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Solid Holdings And Growing Dividends Are On Sale? I’d Like To Buy Those

Summary The Schwab U.S. Equity Dividend ETF offers investors very solid growth in dividends. Looking at the combination of yield and growth rate makes SCHD look like a very compelling long term investment. SCHD has been slightly less volatile than the S&P 500. I don’t want to stop buying equity when prices drop, so I’m buying the slightly less volatile equity. The holdings are a solid batch of companies with strong dividend histories and established market positions. Lately I’ve been looking for ETFs that offer investors more safety. We are seeing macroeconomic issues with corporate profits after tax making up record percentages of GDP and a stock market that, at least measured by the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) is getting quite expense when we measure price to earnings or price to sales. That creates a real problem for investors looking for investments that have respectable yields without absurd levels of risk. In my opinion, one of the better shelters for the potential volatility is the Schwab U.S. Dividend Equity ETF (NYSEARCA: SCHD ). How expensive is the market? To demonstrate the relatively high prices, I grabbed the following chart: (click to enlarge) I try not to focus too much on any single measure. However, it is worth noting that price to sales levels are fairly high and that is enough to concern me and encourage me to focus on using more conservative allocations. Some sectors such as telecommunications are seeing substantial pricing wars that will drive down both sales values and profit levels. That makes me fairly bearish about the outlook for that sector. In the same way, we have seen mining companies facing very high fixed costs. Rather than respond to lower prices by cutting production, many initially attempted to increase production so the fixed costs could be spread over more units of production. From a macroeconomic perspective, I think thinner profit margins stemming from fierce competition are very healthy for the long term economy. More intense competition drives more efficient allocation of resources and lower costs are a very material benefit for consumers. Despite those gains, I want to be careful not to overextend my portfolio in buying up companies with deteriorating earnings. I’ve had quite enough of that pain from Freeport-McMoRan (NYSE: FCX ) when I didn’t predict that copper prices would get smashed by hedge funds shorting copper futures contracts to express a bearish view on China. That was an interesting lesson to learn. It encouraged me to be more careful about firms that are susceptible to seeing declining pricing power. Why SCHD is great While SCHD offers investors some appealing characteristics, like a .07% expense ratio, I’m finding more to love than the low holding costs. SCHD is offering some pretty great dividend growth history. 2011 was an incomplete year and is not a fair comparison. The full year data begins in 2012. The impressive thing is that 2015 is also an incomplete year but it is already matching the distributions for 2013. This is a dividend ETF with a respectable yield and it is a solid choice as a core portfolio holding. Holdings The following chart shows the top 10 holdings: (click to enlarge) This is a pretty good batch. I can’t help but notice that they are putting heavy weights on some of the companies that seem to be out of favor right now. Verizon Communications (NYSE: VZ ) is an example of one of the companies that I’m concerned about as Sprint (NYSE: S ) wages a massive price war. On the other hand, I’m left wondering how long the fierce competition will last. In a market that is so heavily concentrated, it seems like a reduction in intensity of competition would immediately benefit all companies. You might wonder who would move first to calm the battle. My guess is Sprint, if they stopped battling I think Verizon and AT&T (NYSE: T ) would both quickly drop back into a more complacent strategy. I have to admit that I’m pretty big on seeing the heavy allocations to Exxon Mobil (NYSE: XOM ) and Chevron (NYSE: CVX ) because I expect those mammoths to get back on track. Investors may believe that cheaper gas is here to stay, but I think money in politics is here to stay for much longer. Don’t expect XOM and CVX to go quietly into the night. One way or another, the major gas companies will put up a fight for their shareholders. The Coca-Cola Company (NYSE: KO ) and Pepsi (NYSE: PEP ) have both trailed the S&P 500 dramatically over the last five years. I’ll take that risk because they have a great distribution system in place. While junk food may be on the way out and healthier food is on the way in, these companies still have an incredible economic moat. They can still acquire the more attractive products and utilize their system of delivery to add substantial value to the process. Remember KO wasn’t too shy about taking a major position in Monster Beverage Corp. (NASDAQ: MNST ) when they recognized that MNST had a very desirable product that needed a stronger global distribution channel. Conclusion When the volatility in the market gets ugly, I’d rather not sit on the sidelines. This great dividend ETF is just what I need to keep acquiring the kind of dividend champions I want to hold for decades. Now if the price would just drop a little further and trigger my latest buy order… Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SCHD, FCX 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.

