Tag Archives: portfolio

FVD: Great Sector Allocations For This Dividend Growth ETF

Summary FVD offers a dividend yield of 2.17%, which is fairly low for being included in the discussion of dividend ETFs. The top several holdings include heavy exposure to the major oil companies. The expense ratio is quite dreadful. The sector allocations look great for a dividend ETF, which seems ironic given the weak yield on the fund. The First Trust Value Line Dividend ETF (NYSEARCA: FVD ) looks great for sector allocations, pretty good for individual companies, and weak for yield, and painful for the expense ratio. That is one of the most mixed bags I’ve found when reviewing dividend ETFs. I’ve found ones that are good, ones that seem poorly designed, and ones that are all around average. I rarely see such strong contradicting signals though. Expenses The expense ratio is a .75% on the gross level and .70% on the net level. Is it any surprise I’m not loving the expense ratio? Dividend Yield The dividend yield is currently running 2.17%. That seems strange for a dividend ETF, but I’ve seen low yields on dividend ETFs before so I won’t dwell on it. Holdings I grabbed the following chart to demonstrate the weight of the top 10 holdings: I love seeing Exxon Mobil (NYSE: XOM ) as a top holding. Investors may be concerned about cheap gas being here to stay, but I think money in politics will be around decades (centuries?) longer than cheap gas. Bet against big oil at your own peril. I can say the same about liking Chevron (NYSE: CVX ) and ConocoPhillips (NYSE: COP ). These companies offer investors a good way to benefit from high as prices which would generally be a drag on the rest of the economy and on the personal expenditures of consumers. As we go farther down the list there are a couple of high quality equity REITs incorporated into the portfolio. I should note that while these allocations are fairly far down the list, their allocations are still higher than .58% and the second heaviest weighting is only .63%, so being far down on the list doesn’t mean much in terms of weighting. The high quality equity REITs I see here are Realty Income Corporation (NYSE: O ) and Public Storage (NYSE: PSA ). Realty Income Corporation is a monthly pay equity REIT that runs a triple net lease structure. In short, they are buying up commercial properties and renting them out to businesses. The company has exceptionally high credit standards and screens applicants to reduce their risk of having renters default on the contract. Public Storage on the other hand has a fairly simple business in terms of renting out storage space. This can be a fairly attractive space because there aren’t too many REITs competing in the space which reduces the need for price based competition. Sectors (click to enlarge) The very heavy allocation to utilities is great for investors that don’t already have the exposure in their portfolio. Utilities tend to have a lower correlation with the rest of the domestic market and generate significant income for shareholders which causes them to also have some correlation with the bond markets since investors interested in income are able to pick between bonds and utilities. The high allocation to financials is a bit higher than I’d like to see since equity REITs are only a few of the positions. Most of the financials exposure is coming from the more traditional sources such as banks. Heavy exposure to consumer staples is another positive aspect in my opinion since it makes the portfolio more resistant to selling off during negative market events. Telecommunications usually gets a much heavier weight in dividend portfolios due to the presence of AT&T (NYSE: T ) and Verizon (NYSE: VZ ), but the weighting strategy for this fund giving most equity positions allocations around .6% has resulted in those two companies combining to be only 1.14% of the portfolio. Suggestions I wouldn’t mind seeing this portfolio show a slightly higher allocation to a few dividend champions such as Pepsi (NYSE: PEP ) or Coke (NYSE: KO ). I wouldn’t mind seeing the oil companies get slightly higher allocations either. The final modification would be increasing the presence of sin companies in the portfolio by overweight companies like Altria Group (NYSE: MO ). Of course, this runs contrary to the ETF’s strategy of aiming to have their holdings be roughly equally weighted. Conclusion Overall I like the portfolio that has been created, but the weighting methodology creates the possibility of material changes in the allocation from period to period. There are several companies that were selected by the ETF’s methodology that also meet my definitions for attractive dividend payers, but I’d really like to see the strategy implemented with a lower expense ratio even if that required sacrifices such as less frequent rebalancing of the portfolio.

