In an era of an ETF or mutual fund for every idea or investment theme one can conjure up, one such fund focusing on capitalizing on uncertain market direction is the Collar Fund (symbol COLLX). For those unfamiliar with the options collar strategy, it is a case where one simultaneously buys a put option and sells a call option on an underlying asset (typically to match 1 options contract on either side with 100 shares of the underlying equity. The theory is that while you may forgo some massive upside gain once the shares have breached the call strike price, you will have at least realized that nominal gain up to that point; meantime, you can limit your downside with that protective put option.
Personally, I’ve used collars before, but not for a long term investment strategy. I like collars for a situation where you’re sitting on a sizable taxable gain on a position and you want to protect those gains, but want to push that taxable gain into next year. You could do the collar for January expiry with a net zero cash outlay, protect your range, and push a sizable gain out into the next tax year. The difference here is that the fund isn’t focused on tax efficiency, but just providing more muted returns while minimizing losses in various market conditions.
Holdings:
The Collar Fund’s most recent update showed top holdings in companies like Research in Motion (RIMM), Baidu.com (BIDU), Apple (AAPL) and a mix of industrials, materials, and other sectors.
Collar Fund Performance:
The fund would be expected to limit losses (and hence outperform broad market indices) in a down market, but would also be expected to under-perform in an up market. Since its launch in 2009, there have been spurts of each, so let’s take a look under the hood during some periods of each vs. the S&P500 (SPY):
Since Inception: Loser
Going back to July 17, 2009, COLLX gained 4% while SPY gained 22%
Market Upswing: Loser
During an up market from July 17, 2009 to Jan 8, 2010 when SPY gained 30%, COLLX gained only 7%.
Down Market: Winner (sort of)
During a down leg from Jan 8, 2009 through July 7, 2010 when SPY lost 7%, COLLX lost only 2%. To call this fund a winner is a bit of a misnomer though. Do you really want to bank on going long in a down market? Or perhaps just sit it out altogether if that’s the environment you anticipate?
Flat Market: Wash
In looking for a longer duration flat market, from Oct. 26, 2009 through Aug. 19, 2010, with SPY flat at -.2%, COLLX gained 0.39%. Given the higher expense ratio of 0.99%, overall, it’s about a wash or possibly even a loser, depending on how long you ultimately hold the fund.
This really begs the question as to where you see the market headed and whether you should be in this fund at all, subjecting yourself to fees, transaction costs, tax liabilities and a lack of liquidity.
- If you think the market’s going up, why would you want to limit your gains with a fund like this?
- If you think the market’s going to decline, why would you be in equities at all? Cash, corporate bonds, or even inverse funds would be your play.
Disclosure: The author has no holding in COLLX and owns puts on SPY as hedge; see full portfolio holdings here.
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With the S&P500 cratering (uh-oh, we hit the dreaded Hindenurg Omen) and investors flooding to the (percieved) safety of Treasuries in droves, the thing that differentiates this market from the carnage of 2008 and 2009 is that there IS now some decent delinking of asset classes. During the 2008-2009 crash, ALL asset classes but Treasuries were selling off simultaneously as investors were dumping everything liquid to free up cash. This time around though, there’s been a steady exodus from US equities into not only bonds bonds, while gold is holding its value…And there are some sectors that are actually running.
