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RevenueShares Ultra Dividend Has Utility

Summary RDIV has a relatively high yield compared to its nearest competitors such as DVY. RDIV takes the S&P 500 Index, pulls out the top 60 highest yielding stocks, and then weights them by revenues. RDIV’s strategy in the current market environment results in a very utilities heavy portfolio. RevenueShares takes a different approach to indexing. Instead of using the market capitalization approach to weighting index constituents, the firm uses a company’s share of revenues. RevenueShares takes an existing S&P index such as the S&P 500 Index and then applies the different weighting methodology. One of the main arguments against market capitalization weighted indexes is the valuation argument. As the price of a stock rises, so does its market cap, and over time a market cap weighted index becomes increasingly weighted towards overvalued shares. By using revenues as a weighting strategy, as a stock price rises faster than its revenue share, it is sold off at rebalancings. If a company’s stock price falls, but its revenues are steady or rise as a share of the index, it is purchased at each rebalancing. In other words, stocks that are overvalued by the price-to-sales metric are sold, and stocks that are undervalued by the price-to-sales ratio are purchased. RevenueShares has a dividend fund that uses this strategy: the RevenueShares Ultra Dividend ETF (NYSEARCA: RDIV ) . Index & Strategy As mentioned, RDIV weights the index by revenues. The index constituent universe is the S&P 500 Index. The field is narrowed to the top 60 stocks, ranked by the average 12-month trailing dividend yield. Holdings are then weighted by revenue. The result is a portfolio heavily overweight the top holdings in the modified index, as well as overweight the “defensive” sectors. The top 10 holdings are book-ended by Duke Energy (NYSE: DUK ) at the top, with a 5.07 percent weight as of January 26, and Kinder Morgan (NYSE: KMI ) at the bottom with 4.20 percent of assets. The top 10 holdings combine for 46.70 percent of assets. Utilities dominate sector exposure, with 39 percent of assets. The telecom sector is also overweight relative to the S&P 500 Index, at 17 percent of assets. Consumer staples and energy make up 16 percent and 13 percent of assets, respectively. Technology is almost non-existent at 0.19 percent of assets. Financials are very underweight relative to the S&P 500 at 4 percent of assets, and there’s no healthcare exposure. This makes for a very “defensive” portfolio whose performance currently lives and dies by the utilities sector. Performance RDIV’s inception date is October 2013. For much of this period, the utilities sector has performed very well and it was the best performing S&P 500 sector in 2014. The first chart here is the price ratio of RDIV versus the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) in red. In black, for comparison, is the price ratio of the Utilities Select Sector SPDR ETF (NYSEARCA: XLU ) versus SPY. The chart confirms what the sector exposure tells us: RDIV is highly influenced by the utilities sector. (click to enlarge) A dividend ETF with a similarly high concentration in utilities is the iShares Select Dividend ETF (NYSEARCA: DVY ), and the two funds fall into nearly the same section of Morningstar’s Stylebox: Large Cap Value. DVY falls on the line with the mid cap box and gets a Mid-Cap Value classification from Morningstar. The chart below shows the price ratio of RDIV to DVY, plus the price of the Industrial Select Sector SPDR ETF (NYSEARCA: XLI ). Industrials is the second largest sector in DVY. When industrials have rallied, RDIV trailed DVY, and vice versa. (click to enlarge) Finally, here’s a performance chart of RDIV, DVY, SDY and SPY since the inception of RDIV, showing that despite having different sector exposure, they’ve largely traded together. RDIV comes out on top thanks to it large utilities exposure. (click to enlarge) Expenses RDIV charges 0.49 percent. This is higher than DVY’s 0.39 percent and SDY’s 0.35 percent expense ratio. Income RDIV has a trailing 12-month yield of 3.26 percent. With only five quarters of dividend payments, it’s too early to evaluate the fund’s payout growth rate. The yield exceeds DVY’s 12-month trailing yield of 3.03 percent. Conclusion RDIV is a new fund that hasn’t found a large following yet, amassing only $52 million in assets in its first 15 months. The heavy weighting of the utility sector is an issue, but DVY has attracted nearly $16 billion in assets with nearly as much in the sector. Overall, the revenue weighting strategy shows a good track record and the yield on RDIV is competitive with the competition. Sector exposure won’t always lean in favor of utilities this much, but for the foreseeable future that’s likely to still be the case. Investors comfortable with that level of exposure can consider the fund as part of a dividend strategy. The main risk for the fund is the same for the utilities sector and dividend funds more generally. If interest rates stay low, investors will eventually bid up RDIV’s holdings until the yield gap with other dividend ETFs closes. If interest rates increase, the high debt utilities sector will come under pressure and investors will look beyond dividend shares to other income alternatives. Rates have come down substantially over the past couple of months though, so a major rebound will be required to take rates back to a level where they are competitive with stocks. The 30-year treasury yield was 2.40 percent as of January 26, down from 3.1 percent in November.

