Tag Archives: opinion

VTSAX: An Excellent Mutual Fund For Passive Investing

Summary VTSAX offers slightly more diversification than SPY, but it is also slightly more volatile. Because this is a total market fund, it has large weightings for the S&P 500 that create an extremely high correlation. VTSAX is one of the best mutual funds an investor can use for eligible employer-sponsored retirement accounts. Not all plans will offer this fund. VTSAX is the mutual fund version of VTI, which is one of the best total market ETFs available. Investors should be seeking to improve their risk-adjusted returns. Regardless of how they are handling the holdings, the goal is to maximize returns and minimize risks. When it comes to maximizing the returns while maintaining excellent diversification, Vanguard Total Stock Market Index Fund Admiral Shares (MUTF: VTSAX ) is an excellent option. My employer-sponsored retirement accounts are through different brokerages. Mine goes through Schwab, and my wife’s account is with Fidelity. Neither of us is eligible to use VTSAX, but I look for funds that replicate VTSAX, because it embodies most of the things I want in a fund. What does VTSAX do? VTSAX uses an indexing approach to track the performance of the CRSP U.S. Total Market Index. The first thing I’m looking for is diversification, so a total market index seems very attractive. Standard deviation of monthly returns (dividend adjusted, measured since January 2001) The standard deviation is not a problem. Because this is a total market index investors should expect it to be a little more volatile than the S&P 500, and that is exactly what we see. (click to enlarge) Basically, the increase in standard deviation is equivalent to having three percent leverage on a position in SPY. I love low-volatility investments, but when using a retirement account with dollar cost averaging automatically involved, a tiny bit of extra volatility is not problematic as long as the investment is very heavily diversified. Expense Ratio The Admiral shares have an expense ratio of .05%. This is excellent. Largest Holdings The diversification is very good in this mutual fund, and this is easily my favorite thing about the fund. The top 10 holdings appear to be somewhat concentrated, but when you consider that there are over 3800 different securities in the total portfolio, it doesn’t concern me. This is simply a great fund, in my opinion. (click to enlarge) Avoiding Fees There is one downside to Vanguard mutual funds. Vanguard charges a $20 annual account service fee for each mutual fund held in the account with a balance of less than $10,000. If you’re picking VTSAX for a new retirement account and want to save the $20, you can sign up on the Vanguard website for electronic delivery of statements. It appears to me that this fee is largely covering the cost of mailing the investments documents through the postal service. With its huge system in place, being able to send everything by one automated e-mail system saves the company money. I don’t see how it could hold its expense ratio down to .05% without having a way to compel investors to either take electronic delivery or pay for the physical copies. All around, this is a nicely designed system. Want VTSAX from Other Brokerages? You can also effectively invest in the fund using the Vanguard Total Stock Market ETF (NYSEARCA: VTI ), which holds the same assets and has the same expense ratio. Using VTI should automatically avoid the $20 fee and doesn’t require signing up the electronic delivery. The downside about using the ETF is that you would usually be stuck purchasing entire shares. While VTI, shares have been running $107-110; for dollar cost averaging, it is more convenient to be able to buy into a mutual fund with automatic deposits. Conclusion I like VTSAX enough that I’m holding a significant chunk of my portfolio in VTI, the ETF version. Lately, I had been adding to my cash positions rather than my equity positions, because I’m concerned about the market getting a little frothy. Over the last week, I dropped quite a bit of that into buying more broad market ETFs and mREITs when prices dipped. When it comes to long-term investing strategy for the employer-sponsored 401k accounts, my favorite technique is still to use dollar cost averaging on low-fee index funds and to max out (or come close) the contributions every year. If you really want to use VTSAX for your 401k, but are going through Fidelity, I would suggest looking into the Fidelity Spartan® Total Market Index Fund (MUTF: FSTVX ). That is the major mutual fund that I’m using for my wife’s 401k. It has slightly less holdings, with around 3,400 to 3,500 rather than 3,800, but is close enough for my purposes. The correlation between FSTVX and VTSAX is in excess of 99%. Disclosure: I am/we are long VTI, 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.

