In August of last year, Seeking Alpha published my Where To Invest $10,000 Today article. It was and still is a diversified portfolio that in many ways imitates my own personal investment style: investing for the long-term in some broad market ETFs, technology, growth, with exposure to some speculative growth for additional alpha. The last update on the portfolio was published on Seeking Alpha in March and I reported a 30.4% gain at that point (which beat the market). Today I'll discuss the portfolio's return since then and make a tweak due to a changing macro development in China.
Background
The "Where To Invest $10,000 Today" portfolio takes a relatively diversified approach that is designed to hold up well over the long-term and position the investor to benefit from what the market gives him or her. That said, I continue to review the portfolio and make some changes around the edges in response to changing macro events. However, the core holdings haven't changed much since the beginning as ~60% of the original portfolio was allocated to ETFs exposed to the DJIA, S&P500, Technology/Software, and Clean Energy Technology. Overall, these holdings have done quite well and haven't been touched since the portfolio's inception.
Portfolio Holdings
The portfolio's current holdings and market value as of the close on 8/2/2021 are shown below along with the changes since the last update in March:
Source: Author's Spreadsheet
As can be seen by the graphic, the performance since March was nothing to crow about (0.09% - trailing the market). A very strong performance by the iShares Tech/Software ETF (IGV), and relatively strong performances by the broad market ETFs (DIA) and (SPY), were largely negated by the severe underperformance by the SPDR S&P China ETF (GXC) and, worse yet, the Grayscale Bitcoin Trust (OTC:GBTC). As a result, and not counting dividends, the portfolio's 30.26% returns have barely outpaced the S&P500 returns of 28.9% since its inception of just under one year ago. That fact will likely give the "BogleHeads" (proponents of simply index investing in a low-cost vanilla S&P500 fund) a thrill.
Analysis
As can be seen by the graphic above, the portfolio's return was basically flat since the last update back on March 23. In such a strong market, a flat return - for all intents and purposes - equates to a "loss" in my opinion.
While the First Trust Clean Energy ETF (QCLN) was lower since the last update, I continue to be bullish on the sector. Note QCLN has been the best overall performer in the portfolio since inception. I will maintain this position.
Despite the downdraft in GBTC, and continual fears of regulation, and the threat of "competition" from central bank digital currencies ("CBDCs"). Yet regulations on the global distributed Bitcoin Network will be tough to achieve and CBCDs are no competition to BTC as they are just digital forms of fiat currencies while the total number of BTC is - now and forever - limited to 21 million. So I continue to be bullish on BTC's future for these and the other reasons outlined in my initial Seeking Alpha article on Bitcoin in November of last year. Nothing has fundamentally changed in my opinion. As a result, GBTC will remain the "speculative growth" allocation within the "$10,000 Portfolio".
However, the macro outlook for China-based companies has fundamentally changed in my opinion. As I pointed out in my recent article on the O'Shares Internet Giants ETF (OGIG), the recent and rather arbitrary China crackdown on technology companies has uncertain and negative long-term implications for US investors (see OGIG: Blunted By The China Tech Crackdown).
That being the case, and as can be seen above, the GXC China ETF is trading well below its high. As a result, I am swapping out of GXC and into the VanEck Semiconductor ETF (SMH). I am sure some of you will point out that SMH is trading at all-time highs and the change will arguably tip the portfolio to be somewhat over-weighted in technology. The decision is a testament to my long-term bullish outlook on the semiconductor and semi-equipment markers. Investors need only review recent EPS reports from the semiconductor makers and semi-equipment companies like KLA Corporation (KLAC). For example, KLA reported a blow-out earnings report last week:
- Non-GAAP EPS of $4.43 was a whopping $0.43 beat.
- Revenue of $1.93 billion was up 32.2% yoy and beat by $50 million.
- The company announced it was basically sold-out for the rest of this year.
- KLAC increased the quarterly dividend by 16.7% (to $1.05/share) and authorized a new $2 billion share buyback program.
The result was that the stock popped around 10%:
As I reported in my Seeking Alpha article on the SMH ETF back in April, the semiconductor sector is seeing strong demand across a wide variety of industries (automotive, smartphone, 5G infrastructure, networking, cloud computing, and AI - just to name a few). In my opinion, semiconductors have a long-term and fundamentally bullish outlook for many years to come. Investors should have a core holding in semiconductors (similar to my advice on the software sub-sector within technology). It would likely take a global economic calamity to see a meaningful decrease in demand for semiconductors. Meantime, there is money to be made in the sector.
