Tag Archives: mutual-fund

Looking For Value From Vanguard

My article last week looked at the long-term benefits to holding a diversified portfolio that included a tilt to large cap and small cap value stocks globally. To illustrate the results, I used the structured asset class mutual funds from Dimensional Fund Advisors (DFA) as my proxies for the value stock categories, unlike the market indexes, where I substituted Vanguard index funds. Why not use Vanguard results across the board? Vanguard has an obvious expense ratio advantage over DFA and just about everyone else, and investors have voted with their wallets – Vanguard has more assets than any other mutual fund company. The issue is, when you look to Vanguard for value, they either don’t measure up or don’t even offer strategies for a given asset class. Take a look at the table below. FUND/Index 3/1993-12/2015 6/1998-12/2015 1/1995-12/2015 DFA US Large Cap Value fund (MUTF: DFLVX ) +9.8% Vanguard S&P 500 fund (MUTF: VFINX ) +9.0% Vanguard Value Index (MUTF: VIVAX ) +8.8% DFA US Small Value fund (MUTF: DFSVX ) +9.1% DFA US Small Cap fund (MUTF: DFSTX ) +8.5% Vanguard Small Value Index (MUTF: VISVX ) +8.1% DFA Int’l Value fund (MUTF: DFIVX ) +6.0% MSCI EAFE Index +4.7% MSCI EAFE Value Index +5.3% DFA Int’l Small Value fund (MUTF: DISVX ) +7.4% MSCI EAFE Small Cap Value Index +7.0% Vanguard manages index funds in the US covering large and small value stocks. But they don’t capture as much of the value “premium” as the asset class funds from DFA do. Since 1993 (DFLVX inception), the DFA US Large Value fund outpaced the Vanguard Value Index (net of a higher expense ratio) by 1% per year. Since 1998 (VISVX inception), the DFA US Small Value fund outpaced the Vanguard Small Value Index (net of a higher expense ratio), again by 1% per year. Surprisingly, the Vanguard value funds even underperformed the S&P 500 and small cap “market” funds, despite the fact that these “neutral” (holding both growth and value) funds obviously have less exposure to value stocks than the Vanguard value indexes. This should dispel any myth that the Vanguard underperformance is due solely to “less exposure to the value factor.” Things get considerably more challenging with Vanguard once we leave the US market. Vanguard doesn’t offer an index fund that buys international large value stocks or small value stocks. You’re stuck with a plain-vanilla market index like the MSCI EAFE. The chart above finds, since 1995 (DISVX inception), the DFA Int’l Value fund bested the EAFE Index (before expenses associated with an actual index fund that buys EAFE stocks) by 1.3% per year. The DFA Int’l Small Value fund did 2.7% per year better. Clearly, there’s a significant cost (return drag) to investing only in international market indexes that doesn’t show up in simplistic expense ratio comparisons. But what if Vanguard did offer large and small value indexes in foreign markets? Would they be worth a look? Here I’ve reproduced the returns on a likely index provider – the MSCI EAFE Value and EAFE Small Value Indexes – for comparison purposes ( source: DFA ReturnsWeb ). These indexes don’t have any fees, and any index fund or ETF that tracks them would likely trail the index return by 0.2% to 0.3% or so. Even still, the apples (net of fee DFA fund return) to oranges (gross of fee index returns) comparison shows a clear advantage to DFA : The DFA Int’l Value fund did +0.7% per year better than the EAFE Value Index while the DFA Int’l Small Value fund did +0.4% per year better than the EAFE Small Value Index. The lack of value stock indexes from Vanguard in non-US markets isn’t just a return issue, either. Large and small foreign value stocks also have lower correlations to US asset classes and have provided an additional diversification benefit. What accounts for these significant net-of-fee differences that are consistent across geographical regions over meaningfully long periods of time? First, as previously mentioned, DFA does hold a deeper subset of the lowest-priced value stocks, about the cheapest 30% compared to the cheapest 50% for Vanguard. And the small cap funds hold almost purely small and micro cap stocks compared to small and mid cap stocks for Vanguard. DFA screens out stocks with low-to-negative profitability and when buying and selling, they do so patiently throughout the year, hanging on to companies with positive momentum while waiting to buy stocks with the strongest negative momentum. And, finally, DFA is a more active security lender, earning a few more basis points on average from lending out stocks overnight and earning a return (that gets credited back to the fund) for doing so. All of this adds up to much purer asset class exposure with noticeably better long-term returns that is not isolated to just one area of the market. I like Vanguard . T hey’ve done a good job of educating investors on the importance of broad diversification and minimizing fees. But given the option, in the crucial asset classes that belong in a “core” diversified portfolio*, I just don’t see the value in using Vanguard. *I would add that the DFA US Large Cap Equity fund (MUTF: DUSQX ) and DFA Five-Year Global fund (MUTF: DFGBX ), which cover the other two core asset classes not discussed in this article, represent superior options to the Vanguard S&P 500 fund and the Vanguard Short-term Bond Index fund as well, but the reasons are beyond the scope of this article. Past performance is not a guarantee of future results. Mutual fund performance shown includes reinvestment of dividends and other earnings but does not reflect the deduction of investment advisory fees or other expenses except where noted. This content is provided for informational purposes and is not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services. Disclosure: I am/we are long DUSQX, DFLVX, DFSVX, DFIVX, DISVX. 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.

