Tag Archives: infrastructure

5 Top-Rated Global ETF Picks For Q4

The global markets went berserk in the third quarter with selling pressure hitting the ceiling. Back-to-back issues like the Chinese market crash, slowdown in the Japanese economy, return of deflationary fears in the Euro zone in spite of stimulus measure and slouching commodities bulldozed the market. Though the situation recovered a little to start Q4, odds remain as evident from the latest growth forecast cut by IMF. The organization slashed the global growth forecast (on October 6) for 2015 to 3.1% from 3.3% projected earlier. Slowing emerging market growth and the commodity market slump were held responsible for this sluggishness. The forecast for 2016 was reduced to 3.6% from 3.8% expected in July (read: 2 Winning Commodity ETFs for the Worst Q3 ). As per Reuters , the key industrial economies cut the rates to almost zero and shelled out around $7 trillion in quantitative easing programs in the seven years since the global financial crisis. But this huge influx of funding could not perk up growth, investment and consumer demand as anticipated and instead raised a cautionary flag over global growth (read: Expect Volatility in Q4? Try These ETF Ideas ). Still, the bulls can ride beyond the U.S. border. After all, most of the developed economies are thriving on easy money and thus act as lucrative investment propositions. Even at home, the hyper-active discussion over the Fed lift-off has taken a back seat after somber job data. Now the prospective timeline has shifted to the end of 2015 or early 2016, provided the economy gains momentum. Though cheap money inflows set the stage for bulls globally, investors need to be selective while playing this field, given the heightened uncertainty. How to Pick Right ETFs? First, fundamentals need to be favorable, and then investors can look at our Zacks ETF Rank. This ranking system looks to find the best funds in a given market segment based on a number fundamental and technical factors about them and the Zacks forecast for the underlying industry or asset class. Following this technique, we at Zacks revised our ETF ranks recently and found out that five global ETFs have been upgraded from #3 (Hold) #2 (Buy). We have also taken diversified exposure into our consideration, given the ongoing volatility in the country-specific exposure, and zeroed in on five global ETFs that are worth considering (see: Our Zacks ETF Rank Guide ): SPDR MSCI ACWI IMI ETF (NYSEARCA: ACIM ) This fund tracks the MSCI ACWI IMI Index. Though the ETF provides exposure to stocks across the developed and emerging markets, U.S. accounts for more than half of the asset base. Apart from this, Japan and UK take the next spots with about 8.1% and 7.3% exposure, respectively. In total, the fund holds about 800 stocks with each accounting for no more than 1.32% of assets. Financials, IT, Consumer Discretionary, Industrials and Health Care are the top five sectors with double-digit allocation each. The product has managed an asset base of $36.5 million and trades in good volume of more than 6,500 shares a day. It charges 25 bps in annual fees and was up 1.2% in the last one month. JPMorgan Diversified Return Global Equity ETF (NYSEARCA: JPGE ) The fund seeks to track the FTSE Developed Diversified Factor Index, following the “Smart Beta” strategy, to provide developed market equity exposure. The fund combines the two approaches under a single umbrella – a top down risk allocation framework and a bottom up multi-factor stock ranking process. The bottom up approach results in selecting stocks based on four factors: value, size, momentum and low volatility, while the top down approach results in an equal-weighted portfolio of stocks selected across 40 different regional sectors. This approach results in the fund holding a portfolio of 488 stocks from the developed markets with the U.S. taking one-fourth share. The fund charges 38 bps in fees and advanced over 2% in the last one month. This fund also has low risk quotient. SPDR MSCI World Quality Mix ETF (NYSEARCA: QWLD ) The fund looks to track the MSCI World Quality Mix Index to provide exposure to 24 developed economies focusing on matrices like value, low volatility and quality. This $6 million-ETF comprises 1,021 stocks. Sector-wise, Financials, IT, Health Care and Consumers get maximum exposure. Despite being a global equity ETF, the U.S. dominates the portfolio followed by Japan (8.24%), UK (8.1%) and Switzerland (4.1%). It charges 30 bps in fees for this exposure. The