Tag Archives: modern

VTTVX: This Is A Great Option For The Investor Nearing Retirement

Summary The Vanguard Target Retirement 2025 Fund has a simple construction and a low expense ratio. Despite being a very simple portfolio, they have covered exposure to most of the important asset classes to reach the efficient frontier. This is quite simply one of the best constructed portfolios I’ve seen for a worker nearing retirement. Lately I have been doing some research on target date retirement funds. Despite the concept of a target date retirement fund being fairly simple, the investment options appear to vary quite dramatically in quality. Some of the funds have dramatically more complex holdings consisting with a high volume of various funds while others use only a few funds and yet achieve excellent diversification. My goal is help investors recognize which funds are the most useful tools for planning for retirement. In this article I’m focusing on the Vanguard Target Retirement 2025 Fund Inv (MUTF: VTTVX ). What do funds like VTTVX do? They establish a portfolio based on a hypothetical start to retirement period. The portfolios are generally going to be designed under Modern Portfolio Theory so the goal is to maximize the expected return relative to the amount of risk the portfolio takes on. As investors are approaching retirement it is assumed that their risk tolerance will be decreasing and thus the holdings of the fund should become more conservative over time. That won’t be the case for every investor, but it is a reasonable starting place for creating a retirement option when each investor cannot be surveyed about their own unique risk tolerances. Therefore, the holdings of VTTVX should be more aggressive now than they would be 3 years from now, but at all points we would expect the fund to be more conservative than a fund designed for investors that are expected to retire 5 years later. What Must Investors Know? The most important things to know about the funds are the expenses and either the individual holdings or the volatility of the portfolio as a whole. Regardless of the planned retirement date, high expense ratios are a problem. Depending on the individual, they may wish to modify their portfolio to be more or less aggressive than the holdings of VTTVX. Expense Ratio The expense ratio of Vanguard Target Retirement 2025 Fund is .17%. That is higher than some of the underlying funds, but overall this is a very reasonable expense ratio for a fund that is creating an exceptionally efficient portfolio for investors and rebalancing it over time to reflect a reduced risk tolerance as investors get closer to retirement. In short, this is a very solid value for investors that don’t want to be constantly actively management their portfolio. This is the kind of portfolio I would want my wife to use if I died prematurely. That is a ringing endorsement of Vanguard’s high quality target date funds. Holdings / Composition The following chart demonstrates the holdings of the Vanguard Target Retirement 2025 Fund: (click to enlarge) This is a fairly simple portfolio. Only four total funds are included so the fund can gradually be shifted to more conservative allocations by making small decreases in equity weightings and increases in bond weightings. The funds included are the kind of funds you would expect from Vanguard. The top 4 which carry almost all of the value are extremely diversified funds. The Vanguard Total Stock Market Index Fund is also available as an ETF. The ETF version is the Vanguard Total Stock Market ETF (NYSEARCA: VTI ). To be fair, Vanguard has a great reputation for running funds but not for coming up with creative names. I have a significant position in VTI because it carries an extremely low expense ratio and offers excellent diversification across the U.S. economy. Volatility An investor may choose to use VTTVX in an employer sponsored account (if their employer has it on the approved list) while creating their own portfolio in separate accounts. Since I can’t predict what investors will choose to combine with the fund, I analyze it as being an entire portfolio. Since the fund includes domestic and international exposure to both equity and bonds, that seems like a fair way to analyze it. (click to enlarge) When we look at the volatility on VTTVX, it is dramatically lower than the volatility on SPY. That shouldn’t be surprising since the portfolio has some very material bond positions. Investors should expect this fund to retain dramatically more value in a bear market and to fall behind in a prolonged bull market. Because the S&P 500 has been significantly outperforming international equity markets and 26.4% of the fund is currently in international markets, there has been an additional source of drag on the portfolio. Since October 2003 the international mutual fund is up 102.8%, just under the total return for VTTVX. Had international markets been doing better relative to domestic markets, this fund would’ve been able to stay closer to SPY while still delivering the significantly lower levels of volatility. Conclusion VTTVX is a great mutual fund for investors looking for a simple “set it and forget it” option for their employer sponsored retirement accounts. It is ideally designed for investors planning to retire around 2025, but can also be used by younger employees with lower risk tolerances or older workers with higher risk tolerances. Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in VTI over the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. 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.

BUI: Has It Held Up In The Downturn?

