Speakers Announced!

The preliminary list of Featured Speakers was released for the upcoming Spring 2015 ETP Forum NYC on Wednesday, April 1^st at The New York Athletic Club!  ETFG will Chair this event which once again looks to be terrific and will feature an all-star lineup located below.

To register, please visit here: Register  For more information, please visit www.expertseries.org and here is a link to Add to Calendar   We hope to see you there!

Featured Speakers:

Jeremy Schwartz, Director of Research, WisdomTree Asset Management

Mark Yusko (Keynote), CEO & CIO, Morgan Creek Capital Management

Chris Romano, Director of Research Applications, ETF Global

Mike Boucher, Portfolio Manager, Fidelity Investments

David LaValle, Head ETF Capital Markets, SPDR ETF Global Cap Markets

Charles de Vaulx, Chief Investment Officer, International Value Advisers

Ethan Powell, Chief Product Strategist, Highland Capital Management

Xiaolian Wang, Managing Director, MarketGrader Capital

Rick Ferri, Chief Executive Officer, Portfolio Solutions

Niall H. O’Malley, Portfolio Manager, Blue Point Investment Management

David Sherrill, The Vector Group, Morgan Stanley Wealth Management

Thomas Cavada, Mowrer-Cavada Wealth Management Group, UBS WM

Scott Dooley, Chief Investment Officer, Fusion Investment Group

Jay Hatfield, Portfolio Manager, Infrastructure Capital Advisors

Matthew Tuttle, Chief Investment Officer, Tuttle Tactical Management

Paul Yook, Portfolio Manager, BioShares Funds

Carlos Diez, CEO, MarketGrader Capital

David Perlman, ETF Strategist, UBS

Jeremy Eisenstein, Exchange Traded Notes, Credit Suisse

Daniel Zraly, Head of US Fixed Income ETF Trading, BNP Paribas

A. Seddik Meziani, PhD, Professor of Finance, Montclair State University

Thomas Picciochi, Multi-Asset PM & Trading, QS Investors

Jason Nicastro, Senior Research Analyst, LPL

Jason DeSena Trennert, Managing Partner, Strategas Research Partners

Scott Ladner, Head of Quant & Alts Strategies, Horizon Investments

Joe Anthony, President, Financial Services, GREGORY FCA

Edward Rosenberg, Head ETF Capital Markets & Analytics, FlexShares

Thank you for reading ETFG Perspectives!

Smart Beta Product Highlight

We enjoy highlighting new and innovative ETF strategies as exchange-traded-products have exponentially expanded the universe of available investment options in a transparent, cost effective and tax-advantaged manner.  With strong outperformance by international equities so far in 2015, we sought a fund to highlight offering diversification and a strategy easy to understand.

Our search brought us to the Vident International Equity Fund (VIDI) where a unique rules-based approach creates a fund offering international exposure beyond most market cap weighted products.  Unlike the MSCI ACWI ex US Index, where the market cap weighting results in an 85% allocation to developed markets, the Vident International Equity Index focuses on identifying countries that have policies to promote human capital and deliver superior long-term returns.

Consisting of 35 different countries, the index is equally weighted before the first reweighting based on stress testing to determine how sensitive each market is to a variety of economic shocks.  Further adjustments are made based on 4 broad headlines:  growth (tax and regulatory burden), sound money (trade barriers, financial regulation), political stability (rule of law, corruption) and price (current market valuations to fundamentals.)  A final screen looks at momentum and other corporate fundamentals to quintile the countries with automatic adjustments to the overall market allocation reconstituted every January and rebalanced in July.

Given the weighting system, it’s not surprising that its performance has a strong emerging market flavor compared to the iShares MSCI ACWI ex US (ACWX) fund.  Since VIDI’s inception on 10/30/2013, the fund has returned -1.35% compared to 1.05% for ACWX and -2.33% for the iShares MSCI Emerging Markets Index ETF (EEM) and is currently underperforming ACWX in 2015 by 1.2% (up 4.1% to ACWX’s 5.37%.)   The main culprit is a greater weighting towards Asia where the fund has nearly twice the exposure to emerging market positions than ACWX in countries like Malaysia and India with the fund’s largest single position is a 2.4% allocation to the iPath MSCI India ETN (INP), up 8.56% YTD.  The larger Asian allocations come at the expense of developed European markets where the largest underweight is the United Kingdom with the fund maintaining a small 2% allocation (compared to ACWX’s 14.5) due to what they feel are weaker growth prospects and already high prices.

