Tag Archives: mutual funds

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.

Don’t Wait For Oil To Hit $20, Sell These Energy Funds

In a doomsday scenario, Goldman Sachs (NYSE: GS ) projects oil prices may nosedive all the way to $20. Financial and fundamental metrics are said to be weaker this year and a glut in global production may drag oil prices lower. While a doomsday scenario will see oil plunge to $20, the official projection for WTI in 2016 is $45, down from a prior estimate of $57. For 2017, Goldman left the projection unchanged at $60. Last Wednesday, the Energy Information Administration (EIA) reported that the US commercial crude oil inventories dropped 2.1 million barrels for the week ending Sep 11 from the previous week to 455.9 million barrels. US commercial crude oil had increased 2.6 million barrels in the week prior. This encouraging report boosted energy shares. However, these are momentary respites for the crude prices, as they may continue to remain low. For the short term, oil prices may remain muted. A radical slump may not be seen in the short term, as there’s hope that geopolitical news doesn’t act as the igniter. Bearishness will persist though, as it is unlikely that there will be a consistent sharp decline in US shale oil production. Also for oil prices to bounce sharply higher, the OPEC nations would need to cooperate with non-OPEC producers to cut production. In spite of soft pricing, U.S. shale producers and OPEC continue to produce more of the commodity for fear of losing their market share. Most importantly, when the energy market had pushed the cartel to cut output last November, it had clearly refrained from doing so. The $20 Doldrum A decade ago, Goldman projected that oil prices have entered the “super spike” period and that the price of oil would inflate to $105. This was proved right, though the prediction had sparked criticism that Goldman Sachs was marketing its commodity index fund. This time with a $20 prediction for the worst-case scenario, even those criticisms will not make sense. When crude prices were hovering significantly over $100, it must have sounded strange to predict its fall to $40 in a year. But it did happen. Goldman says that there is less than a 50% chance of oil dropping to the $20 figure. The glut or global oversupply of oil is larger than what Goldman had predicted earlier. Below $20, some U.S. shale-oil producers will not be able to recover their operating cost and will eventually be forced to stop pumping. Production Cut Most Wanted A production cut from the U.S. shale players is most needed. The International Energy Agency (IEA) is anticipating U.S. oil production to decrease by 400,000 barrels a day in 2016 as the shale players might soon slip on low crude prices. Most importantly, the declining U.S. oil production trend has already started this year. This was revealed in the short-term energy outlook of the Energy Information Administration (EIA) which provides official energy statistics from the U.S. government. Per this outlook, August oil production declined by 140,000 barrels a day from the prior month. Energy Funds to Sell For risk-averse investors who are cautious of this sector, we present 3 Energy funds below that carry either a Zacks Mutual Fund Rank #4 (Sell) or Zacks Mutual Fund Rank #5 (Strong Sell) as we expect these funds to underperform its 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 the likely future success of the fund. The minimum initial investment for these funds is within $5000. The BlackRock Energy & Resources Portfolio A (MUTF: SSGRX ) seeks capital appreciation over the long run. SSGRX invests a lion’s share of its assets in small cap companies related to sectors including energy, natural resources and utilities. SSGRX has no limit on number of companies it can invest in, but it will invest in a minimum of three countries. SSGRX currently carries a Zacks Mutual Fund Rank #4. The year-to-date and 1-year losses are 26.2% and 47.5%. The 3 and 5-year annualized losses now stand at 15.3% and 8.3%. Annual expense ratio of 1.31% is lower than the category average of 1.45%, but SSGRX carries a front end sales load of 5.25%. The BlackRock All-Cap Energy & Resources Portfolio A (MUTF: BACAX ) seeks capital appreciation over the long term. BACAX invests a majority of its assets in domestic and foreign natural resources and energy companies. BACAX may also invest in related businesses and utilities. However, a minimum of 25% of its assets must be invested in the energy sector. BACAX currently carries a Zacks Mutual Fund Rank #4. The year-to-date and 1-year losses are 24.2% and 38%. The 3 and 5-year annualized losses now stand at 9.2% and 4.6%. Annual expense ratio of 1.38% is lower than the category average of 1.45%, but SSGRX carries a front end sales load of 5.25%. The Rydex Energy Services Fund A (MUTF: RYESX ) seeks growth of capital. The fund invests a majority of its assets in equities of small to mid-cap Energy Services Companies that are domestically traded. It also invests in derivatives. The fund may also buy American Depositary Receipts for exposure to non-Us energy companies. RYESX currently carries a Zacks Mutual Fund Rank #4. The year-to-date and 1-year losses are 25.3% and 48.5%. The 3 and 5-year annualized losses now stand at 15.3% and 5%. Annual expense ratio of 1.6% is lower than the category average of 1.45%, but RYESX carries a front end sales load of 4.75%. The Ivy Global Natural Resources Fund A (MUTF: IGNAX ) seeks capital appreciation. It invests heavily in equity securities of companies across the globe, whose primary operations are related to natural resources, including suppliers and service providers. A minimum of 65% of its assets are invested in a minimum of three countries and may include domestic firms. IGNAX currently carries a Zacks Mutual Fund Rank #5. The year-to-date and 1-year losses are 14.6% and 32.2%. The 3 and 5-year annualized losses now stand at 8.1% and 4.5%. Annual expense ratio of 1.57% is higher than the category average of 1.42%, and IGNAX carries a front end sales load of 5.75%. Link to the original post on Zacks.com

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.