ETFs Driving Big Gains For Oil Shorts

Summary Money moving in and out of long and short oil ETFs, as low oil price visibility creates more uncertainty. Retail investors should focus on only holding for a very limited time period if they go short. There is nothing to suggest oil prices can rise to sustainable levels in the near future. Traders with a high tolerance for leveraged risk have been making a killing by shorting oil in 2015, led by a number of ETFs that have been, in some cases, up well over 200 percent on the year. There has been a lot more volatility than usual in these types of instruments, as headlines contradicting one another on the movement of the price of oil have money moving in an out of ETFs catering to short and long outlooks for oil. Some large players have been short oil all year, but for the retail investor, it would be wise to take a position in these ETFs for a very short period of time. Some ETFs even suggest and encourage that to their investors, saying in many cases they’re built to hold a position for only one day. All the volatility and inflows and outflows reinforce the fact no one really knows where the price of oil will go, with some like Goldman Sachs saying it could plunge to as low as $20 per barrel, and OPEC recently saying it’s looking at it rebounding to $80 per barrel. In the case of OPEC, that’s primarily because it believes a decrease in American production will begin to offset excess inventory, and start to drive up prices. That is based upon its assessment it has beaten down a lot of the tight or shale oil drillers, which it believes will be a sustainable event. I disagree with that because of the plethora of drilled but uncompleted (DUC) wells, which can quickly and inexpensively be brought online in response to an increase in the price of oil. The truth is, as the market is showing, it could go either way. ETF oil shorting products Before getting into a couple of products and some interesting facts about their performance and why money has been changing hands, it’s worth looking at a couple of elements related to these types of ETFs. As already mentioned, most if not all retail investors should be thinking very limited holding periods for ETFs that short oil. They are extremely volatile, and can move up or down very quickly. If using leverage to make the trade, when including daily rebalancing, the short term movement can be very different than what is expected of the long-term performance data of the ETF or ETN. At this time risk/reward is worth the plunge for those that have some spare capital and a high tolerance for risk. There has to be the belief the price of oil will continue to go down to enter this play. I’m not in this particular play at this time, but I’ve done it with other commodities, and there is a lot of money to be made if you’re right in your assessment of the market. That said, leverage is becoming more of a risk as things get murkier, as conflicting outlooks suggest the underlying catalysts for either direction are no longer as sure – at least in the mind of traders – as they were earlier in the year. That’s one of the major reasons, even as oil has remained under pressure, a lot of money has been taken off the table. VelocityShares 3x Inverse Crude Oil ETN (NYSEARCA: DWTI ) Since DWTI has been one of the top performers in the sector in 2015, we’ll take a look at it first. DWTI offers 3x or 300% exposure to how the S&P GSCI Crude Oil Index ER performs on a daily basis. It does have a fairly high annual fee of 1.35 percent. Since this and others are so volatile, I’m not going to even attempt to look at how much it’s up for the year. It changes significantly in a very short period of time, as you can see in the chart below. Its prospectus states it’s “suitable” to be held by most investors for one day. This is a short-term play where it simply doesn’t matter. Again, larger investors can hold longer if they believe the trend will remain down, but now that the price of oil has fallen so much over the last year, leveraged players are under increasing risk if things surprisingly and abruptly turn around. Daily average volume is a solid 1.8 million shares, but as with its share price, its asset base can be very volatile. (click to enlarge) source: YahooFinance PowerShares DB Crude Oil Short ETN (NYSEARCA: SZO ) Since SZO doesn’t use leverage, it is probably