Despite the above, VIDI has managed to grow to over $740 million by offering investors more than just one-stop shopping for the international sleeve of their portfolio.  VIDI offers a transparent and understandable portfolio management solution that is also cost effective.  While not considered to be an actively managed fund by ETFG, the .75% expense ratio charged by the fund for the annual reconstitution and rebalancing may be more palpable when compared to the fee’s charged by active mutual fund managers in the foreign large blend or emerging market categories where the average fee’s in 2014 were 1.23% and 1.58% respectively.  Those higher fee’s haven’t greater performance in 2015 with the average EM fund up 2.3% and the average FLB fund is up 5.49% excluding any front-end charges.

Thank you for reading ETF Global Perspectives!

Dollar Doldrums

With last Wednesday’s release of the FOMC meeting minutes, as well as, the on-going drama in Greece, investors can be forgiven for overlooking the subtle shift in the market this February that could threaten to upset investor allocations.  After reviewing the ETFG Behavioral Top 25, we’re wondering if a major shift in investor attitudes towards currency risk could soon take place and what profound impact it could have on performance going forward.

The large number of healthcare and biotechnology funds that dominated the ETFG Behavioral 25 list in 2014 has been steadily eroded - 5 of the top 10 places are now held by European equity funds.  More surprising is the make-up of the funds on the list; despite a blistering 34.38% advance since it’s low on January 30th, the Global X FTSE Greece 20 ETF (GREK) is nowhere to be found as the recent improvement in momentum can’t quite overcome declining short-interest.

Only two funds offering exposure to specific European national markets, the iShares Currency Hedged MSCI Germany ETF (HEWG) and the iShares MSCI Netherlands ETF (EWN) made the top 25.  While both funds have underperformed the broader iShares MSCI EMU Index (EZU) so far up 6.35% this month or the hedged equivalent (HEZU) that is up 5.61% in February not to mention other iShares market specific funds, EWN and HEWG do offer one attractive feature namely lower risk.  Both funds have lower ETFG Red Diamond Risk ratings than EZU, HEZU or nearly any other European equity fund.

Despite the massive inflows into our current #1 ranked fund, the WisdomTree International Hedged Equity Fund ETF (HEDJ), the bulk of the European equity funds on the list offer unhedged currency exposure.  Another outcome of the shift in investor focus towards Europe has been the loss of momentum by the PowerShares DB US Dollar Index Bullish ETF (UUP) which is setting up for its first monthly decline since June of 2014, down .68% so far in February versus a .65% advance for the Guggenheim CurrencyShares Euro Trust (FXE.)

Consider the second order effects of a weakening dollar, especially on the materials sector that has not so quietly taken over sector leadership with the Materials Select Sector SPDR (XLB) up 8.89% in February versus 5.78% for the broader S&P 500.  And while the small rally in commodities such as copper, corn and crude has boosted XLB, it’s had more of an impact on commodity dependent economies with the iShares MSCI Australia Index Fund ETF (EWA) and the iShares MSCI South Africa ETF (EZA) making our top 25.  Neither fund offers a great deal of materials or energy exposure (EWA has 3X exposure to banks than mining), but do offer exposure to two currencies that have each lost over 23% of their value during the last two years thanks to their economies dependence on supplying natural resources to the rest of the globe.

To take advantage of rising commodities or a falling dollar, check out three names from this week’s ETFG Behavioral Quant Movers: the First Trust Canada AlphaDEX ETF (FCAN), the Global X FTSE Argentina 20 ETF (ARGT) and iShares MSCI Chile Index Fund ETF (ECH.)  The economies of Canada, Chile and Argentina have long been associated with supplying natural resources and suffered accordingly in 2014 as a slowing global economy and rising dollar hampered demand.  All three funds have outperformed broader equities indices but for a host of country-specific factors, they still have underperformed the broader commodity complex and could offer additional value to the brave investor.  Brent has bounced over 14.6% in February but energy prices are still well below the production cost per barrel for the Canadian tar sands and continue to weigh down FCAN thanks to its 30% energy allocation despite the Loonie’s 1.5% bounce this month.  While copper and agricultural commodities may have bounced 4% in February, local politics play more of a role south of the border where a loan scandal threatens to derail populist reforms and increase uncertainty in Chile while Argentina remains Argentina.

Thank you for reading ETF Global Perspectives!

