Tag Archives: nysearcavnq

SCHH: Finally The REIT Indexes Are Going Back On Sale; Limit Order Placed

Summary SCHH is trading lower at the same time as treasury yields are falling. When SCHH falls under $38.00 per share, I become interested in buying more. As of my writing I have a buy limit order in place for my personal accounts. I would like to see less SPG in the portfolio to improve diversification, however the rest of the portfolio is beautifully diversified. The Schwab U.S. REIT ETF (NYSEARCA: SCHH ), also known as “Schwab Strategic Trust” on Google, fell today (August 6th, 2015) in early trading and was down by .78% within the first couple hours. The drop in SCHH is interesting because it came while treasury yields were falling. When treasury yields are weak, income investors are more inclined to take on the risks of investing in an equity REIT index to achieve higher yields. As an investor, I love equity REIT indexes and I am long SCHH and the Vanguard REIT Index ETF (NYSEARCA: VNQ ) in my retirement accounts. Why Both? The first equity REIT index that really attracted me was VNQ and I began buying into it. Since then I began the process of moving my brokerage over to Charles Schwab and have free trading on SCHH which makes it more desirable for new allocations. Buying Strategy If I were to simplify my views on SCHH as far as possible it would be like this: Under $38.00 SCHH is a solid deal. The lower it goes, the better the deal. Seeing SCHH fall under $38.00 I decided to place some limit buy orders on SCHH. Since the ETF is so thoroughly diversified (within equity REITs), I’m confident about the underlying fundamentals of the fund. Even though I’m already heavily invested in SCHH and VNQ, I view price drops as favorable because I’m holding some cash and looking to buy more every time the price falls. I got lucky enough to buy in late June when prices were hitting at least a temporary bottom. I would love to say it was pure skill in timing the recovery, but that is absurd. I got home from a vacation, saw cheap shares, and put in a limit buy order. Holdings The holdings are shown in the chart below: (click to enlarge) There is only one meaningful concern I have about buying into SCHH. I feel that their allocation to Simon Property Group (NYSE: SPG ) is simply too large. It hurts the diversification of the portfolio to have 10% invested into a single equity REIT. Regardless of how the portfolio managers feel about this allocation, I don’t like it. I would rather see this allocation dropped to around 5%. Retail REITs The largest sector holding for SCHH is the retail REIT sector. My preferred part of the equity REIT market is the residential REITs, but when it comes down to building a portfolio the diversification into the different parts of the REIT market offer superior risk adjusted returns over the long haul. Simon Property Group I have no current business relationships with Simon Property Group. However, quite a while ago I ended a business relationship with one of their properties. I ended that relationship for two reasons. One is that I was moving farther away from the location and the other is that their system was not friendly to those leasing property. When I was dealing with one of their leasing managers they were too focused on establishing rental rates and sales expectations on a “per square foot” metric. That was a problem because they were offering breaks on expectations for leasing larger amounts of space which turned into breaks for customers were willing to play the game by adjusting square foot usage through building taller displays. The spaces I was leasing were adjacent to customer traffic pathways and were otherwise nearly useless due to how small they were. Of course, my experience is only that of one customer dealing with the leasing manager for one mall. However, getting a feel for the way the leasing business was structured left me feeling concerned that the strategy was less than optimal. Dividend Yield The dividend yield on SCHH is only 2.27% which is incredibly low for an equity REIT index. With reasonably similar holdings VNQ is offering a 3.89% dividend yield. Because the holdings are very similar, I consider SCHH and VNQ to be very comparable when placed inside a tax advantaged retirement account with no plans to withdraw in the next couple decades. On the other hand, if an investor was living off the dividends they would have a solid reason for preferring VNQ over SCHH. If Prices Fall Further The more prices fall, the more limit buy orders I plan to place. My retirement accounts right now contain a meaningful allocation of cash. The return on cash and equivalents is terrible, but I’m holding the cash so I can look for some bargain prices on my favorite investments. If prices fell as low as $36 or $35 my cash position would be mostly gone as I would keep going back to get more shares. Max Allocation Many investors appear to think (judging from comments on my articles) that allocating more than 20% of a portfolio to domestic equity REITs is too heavy. I’m willing to see my allocations go as high as around 40% on domestic equity REIT indexes. The volatility on a diversified REIT index like SCHH is fairly reasonable when compared to other major investments like total stock market indexes or the S&P 500. Due to moderate levels of correlation, the total risk level on the equity portion of the portfolio can often improve as allocations move up towards 40% to 50%. Note that this is referring only to allocation within the equity portion of the portfolio. Clearly replacing cash or high quality short duration bond funds with SCHH or VNQ will result in more portfolio risk. Conclusion I love SCHH as an investment vehicle. I’m long both SCHH and VNQ and I have a buy limit order on SCHH at $37.85. Disclosure: I am/we are long SCHH. (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.

