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  • Retirement Income ETFs vs. Income Mutual Funds: An Update

    09/11/2011

    We first compared asset allocation portfolios using dividend ETFs (and bond ETFs) and those using income mutual funds on SeekingAlpha.com Retirement Income Investing: ETFs vs. Mutual Funds more than two months ago. Let's review these two plans: Retirement Income ETFs  and  Schwab Income Mutual Fund Select List.

    Here are the asset classes covered by the two plans:

     

    The list of minor asset classes covered by Retirement Income ETFs The list of minor asset classes covered by Schwab Income Mutual Fund Select List
    Diversified Emerging Mkts: EEM, VWO, DEM
    Emerging Markets Bond: EMB, PCY
    Equity Energy: AMJ
    Foreign Large Value: PID, IDV
    Global Real Estate: RWX
    High Yield Bond: HYG
    Inflation-protected Bond: TIP
    Intermediate Government: IEI
    Intermediate-term Bond: CIU, CORP, MBB
    Large Blend: VIG
    Large Value: DVY, SDY, VYM, FVD
    Long Government: IEF, TLT
    Long-term Bond: LQD, VCLT
    Mid-cap Value: PEY
    Miscellaneous Sector: PFF
    Muni National Long: MUB
    Muni Short: SHM
    Real Estate: IYR, ICF, VNQ
    Short Government: SHY
    Short-term Bond: CSJ, VCSH
    World Bond: BWX, WIP
    Emerging Markets Bond: TGINX
    Foreign Large Blend: SICNX, LISOX
    Foreign Large Value: AAIPX
    High Yield Bond: STHTX, MWHYX
    Inflation-protected Bond: ACITX
    Intermediate Government: SWGSX, CPTNX
    Intermediate-term Bond: SWIIX, SAMFX, PTTDX, PGBOX, MWTRX, FTRFX
    Large Blend: SWANX, TICRX, PRBLX
    Large Growth: SWLSX, JENSX
    Large Value: TWEIX, PQIAX
    Mid-cap Blend: NMMCX
    Mid-cap Value: ARDEX
    Multisector Bond: PONDX
    Muni National Interm: SWNTX, TWTIX, STTBX
    Muni National Long: NOTEX, ACLVX
    Muni Short: FSHIX
    Real Estate: CSRSX
    Short Government: FIGTX
    Short-term Bond: FSTIX, ACSNX
    Ultrashort Bond: SIGVX
    World Bond: PFODX

     

    Asset Class Retirement Income ETFs Schwab Income Mutual Fund Select List
    REITs 4 1
    Fixed Income 19 24
    Sector Fund 2 0
    Foreign Equity 2 3
    Emerging Market Equity 3 0
    US Equity 6 9
    Other 0 0
    Total 36 37

     

    Little in the two plans' investment choice ratings has changed since then.  As of Sep 9, 2011, Retirement Income ETFs investment choice is rated as average and Schwab Income Mutual Fund Select List investment choice is rated as above average based on MyPlanIQ Plan Rating methodology that was designed to measure how effective a plan's available investment funds are . It has the following detailed ratings:

    Attribute Retirement Income ETFs Schwab Income Mutual Fund Select List
    Diversification great (95%) great (85%)
    Fund Quality below average (29%) great (85%)
    Portfolio Building above average (67%) above average (71%)
    Overall Rating average (64%) above average (80%)



    Performance chart (as of Sep 9, 2011)

    Performance table (as of Sep 9, 2011)

    Portfolio Name2011 YTD1Yr AR1Yr Sharpe3Yr AR3Yr Sharpe5Yr AR 5Yr Sharpe
    Retirement Income ETFs Tactical Asset Allocation Moderate 2.49% 8% 80% 11% 84% 10% 71%
    Retirement Income ETFs Strategic Asset Allocation Moderate -1.16% 5% 42% 5% 23% 3% 14%
    Schwab Income Mutual Fund Select List Tactical Asset Allocation Moderate 3% 9% 84% 11% 101% 10% 92%
    Schwab Income Mutual Fund Select List Strategic Asset Allocation Moderate -2.11% 4% 35% 4% 27% 3% 16%

    Refer to detailed portfolio comparison.

