The Mutual Fund Lemon List

Transcription

1 Doug Fabian s SPECIAL REPORT For Weekly ETF Report Subscribers Only The Mutual Fund Lemon List * The Case Against Mutual Funds * 11 Dividend-Paying ETFs with Yields as High as 15.7% Doug Fabian Editor, Weekly ETF Report and Successful ETF Investing

2 IMPORTANT NOTE: This special report is for information and educational purposes only, based on current data as of December If you are a paid subscriber, do not buy or sell any investments until you have read the current issue of Successful ETF Investing or an update from Doug Fabian. The Case Against Mutual Funds Copyright 2015, by Doug Fabian. All rights reserved. No quotes or copying permitted without written consent. Published by: Eagle Products, LLC 300 New Jersey Ave., NW #500 Washington, DC / [email protected] Website: 2

3 The Mutual Fund Lemon List Do you own any of these mutual funds? RS Global Natural Resources (RGNCX NASDAQ) 2015 Return: - 33% Tortoise MLP and Pipeline Instl (TORIX NASDAQ) 2015 Return: - 29% PIMCO CommoditiesPLUS Strategy (PCPRX NASDAQ) 2015 Return: - 23% Vanguard Precious Metals and Mining (VGPMX NASDAQ) 2015 Return: - 28% Goldman Sachs MLP Energy Infrastructure (GMLPX NASDAQ) 2015 Return: - 30% MainStay Cushing MLP Premier (CSHZX NASDAQ) 2015 Return: - 27% Kayne Anderson MLP Investment Company (KYN NASDAQ) 2015 Return: - 58% Templeton Developing Markets Trust Class A (TEDMX - NASDAQ) 2015 Return: - 19% Ivy High Income Fund Class C (WRHIX - NASDAQ) 2015 Return: - 14% RS Global Natural Resources Delafield (DEFIX - NASDAQ) 2015 Return: - 11% 3

4 Vanguard Emerging Markets Stock Index (VEIEX - NASDAQ) 2015 Return: - 13% Russell LifePoints Balanced Strategy Fund Class E (RBLEX - NASDAQ) 2015 Return: - 11% State Farm LifePath 2020 Fund Legacy Class A (SAWAX - NASDAQ) 2015 Return: - 8% Royce Opportunity (RYPNX - NASDAQ) 2015 return: - 7% Berwyn (BERWX - NASDAQ) 2015 return: - 6% The Case Against Mutual Funds Introduction Every year, mutual fund managers, executives and various industry personnel gather in Chicago for the Morningstar Investment Conference to share ideas on the state of their industry. At the latest conference, according to one report, there was a conspicuously absent discussion of what I think is the biggest threat to the mutual fund industry the rise of exchange-traded funds (ETFs). 4

5 I m referring to an article that appeared on ETF.com and was appropriately titled, Behind Closed Doors, ETFs Are All the Rage. The piece correctly reported that the ETF market is the fastest-growing segment in the financial world today, expanding at roughly a 25-percent-a-year pace and now boasting more than $1.85 trillion in assets in the U.S. alone. Unfortunately, the mutual fund industry wants to keep that inconvenient truth on the back burner and from you, the investor. Investments of roughly $18 trillion are in mutual funds, including money market funds, and $1.8 trillion are in ETFs. Professionals get it. Most investment advisers are migrating to ETFs for their clients. Some retail investors use ETFs, but with one in two households in the United States holding a mutual fund, there is a long way to go for ETFs to catch up to mutual funds. Once investors understand the benefits of an ETF vs. a mutual fund, they will gladly make the leap as long as they have the knowledge to succeed. ETFs are not complicated; they are a very simple product. What makes using ETFs hard is the fact that there are so many now more than 1,500 funds. Some knowledge is required to build an ETF portfolio. Such information can be found through our new website, ETFU.com, my radio show, webinars and our newsletter, Successful ETF Investing. We are filling the knowledge gap that exists today with mutual fund investors so they can become proficient ETF investors. Our first step is educating and motivating mutual fund investors to look closely at the fees, costs and risks of mutual funds. That is the purpose of this report: The Case against Mutual Funds. Several factors contribute to the superiority of ETFs against mutual funds, though the big three are fees, taxes and the failure of active management. The Case Against Mutual Funds Fees If I told you where you could buy gasoline in your town for $1 a gallon, wouldn't you go there? Of course you would. 5