VCR: An ETF For Both Traders And Long-Term Investors

Summary The sector specific exposure makes the ETF a reasonable pick for investors who expect the sector to outperform. The low expense ratio makes it a viable long-term holding for the buy and hold investor. The biggest weakness for a buy and hold strategy here is that the dividend yield would be insufficient to provide retirement income without an enormous portfolio. Investors should be seeking to improve their risk adjusted returns. I’m a big fan of using ETFs to achieve 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 Consumer Discretionary ETF (NYSEARCA: VCR ). Does VCR 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. The correlation is about 88%, which is low enough that I’m expecting some diversification benefits, but I would not expect it to be dramatic. Standard Deviation The standard deviation of annualized returns for VCR was 12.8% compared to SPY at 12.1%. So VCR is slightly more volatile but using it as a small part of a portfolio would get past even that problem. For instance, using VCR at 10% would have brought the annualized volatility down to 12.0%. Yield and Taxes The distribution yield is 1.11%. Simply put, the ETF doesn’t make much sense for retiring investors who want to use portfolio yields as a large part of their retirement income. Sure, they could sell shares to generate income, but that may create a temptation to change the portfolio strategy at the wrong time. Expense Ratio The ETF is posting 0.12% for an expense ratio. That is not bad compared to other ETFs, though it is slightly higher than SPY at 0.09% and higher than a few of the other more popular Vanguard ETFs. Market to NAV The ETF is trading at a 0.02% premium to NAV currently. I don’t see that as being a big enough issue to matter. A few very small ETFs may see their values deviating from NAV but this Vanguard fund should be staying very close to NAV. Largest Holdings The diversification within the ETF would be weak compared to a whole market ETF, but given that this is a specific sector allocation for consumer discretionary stocks, the diversification is better than many investors might expect. (click to enlarge) Through diversification it may be possible (just barely) to lower portfolio risk by adding the ETF due to the correlation. However, the most logical argument for adding the ETF to the portfolio is an investor believing that this sector is set to outperform based on analysis of macroeconomic factors. A belief that the sector is likely to do well would be a great rationale for holding the ETF; however, it would imply more of a short to intermediate term trading mentality rather than a long-term core holding. Does That Make it Bad for Retail Investors? I would not go that far. The volatility is reasonable and the expense ratio is low. So long as the expected returns are keeping up with the market, there is no reason to say the portfolio is unsuitable for a long-term buy and hold investor. I think it makes an ideal fit for a trader who is moving their assets based on macroeconomic analysis, but it is still a reasonable option for the buy and hold investor as well. The thing those investors should remember is to take advantage of the benefits of lower correlation by rebalancing their portfolio. If it is tax exempt, that could be accomplished easily by buying and selling. If the portfolio is not tax exempt, it may be better to adjust exposure by simply adding cash and buying the fund that has fallen below the ideal weighting. Conclusion This is a solid all-round ETF for any investor who wants to add an emphasis on the “consumer discretionary” sector to their asset allocations. As a sector ETF, it would work well for traders, but the low expense ratio and reasonable level of volatility make it a fine choice for the long-term buy and hold investor as well. The one concern for the buy and hold investor may be the weak dividend yields which would be insufficient for retirement income. 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.

