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Vanguard FTSE Pacific ETF Is Mostly Japanese Stocks, But It Looks Compelling

Summary VPL has a respectably low correlation to SPY and isn’t too volatile in its own right. The expense ratios are low and the liquidity is strong, but the ETF is currently trading at a premium to NAV. Despite the name, China is almost completely excluded while Japan and Australia dominate most of the portfolio. 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. A substantial portion of my analysis will use modern portfolio theory, so my goal is to find ways to minimize costs while achieving diversification to reduce my risk level. In this article, I’m reviewing the Vanguard FTSE Pacific ETF (NYSEARCA: VPL ). What does VPL do? VPL attempts to track the investment results of the FTSE Developed Asia Pacific Index. The ETF falls under the category of “Diversified Pacific/Asia”. Does VPL provide diversification benefits to a portfolio? Each investor may hold a different portfolio, but I use the SPDR S&P 500 Trust ETF (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 about 77%, which is low enough that I’m expecting to see significant diversification benefits. Standard deviation of daily returns (dividend adjusted, measured since January 2012) The standard deviation isn’t too bad. For the period I’ve chosen, the standard deviation of daily returns was .889%. For SPY, it was 0.736% over the same period. While VPL is more volatile than SPY, the difference isn’t huge enough to prevent the low correlation from reducing portfolio risk if the level of exposure is right. Mixing it with SPY I also run comparison 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 VPL, the standard deviation of daily returns across the entire portfolio is 0.764%. If the position in SPY is raised to 80% while VPL is used at 20%, the standard deviation of daily returns drops down to 0.734%. This is slightly below the standard deviation of a portfolio that only holds SPY. In practice, I would want to limit a position in VPL to no more than 20% of the portfolio, but I’d prefer to use an amount that was still lower. The low correlation makes a very strong case for using VPL in a small position to enhance diversification. At 5%, the standard deviation of the portfolio would have been 0.733%. If an investor was only measuring risk based off the standard deviation of returns, it would appear that the 20% to 5% range was very reasonable. I’d lean towards being a little more conservative with the exposure. I think 10% to 5% is a fairly reasonable range. 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 2.7%. It’s high enough that the portfolio could be included as part of an ETF portfolio designed for a retiring investor. If an investor wants to ensure they aren’t tempted to get into the portfolio, the strong yields are nice. Expense Ratio The ETF is posting .12% for an expense ratio, which is a very reasonable cost for the diversification. Unfortunately, most ETFs have expense ratios higher than I’d like to see. Clearly, VPL isn’t one of those ETFs. Vanguard funds usually have low expense ratios, which is one of the more appealing things about using their ETFs. Market to NAV The ETF is trading at a .22% premium to NAV currently. I think any ETF is significantly less attractive when it trades above NAV. I wouldn’t have expected such a significant premium on an ETF with over a million shares per day trading hands. I may need to dig deeper into the ETF to look for a reason for that premium and determine if it is normal for the ETF to trade at a premium. Aside from that premium, this is one of the better foreign ETFs I’ve seen. Largest Holdings The diversification within the ETF is pretty good. Despite the largest position being over 3%, the allocations drop off rapidly before we are even out of the top 10. I find that attractive because it ensures investors are getting some diversification benefits within the individual holdings as a benefit for paying the expense ratio. (click to enlarge) Investing in the ETF is largely relying on modern portfolio theory. The argument for the investment is the respectably low correlation of the portfolio to the major U.S. index funds. Making an investment requires a belief that markets are at least somewhat efficient so that the companies within the portfolio will be reasonably priced. Conclusion The ETF looks less volatile than many of the foreign ETFs I have been considering. I’m finding that to be an attractive factor even though there is significant correlation between VPL and the other international market ETFs. So far, VPL is easily one of the stronger contenders for the foreign exposure area in my IRA. The ETF simply does very well on several metrics. Toyota (NYSE: TM ) is a very solid company to have as the top holding. The most interesting thing I found while researching the ETF is that the exposure isn’t quite what I would have expected when broken down by individual countries. I figured Japan would be a significant part of the portfolio, but being over 50% of the portfolio is enough to concern me a little bit. Despite the strong focus on a single foreign country, the volatility has been much lower than competing ETFs with much broader focuses. Australia is the second largest representation at nearly 20%. That’s okay with me. BHP Billiton (NYSE: BHP ) is a quality company that I’d have no issue with having in my portfolio despite the terrible performance lately of mining stocks. Hong Kong is represented with 7% of the portfolio, but China is less than 1%. When I’m looking at something labeled “Asia Pacific”, I generally expect substantially more Chinese companies to be included. If I had commission-free trading on VPL so I could keep rebalancing the position for free, it would be a pretty much automatic pick for my foreign exposure. In that hypothetical scenario, I’d lean towards a 5% exposure. 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. The analyst holds a diversified portfolio including mutual funds or index funds which may include a small long exposure to the stock.