So, here’s a look at the Top 20 ETFs in 2010 YTD:
1. GXG Global X/InterBolsa FTSE Colombia 20 ETF 39.5%
2. ZROZ PIMCO 25+ Yr Zero Cpn U.S. Trsy Idx ETF 35.4%
3. IIH Internet Infrastructure HOLDRs 29.1%
4. THD iShares MSCI Thailand Invest Mkt Index 27.8%
5. ECH iShares MSCI Chile Investable Mkt Idx 24.1%
6. IDX Market Vectors Indonesia Index ETF 24.1%
7. VXZ iPath S&P 500 VIX Mid-Term Futures ETN 21.9%
8. EWM iShares MSCI Malaysia Index 21.5%
9.JJT iPath DJ-UBS Tin TR Sub-Idx ETN 20.3%
10.JO iPath DJ-UBS Coffee TR Sub-Idx ETN 18.4%
11.AMJ JPMorgan Alerian MLP Index ETN 17.3%
12.FRN Claymore/BNY Mellon Frontier Markets 14.4%
13.PCY PowerShares Emerging Mkts Sovereign Debt 14.1%
14.PGF PowerShares Financial Preferred 14.0%
15.EMB iShares JPMorgan USD Emerg Markets Bond 13.0%
16.ICF iShares Cohen & Steers Realty Majors 13.0%
17.PFF iShares S&P U.S. Preferred Stock Index 12.8%
18.GLD SPDR Gold Shares 12.2%
19.FRI First Trust S&P REIT Idx 11.7%
20.TUR iShares MSCI Turkey Invest Mkt Index 11.6%
I intentionally excluded leveraged ETFs since they distort the true nature of the performance of the underlying asset class, and they also aren’t reliable performers long term. I also sought to avoid redundant sector and country ETFs. Finally, I excluded short ETFs since that play can only last so long; the general trend must always be up over a long enough period of time. Some exchange traded notes were included since there’s no ETF to cover the commodity or category. Note some of the themes.
- Emerging Markets – It’s been refreshing to see emerging markets demonstrate the ability to rally even as the US market declines. With the S&P500 down 5% on the year, these markets are rallying. However, noticeably absent are the traditional BRIC economies; it’s the newer set of players, the Frontier players, if you will, like Colombia, Chile, Thailand, Malaysia and other smaller countries that are growing while China, India and Russia struggle with issues as they mature.
- Metals – The metals theme is interesting in that industrial production and residential building is exactly going gangbusters, but coming off such a low base from last year’s collapse, there was room to run this year. There are also continued fears of inflation and currency devaluation, even though many indicators are pointing toward deflation. Gold (GLD), being the most prominent arbiter of future inflation expectations, is actually up a healthy 12% on the year.
- The Internet – What differentiates the recent crash from the internet bubble is that now these tech and internet indices are comprised of companies that actually have real business models, real business utility, real profits. These companies are actually benefiting tremendously from the economic downturn because corporations are increasingly turning toward automation and the web to improve productivity while slashing headcount. There does not appear to be any onus to reverse course in the face of burdensome healthcare reform and continued uncertainty in the market.
- Bonds/High Yield – With the specter of a new bubble forming, investors are bidding bond prices up to record levels. The US Treasury market is beginning to look alarmingly frothy, but there are also some sovereign debt funds that are doing well, especially in the emerging markets. Another breed of bond-type instruments are doing quite well also – the Preferred Stock ETFs – a hybrid between stocks and bonds. With the survival of the large financials more clearly intact coming out of the crash, these vehicles have been providing a nice combination of high yield and capital appreciation for some time now. A new play that just launched Wednesday also includes the new Alerian MLP ETF. While an MLP ETN made the list, I prefer this new ETF over the ETN since there’s no bank solvency risk on the note and there are also no messy K-1 tax forms that you get with individual partnerships.
- Real Estate – While Tuesday’s housing data seemed alarming, what was missed in the headline was that most of the decline was in the low end of the market and the higher priced homes sales weren’t as nearly as bad. Additionally, Real Estate Investment Trusts have been steady performers throughout the year, delivering outsized yields and remaining solvent. Coming off a major dip in 2009, some of the top funds this year include these real estate names.
Disclosure: As of the time of publication, the author is long PFF, GXG and GLD.
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Today hailed the launch of the first MLP ETF (Master Limited Partnerships) which have been crushing the S&P500 this year from a capital appreciation and yield standpoint. For the uninitiated, MLPs are publicly traded companies that are structured as partnerships such that they must distribute the majority of their profits, but in turn, they are shielded from certain tax liabilities that conventional corporations are not. The Alerian MLP ETF (AMLP) will hold positions meant to mimic the Alerian MLP Index which is up 12% YTD vs. a loss of 7% for the S&P500.