VNQ: A REIT ETF Worthy Of My Portfolio

Summary VNQ offers investors the full package of benefits I’m looking for. The ETF is offering excellent correlation benefits to SPY, low expense ratios, and great liquidity. REIT ETF’s generally offer very strong dividend yields. I’m not seeing any reason not to use VNQ. Investors should be seeking to improve their risk adjusted returns. I’m a big fan of using ETFs to achieve the risk adjusted returns relative to the portfolios that a normal investor can generate for themselves after trading costs. I’m working on building a new portfolio and I’m going to be analyzing several of the ETFs that I am considering for my personal portfolio. One of the funds that I’m considering is the Vanguard REIT Index Fund ETF (NYSEARCA: VNQ ). I’ll be performing a substantial portion of my analysis along the lines of modern portfolio theory, so my goal is to find ways to minimize costs while achieving diversification to reduce my risk level. What does VNQ do? VNQ attempts to track the total return (before fees and expenses) of the MSCI U.S. REIT Index. Substantially all of the assets are invested in funds included in this index. VNQ falls under the category of “Real Estate”. Does VNQ provide diversification benefits to a portfolio? Each investor may hold a different portfolio, but I use the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) as the basis for my analysis. I believe SPY, or another large cap U.S. fund with similar properties, represents the reasonable first step for many investors designing an ETF portfolio. Therefore, I start my diversification analysis by seeing how it works with SPY. I start with an ANOVA table: (click to enlarge) The correlation is just under 66%. That’s a very solid level of correlation and not unusual for comparing a REIT index to SPY. As an investor using modern portfolio theory, I’m happy with seeing that level of correlation. Of course, the value low correlation wouldn’t mean much if the values were being distorted by poor liquidity. The average volume of nearly 5 million shares per day suggests that liquidity shouldn’t be a concern. That’s a good sign for investors wanting verification of the statistics or wanting to know that they can exit the position with less concern about it deviating from NAV. Standard deviation of daily returns (dividend adjusted, measured since November 2013) The standard deviation is fairly reasonable. For VNQ it is .843%. For SPY, it is 0.736% for the same period. The ETF is definitely showing more volatility than SPY by a noticeable margin when we compare returns on a daily basis. Given the low correlation, it should still improve the risk profile of the portfolio. Mixing it with SPY I run comparisons on the standard deviation of daily returns for the portfolio assuming that the portfolio is combined with the S&P 500. For research, I assume daily rebalancing because it dramatically simplifies the math. With a 50/50 weighting in a portfolio holding only SPY and VNQ, the standard deviation of daily returns across the entire portfolio is 0.719%. With 80% in SPY and 20% in VNQ, the standard deviation of the portfolio would have been .711%. If an investor wanted to use VNQ as a supplement to their portfolio, the standard deviation across the portfolio with 95% in SPY and 5% in VNQ would have been .727%. In each scenario, the overall portfolio has less volatility than SPY. I am leaning towards running REITs in my portfolio as 10 to 20% of the total portfolio. Why I use standard deviation of daily returns I don’t believe historical returns have predictive