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A Juicy 5% Yield From Emerging Markets But Be Aware Of The Risks

Summary The SPDR S&P Emerging Markets Dividend ETF has a yield of over 5% but dividend inconsistency and region exposure make it a risky proposition. The fund has sizeable positions in China and Brazil – two areas that have been hotbeds of political turmoil. The fund has underperformed the broad MSCI Emerging Markets index since its inception and an above average beta suggests a fund that comes with risks. Income-seeking investors often look to familiar sectors like financials and utilities to generate a higher yield from their equities. A place that investors may not consider for dividend income is emerging markets but, believe it or not, there are some significant yields in this space. The SPDR S&P Emerging Markets Dividend ETF (NYSEARCA: EDIV ) has been around for over four years and boasts a little over $300M in assets. Since its inception, the fund has trailed the iShares MSCI Emerging Markets ETF (NYSEARCA: EEM ) and one of its larger competitors, the WisdomTree Emerging Markets Equity Income ETF (NYSEARCA: DEM ) on a total return basis. EDIV Total Return Price data by YCharts The 5% yield is no doubt tantalizing but it’s important to recognize how that dividend is achieved and how much risk is involved in obtaining it. Not surprisingly, the fund has performed poorly as emerging markets have been hammered over the last year or more. The fund is down a total of 24% over the past one-year period and 35% since inception. The fund is fairly well diversified across the broad economy. The fund has 5% or higher allocations to eight different sectors with communications and technology stocks accounting for roughly 40% of total fund assets. More conservative areas like financials, industrials and basic materials count 30% of the portfolio bringing overall portfolio risk down although a 3 year beta of 1.16 suggests a more aggressive portfolio when compared to emerging markets overall. While ETF Database indicates this portfolio has one-third of its assets in “developed” markets, a look at the fund’s country and region allocation shows its exposure to primarily less developed and risky markets. China (10% of fund assets) for all of the volatility it has experienced over the past year is actually one of the fund’s better performing regions. Brazil (8%) has been the worst performer among the fund’s larger allocations due to the political unrest resulting from the Dilma Rousseff regime. Other regions like Taiwan (27%), South Africa (14%) and Turkey (9%) are all down double digits in the one-year period. Another risk comes from the quarterly dividend volatility. Income seekers looking for a predictable quarterly dividend should probably look elsewhere. Historically, most of the fund’s annual dividends come in the 2nd and 3rd quarter and trail off to minimal levels in the 1st and 4th quarters. Trailing 12-month dividend yields were down below 4% during the summer of 2014 and have risen to their current level of 5.16% thanks in part to the fund’s share price drop. The fund has paid $1.342 per share in dividends over the past four quarters compared to $1.645 per share in the four quarters prior to that. Conclusion This ETF has been able to consistently deliver annualized yields of over 4% but there’s a great deal of volatility involved to get there. Global economic weakness has hit emerging markets hard over the past year and the dividend is just one piece to consider here. The quarterly dividend payments are very inconsistent and the fund has larger exposures to areas with significant political and economic risks. This ETF has a place in a broader portfolio as a smaller high risk high return position but those looking for a predictable income producing investment should probably look elsewhere.