6 That's because $1 per gallon is about a 75% discount in cost from what you pay if you're in California. Well, it's the same thing for investment products. You see, the cost of owning the average mutual fund per year is much more than a comparable exchange-traded fund (ETF). Stated differently, an ETF costs about 75% less than a mutual fund -- and that makes a BIG difference over the course of five, 10 or 15 years. But why do mutual fund managers want to hide the facts? Simple: because the growing popularity of ETFs will almost certainly put the brakes on the mutual-fund-fee gravy train. The problem in the minds of investors, though, is that it appears that mutual funds are FREE. This is not the case; you see, when people realize how much of their money is going to pay for those high-priced mutual fund managers, executives and support personnel to go to conferences such as the aforementioned Morningstar gathering, they aren t going to like it. The mutual fund industry also realizes investors are going to like the fact that they only have to pay a fraction of the cost in fees to own many ETFs that are essentially the same as those high-cost indexed mutual funds. In fact, mutual funds are not required to report their fees, so investors often enter blind and blissfully unaware. Alternatively, the funds put their fee information in documents so dense that the average investor is unlikely to dig through and access the relevant information. And this information remains hidden even from those who do choose to invest in mutual funds: the fees are simply removed from investors accounts, without any notice, bill or receipt. When these phantom fees end up being three times as expensive as those of a comparable ETF, it is easy to see why many investors favor ETFs. I suspect that as more and more investors realize the virtues of owning exchange-traded funds over mutual funds, the mutual-fund-fee gravy train will continue to dry up. That is a great thing for you, the individual investor, 6

7 because the less you pay out in fees, the more money you keep in your pocket and the bigger you ll be able to build your ETF nest egg. Taxes ETFs are far more tax efficient than mutual funds. This situation is mainly due to the high turnover of positions held by mutual funds. That turnover leads to higher taxes for mutual funds. While ETFs follow indexes and stick to their positions, resulting in low turnover, mutual funds feature active management. These managers are responsible for mutual funds high levels of turnover, since they target specific concentrations in fewer stocks and readily move in and out of these positions. Because of this, wholesale liquidations are much more common for mutual funds, which thereby incur capital gains taxes. In addition, a change in managers can result in a complete portfolio revamping, triggering taxes on the previous manager s gains. Every change in a mutual fund s portfolio is considered a taxable event. In addition, mutual funds feature an annual tax, which hurts long-term performance. A mutual fund investor might even end up paying someone else s taxes. This is due to the timing of mutual fund distributions to shareholders: at the end of the year, all investors are taxed for the performance of the mutual fund over the entire year, no matter when they entered the fund. ETFs, on the other hand, as index-based investments, are structured differently and therefore avoid many of the tax issues that cripple the returns of mutual fund investors. Failure of Active Management For the most part, mutual funds don t beat the index or benchmark they re tracking. Mutual funds feature active managers who are constantly looking to generate profits, while ETFs passively follow the results of an index. 7

