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GII Survives My First Round Of Cuts As Poor Liquidity Meets Strong Dividend Yields

Summary I’m taking a look at GII as a candidate for inclusion in my ETF portfolio. The expense ratio isn’t great, but it is within reason. The correlation to SPY is a huge selling point, but the poor liquidity may have made the statistics less reliable. I’m not assessing any tax impacts. Investors should check their own situation for tax exposure. 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. I’m working on building a new portfolio and I’m going to be analyzing several of the ETFs that I am considering for my personal portfolio. One of the funds that I’m considering is the SPDR S&P Global Infrastructure ETF (NYSEARCA: GII ). I’ll be performing a substantial portion of my analysis along the lines of modern portfolio theory, so my goal is to find ways to minimize costs while achieving diversification to reduce my risk level. What does GII do? GII attempts to track the total return (before fees and expenses) of S&P Global Infrastructure Index. At least 80% of the assets are invested in funds included in this index. GII falls under the category of “Miscellaneous Sector”. Does GII provide diversification benefits to a portfolio? Each investor may hold a different portfolio, but I use (NYSEARCA: SPY ) as the basis for my analysis. I believe SPY, or another large cap U.S. fund with similar properties, represents the reasonable first step for many investors designing an ETF portfolio. Therefore, I start my diversification analysis by seeing how it works with SPY. I start with an ANOVA table: (click to enlarge) The correlation is excellent at 69%. I want to see low correlations on my investments. Extremely low levels of correlation are wonderful for establishing a more stable portfolio. I consider anything under 50% to be extremely low. However, for equity securities an extremely low correlation is frequently only found when there are substantial issues with trading volumes that may distort the statistics. Standard deviation of daily returns (dividend adjusted, measured since January 2012) The standard deviation is also very good. For GII it is .7760%. For SPY, it is 0.7300% for the same period. SPY usually beats other ETFs in this regard; GII is doing very well comparatively. Because the ETF has fairly low correlation for equity investments and a reasonable standard deviation of returns, it should do fairly well under modern portfolio theory. Liquidity looks fine Average trading volume is bad. The average over the last 10 days was in the ballpark of 5,000 to 6,000 shares. This represents a serious liquidity problem. As I’m writing (market open), the spread is .46%. I’d be very cautious about crossing that spread and would stick to limit orders. In my sample period (about 3 years), there were 31 days where the dividend adjusted close did not change at all. Those days may represent days in which no shares changed hands and thus a change in fair value would not be recorded. Such an event could significantly damage the reliability of the statistics for correlation and standard deviation. I will perform the rest of the analysis treating the standard deviation and correlation as being reliable and valid numbers, but investors should be aware that the poor liquidity may have significantly changed the results. Mixing it with SPY I also run comparisons on the standard deviation of daily returns for the portfolio assuming that the portfolio is combined with the S&P 500. For research, I assume daily rebalancing because it dramatically simplifies the math. With a 50/50 weighting in a portfolio holding only SPY and GII, the standard deviation of daily returns across the entire portfolio is 0.6930%. With 80% in SPY and 20% in GII, the standard deviation of the portfolio would have been .7006%. If an investor wanted to use GII as a supplement to their portfolio, the standard deviation across the portfolio with 95% in SPY and 5% in GII would have been .7210%. Why I use standard deviation of daily returns I don’t believe historical returns have predictive power for future returns, but I do believe historical values for standard deviations of returns relative to other ETFs have some predictive power on future risks and correlations. Yield & Taxes The distribution yield is 3.12%. The SEC yield is 2.90%. That appears to be a respectable yield. This ETF could be worth considering for retiring investors. I like to see strong yields for retiring portfolios because I don’t want to touch the principal. By investing in ETFs I’m removing some of the human emotions, such as panic. Higher yields imply lower growth rates (without reinvestment) over the long term, but that is an acceptable trade off in my opinion. I’m not a CPA or CFP, so I’m not assessing any tax impacts. Expense Ratio The ETF is posting .40% for a gross expense ratio, and .40% for a net expense ratio. I want diversification, I want stability, and I don’t want to pay for them. The expense ratio on this fund is higher than I want to pay for equity securities, but not high enough to make me eliminate it from consideration. I view expense ratios as a very important part of the long term return picture because I want to hold the ETF for a time period measured in decades. Market to NAV The ETF is at a .09% premium to NAV currently. Premiums or discounts to NAV can change very quickly so investors should check prior to putting in an order. Generally, I don’t trust deviations from NAV and I will have a strong resistance to paying any meaningful premium to NAV to enter into a position. While the .09% premium isn’t too bad, the spread is still a concern. Largest Holdings The diversification within the ETF is mediocre. There are 7 investments that are each over 3% of the total investments, so I’m not overly impressed by the diversification within the portfolio. The value for correlation was great for an equity security, and if that correlation was based on much higher trading volumes I would be confident enough to disregard some of the concentration within the portfolio. (click to enlarge) Conclusion I’m currently screening a large volume of ETFs for my own portfolio. The portfolio I’m building is through Schwab, so I’m able to trade GII with no commissions. I have a strong preference for researching ETFs that are free to trade in my account, so most of my research will be on ETFs that fall under the “ETF OneSource” program. The best argument for the ETF, in my opinion, is that it has a very favorable level of correlation (NYSE: LOW ) with SPY and a strong dividend yield. If further testing on the correlation supports the idea that it actually is that low (I’m doubtful), then I would rate the ETF very favorably despite a mediocre expense ratio and poor liquidity. I’m willing to deal with poor liquidity by using limit orders and watching for deviations from NAV if the ETF actually provides meaningful diversification benefits. I’ll keep GII on my list for the next round with a note to dig deeper on correlations and poor liquidity.

