Tag Archives: security

ETF Stats For September 2015 – Assets Back Below $2 Trillion

Thirty new ETFs and ETNs came to market in September, putting this year’s launch total at 214. Closures numbered 11 and now stand at 89 for the year. Assets fell by 2.2% during the month, which puts them back below $2 trillion and down 1.3% for the year. As the month came to a close, there were 1,787 products (1,592 ETFs and 195 ETNs) listed for trading with industry assets totaling $1.97 trillion. One of the most widely covered ETF stories of the month was the “entry” of Goldman Sachs (NYSE: GS ) into the ETF business. The word entry is in quotes because nearly every article failed to mention the other attempts made by Goldman Sachs to enter the ETF arena. Below are the two existing and four closed ETFs and ETNs the firm was involved with: GS Connect S&P GSCI Enhanced Commodity ETN (NYSEARCA: GSC ), issued by Goldman Sachs and launched in July 2006, has about $124 million in assets. GSC became a broken product on June 9, 2015 when Goldman Sachs discontinued issuing new shares. Claymore CEF Index GS Connect ETN (NYSEARCA: GCE ), issued by Goldman Sachs and launched in December 2007, has about $7 million in assets. When Guggenheim acquired Claymore, this product was not included in the transaction. Adding to the embarrassment, Goldman does not maintain a website for its GS Connect products. Four ETFs tracking Goldman Sachs’ smart beta indexes were launched in December 2012. The four ETFs in the ALPS | Goldman Sachs Index Series closed less than two years later in August 2014 due to lack of assets. Apparently, Goldman Sachs was not willing to put any client money into these ETFs. This is Goldman’s fourth attempt, and this time it looks like they are taking it more seriously by being the sponsor, the index provider, and offering aggressive pricing. Although the new ETFs are called ActiveBeta, investors need to understand these are not actively managed funds. Instead, each will track a multi-factor index that updates its constituents on a quarterly basis. AccuShares have been nothing short of an unmitigated disaster since their arrival on May 19, 2015. Their launch was accompanied by a heap of praise because they were designed to track the “spot” price of the CBOE Volatility Index instead of tracking VIX futures like existing volatility ETFs and ETNs do. However, as I noted, the teeter-totter structure was akin to that used by MacroShares , another product set that was doomed to failure from the start. The AccuShares Spot CBOE VIX Fund Up (NASDAQ: VXUP ) and AccuShares Spot CBOE VIX Fund Down (NASDAQ: VXDN ), which even went so far as to include “spot” in their names, make “normal” distributions, “special” distributions, and “corrective” distributions in a feeble attempt to keep the ETFs tracking their index. These distributions caused the funds to gush cash, and now both are trading at less than $8 per share after being launched at split-adjusted prices of $100 or more just five months ago. In September, rather than doing a cash distribution, the firm decided to do something novel – it made a distribution of the opposite ETFs to each shareholder. Those holding “Up” shares received “Down” shares and vice versa . It was the last thing that everyone making a bet on the direction of volatility wanted – offsetting shares. These products will be put on ETF Deathwatch as soon as possible. September 2015 Month End ETFs ETNs Total Currently Listed U.S. 1,592 195 1,787 Listed as of 12/31/2014 1,451 211 1,662 New Introductions for Month 29 1 30 Delistings/Closures for Month 11 0 11 Net Change for Month +18 +1 +19 New Introductions 6 Months 151 3 154 New Introductions YTD 208 6 214 Delistings/Closures YTD 67 22 89 Net Change YTD +141 -16 +125 Assets Under Mgmt ($ billion) $1,952 $22.1 $1,974 % Change in Assets for Month -2.1% -12.6% -2.2% % Change in Assets YTD -1.0% -17.9% -1.3% Qty AUM > $10 Billion 50 0 50 Qty AUM > $1 Billion 242 5 247 Qty AUM > $100 Million 757 33 790 % with AUM > $100 Million 47.6% 16.9% 44.2% Monthly $ Volume ($ billion) $1,768 $87.6 $1,855 % Change