Sticking With Your Asset Allocation

By Seth J. Masters Careful analysis can help investors pre-experience the outcomes they’re likely to see with various allocation decisions. But an investment plan will work only if an investor has the emotional fortitude to stick with it. That’s easier said than done, particularly with a more aggressive portfolio, when market conditions are rough. Let’s look at the growth of $1 million in three portfolios from January 2005 through June 2015, assuming a withdrawal of $50,000 per year. In one case, the investor maintains a portfolio allocation with 80% in global stocks and 20% in municipal bonds. In the second, the investor stays in a much more conservative 30/70 portfolio. And in the third, the investor begins with 80/20, but panics after a 30% loss and switches out of stocks and into cash on November 1, 2008. He remains in cash through March 31, 2012, and returns to 80/20 thereafter. The Display below shows how each of these investors would have fared. With only 30% in stocks, the conservative investor wouldn’t have lost a great deal in the 2008 stock market slump, but neither would he have picked up much in the roaring bull market that followed. Altogether, after spending $50,000 a year, he would have ended up with $940,000 at midyear 2015 – not too bad considering his regular portfolio withdrawals. The steady 80/20 investor would have suffered a wrenching loss of 46% in the stock market slump, but she would have still wound up with the highest final portfolio value: $1,150,000, after spending outlays. The market timer who jumped into cash as the stock market was going south and returned to stocks somewhat late would have been left with only $670,000, far less than both the steady 30/70 investor and the steady 80/20 investor. Indeed, his portfolio’s ending value would have been more than 40% less than the ending value of the 80/20 investor who stuck with her allocation, although his worst drawdown was nearly as large. This illustrative case is – unfortunately – similar to what many investors actually did after 2008. Lots of investors who had flocked to global stocks in the years before the bubble burst stampeded out in 2009, 2010, and 2011, to the tune of $309 billion in outflows. It took until 2013 – by which time the global stock market had already rallied 55% – for fund flows to flip back into stocks. In market cycle after market cycle, most investors sell low and buy high. At Bernstein, we advised clients after the market slump to stick with their long-term strategic asset allocations, including their exposure to equities. One measure of the value of good investment advice, in our view, is the money saved by avoiding big mistakes. The value of that advice can be significant and quantifiable, as this example shows. Even so, there’s a deeper dimension to good investment advice that goes beyond such numbers. Planning carefully and thoroughly can create greater understanding of investment trade-offs, which leads to better life decisions. These benefits are hard to measure precisely, but nonetheless hugely valuable. The views expressed herein do not constitute research, investment advice, or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.

Typical Millennials Should Allocate At Least 25% Of Their Portfolio To This Specific Asset Class

Summary The typical millennial profile (post-college graduation) has human capital as their only asset, but is also effectively short both bonds (student debt) and residential real estate (renters). Given most millennials’ desire to own a home, their largest risk exposure, pre-home-ownership, is the risk of inflation in residential real estate, which can far exceed conventional CPI. Given this, we recommend a large portfolio exposure, indirectly leveraged if possible, to various components of the residential real estate sector, until the goal of home ownership is reached. We offer a portfolio solution to implement our recommendation including specific sectors and stocks. Along the way, we explore various other issues, such as setting your goals, repaying your student debt, and the best time to buy a home. Typical asset allocation weights for millennials The popular financial planning educator, Michael Kitces, on his blog Nerd’s Eye View , wrote about the importance of taking a holistic view of the client’s assets to maximize the risk/return profile. Particularly in your early years, human capital may be up to ten times larger than your financial capital. He cites a paper written by David Blanchett and Philip Straehl of Morningstar, ” No Portfolio Is An Island ” where they create a nice graphic, shown below, of how the typical holistic capital structure changes as you get older. We are interested in looking only at the millennial age group of 25-35 and we will add to this chart further by looking at both assets and liabilities, and actual and implied risk exposures. Typical profile of millennial has student debt and is a renter While not all millennials will fit into our “typical profile” we define the “typical millennial” as having graduated college – with the help of student loans, likely renting as opposed to owning or living with parents, and a desire to someday own a home. We provide the following statistics to support our “typical profile”: From the Institute for College Access & Success , “seven in 10 seniors (69%) who graduated from public and nonprofit colleges in 2014 had student loan debt, with an average of $28,950 per borrower.” From The National Association of Realtors, Generational Trend Report (2015) Exhibit 1-10, 59% of homebuyers age 34 and younger, rented an apartment or house prior to buying their home. In their study, Zillow found first-time homebuyers are renting for six years before buying, are older and less likely to be married than they were in the past, are