    Again, we are seeing income ETFs can still rival the well selected income mutual funds. This is a good news for income investors in their IRA investments or taxable account investments. ETFs have more flexibility and have a well defined and simple indexing strategy (isn't this what MyPlanIQ is also doing?).

    Disclosure:

    MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.

    Symbols: SPX, VIG, DVY, SDY, ICF, RWX, HYG, LQD, IEF, TLT, TIP, AMJ, TWEIX, LISOX, CSRSX, PTTDX, Retirement Investments, IRAs, ETF Portfolios, Portfolio Management, Risk Management, Dividend ETFs

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  • Dividend Stock ETF Investing: Growth vs. Value

    05/24/2011

    Dividends have been long considered to be an important metric to value a company. In essence, dividends are the cash payment out of earnings from a company. If a company has a mandate to reward its shareholders with part of its earnings, company management is more responsible for and conscious on their excessive earnings: give back to shareholders or plow them back for future growth. This puts a check on executives to curb their growth at any price or expand company bureaucracy for their own purposes. 

    Dividend ETFs are favorable investing vehicles in retirement investing. This is especially important for retirees or baby boomers who are relying dividends as part of their income. These ETFs have been used to build lower risk and higher return asset allocation portfolios such asRetirement Income ETFs.  Please refer to this article for more details. 

    Two popular strateggies are employed in dividend stock investing: dividend growth (or appreciation) vs. dividend weighted (or hogs). The former selects and weighs more heavily on stocks that have a record of increasing dividends over time. The latter basically weighs more heavily on stocks that have higher yields (with the exception of filtering out some lower grade stocks). If one views dividends are a stream of earnings that are actually materialized to be delivered to shareholders over time, the dividend growth approach is like growth at a reasonable price while dividend hogs is like value investing. 

    These two strategies are used for most of dividend stock ETFs. The following is a list of some of these U.S. dividend stock ETFs: 

    Vanguard Dividend Appreciation (VIG) Growth
    Vanguard High Dividend Yield Indx (VYM) Hogs
    First Trust Value Line Dividend Index (FVD) Growth
    iShares Dow Jones Select Dividend Index (DVY) Hogs
    PowerShares HighYield Dividend Achievers (PEY) Growth
    SPDR S&P Dividend (SDY) Hogs

    The dividend growth strategy puts more weight on high quality companies that have increased their dividends over time. The high dividends are not the primary focus. Companies that increase dividend payout over time in general should have better cash flow and higher confidence in their future earnings. They are also more shareholder friendly. Such strategy has been long adopted in investment communities. Some of the best investment newsletters such as Valueline and Investment Quality Trends have had model portfolios employing this approach for more than 30 years.

    The high dividend (or so called 'dividend hog') strategy, on the other hand, might run into dangers of investing in companies that merely try to maintain high dividends to appeal to investors.

    The following table & chart show the performance of the above ETFs: 

    Portfolio Performance Comparison

    Portfolio/Fund Name1Yr AR1Yr Sharpe3Yr AR3Yr Sharpe5Yr AR5Yr Sharpe
    PEY 19% 105% -2% -9% -4% -18%
    FVD 27% 147% 4% 18% 8% 29%
    DVY 28% 208% 1% 3% 0% -3%
    VIG 25% 143% 5% 18% 5% 16%
    VYM 28% 152% 3% 6%



    From the above, it is clear that dividend growth ETFs outperformed dividend hog ETFs. Part of the reason is that during the 2008-2009 financial crisis, high dividend financial companies such as banks and mortgage companies were severely damaged. 

    Disclosure: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.

    Symbols: VIG, VYM, SDY, FVD, DVY, PEY

     

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  • Recent Calamities Don’t Slow Down US Equities But What’s Coming Next is Anybody’s Guess

    03/30/2011

    Catastrophic events in Japan left the world in shock, and brought an economic powerhouse to a temporary standstill seems to have had little impact on US equities as the immediate drama dies down. North Africa and the Middle East still have the possibility of exploding.

    Despite everything, US growth appears to be still on track. Labor markets and last quarter’s GDP 3.1% shows the economy is moving in the right direction despite consumer sentiment being on the low side which is to be expected with current events.

    US ASSETS CLASS RETURNS

    In US Equities, Large Cap Value is towards the bottom of the table as investors are looking for more risk with higher returns. However, in the light of current events and evidence of risk, large cap (safe) and value (higher return) may be an interesting compromise. Over the past five years US LARGE CAP GROWTH (ETF) has the highest 5 year returns and US MID CAP VALUE (ETF) the highest one year return.