in Monthly $ Volume -13.3% +8.4% -12.5% Avg Daily $ Volume > $1 Billion 12 1 13 Avg Daily $ Volume > $100 Million 92 5 97 Avg Daily $ Volume > $10 Million 314 13 327 Actively Managed ETF Count (w/ change) 134 +1 mth +9 ytd Actively Managed AUM ($ billion) $21.6 +1.5% mth +25.0% ytd Data sources: Daily prices and volume of individual ETPs from Norgate Premium Data. Fund counts and all other information compiled by Invest With An Edge. New products launched in September (sorted by launch date): EGShares EM Core ex-China ETF (NYSEARCA: XCEM ) , launched 9/2/15, is designed to deliver the performance of up to 700 emerging market companies, excluding those domiciled in China and Hong Kong. Countries representing more than 10% of the ETF include South Korea (18.3%), Taiwan (15.8%), and Brazil (13.6%). XCEM has an estimated yield of 2.4%. The expense ratio will be capped at 0.35% until 8/11/17 ( XCEM overview ). iShares iBonds Dec 2021 AMT-Free Muni Bond ETF (IBMJ) , launched 9/3/15, adds to the iShares Muni Bond line with investment grade municipal bonds that mature in 2021. The estimated yield to maturity comes in at about 1.6%. The ETF’s expense ratio is 0.18% ( IBMJ overview ). iShares iBonds Dec 2022 AMT-Free Muni Bond ETF (IBMK) , launched 9/3/15, targets investment grade bonds maturing in 2022. Investors can expect an estimated yield to maturity of 1.8% and an expense ratio of 0.18% ( IBMK overview ). Cambria Value and Momentum ETF (NYSEARCA: VAMO ) , launched 9/9/15, is an actively managed fund that will hold 100 US stocks with market caps greater than $200 million. Selections will be made using a quantitative approach, factoring in both value and momentum. The fund managers can also tactically hedge the portfolio up to its full value. VAMO sports an expense ratio of 0.59% ( VAMO overview ). ProShares MSCI Europe Dividend Growers ETF (NYSEARCA: EUDV ) , launched 9/10/15, selects European equities that have seen year-over-year dividend growth during the past 10 consecutive years. The ETF will hold at least 25 stocks equally weighted, although it currently holds 51. Each sector’s exposure will be limited to 30% of the portfolio and countries to 50%. The UK is already pushing the latter limit at 49.5%. Expenses will be capped at 0.55% until 9/30/16 ( EUDV overview ). SPDR MSCI International Dividend Currency Hedged ETF (NYSEARCA: HDWX ) , launched 9/15/15, invests in the 100 highest dividend-yielding stocks in the international market (excluding the US). To be included, stocks must have a market cap of at least $600 million for developed market stocks and $300 million for emerging market stocks, daily volume greater than $5 million, and three years of positive earnings growth and profitability. The fund will hedge against changes in value between the US dollar and constituent currencies by employing a one-month forward rate. The yield is estimated at 5.8%. The expense ratio will be capped at 0.48% until 1/31/17 ( HDWX overview ). SPDR MSCI International Real Estate Currency Hedged ETF (NYSEARCA: HREX ) , launched 9/15/15, will invest in companies outside the US that are engaged in the ownership, development, and management of various real estate property in industrial, office, retail, residential, health care, hotel and resort, data centers, and storage. To be selected, a company must derive at least 75% of its revenues from real estate activities related to those core property types. The fund will hedge against fluctuations in exchange rates between the underlying currencies and the US dollar with one-month currency forwards. Investors will pay 0.48% annually to own this ETF ( HREX overview ). Direxion Daily Cyber Security Bear 2X Shares (NYSEARCA: HAKD ) , launched 9/16/15, seeks daily, leveraged investment results of -200% (inverse) of the performance of the ISE Cyber Security Index. The index is comprised of domestic and foreign companies who generate key revenue from providing cyber security services or infrastructure (hardware/software developers). The expense ratio will be capped at 0.80% until 9/1/17 ( HAKD overview ). Direxion Daily