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For Investment Success, Keep It Simple

By Carl Delfeld Investing can seem incredibly complicated and intimidating, especially for the novice. There are thousands of stocks and almost as many funds to choose from, not to mention stock markets that always seem volatile and uncertain. Even tougher is deciding when and how to sell a stock or fund to lock in gains or limit losses. It helps to follow a simple strategy to help make these decisions pretty much automatically. Here are four principles that will help you get started. #1: Build a Diversified Core Portfolio Leonardo da Vinci was right when he said, “Simplicity is the ultimate sophistication.” And legendary global investor Sir John Templeton really nailed it with his sage advice, “Diversify. In stocks and bonds, as in much else, there is safety in numbers.” For your core portfolio, I suggest going with low-cost, tax-efficient exchange-traded funds (ETFs) as building blocks. As I describe in my book, Think Global, Grow Rich , this core portfolio has capital preservation as its primary goal and capital appreciation as a secondary goal. It’s a well-diversified portfolio with allocations to fixed income, broad U.S. equity markets, exposure to high-quality international markets, income- and dividend-oriented ETFs, gold, and even some exposure to other strong currencies – in case the dollar falls off its perch. #2: Set Aside Ample Cash After setting up a core portfolio, you should set aside a comfortable cash position of at least six months’ worth of living expenses. This is where I differ from many other advisors who want their clients to always be fully invested. Another reason to keep a lot of cash in your brokerage account is to be able to take advantage of markets and stocks when they’re on sale. You want to have the ability to move quickly and not have to figure out which stocks to sell in a hurry. #3: Seek Capital Gains With Your Explore Portfolio. Any capital you have left can go to your “explore” portfolio with the full recognition that seeking capital appreciation means higher risk and volatility. You still need some diversification in this portfolio, but you should also feel free to look at aggressive asset classes like emerging markets, commodities, sector ETFs, and individual stock ideas. One great way to gain exposure to international markets is through country-specific ETFs. With a click of the mouse, you can invest in 32 countries, such as Singapore, Switzerland, or Mexico, through the iShares MSCI Singapore ETF (NYSEARCA: EWS ), the iShares MSCI Switzerland ETF (NYSEARCA: EWL ), and the iShares MSCI Mexico Capped ETF (NYSEARCA: EWW ), respectively. Using country ETFs also gives you a hedge on the U.S. dollar weakening since. For example, when you buy the Switzerland ETF, you also gain exposure to the Swiss franc. Pick countries that are out of favor, and with time, you’ll enjoy solid gains. For individual stocks, stick to investing only in companies you understand. Invest only in what you know. Don’t just accept someone else’s opinion, do some independent homework on your own. And try to avoid complicated stories, because managing these companies is difficult and there are just too many things that can go wrong. #4: Capture Gains and Limit Losses We’ve all been there. Nothing is more painful than picking a great stock and watching it peak and then fall back to earth. Don’t ride the roller coaster with your investments. If you’re fortunate enough to have a stock or fund double in value, immediately sell half of your position to protect profits. And whenever you buy a stock, it’s smart to put in place a 20% trailing stop loss. This means you have an automatic exit if your stock falls 20% from its high. This is important, because it takes emotion out of the equation and protects your hard-earned gains, or limits your losses, so you can fight another day. It’s not a perfect approach, and sometimes that darn stock will rebound just after your stop loss strategy tells you to sell it. This is irritating, but much less painful than watching all your gains evaporate day after day, right before your eyes. Follow these four simple rules, and you’ll be way ahead of the crowd. Original Post

