Tag Archives: opinion

VDADX: A Great Mutual Fund That Is Remarkably Low On 2 Key Sectors

Summary VDADX 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 is exceptionally low, and the historical volatility has been better than that of the market. 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: VDADX ). Largest Holdings I’m starting the analysis by looking at the largest holdings in VDADX. As you can guess from the name, there is a heavy emphasis on receiving dividends from the portfolio. (click to enlarge) The holdings are a little on the heavily concentrated side with several holdings over 3%, and it is interesting that the fund opted to include heavyweights on both Coke (NYSE: KO ) and Pepsi (NYSE: PEP ). However, I don’t see any real disadvantage to holding both for better diversification since the investor won’t be stuck paying trading costs to buy each individually. The thing that really stands out to me is that there is no Exxon Mobil (NYSE: XOM ) or Chevron Corporation (NYSE: CVX ) in the top 10. XOM is yielding over 3.5% and CVX is up near 5%. That really concerns me. Though I did not chart the rest of the top 100 holdings, I did scan through them looking for Exxon or Chevron. Neither was included anywhere in the top 100 holdings. 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. On the other hand, Vanguard is including quite a few other holdings that I wouldn’t put at the top of the list for a fund focused on dividends. For instance, Costco (NASDAQ: COST ) is included in the portfolio despite having a yield of only 1.09%. There is nothing wrong with Costco as a company from my perspective, but the portfolio already has quite a bit of retail exposure and is lacking in the big gas companies. 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 who would prefer more stability in their portfolio values. Yield & Taxes The SEC yield is 2.19%. Again, this feels fairly low for a dividend portfolio and brings me back to the question of why companies like Chevron were not given a prominent weighting in the portfolio. Expense Ratio The mutual fund is posting an expense ratio of .10%. I want diversification, I want stability, and I don’t want to pay for them. An expense ratio of .10% is absolutely beautiful and makes VDADX a solid choice for investors. 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) As you can see, the oil and gas sector was only 1.3% for the fund. That matches the index that the fund is tracking; however, I find it interesting that the index was designed to limit the exposure to oil and gas. If I were establishing a dividend index for a fund that could be used as a major portion of an investor’s portfolio, I would want to increase the oil and gas weightings to around 10%. The other interesting factor is that utilities are also mostly absent. Unless the investors are buying utility companies themselves, the ideal allocation, in my opinion, would include a higher weighting for utilities in the 10% to 15% range. Conclusion For investors looking at the very long-term picture, the extremely low expense ratio is beautiful. Vanguard has been one of the best in the business at creating low-fee mutual funds. I don’t think a fund should be chosen purely for the expense ratio, but I do believe investors should be very aware of it. When I’m putting together hypothetical portfolio positions, one of the things I include is the expense ratio on the individual positions to track the overall expense ratio on the portfolio. The overall portfolio looks solid with the exception that oil and gas is largely absent and the utility sector is strangely underrepresented despite several utility companies having strong yields. If I were using VDADX as a core holding in my retirement accounts, I would want to complement it with specifically increasing allocations to large-cap oil and gas companies and a geographically diversified group of utility companies. 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.

