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Thursday, May 23, 2013
Microcaps: The More the Merrier
Fellow InvestorPlace contributor Dan Burrows recently had an interesting look at the market’s current returns. Dan noted that, as the market has pulled back from its peaks, blue-chip large-cap stocks — as represented by Dow Jones Industrial Average — have held up better than small- and mid-cap firms.
This is to be expected, as the riskier the stock, the farther it will rise or fall in bull or bear markets, respectively.
What’s interesting, though, was that the smallest of the small — microcaps and nanocaps — have actually held up better than their less-risky twins. While this can be viewed as outliers, it also goes to show that adding a dose of these tiny companies can help portfolio returns.
Dan, however, suggests that investors shouldn’t go “plowing your nest egg into microcaps or nanos” as they are “hardly a sound bet or a place for anything but a smidgen of your vanity portfolio.”
I do agree with Dan’s assessment that you shouldn’t be buying individual penny or pink-sheet stocks with your retirement money. Nonetheless, not all of the “smallest of the small” are scams. There are opportunities in the space — if you think and act broadly.
Micro-cap stocks are often overlooked by investors and can provide a “happy hunting ground” for portfolio returns. Research by famed economists Fama & French, for example, shows that companies with market caps of less than $250 million outperform their slightly larger twins by a wide margin over the longer term.
One reason is that such small firms are perfect for finding various inefficiencies with market share pricing. To start, there is little to no analyst coverage of these companies. For example, there are at least 21 different brokerage firms that cover tech giant IBM (NYSE:IBM). There are only two that cover gold-miner Claude Resources (NYSE:CGR), on the other hand.
On top of that, institutional investors often lack interest in the sector because the names are simply too small to make a meaningful impact on a portfolio of immense size. Additionally, stocks in the micro-cap sphere often lack “institutional sized” liquidity — meaning millions of shares traded each day — and may have wide bid/ask spreads. There’s a reason why investors and analysts sometimes call them lottery stocks.
Still, these picks don’t have to be like lottery tickets. Despite their shortcomings, there are plenty of micro-cap stocks with strong business and financial strength. Investors perceiving the sector as super-risky could be missing out on the extra boost microcaps can provide. Curbing that risk comes courtesy of the boom in exchange-traded funds.
There are now several funds that track the various micro-cap indices. Like Dan, I wouldn’t recommend going whole-hog into these funds. But shifting a portion of your general small-cap allocation into one of these vehicles — say 5% to 10% — could do your portfolio a world of good. With that in mind, here are the top three funds tracking the sector.
1. iShares Russell Microcap ETF: The gold-standard index tracking this sector is the Russell Microcap, which makes the iShares Russell Microcap ETF (NYSE:IWC) the gold-standard ETF. The fund’s 1,320 holdings include some household names like Popeye’s Chicken parent company AFC Enterprises (NASDAQ:AFCE) and trailer manufacturer Wabash National Corp. (NYSE:WNC). As such, the ETF pays a nearly 2% dividend and has returned around 12% annually over the last three years — all for a relatively cheap 0.69% in expenses.
2. PowerShares Zacks Micro Cap Portfolio: Want a more concentrated bet? Try the PowerShares Zacks Micro Cap Portfolio (NYSE:PZI). The fund tracks investment research group Zack’s Micro Cap Index, which is designed to identify a group of micro-cap stocks with the greatest potential to outperform passive benchmark micro-cap indexes and other actively managed U.S. micro-cap strategies. This results in a more concentrated portfolio of 398 names.
Over the last three months, PZI is nearly 11% higher, compared to the 6% rise in the S&P 500 over the same period. However, over the longer term, PZI has managed to underperform IWC by several percentage points. On the brightside, the PowerShares Fund does currently have a distribution yield of 3.8% … but there have been times that PZI hasn’t made any quarterly payouts at all. Furthermore, when it does make a dividend payment, they have fluctuated rapidly. Some of that has to do with how quickly the underlying index churns through holdings in order to meet its mandate of “beating the passive microcap indexes.” As such, investors shouldn’t count on PZI as major or steady source of income in their portfolios. Expenses run at 0.91%
3. Guggenheim Wilshire Micro-Cap ETF: In terms of holdings, the Guggenheim Wilshire Micro-Cap ETF (NASDAQ:WMCR) is right in the middle of the list with 866 different stocks. The fund tracks the Wilshire Micro-Cap Index, which represents the bottom 1,500 firms in the broad Wilshire 5000 index. WMCR does a great job of spreading out assets, as no one stock accounts for more than 1% of the fund. Conversely, WMCR is somewhat top-heavy from a sector perspective. Financials, healthcare and technology combine to make up around 60% of assets, though, which could make the fund extra-volatile if the market seas get rocky. Still, one huge positive for the Guggenheim ETF is that its the cheapest of the bunch at just 0.58%.