Cyber Security Bull 2X Shares (NYSEARCA: HAKK ) , launched 9/16/15, is designed to return a leveraged daily return of 200% performance of the ISE Cyber Security Index. The index constituents are companies in both domestic and foreign markets who generate key revenue from providing cyber security services or infrastructure (hardware/software developers). Expenses will be capped at 0.80% until 9/1/17 ( HAKK overview ). Direxion Daily Pharmaceutical & Medical Bear 2X Shares (PILS) , launched 9/16/15, seeks daily, leveraged investment results of -200% (inverse) of the performance of the Dynamic Pharmaceutical Intellidex Index. The index is comprised of US pharmaceutical companies involved in various aspects of the industry such as research, manufacture, distribution, and testing. The expense ratio will be capped at 0.80% until 9/1/17 ( PILS overview ). Direxion Daily Pharmaceutical & Medical Bull 2X Shares (PILL) , launched 9/16/15, is designed to give investors a leveraged daily return of 200% performance of the Dynamic Pharmaceutical Intellidex Index. The index constituents are US companies involved in various aspects of the pharmaceutical industry such as development, sales, and facilitating regulatory approval. Expenses will be capped at 0.80% until 9/1/17 ( PILL overview ). iShares MSCI Saudi Arabia Capped ETF (NYSEARCA: KSA ) , launched 9/17/15, provides exposure to the Saudi Arabian stock market, which is an emerging market in the MSCI classification methodology. It currently holds 58 equities, with Financials representing about 55% of the ETF and Materials about 30%. The largest holding is Saudi Basic Industries Corp, which is a member of the Materials sector, at a significant 18.8%. KSA sports a 0.74% expense ratio ( KSA overview ). Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF (NYSEARCA: GSLC ) , launched 9/21/15, is passively managed to an index and is designed to deliver diversified exposure to equity securities of large-cap US issuers, currently with 432 holdings. Positions are selected based on the following factors: value, momentum, quality, and low volatility. The expense ratio is capped at 0.09% until 9/14/16 ( GSLC overview ). FlexShares Credit-Scored US Long Corporate Bond Index Fund (NASDAQ: LKOR ) , launched 9/23/15, seeks to provide investors the benefits of longer maturity corporate bonds while adding in a credit evaluation process and improved liquidity. The index starts with a universe that includes liquid issuers and then utilizes its own proprietary model for credit scoring. The strategy then optimizes the constituents to maximize the credit score while keeping duration and other characteristics similar to the universe. The estimated yield is 4.8% with an effective duration of 13.2 years. Investors will pay 0.22% annually to own this ETF ( LKOR overview ). FlexShares US Quality Large Cap Index Fund (NASDAQ: QLC ) , launched 9/23/15, invests in a selection of US large-cap securities, which are ranked and selected based on perceived characteristics of better quality, attractive valuation, and positive momentum. It currently has 120 holdings, with Information Technology leading the sector allocations at 21.2%. QLC’s expense ratio is 0.32% ( QLC overview ). ProShares S&P 500 Ex-Energy ETF (NYSEARCA: SPXE ) , launched 9/24/15, is a product for investors wishing to achieve the broad exposure of the S&P 500 Index while avoiding the Energy sector. The ETF holds 462 of the 500 securities in the index, all except those relating to natural gas, oil, and petroleum industries. The ETF has an expense ratio of 0.27% ( SPXE overview ). ProShares S&P 500 Ex-Financials ETF (NYSEARCA: SPXN ) , launched 9/24/15, invests in all of the securities in the S&P 500 Index, with the exception of those in the Financials sector. SPXN holds 414 securities, and the ETF sports an expense ratio of 0.27% ( SPXN overview ). ProShares S&P 500 Ex-Health Care ETF (NYSEARCA: SPXV ) , launched 9/24/15, provides an option to invest in the S&P 500 Index while steering clear of the Health Care sector. Instead of tracking all 500 index stocks, SPXV does