one of the safer instruments in this space, if the term ‘safe’ can be applied. It offers inverse exposure to WTI crude, tracking the Deutsche Bank Liquid Commodity Index, which covers how well a group of oil futures contracts are performing. Over the last three months it is up about 30 percent, and has an expense ratio of 0.75 percent. It trades far less than DWTI, with a 3-month daily average of approximately 35,000 shares. Not nearly as popular as DWTI, it only has net assets of about $28.59 million. (click to enlarge) source: YahooFinance ProShares UltraShort Bloomberg Crude Oil ETF (NYSEARCA: SCO ) My final short to look at is SCO; its goal is to attempt to provide double the daily inverse return of the performance of the Bloomberg WTI Crude Oil Subindex. Over the last three months it has generated a return of about 56 percent. Total expenses amount to 95 basis points. I wanted to highlight SCO because it has been one of the top performing ETFs this year, and yet over $175 million has been removed from assets, according to Bloomberg. That points to growing skittishness over the uncertainty the price of oil is going to go. (click to enlarge) source: YahooFinance The United States Oil ETF (NYSEARCA: USO ) Since USO is a long play on oil it is included to confirm there is a lot of money moving in and out of the long and short ETFs, and not all of it is intuitive. With USO, it has enjoyed near $2.75 billion in new cash investment, even though it has lost over 50 percent of its value so far in the last twelve months. There is no doubt this represents investors believing there is going to be a rebound in oil prices; at least in the short term. This, combined with the outflows from SZO, reiterate concerns over the risk associated with using leverage to short oil, and having no visibility on where the price of oil is going. (click to enlarge) source: YahooFinance Conclusion Shorting oil using ETFs has been very lucrative this year, and my thought is there is a more room to make money for those shorting oil within a limited time frame. For myself, I wouldn’t use leverage any longer because of the low visibility factor concerning oil prices, and I wouldn’t stay in longer than a day. I’m primarily speaking to retail investors here, although until there is more clarity in the short term, larger investors will likely play by similar rules, if they continue to use a shorting strategy in oil at all. My final thought concerning oil is a lot of the headlines are misleading because of the fact OPEC know larger shale producers can put production on hold if the price of oil continues to fall, and if it rebounds, can quickly respond within less than a month with its DUC wells. So the idea it can shut down a competitor like it has in the past, in my opinion, is a misguided one. Shale oil isn’t Russian oil or other types of oil that may take a lot of time to get back into production once it has been shut down. Companies with shale exposure can simply bide their time and wait until the price of oil moves up, and they can almost immediately start production. OPEC can do nothing to stop the larger shale companies. And even if the smaller capitalized companies go out of business, it doesn’t take away the fact the oil is still there. Larger companies will acquire the assets. OPEC has signaled it will continue to produce oil in order to maintain market share. While that has resulted in U.S. companies cutting back on production, there is so much supply out there, it will take a lot more to provide support for oil prices. There is a message being sent, but OPEC doesn’t have the teeth it had before shale, and going forward it has to deal with the fact that once production is lowered and prices start going up, shale companies will simply ramp up production and the cycle will continue. That means eventually OPEC will have to lower production if oil price are to increase at sustainable levels. With Russia so dependent on its oil for revenue, it’s not going to do so, which means this is a long-term trend that at this time, doesn’t have an answer outside of OPEC losing market share. For that reason these ETFs built to take advantage of low oil prices, will make money for those willing to take the risk and holding for very short periods of time. 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.

XLY: Do You Need More Aggressive Allocations?