5 Alternative Mutual Funds To Dodge Volatility In 2016

U.S. stock markets have been volatile for a pretty long time. Market volatility can make anyone feel anxious. It threatens the one thing that everybody holds dear – their money. To weather such market swings and book in profits, alternative mutual funds are the best available choice. Their potential to hedge risks, provide unwavering returns and diversify portfolio helps to stand out from other mutual fund classes, particularly in difficult times. Up-and-Down Markets Since June 30, 2015, concerns regarding Grexit have made the markets volatile. Later, from August 24 to August 27, 2015, the Chinese stock market crash unleashed a downward spiral. Add to it the continuous rout in oil prices, uncertainty about the Fed rate hike and selloff in bank stocks and you know why the U.S. markets have been so unstable. The CBOE Volatility Index (VIX) has been proof enough. VIX is “a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices.” VIX being a fear-gauge index moves contrary to market trends. In the first week of January the index gained 48.33%, while in the second week it gained a meager 0.04%. On the other hand, the index declined 17.32% and 9.58% during the last two weeks, respectively. Come February, the index recorded gains of 15.74% and 8.64%, respectively, in the first two weeks, while in the third week it fell 19.17%. This shows that investor sentiment is constantly fluctuating and the stock market is subject to gyrations. Meanwhile, the VIX settled at 20.72 on Wednesday. Any reading above 20 indicates high volatility in the markets. How to Play This Volatility? The best way to navigate market volatility is by investing in alternative mutual funds, which will not only minimize risk but will also provide stable returns. These types of funds are available to investors of all income levels and provide that extra edge brought by diversity. These funds mostly include market-neutral funds, long/short equity funds and trading-leveraged equity funds. Let us now discuss these three types of funds in some details. Market-Neutral Mutual Funds Market-neutral funds aim to adopt a precision approach by shorting 50% of their assets and holding 50% long. This approach seeks to identify pairs of assets whose price movements are related. The fund goes long on the outperforming asset and shorts the underperformer. Say, for example, you take a $1 million long position in Pfizer and a $1 million short position in Wyeth. Both are large pharmaceutical companies. Now, if pharmaceutical stocks fall, you will lose because of your long position in Pfizer but will gain because of the short position in Wyeth. A market-neutral fund is designed to provide stable returns at relatively lower levels of risk regardless of market direction. This is particularly relevant in today’s highly volatile scenario when the objective is to protect the capital invested. Long/Short Mutual Funds Equity long/short funds seek to gain from both winning and losing stocks, irrespective of the current market scenario. These funds use conventional methods to identify stocks that are either undervalued or overvalued. It profits from shorting the overvalued stocks and by buying the undervalued stocks. Weights are subject to change and are dependent on the management’s view regarding the market. For example: Say an investor buys a long/short mutual fund for $100, then the fund manager will invest it in assets that are expected to do well. The manager shorts $30 in stocks that are believed to be overvalued. In the process, he receives $30 in cash. He will now use the $30 to buy more assets with an upside potential. So, now he has a total of $130 invested in long positions and $30 in short positions. This type of long/short fund is called a 130/30 mutual fund. Trading-Leveraged Equity Funds Leveraged funds use borrowed money to increase returns in a short spell of time. These funds generally strive to return a certain multiple of the short-term returns of an equity index. For example, a 2X S&P 500 fund aims to generate twice the returns that the S&P 500 manages to achieve. Leveraged funds are primarily marked “ultra”, “bull” or “2X”. Leveraged funds also offer benefits such as diversification. These funds invest in a diversified portfolio of assets which minimize risk, while escalating returns. In addition to this, investors enjoy the benefits of “dollar cost averaging,” where a young investor depositing $10,000 in these funds reaps the same benefits a high net worth individual receives, say by depositing $50,000,000. These funds also enjoy tax deductions. 