fund nudged up 0.6% in the last one month and has a Medium risk outlook. FlexShares STOXX Global Broad Infrastructure Index ETF (NYSEARCA: NFRA ) This ETF could be appropriate for investors seeking a play on the booming infrastructural activities worldwide. With slow global economic revival, spending on infrastructural activities has been picking up. This was truer in the developing regions rather than developed zones. Investors should also note that infrastructure is an interest rate sensitive sector, usually with strong yields. With a low rate environment prevalent across the globe, infrastructure looks attractive in the near term. NFRA looks to track the STOXX Global Broad Infrastructure Index. No stock accounts for more than 4.43% of the fund. The ETF presently holds 150 securities with total assets of $414.2 million. However, investors looking for heavy international exposure might be a little disappointed with this product, as close to half the portfolio is in the U.S. followed by 25% focus in Europe and the rest spread across the Asia-Pacific (15%), Asia (3%), Latin America (2%) and Asia (1%). The fund charges investors 47 basis points and has a yield of 2.40% per year. NFRA was up 1.3% in the last one month. The fund has a low risk profile. ALPS Workplace Equality ETF (NYSEARCA: EQLT ) The socially responsible fund looks to track the companies that have ‘progressive workplace policies that treat lesbian, gay, bisexual and transgender ( LGBT ) individuals equally and respectfully among all employees’. This produces a portfolio that has about 160 companies in its basket, while it has a slight tilt toward smaller companies, at least when compared to the S&P 500 index. It follows an equal-weight approach, so no single security makes up an outsized portion of the basket. The fund has double-digit exposure in sectors like consumer discretionary, financials, technology and industrials. EQLT charges 75 bps in fees and was almost flat in the last one month. The product has a low risk outlook. Link to the original post on Zacks.com

A Major Problem With Analyzing Infrastructure Projects

Summary There are risks associated with businesses relying on government projects. Colt is an example of a business disrupted by losing government contract. What all investors have to be aware of for companies with a lot of government business exposure. There are an increasing number of calls for governments around the world spending a lot more money on infrastructure projects, as growth in the private sector continues to slow down. One of the tactics used to twist the arm of politicians is to point to decaying bridges and the last time they were upgraded, and similar pressures, asserted and leaked to the media to attempt to create a groundswell of public pressure to spend the money. Then there is the job creation side of it too. What lawmaker wants to be identified as one who resists the creation of more jobs; and in the case of government, those will generate above-market wages and benefits, even though in the longer term paying for all of it isn’t sustainable. With a lot of emotion on both sides of the issue, it lands on investors to sort through it and figure out if they can benefit from it. China’s ghost cities In recent history there probably isn’t anything more wasteful than the “ghost cities” created by China, which have few people living in them and no industry for jobs. They were built in order to create construction jobs, and once they were completed, the debt to develop them remained with nothing to generate revenue in the form of taxes, or to produce business momentum in the private sector. It was a classic catch-22. There were no people to inhabit the city, so there was no businesses that would want to locate in them. People were looking for jobs and businesses were looking for people to buy their products or services. Neither inhabited the cities. So the cities just sit there lying relatively bare with no reason for people to live in them. They’re simply brick and mortar built in the form of houses and buildings sitting empty. We know it won’t take long for nature to start reclaiming these cities. Political issues Since almost everything surrounding infrastructure projects are related to politics, there are all sorts of problems associated with them that the private sector usually doesn’t have to deal with; at least to the degree the public sector has to. For example, there are legal requirements for companies the work is farmed out to that they must adhere to if they want to have a