Watching the Wings

With more than three quarters of the S&P 500 having reported 4th quarter earnings, we did a deep dive into our ETFG Behavioral Quant movers to see what funds are picking up momentum and which are starting to look wistfully at the broader market.  While the healthcare sector continues to see the fastest overall earnings growth, big earnings surprises in the tech sector have blown away analyst’s year end expectations for earnings growth and not surprisingly the sector has come to dominate our Behavioral Quant movers list.

One of the biggest gainers last week was the iShares PHLX Semiconductor ETF (SOXX) which capped the week with a strong 5% advance on the back of Qualcomm’s agreement with China’s National Development and Reform Commission (NDRC) to end its anti-trust investigation and pushed the stock up nearly 6.9% for the week.  SOXX wasn’t the only tech fund to see a strong shift in momentum, as both the iShares U.S. Technology ETF (IYW) and the iShares North American Technology Index fund (IGM) saw a major sentiment shift that sent their Quant scores soaring.  Don’t let their nearly identical names and top ten holdings fool you; there is one major difference between the funds with IGM having nearly 2x the holdings of IYW and includes allocations towards internet retail (Amazon) and services (ADP) that IYW is lacking, although this comes at the expense of a seriously reduced allocation to Apple (9.2% to IYW’s 19.2%).  But that more diversified focus might be the reason why smaller IGM shot past IYW to land at the 16^th spot in our Quant rankings.  Those investors who like to focus on the forward P/E ratio but still love tech stocks might want to take heart; the tech sector is now trading at a forward P/E ratio of 16.1 compared to 17.1 for the market as a whole.

Earnings misses at Citigroup and Morgan Stanley have weighed heavily on the S&P 500’s earnings (in fact quarterly earnings would be up 8.8% ex financials versus the blended 6.3%) and the performance of broad sector trackers such as the Financial Select Sector SPDR (XLF) which in addition to underperforming last week, remains in the red YTD with a loss of 1.21% compared to a 1.85% gain for the broader market.  XLF may have the third weakest behavioral score of any of the select sector SPDR’s, the weakness has spilled over to the SPDR KBW Bank ETF (KBE) and iShares Dow Jones U.S. Financial Services Index Fund ETF (IYG), both of which saw major drops in their Quant Behavioral scores last week.  Unlike the tech ETF’s IYM and IGM, there’s no one underlying name that has been weighing down both funds.  With heavy exposure to large-cap names including last week’s biggest loser, American Express, the amount of pain heaped upon IYG isn’t surprising while KBE’s exposure to those small banks hardest hit by a low interest rate environment (and who stand to benefit the most from expanding net interest margins) has helped it weather the financial storm in 2015.  So far, the fund is only down .21% YTD compared to -1.64% for IYG and -1.21% for XLF.

But for all of those buy and hold investors in bank stocks, the financial sector currently has the lowest forward price-to-earnings ratio in the S&P 500 at 13.5 versus 17.1 for the market as a whole.  And what’s the most “expensive” sector?  Not surprisingly, energy stocks at a forward P/E of 27.6 as collapsing earnings forecasts for the coming year have pushed its forward P/E to more than twice its long-term averages while simultaneously pushing the 4Q revenue growth for the index from 6.1% ex energy to 3.1% as of 2.13.  While there were no energy names on last week’s list of big Quant movers, the Energy Sector Select SPDR fund (XLE) has now outperformed the S&P 500 for 4 straight weeks as energy prices have seemingly stabilized for now.  But even as the energy sector shows signs of life, the heartbeat is starting to fade in the healthcare sector.  Despite having the strongest earnings growth rate in the S&P, the Healthcare Select Sector SPDR (XLV) has now underperformed the market for the last two weeks as surging confidence in equities since the start of February has weakened support for last year’s outperformers like utilities (XLU down 6.5%) and REIT’s (IYR down 1.13%) while healthcare has managed an anemic 2.09% gain.  With above market valuations and high growth forecasts, careful market watchers might want to keep their focus on the sectors at the extreme ends of the market.

Thank you for reading ETF Global Perspectives!

Spring 2015 ETP Forum–NYC April 1st

We are excited to announce that ETF Global will again serve as Chairperson for the upcoming Spring 2015 ETP Forum-NYC on April 1^st at the New York Athletic Club in midtown Manhattan!

For those who have yet to attend this semi-annual event, this one-day conference brings together some of the most widely recognized experts in Exchange-Traded-Funds and Capital Management.