Summary XLY offers investors a fairly aggressive portfolio that is more volatile than the market but benefits from diversification. Most of the allocations seem very reasonable, but MCD looks like a fairly conservative option. If an investor is going to buy into this aggressive fund, they should have a rebalancing plan in place. 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. One of the funds that I’m reviewing is the Consumer Discretionary Select Sector SPDR ETF (NYSEARCA: XLY ). I’ll be performing a substantial portion of my analysis along the lines of modern portfolio theory, so the goal is to design portfolios that perform well on a risk adjusted basis, not portfolios that necessarily beat the market. Expense Ratio The expense ratio for XLY is .15%. That isn’t too bad. I’m usually expecting to see high expense ratios that drain away the investor’s money, but XLY scores well in this regard. Largest Holdings (click to enlarge) The top of the holdings for XLY is Amazon (NASDAQ: AMZN ). For investors seeking to find companies trading at low fundamentals such as P/E ratios, Amazon’s history of not turning a meaningful profit may be a concern. While earnings are a concern for Amazon, sales have been an area of strength as the company blossomed over the last 15 years and has become a household name. The difficulty for this portfolio is the reliance on discretionary spending. This is a reason for the portfolio to show some substantial volatility when investors are concerned about another recession and falling personal expenditures. The interesting holding here is McDonald’s (NYSE: MCD ) coming in as the 5th holding. I would not put MCD in the same category as the other top holdings. MCD pays a very strong dividend, has a long history of doing so, and in a bad economy the restaurant can pick up new customers that are trading down to buy McDonald’s products rather than more expensive food. The rest of the top 10 holdings are all companies that I would expect to perform best when consumers are readily disposing of income. Building the Portfolio This hypothetical portfolio has a fairly aggressive allocation for the middle aged investor. Only 25% of the total portfolio value is placed in bonds and a fifth of that bond allocation is given to high yield bonds. If the investor wants to treat an investment in an mREIT index as an investment in the underlying bonds that the individual mREITs hold, then the total bond allocation would be 35%. Given how substantially mREITs can deviate from book value, I’d rather consider the allocation as an equity position designed to create a very high yield. This portfolio is probably taking on more risk than would be appropriate for many retiring investors since a major recession could still hit this pretty hard. If the investor wanted to modify the portfolio to be more appropriate for retirement, the first place to start would be increasing the bond exposure at the cost of equity. However, the diversification within the portfolio is fairly solid. Long term treasuries work nicely with major market indexes and I’ve designed this hypothetical portfolio without putting in the allocation I normally would for equity REITs. An allocation is created for the mortgage REITs, which can offer some fairly nice diversification relative to the rest of the portfolio and they are a major source of yield in this hypothetical portfolio. The portfolio assumes frequent rebalancing which would be a problem for short term trading outside of tax advantaged accounts unless the investor was going to rebalance by adding to their positions on a regular basis and allocating the majority of the capital towards whichever portions of the portfolio had been underperforming recently. Because a substantial portion of the yield from this portfolio comes from REITs and interest, I would favor this portfolio as a tax exempt strategy even if the investor was frequently rebalancing by adding new capital. The portfolio allocations can be seen below along with the dividend yields from each investment. Name Ticker Portfolio Weight Yield SPDR S&P 500 Trust ETF SPY 35.00% 2.06% Consumer Discretionary Select Sector SPDR ETF XLY 10.00% 1.36% First Trust Consumer Staples AlphaDEX ETF FXG 10.00% 1.60% Vanguard FTSE Emerging Markets ETF VWO 5.00% 3.17% First Trust Utilities AlphaDEX ETF FXU 5.00% 3.77% SPDR Barclays Capital Short Term High Yield Bond ETF SJNK 5.00% 5.45% PowerShares 1-30 Laddered Treasury Portfolio ETF PLW 20.00% 2.22% iShares Mortgage Real Estate Capped ETF REM 10.00% 14.45% Portfolio 100.00% 3.53% The next chart shows the annualized volatility and beta of the portfolio since April of 2012. (click to enlarge) A quick rundown of the portfolio Using SJNK offers investors better yields from using short term exposure to credit sensitive debt. The yield on this is fairly nice and due to the short duration of the securities the volatility isn’t too