chance at winning the business from the government. This plays out in a variety of ways, depending on the country. There of course is the strong potential for corruption, again, the level of which is determined by the specific region of the world infrastructure is being spent on. Also at issue over the longer term, is all of this infrastructure is very costly and debatable as to the real value it provides for citizens. That means it all has to be repaid, and that means either higher taxes or more printing of money by a central bank. That’s important because public sentiment can quickly change, which could have an impact on the future of a company doing business with the government. What’s the problem? Where the major challenge with all of this is at the level of exposure a company has in regard to government projects. That can be infrastructure or otherwise. One recent example on the government contract side was the loss of an $84 million contract by Colt three years ago, which ultimately led to its bankruptcy. Being able to provide guns to the military, once it had won the contract, meant during that time it had a monopoly on military gun sales for the duration of the contract. Once the contract was not renewed, it wasn’t able to compete in the direct to consumer market because its prices were higher than their competitors. Another reason example that’s shaking up the markets some was after the expiry of the Export-Import Bank, which Congress decided not to renew. General Electric (NYSE: GE ) has been the proxy of how it can have an effect on companies, as numerous contracts came under immediate threat because companies relied upon the Bank for financial support. Companies as large as General Electric won’t have trouble attracting financing because of its size and the type of jobs and projects it can bring to other regions of the world, but that’s not the point. The point is when dealing with governments, politics and fickle politicians can make abrupt decisions that can disrupt a business and an industry, specifically when relying on government contracts or government financing for a significant portion of a business. I’m not talking about changing laws here, I’m talking about losing government contracts or financial support that had a heavy impact on the performance of a business, and were expected to continue. Conclusion There is no doubt the global economy is slowing down, and one of the actions being called for is for governments to increase infrastructure spending. Not only does this include a lot of risk, as shown above, but many investors have ethical issues with the government taking on that type of debt and spending on dubious projects that have questionable value. That said, there are a number of companies that win contract year after year, and it’s a big part of their business success. Again, General Electric is an example of that. At issue for some investors is having to set aside personal preferences and analyze the company as it is, even if it is growing via government largesse. I’ve seen some investors look for minutia in order to find something wrong with these companies, even if they’ve locked in contracts that guarantee revenue for a number of years. For the reasons mentioned earlier, I tend not to invest in companies with a lot of reliance on government spending, because I see it as very risky. At the same time, it depends on the size of the company and the type of projects it’s engaged in as to the level of risk. It’s doubtful a company that started improving bridges would lose the contract in the middle of the work. What can’t be assumed is once a portion of the work under contract is completed, new work will be awarded to the company. That’s Colt’s story. And it’s not an unusual one when dealing with government. Infrastructure projects are highly controversial and scrutinized by a lot of special interest groups. It normally doesn’t hurt the brand of a company to be involved in them. The risk is spending money on the business with the expectations of doing further business with the government, and having another company get the business. Companies with significant exposure to government projects are okay as long as the investors understands the terms and duration of the contract. What can’t be counted on that once it’s completed the company will get more government business. That makes it hard to analyze the business because of capex needed to perform the job, and the resultant fallout if it no longer has the revenue stream to pay off its added expenses. Government infrastructure projects may sound good for the economy, but they aren’t always good for a company or investors. Invest accordingly.