Dividend ETFs: Another Canary In The Coal Mine?

Bloomberg reports that money is flowing out of dividend-focused ETFs. That’s a big change after years of inflows. Pair this up with the REIT and Utility selloff, and maybe dividend investors should start getting worried. Years ago, coal miners would bring canaries into the mines with them. Not because they wanted to have a mascot around, but because canaries were more sensitive to deadly gases. When the bird died, it was time for the humans to run for the exits. Right now, the shift taking place in income-oriented stocks could be flashing just such a warning sign. Who doesn’t love an ETF? According to Bloomberg , Vanguard Dividend Appreciation ETF (NYSEARCA: VIG ) has seen more money flow in its doors every year since it was created in 2006. Until this year, that is. Roughly $800 million has left the roughly $20 billion fund so far in 2015. And VIG isn’t alone. According to Bloomberg the dividend ETF category, with about $100 billion in assets, has seen roughly $2 billion in outflows this year. Now that’s not a huge amount of money percentage wise, but it’s a clear indication that the popularity of dividend ETFs is waning. And that’s a big deal. But what’s going on? For starters, as the Federal Reserve has talked about raising short-term interest rates, the market has already started the process. The rate on 10-year treasuries has inched up from 1.6% to 2.3% this year. VIG yields around 2.2%. Why take the risk of owning stocks if you can get the same yield from a treasury? And to add insult to injury, VIG is down roughly 2% so far this year while sibling Vanguard S&P 500 ETF (NYSEARCA: VOO ) is up about 2%. VOO yields around 2%, for comparison. So VIG is lagging the broader market and it doesn’t offer much of a yield advantage compared to the S&P 500 Index. Once again, why bother with VIG? Bigger picture But that’s not the whole picture. For example, real estate investment trusts have also fallen out of favor. Vanguard REIT Index ETF (NYSEARCA: VNQ ) is down around 4% so far this year and roughly 12% from its early year highs. And Vanguard Utilities ETF (NYSEARCA: VPU ) is down roughly 11% this year and nearly 15% from its early year highs. So dividend ETFs aren’t the only ones facing performance headwinds. Note that market watchers have commented on the asset outflows from these two funds this year, too. The take away is that sectors of the market that are associated with dividend investing aren’t the bright spots they once were. They are lagging and seeing investor outflows. And it’s worth noting that VNQ and VPU both have higher yields than the 10-year treasury. So investor flight is about more than just yield. The most likely reason for all of this bad news is investor sentiment. And that’s a potentially dangerous thing if it starts to snowball. At that point it could easily turn into an avalanche of selling. Remember Benjamin Graham’s Mr. Market isn’t sane, the prices he offers sometimes appear ridiculously high and ridiculously low. This is just another way of explaining the pendulum nature of the market, in which prices move back and forth from the extremes. Over long periods, the prices may make sense, but over short periods that’s not really the case. The next shoe to drop? There’s no way to tell, of course, what might cause what’s happening to dividend-focused investments to turn into an avalanche. However, there’s a pretty big issue coming to a head right now: the Fed and short-term rates. Some suggest that any rate hike will be small so it will have little impact on companies. And, thus, should lead to little change in stock prices. You could also argue that any hike will be driven by economic improvement, though I’d argue that the economy is hardly robust and stable right now. But these counter arguments miss the emotional impact, which is what drives stock prices over short periods of time. And it also ignores the multi-year run up in the prices of dividend-focused investments. For example, despite their recent pull backs, VIG, VNQ, and VPU are up still up roughly 70%, 55%, and 40%, respectively, over the past five years. That’s down from early year highs and you could easily argue that the declines so far this year for REITs and utilities have brought at least these two sectors back into buying territory. This thesis, however, ignores the usual market pendulum from extreme to extreme. Yes, the pendulum swings through rational, but that normally happens as it’s swinging to the other extreme. In other words, I don’t think now is the time to be aggressive. I think caution is still in order. And until the Fed actually starts raising rates, uncertainty will be your enemy. So I think the canaries are starting to choke. Perhaps it’s not time to exit the mines just yet, but I’d sure be making plans to do so if you own anything speculative. 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.