Increase Your Portfolio’s Return By Dropping International Funds

Summary International stocks have underperformed historically – performing even worse in the recent past. Multiple hypothetical portfolios demonstrate the poor returns of international stocks. Short periods of outperformance by international stocks do not make up for their overall performance. Will International Stocks Really Outperform? With emerging markets in the dumps and international funds trailing the returns of domestic funds, analysts everywhere are calling for investment in international stocks, claiming that the chronic underperformance is a sign that they are “due” to outperform. International stocks may very well outperform in the next few years. There is nobody who can know that for sure. I am here to present the facts, and the facts show that international stocks have not been delivering on the promise of outperformance given their higher risk. An investment portfolio built entirely from U.S. stocks can outperform international portfolios while avoiding the political and currency risks of other smaller countries. Hypothetical Portfolios For the sake of this hypothetical situation, let us assume that the owner of this portfolio will be investing in 100% equities and plans to maintain that portfolio for the next decade before moving into some safer bonds. The owner of this portfolio currently has $300,000 invested. Let us see how this portfolio would have performed from 2005 to 2015. First, a control sample: 100% U.S. equities for the entire investment period, invested in the broadest manner possible with the Vanguard Total Stock Market ETF (NYSEARCA: VTI ). In this case, the portfolio would be worth $654,240 at the end of the investment period. Not too shabby, the portfolio has more than doubled with an annualized rate of 8.12% ( Source ). Let’s say the investor wished to broadly diversify his equity portfolio with companies from around the world, putting the U.S. weighting at around 40% with the Vanguard Global Equity Fund (MUTF: VHGEX ). In this case, the portfolio would be worth $533,880 at the end of the investment period. The portfolio has increased at an annualized rate of 5.93%. The investor has missed out on $120,360 ( Source ). Perhaps the investor believed that emerging markets would be a good addition to his U.S. equities. Let’s say the investor allocated 20% to emerging markets with the Vanguard FTSE Emerging Markets ETF (NYSEARCA: VWO ) and 80% to Vanguard Total Stock Market ETF. In this case, the portfolio would be worth $625,080 at the end of the investment period. The portfolio has increased at an annualized rate of just over 7.542%. The investor has missed out on $29,160 ( Source ). Let me note that emerging markets are the only international option I would consider. Emerging markets have outperformed U.S. markets from time to time and their current weakness has much to do with the strong U.S. dollar and oil prices. However, emerging markets do not represent all international stocks and therefore I still stand by the statement that international stocks, as a whole, underperform – as seen by the performance of broad international funds such as VHGEX. In all hypothetical portfolios, the investor would have been better off simply investing in the United States market and would have even paid lower fees (and perhaps taxes as well) while doing so. The below table and graph illustrate the results of including international stocks in your portfolio. (click to enlarge) (Excel, using data from Vanguard.com) (click to enlarge) (Excel, using data from Vanguard.com) International Stocks have Underperformed Historically U.S. funds have beaten international funds the past five, 10, 15, 20 and 25 years. Over the past 25 years, large-cap U.S. funds have gained an average 691%, vs. 338% for international funds. The graph below illustrates the difference in performance. (Please note I am not in favor of investments in managed futures. Managed future data is subject to extreme survivorship bias and the results are thus skewed. Survivorship bias is the logical error of concentrating on the people or things that “survived.” inadvertently overlooking those that did not because of their lack of visibility.) (click to enlarge) (AutumnGold) Small Bursts of Outperformance by International Stocks Don’t Make Them a Good Investment Some will argue that there are periods of time when international stocks outperform. This is true. However, these periods of time are often small and they haven’t made up for the underperformance both historically and lately, assuming investors invest gradually over time. For long term investors, a long history of strong performance is needed before an investment can be made. The United States stock market has provided that performance for over a century now. The below chart shows the periods of outperformance for domestic and international equities for roughly the past 20 years. As you can see, in the mid-80s international stocks did very well and mildly outperformed in the mid-2000s. However, in all other years the U.S. stock market outperformed and overall U.S. stocks came out far ahead as mentioned earlier, assuming you didn’t throw all your money into international stocks in 1984. However, most people invest over time and if you had done that, you would have had higher returns with domestic stocks. (Bason Asset Management) For the past 15 years domestic stocks have pulled ahead of international stocks by a fairly wide margin. This is achieved even when the domestic market returns are relatively normal compared to historical averages. International stocks have simply underperformed consistently. You would be very hard pressed to find an international broad market fund that has beaten a U.S. broad fund from inception to date with reasonable fees, assuming the inception dates are relatively similar and that the funds didn’t start around 1984. The Vanguard International Explorer Fund is one exception I have found as it has performed very well since inception in 1996. Unfortunately, over the past 10 years it has returned less than 6% annually. Having a Portfolio of Pure U.S. Stocks Outperforms and Provides International Exposure Investing in U.S. stocks doesn’t mean you lose out on foreign growth potential. In fact, U.S. companies are very savvy and have the luxury of being able to choose which countries to do business in. There is no reason the U.S. equity market can’t benefit from the growth of other nations. Companies in the S&P 500 get 46.2% of their earnings from overseas . If you are looking for diversification to reduce the risk of a drastic drop in your portfolio value, international stocks won’t help you. The 2008 stock market crash showed that all equities fell drastically at the same time. Investing in one country or another made no difference. So do the smart thing: invest in domestic funds and enjoy the decent returns, as boring as they may be.

