Tag Archives: mutual funds

VDAIX: Vanguard’s Major Dividend Mutual Fund Needs Oil And Utilities

Summary VDAIX offers investors a great start to building a dividend portfolio. The fund is missing almost all exposure to the utility sector and to oil and gas. The expense ratio on the investor class of shares is .2%, which is higher than I would want to see for a long term holding. If an investor builds a portfolio around this fund they should be adding their own utility and oil exposure. CVX and COP offer great dividend yields. A very well diversified equity portfolio would also use some equity REIT exposure from another ETF. Investors should be seeking to improve their risk adjusted returns. I’m a big fan of using ETFs to achieve the risk adjusted returns relative to the portfolios that a normal investor can generate for themselves after trading costs. Despite my frequent use of ETFs in my personal investing, many retirement accounts still use mutual funds as a major source of their investing. When it comes to assessing the mutual funds, one of my earlier favorites is the Vanguard Dividend Appreciation Index Fund (MUTF: VDAIX ). Largest Holdings I’m starting the analysis by looking at the largest holdings in VDAIX. As you can guess from the name there is a heavy emphasis on receiving dividends from the portfolio. (click to enlarge) Where is the Oil? Granted oil prices are plummeting and oil stocks may seem “risky”, but a small inclusion would be entirely appropriate for a portfolio focused on dividends. The yields are high and the companies would benefit from higher gas prices while many parts of the economy would be disadvantaged by high fuel prices. For diversification purposes it is very strange not to have them included. Big oil can pay some big yields. ConocoPhillips (NYSE: COP ) has a dividend yield around 5.75%. When the mutual fund is yielding slightly over 2% it seems like adding some COP to the portfolio would be an excellent choice. It provides more diversification to the portfolio and a much stronger yield. Phillips 66 (NYSE: PSX ) is only yielding 2.6%, but that would still benefit the yield across the entire fund. Chevron (NYSE: CVX ) has a yield around 5%. Those all seem like viable options to me. If the portfolio is really focused on taking dividend income I would think COP and CVX would be a natural fit for the top 10 holdings. Diversification Benefits The correlation to SPY is just under 97%, so diversification benefits are not very substantial. However, the volatility on the fund is materially lower at only 87% of the level on SPY which is nice for investors that would prefer more stability in their portfolio values. Expense Ratio The mutual fund is posting an expense ratio of .20%. I want diversification, I want stability, and I don’t want to pay for them. An expense ratio of .20% may seem pretty good to many investors but this falls below my level expectations for Vanguard. Since Charles Schwab (NYSE: SCHW ) cut their expense ratios on ETFs and ensured the two were locked in a price war it has been easier for me to find very low expense ratios. With that said, .20% certainly isn’t bad. It just isn’t up to the level I want to see on my investments since I’m looking at the expected returns on periods greater than 30 years and the compounding effects of a high expense ratio can severely reduce an investor’s total wealth over a time period measured in decades. Sector Allocations To go a little deeper into the absence of the major oil companies I like to see included in a dividend growth portfolio, I grabbed a chart of the sector allocations. (click to enlarge) If you were to combine oil and gas with the utility sector the combined weight would still only be 3.5%. In my opinion the combined weight should be at least 20% and I wouldn’t object to seeing it even higher. Conclusion This is a pretty good fund but these investor class shares of the mutual fund carry an expense ratio of .2% which is higher than I would like to see. The bigger issue for many investors may be that the portfolio does not fulfill the reasonable level of diversification for the equity portion of a portfolio. If an investor wants to tie up a significant portion of their 401k account in VDAIX they would be wise to also hold funds that provide them with a material exposure to both utilities and oil and gas. For the sake of diversification, especially in a tax advantaged account, I would suggest including some equity REIT exposure to give the portfolio a more thoroughly diversified set of exposures while increasing the dividend yield since most equity REITs and utilities offer higher yields. Of course, using some CVX or COP is another solid way to boost yields even further. 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.

