Enterprising Investor Forum

ETF for troubled times Friday, March 6, 2009

We still feel uncomfortable about highlighting specif stocks seeing market conditions and possible unintended ramifications of problems with global financial/insurance conglomerates. At the moment, a lot of companies are very vulnerable to events completely out of their hands and more importantly, that they really cannot foresee.

Having said this, valuations are quite interesting and instead of focusing on how low things can go or when we are going to seen a massive bear-market rally, we prefer to look at an interesting ETF that could be added to your portfolio, thereby minimizing the risk of taking a position in a specific company.

One of the themes we feel is worth considering is inflation. Even though not many commentators are focusing on this, sooner or later we will have to deal with it and investors need to be aware of this.

In order to tackle this, a classical ‘boring’ way to be defensive is to think of utilities and an interesting option is the Vanguard Utilities ETF (VPU) which is trading close to all time lows and offers an attractive dividend yield.

Please read our disclaimer.

Diversified ETF Portfolio Friday, November 7, 2008

Some of our readers have asked us about how we would go about constructing a diversified ETF portfolio. Naturally, it always depends on what your ultimate investing goals are, your age, what percentage of your liquid net-worth will be invested in the portfolio, etc, etc… However, we thought that we would offer our view on what we feel could be a starting-point for a well-balanced option.

First of all, since stocks outperform all other asset classes over the long-term (see post & graphs: here), we would aim to have a majority of the portfolio in stocks and would therefore opt for a 60/40 split vs. bonds. In terms of bonds, we would place half of the allocation in a total bond market ETF and split the rest between short-term and long-term bonds. You could also just place it all in the total bond market but since we would aim to slowly build up all of our positions by buying in  thirds, we would prefer to have more choice when entering the markets:

• Vanguard Total Bond Market (BND): 20%
• Vanguard Long-Term Bond (BLV): 10%
• Vanguard Short-Term Bond (BSV): 10%

With the remaining 60% of the portfolio that we will invest in stocks, it is important to keep in mind that we want diversification and enough exposure to different markets that will allow us to slowly enter our positions depending on market swings and investment cycles. Naturally, as our reader know, we prefer small cap value (they out perform! – see post and graphs: here) – but generally speaking, we always try to focus on value.

Based on the above, we will complement the total US market with US small cap value and MSCI EAFE Value index that will give us international exposure.

• Vanguard Total Stock Market (VTI): 15%
• Vanguard Small Cap Value (VBR): 10%
• IShares MSCI Value (EFV): 10%

Then we would add some emerging markets and here, apart from overall market diversification/exposure, we like to look for ETFs that hold not only Asian companies but also Russian and Brazilian oil (simply our preference based on our view of future mega-trends), Gazprom, Lukoil, Petrobras,etc…:

• Vanguard Emerging Markets (VWO): 5%

In conclusion, it is always worth having some real-estate in a diversified portfolio, also due to the stable dividend yield. Furthermore, taking into account a stream of dividend yield that would also allow you to rebalanced the portfolio, we would look at high dividend payers and possibly (in the current situation) a financial preferred share ETF:

• Vanguard SF Reit (VNQ): 10%
• Vanguard High Dividend Yield (VYM): 5%
• Powershares Exchange (PGF): 5%

We feel that ultimately, you should try and have a stable 40% in bonds, 40% in the market and value stocks and 10% in real-estate and then you can try and be a little more opportunistic with the remaining 10% of the portfolio.

Please note that opinions and strategies vary and that this is just one option which we would be happy owning – not only in terms of mix but also because of the low expense ratios and dividend yield.

Happy fine-tuning of your portfolio!

Please read our disclaimer.

MSCI EAFE Value Index Friday, September 12, 2008

Has anyone noticed that the MSCI EAFE Value Index (EFV) is trading at 2005 levels and is currently yielding over 6%? Obviously the suffering has been compunded by the fact that over 40% of the holdings are in the financial sector but this could be an interesting way to play the recovery, without the risk of investing in a company that will have to file for Chapter 11.

Yahoo! ETF Summary: The investment seeks investment results that correspond generally, before fees and expenses, to the price and yield performance of the MSCI EAFE Value index. The fund invests at least 90% of assets in the securities of its underlying index or in ADRs, GDRs or EDRs representing securities in the underlying index. It may invest the remainder of assets in securities not included in the index but which the fund’s manager believes may help the fund track the index. The fund may also invest other assets in futures, options and swaps related to the index, as well as cash and cash equivalents. It is nondiversified.

