectively (dividends from companies in certain countries are not considered qualified). Investors should note that some of the dividends paid by stocks in the fund are subject to foreign tax withholding. Investors can claim their portion of the withheld taxes as a tax credit, but only if they hold this fund in a taxable account. Alternatives One similar option is Vanguard Global Minimum Volatility (MUTF: VMNVX ) . Similar to the iShares fund, this Vanguard fund employs quant models to construct a low-volatility portfolio. Key differences are: The Vanguard fund hedges out foreign-currency exposure and has a mid-cap tilt, whereas the iShares fund does not hedge out foreign-currency exposure and has a large-cap tilt. This Vanguard fund is relatively new; its inception was in December 2013. The Admiral share class carries an annual expense ratio of 0.20%. IShares has a suite of low-volatility strategies that cover the different segments of the global equity universe. These ETFs include iShares MSCI USA Minimum Volatility (NYSEARCA: USMV ) , iShares MSCI Emerging Markets Minimum Volatility (NYSEARCA: EEMV ) , iShares MSCI EAFE Minimum Volatility (NYSEARCA: EFAV ) , iShares MSCI Japan Minimum Volatility (NYSEARCA: JPMV ) , iShares MSCI Asia ex Japan Minimum Volatility (NYSEARCA: AXJV ) , and iShares MSCI Europe Minimum Volatility (NYSEARCA: EUMV ) . A solid core allocation option is Vanguard Total World Stock ETF (NYSEARCA: VT ) . This fund tracks the FTSE Global All Cap Index, which seeks to cover 98% of the world’s total investable stock market capitalization and includes approximately 7,500 securities. It has an expense ratio of 0.18%. Disclosure: Morningstar, Inc. licenses its indexes to institutions for a variety of reasons, including the creation of investment products and the benchmarking of existing products. When licensing indexes for the creation or benchmarking of investment products, Morningstar receives fees that are mainly based on fund assets under management. As of Sept. 30, 2012, AlphaPro Management, BlackRock Asset Management, First Asset, First Trust, Invesco, Merrill Lynch, Northern Trust, Nuveen, and Van Eck license one or more Morningstar indexes for this purpose. These investment products are not sponsored, issued, marketed, or sold by Morningstar. Morningstar does not make any representation regarding the advisability of investing in any investment product based on or benchmarked against a Morningstar index.