Build Your Own Leveraged ETF (ETRACS Edition)

Summary A previous article showed that the ETRACS 2x ETNs did not inexorably decay in value even over several years. Other authors have investigated the idea of using leveraged funds to build your own ETF. The application of this strategy to the ETRACS 2x ETNs are investigated, revealing the potential for additional yield. Introduction The ETRACS line-up of ETNs issued by UBS (NYSE: UBS ) provides investors with exposure to a broad range of investment classes. A number of the ETRACS ETNs are 2x leveraged, which means that they seek to return twice the total return of the underlying index, minus fees. This allows the ETNs to offer alluring headline yields, making them attractive for income investors. Additionally, some of these funds pay monthly distributions, although these can be lumpy. A recent article provides an overview of the types, yields and expense ratios of these 2x leveraged ETNs. An interesting feature of the 2X leveraged ETNs is that their leverage resets monthly rather than daily, which is the norm for most leveraged funds on the market. It is known that decay or slippage in leveraged funds will occur when the underlying index is volatile with no net change over a period of time. By resetting monthly rather than daily, this decay can be somewhat mitigated. An article by Seeking Alpha author Dane Van Domelen addresses the decay issue mathematically and shows that in most cases, the decay is not as serious as is often thought. However, this leverage does not come without costs. There is the management cost associated with providing the ETN, as well as a finance cost associated with maintaining the 2x leverage. Finally, it should be noted that investors in ETNs are subject to credit risk from the fund sponsor, in this case UBS. If UBS were to go bankrupt, the ETNs will likely become worthless. However, Professor Lance Brofman has argued that the risk of ETN investors losing money due to UBS going bankrupt is, barring an overnight collapse, minimal because the notes can always be redeemed at net asset value. I recently studied the performance of several of the 2x leveraged ETNs and found that, in general, the 2x ETNs fulfilled their objectives and also outperformed the corresponding (hypothetical) daily-reset 2x ETNs. This suggests that, over the last few years at least, that the 2x ETNs have been suitable (insofar as them being able to meet their objectives vis-a-vis their 1x counterparts) long-term instruments for the leverage-seeking investor. Just to make this point crystal clear, the 2x ETRACS ETNs have allowed aggressive investors to obtain 2x participation in a variety of asset classes in an efficient and stable manner – both to the upside and to the downside – I am not making specific recommendations as to whether the asset classes themselves (e.g. mREITs, MLPs, BDCs, and CEFs, just to name a few of the asset types covered by the ETRACS) are suitable as long-term investments. Building your own ETF In another article entitled ” Build Your Own Leveraged ETF “, Dane Van Domelen explores the possibility of combining leveraged ETFs with cash or other funds for various purposes. For example, Dane posited that a one-third ProShares UltraPro S&P 500 ETF (NYSEARCA: UPRO ), a 3x leveraged version of the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ), two-thirds cash portfolio has virtually the same properties as a 100% S&P 500 portfolio (with periodic rebalancing), but allows you to hold a lot of cash: An interesting special case is where you put one-third of your money in UPRO and two-thirds in cash. At the onset, this portfolio would behave almost exactly as if you had all of your money in the S&P 500. UPRO’s expense ratio should result in somewhat diminished returns, but not much. And it might be worth it to free up two-thirds of your money, for emergencies and so forth. UBS 2x ETN expert Lance Brofman has also considered the same idea : If this hypothetical investor were thinking of either investing $1,000 of his $10,000 in the UBS ETRACS 2X Leveraged Long Wells Fargo Business Development Company ETN ( BDCL) and keeping $9,000 in the money market fund, or investing $2,000 of his $10,000 in the UBS ETRACS Wells Fargo Business Development Company ETN ( BDCS) and keeping $8,000 in the money market fund, either choice would entail the same amount of risk and potential capital gain. This is because