Fed To Hike In June? Expected ETF Moves

Taking most investors by surprise, minutes from the Fed April meeting pointed to interest rate hike possibilities in June. While this seemed unfeasible a few days back, a volley of upbeat economic data lately sparked off possibilities for further policy tightening. Also, plenty of positive vibes were felt in the market, including a healing labor market and the latest uptick in global sentiments buoyed by stabilization in China and oil. All these opened the door for a likely hike in June. Most Fed officials sought signs of economic improvement in the second quarter including a strong employment and inflation scenario. Inflation rose at the quickest clip in three years in April, as the consumer price index jumped a seasonally adjusted 0.4% (read: TIPS ETF (NYSEARCA: TIP ) Hits New 52-Week High). Upbeat Data Points Though April’s non-farm payroll reading of 160,000 was below the estimated 205,000 and the prior-month reading of 208,000, the unemployment rate was unchanged at 5%. Other key indicators including workweek and average hourly earnings showed increases. Hourly earnings in April rose 0.3% month over month and 2.5% year over year. Meanwhile, overall retail sales expanded 1.3% in April from March, representing the largest gain since March 2015. April retail sales beat economists’ forecast of a 0.8% rise . The University of Michigan indicated that its consumer sentiment index rose 6.8 points to 95.8 in early May, marking the strongest reading since June (read: Retail Sales Back to Health; ETFs to Watch ). Since consumer spending makes up about 70% of the U.S. GDP, April retail sales data indicates that the U.S. economy is progressing at a decent clip to end Q2 and is less likely to falter like it did in Q1. In the first quarter, the economy grew at an annual rate of just 0.5%, marking a two-year low. The housing market is also giving bullish signals. Lately, the economy was gifted with strong new home construction and building permits data. All these might encourage the Fed to take the next policy tightening decision sooner than expected. The last hike was seen in December 2015. Investors’ Perception Following the release of the minutes, investors’ bet over the possibility of a June hike shot up to 34% from 19% (according to CME Group) as indicated by the prices for futures contracts on the Fed’s benchmark overnight lending rate. And by late Wednesday, traders wagered on a 56% possibility of a hike by July, up from 20% on Tuesday. Possible ETF Moves Some subtle moves in various markets and asset classes are likely to be observed if the Fed goes hawkish in June or July. Below we discuss a few ETFs that were among the biggest movers and could remain in focus ahead. PowerShares DB USD Bull ETF (NYSEARCA: UUP ) As widely expected, the U.S. dollar will likely gain strength. The U.S. dollar ETF UUP was up about 0.7% on May 18. iShares 7-10 Year Treasury Bond ETF (NYSEARCA: IEF ) The yield on the 10-year U.S. Treasury jumped 11 bps to 1.87% on May 18, following the Fed minutes. The ultra-popular bond ETF IEF shed over 0.8%. But since global growth worries are still extensive with Brexit fears looming large, the intermediate and long-term U.S. Treasury bonds should be in fine fettle. SPDR S&P Regional Banking ETF (NYSEARCA: KRE ) Banking stocks should rally if the Fed hikes in June as these perform better in a rising rate environment. KRE added 4.24% on May 18, 2016. PowerShares FTSE RAFI Emerging Markets Portfolio ETF (NYSEARCA: PXH ) Emerging markets ETFs will likely be losers if the Fed goes ahead with a hike. Dearth of cheap money inflows would hit this space. PXH was down about 1.4% on May 18. iShares Select Dividend ETF (NYSEARCA: DVY ) The dividend ETFs, one of the biggest beneficiaries of subdued Treasury yields, might stall a bit if the Fed hikes sooner than expected. However, it all depends on how the global market shapes up and investors’ appetite for risk. Vanguard Total Stock Market ETF (NYSEARCA: VTI ) Normally, the initial reaction of a rate hike is a slide in stock prices. However, the reaction should vary across capitalization and the turbulence should settle down with time. Total stock market ETF was down 0.01% on May 18, and may be under pressure immediately after the tightening move. Link to the original post on Zacks.com

Many MLP CEF Investors Are Using The Wrong Benchmark – Are You?