bad. PLW on the other hand does have some material volatility, but a negative correlation to other investments allows it to reduce the total risk of the portfolio. FXG is used to make the portfolio overweight on consumer staples with a goal of providing more stability to the equity portion of the portfolio. FXU is used to create a small utility allocation for the portfolio to give it a higher dividend yield and help it produce more income. I find the utility sector often has some desirable risk characteristics that make it worth at least considering for an overweight representation in a portfolio. VWO is simply there to provide more diversification from being an international equity portfolio. While giving investors exposure to emerging markets, it is also offering a very solid dividend yield that enhances the overall income level from the portfolio. XLY offers investors higher expected returns in a solid economy at the cost of higher risk. Using it as more than a small weighting would result in too much risk for the portfolio, but as a small weighting the diversification it offers relative to the core holding of SPY is eliminating most of the additional risk. REM is primarily there to offer a substantial increase in the dividend yield which is otherwise not very strong. The mREIT sector can be subject to some pretty harsh movements and dividends from mREITs should not be the core source of income for an investor. However, they can be used to enhance the level of dividend income while investors wait for their other equity investments to increase dividends over the coming decades. If you want a really quick version to refer back to, I put together the following chart that really simplifies the role of each investment: Name Ticker Role in Portfolio SPDR S&P 500 Trust ETF SPY Core of Portfolio Consumer Discretionary Select Sector SPDR ETF XLY Enhance Expected Returned First Trust Consumer Staples AlphaDEX ETF FXG Reduce Beta of Portfolio Vanguard FTSE Emerging Markets ETF VWO Exposure to Foreign Markets First Trust Utilities AlphaDEX ETF FXU Enhance Dividends, Lower Portfolio Risk SPDR Barclays Capital Short Term High Yield Bond ETF SJNK Low Volatility with over 5% Yield PowerShares 1-30 Laddered Treasury Portfolio ETF PLW Negative Beta Reduces Portfolio Risk iShares Mortgage Real Estate Capped ETF REM Enhance Current Income Risk Contribution The risk contribution category demonstrates the amount of the portfolio’s volatility that can be attributed to that position. Despite TLT being fairly volatile and tying SPY for the second highest volatility in the portfolio, it actually produces a negative risk contribution because it has a negative correlation with most of the portfolio. It is important to recognize that the “risk” on an investment needs to be considered in the context of the entire portfolio. To make it easier to analyze how risky each holding would be in the context of the portfolio, I have most of these holdings weighted at a simple 10%. Because of TLT’s heavy negative correlation, it receives a weighting of 20% and as the core of the portfolio SPY was weighted as 50%. Correlation The chart below shows the correlation of each ETF with each other ETF in the portfolio. Blue boxes indicate positive correlations and tan box indicate negative correlations. Generally speaking lower levels of correlation are highly desirable and high levels of correlation substantially reduce the benefits from diversification. (click to enlarge) Conclusion XLY offers investors a fairly aggressive allocation that is heavy on companies that should succeed when the market is doing well and should struggle more during a market downturn. To take advantage of the investment investors would want to be ready to buy into the ETF when fear is stronger in the economy. In my opinion, the most effective way to do that would be to set up an automatic rebalancing schedule or use allocation bands and buy in/sell off whenever the allocation was exceeding the desired range. Due to some diversification benefits, a small allocation can be used in a portfolio without driving up the total risk of the portfolio. However, investors aiming to use the ETF for more than 10% or so of the portfolio may find their volatility across the portfolio increasing. An investor could counteract some of that additional risk by increasing their allocation to treasury securities with an ETF like PLW where the correlation between the two funds is a negative .4. Despite a fairly low expense ratio, if an investor is using a large enough portfolio they may still find it worthwhile to imitate the portfolio by buying up the major holdings because so much of the portfolio is held in the top 10. For the investor that wants to get a little more aggressive without a large enough portfolio to replicate XLY, it looks like a fairly solid option for the sector. 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.