Saturday, June 21, 2014
Today, a topic that I bet will surprise you... a review of the world's best exchange-traded funds (ETFs). I'm going to give you seven well-run ETFs that you can buy safely and enjoy their outstanding investment performance... even if you know absolutely nothing about investing and you have no desire to learn. This is for all of our readers who don't want to manage their own assets, but want better-than-reasonable returns on their savings.
If you aren't familiar with ETFs, they're investment funds that can hold any of a variety of assets (like stocks, but also bonds or commodities). The key feature is their shares trade on public stock exchanges, so you can buy shares of them just as you would shares of an individual company's stock.
What we're looking for in our list of the seven best ETFs isn't necessarily diversification or the cheapest possible fees... we're looking for funds that help investors succeed. We're looking for funds that are based on solid financial research and follow strategies that make sense to us.
Most investors don't know this, but most of the money that goes into index funds and ETFs ends up being managed around the basis of the S&P 500 Index. That index, maintained by credit-rating giant Standard & Poor's, isn't designed to help investors. It's designed to help sell S&P's bond ratings to issuers – i.e. large public companies.
The index is "weighted" toward the stocks with the largest market caps. Funds copying this index put most of their capital into the largest and most expensive stocks. That just doesn't make sense. They are literally deciding to "buy high" instead of trying to find smart ways to "buy low." Also, there's very little indication of the overall quality of the business. Bigger isn't necessarily better.
Let's jump in...
No. 1: Cambria Shareholder Yield Fund (SYLD)
The basic idea here is simple... instead of buying the entire S&P 500, our friend, fund manager Meb Faber, has organized an ETF that owns nearly equal stakes in the top 100 highest "shareholder yield" stocks in the U.S. The list is determined by looking at the market cap (the value of all outstanding shares) and the combined value of the capital the company has returned to shareholders through dividends and share buybacks. Over time, this keeps investors' capital in the stocks that are treating their shareholders best and that are fairly priced. The result? Nearly guaranteed outperformance of the S&P 500 without lifting a finger.
No. 2: WisdomTree Emerging Markets Equity Fund (DEM)
The approach here is similar to Meb's SYLD, but instead of investing in large-cap U.S. stocks that treat shareholders well, DEM owns the top 100 highest-yielding emerging-market stocks. Its top holding today? Russia's huge natural gas company Gazprom (5.6% of the portfolio).
Investing in emerging markets is hard because of the huge volatility, the poor disclosure, and the difficulty transacting in foreign markets. On the other hand, over most market cycles, emerging markets vastly outperform U.S. stocks. This fund allows you to own a huge basket of only the best emerging-market stocks. And it pays a large dividend (more than 4% currently) to reward you while you wait out the volatility. Companies in the index are weighted based on actual cash dividends paid. It's also currently a "buy" in Steve Sjuggerud's True Wealth.
No. 3: U.S. Commodity Index Fund (USCI)
You've got to be very careful when you buy a commodity fund – like the U.S. Oil Fund (USO) or the U.S. Natural Gas Fund (UNG). These ETFs sometimes do a terrible job of converting gains in commodity prices to profits for investors. That's because they invest in futures contracts on their specific commodity. So they have to roll their futures contracts forward. These markets are often in "contango" – meaning that the forward months' prices are much higher. In these situations, the cost of rolling their contracts forward eats up all (or most) of the profits.
The U.S. Commodity Index Fund (USCI) overcomes that problem by investing in a range of different commodities – and only when their forward-pricing curves are in backwardation. That's the opposite of contango, and it allows the fund to make easy profits, even when commodity prices are flat.
The fund invests the other half of its assets in commodities whose prices are moving higher at a rapid pace. By hopping on some of these trends, the fund can still make money (most of the time) despite the contango. There are a lot of moving parts here, as you can see, so for a full overview, I encourage you to read Steve's June 17 DailyWealth essay, where he published a full write-up on this unique commodity ETF.
No. 4: Blackstone Mortgage Trust (BXMT)
OK, this one is not really an ETF... it's a mortgage real estate investment trust (REIT), meaning it's a business that invests in mortgages. But it might as well be an ETF...
It's managed by Blackstone, whose real-estate head (Jonathan Gray) is the most impressive Wall Street executive I've ever met. This is a leveraged fund that invests only in top-shelf commercial properties by owning their mortgages. It does so in a unique way that eliminates the big risks faced by most leveraged mortgage REITs. Unlike residential real estate, commercial property has very little pre-payment risk. So the fund is able to lock in its interest-rate spread by using both floating-rate financing and floating-rate mortgages. The fund is currently yielding more than 6%.