I looked at BlackRock Utility and Infrastructure Trust not too long ago. Comparing it to UTG, the big difference was the use of options versus leverage. Is that not so subtle difference playing out as expected? One of my favorite utility and infrastructure closed-end funds, or CEFs, is the Reaves Utility Income Fund (NYSEMKT: UTG ). But it’s far from the only fund out there that focuses on this space, which is why readers asked that I look at the BlackRock Utility and Infrastructure Trust (NYSE: BUI ), a much younger entrant in the space. At the time I first looked at the two together I said I liked UTG better, but that BUI theoretically should hold up better in a downturn. Well, it’s time to look at how that’s playing out. Similar, but different UTG and BUI both invest in the infrastructure that makes our modern world work. That includes electric companies, but also things like water utilities, oil companies, airports, and railroads. Both take a pretty broad look at their niche. But, in the end, they both are looking to do a very similar thing. However, that doesn’t mean their portfolios are alike. For example, at the end of June, the energy space made up around 6% of UTG’s portfolio. That number at BUI was a far more meaty 24%. So similar, but different. Which is to be expected since the CEFs are offered by two different sponsors. However, there’s another notable difference here, too. UTG attempts to enhance returns via the use of leverage. BUI looks to boost returns, specifically income, via the use of an option overlay strategy. In a flat to slowly rising market these two approaches should probably produce similar results. In a fast rising market I’d expect UTG’s leverage to result in better returns. And in a down market, I’d expect BUI’s use of options to soften the blow of the decline. That’s what I’d expect, anyway. Now that we’ve seen the utility and other income-oriented sectors fall this year, what really happened? A mixed bag Year to date through August, the net asset value, or NAV, total return for UTG was a loss of 9.3%. BUI’s loss over that same span was a more mild 6.7%. On an absolute basis that’s not such a big difference, but on a percentage basis BUI “outdistanced” (perhaps under-lost?) UTG by around 25%. That’s a pretty big difference. All return numbers assume the reinvestment of distributions. So, on the whole, I’d say that the option overlay did perform as expected. To stress the point, the Vanguard Utilities ETF (NYSEARCA: VPU ) was also down over 9% over the year-to-date period through August. But pull back some and things get a little more interesting. Over the trailing year through August, VPU was essentially break even. UTG, meanwhile, was down 3.3%. BUI was down roughly 5.5%. What gives? For starters, both UTG and BUI have broader investment mandates than VPU. And UTG and BUI are stock pickers, using human intelligence (or not, depending on your opinion of active management) to select stocks. Put another way, VPU has a much tighter focus on utilities. It also doesn’t use leverage, which through a good portion of the time was a drag on UTG’s performance. So I can understand why it did better than BUI and UTG over the trailing year, which has been a pretty turbulent time in the markets for some of the additional areas in which these two CEFs have ventured. But why has BUI underperformed UTG by so much over the trailing year? The answer is most likely the previously mentioned weighting difference in the energy sector. Oil prices, and the stocks associated with the energy sector, started to fall around mid-2014. So, it makes sense that BUI, with a much heavier weighting in the sector, would be hit harder over the trailing year period. And it’s hard to say that the oil downturn is over, yet, either. Which adds a notable amount of risk to owning BUI relative to UTG. Who wins? So, in the end, this difficult period isn’t a clear win for BUI or for UTG. It kind of depends on what period you’re looking at and how you define success. For example, looking even further afield, BUI was down 5.5% over the past year, but that was much better than the Vanguard Energy ETF (NYSEARCA: VDE ) which was down over 30% even though BUI underperformed utility-focused VPU, which was pretty much break even over the span. If you liked the extra oil exposure BUI offered versus UTG when oil was doing well, it’s hard to complain when it starts to work against you. And then there’s this year, when utilities took a hit and UTG underperformed relative to BUI. With leverage adding a helping hand to the downside along the way at UTG and option income softening the blow at BUI. So the use of options did, indeed, appear to do what you’d expect. I still like UTG. It’s a solid fund with a long history of navigating volatile markets and rewarding shareholders along the way. BUI is really seeing its first serious stress test. That said, I think it’s holding up pretty well. And, at the end of the day, I don’t think either is a poorly run CEF. Looking at the two today, UTG’s discount is narrower than normal at around 2%-about half the normal 4% or so over the trailing three years. It isn’t cheap, but then investors are likely rewarding it for its strong historical performance. A flight to safety, if you will. BUI, meanwhile, is trading at a roughly 13% discount versus its trailing three-year average discount of 9.5% or so. It’s clearly the cheaper of the two funds. BUI is also offering a more generous distribution yield, at 8.6%. UTG’s distribution yield is a more modest 6.4% or so. Neither is outlandish, but UTG’s lower yield is likely to be more sustainable over the long-term. That said, if you are looking for yield and prefer wider discounts, BUI looks like the better play-but only if you believe the oil market has stopped falling… If you are conservative, UTG is still the one to watch. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