not hold the 54 that are in the Health Care sector. Investors will pay 0.27% annually to own this fund ( SPXV overview ). ProShares S&P 500 Ex-Technology ETF (NYSEARCA: SPXT ) , launched 9/24/15, is designed to give investors all of the exposure of the S&P 500 Index except for the stocks designated as Technology and Telecommunications. The ETF holds 428 of the 500 equities in the S&P 500. As with the other ProShares ETFs with this theme, the expense ratio is 0.27% ( SPXT overview ). Reaves Utilities ETF (NASDAQ: UTES ) , launched 9/24/15, is an actively managed ETF selecting its holdings from the Utilities sector. It employs both qualitative analysis (management interviews, field research, and macro factors) and quantitative processes (modeling, valuation, and technicals) in its selection methodology. The ETF is concentrated with only 21 holdings. The expense ratio is 0.95% ( UTES overview ). Goldman Sachs ActiveBeta Emerging Markets Equity ETF (NYSEARCA: GEM ) , launched 9/29/15, invests in equities of emerging market companies. The underlying index uses value, momentum, quality, and low volatility factors when selecting holdings. The expense ratio will be capped at 0.45% until 9/14/16 ( GEM overview ). John Hancock Multifactor Consumer Discretionary ETF (NYSEARCA: JHMC ) , launched 9/29/15, targets the US Consumer Discretionary sector. The strategy utilizes a multi-factor approach that emphasizes smaller capitalization, lower relative price, and higher profitability. The expense ratio will be capped at 0.50% until 8/31/17 ( JHMC overview ). John Hancock Multifactor Financials ETF (NYSEARCA: JHMF ) , launched 9/29/15, invests in a wide range of domestic Financial stocks. The underlying index utilizes a multi-factor approach that emphasizes smaller capitalization, lower relative price, and higher profitability. The expense ratio will be capped at 0.50% until 8/31/17 ( JHMF overview ). John Hancock Multifactor Healthcare ETF (NYSEARCA: JHMH ) , launched 9/29/15, aims its multi-factor strategy at US Health Care stocks. Holdings are selected based on factors that emphasize smaller capitalization, lower relative price, and higher profitability. The expense ratio will be capped at 0.50% until 8/31/17 ( JHMH overview ). John Hancock Multifactor Large Cap ETF (NYSEARCA: JHML ) , launched 9/29/15, targets a wide variety of US large-cap stocks with over 770 holdings. The index-based strategy utilizes a multi-factor approach that emphasizes smaller capitalization, lower relative price, and higher profitability. The expense ratio will be capped at 0.35% until 8/31/17 ( JHML overview ). John Hancock Multifactor Mid Cap ETF (NYSEARCA: JHMM ) , launched 9/29/15, invests in domestic mid-cap stocks and holds over 650 positions. The underlying index utilizes a multi-factor approach that emphasizes smaller capitalization, lower relative price, and higher profitability. The expense ratio will be capped at 0.45% until 8/31/17 ( JHMM overview ). John Hancock Multifactor Technology ETF (NYSEARCA: JHMT ) , launched 9/29/15, aims its index-based strategy at US Technology stocks. Holdings are selected based on a multi-factor approach that emphasizes smaller capitalization, lower relative price, and higher profitability. The expense ratio will be capped at 0.50% until 8/31/17 ( JHMT overview ). CS X-Links Multi-Asset High Income ETN (NYSEARCA: MLTI ) , launched 9/30/15, is an exchange-traded note designed to provide exposure to an index that is made up of a diversified mix of up to 120 high-dividend paying securities. Index constituents include other exchange-traded products, such as iShares iBoxx $ High Yield Corporate Bond Fund (NYSEARCA: HYG ) at 8.5%, iShares US Preferred Stock ETF (NYSEARCA: PFF ) at 8.1%, and iShares JPMorgan USD Emerging Market Bond ETF (NYSEARCA: EMB ) at 6.7%. Currently, the estimated yield is 7.1%, and dividends are expected to be paid monthly. Investors will pay 0.84% annually to own this ETN ( MLTI overview ). IQ Leaders GTAA Tracker ETF (NYSEARCA: QGTA ) , launched 9/30/15, is designed to track the performance and risk characteristics