power for future returns, but I do believe historical values for standard deviations of returns relative to other ETFs have some predictive power on future risks and correlations. Yield & Taxes The distribution yield is 3.60%. I like to see strong yields for retiring portfolios because I don’t want to touch the principal. By investing in ETFs I’m removing some of the human emotions, such as panic. Higher yields imply lower growth rates (without reinvestment) over the long term, but that is an acceptable trade off in my opinion. The ETF is composed of REITs, so investors concerned about the taxation impacts of investing in a REIT ETF should seek tax advice from a qualified professional. Expense Ratio The ETF is posting an expense ratio of .10%. I want diversification, I want stability, and I don’t want to pay for them. An expense ratio of .10% is absolutely beautiful and extremely attractive for an ETF that is also offering low correlation to SPY, strong yields, and great liquidity. Market to NAV The ETF is at a .05% discount to NAV currently. Premiums or discounts to NAV can change very quickly so investors should check prior to putting in an order. Generally speaking, that discount to NAV isn’t big enough to be a big deal. However, even a small discount to NAV is fairly attractive when we are talking about a high quality ETF. In my opinion, this is easily one of the most attractive ETFs I have examined. Largest Holdings The diversification in the holdings isn’t going to be a strong selling point. Nothing against Simon Property Group (NYSE: SPG ), but over 8% in the position is pretty big. Given that the expense ratio is .10%, I think that offsets the relatively mediocre level of diversification within the positions. The other individual companies that are making up the top several sections all have different exposures, such as self-storage, multi-family housing, and health care. (click to enlarge) Conclusion The combination of correlation, liquidity, and yield makes a great investment for investors that want to reduce the overall volatility of their portfolio without having their capital tied up in investments that can be difficult to exit. For investors looking at the very long term picture, the extremely low expense ratio is beautiful. Vanguard and Schwab have provided some ETFs with very low expense ratios. I don’t think an ETF should be chosen purely for the expense ratio, but I do believe investors should be very aware of it. When I’m putting together hypothetical portfolio positions, one of the things I include is the expense ratio of the ETFs to track the overall expense ratio on the portfolio. In trying to find anything wrong with the ETF, the biggest weaknesses would probably be the size of the position in SPG and the fact that it is market weighted. However, most ETFs are market weighted. Most ETFs also have enough weaknesses that I can easily spot at least something wrong. In the case of VNQ, the market cap issue is offset by the fund having a turnover ratio of only 11%. I’ve had a preference for Schwab funds because I have an account that can trade them for free. However, I also have some significant tax exempt accounts with other brokerages. I’m strongly considering VNQ for a position in my IRA. Got a different opinion? An argument for why I shouldn’t invest in VNQ? Let’s hear it in the comments. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis. The analyst holds a diversified portfolio including mutual funds or index funds which may include a small long exposure to the stock.

Managing Volatility, Earnings And Why Agriculture?

