Tag Archives: investing ideas

Refined Approach To Energy ETFs

Oil refiners could outperform in energy space. Widening spread between crude and refined products help support refiners. An ETF option that tracks some strengthening oil refineries. In the energy space, oil refiners and sector-related exchange traded fund could outpace the big oil and services names as refineries capitalize on the cheap crude oil and higher prices on refined products. Investors interested in tracking the oil refinery space can take a look at the Market Vectors Oil Refiners ETF (NYSEArca: CRAK ) , which began trading in August. CRAK has gained 3.6% over the past month. “Refiners have been the lone bright spot in the energy sector during the past year, handily outperforming every other subsector,” writes Allen Good, who is a senior equity analyst for Morningstar . “While oil prices have deteriorated, refining margins have improved, thanks to strength in gasoline margins due to key refinery outages and strong demand.” Gasoline demand, which is nearing its 2007 record high, and supply disruptions from refinery outages have bolstered gasoline margins about 50% this year. While we are at the end of the summer driving season, Good expects demand growth outside of normal seasonality, thanks to help from cheap oil prices. Good also projects improved earnings in the refining space as short-term investments. Oil refiners have not taken large, capital-intensive expansions or acquisitions. Instead, companies have capitalized on the availability of discount crude and natural gas or improving yields. “These projects typically require much less capital (processing capacity is much cheaper for light crude than heavy crude), have short payback periods, and generate attractive returns,” Good added. “Thanks to the completion of many of these projects, as well as improved operating performance, refiners can generate earnings growth in a flat-margin environment.” For example, Tesoro (NYSE: TSO ) shows ongoing improvement and is adding integration programs in California. HollyFrontier (NYSE: HFC ) is investing in improvement projects. Marathon Petroleum (NYSE: MPC ) added increased condensate processing, distillate production and exports. Western Refining (NYSE: WNR ) invested in logistics projects. CRAK includes a 5.5% tilt toward TSO, 5.0% in HFC, 6.9% in MPC and 3.4% in WNR. Refiners are also investing in midstream assets, which can provide earnings and achieve higher midcycle returns, with less volatility, Good said. Furthermore, many refiners have generated free cash flow, which have been returned to shareholders through dividends and share buybacks. While yields have remained relatively low, dividend growth is picking up. CRAK’s underlying index shows a 30-day SEC yield of 1.51%. Disclosure: None. Max Chen contributed to this article .

Investing Basics: Asset Allocation For The Near Term

By Anne Bucciarelli and Heather George Stocks tend to perform best over longer-term periods, but over shorter time periods, stock returns can be all over the map. Bond returns are usually lower, but far more predictable. Since you can’t know for sure what will happen in the period ahead, the right asset allocation for you depends in large part on your time frame. If you plan to use the money fairly soon (say, in less than two years) for something important (such as a down payment on a house or a wedding), it generally makes sense to keep most of that money in risk-mitigating assets such as cash instruments or fairly short-term bonds. For longer-term uses, such as education for your children or endowing your spending in retirement, a greater allocation to return-seeking assets such as stocks makes sense, as the Display below shows: Cash rarely loses value in nominal terms: Cash (represented by 3-month Treasury bills) has delivered negative returns in less than 1% of all three-month periods and no two-year periods since 1926. By contrast, stocks (represented by the S&P 500) have had negative returns in 37% of 3-month periods and 20% of two-year periods. Moving just 30% of an all-cash portfolio into stocks dramatically increased the share of periods with negative returns materially vs. the all-cash portfolio. Cash is also highly liquid: There’s little chance that you won’t be able to withdraw your money when you want to, without accepting fire-sale prices or paying high transaction fees. But holding cash has a cost. Cash returns have been lower than inflation over many three-year periods, as well as about one-third of all 10-year periods since 1926. Given the very low interest rate and low inflation environment today, we expect the return on cash after taxes and inflation to be negative over the next three years, as the next Display shows: We expect the after-tax, inflation-adjusted return on bonds to be significantly better than cash over the next three years if market conditions are typical, represented by the diamond, or very good; we expect bond returns to lag cash only slightly if market conditions are very bad. Even more remarkable, in today’s unusual market conditions, we estimate that returns for a conservative portfolio, with 30% in global stocks and 70% in bonds, would be no worse than cash if markets are hostile for the next three years – and would be much better if markets are typical or very good. In sum, cash instruments are suitable if you need to put money aside for near-term needs, but when you’re investing for three years or more, holding cash is likely to mean forgoing significant gains. The Bernstein Wealth Forecasting System uses a Monte Carlo model that simulates 10,000 plausible paths of return for each asset class and inflation and produces a probability distribution of outcomes. The model does not draw randomly from a set of historical returns to produce estimates for the future. Instead, the forecasts (1) are based on the building blocks of asset returns, such as inflation, yields, yield spreads, stock earnings and price multiples; (2) incorporate the linkages that exist among the returns of various asset classes; (3) take into account current market conditions at the beginning of the analysis; and (4) factor in a reasonable degree of randomness and unpredictability. The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Anne K. Bucciarelli – Director, Wealth Planning and Analysis Group Heather A. George – Associate Director, Wealth Planning and Analysis Group

What Smart Beta Can’t Do

The growth of assets in Smart Beta ETFs is staggering. From Michael Batnick : Investors have become enamored with alternative ways to slice and dice the indices. According to Morningstar , “Strategic Beta” now accounts for 21% of total industry (ETP) assets, up from under 5% in 2000. As assets have exploded, so too has the number of strategic-beta ETPs, which have grown from 673 to 844 in the past year, while assets grew 25% to $497 billion. While much of the focus is on the nomenclature- “smart” vs. “factor” vs. “strategic,” perhaps the most important aspect is being overlooked; like all things investing, the product won’t to be drive returns as much as your behavior will. To demonstrate this point, I chose five popular strategies that differ from the traditional plain vanilla cap-weighted index: Nasdaq US Buyback Achievers Index, S&P 500 Equal Weight Index, Nasdaq US Buyback Achievers, MSCI USA Momentum Index and the S&P 500 Low Volatility index.* Every one of these Smart Beta strategies has outperformed the S&P 500 from 2007-today**. The problem investors run into, as you can see below, is that very often the best performing in each year lagged the S&P 500 in the prior year. Myopia is a huge impediment to successful investing as much of our “discipline” is driven by “what have you done for me lately?” Each of these five strategies has outperformed the S&P 500 over the previous eight years. Had you chased the prior year’s best strategy, you would have compounded your money at just 3.5%, less than the 6% you would have earned if you invested in the prior year’s worst strategy. This goes to show that mean reversion is a powerful force for a proven, repeatable process. Interesting. There are all kinds of studies showing that when it comes to individual stocks, buying last year’s winners works great (click here for just one of the white papers written on this topic). However, Batnick is arguing that buying last year’s winning Smart Beta ETF is not effective (at least in this short sample) when it comes to investment factors. This has important implications for building an asset allocation that includes a variety of Smart Beta factors: You may well be better off simply seeking to identify those factors that are likely to outperform over time (we like momentum and value in particular) and make passive allocations to those factors rather than trying to time your exposure to them. Smart Beta has, in our view, been a tremendous positive for investors. However, it won’t keep performance-chasing investors from hurting themselves if they fail to allocate money to them in a prudent way. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. Share this article with a colleague