    Description

    Symbol

    1 Yr

    3 Yr

    5 Yr

    1 Yr Sharpe

    SPDR Dow Jones Industrial Aver

    DIA

    12.09%

    0.73%

    3.17%

    72.34%

    Vanguard Dividend Appreciation

    VIG

    11.54%

    3.01%

    NA

    69.21%

    Vanguard Value ETF

    VTV

    11.43%

    -0.38%

    1.43%

    62.67%

    iShares Dow Jones Select Divid

    DVY

    11.23%

    -1.78%

    -1.82%

    73.78%

    iShares Russell 1000 Value Ind

    IWD

    11.04%

    -1.14%

    0.29%

    59.07%

    iShares S&P 500 Value Index

    IVE

    10.73%

    -1.73%

    -0.29%

    55.86%

    SPDR S&P Dividend

    SDY

    8.88%

    3.44%

    2.12%

    54.49%

     

    This chart shows the top large cap value ETFs based on volume and return. Without sufficient volume, any ETF can suffer low liquidity or high trading friction.

    The best performers in the US Large cap value stocks are:

    1.        SPDR Dow Jones Industrial Aver (DIA)

    2.        Vanguard Dividend Appreciation (VIG)

    DIA is star performer in terms of return the 1 year returns are 12.09 % with an average volume of 7.8 million. The 5 year yields are also the highest at 3.17% giving us added confidence.

    VIG is the second best perfomer with the return of 11.54% in year although the VIG is a new ETF being in market for less than 5 years the overall performance is very good the three year yields are 3%.

    The large cap value ETF are those whose values are above that $10 billion, the size of these ETF’s give them the favourable advantage in the event of volatile period as these fund related investments are less riskier due to the change in terms of environmental factor.

    Currently they are out of favour with those who are looking for return but in these days of increasing risk awareness, perhaps they will come back into fashion.

    Disclosure:

    MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.

    Symbols:DIA,DVY,IVE,IWD,SDY,VIG,VTV,SPY,VTI,

    Symbols: (NYSE: DIA), (NYSE: DVY), (NYSE: IVE), (NYSE: IWD), (NYSE: SDY), (NYSE: VIG), (NYSE: VTV), (NYSE: SPY), (NYSE: VTI)

     

     

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  • Tactically Manage An Income Producing Portfolio With Commodity Exposure

    03/25/2011

    Coming out of the great recession, governments around the world have adopted  loose monetary policies to prop up the economies. These include U.S. central bank's QE2 (Quantitative Easing act 2) and Euro Zone's bailout of troubling peripheral countries like Greece. The current natural disasters in Japan and other countries can only add more demand for the stimulus. These policies resulted in commodity hoarding, especially in material hungry emerging economies such as China. 

    It is critical to have anti-inflation anti-currency devaluation component. In this article, we explore the feasibility of adding commodity exposure to an income producing portfolio. Commodity ETFs are effective tools to cope with the current situations. In a portfolio that is designed to preserve capital for retirement needs. However, because of volatile and somewhat dangerous nature of commodites, one needs to actively manage such a portfolio by adopting tactical asset allocation strategies. 

    Income producing ETFs such as high yield stock ETFs and bond ETFs can be used to build a lower risk portfolio for retirement income producing purpose. We study the two plans: one is without commodity exposure and the other one with the exposure. 

    Retirement Income ETFs with Commodities plan is an extension to Retirement Income ETFs: adding extra commodity asset class with PowerShares DB Commodity Index (DBC) and GreenHaven Continuous Commodity (GCC). This plan consists of 37 funds. These funds enable investors to gain exposure to 6 major assets: US Equity, Commodity, Foreign Equity, Emerging Market Equity, REITs, Fixed Income. Compared with Retirement Income ETFs, this plan has two additional ETFs that represent the extra commodity asset class.  

