Tag Archives: mutual-fund

HACK Or CIBR? Choosing A Cybersecurity ETF

Summary HACK is the more expensive fund, with greater liquidity and more of a pure play portfolio. CIBR is the cheaper fund with greater exposure to larger companies, resulting in slightly less volatility. HACK and CIBR have proven to be considerably more volatile than the broader technology sector. High-profile data breaches have affected companies like Ashley Madison, Sony (NYSE: SNE ), Starbucks (NASDAQ: SBUX ) and Target (NYSE: TGT ). There have also been reports of cyberattacks against government agencies, including the Department of Defense. Organizations around the world are stepping up their efforts to update their protocols and technology to restrict unauthorized intrusions and the theft of sensitive information. As a result, analysts expect spending on cybersecurity to be a growing line item for all manner of organizations. This has led to increased interest in cybersecurity-related stocks and in 2015, cybersecurity stocks had produced some of the market’s best year-to-date returns before the August sell-off. Rather than trying to single out individual firms, two exchange-traded funds, the PureFunds ISE Cyber Security ETF (NYSEARCA: HACK ) and the First Trust Nasdaq CEA Cybersecurity ETF (NASDAQ: CIBR ), offer investors broad exposure and diversification across this niche in the information technology industry. PureFunds ISE Cyber Security Established in November 2014, HACK was the first ETF created to track the cybersecurity industry. The fund’s goal is to provide investment returns that generally correspond to those of the ISE Cyber Security Index before fees and expenses. The index tracks the performance of domestic and international companies that provide cybersecurity or for which cybersecurity is a key driver in their overall business model. The $1.29 billion fund has a 71.5 percent exposure to domestic stocks and a 28.5 percent allocation to foreign securities, mainly Greater Europe and the Middle East. The fund’s largest exposure is to mid-, small- and micro-cap companies. First Trust Nasdaq CEA Cybersecurity The First Trust Nasdaq CEA Cybersecurity ETF began trading on July 7, 2015. CIBR seeks to replicate the performance, before fees and expenses, of the Nasdaq CEA Cybersecurity Index. The benchmark index includes common stocks and depository receipts of companies classified as engaging in cybersecurity according to the Consumer Electronics Association (CEA). The fund intends to hold a position in each security contained within the index. CIBR has a 28 percent allocation to large cap stock as well as a 38 percent allocation to mid-cap and 22 percent exposure to small-cap stocks. CIBR has a 67 percent exposure to domestic securities and a 33 percent exposure to foreign issues, mainly the United Kingdom, the Middle East and Emerging Asia. Fund Differences Although the funds have similar goals, there are differences between the two ETFs. These subtle nuances may result in one fund, rather than the other, being more suitable for your individual portfolio. The first difference is the construction of their underlying benchmark indices. HACK utilizes the ISE Cyber Security Index as its benchmark. This index focuses on companies that develop hardware and software for safeguarding networks, websites and files. CIBR tracks the Nasdaq CEA Cybersecurity Index, which includes companies engaged in building, implementing and managing security protocols for public and private networks, computers and mobile devices. While the indices are similar, they differ in the size of the companies held within the portfolio, their market liquidity and the manner in which the index is weighted. CIBR has a market cap minimum of $250 million and an average three-month trading volume of $1 million. HACK lowers the market cap requirement to $100 million and does not have a trading minimum. While the ISE Cyber Security Index of HACK uses a modified equal weighting methodology, the