No. 5: Market Vectors Unconventional Oil & Gas Fund (FRAK)
Simple story here: The ongoing shale boom in the U.S. is going to get bigger – far bigger than anyone realizes, even now. We've recommended our favorites in our newsletters. But one ETF gives you immediate exposure to all of the leading shale-drilling firms – FRAK. Its top 10 holdings include most of our favorites: Anadarko, EOG, Devon, Pioneer, Noble, and Chesapeake. Careful... this will surely be a volatile ETF as it is focused on a booming sector that's very dependent on higher oil prices. Nevertheless, we think this is one of the best bets in the global markets right now.
No. 6: PowerShares International Dividend Achievers (PID)
This ETF owns 100 of the highest-yielding international stocks that have shares listed on one of the major global exchanges. It weights its fund into the highest-yielding stocks. (Two of its largest positions currently are units of Teekay Shipping, a company whose LNG shipping business has been a long favorite of my Investment Advisory newsletter).
By sticking with only companies paying a good dividend and trading on major exchanges, a lot of the risk of buying foreign stocks has been removed. Also, by holding 100 companies, it offers plenty of diversification. The weighting toward higher dividends should help produce index-beating results over time.
Lately, of course, this ETF has underperformed the U.S.-centric S&P... which might indicate it's a good time to buy. Certainly, this looks like a cheap index fund: The average price-to-earnings (P/E) ratio here is only 13 times earnings. And the average price-to-cash-flow ratio is a stunningly low 7 times.
No. 7: SPDR Dow Jones International Real Estate (RWX)
There's no really great international real estate ETF... yet. So in the meantime, I'd recommend just getting the broadest possible exposure to the best managers. This fund fits the bill. Here you're getting 100 of the biggest and best real estate firms in the world – Japan's Mitsui Fudosan, Canada's Brookfield Asset Management, Hong Kong's Link REIT, and the British Land Co. These are all legendary real estate firms... and you're getting all of them, from around the world.
Over the past five years, the returns have been very good: 15% annually. Of course, that's the rebound from the global real estate crisis. But even so, I suspect the returns here will continue to be double-digit or better over the next 10 years at least.
What you have here – with just six ETFs and one U.S.-based REIT – is a group of funds that offer you value, diversification, and smart investing strategies. What you'll pay for these funds is next to nothing. You don't need a broker. You don't need an asset planner. You don't even need to read our newsletters (although we hope you'll continue to do so anyway).
Put equal parts of your portfolio into these seven investment vehicles, and you'll rarely have a down quarter. Year after year, you'll beat the international stock indexes. And in almost every year, you'll beat the S&P 500. Try to learn to allocate additional capital to this plan when other investors are panicking. But either way, learn to save something regularly – every month or every quarter at least.
My advice? Just allocate funds to whichever has performed the worst over the previous three years. If you do this for 15-20 years, I have no doubt you will end up with far more money than you ever dreamed was possible. If you do this for 30-40 years (you've got to start early), you'll end up stupendously wealthy.
There's no real trick to investing if you're disciplined enough to save, and if you only buy good assets and good companies at reasonable prices. These funds enable you to do that, and do it well, in what I consider to be all of the major areas of equity finance: U.S. stocks, foreign stocks, emerging-market stocks, U.S. real estate, global real estate, commodities, and energy.
What's really missing in this list is the fixed-income component. If you're looking for income in today's market (and thanks to the Fed, we all are), there's no better resource than Dr. David Eifrig's Income Intelligence.
In Income Intelligence, "Doc" covers all the different income-producing sectors – real estate investment trusts (REITs), corporate bonds, municipal bonds, dividend stocks, master limited partnerships (MLPs), etc...
Because he has such a large universe of income-producing securities to choose from, Doc is able to recommend the best, safest, and cheapest sectors at any given time.
This week, Doc recommended shares of a European insurance giant. Regular readers know I believe insurance is the greatest business in the world. And this company pays a fat 4%-plus dividend. It's a super-safe way to get some extra yield on your dollars today.
To learn more about Income Intelligence, click here...
Date Range:6/12/2014 to 6/19/2014
Date Range:6/12/2014 to 6/19/2014