An Update On UBS’s ETRACS 2X Leveraged ETNs

Summary Since my last article, UBS has launched two more 2X Leveraged ETRACS ETNs. The mid-year spike in interest rates has pulled down many of these income-generating funds to more attractive levels. Relevant data for all of the funds are updated. Introduction In a Mar. 2015 article entitled ” A Quick Overview Of UBS ETRACS 2X Leveraged ETNs “, I gave a brief introduction to the line-up of 2X leveraged ETNs offered by UBS (NYSE: UBS ). These ETNs cover a broad range of investment classes, including traditional equity as well as alternative investment types such as real estate investment trusts [REITs], mortgage REITs [mREITs], master limited partnerships [MLPs], business development companies [BDCs] and closed-end funds [CEFs]. The use of 2X leverage allows these ETNs to offering alluring headline yields. For further general information regarding the pros and cons of leverage, as well as specific risks regarding these ETNs, please see my previous article . New offerings In May 2015, UBS launched the ETRACS Monthly Pay 2xLeveraged MSCI US REIT Index ETN (NYSEARCA: LRET ), an ETN that tracks twice the monthly return of the MSCI US REIT Index (the same index tracked by the giant Vanguard REIT ETF (NYSEARCA: VNQ )). LRET charges 1.96% in total fees (see below for how this is calculated), and sports a headline 2X index yield of 7.45%. In July 2015, UBS launched ETRACS 2xMonthly Leveraged S&P MLP Index ETN (NYSEARCA: MLPV ), which tracks twice the monthly return of the S&P MLP index. MLPV charges 2.26 in total fees, and sports a headline 2X index yield of 12.49%. The funds UBS currently offers fifteen 2X leveraged ETNs. The following table shows the fund name, ticker symbol, 12-month trailing yield, inception date, the corresponding 1X leveraged fund (where available), average trading volume and total expense ratio [TER] of the ETNs. The TERs were obtained from the funds’ pricing supplements and the remaining data are from Morningstar . Where 12-month trailing yields are not available (for more recent launches), the 2X index yield provided by UBS has been presented. UBS engages in the (rather dubious, in my opinion) practice of hiding their financing spread within their pricing supplement, which makes their headline management fee (known as “tracking rate”) look lower. For example, the UBS ETRACS Monthly Pay 2x Leveraged S&P Dividend ETN (NYSEARCA: SDYL ) has an annual tracking rate of 0.30%, a figure that is displayed prominently on the fund’s website, but you have to dig into the pricing supplement to see that you are being charged an additional 0.40% financing spread, which means that the total financing rate will be 0.40% + 3-month LIBOR (currently 0.31%). Adding all three fees together gives a total expense ratio of 0.30% (tracking rate) + 0.40% (financing spread) + 0.31% (3-month LIBOR) = 1.01%. Since LIBOR is subject to change, in my previous article I excluded LIBOR when quoting the TER of the funds (while reminding readers to be aware of this expense). However, in this article I have decided to quote TER to be inclusive of LIBOR (currently 0.31%) to give investors a better idea of the total fees that are currently paying. Additionally, note that because the funds are 2X leveraged, one should divide the TER by two if one wish to compare the expense ratios with unleveraged funds. I have also rearranged the categories of the funds somewhat compared to the last article. All broad equity, dividend equity, small-cap equity and homebuilder equity ETNs are grouped under “Equity”. The “Alternative Equity” class includes MLP, REIT, mREIT, and BDC funds. “Balanced” includes CEF and multi-asset funds. Fund Ticker Yield Inception Volume TER* 1X Alternative Equity Monthly Reset 2xLeveraged S&P 500 Total Return ETN (NYSEARCA: SPLX ) N/A(1) 3/2014 9K 1.56% SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) Monthly Pay 2xLeveraged S&P Dividend ETN SDYL 5.43% 5/2012 1.8K 1.01% SPDR Dividend ETF (NYSEARCA: SDY ) Monthly Pay 2xLeveraged Dow Jones Select Dividend Index ETN (NYSEARCA: DVYL ) 8.09% 5/2012 8K 1.06% iShares Select Dividend ETF (NYSEARCA: DVY ) Monthly Pay 2xLeveraged US High Dividend Low Volatility ETN (NYSEARCA: HDLV ) 10.02%^ 9/2014 15K 1.76% Monthly Pay 2xLeveraged US Small Cap High Dividend ETN (NYSEARCA: SMHD ) 17.70%^ 3/2015 23K 1.96% Monthly Reset 2xLeveraged ISE Exclusively Homebuilders ETN (NYSEARCA: HOML ) N/A(1) 3/2015 23K 1.96% ISE Exclusively Homebuilders