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The Vanguard Short-Term Bond ETF Is A Great Replacement For Cash

Summary The Vanguard Short-Term Bond ETF delivers excellent diversification benefits relative to the equity market without being as miserable as a savings account. The bonds in the Vanguard Short-Term Bond ETF are focused on very high credit quality but there is a small selection of lower rated bonds to enhance returns. The Vanguard Short-Term Bond ETF bond selections contain some diversification in maturity to give investors a focus on short term investments without giving up on yield. The Vanguard Short-Term Bond ETF (NYSEARCA: BSV ) is a solid bond fund for the very conservative investor that wants a place to park while earning a better return than a savings account will offer. Lately I’ve been concerned about the market being relatively highly valued. I don’t intend to retire for quite a while (measured in decades), so I’m willing to be more aggressive with my portfolio. Despite being willing to accept additional risk on my portfolio, I want to be compensated for taking risk. While I still like certain parts of the market (as shown by buying diversified REIT ETFs), I’m looking for ways to get better diversification in the portfolio. The desire for better diversification across asset classes has pushed me to make a few hard decisions. For instance, it is pushing me to slow my rate of purchases on additional equity so I can have more money on hand to buy in if we see a significant retreat in equity prices. Those expectations and desires bring to me look for some solid bond ETFs so I can at least get a little interest on the money that I would otherwise have to hold in cash. Low volatility and low correlation with the domestic stock market are major concerns, but I also want something with reasonable liquidity and low expense ratios. When the yields on bonds are terrible, and I believe that is a fair statement today, a high expense ratio would eat a substantial portion of the returns. In this case, the expense ratio is only .10%. It is in my nature to be cheap and I have to admit, that .10% sounds fair to me. It thoroughly beats many bond funds on expense ratio. How volatile is the Vanguard Short-Term Bond ETF? I started by checking for correlation with the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) by comparing the monthly changes in dividend adjusted closes over the last 8 years. The correlation was 3.34%, which is beautiful. By virtually any measure, incorporating BSV into a portfolio is going to materially reduce the risk of the portfolio. While SPY had a standard deviation of 4.6% in monthly returns, BSV only had a deviation of .777%. Low correlation and low volatility is exactly what we should expect for a fund invested in short-term high quality bonds, but it is always worth double checking. Sources of Return With the returns on short term maturities being very low, investors should consider having at least a little bit of credit risk or duration in their portfolio even if they want to focus on short term holdings. I checked both of those areas to see how the Vanguard Short-Term Bond ETF was doing on internal diversification. Credit The following chart shows the credit quality breakdown: In my opinion, this is a fairly reasonable allocation for an ETF that an investor might want to use as a substitute for cash in their portfolio if they expect to be holding that cash for a few months at a time. The ETF portfolio drops down to ratings as low as Baa but keeps the majority of their holdings in very high credit quality bonds. Maturity The next chart shows the maturity of the various bonds Again the maturity distribution looks good for short term holdings. By dividing the holdings between the different maturities rather than focusing them around a specific point there is more diversification across the short term yield curves which should produce a slight decrease in the expected level of volatility for the expected level of income. A Potential Cash Replacement Looking at the monthly returns over 8 years, I found there was only one month where the change in the dividend adjusted close was equal to 2% or greater. In that one month, it was precisely at 2%. Due to the positive returns from interest and low levels of duration and credit and risk the downside risk is fairly low. Of course, if an investor is using it as a replacement for cash they’ll need to use a brokerage that lets them buy and sell it with no commissions. Conclusion I like the portfolio for the Vanguard Short-Term Bond ETF. The yields are still weak, but that is an issue with high quality short term yields being very low rather than a problem with the underlying ETF. Given the low risk of the bond ETF, I like this fund as a source of diversification in the portfolio. It’s too bad free trading on the ETF is not more widely available, because this looks like a solid place to park cash when the market gets too rich or when investors are just looking for new options. The combination of a small amount of duration with a little credit risk makes this option more appealing to me than a fund that refused to take on any risk in those categories. 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. 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.