The ETP Forum is a very different type of industry meeting that provides for renowned speakers to address cutting-edge topics within a vibrant and intimate learning atmosphere.  The forum is produced by The Expert Series and features truly expert panels focused on both Wealth Management and Institutional topics.

For complete event details including the agenda, registrations, speakers and sponsorship, please visit www.expertseries.org   We look forward to seeing you there on April 1st!

Thank you for reading ETF Global Perspectives.

New-to-Market: DVP

New-to-Market:  This featured blog series highlights ETFs that have recently gone public and reflect those strategies currently most in-demand by investors.  Our goal is to bring you timely insights on the most cutting-edge investment strategies that have recently embraced the ETF structure and may be too early to be eligible for ETFG Risk & Reward Ratings* – we hope you enjoy this series.

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In continuing our “New to Market” series of featured posts, we take a deep dive into the world of value investing strategies.  By focusing on the highest yielding securities within a particular benchmark, investors are likely to find those stocks that have lagged the broader index for an extended period with the assumption that mean reversion will lead to relative out-performance in the near future.  Filtering the "Alpha Seeking" universe via the ETFG Scanner, we find one deep value fund that not only combines the ease of investing within an ETF and actively managed value investing strategies, but also top-notch performance in its category thus far in 2015 - DVP.

The fund is the new TWM Deep Value Fund ETF (DVP), which was launched late in the 3^rd quarter of 2014 and has already gotten off to an impressive start in 2015; up 3.17% YTD putting in the top percentile of its category (Large Value) and well ahead of the .47% gain registered by the S&P 500 from which it draws its components.  The fund’s benchmark is the TWM Deep Value Index which draws 20 stocks from the S&P 500 chosen using a simple rules-based methodology that would be familiar to value gurus like Benjamin Graham although not as strict as his “cigar butts” policies.

Companies included in the index must have positive earnings, generate free cash flow and currently pay a dividend.  According to the fund’s prospectus, once the list has been derived, the fund will use a weighting system that re-sorts the individual stocks based on different valuation metrics such as FCF, EBITDA and enterprise valuation with the 10 most ‘undervalued’ securities getting 60% of the weighting (7.5% in the first five, 4.5% in the next five) and the bottom 10 getting 4% each.  The most undervalued 10 stocks are generally held for a whole year while the other 10 stocks are re-evaluated and reweighted quarterly.

Like the ALPS Sector Dividend Dogs (SDOG), the fund owes a lot of its success in 2015 to the telecommunications sector where the acquisition of land-line customers among other assets from Verizon has pushed Frontier Communications Corp (FTR) up 23.84% YTD and up over 95% in the last year.  With over 50 holdings, SDOG’s current allocation to FTR is only 2% whereas DVP has the stock in the top 5 “undervalued” holdings with a current weighting of 8.85% thanks to the strong price appreciation since the last rebalancing with another 7.17% currently in Verizon and slightly less than 4% in AT&T giving the fund heavy exposure to the telecommunications sector where the telecom iShares (IYZ) has underperformed the S&P 500 by 200 bps annually over the last five years.  Investors worried about buying into another deep value cigarette-only portfolio, should take heart that consumer discretionary names make up nearly a quarter of the fund where double digit returns from Gamestop and Kohls have added some diversity to the returns generated by the telecom positions.

The ultimate attraction of DVP for many investors may be in part the active management compared to other funds using a deep value methodology like SDOG or the Elements Dogs of the Dow ETN (DOD.)  The benchmark used by DVP is reconstituted annually with the top 10 undervalued securities being held for a full year while the ten smaller 4% positions are reconstituted and rebalanced quarterly.  Compare that to SDOG, which is reconstituted annually/rebalanced quarterly or DOD, which with only 10 positions has a substantially higher concentration risk and follows the classic Dogs of the Dow theory, so only updates its holdings in December.  While DVP does carry a higher expense ratio than SDOG, .8% versus .4% (and is only slightly more expensive than DOD at .75%), the potential value added by periodically “taking some chips off the table” might be more than enough to cover the added expense.

Investors looking for a smarter way to invest along the lines of many classic value strategies but with more liquidity than a mutual fund or separate account might want to keep DVP on their watchlist.

Thank you for reading ETF Global Perspectives!