8 Research shows that 75% of mutual funds underperform their underlying index. A mutual fund manager could put together one or two strong years, but the results will revert to the underperforming mean eventually. Couple that with the aforementioned issues with fees and taxes, and mutual fund investors pay more for worse results. In contrast, ETFs are pegged to an index, so their consistent performance matches that index automatically. In addition, many investors let their money just sit around in mutual funds, accruing the burdens of fees and taxes. Since ETFs are traded like stocks, investors are encouraged to keep an eye on their positions and trade actively and intelligently. Other Factors In addition to these three main pillars, a few other factors contribute to the superiority of ETFs. Lack of access: Mutual funds do not invest in commodities, currencies or alternative strategies, nor do they give investors the flexibility of ETFs and access to investments like single countries, sectors, emerging markets, industry groups, leveraged funds, etc. Innovation: There is very little new innovation going on in mutual funds today, since launching a fund is very expensive and the marketplace is very crowded. But there are hundreds of new ETFs coming out every year. All of the innovation is happening in the world of ETFs. The vast number of new ETFs allows for many more experimental funds that explore sectors that mutual fund company management teams couldn t imagine entering. A look through these more offbeat ETFs could uncover dozens that may be a good fit for your portfolio. Liquidity: During the financial crisis in 2008, many investors who redeemed their mutual funds during the bottom of the crisis saw their investments sink in value. The reason a mutual fund is a bad vehicle in a down market is because, as redemptions occur, a portfolio manager will sell the most liquid investments, their best stocks and bonds. As the redemptions pick up, they are faced with selling less liquid assets and getting bad pricing. This situation holds especially true with bond funds. 8

9 In addition, there is now talk of imposing a redemption fee on less liquid assets. Also, if you have investments of $200,000 or more in a fund, you may end up receiving stock rather than cash if you want to redeem,. In other words, it s more difficult to exit a mutual fund, as you can get hit with penalties and fees for getting money out. Plus, when the next market correction hits, the mutual fund companies will sell their best assets first... But if panic ensues, and investors want to sell, the less liquid assets/positions will be left and exiting expediently may not be available. The Case for Exchange Traded Funds -- My Top 11 Dividend-paying ETFs Introduction The following report contains 11 of my best recommendations for dividend-paying exchange-traded funds (ETFs). I created this report as a way for you to blow the lid off of Wall Street s Cash Cow Con and get revenge on the unscrupulous brokers who have kept these investments from you. I m confident that after reading this report you ll agree with me: dividend ETFs offer independent investors like you and me outstanding capital gains AND up to five times the yields of traditional income plays. But do you know why your broker hasn t mentioned these investments to you? It s because he doesn t earn nearly as much in fees from putting you into them. That s just not right. And here s how we stop that injustice. With that, I leave you to enjoy The Top 11 Dividend ETFs to Buy Right Now. - Doug 9

10 Top Dividend ETF #1: ishares Mortgage Real Estate Capped (REM) This non-diversified fund tracks the investment results of an index which is composed of U.S. real estate investment trusts (REITs) that hold U.S. residential and commercial mortgages. The performance of REM is therefore based on the performance of the residential and commercial mortgage real estate, mortgage finance and savings associations sectors of the U.S. equity market. REM lost 9.65% in the first half of However, the fund currently features the highest yield of the 11 investments in this report, offering a whopping 14.44% that more than makes up for a performance stumble. This ETF has all of its holdings in the real estate sector. REM s top 10 holdings comprise 68.13% of its total assets. The top three of these companies are: Annaly Capital Management Inc. (NLY), 16.14%; American Capital Agency Corp (AGNC), 11.41%; and Starwood Property Trust, Inc. (STWD), 8.40%. 10

11 Top Dividend ETF #2: Global X SuperDividend (SDIV) This fund seeks to track the results of the Solactive Global SuperDividend Index, which is made up of a selection of high-dividend-paying global companies. SDIV rises when this index performs well and pays dividends itself through its investments in the indexed firms. And SDIV has weathered the turbulent market passably, down 3.99% in the first half of Beyond possible increases in share price, SDIV offers income-oriented investors a 6.94% dividend yield. This fund s largest sector weighting is real estate at 36.27%. Other large portions include financial services, 20.61%, and utilities, 10.11%. The fund s top 10 holdings comprise 14.10% of its total portfolio. The three highest of these holdings are: Evergrande Real Estate Group (EGRNF), 1.88%; Amlin plc, 1.55%; and Elisa Corp. (ELMUF), 1.49%. 11

