Tag Archives: year

2014 Diversified ETF Portfolio: Annual Performance, Replacing BOND With TLT And 2015 Estimates

Summary The S&P 500 had another great year with 14% annual return (including dividends). The diversified portfolio only returned 3.6%, held back by Business Development Company ETF. Portfolio yield exceeded the S&P 500 by 118 basis points. Pimco’s BOND ETF was replaced by TLT. TLT chosen based on correlation. S&P 500 Fundamentals need to continue to grow to have a positive 2015 year. Here are the fourth quarter and full-year results of a diversified ETF portfolio. The holding in BOND was replaced with TLT because of a change in my thesis. BOND was included to cover the bond portion of the portfolio because my thesis was that the expertise of Bill Gross would help BOND perform during calendar year 2014. Once Bill Gross quit Pimco, it was time for a change. Q1 Update: Link Q2 Update: Link Q3 Update: Link MARKET PERFORMANCE The S&P 500, as measured by the Vanguard S&P 500 ETF (NYSEARCA: VOO ), was up 13.97% (including dividends) for CY2014. Not too shabby. (click to enlarge) Eight of the nine sectors were positive for the year. Energy was the one sector that was negative. Technology, health, and utilities all outperformed the S&P 500. The utilities sector was the best performer, up 24.4%, which is usually considered a safe harbor investment. According to my calculations, a portfolio equal weighted in each sector would have returned 11% for the year. Throughout CY2014, bond yields fell. Yields closed the year at 2.2%. There was a significant drop during Q4, which is reflected in the performance of TLT. A drop in yields results in a price increase for the bonds. PORTFOLIO PERFORMANCE For Q4, the portfolio was up 2% while the S&P 500 was up 4.89%. For the year, the portfolio was up 3.62% while the S&P 500 was up 13.97%. PowerShares Buyback Achievers (NYSEARCA: PKW ), PowerShares Fundamental Pure Small Value (NYSEARCA: PXSV ), and the iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ) all outperformed the S&P 500 for the quarter. Market Vectors BDC Income ETF (NYSEARCA: BIZD ), Vanguard FTSE Emerging Markets ETF (NYSEARCA: VWO ), and SPDR Barclays High Yield Bond (NYSEARCA: JNK ) all posted negative returns for the quarter. (click to enlarge) For the year, only the Market Vectors BDC Income ETF was down; even with its high dividend yield, it was not able to generate a positive return. No one fund outperformed the S&P 500 for the year. The Buyback Achievers came close and the Small Value fund posted a decent rally at year’s end, along with the Bond ETF. (click to enlarge) Here is the performance of the portfolio for the year: BOND FUND REPLACEMENT Why did I replace PIMCO Total Return ETF with iShares 20+ Year Treasury Bond ETF? The purpose of the bond fund is to give some negative correlation to the portfolio and help smooth out some returns over a long time frame (I know, I am monitoring the portfolio on a quarterly basis). As soon as it was announced that Bill Gross was leaving Pimco, I ran a correlation matrix on several possible bond funds. I used the following funds: iShares TIPS Bond (NYSEARCA: TIP ) Vanguard Short-Term Infl-Prot Secs ETF (NASDAQ: VTIP ) iShares Core Total U.S. Bond Market ETF (NYSEARCA: AGG ) Vanguard Intermediate-Term Corp Bd ETF (NASDAQ: VCIT ) SPDR Barclays Capital Convertible Bond ETF (NYSEARCA: CWB ) iShares 20+ Year Treasury Bond Vanguard Short-Term Corporate Bond ETF (NASDAQ: VCSH ) Vanguard Long-Term Corporate Bond ETF (NASDAQ: VCLT ) Here are the results of the correlation matrix (as of 3-Oct-2014): (click to enlarge) TLT has the largest negative correlation to the three equity funds (PKW, BIZD, and PXSV) and therefore, I choose it as the replacement for BOND. Note: The ETF share price used for the correlation matrix was sourced from Yahoo! Finance. TIP came in a very close second. As an exercise, I took the 10 worst days for PXSV (01-Jan-2014 through 03-Oct-2014) and compared that with TLT and TIP. TIP actually had the least correlation over this time frame. LOOKING FORWARD Last year at this time, I estimated a 10% return for the S&P 500. The S&P 500 outpaced that estimate. I estimated a 4.5% increase in sales per share with an 8.5% EPS margin. The actual sales per share increase was only 3.5%, but the EPS margin was 9.18%, which resulted in an actual EPS of $105.96, as compared with my $99.07 EPS estimate. I estimated a 20.5 multiple but the multiple (for the trailing twelve months) came in at 19.4, still allowing a greater than 10% return for the S&P 500. How about for 2015? I looked at three scenarios below. With the continuing improving employment numbers and the recent robust GDP numbers, I would expect the S&P to return between 2.5% and about 14% for the year. Large range, I know. Looking at the three scenarios below, it does not take much degradation in the fundamentals to get a negative return for the year. I was surprised how easy it would be to get a -11% annual return, using what I would still consider to be some decent fundamental performance. (click to enlarge) Disclosure: The author is long VOO, VWO. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