Previously, if you wanted to participate in MLP investing, you had to either invest in individual issues or invest in some of the various exchange traded notes (ETNs), which are subject to solvency risk of the issuing firm. Typically, investors are forced to deal with the dreaded K-1 form when investing in an MLP which can be a major hassle at tax time. Not only is it another form to complete, but from first-hand experience, I can confirm that the form is always the last to arrive, around mid-March or so, which holds up filing your taxes even if everything else is ready. This ETF will not require a K-1 and will obviously provide the benefit of diversification of multiple Master Limited Partnerships, spreading both company and sector risk.
Typical holdings in the index, and the ETF include more widely known names like Kinder Morgan Energy Partners (KMP) and Enbridge Energy Partners (EEP).
MLP Yields and Risks
People generally buy Master Limited Partnership instruments for the high yield, often upwards of 6%. Given the extraordinarily high payouts, the common stock tends to be less volatile than other higher Beta sectors, and the payouts are often relatively steady over time (some pay monthly). Many have continued to pay out consistently even through the recent economic crash. Moving forward, while the economy is showing more signs of trouble than hope at this point, there’s little evidence that the MLPs, primarily in the energy sector are in dire straights. This is further evidenced by the underlying index outperformance.
The one thing to be mindful of is the potential for a bubble in MLPs. For the first time in years, there has been much press regarding the once-quiet segment, with the launch of various ETNs, and now this ETF generating buzz. Fortunately, many large institutions and pension funds cannot hold MLPs due to their structure which is already tax-advantaged (hence, can’t enjoy a double tax advantage), so perhaps no bubble has formed yet just from the retail investor side. But when your fellow cube dwellers start talking about MLPs just like they were talking about internet stocks in 1999 and gold in 2009, maybe it’s time to start thinking about taking some profits.
If you’re thinking about purchasing individual MLPs or ETNs for a self-directed IRA, you’ll want to consider the following MLP Tax Treatment and perhaps even seek professional tax advice for AMLP given this new breed of an ETF that doesn’t require an IRS K-1.
Disclosure: No position in any ETFs or ETNs referenced in this article.
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With broad market indices showing a moderate loss of less than 1% on the week, it’s starting to look as though the next bubble may be in the Bond Market (Bloomberg). We did survive the first week out of the Hindenburg Omen intact, but with investors continuing to flood into bonds, if and when that bond bubble deflates, where to then? There would be few alternatives left outside of cash and high yield ETFs tied to equities and preferreds. Gold investing may have run its course, although there’s been a slight run in the past week – but battling a growing chorus deflationary hawks is going to be difficult.
With this backdrop, here are the top traditional and leveraged ETFs across various asset classes for the prior week:
Non-Leveraged ETFs:
THD – iShares Trust iShares MSCI Thailand – Up 6% – Thailand has been a top performing country with its own listed ETF, up 26% YTD. Shares were under some pressure of late with concerns over riots and protests within the country, but with some of those tensions easing, the flood gates opened last week.
MOO – Market Vectors Agribusiness ETF – Up 5% - The aptly tickered MOO had a strong week, with much benefit derived from the surprising BHP bid for Potash (POT) which has turned hostile, so shares may continue to rally. This has in turn driven up shares of some other players in the sector like Mosaic (MOS), up 11%, anticipating more merger or acquisition announcements. Prior to the announcement, Potash had comprised roughly 7% of MOO’s holdings and it spiked 35% on the week.
ECH – iShares MSCI Chile – Up 3% - With a major mining cave-in drawing international attention this weekend, it just illustrates Chile’s developing world struggles in trying to achieve the industrial output of its competitors and the safety and environmental downside that accompanies such aspirations. Chile has been one of the top individual country ETFs thus far this year, up 25% YTD.
Leveraged ETFs:
TMF – Direxion Daily 30 Yr Trs Bull 3X Shares - Up 11% – Treasuries were very strong, again, as mentioned above with the possible formation of a the next major asset bubble. On one hand, rates could continue to decline if we are truly facing a deflationary future. Even some corporate bonds are seeing historical low rates like the 1% bond issue from IBM, companies are also sitting on record cash hoards, and seeing dividend increases might spur a move out of Treasuries and into high dividend stocks. Some contrary indicators include a moderately steep yield curve and gold staying at a stubbornly high price though.