Fidelity Suffers Massive Active Funds Outflow

Summary According to Morningstar data, US-focused mutual funds and exchange-traded funds have seen $78.8 billion worth of outflows in the first seven months of 2015. Fidelity Investments witnessed the biggest outflows on the active side for both July and 1-year period. The Fidelity Contrafund Fund, the Fidelity Growth Company Fund and the Fidelity Low-Priced Stock Fund accounted for outflows of $2,360 million, $2,111 million and $1,463 million in July. We present 5 funds that were in the Top-Flowing Active Funds list. In our previous article, we discussed that domestic equity-focused funds are facing tough time in terms of fund outflows. According to Morningstar data, US-focused mutual funds and exchange-traded funds have seen $78.8 billion worth of outflows in the first seven months of 2015. Continued transfers from open-end mutual funds to collective investment trusts at Fidelity triggered much of the outflows. This is higher than any full-year outflows since 1993. The money had instead been poured into international funds. This time, we will look into the flows in active and passive funds; which in fact shows how outflows in active funds have led to record dismal numbers. The active funds saw outflows of $20,446 million in July, while inflows of $6,175 million were recorded on the passive side. Over the last 1-year period, $158,607 million flowed out of active funds, while the passive funds added $140,836 million. Inflows into passive funds failed to offset the outflows from the active U.S. equity funds. In July alone, estimated net outflows from U.S. equity funds increased to $14.3 billion from $8 billion in June. Outflows a Trend Now? According to the Morningstar Direct U.S. Asset Flows Update, passive U.S. equity funds saw inflows of $166.6 billion, while active U.S. equity funds lost $98.4 billion in 2014. Reportedly, 2014 was one of the worst years for active managers. Based on Standard & Poor’s 2014 SPIVA Scorecard (S&P indexes versus active funds), only 23% of actively managed domestic stock funds were reported to have outperformed the Standard & Poor’s Composite 1500 in 2014. Separately, Morningstar had revealed earlier that indexed equity vehicles, mutual funds and exchange-traded funds attracted $1 trillion in the five years ending March 31st. On the other hand, active management saw redemption of $266 billion over the same period. Many active managers run at a disadvantage against the indexed funds owing to higher costs of active management, efficient capital markets and intense competition. While a spokesman for Fidelity Investments called it a “cyclical trend”, a MarketWatch article notes that it is not cyclical, as investors are starting to understand this being a permanent trend. Fidelity Investments Witness Huge Outflows Fidelity Investments witnessed the biggest outflows on the active side for both July and 1-year period. Again, much of Fidelity’s outflows indicated continued transfers from mutual funds to collective investment trusts. Fidelity witnessed outflows of $10,101 million in July and $18,928 million over 1-year period. The Fidelity Contrafund Fund (MUTF: FCNTX ), the Fidelity Growth Company Fund (MUTF: FDGRX ) and the Fidelity Low-Priced Stock Fund (MUTF: FLPSX ) accounted for outflows of $2,360 million, $2,111 million and $1,463 million in July. Ironically, earlier this year, Fidelity ads had been vocal about the “power of active management”. Fidelity promoted via an ad featuring Joel Tillinghast, speaking in favor of active management and how its top stock pickers outperformed rivals. The Tillinghast managed Fidelity Low-Priced Stock fund claimed in the ad that it has outperformed the Russell 2000 index by 4.66% on annualized basis since its inception in 1989. A Bloomberg Markets Global Poll of financial professionals showed 42% were in favor of indexed products as the better option for retirement savings. Instead, only 18% supported actively managed funds. The waning popularity of actively managed funds was thus a wake-up call for Fidelity, which has built its reputation on active management. For the 1-year period, Fidelity saw outflows of $18,928 million on the active side, while passive funds accumulated $23,015 million. Franklin Templeton Investments and PIMCO were also big losers over the 1-year period. They witnessed outflows of $10,422 million and $176,451 million, respectively. Bottom & Top Flowing Funds Below we present 5 funds that were in the Bottom-Flowing Active Funds list: Source: Morningstar *Note: T. Rowe Price New Income witnessed $1,160 million of inflows over 1-year period. However, these funds have encouraging year-to-date and 1-year returns. They also carry favorable Zacks Mutual Fund Ranks. The Fidelity Growth Company carries a Zacks Mutual Fund Rank #1 (Strong Buy). It has returned 8% year to date and 14.6% over the last one year. The Fidelity Low-Priced Stock and the T. Rowe Price New Income Fund (MUTF: PRCIX ) carry a Zacks Mutual Fund Rank #2 (Buy) and have year-to-date return of 3.8% and 0.6%, and 1-year return of 6% and 1.6%, respectively. The Fidelity Contrafund also carries a Buy rank and has a year-to-date return of 7.8% along with 1-year return of 10.9%. The PIMCO Total Return Fund (MUTF: PTTAX ) carries a Zacks Mutual Fund Rank #3 (Hold). Below we present 5 funds that were in the Top-Flowing Active Funds list: Source: Morningstar Here, both the PIMCO Income Fund (MUTF: PONAX ) and the Metropolitan West Total Return Bond Fund (MUTF: MWTRX ) carry a Zacks Mutual Fund Rank #2 (Buy). However, Morningstar notes that inflows into PIMCO Income were not sufficient to offset outflows from PIMCO Total Return. PIMCO Total Return has lost $122.5 billion since September 2014. The fund family itself has seen substantial outflow as PIMCO’s total outflows since January 2014 was at $212.8 billion. Nonetheless, Morningstar opines that the numbers proving PIMCO Income to be a better performer is not completely fair. The Morningstar Direct U.S. Asset Flows Update mentions: “PIMCO Income is in the multisector-bond category as opposed to the intermediate-bond category, and it can afford to look for alpha by having much higher allocations to emerging-markets and high-yield bonds, for example”. Mutual funds would definitely want to see more inflows than the outflows. For that to happen, the domestic strength is of particular importance. China has sparked many concerns recently, and if investors decide to keep the money within the domestic boundaries, it would help domestic-stock focused funds to see inflows. However for active funds, it is getting difficult, as many active managers run at a disadvantage against the indexed funds owing to higher costs of active management, efficient capital markets and intense competition. Nonetheless, a turnaround would definitely cheer up the active funds. Original Post