A Word About Dividends
It's not that I don't like dividends (I do), and it might be somewhat non-intuitive that I am not focused on dividends (like many Seeking Alpha contributors...) considering the extremely low 10-year Treasury yield of 1.174%. But the fact is the market continues to reward growth over income. It's been that way for a number of years now and - despite the market rotation head-fake earlier this year (out of growth and into "value") - that continues to be the case.
One only needs to look at recent earnings reports from companies like Apple (AAPL), Amazon (AMZN), and Google (GOOG) to understand why these companies continue to out-perform the market.
And this is the main reason that dividend-focused investors have so badly lagged the market over the past few years. And that includes energy investors reaping what appear to be generous dividends, while the total returns from the energy sector have been truly pathetic - for over a decade now. As a result, the "10,000 Portfolio" does not emphasize dividends other than the typical exposure to them via the allocation to the various ETFs held within the portfolio.
Speaking of energy...
A Word About Energy
The energy sector certainly offered investors a bullish covid-19 "re-opening" thesis. Sure enough, according to Seeking Alpha's homepage sector watch as measured by the comparable returns of the SPDR Energy Select ETF (XLE), YTD energy is the market's leading sector with a 30%+ gain. The "$10,000 Portfolio" obviously missed this opportunity.
However, as noted in my bullish Seeking Alpha piece on the SPDR S&P O&G ETF (XOP) back in April, the energy sector still faces substantial headwinds: OPEC+ production increases, covid-19, and the new era of energy abundance. Unfortunately for the sector, the first two have come to fruition as low vaccination rates in many US states (self-inflicted social and economic wounds in my opinion...) have led to a renewed surge in covid-19 infections due to the delta variant. Florida, for example, recently hit a new record high in covid-19 infections.
Covid-19 Testing Lines In Miami
Source: 7-News Miami
As a result, the XLE index is off its recent high despite generally strong Q2 earnings:
While I expect ConocoPhillips (COP) to report an excellent Q2 report tomorrow (Tuesday, August 3rd) due to higher yoy O&G prices and production growth due to the Concho acquisition, the company has previously made it clear that it plans to over-emphasize share buybacks as compared to the dividend for the foreseeable future. That includes selling its entire stake in Cenovus (CVE) (~10% of the company worth an estimated $1.6 billion) and using ALL the proceeds for yet more share buybacks. This is not what investors wanted to hear and is exactly the problem with so many O&G companies: they waste billions of shareholder capital on share buybacks at market cycle highs instead of buying at market cycle lows (like last year).
That said, Chevron (CVX) - a company that has consistently allocated more shareholder returns in the form of dividends as compared to buybacks - had a very strong Q2. It delivered earnings of $3.1 billion ($1.60/share) and - more importantly - free cash flow of a whopping $5.2 billion ($2.68/share). As a result, Chevron announced it was resuming its share buyback program at a $2-3 billion annual run rate. Meantime, CVX pays a $5.36/share annual dividend for a 5.3% yield. Peer Exxon (XOM), despite much improved Q2 results yoy, did not restart share buybacks. Exxon continues to prioritize debt repayment due to last year's expansion of the balance sheet.
I continue to advise investors to take advantage of oil cycle highs to lighten up on O&G energy positions. The combination of generally poor executive management teams, the new era of energy abundance as a result of technology disruption (i.e. fracking + Hz drilling), combined with headwinds from electric vehicles and ESG concerns with respect to global warming, means the energy sector is likely to significantly under-perform the broad market over the coming decade (just as it did the last decade). That being my view, there is no direct energy investment in the $10,000 Portfolio.
Summary & Conclusion
No doubt the "$10,000 Portfolio" struggled since my last update in March. That was primarily the result of two holdings: the GXC China ETF and the GBTC Bitcoin Trust. The rest of the portfolio generally did pretty well. Swapping out of the China ETF and into the SMH semiconductors ETF should prove to be a long-term winner. Meantime, the volatility in Bitcoin was on display and will likely continue. That said, despite being significantly below its highs, GBTC is still up 42.6% since the portfolio's inception. That has beaten the S&P500 by ~10% and is exactly what an allocation to "speculative growth" is designed to do: beat the market.