of what it defines as the 10 leading global allocation mutual funds. The 10 leaders are selected based on size, returns, consistency of long-term performance, quality of short-term performance, and other factors. Instead of investing in those 10 funds, actual index components are selected so that their combination reflects the risk-return characteristics of the 10 leaders. The fund is typically 120% long and 20% short, although the prospectus allows up to a 130/30 long/short split. The current top holdings are Vanguard FTSE Developed Markets (NYSEARCA: VEA ) at 21.2%, Vanguard Total Bond Market (NYSEARCA: BND ) at 15.7%, and iShares Core U.S. Aggregate Bond (NYSEARCA: AGG ) at 15.6%. The ETF has an expense ratio of 0.60% ( QGTA overview ). JPMorgan Diversified Return U.S. Equity ETF (NYSEARCA: JPUS ) , launched 9/30/15, invests in large- and mid-cap US equities that are chosen based on relative valuation, price momentum, and quality. It currently has 561 holdings, and up to 20% of its assets can be invested in futures. Expenses will be capped at 0.29% until 2/27/17 ( JPUS overview ). Product closures/delistings in September : iShares iBonds Sep 2015 AMT-Free Muni Bond (NYSEARCA: IBMD ) Deutsche X-trackers Regulated Utilities (NYSEARCA: UTLT ) Deutsche X-trackers Solactive Investment Grade Subordinated Debt (NYSEARCA: SUBD ) ProShares UltraShort Telecommunications (NYSEARCA: TLL ) Market Vectors MSCI Emerging Markets Quality (NYSEARCA: QEM ) Market Vectors MSCI Emerging Markets Quality Dividend (NYSEARCA: QDEM ) Market Vectors MSCI International Quality (NYSEARCA: QXUS ) Market Vectors MSCI International Quality Dividend (NYSEARCA: QDXU ) PIMCO 3-7 Year U.S. Treasury Index ETF (NYSEARCA: FIVZ ) PIMCO 7-15 Year U.S. Treasury Index ETF (NYSEARCA: TENZ ) PIMCO Foreign Currency Strategy Active (NYSEARCA: FORX ) Product changes in September: The iShares MSCI USA ETF (NYSEARCA: EUSA ), a capitalization-weighted fund, underwent an extreme makeover on September 1, becoming the iShares MSCI USA Equal Weighted ETF ( EUSA ). The iShares Japan large-Cap ETF (NYSEARCA: ITF ), based on the S&P/TOPIX 150 Index, underwent an extreme makeover on September 4, becoming the iShares JPX-Nikkei 400 ETF (NYSEARCA: JPXN ). State Street performed forward splits on ten of its SPDR industry ETFs effective September 10. VelocityShares 3x Long Crude Oil ETN (NYSEARCA: UWTI ) had a 1-for-10 reverse split and VelocityShares 3x Long Natural Gas ETN (NYSEARCA: UGAZ ) had a 1-for-5 reverse split effective September 10 . Owners of AccuShares Spot CBOE VIX Up ( VXUP ) received a ” corrective distribution ” of one share of AccuShares Spot CBOE VIX Down ( VXDN ) for each share held effective September 16. Meanwhile, the owners of AccuShares Spot CBOE VIX Down ( VXDN ) received a “corrective distribution” of one share of AccuShares Spot CBOE VIX Up ( VXUP ) plus a regular distribution of $0.470145. PowerShares S&P 500 High Dividend (NYSEARCA: SPHD ) was renamed PowerShares S&P 500 High Dividend Low Volatility ( SPHD ), effective September 25, to better reflect its existing strategy. AccuShares Spot CBOE VIX Up ( VXUP ) and AccuShares Spot CBOE VIX Down ( VXDN ) had 1-for-10 reverse splits effective September 25. Announced Product Changes for Coming Months: Direxion performed reverse splits on six of its leveraged ETFs effective October 1 (originally scheduled for September 10). Market Vectors Emerging Markets Local Currency Bond ETF (NYSEARCA: EMLC ) was renamed Market Vectors JPMorgan EM Local Currency Bond ETF ( EMLC ) effective October 1, 2015. AdvisorShares Pring Turner Business Cycle ETF (NYSEARCA: DBIZ ) closed with October 2 being its last day of trading. EGShares Blue Chip ETF (NYSEARCA: BCHP ) and EGShares Brazil Infrastructure ETF (NYSEARCA: BRXX ) will close with their last day of trading on October 30. Van Eck Global plans to acquire Yorkville MLP ETFs ( press release ) and hopes to close the transaction in the fourth quarter. Previous monthly ETF statistics reports are available here . Disclosure covering writer: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.