BDCL, being 2X leveraged, would be expected to move either way twice as much as a basket of Business Development Companies, while BDCS would move in line with a basket of Business Development Companies. This article seeks to analyze whether it is possible to “build your own ETF” with the suite of UBS 2x leveraged ETNs, by applying the strategy described above by Dane Van Domelen and Lance Brofman. Interestingly, the analysis reveals the potential to add on additional yield to your portfolio. Considering fees The fee required to maintain the 2x leverage of the ETRACS 2x ETNs is based on the 3-month LIBOR, which currently stands at 0.33%. This is added to a variable financing spread (0.40-1.00%) to generate a total financing rate that is passed on to investors. This total financing rate of 0.77-1.33% is much lower than is available for all but the wealthiest of individual investors. Lance Brofman writes : Many retail investors cannot borrow at interest rates low enough to make buying BDCS on margin a better proposition than buying BDCL. This means that from an interest point of view, it would usually be better to buy the leveraged fund than to try and replicate it yourself with a margin loan from your broker. Applying the strategy However, what if the investor wasn’t interested in using leverage in the first place? Can he still make use of the low financing rates charged by the ETRACS 2x ETNs? To explore this, let’s try to apply the strategy described above by Dane Van Domelen and Lance Brofman, which basically entails replicating a 100% investment in a 1x fund with a 50% investment in the corresponding 2x fund and a 50% allocation to cash or a risk-free asset. The following illustrates such an example. Example Let’s say that you had $10K invested in the SPDR Dividend ETF (NYSEARCA: SDY ). SDY charges 0.35% in expenses, which comes out to $35 per year. You could replicate that investment with $5K in the UBS ETRACS Monthly Pay 2x Leveraged S&P Dividend ETN (NYSEARCA: SDYL ), leaving yourself with $5K in cash. SDYL charges 1.01% in total expenses, which on $5K comes out to $50.50. In other words, you’d be paying an extra $15.50 per year if you decided to invest $5K in SDYL compared to $10K in SDY. But wait! You have an extra $5K in cash left over. If you can use that $5K to earn $15.50 per year, corresponding to a rate of return [RR] of 0.31%, you can break even. With any higher rate of return, you would benefit from using the leveraged ETN and investing the rest of your cash. At first glance, it seems that 0.31% is a ridiculously low hurdle to surpass, suggesting that one would nearly always benefit from using the leveraged ETNs and investing the rest of the cash. However, one also needs to consider the risk of the invested cash portion. To mimic, as closely as possible, the risk of the original scenario (i.e. $10K invested in SDY), the $5K cash left over after investing $5K in SDYL should be invested in as risk-free of an asset as possible. Bankrate.com shows that 1.30% 1-year CDs and 1.25% savings accounts are currently available. These investments are insured by the FDIC, and can be considered to be nearly risk-free. Using the above example, investing $5K at 1.30% for one year yields you $65.00. After subtracting the additional $15.5 required for the additional expenses of SDYL ($50.50) vs. SDY ($35), you’d gain $49.50, or an additional 0.495%, from using this strategy! Results The following table shows a list of 2x leveraged ETNs, their corresponding 1x fund, and their respective total expense ratios [TER]. Also shown is the rate of return [RR] required on the risk-free portion to break-even, as well as additional yield that you would be able to obtain on the entire portfolio had the risk-free portion been left in cash paying 0%, a savings account paying 1.25% or a 1-year CD paying 1.30%. A negative number indicates that this strategy would lose money relative to investing the whole portion in the 1x fund. The funds are arranged in descending order of required RR on the risk-free portion. Please see my previous article if further information is required regarding these 2x ETNs. Note that some funds such as the ETRACS Monthly Pay 2xLeveraged US High Dividend Low Volatility ETN (NYSEARCA: HDLV ) and the ETRACS Monthly Pay 2xLeveraged U.S. Small Cap High Dividend ETN (NYSEARCA: SMHD ) so not have corresponding 1x counterparts, so are excluded from this analysis. Ticker TER Ticker TER Required RR Cash (0%) Savings (1.25%) 1-year CD (1.30%) ETRACS Monthly Pay 2xLeveraged MSCI US REIT Index ETN (NYSEARCA: LRET ) 1.96% Vanguard REIT Index ETF (NYSEARCA: VNQ ) 0.10% 1.76% -0.88% -0.26% -0.23% UBS ETRACS Monthly Reset 2xLeveraged S&P 500 total Return ETN (NYSEARCA: SPLX ) 1.56% SPY 0.09% 1.38% -0.69% -0.07% -0.04% ETRACS Monthly Reset 2xLeveraged ISE Exclusively Homebuilders ETN (NYSEARCA: HOML ) 1.96% ETRACS ISE Exclusively Homebuilders ETN (NYSEARCA: HOMX ) 0.40% 1.16% -0.58% 0.05% 0.07% ETRACS 2xMonthly Leveraged S&P MLP Index ETN (NYSEARCA: MLPV ) 2.26% iPath S&P MLP ETN (NYSEARCA: IMLP ) 0.80% 0.66% -0.33% 0.30% 0.32% SDYL 1.01% SDY 0.35% 0.31% -0.16% 0.47% 0.50% UBS ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN (NYSEARCA: MORL ) 1.11% Market Vectors Mortgage REIT Income ETF (NYSEARCA: MORT ) 0.41% 0.29% -0.15% 0.48% 0.51% UBS ETRACS Monthly Pay 2x Leveraged Dow Jones Select Dividend Index ETN (NYSEARCA: DVYL ) 1.06% iShares Select Dividend ETF (NYSEARCA: DVY ) 0.39% 0.28% -0.14% 0.49% 0.51% UBS ETRACS Monthly Pay 2xLeveraged Closed-End Fund ETN (NYSEARCA: CEFL ) 1.21% YieldShares High Income ETF (NYSEARCA: YYY ) 0.50% 0.21% -0.11% 0.52% 0.55% UBS ETRACS Monthly Pay 2X Leveraged Dow Jones International Real Estate ETN (NYSEARCA: RWXL ) 1.31% SPDR Dow Jones International Real Estate ETF (NYSEARCA: RWX ) 0.59% 0.13% -0.07% 0.56% 0.59% UBS ETRACS Monthly Pay 2xLeveraged Wells Fargo MLP Ex – Energy ETN (NYSEARCA: LMLP ) 1.76% UBS ETRACS Wells Fargo MLP Ex-Energy ETN (NYSEARCA: FMLP ) 0.85% 0.06% -0.03% 0.60% 0.62% UBS ETRACS Monthly Pay 2xLeveraged Diversified High Income ETN (NYSEARCA: DVHL ) 1.56% UBS ETRACS Diversified High Income ETN (NYSEARCA: DVHI ) 0.84% -0.12% 0.06% 0.69% 0.71% UBS ETRACS 2x Leveraged Long Alerian MLP Infrastructure Index ETN (NYSEARCA: MLPL ) 1.16% UBS ETRACS Alerian MLP Infrastructure Index ETN (NYSEARCA: MLPI ) 0.85% -0.54% 0.27% 0.90% 0.92% BDCL 1.16% BDCS 0.85% -0.54% 0.27% 0.90% 0.92% From the table above, we can see that the LRET/VNQ combination would be the worst pair to implement this strategy with, as it requires a 1.76% RR to break even. This means that even with a 1-year CD rate of 1.30%, you would be losing -0.23% using this method. This can be attributed to LRET’s exceptionally high expense ratio of 1.96%, and VNQ’s exceptionally low expense ratio of 0.10%, making it highly expensive to replicate 100% VNQ with 50% LRET. At the other end of the spectrum, the BDCL/BDCS combination appears to be the best pair for this strategy. The required RR is negative 0.54%, meaning that even if you left the 50% risk-free portion in cash, you would be gaining 0.27% on your overall portfolio. Investing the risk-free portion is a 1-year CD improves the performance of the portfolio by 0.92%. This can be attributed to BDCL’s below-average expense ratio of 1.16% and BDCS’ above-average expense ratio of 0.85%. The following chart shows the required RR for the 2x funds in order to implement this strategy. The following chart shows the additional yield that can be harvested by investing the 50% risk-free portion in cash (0%), a savings account (1.25%) or a 1-year CD (1.30%) for the respective 2x funds. Risks and limitations The 50% investment in a 2x fund may not correspond exactly to a 100% investment in 1x fund. It may do better or it may do worse. Periodic rebalancing may help, but this would entail additional transaction fees. In the case where the 1x fund is an ETF, you are additionally exposed to the credit risk of UBS when it is substituted for a 2x ETN (see introduction). In the case where the 1x fund is an ETF, the tax treatment may change when it is substituted for a 2x ETN. Savings accounts and CDs are only FDIC-insured up to a certain value (though if we’re worrying about this we have much bigger problems on our hands than the implementation of this strategy!). Conclusion A previous article showed that the ETRACS 2x ETNs did not inexorably decay in value even over several years, suggesting that the funds can function as efficient long-term investments for the leverage-seeking investor. This article shows that an investor not interested in leverage could still potentially benefit from the ETRACS 2x funds by “building his own ETF”. This simply costs of replicating a 100% investment in a 1x fund with a 50% investment in the corresponding 2x fund, and a 50% investment in a risk-free asset. Additional yields of up to 0.92% per year are available using this strategy. Further enhancements in yields can be achieved by investing the 50% into more risky assets such as corporate bonds, although this alters the overall risk-reward dynamics of the strategy.