buying increasingly expensive first homes and spending more relative to their incomes than any time in the past 40 years. Quoting from their press release , “Millennials are delaying all kinds of major life decisions, like getting married and having kids, so it makes sense that they would also delay buying a home,” said Zillow Chief Economist Dr. Svenja Gudell. “We know millennials value home-ownership and want to buy. The next challenge will be figuring out how they can save for a down payment and qualify for a mortgage, especially while the rental market is so unaffordable all over the country. The last hurdle will be finding a home they like amidst very tight inventory, especially among starter homes.” While this describes the average millennial, there is nevertheless a significant difference in wealth levels among millennials. Courtesy of the Equifax Client Insights , in addition to average household assets, estimated household income varies from $55,000 for Mass Market, to $110,000 for Mass Affluent, to $289,000 for Affluent. Establish real exposures and risks Given this “typical profile” we can now begin to look closer at the real and implied risks as a starting point to understand the most suitable investments for the financial component of their portfolios. The chart below shows the expanded weights of the portfolio components to include the liabilities as well. (click to enlarge) The liabilities are shown as negative risk exposure, below the zero line. The student debt is easily understandable as a liability, but you may be wondering why renting your primary residence shows up as such a large liability. This point is the key idea to our whole thesis: Renting a home is very similar to being short residential real estate. Although technically you don’t have to buy the house, at some point in the future for most people, this is their goal, so the risks are effectively very similar. Put another way, being a renter exposes you to significant risk if the price of residential real estate goes higher. With this more comprehensive risk profile we can now begin to think more clearly about goals and planning. With most millennials wishing to own a home, their biggest exposure (excluding their human capital) until they reach this objective, is the risk of inflation in residential real estate, which can far exceed conventional CPI inflation from time-to-time, for many years. The first chart shows various home price indices together with the traditional Consumer Price Index. Notice that they do not move neatly together and that home price indices have been higher than inflation for most of the past fifteen years. People who live in a major metropolitan area like San Francisco, New York or Los Angeles will instinctively know this is the case without needing to look at a chart. (click to enlarge) This chart shows the year-over-year percentage change in the Home Price Index less the traditional Consumer Price Index. Unless we are going into a recession, home prices always seen to rise faster than CPI. (click to enlarge) So given your implied short position in residential real estate, and the worries of getting caught in a short squeeze, what should you do to achieve your objective of owning a home someday, and how does it fit into your big picture? Setting your bigger picture financial goals While many financial advisors or target date funds invest for retirement, thinking 40 years down the road, we believe it easier to set and visualize a 10-year goal than a 40-year goal. At age 25, it’s difficult to focus on retirement and you don’t have to – just focus on getting to the next level . We posit that a reasonable goal for millennials is to get to age 35 or 36 and accomplish the following: Be free of student debt Own a home Have an emergency fund of 6 months’ salary While the requirements to reach this goal will vary widely, in general they require two basic things, which you mostly have control over and should try to maximize: Maintain the income from your job, or similarly if you take the entrepreneurial route. Save at least 10% -15% of your earnings every year. The two biggest risks to reaching these goals are 1) losing your job/income and 2) inflation in residential real estate prices. Allocating your saving to various financial assets to reflect your goals and risk profile 1. Human Capital Don’t rely on your portfolio to protect your largest asset. Your portfolio is small in relation to your earnings at this stage so it will not have a meaningful impact if you lose your job. The study cited by Kitces involves hedging your human capital by investing in industries that are not correlated with the industry where you make a living. For example if you are in the tech industry, do you really want more exposure to tech stocks? While there is some merit to this later on in life, we think it not relevant in your early career stage. Losing your job could occur for a number of reasons beyond your control, but for the most part you are in control of this, which means keeping your skill set up to date, and make sure you are adding value to your employer – even if a recession does come along, employers will try hang on to their best people for as long as possible. 2. Real Estate The real estate inflation risks we are exposed to are out of our control, so we want to hedge this as closely as possible. We recommend a large exposure, indirectly leveraged if possible, specifically to various components of the residential real estate sector, until you own your home. We think that allocating at least 25% of your portfolio to an aggressive, inflation tilted, residential real estate portfolio of stocks makes sense. 