The bottom line is that investor’s should be afraid of micro-cap space. They just to need to play it smartly … by thinking broadly.
As of this writing, Aaron Levitt was long IWC.
Article printed from InvestorPlace Media, http://investorplace.com/2013/03/microcaps-the-more-the-merrier/.
©2013 InvestorPlace Media, LLC
Aussie! Aussie! Aussie! L-N-G!
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3 New Dividend Funds Let You ‘Pick Your Risk’
With coupon rates on risk-free government bonds yielding only 2% these days, investors have gone gaga for dividend-focused exchange-traded funds. More than $6.1 billion in new funds flooded dividend ETFs during the first quarter, according to S&P Capital IQ, and total assets under management in such vehicles now sits at a record $68.5 billion!
So clearly, investors’ appetite for income must be satiated by now, right?
Well, at the very least, FlexShares — the ETF unit of high-net-worth bank Northern Trust (NASDAQ:NTRS) — doesn’t think so, and has launched three new dividend-focused equity funds as a bet that it’s right.
The trio of new funds — the FlexShares International Quality Dividend Index Fund (NYSE:IQDF), FlexShares International Quality Dividend Dynamic Index Fund (NYSE:IQDY) and FlexShares International Quality Dividend Defensive Index Fund (NYSE:IQDE) — began trading this past Tuesday, and offer investors another few ways to gain income exposure.
But do they really add anything different and improved to the portfolio?
With nearly $11.16 billion plunked into the SPDR S&P Dividend ETF (NYSE:SDY) and $5.4 billion in the Vanguard High Dividend Yield ETF (NYSE:VYM), investors have loudly voted with dollars as to which ETFs they prefer in this space. And that doesn’t even include the other billion-dollar funds from Vanguard, State Street (NYSE:STT) and BlackRock‘s (NYSE:BLK) iShares. So why would another firm think it could make waves with a relatively simple and common strategy of investing in high-quality equities that pay dividends?
The devil might be in the details.
The new FlexShares funds are part of a new breed of dynamic indexing. These intelligent index products track baskets of stocks based on various fundamental factors. These can include measures of profitability, cash flows, earnings and even volatility to create the underlying basket of stocks. The basic idea is that by using non-traditional weights or factors, these dynamic indices will outperform “standard” measurements — like the S&P 500 — on a risk-adjusted basis.
The three funds are all designed to provide exposure to the long-term growth potential of international equities and deliver dividend income. The “Quality” jargon in the funds’ names means that a screening process will select stocks based on expected dividend payments and three fundamental factors: profitability, solid management and reliable cash flows. “Dynamic” and “Defensive,” meanwhile, refer to measures of volatility. “Dynamic” will showcase firms with volatility above the respective “Quality” index, and “Defensive” will be below.
More simply put: It essentially allows you to “pick your risk profile” when compared to the index. Want more risk? Choose the Dynamic IQDY. Want less? IQDE is for you. Want to match the market? IQDF is for you.
All three funds will charge 0.47% in expenses a year — that’s not much, and comparable to other international dividend ETFs. For example, the $2 billion iShares Dow Jones International Select Dividend ETF (NYSE:IDV) charges 0.5%.
However, aside from the slightly cheaper expense ratio, there isn’t much else to be had.
All three funds have roughly the same number of holdings between 215 and 217. More importantly, the three ETFs — despite their different “intelligent” indices — feature many of the same stocks within their top 10 holdings.
All count the Commonwealth Bank of Australia (PINK:CMWAY), British American Tobacco (NYSE:BTI), Royal Dutch Shell (NYSE:RDS.A, RDS.B) and AstraZeneca (NYSE:AZN) in their top 10 holdings — interestingly, all are found in the top holdings of iShares’ IDV as well.
Given the similarities, I’m not sure what investors are truly gaining by shifting into the “Dynamic” or “Defensive” funds — especially since FlexShares hasn’t provided any back-testing or hypothetical yield information on its website. This could help explain why the U.S. equities-focused versions of these funds launched back in December — the FlexShares Quality Dividend Dynamic Index Fund (NYSE:QDYN) and FlexShares Quality Dividend Defensive Index Fund (NYSE:QDEF) — haven’t really caught on with investors. Based on their yield information, the two styles only provide a few tenths of a percentage point more in yield over their base “Quality” index.
All in all, the trio of funds have some work to do.
Northern Trust is no stranger to the ETF business and currently has about $4.69 billion in assets in the FlexShares line of funds. Given some of its other innovative and popular products, I’m surprised by this launch. Overall, the new funds — along with their U.S.-focused twins — fall flat on the dividend ETF front.
While it’s too early to tell just how effective the funds will be, at first glance, investors looking for international dividends might be better suited in the IDV or the SPDR S&P International Dividend (NYSE:DWX). Both have solid operating histories, trading volumes and similar expense ratios.