FAZ – Direxion Daily Financial Bear 3X Shares - Up 4% – Financials declined on the week, but given the higher beta the sector has seen since the financial collapse and the 3X leverage employed by this fund, there’s nothing out of the ordinary here. They were the rebound story of 2009 and now in 2010, new questions are being raised over whether they continue to mint the profits they did in the past few quarter and what surprise they could possibly have in store next. The inevitable loss of prop trading and increasing liquidity requirements combined with stubborn unemployment and no near-term home price rally in sight add up to questionable prospects for the sector in the intermediate term.
SCO – UltraShort DJ-UBS Crude Oil ProShares - Up 5% – Oil has been range bound for months now, highly correlated with equities returns, so this negative 2X leveraged oil fund rose slightly for the week. I always caveat leveraged ETF mentions with the leveraged ETF decay in value that occurs as a mathematical certainty in choppy markets that can’t sustain a constant trend.
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Dividend ETFs are beating the S&P500 handily and it appears as though they have the propensity to do so into the foreseeable future. There are some interesting happenings in both the broader market as well as the fixed-income space. Treasuries continue to break new lows leaving investors scratching their heads as to whether we’re truly headed into a a deflationary environment, whether government paper is really THAT much more attractive than risky assets or whether this is the beginning of a bond bubble of epic proportions. Common equities meanwhile have been pretty much range bound with good recent earnings news tempered by continued economic malaise in the US at large and last week, the dreaded Hindenburg Omen reared its ugly head. While there are only a handful of AAA companies left in the world, there are dozens upon dozens of very high quality outfits yielding 3-6% that have adequate cash flow to continue/increase dividend payouts at their current pace, especially in the face of their persistence during the recent financial collapse.
There are some key drivers for this performance and it’s also helpful to look back at the prior decade to take solace in the fact that value stocks actually did fairly well compared to the “lost decade” for the broader market indices.
- Few Income Alternatives – Investors seeking income have very few choices that balance an acceptable yield with liquidity and risk. Savings and money markets are near zero, CDs have penalties and government bonds are at record lows. Even in the corporate bond space, IBM just issued a 1% note recently!
- Future inflation and interest rate hikes? – If and when interest rates finally rise, and if inflation kicks in, that will not bode well for fixed income investments as they lose their buying power in that environment. Dividend stocks can continue to increase their payouts however.
- The Dividend Cuts Have Already Occurred – The only direction seems to be up. Many companies cut their dividends in 2008 and 2009, but now we’re seeing increases and if a company survived the crash only to cut their dividend now, that would certainly leave shareholders scratching their heads. Most cuts have already occurred, so the propensity will be to increase rather than decrease payouts.
- Cash Hoards with Nowhere to Spend it – Companies are sitting on record hoards of cash. On one hand, some may be choosing to hang on to these cash hoards indefinitely so they’re not priced out of credit during another crunch in the future, but short of acquisitions, what are some of these outfits going to do with $10 Billion or more on their balance sheets besides increase dividend payouts. It is likely just a matter of time.
According to JEREMY SIEGEL AND JEREMY SCHWARTZ in this week’s Wall Street Journal Opinion piece,
Those who bought “value” stocks during the tech bubble—stocks with good dividend yields and low price-to-earnings ratios—have done much better. From December 1999 through July 2010, the Russell 3000 Value Index returned 35% cumulatively while the Russell 3000 Index of all stocks still showed a loss.
The spread in performance between Dividend ETFs and the S&P500 (SPY) has been impressive year to date:
(SDY) – SPDR S&P Dividend ETF – up 3.4%
(DVY) – iShares Dow Jones Select Dividend – up 3.3%
(PEY) - PowerShares High Yield Dividend Achievers – up 4.8%
(VIG) – Vanguard Dividend Appreciation ETF – flat 0.0%
vs. SPY at -2.2% (S&P500 ETF), not to mention, these dividend ETFs have higher dividend yields than SPY as well.
Aside from the primary dividend stock ETFs covered above, there are also even higher yields and attractive prospects in Utility Stock ETFs, Preferred Stocks, Master Limited Partnerships, and this REIT List as well.
Disclosure: No position in any ETFs covered in this article.
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