Enersis S.A. (ENI) Q4 2014 Results – Earnings Call Webcast

The following audio is from a conference call that will begin on January 30, 2015 at 11:00 AM ET. The audio will stream live while the call is active, and can be replayed upon its completion. How did this change your view of ? More Bullish More Bearish It Didn’t This impact ( ) More Bullish More Bearish Unchanged Thanks for sharing your thoughts. Submit & View Results Skip to results » Share this article with a colleague

Safe Withdrawal Rates For Retirement Income Portfolios Using Vanguard Mutual Funds

Summary Investment portfolios with good withdrawal rates can be constructed with Vanguard mutual funds. From January 2005 to December 2014, a Vanguard portfolio with fixed allocation could produce a safe 5% annual withdrawal rate and 1.14% annual increase of the capital. Same portfolio with rebalancing at 25% deviation from the target allowed a safe 5% annual withdrawal rate and achieved 1.25% compound annual increase of the capital. Better performance could be achieved using adaptive asset allocation. Same portfolio could have produced a safe 10% annual withdrawal rate and 1.97% annual increase of the capital. The drawdown of the portfolio increases with respect to any increase in the rate of withdrawal. At high withdrawal rates the equity increase reduces substantially. In a previous article , I reported an experiment of the Chicago South Suburban Investment Club with a monthly asset rotation strategy applied to a hypothetic IRA account using five Fidelity mutual funds. The selection of the Fidelity funds was made because many members of the club own IRA accounts with Fidelity. There are many other families of mutual funds that can apply the same methodology to create profitable investment portfolios. In this article, I attempt to build a similar portfolio using Vanguard mutual funds. In the future, I plan to also investigate the applicability of same methods for other mutual fund families such as American Century, Janus, Northern, Schwab, T Rowe Price, Wasatch, etc. To review what was presented in previous articles, the rotation strategy is as follows: on the last trading day of each month, the funds are ranked by the previous 3-month return. All equity is invested in the fund with the highest return, as long as that return is positive. If all the assets had negative returns over the previous 3 months, then all equity is moved into CASH. The five mutual funds considered for investment are the following: Vanguard Intermediate Term Investment Grade Income (MUTF: VFICX ) Vanguard Short Term Investment Grade Income (MUTF: VFSTX ) Vanguard Explorer -small cap growth (MUTF: VEXPX ) Vanguard Windsor II – large cap value (MUTF: VWNFX ) Vanguard Morgan Growth – large cap growth (MUTF: VMRGX ) In this article, three different strategies will be considered: (1) Portfolio is initially invested 20% in each fund without rebalancing. (2) Portfolio is initially invested 20% in each fund and is rebalanced when the allocation to any fund deviates by 25% from its target. (3) Portfolio is at all times invested 100% in only one fund. The switching, if necessary, is done monthly at closing of the last trading day of the month. All money is invested in the fund with the highest return over the previous 3 months. The data for the study were downloaded from Yahoo Finance on the Historical Prices menu for the five tickers, VFICX, VFSTX, VEXPX, VWNFX, and VMRGX. We use the monthly price data from January 2005 to December 2014, adjusted for dividend payments. The paper is made up of two parts. In part I, we examine the performance of portfolios without