*Please note that ETFs are eligible for ETFG Red Diamond Risk Ratings following 3 months of trading and ETFG Green Diamond Reward Ratings following 12 months of trading.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.  Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue.  Prices, values, or income from any securities or investments mentioned in this report may fall against the interests of the investor and the investor may get back less than the amount invested.  Where an investment is described as being likely to yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate.  Where an investment or security is denominated in a different currency to the investor's currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor.

Dogs on the Run

Investors who came into 2015 planning to reuse their 2014 playbook were given a rude shock on Friday as the surprising jobs report combined with the strong performance by crude throughout the week to suck all the momentum out of the “hunt for yield” trade with the Utilities Select Sector SPDR (XLU) dropping 4.12% while the iShares U.S Real Estate Fund (IYR) lost 2.64%.

You can imagine our little surprise when we checked our ETFG Quant Movers report and discovered that two small funds who focused on dividend payers and the classic “Dogs of the Dow” methodology saw big gains in their overall quant score and strong performance for the week to boot.  The first is the ALPS Sector Dividend Dogs ETF (SDOG) while the second is the Elements Dogs of the Dow ETN (DOD) up .74% and .72% respectively in 2015 while the DJIA is up .01% and the S&P 500 continues to lag at -.17%.  That kind of performance has us asking ourselves, can old dogs still bite?

2014 may have been the year for dividend payers, it certainly wasn’t a stellar year for the classic investment theory that advises determining ten highest yielding components of Dow Jones Industrial Average on December 31^st and holding an equally weighted portfolio of those stocks with the expectation that they will outperform in the coming year.  While there’s a lot of be said for simplicity, the Dogs of the Dow underperformed noticeably in 2014 with the ten highest yielding stocks of 2013 delivering a respectable 2014 performance of 7% compared to 10% for the DJIA ex the Dogs according to Dogs of the Dow.com.  Then again, the Dogs didn’t include any of last year’s high flying sectors like utilities or REIT’s but was dominated by telecom stocks, energy giants, consumer staples, tech stocks and believe it or not, the odd industrial.  Strong performance in 2014 by Microsoft, Intel and Cisco led then to escape the doggy doldrums but after checking our notes, what made last year so interesting for the Dogs was that the strongest performers weren’t necessarily offering the highest yields.

Momentum, one of the most persistent violations of the efficient market hypothesis, plays a role in much of our research and strong momentum played a key role in helping some of the Dow dogs escape the kennel in 2014.  2 of the 3 tech stocks that escaped from the dogs by outperforming the DJIA in 2014, Microsoft and Intel, had previously outperformed it in 2013.  The other Dow tech stock, Cisco, had underperformed the DJIA by nearly 1,000 bps in 2013 but historically the stock has much higher volatility relative to most of the Dow components and was only in the dog house for one year.  What really kept the high yielders from outperforming in 2014 was the fact that many of them had underperformed in 2013.  GE may have been the worst performing Dog in 2014 but most of the underperformance for the group as a whole came from components that had been underperforming the benchmark for extended periods such as Verizon and AT&T which underperformed in 2013 as well as McDonalds and new addition Chevron, both of which had underperformed in 2012, 2013 and 2014. 

If you were to look at those Dow stocks that were in the index in both 2013 and 2014, the chances of an underperformer in 2013 continuing to underperform in 2014 reached a post-Lehman extreme last year.  According to the Yinzer Analyst, of the 27 stocks that were in the Dow for all of 2013 and 2014, 12 underperformed the benchmark in 2013 and 9 or those underperformed again in 2014 so 75% of 2013’s underperformers did so again in 2014, a post-Lehman extreme.  Of the 15 Dow components that outperformed in 2013, 11 outperformed again in 2014, meaning 73% of the Dow outperformers in 2013 kept outperforming in 2014.  Strong momentum, and not the quest for yield, is what separated the winners from the losers in 2014 and so far, the story hasn’t changed much in 2015 although the names certainly have. 

At the end of 2014, the DJIA was yielding 2.58% and of the 15 stocks with higher yields, 10 are underperforming the broader index while McDonalds is only slightly ahead, up .3% this year while only 5 of the lower yielding Dow components are underperforming, led principally by financials J.P. Morgan and Goldman Sachs.  The strongest performance has come from some of the lowest yielding components including Boeing and Disney and while the strong performance last week by energy stocks including Chevron (6.91%) and Exxon Mobil (5.45%) did much to lift DOD and SDOG, the real boost came from telecom giants Verizon and AT&T followed by Pfizer on the back of “merger mania.”  Pfizer soared after announcing plans to acquire Hospira while funds from Verizon’s asset sales while be spent partly on share buybacks as well as freeing up capital for the next round of spectrum auctions or potentially buying Dish Networks and dragging sister telecom AT&T along for the ride.      