FFFDX: A Target Date Fund In Need Some Work

Summary FFFDX offers investors a high expense ratio to go with a needlessly complex portfolio. Investors seeking superior risk adjusted returns could go with allocations as simple as SPY + any long term treasury ETF. By incorporating an enormous volume of other mutual funds the target date fund incorporates a higher expense ratio with suboptimal holdings. If the fund needs exposure to the total US market, they can ditch the complicated combination of funds and just use FSTVX (Disclosure: long FSTVX). Lately I have been doing some research on target date retirement funds. Despite the concept of a target date retirement fund being fairly simple, the investment options appear to vary quite dramatically in quality. Some of the funds have dramatically more complex holdings consisting with a high volume of various funds while others use only a few funds and yet achieve excellent diversification. My goal is help investors recognize which funds are the most useful tools for planning for retirement. In this article I’m focusing on the Fidelity Freedom 2020 Fund (MUTF: FFFDX ). What do funds like FFFDX do? They establish a portfolio based on a hypothetical start to retirement period. The portfolios are generally going to be designed under Modern Portfolio Theory so the goal is to maximize the expected return relative to the amount of risk the portfolio takes on. As investors are approaching retirement it is assumed that their risk tolerance will be decreasing and thus the holdings of the fund should become more conservative over time. That won’t be the case for every investor, but it is a reasonable starting place for creating a retirement option when each investor cannot be surveyed about their own unique risk tolerances. Therefore, the holdings of FFFDX should be more aggressive now than they would be 3 years from now, but at all points we would expect the fund to be more conservative than a fund designed for investors that are expected to retire 5 years later. What Must Investors Know? The most important things to know about the funds are the expenses and either the individual holdings or the volatility of the portfolio as a whole. Regardless of the planned retirement date, high expense ratios are a problem. Depending on the individual, they may wish to modify their portfolio to be more or less aggressive than the holdings of FFFDX. Expense Ratio The expense ratio of Fidelity Freedom® 2020 is .66%. That expense ratio is simply too high. Investors using a target date fund need to keep an eye on those expenses. It is possible to create a very efficient portfolio using only a few funds. Ideally the funds selected for building the portfolio would be selected for offering excellent diversified exposure at very low expense ratios. At the most simplistic level, an investor is looking for domestic equity, international equity, domestic bonds, and international bonds. If any of those had to be left out, the international bond allocation is the least important. In my opinion, there is no need to use both growth and value indexes. There is no need to individually use large, medium, and small-cap allocations. For instance, the Fidelity Spartan® Total Market Index (MUTF: FSTVX ) has a net expense ratio of .05% and offers exposure to the vast majority of the U.S. market. If you were building a target date fund from Fidelity funds, you could simply use FSTVX and eliminate all other domestic equity funds. This method would provide investors with a low expense ratio on the underlying domestic equity position and excellent diversification. That is precisely why I am including FSTVX as a holding in my portfolio. Holdings / Composition The following chart demonstrates the holdings of Fidelity Freedom® 2020: If you were making a target date fund, how many allocations would you need? Hopefully it wouldn’t be that many. Note that the holdings chart above simply showed the equity funds. There is another long list of funds for bond exposures. There is simply no need for a portfolio to be this complex. For comparison, Vanguard’s Target Retirement 2020 Fund (MUTF: VTWNX ) includes only five allocations and one of them is less than one percent. Volatility An investor may choose to use FFFDX in an employer sponsored account (if their employer has it on the approved list) while creating their own portfolio in separate accounts. Since I can’t predict what investors will choose to combine with the fund, I analyze it as being an entire portfolio. (click to enlarge) When we look at the volatility on FFFDX, it is dramatically lower than the volatility on the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ). That shouldn’t be surprising since the portfolio has some large bond positions. Over the last five years it has significantly underperformed SPY, but that should be expected given the much lower beta and volatility of the fund. Investors should expect this fund to retain dramatically more value in a bear market and to fall behind in a prolonged bull market. Despite that expectation, for having a beta of .56%, delivering less than half the gains of the S&P 500 is really sad. It isn’t like the portfolio simply has an enormous amount of cash sitting around. A target date fund should have a substantial allocation to treasury securities. As you might recall, treasury securities did fairly well. Over the last five years the iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ) was up 36.4%. Want lower volatility with better annualized returns? Simply combine TLT and SPY as demonstrated in this hypothetical portfolio: (click to enlarge) This portfolio produces a lower level of annualized volatility and superior returns despite having only two tickers. SPY provided domestic equity and TLT provided long term treasury exposure. The reason to have a target date portfolio is so that it is automatically readjusted over time to reduce risk (at the cost of expected return). Opinions The first change I would want to make here is to see a lower expense ratio and a dramatically simplified portfolio of holdings. There is no need for a large complicated portfolio. To drive annualized volatility down while using Fidelity funds, I would favor using the Spartan ® Long-Term Treasury Bond Index Fund – Fidelity Advantage Class (MUTF: FLBAX ). The fund has a very high weighted average maturity (around 25 years), over 99% of the portfolio is in treasury securities (low credit risk), and an expense ratio of only .1%. That is a good solid mutual fund and using it in a target date portfolio fund with regular rebalancing allows investors to automatically take advantage of the negative correlation that long term treasuries have with the domestic equity market. Conclusion When an investor takes on an expense ratio that is even .3% higher and pays that ratio for 20 years, they are looking at losing 6% of the value of the portfolio without accounting for compounding. If investors account for the benefits of compounding and assume annual returns are positive, the potential value lost is even greater than 6%. FFFDX is an expensive option for investors looking for a simple “set it and forget it” retirement plan from their employer sponsored retirement accounts. The volatility of the fund is not a problem and the total exposures are not unreasonable. The problem comes down to two issues. One is that the fund has needlessly complicated the portfolio holdings and the other is that the expense ratio is simply too high when compared to similar products offered by competitors. There are some great funds offered by Fidelity and I have positions in a few of them. Unfortunately, this fund just falls short of the mark. Disclosure: I am/we are long FSTVX. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. 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.