5 Alternative Mutual Funds to Invest In The investment community is a dynamic one where new products will come into play and make the most of the stock markets. In times of market volatility, alternative mutual funds are such new product classes that are equipped to protect investors’ portfolio and provide steady returns. Here we have selected five such alternative mutual funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy), have positive 3-year and 5-year annualized returns and carry a low expense ratio. Calamos Market Neutral Income A (MUTF: CVSIX ) seeks high current income. CVSIX invests mainly in convertible securities and employs short selling to enhance income and hedge against market risk. The fund’s 3-year and 5-year annualized returns are 1.9% and 2.7%, respectively. Annual expense ratio of 1.11% is lower than the category average of 1.7%. CVSIX has a Zacks Mutual Fund Rank #1 and has a minimum initial investment of $2,500. Gateway A (MUTF: GATEX ) seeks to capture most of the higher returns associated with equity market investments, while exposing investors to significantly less risk than other equity investments. The fund’s 3-year and 5-year annualized returns are 3% and 3.5%, respectively. Annual expense ratio of 0.94% is lower than the category average of 1.82%. GATEX has a Zacks Mutual Fund Rank #1 and a minimum initial investment of $2,500. Diamond Hill Long-Short A (MUTF: DIAMX ) seeks to provide long-term capital appreciation. DIAMX invests its assets in U.S. equity securities of any size capitalization that are undervalued and sells short equity securities of any size capitalization that are overvalued. The fund’s 3-year and 5-year annualized returns are 5.4% and 6.3%, respectively. Annual expense ratio of 1.4% is lower than the category average of 1.82%. DIAMX has a Zacks Mutual Fund Rank #1 and a minimum initial investment of $2,500. Aberdeen Equity Long-Short A (MUTF: MLSAX ) seeks long-term capital appreciation with a total return greater than the S&P 500 Index. MLSAX invests a large portion of its assets in long and short positions in equity securities of publicly traded companies in the U.S. The fund’s 3-year and 5-year annualized returns are both 0.1. Annual expense ratio of 1.56% is lower than the category average of 1.82%. MLSAX has a Zacks Mutual Fund Rank #2 and a minimum initial investment of $1,000. ProFundsUltraSector Health Care Investor (MUTF: HCPIX ) seeks daily investment results, before fees and expenses that correspond to one and one-half times the daily performance of the Dow Jones U.S. Health CareSM Index. The fund’s 3-year and 5-year annualized returns are 22.9% and 23.9%, respectively. Annual expense ratio of 1.61% is lower than the category average of 1.99%. HCPIX has a Zacks Mutual Fund Rank #2 and a minimum initial investment of $15,000. A higher minimum investment helps the fund manager to control cash flows, which eventually helps management of assets on a regular basis. Original Post

Low-Beta Funds For Safety Amid Fears Of Downturn

In spite of registering this year’s best gains last week, the benchmarks remained deep in the red due to volatility in oil prices along with weakness in global and domestic growth. The Dow, the S&P 500 and the Nasdaq are down 5.7%, 6% and 10.1% in the year-to-date frame. In this erratic market, low-beta funds, which provide a better understanding on volatility or the systematic risk of a portfolio in comparison to the broader market, may turn out as safer investments. Meanwhile, low-beta funds from broader categories like utility, precious metals and municipal bonds that are performing well this year despite an overall negative tone, may offer healthy returns with low associated risk. Surging Volatility The CBOE Volatility Index (VIX) – considered the most popular fear gauge – has surged 15.2% in the year-to-date frame and is hovering around 20, indicating fears of a downtrend among investors. Investopedia defines VIX as “a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices.” VIX also increased 11.2% and 13.1% over the past five days and in the trailing one-month period, respectively. The deep plunge in oil prices with short-lived spikes has been troubling investors since the start of 2016. Despite several indications, the major oil producers failed to take a bold step in reducing output and thus left a