Good Business Portfolio Started A Position In Hanesbrands

Summary Hanesbrands is in a strong growth uptrend, can it continue? Dividend is 1.2% and has been paid for three years with a low payout ratio. Growth over the last 5 years is fantastic at over 500%. This article is about Hanesbrands (NYSE: HBI ) and why it should be considered as a growth company. Hanesbrands products cover a full line of consumer goods and designs, manufactures, sources and sells a range of apparel products, including t-shirts, bras, panties, men’s and children’s underwear. This growth company could make you rich if the growth continues. The Good Business Portfolio Guidelines, total return, earnings, and company business will be looked at. Good Business Portfolio Guidelines. HBI passes 8 of 10 Good Business Portfolio Guidelines. These guidelines are only used to filter companies to be considered in the portfolio. There are many good business companies that don’t break many of these guidelines but will still not be considered for the portfolio at this time. For a complete set of the guidelines, please see my article “The Good Business Portfolio: All 24 Positions”. These guidelines provide me with a balanced portfolio of income, defensive and growing companies that keeps me ahead of the DOW average. Hanesbrands Inc. is a large cap company with a capitalization of $13.5 Billion compared to many other similar clothing manufacturers. The company has a dividend yield of 1.2% and is its dividend has been paid for 3 years in a row with the payout ratio low at 32%. HBI is therefore not a dividend story at this time but may be if this growth of the company continues. Hanesbrands’ cash flow is good at $503 Million, allowing it to pay its modest dividend and have plenty left over to investing in the growth of the company. HBI has bought small companies to attach to its already large apparel business. They are just getting the cost savings from the Knights purchase. I also require the CAGR going forward to be able to cover my yearly expenses. My dividends provide 2.8% of the portfolio as income and I need 2.2% more for a yearly distribution of 5%. HBI has a 3 year CAGR of 20% easily meeting my requirement. Looking back 5 years $10,000 invested 5 years ago would now be worth over $55,000 today. I feel this makes HBI a good investment for the growth investor. S&P Capital IQ does not have a star rating on HBI but the financial parameters on the fact sheet are very positive indicting a buy. Total Return and Yearly Dividend The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of the Good Business portfolio. HBI did better than the DOW baseline in my 30.4 month test compared to the DOW average. I chose the 30.4-month test period (starting January 1, 2013) because it includes the great year of 2013, the moderate year of 2014 and 2015 YTD. I have had comments about why I do not compare the total return to the S&P 500 average. I use the DOW average because the Good Business Portfolio has six DOW companies in it and is weighted more to the DOW average than the S&P 500. Modeling the DOW average is not an objective of the portfolio but just happened by using the ten guidelines as a filter for company selection. The total return makes HBI appropriate for the growth investor. The dividend is below average and well covered and has been increased each year for 3 years. DOW’s 30.4-month total return baseline is 38.03% Company Name 30.4 Month total return Difference from DOW baseline Yearly Dividend percentage Hanesbrands Inc. 265.7% 227.7% 1.20% Last Quarters Earnings For the last quarter HBI reported earnings that were expected at $0.22 compared to last year at $0.19 and expected at $0.22. Revenue missed by $20 Million. They guided higher to $1.61 -1.66 for the year. This was a fair report. Earnings for the next quarter are expected to be at $0.50 compared to last year at $0.39. HBI will most likely do well going forward. In the fullness of time HBI should continue its growth and make good total returns but will be watched for weakness. Business Overview The HBI apparel business is highly vulnerable to economic shocks as the purchase of clothing items is largely optional in comparison to other discretionary consumer goods. In the first quarter, the negative effects of a harsh winter, West Coast port disturbances and unfavorable currency translations were offset by an improving economy and lower gas prices which improved consumers’ discretionary spending power. The Company’s innerwear and active wear apparel brands include Hanes, Champion, Bali, Playtex, Maidenform, JMS/Just My Size, L’eggs, Flexees, barely there, Wonderbra, Gear for Sports and Lilyette. Its international brands also include DIM, Nur Die/Nur Der, and Zorba,. The economy seems to have steadied and is getting better but very slowly and who knows when the FED will start to raise rates which will indicate a stronger growing economy. The past three years have seen a straight line of upward growth for HBI , we will see in time if it can continue. Low Cotton prices have helped HBI reduce material costs. Take Aways I think HBI could well be a continuing growth company. I have just started a small position at 0.3% of the Good Business Portfolio and will add to it if the earnings continue to show growth and when cash is available as I trim the positions above 8% after earnings season. The objective of the Good Business Portfolio is to embrace all styles of investing, HBI is a growth play. My only fear is that I am too late to the party. Of course this is not a recommendation to buy or sell and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account and the opinions on the companies are my own. Disclosure: I am/we are long HBI. (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.