Guide To European Hedged ETFs

Apart from the oil price havoc, Europe has taken center stage globally with the start of the New Year thanks to the struggling economy, political instability in Greece and tumbling Euro. This is especially true as fears of the opposition party’s win in Greece later in the month led to apprehensions of the country’s departure from the Eurozone. Europe is struggling with slow growth, tumbling inflation, higher unemployment and deflation fears that have been stalling the burgeoning Euro zone economic recovery for several months. This is especially true as PMI Composite index, for the Euro zone fell to 51.4 in December from the flash estimate of 51.7. However, it is up from the 16-month low of 51.1 in November, suggesting that economic and business activity in the Eurozone is growing but at an anemic pace. In fact, the PMI Composite index grew by just 0.1% in the final quarter of 2014 driven by continued downturn in France and Italy as well as a faltering Germany, a powerful engine and the largest economy of Europe. Additionally, several months of decline in energy prices has finally trapped Eurozone into deflation for the first time in more than five years. Inflation has turned negative with consumer prices falling 0.2% year over year in December. All these sluggish fundamentals have bolstered the case for aggressive quantitative easing (QE) measures by the European Central Bank (ECB) that might be similar to the policies that the U.S. or U.K. undertook over the past few years. The ECB signaled last week that it could announce a major bond-buying program later this month to reinvigorate growth in the continent and fight deflation. If successful, this will propel the European stocks higher but continue to weigh on the currency. The euro tumbled to a nine-year low of $1.18 against the greenback. The downfall can also be credited to the measures taken by the ECB last year when it cut interest rates to record lows and supported the purchase of some private-sector bonds. Further, the strengthening the U.S. economy and the prospect of rising interest rates sometime in mid 2015 are driving the U.S. dollar upward, thereby resulting in depreciation of the euro against the USD. However, a slumping euro will actually benefit exporters and the manufacturing industry, resulting in soaring stock prices. This is because Japan is primarily an export-oriented economy and a weaker currency makes its exports more competitive. It will also help in improving the regions’ trade balances. Given this, investors may still want to play the European space while simultaneously seeking protection against the sliding euro. Fortunately, there are a handful of euro-hedged ETFs available on the market, any of which could be excellent choices in the current environment. Below, we have profiled some of these in detail for those who are looking for a hedged European ETF exposure at this time: WisdomTree Europe Hedged Equity Index Fund ( HEDJ ) This fund offers exposure to the European stocks while at the same time provides hedge against any fall in the euro. This will be done by tracking the WisdomTree Europe Hedged Equity Index. In total, the fund holds 126 securities with a heavy concentration on the top 10 holdings at 45.4%. However, it is pretty well spread across a number of sectors with consumer staples, industrials, consumer discretionary, financials and health care taking double-digit exposure. Among countries, Germany (26%), France (24.5%), Spain (18%) and the Netherlands (16.7%) dominate the holdings list. HEDJ is one of the popular and liquid choices in the European space with AUM of about $5.5 billion and average daily volume of more than 1.2 million shares. Expense ratio came in at 0.58%. The fund is up 0.2% in the trailing one-year period. Deutsche X-trackers MSCI Europe Hedged Equity ETF ( DBEU ) This product tracks the MSCI Europe US Dollar Hedged Index, which provides exposure to the European equity market and hedges the euro to the U.S. dollar. The fund holds 442 securities in its basket, which is widely spread out across each component with none holding more than 2.92% of assets. United Kingdom takes the top spot at 28.5% while Switzerland, France and Germany round off the next three spots. From a sector look, financials account for the largest share at 22.2% closely followed by consumer staples (19.2%). Other sectors make up for a nice mix in the portfolio with a single-digit allocation. The fund has amassed $723.2 million in its asset base while trades in good average daily volume of more than 310,000 shares. It charges 45 bps in fees per year and returned 0.7% over the past one year. iShares Currency Hedged MSCI EMU ETF ( HEZU ) This product provides local currency performance of stocks from developed market countries within the EMU (European Monetary Union) while managing currency risk as well. It follows the MSCI EMU 100% USD Hedged Index and is a play on the popular iShares MSCI EMU ETF ((NYSEARCA: EZU ) with a hedge to strip out the euro currency exposure. The fund holds 248 well-diversified securities in its basket dominated by financials (22.7%) and followed by consumer discretionary (13.2%) and industrials (12.7%). The ETF has amassed $64.2 million in its asset base since its debut in July 2014 and trades in small volumes of 39,000 shares a day. The fund charges 51 bps in annual fees from investors and has delivered flat returns since its debut. Currency hedge strategies are gaining immense popularity in recent months on a strengthening U.S. dollar and the prospect of higher interest rates. Given a weak Euro and hopes of stimulus, investors could definitely look to these currency hedged ETFs. These products are expected to perform better than the traditional funds if ECB introduces a massive asset buying program.