By James Wang Click to enlarge Today there are 95 publicly-traded energy MLP-access products on the market; a figure that nearly matches the number of MLPs [1] themselves. While having options is generally a good thing, having too many options brings up the paradox of choice [2]. So how do you objectively choose the best fund? Well, as an indexing company, we’d tell you to compare it to a benchmark. You may ask, “but isn’t the Alerian MLP Index (AMZ) already the gold standard for MLP benchmarks?” and you’d be right. (Clearly, we’re biased.) However, with the abundance of MLP investment funds, comes a variety of different product structures and nuances. We’ve launched the Alerian MLP Closed End Fund Index (AMCI) to address a particular subset of those products: closed-end funds (CEFs) which elect to be taxed as C Corporations for federal tax purposes. So what are closed-end funds and what makes them special? Well, to start with, CEFs were the first type of pooled investment products to enter into the MLP space, with Tortoise Capital Advisors launching the Tortoise Energy Infrastructure Corp (NYSE: TYG ) in 2004. Today CEFs make up about 20% [3] of all MLP investment products by AUM. As partnerships, MLPs have certain tax complexities that reduce their efficiencies in pass-through investment products. While traditional mutual funds, CEFs, and ETFs may pass on all gains/losses to their investors, funds whose holdings comprise more than 25% in MLPs must elect to be taxed as a C Corporation [4] for federal income purposes. This means that there’s an extra layer of corporate taxation that shaves off approximately 35% [5] of all gains before it even reaches the investor. Yeah, it kind of stinks, but unfortunately those are the rules, and it’s the only way to construct a pure-play MLP fund. C Corp CEFs, however, have the ability to mitigate some of that tax drag through the use of leverage. Furthermore, since the funds are “closed” in construction, unlike open-end funds (ETFs, Mutual Funds), the capital they have is permanent, allowing them to hold less-liquid investments. A potential downside (or upside, if you time it right) to the structure is that these funds may trade at a significant discount or premium to their net asset value. To make things even more complicated, there are a number of CEFs with the words MLP in their title, but they merely hold 25% of their fund in MLPs (to get around the C Corp rules). Those types of funds are referred to as “RIC-Compliant funds” and may have significantly different investment characteristics. For the purpose of the AMCI, RIC-Compliant funds are excluded, as it would not allow for an apples-to-apples comparison. Click to enlarge The Alerian Closed End Fund Index’s construction is relatively straight-forward. Today, there are 21 MLP C Corp CEFs on the market, with AUMs ranging from $19 million to nearly $2 billion. All of these funds are included and equal-weighted within the AMCI. Historical data was generated by backtesting the index back to 2004, when the first MLP C Corp CEFs were launched. Click to enlarge Examining the total return performance of the AMCI in the chart above, you’ll notice that it lags significantly behind the AMZ. This is expected and really showcases the effect of the C Corp tax drag. Even though CEFs use leverage [6] to offset some of this drag, that leverage is only helpful on the way up. On the way down, leverage exacerbates losses. Although in the past three months, the AMCI has outperformed the AMZ, over periods of a year or longer, it has significantly underperformed. When looking at the yield of the AMCI, you’ll see that it’s also significantly higher than the AMZ. While some CEFs may focus their investments on higher-yielding MLPs, it’s not necessarily a universal trend, with leverage playing a larger role in boosting yields. One important note is that since this index is equal-weighted, small funds have an outsized influence on index performance while larger funds may be under-represented when compared to an AUM- weighted index. Unfortunately, the smallest funds are also the worst-performing in the index. When looking at the price return of the AMCI as of 3/31/16, the following data points stand out. 12 of 21 funds have outperformed the AMCI on a trailing one-year basis 11 of 13 funds have outperformed the AMCI on a trailing three-year basis 7 of 8 funds have outperformed the AMCI on a trailing five-year basis 4 of 4 funds have outperformed the AMCI on a trailing 10-year basis How is it possible that the majority of index constituents outperformed the index for the 3-, 5-, and 10-year history? Unfortunately, two funds [7] dragged the entire index down by hundreds of basis points [8]. Although it’s unfortunate that these funds had such a negative impact on index performance, it also showcases that there can be large disparity between the best- and worst-performing active managers. In the end, Alerian exists to equip investors to make informed decisions about their MLP investments. There are multitudes of MLP-related funds in the marketplace today and the most important thing is to know what you own. If you’ve already made the decision to go with an active manager and are comfortable with the pros and cons of C Corp CEFs, we hope that the AMCI better equips you to make an informed decision with your investments. 2016.05.19 2:30PM CST – Edited to correct phrasing in paragraph 4 and footnote 4. Footnotes [1] There are 118 energy MLPs as of the end of April. [2] As psychologist Barry Schwartz has said “Autonomy and freedom of choice are critical to our well-being, and choice is critical to freedom and autonomy. Nonetheless, though modern Americans have more choice than any group of people ever has before, and thus, presumably, more freedom and autonomy, we don’t seem to be benefiting from it psychologically.” [3] Over $9B in aggregate AUM as of February 29, 2016 [4] This is due to the American Jobs Creation Act of 2004. Previously, MLPs could not be held at all in such funds without making a corporate tax election. [5] The federal corporate tax rate is 35%, but state taxes could push the fund tax rate higher. [6] The amount of potential leverage can be found in each fund’s offering documents, but typically a fund’s maximum debt leverage is 33% while its equity leverage is 50%, as governed by the Investment Company Act of 1940. [7] The Cushing MLP Total Return Fund (NYSE: SRV ) fell over 87% from its inclusion on December 21, 2007 to March 31, 2016 while the Cushing Energy Income Fund (NYSE: SRF ) fell over 93% from its inclusion in the index from June 15, 2012 to March 31, 2016. [8] Theoretically, if we were going to cherry-pick this index and remove SRV and SRF, the annualized 10-year total return performance would have jumped 220 basis points from +1.7% to +3.9%. The 5-year annualized performance shows similar results, jumping nearly 370 bps from -7.8% to -4.1%. Disclosure: © Alerian 2016. All rights reserved. This material is reproduced with the prior consent of Alerian. It is provided as general information only and should not be taken as investment advice. Employees of Alerian are prohibited from owning individual MLPs. For more information on Alerian and to see our full disclaimer, visit http://www.alerian.com/disclaimers. James Wang is the Director of Data Analytics at Alerian, which equips investors to make informed decisions about Master Limited Partnerships (MLPs) and energy infrastructure. Mr. Wang conducts quantitative and statistical analyses in order to bring to light historical and emerging trends in the asset class. He also oversees the firm’s efforts to efficiently integrate and utilize technology in its brand management activities. Prior to Alerian, Mr. Wang was an Associate in the Equity Research Division of Raymond James & Associates Inc, where he constructed financial models for energy infrastructure MLPs and published comprehensive research reports to discuss his findings. Mr. Wang graduated with a Bachelor of Science in Biomedical Engineering and a minor in Management from the Johns Hopkins University Whiting School of Engineering.