The Low Volatility Anomaly: A Theoretical Underpinning

Summary This article introduces a discussion of the theoretical underpinning for the Low Volatility Anomaly, or why lower-risk investments have outperformed higher-risk investments over time. It features long time interval studies of the Low Volatility Anomaly from famed academics, supplementing the more recent 25-year study referenced in the introductory article to the series. The article discusses the divergence between model and market of one of the most oft-cited financial concepts. Given the long-run structural alpha generated by low volatility strategies, I want to dedicate a more detailed discussion of the efficacy of this style of investing for Seeking Alpha readers. Providing a detailed theoretical underpinning of the strategy or detailing multiple examples of its outperformance can prove challenging in a single blog post, so I am providing a more academic examination of the topic over multiple articles that each zero in on a separate proof point describing the strategy. In the first article in this series, I provided an introduction to the Low Volatility Anomaly with an example depicting the outperformance of a low-volatility (NYSEARCA: SPLV ) bent to the S&P 500 (NYSEARCA: SPY ) relative to the broader market and high-beta stocks. In this second article, I am going to begin to delve into a theoretical underpinning for the Low Volatility Anomaly and demonstrate that it has been proven in research dating back to the 1930s. Theoretical Underpinning for the Low Volatility Anomaly Since its introduction in the early 1960s, the Capital Asset Pricing Model (CAPM) has permeated the investment management landscape. CAPM is used to determine a theoretically appropriate required rate of return of an asset added to a diversified portfolio. This model takes into account the asset’s sensitivity to non-diversifiable risk, which is oft represented through the beta coefficient. In CAPM, in what has become one of the most fundamental formulas of modern finance, the expected return of an asset is equal to the risk-free rate plus the product of beta multiplied by the difference between the expected market return less the risk-free rate, as seen in the following equation: E(R a ) = R f + Β a *(E(R m )-R f ) The idea of beta is axiomatic to many investment managers. Investment discussion is littered with the concept of beta. High-beta investments have higher expected returns and above-market risk. As we move back down the security market line (SML), the inverse is then true for low-beta investments, characterized by lower expected returns and below-market risk. Empirical evidence, academic research and long time series studies across asset classes and geographies have shown that the actual relationship between risk and return is flatter than the model or market expectations suggests. At the extremes, and as shown in the graphs above in this article, the relationship between risk and return might indeed be negative. Understanding the shortcomings of CAPM and the market’s misinformed notion of the relationship between beta, risk and expected return could produce a normative arbitrage opportunity that is exceedingly capital-efficient. If the Capital Asset Pricing Model held in practice, we should see a linear relationship between beta and return as predicted by the model. Low-beta/lower-volatility assets would be expected to generate proportionately lower returns than the market. Since CAPM can be mathematically derived, and this series will subsequently demonstrate that it has failed in empirical tests, then the assumptions underpinning CAPM must be unable to hold in practice. Criticisms of the Capital Asset Pricing Model are almost as old as the model itself, but the model’s simplicity and utility have become ingrained in modern finance nonetheless. In 1972, Black, Scholes and Jensen, in a study of NYSE-listed stocks from 1931-1965, found that when securities were grouped into deciles by their beta, a time series regression of these portfolios’ excess returns on the market portfolio’s excess returns indicated that high-beta securities had significantly negative intercepts and that low-beta securities had significantly positive intercepts – a contradiction