3 Under-The-Radar ETF Breakout Contenders

Summary With the market trading in a wide range since the beginning of the year, many momentum investors may be searching for signs of life in alternative areas. Several ETFs are showing positive technical divergences or signs of breakout that may warrant closer scrutiny. Solar stocks, consumer discretionary, and mid-cap stocks are excellent contenders. With the SPDR S&P 500 ETF (NYSEARCA: SPY ) trading in a wide range since the beginning of the year, many momentum investors may be searching for signs of life in alternative areas of the market. Just because the broad measure of U.S. stocks is waffling sideways, doesn’t mean that there aren’t suitable ETF candidates to add to your watch list at this juncture. The following funds are just a few of the ETFs I have been monitoring over the past several weeks as they show positive technical divergences from their peers. Guggenheim Solar ETF (NYSEARCA: TAN ) Solar stocks had a horrific year in 2014 that included various whipsaws and other erratic price action. They finished the year markedly lower despite positive net strength in large-cap indices such as SPY. However, they may be looking to turn those fortunes around in 2015 and have been showing a bias towards higher prices since bottoming in January. TAN is the largest renewable energy ETF with over $300 million in total assets. This fund tracks 29 global solar energy companies engaged in the manufacture, installation, and maintenance of solar power equipment. The index is composed of 47% U.S.-based companies, with the remaining allocation spread amongst China, Hong Kong, and other smaller nations. As you can see on the chart below, TAN had some brief consolidation at its 50-day moving average and is now marching back towards its long-term 200-day moving average. Since the beginning of the year, this ETF has gained more than 9% and is continuing to show positive relative strength versus many sector alternatives. Aggressive growth investors who can stomach heightened volatility may want to research solar ETFs as a possible comeback story for 2015. Consumer Discretionary Select Sector SPDR (NYSEARCA: XLY ) Consumer discretionary stocks are another area of the market that has shown strong momentum through earnings season. XLY is heavily dominated by media, specialty retail, and other luxury goods sellers such as Walt Disney (NYSE: DIS ) and Home Depot (NYSE: HD ). This ETF contains 87 large-cap stocks and charges an expense ratio of 0.15%. The strong vote of confidence for this sector came when it recently broke out above its 2014 highs and is continuing to show impressive overall strength. Many investors consider this ETF to be an indicator of consumer health, and judging by the price action, the trend of consumer spending habits continues in earnest. XLY will certainly be an important sector of the market to watch as a potential growth-focused momentum trade in 2015. iShares Core S&P Mid-Cap ETF (NYSEARCA: IJH ) Mid-cap stocks are another area of the market, similar to XLY, which has newly peeked out above its 2014 highs. IJH is the largest ETF in this space that tracks 400 mid-sized companies with market capitalization between $1.5 billion and $5 billion. This fund has over $24 billion in total assets and charges a modest expense ratio of 0.12%. While mid-cap stocks don’t always get as much recognition as their large or small-cap peers, they do have the potential to be successful long-term growth candidates. The positive technical move in this space should be viewed as a sign of building momentum that may lead to outperformance versus SPY in 2015. For my growth clients, I am accessing the mid-cap space through the Vanguard Mid-Cap ETF (NYSEARCA: VO ). This passive index follows a similar basket of 375 stocks and includes a lower expense ratio at 0.09%. The Bottom Line These growth themes show promising characteristics of momentum and strength versus plain-vanilla ETF alternatives. However, any new entrants in these ETFs should implement a stop loss or sell discipline to define your risk management strategy. In addition, when starting a new position, I typically recommend breaking up the trade in pieces so that you can add slowly over a limited time. This allows you to better control your cost basis and allocation size. Disclosure: The author is long VO. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article. Additional disclosure: David Fabian, FMD Capital Management, and/or clients may hold positions in the ETFs and mutual funds mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell, or hold securities.

