Tag Archives: fund

The Global X SuperDividend ETF Illustrates The Risks That Come With Yield Chasing

Summary The SuperDividend U.S. ETF has underperformed considerably this year posting a loss this year of 6.5% compared to a gain 0.6% for the S&P 500. The fund’s yield of over 7% may have been tempting for investors but the fund’s composition showed it took positions in riskier investments to achieve that yield. The fund increased its position in MLPs to around 15% of fund assets at the end of Q2 right around the time when losses in MLPs were accelerating. A heavier allocation to underperforming utility stocks also contributed to the fund’s poor performance. As Treasury yields remain near all time lows and bank products struggling to yield as much as 1%, investors often look to riskier products in search of higher yields. Corporate bonds sport modestly higher yields. That leaves a lot of people turning to much riskier equities for income. The SuperDividend family of ETFs from Global X was created to appeal to investors looking for a high yield product. The Global X SuperDividend ETF (NYSEARCA: DIV ) has been around since the beginning of 2014 tempting investors with yields as high as 6% and currently has a 30 day yield of over 7%. The fund has drawn nearly $300 million in total assets since its inception but some investors are now finding out the hard way that those high yields come with risks. High dividend equity ETFs like the Vanguard High Dividend Yield ETF (NYSEARCA: VYM ) and the iShares Core High Dividend ETF (NYSEARCA: HDV ) have performed roughly on par with the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) year-to-date but DIV has lagged considerably. DIV Total Return Price data by YCharts A big chunk of the blame could come from the composition of the fund itself. The Vanguard and iShares ETFs are well diversified broadly among the major sectors. DIV is much more concentrated. As of 10/23/15, utilities and real estate count for nearly half of the portfolio. Real estate has performed in line with the S&P 500 but utilities have lagged the index by about four percent. DIV Total Return Price data by YCharts The biggest offender however could be MLPs. MLPs have gotten hammered this year as the Alerian MLP Index is down 30% year-to-date. The index’s losses accelerated just as DIV begin piling in. DIV Total Return Price data by YCharts Consider some of the fund’s most recent quarterly fact sheets. The holdings as of the end of the first quarter indicate that about 8% of assets were committed to MLPs At the end of the second quarter, MLPs accounted for over 15% of fund assets. It’s right around this time that you can see losses in the ETF began to accelerate. Even now, taking a look at the fund’s current assets shows that about 12% of the fund is still in MLPs. The Alerian MLP Index’s total return is still sitting over 40% below its high reached in 2014 thanks to the fall in oil and other energy prices. The MLP Index rallied over 20% between the end of September and the middle of October but a chunk of that gain has been given back demonstrating again that some of these high yielding investments aren’t necessarily conservative. Conclusion The moral of the story here is pretty simple. Higher yields usually mean higher risk. As we’ve seen this year, risk isn’t always rewarded as there’s been a pretty sizeable shift out of riskier assets into more conservative investments. But maybe another reason is that the ETF has just plain old performed lousy. The relatively high exposure to MLPs at a time when their value was tanking doesn’t help the fact that year-to-date the ETF has lagged almost every sector that it has a reasonable exposure to. It’s understandable that income seeking investors are looking for ways to improve on the low yields that they’re seeing in just about every other corner of the market. But one of the primary principles of investing is that the chance at higher returns usually only comes when taking on additional risk. Sometimes that risk doesn’t pay off and some investors may be learning that rule the hard way.

3 Ways To Play A Nearing Fed Rate Hike

Summary Thanks to weaker than expected job growth and retail sales along with global economic uncertainty, the futures market is not expecting a rate hike until into 2016. Investors want to plan for rising interest rates should look for investments with low duration, low interest rate sensitivity or that can profit from higher rates. In this article, I suggest three different ETFs that can fit those criteria. With the target Fed Funds rate sitting at 0% for the last 6+ years, the Fed is finally getting poised to raise interest rates again. Many watchers felt a rate hike in 2015 was imminent until a slew of economic data – weak job growth and retail sales data along with uncertainty in China – have pushed off rate hike expectations into 2016. Fed funds futures suggest that there’s only a 50-50 chance will see a rate hike at the March Fed meeting with the first likely hike coming in June. For those looking to protect themselves from rising rates, now might be a good time to reposition your portfolio. That means looking for investments that maintain a low duration, staying away from sectors that are highly rate sensitive and looking for stocks that can profit from higher rates. If you’re looking to stay away from interest rate risk, consider these ETFs for your portfolio. The iShares 1-3 Year Treasury Bond ETF (NYSEARCA: SHY ) This is the good old fashioned conservative approach. Its 30 yield of 0.49% won’t necessarily impress income seeking investors but with a beta of near zero this is exactly the type of risk averse investment that those looking for safety should consider. Since its inception in 2002, we’ve been able to see how the fund performs in both a rising rate and falling rate environment. In the 2004-2007 period when the Fed Funds rate rose from 1% to over 5%, the fund managed a total return of around 8%. Not a huge return by any means but it demonstrates how the fund was still able to generate a return even in a rapidly rising rate environment. In the subsequent 2007-2008 period during the financial crisis when the target Fed Funds rate dropped to 0%, the fund returned around 12%. These are solid returns in both scenarios but the risk minimization and capital preservation strategy of this ETF is what matters most. The SPDR S&P Bank ETF (NYSEARCA: KBE ) Banks profit when the yield curve is steeper and interest rates are higher. This fund debuted right at the tail end of when interest rates were rising in 2005. As you can see, the overall performance of the fund followed the Fed Funds rate downward. KBE Total Return Price data by YCharts Conversely, it would be expected that bank stocks should outperform when rates begin moving back up. Being an equity ETF, this will still experience the volatility that comes with investing in the stock market but it should be positioned better than the broader market when rates finally begin to move back up. The PowerShares S&P 500 ex-Rate Sensitive Low Volatility Portfolio (NYSEARCA: XRLV ) Debuting just earlier this year, this ETF looks to isolate the stocks of the S&P 500 that exhibit the lowest volatility and low interest rate sensitivity characteristics of the broader index. The fund’s composition is largely as one would expect. Most of the fund’s assets are invested in financials, industrials, consumer defensive and health care stocks – areas of the market that experience steady demand and are less prone to economic fluctuations. There’s not much of a track record to go on with this ETF but the strategy is such that it should help limit the downside associated with interest rate risk while maintaining broader exposure to the equity markets.