Nasdaq CEA Cybersecurity Index backing CIBR utilizes a modified liquidity-weighted technique. The result of these differences is HACK has more assets in smaller companies that are more easily categorized as pure plays in the industry. This focus creates the potential for higher volatility and risk associated with owning small and micro-cap stocks. A second difference is portfolio composition. The top five holdings for HACK are Fortinet (NASDAQ: FTNT ), Imperva (NYSE: IMPV ), Trend Micro ( OTCPK:TMICY ), Proofpoint (NASDAQ: PFPT ) and Juniper Networks (NYSE: JNPR ). CIBR’s top holdings include Qihoo 360 (NYSE: QIHU ), Palo Alto Networks (NYSE: PANW ), Cisco (NASDAQ: CSCO ), FireEye (NASDAQ: FEYE ) and NXP Semiconductors (NASDAQ: NXPI ). With a heavier tilt towards software names, HACK is more of a pure play. Overall, HACK has a little over 10 percent of its portfolio in stocks not held in CIBR, while CIBR has about a third of its holdings in stocks not held by HACK. Beyond owning a more differentiated portfolio, CIBR is a bit more diversified since it has more individual holdings within its portfolio. Due to the size of the industry and the companies available for investment, both funds also hold some large caps to fill out their portfolios. As a result, both funds hold large caps such as Cisco Systems and Juniper Networks that are not pure plays on cybersecurity. CIBR doesn’t have a long history and has tracked closely with HACK since inception. Since the inception of HACK, it has outperformed the Technology Select Sector SPDR ETF (NYSEARCA: XLK ), 0.60 percent gain versus a 2.10 percent loss for XLK through September 30, but it comes with a high degree of volatility. In September, XLK fell 1.4 percent, but HACK and CIBR fell 6.9 percent and 3.6 percent, respectively. Since the inception of CIBR in July 2015, XLK is down 1.7 percent, versus a 15 percent drop in HACK and a 12.5 percent decline in CIBR. The recent negative returns may be a reflection of the downturn in the overall market rather than the cybersecurity industry, but it reflects the type of volatility investors can expect. The chart below shows XLK in black. The red line shows the price ratio of HACK versus XLK (a rising line indicates outperformance), while the blue line shows the price ratio of HACK versus CIBR. (click to enlarge) With a short history, one cannot make a long-term prediction about relative performance, but to date, the funds are behaving as expected given their construction. When the technology sector is rising, HACK outperforms XLK. When the technology sector is falling, HACK and CIBR underperformed. HACK also underperformed CIBR when the technology sector declined. Outlook HACK’s emphasis on smaller, faster-growing firms makes it more of a pure play on this market niche. Smaller cap stocks often provide better returns during bull markets and worse returns during a bear market and thus far, performance has been as expected. Investors in cybersecurity stocks can look forward to a roller coaster ride, but HACK will likely deliver bigger gains and losses. By concentrating on larger companies due to stricter liquidity requirements, and greater diversification, CIBR focuses on more established names that may make the ETF better suited for more conservative investors – although even CIBR will be far more volatile than the average technology fund. With an expense ratio of 0.60 percent, CIBR also has a lower cost than the 0.75 percent expense ratio of HACK. Weighing the two options, HACK is the better choice for aggressive investors looking for as much pure play exposure as possible as well as more short-term oriented trades. CIBR would be a little better fit for an investor looking to shift some technology exposure into cybersecurity, if only for the lower expense ratio compared to HACK. Both funds have more than adequate daily volume, but HACK has more than 10 times the daily dollar volume of CIBR, making it the more liquid option for large investors.