    The following is the list of the candidate ETFs in the Retirement Income ETFs with Commodities

     

    The list of minor asset classes covered by Retirement Income ETFs with Commodities
    Commodities Broad Basket: DBC, GCC
    Diversified Emerging Mkts: EEM, VWO, DEM
    Emerging Markets Bond: EMB, PCY
    Foreign Large Value: PID, IDV
    Global Real Estate: RWX
    High Yield Bond: HYG
    Inflation-protected Bond: TIP
    Intermediate Government: IEI
    Intermediate-term Bond: CIU, CORP, MBB
    Large Blend: VIG
    Large Value: DVY, SDY, VYM, FVD
    Long Government: IEF, TLT
    Long-term Bond: LQD, VCLT
    Mid-cap Value: PEY
    Miscellaneous Sector: PFF
    Muni National Long: MUB
    Muni Short: SHM
    Real Estate: IYR, ICF, VNQ
    Short Government: SHY
    Short-term Bond: CSJ, VCSH
    World Bond: BWX, WIP 

     

    As of Mar 24, 2011, Retirement Income ETFs with Commodities investment choice is rated as and Retirement Income ETFs investment choice is rated as average based on MyPlanIQ Plan Rating methodology that was designed to measure how effective a plan's available investment funds are.  It has the following detailed ratings:

     

    The chart and table below show the historical performance of moderate model portfolios employing strategic and tactical asset allocation strategies (SAA and TAA , both provided by MyPlanIQ). 

    Performance chart (as of Mar 24, 2011)

    Performance table (as of Mar 24, 2011)

    Discussions:

    1. Commodity ETFs are volatile. In fact, PowerShare DB Commodity Index ETF (DBC) lost 32% in 2008 while iShares S&P GSCI Commodity Index (GSG) lost a whopping 46% in the same year. 

    2. Simply adding commodity ETFs to a strategic asset allocation portfolio (buy and hold with regular rebalancing) did not improve the returns in the past five years. This is again due to the big loss incurred in commodtiy ETFs. 

    3. Adding commodity ETFs as fund candidates in a tactical asset allocation portfolio, however, can improve returns. In the past five years, Retirement Income ETFs with Commodities Tactical Asset Allocation Moderate had extra 1% annualized return over Retirement Income ETFs Tactical Asset Allocation Moderate

    In conclusions. commodity ETFs are effective tools to cope with the current situations. In a portfolio that is designed to preserve capital for retirement needs. However, because of volatile and somewhat dangerous nature of commodites, one needs to actively manage such a portfolio by adopting tactical asset allocation strategies. 


    Disclosure:

    MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.

    Symbols:DBC,GCC,GSG,EEM,VWO,DEM,EMB,PCY,PID,IDV,RWX,HYG,TIP,WIP,IEI,CIU,CORP,MBB,VIG, DVY,SDY,VYM,FVD,IEF,TLT,LQD,VCLT,PEY,PFF,MUB,SHM,IYR,ICF,VNQ,SHY,CSJ,VCSH,BWX,

    Exchange Tickers: (DBC),(GCC),(GSG),(EEM),(VWO),(DEM),(EMB),(PCY),(PID),(IDV),(RWX),(HYG),(TIP),(WIP),(IEI),(CIU),(CORP),(MBB),(VIG),(DVY),(SDY),(VYM),(FVD),(IEF),(TLT),(LQD),(VCLT),(PEY),(PFF),(MUB),(SHM),(IYR),( ICF),(VNQ),(SHY),(CSJ),(VCSH),(BWX)

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  • Dividend Stock ETFs Somewhat Defensive But Not Enough to Withstand Market Stress

    03/17/2011

    The week ending on last Wednesday was not easy to investors: the biggest events in the week are the Japanese biggest earthquake in the last 20 years and its increasingly dangerous nuclear reactors meltdown (still unfolding). In the domestic economic side, the housing starts (home construction) in February plunged to the lowest level in almost a year, indicating the housing situation is yet to stabilize. 

    The performance of dividend stock ETFs for the week ending on Wednesday (3/16/2011) varied. Dividend ETFs clearly showed their defensive natures: for U.S. equity, the broadbase S&P 500 (SPY) dropped 4.7%, while SPDR S&P dividend (SDY) dropped 4.1%, iShares Dow Jones Dividend Select (DVY) dropped 4.2%. In fact, all of U.S. stock dividend ETFs fared better than S&P 500. A standout is the iShares S&P U.S. Preferred ETF (PFF), losing only 0.6%. Similarly, Powershares Intl Dividend Achievers (PID) did much better than broadbase MSCI index (EFA): -5.3% vs. -9.1%. For more detailed performance, please refer to here.