to the expected finding from the CAPM model. An excerpt of their findings is tabled below, expanding the scope of the Low Volatility Anomaly far longer than my simple twenty-five year charts. High-beta stocks (left) had negative alpha, and low-beta stocks (right) had positive alpha. (click to enlarge) Excerpted from “The Capital Asset Pricing Model: Some Empirical Tests” by Fischer Black, Michael Jensen and Myron Scholes (1972) Three years later, Robert Haugen and James Heins produced a forty-year study that demonstrated that, over the long run, stock portfolios with lower variance in monthly returns experienced greater average returns than riskier cohorts through multiple business cycles, and that relative returns were time series-dependent. Fischer Black (1993) and Robert Haugen (2012) would both produce academic papers decades later with expanded market data sets that demonstrated the efficacy of low volatility strategies. Black, enshrined in the nomenclature of an option pricing model that won his frequent collaborator Myron Scholes a Nobel Prize after Black’s death, updated his previous study conducted with Scholes and Jensen in 1972 to include data through 1991. A period that takes us from their early Depression-era study and links it with our S&P data from 1991 to current. (click to enlarge) Excerpted from “Beta and Return: Announcement of the Death of Beta Seem Premature”, Fischer Black 1993 In the chart above, one can see that in this expanded sample period, low-beta stocks (right) again did much better than predicted by CAPM (positive alpha), and high-beta stocks did worse still. Robert Haugen published several papers in the subsequent decades focused on the low volatility anomaly. In 1991, Haugen and collaborator Nardin Baker demonstrated that a low volatility subset of the capitalization-weighted Wilshire 5000 would have outperformed from 1972 to 1989. Shortly before Haugen’s death in early 2013, Baker and Haugen demonstrated that from 1990 through 2011, in a sample set that included stocks in twenty-one developed countries and twelve emerging markets, low-risk stocks outperformed in the total sample universe and in each individual country – a study I have previously referenced in past articles. Excerpted from: Low Risk Stocks Outperform within All Observable Markets of the World. Baker and Haugen (2012) If CAPM is a descriptive, but not practicable, model of investing, then violations of its underpinning assumptions could serve as possible explanations for successful strategies that appear to deviate from what one would expect from the model. The following pages are dedicated to examining how violations of CAPM’s assumptions lead to market returns that deviate from expectations. Sharpe (1964) formalized the assumptions underpinning Markowitz’s (1954) Modern Portfolio Theory . With the market fifty years later still thinking about risk-adjusted returns in a ratio bearing his name, it seems prudent to use Sharpe’s underlying model assumptions: Investors are rational and risk-averse, and when choosing among portfolios, they care only about maximizing economic utility of their one-period investment return; A common pure rate of interest, with all investors able to borrow or lend funds on equal terms; Homogeneous investor expectations, including expected values, standard deviations and correlation coefficients; The absence of taxes or transaction costs. The second of these underlying assumptions will form the basis of our first hypothesis, Leverage Aversion, for the existence and persistence of the Low Volatility Anomaly, which will be captured in the next article in this series. Disclaimer My articles may contain statements and projections that are forward-looking in nature, and therefore, inherently subject to numerous risks, uncertainties and assumptions. While my articles focus on generating long-term risk-adjusted returns, investment decisions necessarily involve the risk of loss of principal. Individual investor circumstances vary significantly, and information gleaned from my articles should be applied to your own unique investment situation, objectives, risk tolerance, and investment horizon. Disclosure: I am/we are long SPLV, SPY. (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.