3. Bonds Most advisors will not recommend you have much exposure to bonds at this point in your life, and we recommend you have exactly zero allocated to long bonds. You are already short bonds with your student loans so why own government bonds at 2-3% when you can pay down your student debt which earns you 5-6%. If you want to keep six months of emergency funds in short term 1-2 year government bonds that is fine. Given that real estate inflation is your biggest uncontrollable risk until you purchase your home, and given that being short bonds (i.e. borrowing) benefits from high inflation, we actually recommend paying down only the minimum necessary on your student loans, until you own your home. We also endorse getting some additional, indirect (meaning you are not borrowing directly) short exposure to bonds, by investing in companies with higher leverage ratios. It is more risky, but keep in mind you are merely balancing out your overall risk. A portfolio solution to implement our recommendations The portfolio solution we have created is designed specifically for millennials who are saving toward owning a home within a 7 to 10 year horizon. The holdings are designed to hedge against an implied short position in real estate created from renting. We invest in companies that are geared specifically toward the residential real estate market mostly through land, homebuilders, apartment REITS, realtors, and some exposure to home improvement retailers. The objective is to keep pace with or exceed the rate of appreciation in home prices. We identify a list of suitable stocks in these industries: Land – The Howard Hughes Corporation (NYSE: HHC ), iStar, Inc. (NYSE: STAR ), Tejon Ranch Co (NYSE: TRC ); Homebuilders – Lennar Corporation (NYSE: LEN ), Toll Brothers, Inc. (NYSE: TOL ), DR Horton Inc. (NYSE: DHI ), Pulte Group, Inc. (NYSE: PHM ), KB Home (NYSE: KBH ), Cal Atlantic Group, Inc. (NYSE: CAA ); Realtors – Zillow Group, Inc. (NASDAQ: Z ), Realogy Holdings, Inc. (NYSE: RLGY ), RE/MAX Holdings, Inc. (NYSE: RMAX ); Home Improvement Retailers – The Home Depot, Inc. (NYSE: HD ), Lowe’s Companies, Inc. (NYSE: LOW ); Apartment REITS – Camden Property Trust (NYSE: CPT ), Apartment Investment and Management Company (NYSE: AIV ), Avalonbay Communities, Inc. (NYSE: AVB ). If you wish to create a passive portfolio with these, you can allocate say 20% to each category – there is no magic formula, although some sectors like land are more leveraged to changes in home prices, so you can adjust the mix to suit your risk profile. In our actively managed portfolio we analyze each stock to make sure we are buying them at reasonable valuations; since we are planning on holding this portfolio for up to 10 years, and the single biggest determinant of long term returns is the price that you bought it at – do your homework here. We also consider gaining additional indirect leverage via company debt, land exposure and stock beta. Remember, with inflation, debt is your friend. Actively managing your positions If you have a nice profit and perhaps enough to make your down payment, you may want to cash out and remember the purpose of why you invested in these stocks in the first place. Lastly, it’s probably better not to try and time the market; if we go into a recession, real estate stocks will get hurt like all other stocks. But remember the purpose of this portfolio is to hedge your future down payment on your home – so if your portfolio goes down, home prices will likely decline too, and you will benefit from being able to purchase your home at a cheaper price – your hedge will still have served its purpose. When is the best time to buy a home? Lastly, let’s look at a few factors to keep in mind around the timing of buying your home. The following graph plots the Housing Affordability Index, the National Home Price Index and the Renters CPI Index on the left hand scale, and the 10 Year Treasury rate on the right hand scale. (click to enlarge) Housing affordability index It is a function of income levels, home prices and interest rates. For a given level of income and interest rates, there is a limit on how high prices can go. It’s good to know where we are in this cycle; for example in 2007 you can see the huge spread between the home price index and the affordability index – unsustainable, as we know in hindsight. Currently, prices are almost back to where they were in 2007 but the affordability index is much better than in 2007, so don’t expect home prices to come crashing down like they did in 2008. Rental Inflation Rents seem go up steadily over time. Quite simply, this means you really should try to own your own house at some point. Is it better to buy when interest rates are high or low ? While it feels good to know you have locked in a low rate for 30 years, buying when rates are low is not necessarily the best time. For one thing, low rates imply that you will pay a much higher purchase price than when rates are high. It’s generally better to buy when rates are high and declining; your purchase prices will be lower (also your property taxes may be lower) and you may have the option to refinance your mortgage if rates go down plus your home value should increase with lower rates; if you buy when rates are low, you pay a higher price (and higher real estate taxes) but have no option to refinance at a better rate in the future and your home value may also decline when rates rise. Your income level The lower your income level, the more at risk you are to rising real estate prices and being priced out of both the home purchase and rental market, creating a greater sense of urgency to purchase your own home. Non-monetary considerations may trump everything else Sometimes the timing of home purchase will likely be driven more by family considerations, or the peace of mind and sense of security of owning a home. Conclusion Hopefully this article helps you to plan toward owning a home within the next ten years by looking at your balance sheet holistically.