I’ll Take VNQ Over The Federal Reserve: Benefit From Low Rates

Summary The Vanguard REIT Index ETF is holding a diversified portfolio of REITs that can benefit from low rates. Wage growth is a bullish factor for domestic demand. Inventories at high levels relative to sales are bearish, but goods are frequently imported rather than built domestically. If the Federal Reserve follows the mandate to maintain high employment, they will need to keep rates low. The Vanguard REIT Index ETF (NYSEARCA: VNQ ) has been one of my core portfolio holdings and I don’t foresee it going anywhere. The fund offers investors a very reasonable expense ratio of .12%, a dividend yield running a hair under 4%, and a large degree of diversification throughout the industry as demonstrated in its sector allocations: Weak Bond Yields The yield on the 10-year treasury has dipped under 2% and I don’t expect it to end the year much higher. Our economy is depending on very low interest rates, which can be a boon for the equity REITs as it offers them access to lower cost debt financing for properties. Why Treasury Yields are Limited The Federal Reserve is largely incapable of pushing rates up. It might be technically possible for them to have some influence in pushing the rates higher, but it would be a disastrous scenario. The Federal Reserve is facing a dual mandate for low and steady inflation combined with high employment. If domestic interest rates are increased, it would encourage further capital flows into the country as globally investors would seek the security of buying treasuries. The predictable impact would be a stronger dollar that encouraged companies to ship more jobs abroad and a decline in domestic asset prices due to the “cheaper” goods being imported. Essentially, when interest rates are rising, it will need to be across the globe. Raising interest rates in only one developed country is asking for problems when the tools of production can be operated on a global scale. I understand investors are clamoring for respectable low-risk yields, but increasing rates is not practical. If Those Yields Stay Low If the bond yields are remaining low, investors are going to be searching for yield in other places. With that dividend yield around 4%, VNQ is one viable option for providing some yield to the portfolio. It isn’t just demand for the shares of the REIT, though. The REIT industry has another tailwind that makes it more favorable. Wage Growth is Bullish Some major employers like Wal-Mart (NYSE: WMT ), Target (NYSE: TGT ) and McDonald’s (NYSE: MCD ) have announced very substantial increases in their base wages. This is finally showing that domestic companies are finding value in their own employees. When capital is not flowing to labor, there is less demand in the society for physical goods. As corporate earnings were climbing in previous quarters, there wasn’t enough capital flowing back to “Main Street.” A growth in wages here should help combat weakness in sales for the corporate sector. This growth in wages is a favorable sign that major employers are seeing value from labor. Many investors may scoff that the jobs provided by these employers are creating “low wage” or “low class” jobs. That makes the increase in wages even more important. In a recovery in which too many of the new jobs were failing to provide material levels of income for workers, there is finally an increase near the bottom of the pyramid. Increasing Inventories to Sales is Bearish The following chart compares inventory levels with sales: (click to enlarge) We are seeing a growth in inventory levels, which is a dangerous macroeconomic sign, as higher inventory levels encourage companies to cut production. If the physical production is reduced, there is less demand for workers. That could bring us back towards higher levels of unemployment and weaker wage growth at the bottom of the pyramid. It also indicates that earnings could take a substantial hit. Weaker Earnings Projections Should Force Rates Down For the investors that are not familiar with the accounting for inventory costs, it is important to state that higher levels of production generally stretch fixed costs across more units of production. When companies have to cut production due to inventory levels becoming too high, it results in higher costs of production. Those higher costs can effectively be wrapped into the “inventory” line item and the expense won’t pass through the income statement until the inventory is sold. When the inventory is sold, the higher costs of production flow through the income statement as “cost of goods sold.” The REIT Impact If increasing inventories results in a large reduction in labor in the United States, it would be a