    The following table shows the trend scores of dividend ETFs. A noticeable jump is for the Preferred ETF (PFF): it now rose from the last place to the middle in the table, indicating a clear defensive nature of the preferred stocks.

    Assets Class Symbols 03/16
    Trend
    Score
    03/09
    Trend
    Score
    Direction
    iShares Dow Jones US Real Estate IYR 4.65% 9.61% v
    Vanguard Dividend Appreciation VIG 2.98% 9.2% v
    SPDR S&P 500 SPY 2.79% 9.41% v
    Vanguard High Dividend Yield Indx VYM 2.7% 9.15% v
    iShares Dow Jones Select Dividend Index DVY 2.43% 8.42% v
    iShares S&P U.S. Preferred Stock Index PFF 2.32% 3.38% v
    First Trust Value Line Dividend Index FVD 1.91% 8.22% v
    SPDR S&P Dividend SDY 1.74% 7.95% v
    WisdomTree Emerging Market Equity Income DEM 1.66% 8.12% v
    PowerShares Intl Dividend Achievers PID 1.01% 7.84% v
    PowerShares HighYield Dividend Achievers PEY 0.12% 7.11% v
    iShares MSCI Emerging Markets Index EEM -0.44% 6.3% v
    iShares Dow Jones Intl Select Div Idx IDV -0.92% 8.05% v
    SPDR DJ Wilshire Intl Real Estate RWX -1.47% 9.74% v
    iShares MSCI EAFE Index EFA -4.57% 6.48% v

    The trend score is defined as the average of 1,4,13,26 and 52 week total returns (including dividend reinvested).


    Portfolios that use dividend ETFs in place of broadbase stock index ETFs showed a slight advantage over a pure broadbase index ETFs based portfolios. For example, we introduced a retirement income ETF investment plan that uses dividend stock ETFs. The following chart shows the five day performance comparison between the Strategic Asset Allocation (SAA) moderate risk portfolio and a broadbased Five Core Asset ETF (SAA) moderate risk portfolio



    In fact, the dividend ETF plan's Strategic Asset Allocation (SAA) moderate risk portfolio had a big 28% drop in 2008. That shows one can not simply rely on dividend paying ETFs to avoid big loss.

    If a more tactive Tactical Asset Allocation (TAA) strategy is used for these dividend ETFs, performance can be improved dramatically: 

    Portfolio Performance Comparison

    Portfolio Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
    Retirement Income ETFs Strategic Asset Allocation Moderate 8% 63% 4% 17% 4% 16%
    Retirement Income ETFs Tactical Asset Allocation Moderate 5% 60% 8% 72% 9% 68%
     

     

    The takeaway is that dividend stock ETFs are more defensive in nature. However, to achieve greater risk reduction, a more active tactical asset allocation strategy should be employed.

    Symbols: RWX,SPY,IYR,VIG,IDV,VYM,EEM,PID,EFA,FVD,DVY,PEY,SDY,PFF ,


    Symbols: (NASDAQ: RWX), (NASDAQ: SPY), (NASDAQ: IYR), (NASDAQ: VIG), (NASDAQ: IDV), (NASDAQ: VYM), (NASDAQ: EEM), (NASDAQ: PID), (NASDAQ: EFA), (NASDAQ: FVD), (NASDAQ: DVY), (NASDAQ: PEY), (NASDAQ: SDY), (NASDAQ: PFF)

    Disclosure:

    MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.


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  • Riding High with Global Economy, International REITs Offer Currency and Inflation Hedge

    03/10/2011

  • Dividend ETFs: Public REITs Offer Good Value While Economy Recovers

    03/04/2011

  • Dividend Stock ETFs All Dropped, But Showing Defensive

    02/24/2011

  • Initiating Tracking of US Subclasses

    02/22/2011

  • RSP Leads US Large Cap Blend Equities

    02/14/2011

  • Yield Quest Turns from Bonds to High Yield Stocks

    12/16/2010

  • ETF's for Income Nov 29

    11/29/2010

  • ETF's for Income Rebound Well

    11/23/2010

  • High Dividend Stock ETFs for Income Producing Portfolios

    11/12/2010

  • Retirement Income Portfolio Building Using ETFs and Asset Allocation Strategies

    11/12/2010

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