ETN (NYSEARCA: HOMX ) Alternative Equity Monthly Pay 2xLeveraged Wells Fargo MLP Ex-Energy ETN (NYSEARCA: LMLP ) 13.56% 6/2014 23K 1.76% Wells Fargo MLP Ex-Energy ETN (NYSEARCA: FMLP ) Monthly Pay 2xLeveraged MSCI US REIT Index ETN LRET 7.45%^ 5/2015 63K 1.96% Vanguard REIT ETF [VNQ] Monthly Pay 2xLeveraged Mortgage REIT ETN (NYSEARCA: MORL ) 26.52% 10/2012 289K 1.11% Market Vectors Mortgage REIT Income ETF (NYSEARCA: MORT ) Monthly Pay 2xLeveraged Dow Jones International Real Estate ETN (NYSEARCA: RWXL ) 4.99% 3/2012 24K 1.31% SPDR Dow Jones International Real Estate ETF (NYSEARCA: RWX ) 2xMonthly Leveraged Long Alerian MLP Infrastructure Index ETN (NYSEARCA: MLPL ) 15.02% 7/2010 103K 1.16% Alerian MLP Infrastructure Index ETN (NYSEARCA: MLPI ) & ALPS Alerian MLP ETF (NYSEARCA: AMLP ) 2xMonthly Leveraged S&P MLP Index ETN MLPV 12.49%^ 7/2015 1.6K 2.26% iPath S&P MLP ETN (NYSEARCA: IMLP ) 2xLeveraged Long Wells Fargo Business Development Company Index ETN (NYSEARCA: BDCL ) 20.24% 5/2011 164K 1.16% Wells Fargo Business Development Company ETN (NYSEARCA: BDCS ) Balanced Monthly Pay 2xLeveraged Closed-End Fund ETN (NYSEARCA: CEFL ) 22.04% 12/2013 150K 1.21% YieldShares High Income ETF (NYSEARCA: YYY ) Monthly Pay 2xLeveraged Diversified High Income ETN (NYSEARCA: DVHL ) 16.56% 11/2013 15K 1.56% Diversified High Income ETN (NYSEARCA: DVHI ) * Includes 3-month LIBOR (currently 0.31%). ^ 2X index yield provided by fund sponsor. Actual yield may be different. (1) No dividends are paid out as this is a total return fund. Recent performance A chart of the total return performance of the 6 equity-based 2X leveraged ETNs (excluding SMHD, which for some reason doesn’t show on YCharts) since my last article is presented below. SPLX Total Return Price data by YCharts The graph above shows that the 2X homebuilder ETN HOML has outperformed with a total return of 9.88% since Mar. 2010, followed by SPLX with 3.78%. HDLV had a slight positive return of 2.76%, while the two “vanilla” dividend ETNs, SDYL and DVYL, had the lowest total returns of -1.05% and -2.57%, respectively. However, if SMHD had been included in this graph, it would have been by far the worst-performing fund, with a total loss exceeding -15%. A chart of the total return performance of the 7 alternative equity-based 2X leveraged ETNs (excluding LRET and MLPV whose histories are too short) since my last article is presented below. LMLP Total Return Price data by YCharts Unfortunately, all five of the alternative equity ETNs shown in the chart have had negative returns since Mar. 2015. This is not surprising because many of these asset types are considered to be income-generating vehicles that suffered significantly during the interest rate spike in the first half of 2015. MLPL had the worst total return of -21.7%, a consequence of collapsing oil prices, while MORL had the second-lowest total return of -12.8%. The best (relative) performance was turned in by the 2X international real estate ETN RWXL, at -7.17%, followed by BDCL at -7.87%. LMLP had a total return of -8.06% over this period. Finally, a chart of the total return performance of the 2 balanced 2X leveraged ETNs since my last article is presented below. CEFL Total Return Price data by YCharts We can see from the chart above that CEFL had a total return of -9.68% while DVHL had a total return of -12.0%. The total return performances of the 2X leveraged ETNs since Mar. 2015 is shown in the chart below, arranged in order of highest to lowest return. Equity funds are in green, alternative equity funds are in blue, and balanced funds are in yellow. We can see from the chart above that the equity ETNs have had the best total return performances since Mar. 2015. In fact, the five best-performing funds were all equity ETNs. The notable exception of this class was SMHD, which performed poorly. Distributions Most of the funds have “Monthly Pay” in their title, and therefore these funds pay monthly. BDCL, MLPL and MLPV pay quarterly, while SPLX and HOML are total return funds and so they pay out nothing at all. However, investors should be aware that the monthly payments can be quite lumpy. This is especially true when the majority of the underlying constituents of the fund pay quarterly dividends on the same month. An extreme example is MORL, where the “big month” distributions are approximately 10 times as large as the two “small month” distributions. The yields of the funds are also displayed graphically below, arranged