A Primer On Alternate Energy ETFs

Despite a multitude of macro challenges like deflationary worries in Europe, a slowdown in China and Japan, along with the oil price carnage in the market, the long-term outlook for the alternative energy space has held up pretty well. Climate change is one of the defining challenges of the century. Given the attempts to combat global warming worldwide, environmental considerations have been driving demand for alternative energy sources. The latest report from the U.S. Energy Information Administration (“EIA”) shows that renewable energy will be the fastest growing power source through 2040. “Clean energy” has long been the focus of the current administration. President Obama’s “Climate Change Action Plan” and the favorable green energy trends have already done a lot in pushing the sector northward. On Aug 3, 2015, the White House revealed the final version of the ambitious climate policy. This Environmental Protection Agency (EPA) program seeks to cut CO2 emissions from the nation’s power plants. The Obama administration has vowed for CO2 reduction of 28% by 2025 and 32% by 2030 from 2005 levels. This version turns out to be a little stronger than the draft proposal released last summer, wherein the EPA had proposed total CO2 reduction of 29% by 2025 and 30% by 2030. Per the International Energy Agency, the share of renewables in total power generation is expected to rise to 33% in 2040 from 21% in 2012 globally. Again, the EIA report reveals that electricity generation from renewable sources is projected to increase to 18% by 2040 in the U.S. Wind and solar production have been rising at an exponential rate and renewable energy sources can now generate electricity at a price very close to the electricity generated by fossil fuels. Per the latest report released by the Solar Energy Industries Association (“SEIA”), the U.S. solar energy industry grew 8.7% year over year to reach 1,393 megawatts (“MW”) DC in the second quarter 2015. This is a landmark for the market, with cumulative installations reaching the 20 GW DC mark, buoyed by strong contributions from each of three segments: utility, commercial and residential. The SEIA expects the U.S. PV market in 2015 to witness yet another strong year, with installations reaching 7.7 GW DC, representing a 24% increase over 2014. Again, the American Wind Energy Association (“AWEA”) reported that the U.S. wind industry installed 1,661 MW during the second quarter of 2015, bringing the first half 2015 installations to 1,994 MW. This is more than double the capacity installed in the first half of 2014. Just as pro-environment regulations have given a boost to the alternative energy sector, trade conflicts between some of the major solar product manufacturing countries have complicated the landscape. Solar trade relations have particularly heated up with China and the U.S. trying their level best to protect homegrown interests. The Commerce Department in December 2014 set anti-dumping duties at about 52% on most module imports from China and at 19.5% on most imports of Taiwanese cells. It has also slapped 39% anti-subsidy tariffs on most China-made panels. The new duties would further escalate trade tensions between the two countries at a time when the two nations were planning to work together in the common fight against global warming and carbon emissions. The U.S. believes that Chinese manufacturers have hitherto benefited from unfair subsidies offered by their government. Globally, China, the world’s prime manufacturer of solar panels, is emerging as the market leader for solar PV to meet the growing need for clean energy. The Chinese economy has been struggling and its stock market has sold off dramatically in recent months. As the world’s biggest producer of solar panels is now contending with lower growth forecasts (below 7% for 2015), decreasing exports along with industry overcapacity as well as the ongoing decline in the stock market, its solar industry may also be at risk. Beyond the China factor, the sector as a whole – and solar stocks in particular – have taken a beating ever since oil prices began to tumble last June. This weakness has persisted this year as well. The decline in oil prices has made renewable energy stocks unattractive, sparing neither U.S. nor Chinese solar