any income withdrawal. In part II, we examine the performance of portfolios when income is extracted periodically from the account. Part I: Portfolios without withdrawals In table 1 we show the results of the portfolios managed for 10 years, from January 2005 to December 2014. Table 1. Portfolios without withdrawals 2005 – 2014. Strategy Total increase% CAGR% Number trades MaxDD% Fixed-no rebalance 92.50 6.77 0 -35.40 Fixed-25% rebalance 101.80 7.27 3 -35.40 Adaptive 267.36 13.90 48 -14.16 The time evolution of the equity in the portfolios is shown in Figure 1. (click to enlarge) Figure 1. Equities of portfolios without withdrawals. Source: This chart is based on EXCEL calculations using the adjusted monthly closing share prices of securities. From figure 1, it is apparent that the rate of increase of the adaptive portfolio is substantially greater than the rate of the fixed allocation portfolios. Part II: Portfolios with withdrawals Assume that we invest $1,000,000 for income in retirement. We plan to withdraw monthly a fixed percentage of the initial investment. That amount is increased by 2% annually in order to account for inflation. In table 2, we show the results of the portfolios managed for 10 years, from January 2005 to December 2014. Money was withdrawn monthly at a 5% annual rate of the initial investment plus a 2% inflation adjustment. Over the 10 years from January 2005 to December 2014, a total of $535,920 was withdrawn. Table 2. Portfolios with 5% annual withdrawal rate 2005 – 2014. Strategy Total increase% CAGR% Number trades MaxDD% Fixed-no rebalance 12.00 1.14 0 -39.19 Fixed-25% rebalance 13.24 1.25 4 -39.96 Adaptive 144.46 9.35 48 -20.98 The time evolution of the equity in the portfolios is shown in Figure 2. (click to enlarge) Figure 2. Equities of portfolios with 5% annual withdrawal rates. Source: This chart is based on EXCEL calculations using the adjusted monthly closing share prices of securities. To illustrate better the advantage of the adaptive allocation strategy and the effect of withdrawal rates on the evolution of the capital, we give in Table 3 the results of simulations for the following withdrawal rates: 0%, 5%, 6%, 8%, 10%, and 12%. Table 3. Adaptive Portfolios with various annual withdrawal rates 2005 – 2014. Withdrawal rate % Total increase% CAGR% MaxDD% 0 267.36 13.90 -14.16 5 144.46 9.35 -20.98 6 119.88 8.20 -22.53 8 70.72 5.49 -25.88 10 21.55 1.97 -29.70 Important observations can be made by analyzing the results posted in Table 3. At the safe withdrawal rate of 5%, the increase of the equity of the account is still significant resulting in a CAGR of 9.35%, a reduction of only 4.55%. On the other hand, by increasing the withdrawal rate by another 5% results in a CAGR of 1.97%, an additional reduction of 7.38%. The maximum drawdown increases quickly with any increase in the withdrawal rate. At the safe 5% withdrawal rate, the resulting drawdown increases with 6.82% which is comparable with the withdrawal rate. At higher withdrawal rates, the increase of the drawdown becomes dramatic, leading eventually to the quick depletion of the account. Conclusion The adaptive allocation algorithm performed substantially better than the fixed allocation algorithms. The fixed allocation strategies allow a safe withdrawal rate of 5% at any time horizon between 2005 and 2014, without a substantial decrease of capital. The adaptive allocation algorithm allows a 5% annual withdrawal rate while assuring a substantial increase of capital. In fact, the momentum-based adaptive allocation strategy allows a safe 10% annual rate of withdrawal without any decrease of capital.