New Janus Mutual Fund Uses Tail Risk Analysis

Summary JAGDX is a global allocation fund (70/30) which uses tail risk analysis to mitigate risk. The Fund inception was in June 2015, and it has gotten off to a rocky start. But it may be worthwhile to track this fund to see how they manage a full market cycle. Overall Objective and Strategy The primary objective of the Janus Adaptive Global Allocation Fund (MUTF: JAGDX ) is to provide investors total return by dynamically allocating its assets across a portfolio of global equity and fixed income investments, including the use of derivatives. The fund attempts to actively adapt to market conditions based on forward looking views on extreme market conditions (both positive or negative) with the goal of minimizing the risk of significant loss in a major downturn while still participating in the growth potential of capital markets. On average, the fund provides 70% exposure to global equities and 30% exposure to global bonds (70/30 allocation). But the fund has the flexibility to shift this allocation and may invest up to 100% of its assets in either asset class depending on market conditions. Because of this, JAGDX will likely have above average portfolio turnover compared to other funds. The portfolio managers use two complimentary processes: a “top down” macro analysis and a “bottom-up” risk reward analysis. These processes use proprietary models which seek to identify indicators of market stress or potential upside. These models include an options-implied analysis that monitors day-to-day movements in options prices for indicators of risk and reward between asset classes, sectors and regions. Top-Down Macro Analysis: Focuses on how the Fund assets will be distributed between global equity and fixed income. They use a proprietary options implied information model, among other tools, to monitor expected tail gains and losses across the equity and fixed income sectors and adjust as necessary to mitigate downside risk exposure. Bottom-Up Risk Reward Analysis: Designed to identify underlying security exposures in order to maximize exposure to securities which will realize tail gains while minimizing exposure to securities expected to provide tail losses. Within the Fund’s equity positions, the managers will adjust sector, currency and regional exposures away from market cap weightings based on their evaluation of expected tail loss and gain. Within the Fund’s fixed income positions, they will adjust the credit, duration and regional exposures using the same analysis. The fund managers measure both extreme positive and negative movements known as expected tail gain (ETG) and expected tail loss (ETL). Portfolio construction is driven by the ratio of ETG to ETL, while targeting a desired level of portfolio risk with the goal of maximizing future total return. For more information on expected tail loss, take a look at this Wikipedia page on Expected shortfall . (click to enlarge) Source: rieti.go.jp Fund Expenses The Fund offers several classes of shares. JAGDX is available without a 12b-1 charge, but only if you buy the fund directly from Janus. The expense ratios for some of the share classes are listed below: JAGDX (Class D Shares): 1.01% JVGIX (Class I Shares- Institutional): 0.82% ($1 million minimum) JVGTX (Class T Shares): 1.13% (available on brokerage platforms) JAGAX (Class A): 1.07% (front-end load 5.75%) JAVCX (Class C Shares): 1.82% (deferred load 1%) Minimum Investment JAGDX has a minimum initial investment of $2,500. Past Performance JAGDX is classified by Morningstar in the “World Allocation” or IH category. The fund had unfortunate timing when it was first issued on June 23, 2015. As of the end of the third quarter it had dropped by 9%, although it has recovered a bit since then. It is still very early, but so far the Fund is lagging its peers. 1-Month 3-Month JAGDX +1.18% -4.16% Category(IH) +1.37% -3.89% Percentile Rank 61% 66% Source: Morningstar Mutual Fund Ratings The fund is too new to have a Lipper or Morningstar rating. Fund Management The fund is managed by two individuals: Enrique Chang: Chief Investment Officer, Equities and Asset Allocation. Joined Janus in September 2013, and has previously worked for American Century and Munder Capital Management. Holds a BS in Mathematics from Fairleigh Dickinson and a master’s degree in finance/quantitative analysis and statistics and operations research from NYU. Ashwin Alankar, PhD: Global Head of Asset Allocation & Risk Management. Joined Janus in August, 2014 and has previously worked for AllianceBernstein and Platinum Grove Asset management. Holds a BS in chemical engineering and mathematics and a master of science degree in chemical engineering from MIT. He also holds a PhD in finance from the University of California at Berkley Haas School of Business. Comments Tail risk hedging is designed to enhance return potential by: Helping to mitigate losses when a market storm hits. Provide liquidity in a crisis, allowing you to buy assets at distressed prices when others are forced to sell. Allow investors to take greater risks elsewhere in their portfolios. But as with any market timing strategy, there is always the possibility of market “whipsaws,” where markets trade up and down in a sideways pattern for extended periods and tail risk hedging may become an extra expense instead of a benefit. JAGDX has gotten off to a rocky start, but they have an interesting approach to risk management, and I will be tracking the fund to see how they do over a full market cycle. So far, they have attracted about $50 million in assets, so it is still uncertain whether the fund will be a long term success.