What do Verizon, AT&T, and Pfizer have in common with Exxon Mobil, Chevron and McDonalds?  They have all been persistent underperformers in the Dow while stalwarts like recent additions Goldman Sachs and Nike along with longer-term members J.P. Morgan and Johnson & Johnson are underperforming while low versus high yields seem to be playing little part in determining who out or underperforms the benchmark.  Mean reversion seems to be playing a stronger part as consistent underperformers, whatever their 2014 yield, finally begin to catch up as investors start to look for relative bargains among domestic equities and along the lines of the broader trend that has seen less globally dependent (and 2014 laggards) mid and small cap names outperform in 2015.   

While the Dogs of the Dow may be easy to remember, investors will need to dig deeper under the surface to find the truth behind 2015’s outperformance.

Thank you for reading ETF Global Perspectives!

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.  Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue.  Prices, values, or income from any securities or investments mentioned in this report may fall against the interests of the investor and the investor may get back less than the amount invested.  Where an investment is described as being likely to yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate.  Where an investment or security is denominated in a different currency to the investor's currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor.

"New-to-Market" - AMZA

Welcome to our new featured Blog Series entitled: "New-to-Market"

This periodic series of posts will highlight select ETFs that have recently gone public and reflect those strategies currently most in demand by investors. Our goal is to bring you timely insights on the most cutting-edge investment strategies that have recently embraced the ETF structure – we hope you enjoy this new series.*

The zero interest rate policy era may have been tough on investors seeking income, but it has been a blessing to Master Limited Partnerships (MLPs) as the number of publicly-traded mid-stream MLPs has more than doubled since 2008 with investors trading earnings growth potential for stable income and no pesky K-1.  In recent years, you have probably reviewed products with “equity income” or “energy infrastructure” somewhere in the name, helping fuel this explosive growth in the sector.

The MLP space is currently dominated by two funds; the Alerian MLP ETF (AMLP) with $9.05 billion and benchmarked to the Alerian MLP Infrastructure Index while the second largest fund is the JPMorgan Alerian MLP Index ETN (AMJ) with $5.6 billion and benchmarked to the Alerian MLP Index.  Both benchmarks are market-cap weighted and adjusted for free-float, but like many benchmarks in the natural resources universe, the number of available companies to build an index around is fairly small, leading the Infrastructure Index to have 25 constituents while the MLP Index has 50 and with a large degree of cross-holdings between the two funds.

For those investors looking for the higher yields in MLPs but not willing to sacrifice all the possible upside as the energy sector looks to retrace a 26% sell-off since last June might want to consider the first actively managed MLP fund, the InfraCap MLP ETF (AMZA.)  Launched last October and targeting an 8% distribution yield from MLP dividends and option income, the fund is smaller than its larger rivals AMJ and AMLP but unlike them, the fund is not based on a market-cap weighted index and can actively rotate among the available MLP universe to find the best opportunities and reduce the likelihood of highly correlated performance.  As an example, both AMJ and AMLP have a large allocation to Enterprise Product Partners, LP (EPD) at 17.8% and 10.1% respectively while AMZA currently maintains an allocation of 8.7%.  Other distinguishing features of the fund include the ability to invest directly in the general partner/plan sponsor, which could lead to larger capital gains while reducing some of the income potential and they can also employ leverage to magnify returns. 

That ability to invest anywhere within the midstream universe while employing leverage isn’t without its risks however.  During the great energy stock rout last year, the income producing abilities of the MLP space helped cushion their downside compared to the broader energy sector, but from AMZA’s inception on October 2^nd to the energy sector low on January 14^th, larger rival AMLP was 11.79% while AMZA underperformed the XLE, down 19.55% compared to its 16.35%.  But as investors start to return to the sector, the shoe has been on the other foot as MLPs have outperformed the broader market, with AMLP up 5.76% from January 15^th through yesterday, XLE up 8.39% and newcomer AMZA, currently long 120%, up over 11.59% compared to the S&P 500’s 1.93% gain.

For those investors willing to trade some income for great upside opportunity when oil stocks begin to rise, AMZA could be a focus fund to watch.

Thank you for reading ETFG Perspectives!