I would skip the new ones until they can prove themselves to investors.
As of this writing, Aaron Levitt was long RDS.A and RDS.B.
Article printed from InvestorPlace Media, http://investorplace.com/2013/04/3-new-dividend-funds-let-you-pick-your-risk/.
©2013 InvestorPlace Media, LLC
iShares ETF Closure: The First of Many?
With 281 different exchange-traded funds, BlackRock’s (NYSE:BLK) iShares line is by far the largest ETF platform available to investors.
Unfortunately, that lineup might be shrinking in the next few years.
For the first time since 2002, Blackrock has decided to shutter one of its funds. While ETF closures and reorganizations happen all the time, this is a rare occurrence for iShares. The closure could have repercussions across iShares’ stable of funds, but at the very least, it definitely serves as a cautionary tale and warning to investors holding some of iShares’ less-popular ETFs.
The iShares Diversified Alternatives Trust (NYSE:ALT) was a bit of an anomaly among the rest of the index-tracking ETFs under iShares’ wing.
The actively managed fund was considered to be granddaddy ETF in the managed futures sector. At their core, managed futures strategies take advantage of price trends across a variety of asset classes. Investors employing the tactic can go long or short (or both) various futures contracts in sectors such as commodities, equity indices, foreign currency or even U.S. government bond futures.
The idea is to generate positive and stable returns no matter what the market environment. You’re not looking for home runs, but consistent singles and doubles.
Launched back in 2009, ALT hoped to profit from the mispricing of financial instruments by capturing spreads between assets that deviate from the fair value. The ETF simultaneously enters into long and short positions in various bond, equity, currency and interest rate futures. The ETF was basically split 50/50 long/short among its three target areas — global equities, currencies and bonds.
ALT was somewhat successful at meeting its goal. The ETF did manage to eke out a slight 0.87% return at far lower levels of volatility. However, most professional manage futures funds usually perform in the 3%-to-7% range. So despite being the first fund in a now-popular category, iShares has pulled the plug. After June 4, ALT will be no more.
Overall, iShares blamed the closure on lack of investor interest with Patrick Dunne, BlackRock’s head of Global Markets and Investments. In a statement, it said, “iShares continually reviews its product range to ensure it meets the evolving needs of our clients. Based on the review and client feedback, it appears this product has a limited role in today’s investment portfolios, and we have seen little long-term demand.”
The interesting thing about ALT’s closure is that the fund was actually kind of popular.
The issuer’s previous closures, back in 2002, were two sector funds that covered chemicals and Internet stocks, as well as a fund linked to the S&P/TSE 60, which tracks Canadian stocks. iShares closed these funds because they were duplicative of other products within the lineup. However, ALT still fills an appealing role for both investors and BlackRock. The ETF was iShares’ only “alternatives” ETF and helped bring manage futures to the average Joe investor.
Even more interesting is the fact that ALT isn’t even iShares “least popular” product.
The fund is closing with roughly $58 million in assets under management. At one point in 2011, as volatility raged, ALT had approached the $150 million mark, though with investors turning back toward stocks, AUM have fallen. Still, of iShares’ 281 exchange-traded funds, 75 have fewer assets than ALT — and 32 of those have less than $10 million in assets.
The general rule has been that small funds usually are given the axe first from sponsoring firms. However, ALT will have a distinction of being the third-largest ETF to ever close. The largest — $600 million PowerShares DB Crude Oil Double Long ETN (DXO) — closed because of a technicality with regards to regulation, not because Invesco (NYSE:IVZ) wanted it to.
With a rather large and somewhat popular first-mover ETF now closing, investors have been wondering what will become of iShares’ fund family. BlackRock declined to comment aside from saying that it continually reviews its product lineup — and that could mean more closures or fund mergers coming to an iShares ETF near you.
Just take a look at the potential funds that could be on the chopping block.
Backing out iShares’ various target-date bond funds — since they have a finite end to them anyway — I think roughly 40 different ETFs could be going the way of the dodo based on AUM and poor trading volumes. Several of them are “duplicates” of other more successful iShares funds and track similar indices. Most of the funds on the list wouldn’t even be missed.
If I was an investor in one of iShares’ low-asset “me too” funds like the iShares MSCI India Small Cap (BZX:SMIN) or incredibly narrow-focused ETFs like iShares MSCI All Country Asia Info Tech (NASDAQ:AAIT), I would be a little worried and perhaps find a better portfolio substitute. Both have less than $10 million in assets — combined.
ETF closures aren’t necessarily the end of the world. But with the shuttering of a market leader and other fund closures a possibility, we could be seeing a shake-up in the industry.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
Article printed from InvestorPlace Media, http://investorplace.com/2013/05/ishares-etf-closure-the-first-of-many/.
©2013 InvestorPlace Media, LLC
Watch for an Exxon Discount on TransCanada
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