problem for REITs as it would signal deteriorating fundamentals. On the other hand, a great deal of inventory comes from imports and a reduction in imports would not have the same dramatic impact. According to ABC news , in the 1960s only 8% of American purchases were made overseas. Now that value is greater than 60%. Whether we talk about residential REITs, office REITs, or retail REITs, a lack of domestic employment would be a bearish sign that would indicate a reduction in the consumption of goods. For residential REITs, the impact would be a drop in the amount of demand for apartments as unemployed workers are not a solid renting demographic. For the office REITs, there is a lack of demand for office space if the companies renting that space find their sales diminishing and must cut their costs. The retail REITs face a similar problem to the office REITs as they depend on consumers buying products from their tenants. Why I’m Still Holding onto VNQ The potential for weakening levels of employment as evidenced by factors like the increase in inventories relative to sales is a material concern. Despite that concern, I choose to remain long VNQ. The increasing inventories are a concern, but imports still fund a substantial portion of inventory. If rates were rising and forcing the dollar to appreciate even further, it would be a serious risk factor for the REITs, but it would also be a challenge directly to the mandate of full employment. So long as the Federal Reserve is following that part of their mandate, they will be forced to keep the rates low. That provides support to share prices as investors seek yield and it provides support to the underlying business by keeping the cost of debt capital lower. Because the REITs can benefit from a low cost of capital and the impact of higher wages, they are in position to gain twice. On the other hand, if I’m wrong and the Federal Reserve does opt to start jacking up short-term rates, then I’ll be eating some nasty losses on my portfolio value. I can’t be certain that I’m right, but I’m confident enough that I am holding VNQ and the Schwab U.S. REIT ETF (NYSEARCA: SCHH ) in my portfolio .

Consolidated Edison’s Place In A Dividend Growth Portfolio

Consolidated Edison is known as a slow growing utility. Yet this alone has not precluded the security from providing reasonable returns. This article illustrates what an investor ought to require in order for the company to have a place in your dividend growth portfolio. Tracing its roots back over 180 years, Consolidated Edison (NYSE: ED ) provides electricity for 3.3 million customers and gas to 1.1 million customers in and around New York City. You might imagine that this business is fairly stable. Indeed, the company has not only paid but also increased its dividend for 41 consecutive years . That’s an investing lifetime for many, each and every year waking up to more and more Consolidated Edison dividends. The way the company operates is a slightly different from your typical dividend growth firm. That’s to be expected: it’s a regulated utility. Yet this alone does not preclude it from providing reasonable returns. I’ll demonstrate both points below. Here’s a look at both the business and investment growth of Consolidated Edison during the 2005 through 2014 period: ED Revenue Growth 1.1% Start Profit Margin 6.2% End Profit Margin 8.3% Earnings Growth 4.5% Yearly Share Count 2.0% EPS Growth 2.1% Start P/E 15 End P/E 18 Share Price Growth 4.0% % Of Divs Collected 46% Start Payout % 76% End Payout % 70% Dividend Growth 1.1% Total Return 7.3% The top line growth certainly isn’t impressive. As a point of comparison, companies like Coca-Cola (NYSE: KO ), Boeing (NYSE: BA ) and Procter & Gamble (NYSE: PG ) were able to grow revenues by 8%, 6% and 4% respectively over the same time period. Of course this is easily anticipated: utilities by their nature tend to be slow growing. The demand for their product is fairly consistent and doesn’t suddenly accelerate with the advent of a new higher efficiency light bulb. So 1% annual revenue growth sets the stage. From there the company has been able to increase its net profit margin, resulting in total earnings growth that outpaces total revenue growth. If the number of common shares outstanding remains the same, total earnings growth will be equal to earnings-per-share growth. Yet this situation rarely holds. With you typical dividend growth company you see shares being retired over the years due to share repurchases. As a point of reference, about three-fourths of the current Dow Jones (NYSEARCA: DIA ) components have reduced their share count in the last decade. Utilities tend to do the opposite – selling shares to raise capital. Consolidated