The portfolio will always have cash on had to deploy into depressed sectors. Currently we are watching agriculture & Gold mining shares. Agriculture has fantastic fundamentals. I can only see future growth in this sector. Earnings on one of our underlyings (Proctor & Gamble) has been disappointing. Nevertheless we will continue to hold as the company is going through a period of transition. So we have started a portfolio which is producing regular income ( I will post January Income results at the end of the month) but what do we do when we want to add savings to our portfolio on a monthly or yearly basis? To explain this point further, let me illustrate an example. Imagine that at a given point in time in our portfolio (asset class A & asset class B) have done the following over 5 years. Both asset classes started out at zero and we invested $10,000 per year into each asset class. Study both tables below and choose the asset class that you think would have given the best return. Asset Class A Year 1 Unchanged – $100 per share Year 2 Value Drops to $60 per share Year 3 Remains unchanged at $60 per share Year 4 Shoots up to $140 per share Year 5 $100 per share – Where it started Asset Class B Year 1 Unchanged Year 2 Value Increases to $110 per share Year 3 Increases to $120 per share Year 4 Increases to $130 per share Year 5 Finished at $140 per share It may come to surprise you that “Asset Class A” (higher volatility) would have yielded better results and more income. Asset Class B would have risen to $59,150 but “Asset Class A” would have risen to $60,048! – a profit of $10,048. Moreover “Asset Class A” finishes where it started – at $100 per share! How can we use this information for our 1% portfolio? Two things are obvious in my mind. 1. We will never have all our capital invested 2. When individual asset classes become depressed, we will aggressively invest more into that sector. We currently have $460k invested out of a possible million and the depressed sectors that are on my radar are agriculture and Gold mining stocks. We already have capital deployed in these sectors but we will deploy more if we see more weakness. Yesterday we invested in (NYSEARCA: MOO ) and (NYSEARCA: DBA ). Why agriculture and why now? The fundamentals for this asset class are excellent. Let’s go through them. 1. We are losing farmland at an astonishing rate. Moreover, when you combine this with an ever increasing population, this sector screams under-supply. The graphic below shows where we are in terms of arable land on a per person basis 2. The biofuel industry has also put pressure on the agricultural industry. I expect corn, sugar and our ETFs to rise when the price of oil rises as governments continue to invest in renewable energies such as corn and sugar cane-based ethanol. 3. 3rd fundamental is China. With a population of well over a billion and with millions of Chinese joining the middle class, grains supply are taking a hit. Wheat supplies are already falling as middle class Chinese turn to meat. In order to produce meat on mass, cattle must be fed grains. There is a direct link between a growing middle class and higher grain consumption. If China’s middle class continues to grow, grains supply will fall even more 4. Agricultural products could really spike in price if China doesn’t sort out their water problem. China feeds 20% of the world’s population so obviously water is fundamental in maintaining this part of their economy. The problem is far from solved despite the huge sums of money that has been invested by the government. Any disruption here would be ultra bullish for our agriculture ETFs. There are so many reasons to be long agriculture. We will leave our allocation as it is at the moment and then invest more aggressively when we see the trend changing. Earnings are coming in thick and fast in the US but for the most part, they have been disappointing. Big companies such as Microsoft (NASDAQ: MSFT ), Caterpillar (NYSE: CAT ) and (NYSE: UPS ) missed earnings estimates by a big margin. Moreover Procter & Gamble (NYSE: PG ) announced a reduction in earnings of 34% ! Since we have Procter & Gamble in our portfolio, I want to talk a bit about it here. First of all, profits are going to be effected in the short term because of the strong dollar. Its PE ratio is now 22, price to sales ratio is 2.92 and projected sales growth for 2015 is 2.9%. Analysts believe this company is expensive as its stock rose 14% in value in 2014 in the midst of bad earnings. However we are income investors and Procter & Gamble has raised its dividend for 58 years straight! Many investors forget that yields in bellwether stocks go up when the stock price falls. It raised its dividend relentlessly in 2008 and I have no doubt this measure will continue. The company continues to grow even though profits are down in the short term. Also the company needs time to restructure. In 2014 alone Procter & Gamble cut costs aggressively by deciding to stop marketing underperforming brands so it could concentrate on their top performing brands. This was a smart move in my opinion. Usually in business, 80% of your sales come from 20% of your products (80-20 rule). Therefore the company has decided to focus exclusively on its profitable products and ditch the lethargic ones. Firstly it exited the pet food industry last April by selling its pet food brands for almost $3 billion. Then last November, it sold its Duracell brand to Berkshire Hathaway (NYSE: BRK.A ) (NYSE: BRK.B ). Then last month the company sold its Camay and Zest brands to Unilever (NYSE: UL ). A strong dollar is going to make Procter & Gamble even more competitive which will benefit the company and shareholders in the long run. We will continue to hold in our 1% portfolio because the company has always adapted to changing times as the long term chart shows.