Dividend Stocks And Higher Rates ('94 Example) [View article]
Glad this was interesting Cheesehusker and Okatie Jack - did the research for my own edification and thought I would share with the income investing audience - thanks for reading
Thanks jbzw - I like your strategy of earning higher returns through going down in credit quality in short duration bonds. Default rates are likely to stay low, and you are less exposed to rising rates which we saw generate poor performance in long duration assets.
Revisiting The SuperDividend ETF And Its 7.3% Yield [View article]
Phenom - look at the net asset values (assets - liabilities) of the funds, which have declined substantially. Imagine you lent somebody $100 and they owe you 3.5% per year for thirty years. Let's ignore the amortization and pretend that at the end of 30 years they will pay you back the $100. If the market interest rate goes from 3.5% to 4% to lend $100 to the same type of borrower, then your loan at 3.5% is underwater. If you were forced to sell your loan to someone else, they wouldn't pay you $100 for it because they could lend in the market at 4% instead. They will pay you a discount. This is why mortgages and mortgage REITs have fallen in value.
While the ultrashort end is pegged, many of these REITs borrow in the belly of the curve so they do not have to continually roll financing. The cost on that financing rose - as a reference rate, the 5yr Treasury is up from .7% to 1%, so the spread that they are earning did not increase as much as you are suggesting.
Hope this helps - let me know if you have any more questions.
True Diego - although with the expansion of ETFs into the fixed income universe, I wouldn't be surprised if we saw funds based on ratings cohorts. Of course, a fund with on demand liquidity holding a replicating portfolio of less liquid portfolios would either need to charge high fees for transaction costs, or potentially increase the liquidity of less liquid bonds. While I don't expect investors to be able to replicate this strategy, I do think that the alpha-generative nature far outweighs the transaction costs. There would not have been a trade needed for the last seven months as CCCs outpaced BBs. I think that this idea is valuable for investors wondering how they should lean their bond portfolio. This is my original idea - I believe it is quite powerful - and I am happy readers are getting it for free with monthly updates on performance. If you disagree with the efficacy, that is what makes markets. Thanks for reading and commenting.
Revisiting The SuperDividend ETF And Its 7.3% Yield [View article]
You are partially correct phenom1 - mortgage REITs can now potentially earn a higher spread, but their existing long mortgage holdings have fallen in value sharply. Mortgage REITs that borrow in the belly of the curve saw a rising five-year increase their financing costs while the value of their holdings fell - a double whammy.
Revisiting The SuperDividend ETF And Its 7.3% Yield [View article]
No K-1 like an MLP, but high non-qualified dividends given the high level of foreign corporations - this fund, like most high dividend funds, would be best in a tax deferred account
Revisiting The SuperDividend ETF And Its 7.3% Yield [View article]
For those believing that the S&P 500 is the wrong benchmark for SDIV, as a U.S.-based investor, I judge all of my equity investments off this broad market benchmark.
Several readers noted that SDY has outperformed. In my article on the Dividend Aristocrats, I suggested that this fund would do just that in early 2013: http://seekingalpha.co...
Don'tbugmeplease - the dividend yield is certainly attractive, but if the combination of price return and dividend yield trails the broader market (with higher risk) then an investor could liquidate a portion of their higher principal balance and generate a higher pre-tax return.
I pulled the data from Bloomberg. The Bloomberg indices are on the fact sheet on the S&P website. I assume that the backtest was done correctly given that we are dealing with the foremost index provider and the leading financial data service, but can not verify.
Sasb - I did not see an ETF that replicates the index or even a GS proprietary fund that would do so - would not be surprised to see that evolve over time - the Standard and Poor's High Beta Index ETF (SPHB) could be a proxy if you want to "go down in quality" with the belief that markets are going to rally
Thanks for the thought provoking and disparate feedback. For those who dismissed low volatility investing as a "gimmick" or "flavor of the month", attached is thoughtful economic research that shows that this anomaly has existed across markets, geographies, and time, and is calling into question the Capital Asset Pricing Model in the minds of some investors and academics (including me).