Edison has been no exception, increasing its share count from about 245 million in 2005 to 293 million by 2014, or an average compound increase of about 2% per year. As such, EPS growth trailed overall company profitability, coming in at just over 2% per year. If the earnings multiple remains the same at the beginning and end of the observation period, the share price appreciation will be equal to EPS growth. In this case, investors were willing to pay about 15 times earnings at the start as compared to roughly 18 times at the end of 2014. As such, the share price increased by 4% per year. If you were to look at a stock chart, this is all that you would see. Yet an even larger component to the overall return was dividends received. Remember, investors were able to collect a rising stream of income over time. The magnitude of these increases has not been impressive in any sense: coming in at just over 1% annually. Yet the beginning payout ratio was above 75%. When coupled with a reasonable valuation, this equates to starting dividend yield of about 5%. So investors were able to collect nearly half of their beginning investment in this slow grower. All told capital appreciation would have accounted for about $20 worth of additional value while you would have also received about $21.50 in dividend payments. Your total return would have been roughly 7.3% per year. Now surely this isn’t overly impressive – it’s more or less in line with what I would deem “reasonable” returns. Yet it should be noted that the slow growth didn’t prevent you from increasing your wealth. Moreover, the annual return is in-line with or better than what Procter & Gamble, Caterpillar (NYSE: CAT ), UnitedHealth (NYSE: UNH ) or Intel (NASDAQ: INTC ) provided during the same time period. Its not always about the growth, the interaction of the value components also makes a difference. The reason that Consolidated Edison provided reasonable returns was related to two factors: investors were willing to pay a higher of a valuation and the dividend yield started near 5%. Moving forward, you likely want to think about the repeatability of those components. More than likely Consolidated Edison isn’t going to “wow” you with its upcoming growth. Analysts are presently expecting intermediate-term growth in the 2% to 3% range , much like the past decade. As such, the valuation that you require to invest should be paramount. You can pay a bit more for a company that grows by 8% or 10% and “grow out of” a slight premium paid. When you have a much lower growth rate, your margin of error is much lower. As a for instance, imagine company that grows earnings-per-share by 2% annually over the next five years. If you paid say 17 times earnings and it later trades at 15 times earnings, this results in negative capital appreciation. On the other hand, if you pay 17 times earnings for a company that grows by 8% per year and it later trades at 15 times earnings, this equates to 5.3% annual price appreciation. The penalty of “overpaying” is far less severe for faster growing companies. Thus in contemplating an investment in Consolidated Edison you should be especially mindful of the price paid. (Naturally this holds for any company, but even more so with slower expected growth.) Over the past decade shares have routinely traded in the 12 to 18 P/E range. While its possible to see a valuation outside of this range, you’d likely want to demand something on the lower end of the spectrum in order for the security to look comparatively compelling. The second important thing to note is that the dividend payment is apt to play a much larger role than your typical investment. You know the rate of dividend increases likely isn’t going to be substantial, so once more the focus is on demanding a reasonable starting yield. It’s the high starting yield that allows an investment in Consolidated Edison to rival that of the Procter & Gamble’s of the world. Without a reasonable yield premium the investment doesn’t have many more levers at its disposable. An investment in Consolidated Edison is an investment in the dividend, with the occasional revision in valuation. Alternatively, with a reasonable dividend yield and reinvestment, it’s a reliable way to see your income increase by 5% or 6% annually. In short, just because Consolidated Edison hasn’t grown very fast doesn’t mean that it can’t be a reasonable investment. As illustrated above, just 1% annual revenue growth turned into 7%+ yearly returns. Moving forward, the same drivers – valuation and dividends received – will continue to play an outsized role in future returns. As such, focusing on these components from a slow growing utility becomes central to a successful investing process.