VNQ: Profit From The Improving Middle Class

Summary Vanguard REIT Index ETF is positioned to benefit from legislation that may materially improve income and employment prospects for the middle class. The strategy of making employees “exempt” and working them longer hours to generate less than minimum wage is reducing demand for apartments. If income improves for these employees or if more employees are hired it should result in more competition for apartments and higher rents. The rents should increase faster than costs which will drive growth in FFO and earnings. The Vanguard REIT Index ETF (NYSEARCA: VNQ ) is one of the best investment options for investors seeking risk adjusted returns in a tax advantaged portfolio. The ETF offers low expense ratios and excellent diversification of REIT holdings. I believe it is positioned to deliver great returns over the next several years even if we see some increases in interest rates. One of the potential catalysts for it is a bill that would make it more difficult to exploit “salaried” status to force employees to work at or near minimum wage while being classified as a manager. The pending legislation may stir up some fierce political pandering and positioning. Sorry, I believe politicians refer to it as “debate”. The legislation I’m referring to was referenced in a recently released fact sheet . The bill would significantly expand the number of workers eligible for overtime pay. Nearly five million workers would be covered. What Won’t Quite Happen If nothing else changed and the companies simply paid the overtime that is currently avoided through “salaried” compensation, the simple result would be increases in labor expenses and compressed profit margins. At the same time, I would expect increased levels of sales as more money would go to middle class and lower class workers with a high propensity to consume . In short, the money would go into their pockets and then into the cash register at another establishment. If the legislation is passed intact, with no enormous loopholes, the companies impacted by it will surely work to minimize the impact. Despite their best efforts, I believe the companies would still be forced to either pay out higher wages to the impacted employees or reduce their hours to prevent “paid overtime” which is substantially less desirable for the company than “unpaid overtime”. If hours are reduced by hiring more employees because regular hours are less expense than overtime, the result would be lower levels of unemployment. If a thorough cost analysis showed that savings in other areas such as recruitment and intangible benefits made overtime superior to hiring, then the total pay for the impacted employees might increase significantly. The “Middle Class” Perhaps I’m being generous by using the term “middle class” when the bill will help making as little as $24,000 per year that were being classified as “exempt” and worked for upwards of 50 to 60 hours per week. However, the upper end of the protected class is significantly higher at around $50,000 per year. In lower cost of living areas this is solidly middle class in my opinion. Excellent News An increasing level of employment and income among workers in the middle class and below would be extremely favorable for apartment REITs that are already benefiting from solid rental numbers. With the underwriting process on mortgages being fairly strict since the financial crisis there has been a significant increase in the proportion of Americans that have chosen to rent. There is another hidden market though, the boomerang babies. There are many individuals that for lack of income moved back in with their parents after college. Improving employment prospects and higher pay for positions that were previously classified as “exempt” bode well for the average income in the younger generations. Propensity to Consume With low labor costs I expect corporations to spend a significant portion of earnings on repurchasing stock and paying dividends. Dividends are often reinvested and repurchased stock increases the ownership stake for existing shareholders but fails to put any cash in the hand of the shareholders absent a decision to sell some of the shares. Because these uses of cash do not put cash in the hands of consumers that are eager to spend it on immediate consumption, they are not sources of cash that would drive up rent. On the other hand, an increase in income for the middle class and below would drive up demand for independent housing. By independent, I simply mean housing that is not occupied (and owned) by their parents. Great Cost Structure The costs of the equity REITs should not increase as rapidly as the revenue may increase from higher rents. I believe the apartment REITs will see increases in revenue that are mostly carried down to the bottom line increasing EPS and FFO (funds from operations). For shareholders of the equity REITs this is a bullish development because it means the REITs should be paying higher dividends. This argument is bullish for the entire industry and makes a diversified play on the industry like the Vanguard REIT Index ETF an excellent choice. Other Sectors The Vanguard REIT Index ETF holds other kinds of REITs as well. An investor in the fund gains exposure to a diversified REIT portfolio and while I would favor seeing a larger concentration in apartment REITs the other REITs stand to benefit as well. The sector I like less on this news is the personal storage REIT sector where companies may see lower levels of business as consumers are capable of acquiring more housing and reducing their consumption of storage space. On the other hand, there is a legitimate case that many consumers receiving cash will spend it on junk and need a place to store that junk. If consumers do decide to buy more junk that they don’t need it would be a very bullish development for the equity REITs. I’m sure some people will think that I’m being too harsh when I refer to the purchases as “junk they don’t need”, but how often do you really access the items in storage? If they were used on a frequent basis it wouldn’t make much sense to keep them in storage. Growth in junk is a major factor in the demand for storage space. Conclusion I’m personally holding a substantial position in equity REITs which includes a substantial position in VNQ. With prices having fallen over the last few months I have stepped up my purchases in the sector and made it my major investment area for new funds. Despite my strong allocation to the sector, I would love to see prices fall further. Whenever the shares get cheaper the yield gets better and I’m able to buy more for the same price. Who is scared of weakness in share prices? Not me. I’m currently holding between 22% and 23% of my portfolio in domestic equity REIT investments and raising that percentage each month. Disclosure: I am/we are long VNQ. (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.