Those Are Your Favorite Dividend Growth Funds? Try This One Instead

Summary SCHD feels like it doesn’t get much coverage in the dividend investing world, but it is one of the best ETFs in the space. SCHD offers the lowest expense ratio and the one of the better distribution yields. When I was browsing a list by Morningstar, I noticed they were not very interested in the expense ratios or the distribution yields. A few charts showing expense ratios and dividend yields may help you analyze which ones would make sense for you. It seems like the Schwab U.S. Dividend Equity ETF (NYSEARCA: SCHD ) is never in the news. That isn’t a bad thing, but is interesting when I look at some of the ETFs that are getting mentioned by big companies. I recently ran across an article on Morningstar that left me a little curious. The author, apparently speaking for Morningstar, was giving their take on “Our Favorite Dividend Growth Funds and ETFs.” She is a director of personal finance and the author of a book on how to succeed when investing in mutual funds . If anyone should understand the importance of low expense ratios and high distribution yields, she would have the background for it. Of course, I don’t know her and have no grudge, but I was hoping for higher quality when Morningstar decided to publish it. The article included the following funds: T. Rowe Price Dividend Growth Fund (MUTF: PRDGX ) Vanguard Dividend Growth Fund (MUTF: VDIGX ) Vanguard Wellington Fund (MUTF: VWELX ) Hartford Dividend and Growth Fund (MUTF: IHGIX ) WisdomTree U.S. Dividend Growth ETF (NASDAQ: DGRW ) iShares Core Dividend Growth ETF (NYSEARCA: DGRO ) iShares Select Dividend ETF (NYSEARCA: DVY ) Vanguard Dividend Appreciation ETF (NYSEARCA: VIG ) Vanguard Dividend Appreciation Index Fund (MUTF: VDAIX ) It did not include SCHD, which I think should have been one of the top contenders. Let’s talk about the things that actually matter when comparing ETFs with similar investing goals. Remember that this is a discussion of dividend funds, so allocations may be different but there should be quite a bit of overlap. Expense Ratios The expense ratios on an ETF (or mutual fund) are one of the very first things an investor should consider. When I’m considering funds for my portfolio a high expense ratio is pretty much an automatic rejection. When buying an ETF you are making the assumption that the market is reasonably efficient and that your best bet for limiting your risk and finding success is to diversify your investments. If you don’t believe that to at least some extent then there is no reason to invest in either unless it was a requirement of an attractive retirement plan. The point is simple. Expense ratios literally eat your investment. The only reason to pay the expense ratio rather than to buy the individual stocks is for the benefit of being able to buy them all at once with less work and fewer transaction charges. Some investors may be willing to pay a high premium to acquire the most talented that is running “the best” fund. However, the premise that an individual investor can determine which manager will be most successful without ever meeting the manager is absurd. I’m not a believer in the market being perfectly efficient. I cover small cap mREITs and the price movements I’ve seen have convinced me that the small cap companies in the sector are anything but indicative of an efficient market. That is precisely the reason I choose to focus so much of my analysis on a small corner of the market. When a market is small it is expected to have significantly more opportunities for superior analysis because there are fewer experts in the field searching for a market failure. How often were expense ratios mentioned? Only once in identifying one of the reasons VIG was a top choice. The actual expense ratios were not stated for any of the funds. Since those expense ratios matter, I built a chart to display them: As you might guess, I’m fairly partial to SCHD and VIG as my choices for the best dividend growth funds. Distribution Yield Even though the market regularly moves up, many investors find themselves significantly underperforming the S&P 500. One major reason that actual realized returns for investors frequently underperform the market (besides expense ratios) is that as a group investors are terrible at knowing when to buy and sell. If investors as a group regularly understood when to sell, the market would be absurdly stable and herd mentalities would be avoided. I’m not giving myself some kind of self-serving analyst credit there either. Analysts aren’t good at calling the bottom or the top of the markets either. When it comes to winning by market timing, the best solution is to not play the game. Focus on buying ETFs but not selling them. If an investor is simply using a buy and hold strategy for the core of their portfolio the worst they can do is buy at a market top. One of the reasons for using a dividend growth portfolio is that the investor can hopefully live off the dividends eventually. Being able to do that encourages them to avoid selling their shares when the market crashes. I don’t know when the next crash will happen, but I’m fairly confident that most of us will live to see it. The last thing I would want is to be selling off the portfolio during the crash. This is a human error. It is not something intrinsic to the stocks or the ETF that holds them. It is a human mistake that panic leads to a sell off. Being able to live off the dividends prevents that mistake. Living off the dividends requires a stronger distribution yield. The distribution yields were mentioned zero times in the article on Morningstar, but I think they are very important for encouraging good investor decisions. Here is a chart of the expense ratios: Conclusion SCHD has the lowest expense ratio and the second highest distribution ratio. How can anyone skip past SCHD when consider dividend growth ETF investments? On the other hand, IHGIX had a very high expense ratio (over 1%) and a low distribution yield. That does not automatically make it a terrible investment, but it would concern me and certainly deserves to be mentioned when the stock is being suggested as one of the “favorites” for the dividend growth space. When I looked at the prospectus I noticed there were some fairly hefty charges on buying into the fund as well including a very nice dealer commission. No thanks, IHGIX is clearly not for me. For the investors that want to pick a dividend growth ETF, it would be wise to start with determining precisely what you want out of the fund. I always start with low costs. That means a low expense ratios and a preference for free to trade. If you’re convinced that you can handle selling small amounts off to create your own dividend yield without buying into a full scale panic, then distribution yield won’t be as important. I don’t think that dividend stocks are inherently better, but I think many investors would benefit by being protected from themselves. Perhaps the question should be, if an investor does not find dividend growth stocks superior and does not mind selling off portions of their portfolio, why would they be searching for a dividend growth ETF in the first place? Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SCHD over 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.