We still feel that this ETF has more downside but investors could start to build up their position…

Please read our disclaimer.

Commodity Update Thursday, September 11, 2008

The sell-off in commodities has been quite impressive, but do we really believe that the bubble has burst or is this just a severe correction in a secular bull trend that offers an interesting entry point for investors that had not managed to invest before the spike in prices?

We would definitely encourage the Enterprising Investor to take a closer look at some of the commodity ETFs like DBA or DBC and try to formulate an opinion on what strategy to adopt and identify a possible entry point. Even Russia, RSX (over half of the market cap is commodity based), will become attractive if prices continue to fall……

Investing in REITs Wednesday, June 4, 2008

With the market heading towards another pull back, the Enterprising Investor should be looking to take advantage of this volatility in order to secure superior long-term returns.

With a current yield of over 5% the Vanguard SF REIT ETF (VNQ) looks pretty interesting to us and a move back into the low 60s would definitely represent a good buying opportunity.

The investment seeks income and moderate long-term capital growth. The fund normally invests at least 98% of assets in stocks of real estate investment trusts (REITs) that are included in the Morgan Stanley REIT index.

This is a great and cost efficient way for investors seeking real estate exposure in their portfolio but that want to limit extreme volatility or the complete loss of capital that could come with picking individual REIT at this specific moment in time.

We all know, that the credit crunch is placing a lot of stress on housing markets but long-term, private and especially, commercial real-estate will continue to appreciate in value and offer good returns to patient investors.

Please read our disclaimer.

Investing in Russia Friday, April 25, 2008

We often hear about investing in Russia and how there are incredible opportunities despite the fact that the market has surged so much.

However, the key question is always trying to understand how to take advantage of this and in what companies to invest: investors are always skeptical about transparency, accessibility, political risk and corruption amongst other things. Wouldn’t it be better to hedge your bets and follow a basket of the top Russia publicly traded companies?

One of the best ways to tackle this investment could be through and ETF: take a look at Market Vectors Russia ETF (RSX). Despite a very good performance so far, in has recently pulled back a little and certainly has more room to grow, without charging ‘crazy’ fees – the expense ration is 0,69%, which is very reasonable for this kind of ETF.

Please read our disclaimer.

ETF idea from recent SEC filings Tuesday, February 19, 2008

As we finish looking through recent SEC filings from some of the all time investment Gurus, we thought we would report on one of the interesting things that caught our attention.

There has been quite a lot of movement into the Select Sector SPDRFinancial (XLF), amongst others, Arnold Van Den Berg and David Dreman have opened positions. This is a quite interesting ETF due to the fact that it holds all of the financial companies in the S&P 500 Index, has a very low expense ratio compared to competitors and is well diversified.

As you can imagine, this is a good way to play the inherent value which can be found in the financial industry without having to take a risky bet on a specific company. The industry is currently suffering but not all the companies are exposed in the same way and there is value left in there. Furthermore, this ETF is a way to play this investment thesis without only focusing on the banks, it also invests in diversified financials, insurance and real estate.

Please read our disclaimer.

Inverse ETFs Tuesday, January 8, 2008

Despite the fact that we favor a ‘buy and hold’ strategy focusing on ‘long’ investments, some of our readers have asked us about inverse ETFs and how to find them.

We feel that these products can be interesting, not necessarily to take a short-term view on an index or sector but as a way to tactically hedge against certain exposures. Please note that ‘single leverage’ means the fund aims to produce the inverse daily performance of the target index or sector each day and ‘ double leverage’ means twice the inverse daily performance.

We had already posted a link on how to navigate the ETF world and find sector specific ETFs (link) but here is a really good pdf document we found on Money and Markets that offers a comprehensive list on Inverse ETF where you can search by index or sector you want to hedge against.

Please click: here.

Navigating the ETF World Friday, June 29, 2007

Trying to get your head around all the different ETFs can be quite tricky, especially due to the fact that there are so many new offerings.

We recently came across Bespoke Investment Group’s ETF Family Tree which we found extremely useful.

Hope it helps!