3 Low Beta ETFs For A Choppy Market

The U.S. stock market is caught in a web of uncertainty since the start of this year and sees little chance of it clearing up in the months ahead. This is primarily thanks to geopolitical tensions, sliding oil prices, turmoil in Greece, sluggish European and Japanese growth, weakness in key emerging markets, and weak corporate earnings. Additionally, the currency war has escalated with many countries choosing loose monetary policies to stimulate growth and prevent deflationary pressure. This is in contrast to the U.S. Fed policy of tightening the stimulus. The diverging central bank policies have propelled the U.S. dollar against the basket of various currencies to multi-year highs. Further, both the World Bank and International Monetary Fund (IMF) recently cut their growth forecast for the next two years. The World Bank projects the global economy to expand 3% this year and 3.3% in the next, down from 3.4% and 3.5%, respectively. On the other hand, IMF lowered its global growth outlook to 3.5% from 3.8% for 2015, representing the sharpest cut in three years. Growth for 2016 is forecast at 3.7% versus the previous projection of 4%. Another reason for the recent market pullback has been the U.S. monetary policy, wherein the Fed is on track to raise interest rates but the timing is still uncertain. Amid these uncertainties, investors are seeking exposure to alternative sources of income rather than equity and bonds. For these investors, an allocation to low beta funds could be the safest bet, as long as the disorder lingers. Why Low Beta? Beta measures the price volatility of the stocks or funds relative to the overall market. It has a direct relationship to the market movements. A beta of 1 indicates that the price of the stock or fund tends to move with the broader market. A beta of more than 1 indicates that the price tends to move higher than the broader market and is extremely volatile while a beta of less than 1 indicates that the price of the stock or fund is less volatile than the market. With that being said, low beta ETFs exhibit greater levels of stability than their market sensitive counterparts and will usually lose less when the market is crumbling. Though these have lesser risks and lower returns, the funds are considered safe and resilient amid uncertainty. However, when markets soar, these low beta funds experience lesser gains than the broader market counterparts and thus, lag their peers. Given the huge levels of volatility in the market, investors could find the following ETFs as intriguing options until the market track becomes clear. WisdomTree Managed Futures Strategy ETF (NYSEARCA: WDTI ): Beta – 0.02 This actively managed fund seeks to deliver positive returns in rising or falling markets that are uncorrelated to equity or fixed income returns. It uses a quantitative, rules-based strategy to provide returns that correspond to the performance of the Diversified Trends Indicator and invests in a combination of U.S. treasury futures, currency futures, commodity futures, commodity swaps, U.S. government and money market securities. This strategy seeks to benefit from both rising or declining price trends via long and short positions in commodity, currency, and U.S. treasury futures market. The product has amassed $209.9 million in asset base and trades in a light volume of about 34,000 shares a day. Expense ratio came in at 0.95%. The fund has added 0.3% so far in the year. QuantShares U.S. Market Neutral Size ETF (NYSEARCA: SIZ ): Beta – 0.14 This fund invests in low capitalization securities while at the same time short high capitalization stocks of approximately equal dollar amounts within each sector. It seeks to deliver the spread return between high and low ranked stocks. This can easily be done by tracking the Dow Jones U.S. Thematic Market Neutral Size Index. The product holds a long position in 200 stocks and a short position in another basket of 201 stocks. It will generate positive returns when the basket of long stocks outperforms the short portfolio. The fund is expensive charging 1.49% in fees per year and trades in a paltry volume of under 1,000 shares per day. BTAL is unpopular having AUM of $1.2 million and has added 0.9% so far this year. IQ Hedge Market Neutral ETF (NYSEARCA: QMN ): Beta – 0.19 This product tracks the IQ Hedge Market Neutral Index, which seeks to replicate the risk-adjusted return characteristics of hedge funds using a market neutral hedge fund strategy. It invests in both long and short positions in asset classes while minimizing exposure to systematic risk. This strategy seeks to have a zero beta exposure to one or more systematic risk factors including the overall market (as represented by the S&P 500 Index), economic sectors or industries, market cap, region and country. The portfolio consists of a variety of ETFs including a number of fixed income funds and equity funds. The ETF allocates heavy weights in fixed income products like the Vanguard Short-Term Bond ETF (NYSEARCA: BSV ), the iShares 1-3 Year Treasury Bond ETF (NYSEARCA: SHY ) and the Vanguard Total Bond Market ETF (NYSEARCA: BND ) focusing on Treasury and corporate securities that are of high quality. The ETF is often overlooked by investors in the hedge fund space with AUM of just $15.3 million and average daily volume of about 3.000 shares. It charges 85 bps in fees and expenses and is up 0.2% in the year-to-date timeframe. Bottom Line These products could be worthwhile for low risk tolerance investors and have the potential to outperform the broad market, especially if market uncertainty persists over the coming months.