Vanguard Long-Term Corporate Bond Index ETF: A Great Bond Option If You Don’t Mind The Duration

Summary The Vanguard Long-Term Corporate Bond Index ETF takes on some credit risk and quite a bit of duration risk to deliver better yields. The ideal exposure for bond investors would probably include other bond funds for more diversification on credit grades and durations. The low expense ratio is respectable. The Vanguard Long-Term Corporate Bond Index ETF (NASDAQ: VCLT ) is a solid bond fund. As I’ve been searching for appealing bond funds, I’ve found some of my favorites are from Vanguard. Given my distaste for high expense ratios, it should be no surprise that Vanguard products would be appealing. After looking through the portfolio, I think the holdings are fairly reasonable for an investor wanting to regularly keep part of their portfolio in a bond fund. With that said, I have to admit that the duration is fairly long and I’d really like to see stronger yields when taking on this level of duration risk. This would be a dangerous holding for an investor with a fairly short time horizon. For the investor with a long-term horizon, a small allocation here makes sense. Quick Introduction The Vanguard Long-Term Corporate Bond Index ETF is showing a yield to maturity of 4.9% and an average duration of 13.5 years. The yield gives investors a reason to take on the interest rate risk. Credit Quality When I first looked at the credit quality of the Vanguard Long-Term Corporate Bond Index ETF, my first impression was that the credit ratings were stacked pretty close together. The vast majority of the portfolio is rated A or Baa as shown below: It isn’t just the credit ratings that are stacked to a fairly small part of the curve, we also see the effective maturity is very long. Keep in mind that effective maturity is not the same as duration. The average effective maturity is 24 years. Maturities I grabbed another chart to show the effective maturity on the securities: Since we are getting a reasonable yield in a very low interest rate environment it shouldn’t be surprising to see that the maturities are fairly long. However, we are seeing quite a bit of concentration here as well. Because the credit risk and effective maturity are both heavily focused on specific parts of the curve, there is a meaningful amount of diversifiable risk left in the holdings. Risk The easiest way to control for the risk from the concentration of the holdings is simply to combine a few bond ETFs. In my estimate, VCLT is a very solid bond ETF that is at its best when it is combined with other bond ETFs to create the bond portion of a portfolio. Having so much concentration on the risk factors would be a problem if the investor only held VCLT, but very specific exposure can be a desirable factor when an investor is trying to figure out how to fit the bond ETF into their portfolio. Conclusion As far as bond ETFs go, the Vanguard Long-Term Corporate Bond Index ETF is a fairly solid option. For investors that get free trading on the ETF, it is even better because it would be easier to handle rebalancing to take advantage of the diversification benefits that the long-term bond portfolio can bring to a portfolio. The expense ratio is low which is an important selling point. With bond yields already being fairly low, having a high expense ratio is a quick way to get a real drag on any returns from interest payments. If an investor prefers to be a speculator and just wants to bet on rates going lower and getting price appreciation, then the expense ratio is less of an issue. For the long-term holder planning to keep high quality bond ETFs in their portfolio for the next few decades, the low expense ratios are an important factor. Due to the volatility created by having a fairly long duration, I would really favor a strategy with automatic rebalancing and a long time horizon. 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.