6 Reasons Why JETS ETF Could Fly Higher

Gone are the days when aviation companies were ill-famed for their bankruptcy protection status. During 2005 and 2008 , over half of the U.S. carriers functioned under Chapter 11 of bankruptcy protection. But things have changed in the last seven years. Since last year, the U.S. aviation industry has been soaring with oil price going into a tailspin. Moreover, a pickup in the domestic economy, rising cargo demand and a boost to tourism bode well for the sector and the pure play airline ETF U.S. Global Jets ETF (NYSEARCA: JETS ) . The fund was up 6.5% in the last one month though it lost slightly in the first quarter, resulting in a muted year-to-date return of 2.3% (as of August 19, 2015). Since the fund is new in the industry and debuted on April 30, 2015, let’s take a look at the drivers that can take the fund higher in the coming days. To analyze this, we have considered the details provided by U.S. Global Investors in its JETS presentation. Higher Margin & Lower Debt: The U.S. airline industry saw the 10-year best margin performance in 2014. Not only this, U.S. airlines are projected to see huge free cash flows (in the range of $15,000 to $20,000 million) in the coming three years including 2015. These figures represent a remarkable jump from less than $5,000 million of FCF earned in 2014. The debt-ridden airlines are also paying down borrowings over the years. Total debt in proportion of operating revenues came down to 41.4% at the end of 2014 from around 65% at the end of 2010. Surge in Ancillary Revenues: Apart from the key business, supplementary revenues including hotel accommodation, car rentals, onboard food, and travel insurance are all performing well. Restructuring: Modifications in operations and carrier structure are on in full swing. While slimmer seats and the addition of more rows resulted in about a 16 percentage point increase in passenger load factor in 10 years (till Q2 of 2014), fuel-efficient aircraft contributed to energy savings. Limited Capacity Growth: Most airlines recently acknowledged plans of adding lesser fleet in the coming days. While several factors are responsible for this decision, a shortage of pilots is the primary reason. As per U.S. Global Investors’ report, as much as 34% of present pilots will retire by 2021. Solid Earnings: The positive factors led to an immense improvement in the companies’ earnings. The airline stocks gained altitude post Q2. In any case, cheap fuel has been a windfall and will likely remain so in the quarters to come. The mounting middle-income population in emerging markets is benefitting worldwide customer growth. Strong Zacks Metrics: At the time of writing, the sector resides in the top 16% of the Zacks Industry Rank. Most of the industry players have a top Zacks Style Score of ‘A’ for their Growth and Value metrics, suggesting a bullish outlook for the space. By now, one must have realized that the underlying trend is solid in the airlines industry. So, investors might play it via the basket approach to tap the entire potential of the space. And to do so, what could be the best option other than the JETS ETF? The fund holds 33 stocks in its portfolio and is concentrated on a few individual securities, as it allocates about 70% to the top 10 holdings. Southwest (NYSE: LUV ) (12.75%), Delta Air Lines (NYSE: DAL ) (12.49%), United Continental (NYSE: UAL ) (11.9%) and American Airlines (NASDAQ: AAL ) (11.34%) are the top four elements in the basket, with a combined share of about 45%. Other firms mentioned above also get places in the top 10 chart, each with over 4% weight. The product charges 60 bps in fees. Original Post