companies. While the solar energy sector’s long-term potential is undeniable, the industry is faced with a number of near-term challenges that will likely keep these stocks under pressure. That said, the demand for solar energy is strengthening at a rapid clip and analysts see no fundamental correlation between the oil plunge and solar share losses. ETFs to Tap the Sector For investors seeking to play this trend in ETF form, the following series of alternative energy ETFs could make interesting picks. PowerShares WilderHill Clean Energy Portfolio ETF (NYSEARCA: PBW ) Launched in March 2005, PBW tracks the WilderHill Clean Energy Index and manages an asset base of $102.9 million which it invests in a portfolio of 45 stocks. It is well diversified across various sectors. Information Technology takes the top spot with a 51% allocation followed by Industrials (18%) and Utilities (15%). The fund’s top 10 holdings jointly contribute 31.7%. The product invests almost 90% in companies that are involved in the generation of cleaner energy and conservation. It charges a hefty 72 basis points in fees. Market Vectors Global Alternative Energy ETF (NYSEARCA: GEX ) Launched in May 2007, GEX tracks the Ardour Global Index, focusing on companies that are primarily engaged in the business of alternative energy comprising solar power, bioenergy, wind power, hydro-power and geothermal energy. The fund holds about 31 stocks in its pocket, has assets under management of $84 million and charges an expense ratio of 64 basis points annually. Apart from robust holdings in the U.S., the product offers solid exposure to China and some European countries. From a sector perspective, Industrials and Information Technology take the largest share with a respective 45% and 27.7%. Further, the fund’s top 10 holdings jointly contribute 62.69% to the fund. Vestas Wind Systems A/S, Tesla Motors Inc. (NASDAQ: TSLA ) and Eaton Corp Plc (NYSE: ETN ) are the top three holdings, with 28.88% of asset allocation in total. PowerShares Global Clean Energy Portfolio ETF (NYSEARCA: PBD ) This ETF follows the WilderHill New Energy Global Innovation Index, giving investors exposure to about 105 companies that are engaged in renewable sources of energy and technologies facilitating cleaner energy. Assets under management are just over $62.7 million and the expense ratio is 76 basis points a year. The fund’s top 10 holdings contribute 17.95% to it. PBD is heavy in Industrials, as this represents 31.36% of the fund. This is followed by Information Technology (30%) and Utilities (27.15%). In terms of countries, the U.S. dominates with 30.17% followed by China with 17.16%. First Trust NASDAQ Clean Edge Green Energy Index ETF (NASDAQ: QCLN ) This ETF tracks the NASDAQ Clean Edge Green Energy Index and follows a benchmark of clean energy companies, giving exposure to 48 such companies in total with an asset base of $83.3 million. The fund charges investors 60 basis points a year in fees for the exposure. The top 10 holdings comprise 55.18% of the total fund. Technology firms dominate this ETF, accounting for 31.96% of the assets, followed by Oil and Gas stocks with about 22.66%. In terms of geographical diversification, the fund is almost entirely focused on the U.S. market. iShares S&P Global Clean Energy Index ETF (NASDAQ: ICLN ) This ETF tracks the S&P Global Clean Energy Index with 29 holdings and an asset base of $71.8 million. ICLN charges investors 47 basis points a year in fees for the exposure. In terms of geographical breakdown, China leads the list with 26.33%, while the U.S. holds the second spot with 24.12%. ICLN is more inclined toward Renewable Electricity, representing 26.29% of the fund, although Heavy Electrical Equipment receives a big chunk as well (20.31%). The fund appears to be highly concentrated in the top 10 holdings with a share of 58.11%. Bottom Line The depletion of fossil fuel reserves, new and advanced technologies, accompanied with more competent alternative energy applications have made green power more feasible, injecting optimism into the sector. Yet, investors should closely track the political factors that could impact the sector. These include eco-friendly mandates and renewable energy agendas to see if potential benefits will spill over to the renewable companies and the sector ETFs. Original Post