*Please note that ETFs are eligible for ETFG Red Diamond Risk Ratings following 3 months of trading and ETFG Green Diamond Reward Ratings following 12 months of trading.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.  Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue.  Prices, values, or income from any securities or investments mentioned in this report may fall against the interests of the investor and the investor may get back less than the amount invested.  Where an investment is described as being likely to yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate.  Where an investment or security is denominated in a different currency to the investor's currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor.

Yield Hunting

If you’ve been managing money over the last six years, at some point you’ve been asked “when are rates going to rise again” followed by the even harder “what am I supposed to do for retirement income?”

Following last week’s equity rout that saw the S&P 500 pullback 2.69% and the ten year Treasury yield drop another 7.8%, investors and their advisors are wondering if they’re right back to where they were in 2011.  Should they commit more to their bond portfolios and the possibility of negative real rates of return or just given in and join the chase for higher dividend yields in equities?  Everyone else did in 2014, but with the Real Estate iShares up 5.71% in January and the SPDR Select Utilities Sector ETF up 2.33%, what happens to your portfolio if the Fed decides to hold off on rate hikes or gulp, starts QE4?  Will it be 2013 all over again?

Using the ETFG Scanner to screen funds based on trailing twelve month yield is one way to find a higher yielding investment, but what about those investors who aren’t interested in picking up pure high yield bond exposure or Brazilian equity exposure?  First, change the filter under “Focus” to multiasset-target outcome and resort the list based on assets under management.  A whole cottage industry has grown around developing funds generating higher income with less volatility and the number of funds has grown substantially over the last several years with our filter showing 26 funds in this space, most in existence for less than three years and with a mix of active and passive managers.  And while there may be a flavor for every investor there are, broadly speaking, two basic investment models they employ.

First are those funds that invest in what would be considered the “classic” high income categories that you’ve probably had pitched to you by a fund wholesaler such as REIT’s, MLP’s and preferred stocks although a small allocation (20% or less) may be set aside for high yield bonds.  The focus is on generating income but with more equity upside potential and consequently, more equity volatility that some conservative investors might want.  The two largest funds on our list fall into this category with the Guggenheim Multi-Asset Income ETF (CVY) with a strong leaning towards financials (30.9%) and energy stocks (23.51%) which weighted heavily on the returns in 2014, down 4.33% and 1.92% in 2015.  The First Trust NASDAQ Multi-Asset Diversified Income Index Fund (MDIV) relies on the same equity categories to generate the bulk of its returns although the largest single allocation is in a sister fund, the First Trust Tactical High Yield ETF (HYLS), which as the name implies is all high yield bond, all the time.  That high yield bond exposure helped dampen some of the downside volatility although the strong 8% return in 2014 had more to do with the REIT allocation, currently around 33% of assets.

The other (and better performing option so far this year) is to turn to the “conservative allocation” space, where the allocation is more bond-centric with smaller equity allocations that could provide some upside potential but more tend to cushion capital loss in the event of a bond sell-off.  A prime example would be the iShares Morningstar Multi-Asset Income (IYLD), a fund-of-funds product that unlike CVY or MDIV can boast a positive YTD return of 1.72%.  The secret to its success is a 60% bond allocation although only slightly less than 6% is invested in the iShares 20+ Year Treasury Bond ETF (TLT).  Approximately 45% is being put to work in investment grade and high yield credit with 20% invested in mortgage REIT’s and International REIT’s.  While that large bond allocation helps IYLD offer a lower standard deviation of 6.6% compared to 9.83% for CVY, the trade-off is what happens in a rising rate environment.  In 2013 IYLD delivered an uninspiring .47% return compared to 19.42% for its equity heavy brethren CVY.

For those investors who want another option besides building portfolio’s around REIT’s or Treasuries might want to consider the active management space where two funds, the AdvisorShares YieldPro ETF (YPRO) and SPDR SSgA Income Allocation ETF (INKM), have stood out from the pack with strong performance in 2015.  Both funds actively rotate between cash, fixed income and equities seeking to maximize risk and return; YPRO does so with a targeted absolute volatility of between 2% and 6% (according to AdvisorShares, it has around 2.65% since inception) while INKM doesn’t specify any specific risk target.  These two funds might seem like convenient one-stop shopping and you would be right because they were intended to be used as core holdings within a portfolio, meaning that the principal downside for some asset allocators would be the fact that the allocation does actually shift and could leave your clients with more equity or interest rate risk than they would be comfortable with.

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