The question then arises as to whether market's have figured out this anomaly and bid up the prices of low volatility stocks accordingly. While low vol stocks now trade at roughly an earnings multiple that is 3 turns higher (20x vs. 17x for market), if you flip this on its head then low vol stocks have an earnings yield 88bps lower. This is roughly the spread the between the debt of high quality companies (AA) and mid quality companies (BBB). I think that the equity multiple differential should be higher than the debt differential.
For those that view the P/E of 20x as too rich, it still looks cheap to Treasuries (think of the 2% yield on Treasuries as a 50x earnings multiple when you divide the 2% coupon by the 100 price. There is alot of money in cash and Treasuries that is going to find a home and it will not move straight to high beta equities. I think we will see some more multiple expansion in low vol equities still. 20x is not that much higher than the earnings multiple on the market over the last 20 years.
Certainly if we have a pickup in economic growth, cyclicals will outperform as will companies with high financial or operating leverage. I believe that low vol stocks will still outperform when adjusting for their low risk. Investors are like snowflakes - unique horizons, risk tolerances, liquidity - for those who are seeking dividend income and want lower volatility - this is a great fund for the long-run.
Thanks - fschew - BRK generated this outperformance with greater volatility however (due to its leverage) - annualized standard deviation of returns was about a third greater than the overall market. Can the success be replicated - managers are in their 80s and they are having trouble re-investing their cash ...
Dividend Stocks And Higher Rates ('94 Example) [View article]
Equity/Fixed Income Momentum - June 2013 [View article]
Fixed Income Momentum - June 2013 [View article]
Revisiting The SuperDividend ETF And Its 7.3% Yield [View article]
While the ultrashort end is pegged, many of these REITs borrow in the belly of the curve so they do not have to continually roll financing. The cost on that financing rose - as a reference rate, the 5yr Treasury is up from .7% to 1%, so the spread that they are earning did not increase as much as you are suggesting.
Hope this helps - let me know if you have any more questions.
Fixed Income Momentum - June 2013 [View article]
Revisiting The SuperDividend ETF And Its 7.3% Yield [View article]
Revisiting The SuperDividend ETF And Its 7.3% Yield [View article]
Revisiting The SuperDividend ETF And Its 7.3% Yield [View article]
Revisiting The SuperDividend ETF And Its 7.3% Yield [View article]
Several readers noted that SDY has outperformed. In my article on the Dividend Aristocrats, I suggested that this fund would do just that in early 2013: http://seekingalpha.co...
Don'tbugmeplease - the dividend yield is certainly attractive, but if the combination of price return and dividend yield trails the broader market (with higher risk) then an investor could liquidate a portion of their higher principal balance and generate a higher pre-tax return.
A New Market Beating Dividend Fund [View article]
51 Stocks For A Recovering Economy [View article]
A New Market Beating Dividend Fund [View article]
http://bit.ly/10UlUTl
http://bit.ly/16QDgZi
The question then arises as to whether market's have figured out this anomaly and bid up the prices of low volatility stocks accordingly. While low vol stocks now trade at roughly an earnings multiple that is 3 turns higher (20x vs. 17x for market), if you flip this on its head then low vol stocks have an earnings yield 88bps lower. This is roughly the spread the between the debt of high quality companies (AA) and mid quality companies (BBB). I think that the equity multiple differential should be higher than the debt differential.
For those that view the P/E of 20x as too rich, it still looks cheap to Treasuries (think of the 2% yield on Treasuries as a 50x earnings multiple when you divide the 2% coupon by the 100 price. There is alot of money in cash and Treasuries that is going to find a home and it will not move straight to high beta equities. I think we will see some more multiple expansion in low vol equities still. 20x is not that much higher than the earnings multiple on the market over the last 20 years.
Certainly if we have a pickup in economic growth, cyclicals will outperform as will companies with high financial or operating leverage. I believe that low vol stocks will still outperform when adjusting for their low risk. Investors are like snowflakes - unique horizons, risk tolerances, liquidity - for those who are seeking dividend income and want lower volatility - this is a great fund for the long-run.
Low Volatility Investing In 2013 [View article]
Low Volatility Investing In 2013 [View article]
Low Volatility Investing In 2013 [View article]