in order of smallest to highest yield. Equity funds are in green, alternative equity funds are in blue, and balanced funds are in yellow. We can see from the graph above that MORL has the highest yield, at 26.52%, while CEFL and BDCL have the second and third-highest yields of 22.04% and 20.24%, respectively. At the other end of the spectrum, RXWL, SDYL and LRET have the lowest yields of 4.99%, 5.43% and 7.45%, respectively. Expense ratios As explained above, the headline expense ratio (or “tracking rate”) stated on the UBS website for the ETRACS products is not the total fee charged by the ETNs. One must delve into the pricing supplement to ascertain the additional “financing spread” charged by the issuer. The sum of the two expense ratios is then added to the 3-month LIBOR (currently 0.31%) to calculate the TER of the funds. Additionally, and as mentioned above, the TER should be divided by two if one wishes to compare the expense ratios of these ETNs to non-leveraged funds. The TERs ( including 3-month LIBOR, currently 0.31%) of the funds is also depicted graphically below, from lowest to highest. The breakdown of the TERs are also shown. In my previous article, I wrote that: Finally, we observe that the TERs of the funds span a wide range of values, from 0.80% to 1.65%, with the somewhat unsettling observation that the more recent funds have been launched with higher expense ratios. That statement turned out to be somewhat prophetic as the two funds launched since my last article, LRET and MLPV, have the highest TERs of 1.96% and 2.26%, respectively (HOML and SMHD, two other recent launches, are tied for second at 1.96%). For LRET, the financing spread is shown in the “pricing supplement”, which can be accessed from the fund website : (click to enlarge) For the newest launch, MLPV, there is no pricing supplement. This was the case for two of UBS’ earliest funds, BDCL and MLPL, who do not possess the veiled financing spread. I was ecstatic. I thought “maybe UBS was reading my articles that shed light on their shenanigans and finally decided to lower their expense ratios for the benefit of their investors.” Alas, I was wrong. Instead of a pricing supplement, the financing spread was detailed, for the first time, in the prospectus supplement, which can be accessed from the fund website . The cynic in me thinks that the reason that UBS moved the financing spread from their pricing supplement to their prospectus supplement is to further obfuscate investors about the presence of said spread. After all, why would someone invest in their new launch MLPV, which charges 2.26% in expense ratio, when they could invest in the similar 2X leveraged MLP ETN MLPL, which charges only 1.16% in fees? However, the unwitting investor would not know about this difference because the headline tracking rate displayed for MLPV (0.95%) is only 0.10% higher than that for MLPL (0.85%). I therefore call on UBS to display all relevant expenses clearly on their fund website instead of in fine print within the pricing or product supplements. Conclusion The 2X leveraged funds allow investors to obtain leveraged participation in traditional equity as well as alternative equity classes such as REITs, mREITs, BDCs, MLPs and CEFs. For the average investor, this leverage can be obtained much more cheaply compared to a margin loan from a broker. For example, for the smallest account size, Charles Schwab (NYSE: SCHW ) charges 8.50%, Fidelity 8.575%, Scottrade 7.75%, Merrill Edge 8.625%. Only Interactive Brokers (NASDAQ: IBKR ) (which I use) offers a competitive margin rate at 1.61% for their smallest accounts. This article also provides an update on the two newest issues, LRET and MLPV. Regrettably, the expense ratios of these two funds are the highest or tied-highest of all the ETNs launched so far. While several of these leveraged ETNs offer sky-high yields, investors need to be aware of the drawbacks of these funds, which include leverage decay (which is somewhat ameliorated by the monthly reset), significant expense ratios and credit risk of the fund sponsor [UBS]. Of course, these risks are on top of the inherent risks of investing in each asset class. For example, MLPs are sensitive to commodity prices while REITs/mREITs are sensitive to interest rates. Interested readers may also consult my recent articles on HDLV and CEFL . Disclosure: I am/we are long CEFL, BDCL, MLPL, MORL, LMLP. (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.