The Best Mutual Fund For A Conservative Investor Retiring Today

Summary The Vanguard Target Retirement 2015 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 2015 Fund Inv (MUTF: VTXVX ). This is the kind of fund I would suggest for using in a 401K account in planning out a safe retirement strategy . What do funds like VTXVX 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 VTXVX 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 VTXVX. Expense Ratio The expense ratio of Vanguard Target Retirement 2015 Fund is .16%. 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. Bonds or Stocks The Vanguard Target Retirement 2015 fund is currently using a fairly equal allocation between bonds and stock. Over time that allocation will shift to hold more bonds and fewer stocks. The next section breaks it down further. Holdings / Composition The following chart demonstrates the holdings of the Vanguard Target Retirement 2015 Fund: (click to enlarge) This is a fairly simple portfolio. Only five total tickers 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 create most of the returns are very solidly diversified passive index funds. The Vanguard Total Stock Market Index Fund (NYSEARCA: VTI ) is also available as an ETF. 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 VTXVX 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 VTXVX, it is dramatically lower than the volatility on SPY. That shouldn’t be surprising since the portfolio has some large 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. The chart above used returns since 2003 so it included a fairly solid fall in 2007. As you can see, the worst drop was significantly less damaging than what the S&P 500 incurred. However, this fund is being regularly rebalanced towards a more conservative weighting and the current portfolio is more conservative than the weightings would have been in 2007. The following chart isolates the last 5 years. (click to enlarge) The volatility has dropped down even further and the beta has fallen from .57 to .52. Within a few years that beta will probably fall under .50. The worst drawdown in the last 5 years was substantially less damaging for VTXVX than it was for the broad equity market. Opinions Warren Buffet has suggested that investors would be wise to simply buy the S&P 500 because many will underperform the market after adjusting for trading costs. To be fair, many will underperform the S&P 500 even before trading costs. For investors that can take on the risk of pure equity positions, that is fine. For investors that don’t have that luxury, this is a remarkably complete fund that works incredibly well as the core of a portfolio. For the investor nearing retirement with this as an option in their employer sponsored account, it should receive extremely strong consideration. Conclusion VTXVX 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 walk out the employer door for the last time in the very near future. Vanguard doesn’t create target retirement date funds for every year, so the next option after this one is the 2020 fund. There is one thing I’d still like to see Vanguard do with this fund. I’d love to see them make an ETF version for easier use in taxable accounts and for investors with different brokerages.

Simple Pair – Switching Bond Strategy Using Mutual Funds

Summary This strategy switches between a high yield corporate bond fund and a high yield municipal bond fund based on 3-month returns. A 3-month simple moving average filter is also used. The strategy is very low risk (i.e. low standard deviation and low maximum drawdown) while maintaining reasonable growth (~10% CAGR). Backtesting from 1986 using FAGIX and MMHYX produces CAGR = 11.3%, standard deviation = 5.5%, and maximum drawdown (based on monthly returns) = -5.5%. There are essentially no losing years. No load/no fee mutual funds must be selected for practical application. They are platform-dependent; for Schwab, I selected JAHYX and NHMAX as the best available no load/no fee mutual funds. Using JAHYX and NMHAX and backtesting to 2000, the strategy produces CAGR = 9.7%, standard deviation = 4.8%, and maximum drawdown = -3.5%. There are no losing years. This article explains a rather simple strategy that tactically switches between a high-yield corporate bond mutual fund and a high-yield municipal bond mutual fund, with money market being a safety net. The goal was to develop a low risk, capital-preservation strategy with reasonable growth (CAGR ~ 10%). I also desired to use mutual funds rather than ETFs to reduce volatility. This necessitated that the strategy be updated on a quarterly basis rather than a monthly basis (my usual preference). The reason these two bond asset classes were chosen was because they are not well-correlated; typically, their correlation