ETFs To Hideout In While New Trends Take Shape

Summary Uncertainty in the markets can be a scary thing and often prompt ill-timed moves that set your portfolio back from achieving your goals. The unknown is how long will it take for new opportunities to develop and where the most rewarding setups may ultimately materialize. You may be better off seeking out conservative strategies that give you some measure of correlation to stock or bonds. Uncertainty in the markets can be a scary thing and often prompt ill-timed moves that set your portfolio back from achieving your goals. The initial days of trading in 2015 have certainly shown an increase in volatility that may prove to setup new trends in the near future. The SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) is more than 4% off its all-time highs and initiating the worst start to a New Year since 2008. The unknown is how long will it take for new opportunities to develop and where the most rewarding setups may ultimately materialize. Patience and discipline may be your best allies when stalking new trends. Instead of just languishing in cash that is paying nothing, you may be better off seeking out conservative strategies that give you some measure of correlation to stock or bonds. These short-term holdings using diversified ETFs that will give you the opportunity for some income , capital appreciation, or both. Short Term Bonds Investors that favor short-term bond ETFs as temporary hideouts may want to check out the iShares 1-3 Year Credit Bond ETF (NYSEARCA: CSJ ) or the Vanguard Short-Term Bond ETF (NYSEARCA: BSV ). CSJ is made up of over 900 investment grade credit securities from both domestic and foreign issuers with an effective duration of less than 2 years. The fund has a yield of approximately 1% and charges an expense ratio of just 0.20%. In addition, the net asset value has been very stable over the last several years. BSV has a similar yield with more government related fixed-income and a slightly higher duration as well. Depending on your broker, you may be able to purchase one or both of these ETFs commission-free in order to be able to trade in or out when needed without eating into income or principal. Asset Allocation Funds If you are looking for a fund that is designed to take less risk than the overall market, you may want to consider an asset allocation fund such as the iShares Conservative Allocation ETF (NYSEARCA: AOK ). This ETF takes a “fund of funds” approach to allocate among stocks, bonds, and cash with the goal being low volatility. AOK is primarily weighted towards investment grade bonds with some select domestic and foreign equities. This provides conservative market correlation with a decent 2% yield. Income is paid on a monthly basis, which is an attractive quality as well. Another new entrant in the asset allocation space with more international exposure is the Cambria Global Asset Allocation ETF (NYSEARCA: GAA ). This ETF is unique in that it takes wider exposure to global asset classes and doesn’t charge an overriding management fee. The fund is currently weighted with 50% bond exposure, 43% stocks, and 7% commodities. GAA can provide heavy diversification in a single low-cost investment vehicle . What’s not to like? The Bottom Line Implementing a plan to navigate a market crossroads, while avoiding too much risk, can be a prudent portfolio management technique for most investors. Having too much cash for long periods of time can breed indecision and lead to a state of paralysis. With these ETFs you can still enjoy some participation in market dynamics with less overall exposure to draw down than a traditional equity or bond fund. They can ultimately be a stepping stone to a more conventional trend or strategy when conditions prove to be more favorable. Additional disclosure: David Fabian, FMD Capital Management, and/or clients may hold positions in the ETFs and mutual funds mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell, or hold securities.