negative impact on oil prices and the broader markets. Moreover, the growth condition in major economic zones including the U.S., China and Eurozone appears bleak. And if these weren’t enough, the recent slump in global financial stocks added to investors’ worries. Why Low-Beta? Generally, there are five indicators of investment risks, namely alpha, beta, r-squared, standard deviation and the Sharpe ratio. Among these, beta is a popular tool to measure the level of volatility in a mutual fund in contrast to the broader markets. “Essentially, beta expresses the fundamental tradeoff between minimizing risk and maximizing return,” according to Investopedia. Therefore, when the major benchmarks are facing a high level of volatility, investors may seek low-beta funds to minimize the risk level in their investments. Now, the question is: what is the range of low beta? Beta ranging from 0 to 1 is generally considered low beta as funds falling in this range will show less volatility than the broader markets. While negative beta indicates an inverse relationship with the broader markets, beta equal to 0 signals no relationship at all. Beta with a minimum value of 1 indicates that the fund will experience the same or a higher level of volatility than the broader markets. 3 Low-Beta Funds from Winning Sectors Low-beta funds from sectors with a safe-haven appeal are favorable in an unstable market. This is why precious metals – especially gold- utilities and municipal bonds are enjoying a dream run since the start of this year. We present three mutual funds from the above-mentioned sectors that carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy) and have beta within 0 to 1. We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund. These funds have steady three-month and year-to-date returns. The minimum initial investment is within $5000. Also, these funds have a low expense ratio and no sales load. Precious Metal Fund After experiencing a rough patch for three years, mutual funds having significant exposure to securities related to gold made a strong rebound this year by virtue of their safe-haven appeal. The American Century Quantitative Equity Funds Global Gold Fund Inv (MUTF: BGEIX ) seeks total return. BGEIX invests in securities of global companies whose operations are related to gold or other precious metals. The fund invests the lion’s share of its assets in companies involved in processing, mining, fabricating and distributing gold or other precious metals. BGEIX currently carries a Zacks Mutual Fund Rank #2 and a 3-year beta of 0.33 against the standard index. The fund has three-month and year-to-date returns of 30% and 30.3%, respectively. The annual expense ratio of 0.67% is lower than the category average of 1.44%. Utility Fund Utility is prospering this year thanks to the safety it offers. The broader utility sector, which has added 8.1% in the year-to-date frame, is the biggest gainer among the S&P 500 sectors. Also, dimming prospects of an immediate rate hike gave a boost to this sector, which requires a high level of debt. American Century Utilities Fund Investor (MUTF: BULIX ) invests a large portion of its assets in equities related to the utility industry. BULIX’s portfolio is constructed on qualitative and quantitative management techniques. In the quantitative process, stocks are ranked on their growth and valuation features. The fund currently carries a Zacks Mutual Fund Rank #1 and a 3-year beta of 0.36 against the standard index. The three-month and year-to-date returns of BULIX are 8.5% each. The annual expense ratio of 0.67% is lower than the category average of 1.25%. Municipal Bonds Fund Municipal bond funds are attracting healthy investments since the start of this year. According to Lipper, these funds witnessed a net inflow of $669 million in the week ended Feb 17, preceded by an inflow of $940.7 million in the prior week. Russell Tax Exempt Bond Fund (MUTF: RTBEX ) seeks tax-exempted current income. RTBEX invests the major portion of its assets in securities that are expected to provide income free from federal income tax. The fund primarily focuses on acquiring municipal debt obligations that are rated as investment grade. RTBEX currently carries a Zacks Mutual Fund Rank #2 and a 3-year beta of 0.69 against the standard index. The three-month and year-to-date returns of RTBEX are 2.4% and 1.6%, respectively. The annual expense ratio of 0.78% is lower than the category average of 0.81%. Original Post