is about 0.15. To show the feasibility of the strategy, I used two representative mutual funds that could be backtested to 1986 in Portfolio Visualizer (PV): Fidelity Capital and Income Fund (MUTF: FAGIX ) and MFS Municipal High Yield Bond Fund (MUTF: MMHYX ). Some might object to the usage of FAGIX as the high-yield corporate bond mutual fund because a small percentage of the fund is invested in equities rather than bonds. Fidelity Advisor High Income Advantage Class A (MUTF: FAHDX ) is actually a better representative of this class, but its history starts in 1987 in PV. I wanted to include 1987 in the analysis, so I used FAGIX instead of FAHDX. But I will show results using both FAGIX and FAHDX later in this article. The strategy uses 3-month relative strength momentum ranking to determine which asset to pick each quarter. In addition, the top-ranked asset must pass a 3-month simple moving average, MA, filter in order to be selected. If the asset does not pass this filter, then the money goes to the money market. This is a pretty simple set of parameters, and others have shown that a 3-month lookback period for bonds is most satisfactory. The backtesting was performed using the free Portfolio Visualizer (PV) software. Any investor can run these calculations and trade this strategy. The backtest results are shown below for FAGIX and MMHYX. CASHX (PV’s ticker for money market) is the cash filter asset. The timeframe is 1986 – present. It can be seen that the CAGR = 11.3%, the standard deviation, SD = 5.5%, the maximum drawdown based on monthly returns (MaxDD) = -5.5%, and the worst year = -0.3%. Risk adjustment return-on-investment can be seen using CAGR/SD and/or CAGR/MaxDD. In this strategy, CAGR/SD = 2.04, and CAGR/MaxDD = 2.02. Summary Table for FAGIX – MMHYX: 1986 – present (click to enlarge) Total Return for FAGIX – MMHYX: 1986 – present (click to enlarge) Annual Returns for FAGIX – MMHYX: 1986 – present (click to enlarge) It should be noted that results are also shown for an equal-weight portfolio, i.e. both assets are held continually and rebalanced annually. This is commonly referred to as a buy & hold strategy. The equal-weight strategy has a CAGR of 7.7%, but it has a MaxDD of -27.6% and a worst year return of -25.9%. The benefit of the tactical strategy I am proposing can readily be seen: almost 50% higher growth compared to the passive buy & hold strategy (CAGR of 11.3% versus 7.7%) and much less drawdown (-5.5% versus -27.6%). If FAHDX is substituted for FAGIX, the backtest timeframe becomes 1988 – present. The results are shown below. It can be seen that CAGR = 10.5%, SD = 5.6%, MaxDD = 6.5%, and worst year = +0.2%. The CAGR/SD = 1.89, and CAGR/MaxDD = 1.62. Summary Table for FAHDX – MMHYX: 1988 – present (click to enlarge) Total Return for FAHDX – MMHYX: 1988 – present (click to enlarge) Now comes the difficult task of picking mutual funds for a real application of the strategy. I needed to find mutual funds with no loads and no redemption fees, and operating expenses (including 12b-1 fees) that are kept to a minimum. Of course, every platform has different funds that meet these requirements. I use the Schwab platform, and they provide a lot of no load/no fee options. After extensive searching, I selected Janus High-Yield T Shs Fund (MUTF: JAHYX ) as the best high yield corporate bond mutual fund, and Nuveen High Yield Municipal Bond Fund Class A (MUTF: NHMAX ) as the best high yield municipal bond mutual fund. These funds only permit backtesting to 2000. So the results shown below have a timeframe from 2000 – present. It can be seen that CAGR = 9.7%, SD = 4.8%, MaxDD = -3.4%, and the worst year = +1.6%. The CAGR/SD = 2.03, and the CAGR/MaxDD = 2.66 (a very good number). Summary Table for JAHYX – NHMAX: 2000 – Present (click to enlarge) Total Return for JAHYX – NHMAX: 2000 – Present (click to enlarge) Annual Returns for JAHYX – NHMAX: 2000 – Present (click to enlarge) The robustness of the strategy is seen in the table below. The MA has been varied between 2 months and 4 months, and the lookback timing period (TP) was changed between 3 months and 4 months. The overall results do not change appreciably. Robustness of Strategy (click to enlarge) In summary, this article presents a very conservative tactical strategy that produces reasonable growth with very low risk. It is a quarterly updating strategy that uses less volatile mutual funds rather than ETFs. The basic strategy can be implemented on any platform, but care must be exercised in finding the best no load/no fee mutual funds for any given platform. For the Schwab platform, I believe the best mutual funds for this strategy are JAHYX and NHMAX. The pick for last quarter (July – September, 2015) was CASHX. The selection for this quarter (October – December, 2015) is NHMAX.