12 Top Dividend ETF #3: PowerShares Global Listed Private Equities (PSP) This fund follows the Red Rocks Global Listed Private Equity Index, which is composed of securities, American depositary receipts and global depositary receipts of anywhere between 40 and 75 private equity companies, including business development companies (BDCs) and master limited partnerships (MLPs), among others. In short, PSP s success depends on the success of private equity companies, BDCs and MLPs. PSP gained 5.55% in the first six months of the year. This fund also offers its solid 8.99% dividend yield to catch the interest of investors. Most of PSP s holdings, 71.85%, come from the financial services sector, though it does have small allocations to the basic materials, industrials, technology, consumer defensive and healthcare sectors. Its top 10 holdings make up 43.13% of its assets and include investments not traded on U.S. exchanges. 12

13 Top Dividend ETF #4: SPDR S&P International Dividend (DWX) This exchange-traded fund (ETF) uses its assets to match the performance of the S&P International Dividend Opportunities index, which focuses on international dividendyielding stocks that are diverse, stable and easy to trade. As the graph below shows, DWX has been volatile at times, and it lost 1.31% in the first half of the year. It also offers a nice 5.64% dividend yield for investors interested in additional income. DWX holds its assets in a wide variety of sectors, with utilities, 18.77%, communication services, 17.45%, and energy, 17.12%, currently leading the way in a fairly well distributed allocation spread. This ETF s top 10 holdings make up 27.03% of its assets, and the most heavily weighted stocks in its portfolio are Fortescue Metals Group Ltd (FSUGY), 3.52%; Berkeley Group Holdings plc (BKGFY), 3.06%; and National Grid plc (NGG), 2.88%. 13

14 Top Dividend ETF #5: Alerian Master Limited Partnership (AMLP) This fund seeks investment results that match the performance of the Alerian MLP Infrastructure Index. This tracks the performance of selected publicly traded U.S. Master Limited Partnerships (MLPs) that focus on energy infrastructure. Given the struggle facing the energy industry of late, it is no surprise that AMLP fell 11.18% in the first half of Fortunately for its investors, AMLP provides an 8.13% dividend yield. With luck, AMLP might recover in the remainder of the year. AMLP is fully invested in the energy sector, which holds 100% of its assets. More than half, 66.64%, of AMLP s assets reside in its top 10 holdings. The top three of these are: Enterprise Products Partners LP (EPD), 10.40%; Magellan Midstream Partners LP (MMP), 7.93%; and Energy Transfer Partners LP (ETP), 7.87%. 14

15 Top Dividend ETF #6: PowerShares CEF Income Composite (PCEF) This ETF tracks the investment results that correspond to the price and yield of the S- Network Composite Closed-End Fund IndexSM. The fund invests at least 90% of its total assets in securities of U.S.-listed closed-end funds that comprise the underlying index. As a fund of funds, PCEF invests in the common shares of funds included in the underlying index, rather than in individual securities. PCEF s year through the first half was nothing to write home about, coming out with a 3.25% loss. The fund currently offers an 8.91% dividend yield. The fund s holdings are weighted 60.28% in bond funds and 23.58% in stock funds. Its top 10 assets comprise 24.15% of the portfolio and don t include any individual holdings above 4%. The top three holdings include PIMCO Dynamic Credit Income Common Fund, 3.70%; Eaton Vance Tax-Managed Global Div. Equity Income Common Fund, 2.93%; and AllianceBernstein Income Fund, 2.65%. 15

16 Top Dividend ETF #7: PowerShares KBW High Dividend Yield Financial (KBWD) This non-diversified investment is another fund of funds that tracks the performance of the KBW Financial Sector Dividend Yield Index. It invests at least 90% of its assets in the publicly listed U.S. companies making up the index that provide financial services and products, including banking, insurance and diversified financial services. The underlying index also may include securities of BDCs and equity and mortgage REITs. KBWD had a bumpy ride in the last few months. Through the first half of 2015, it lost 4.49%, and it has dropped further since. Its current dividend yield is 9.02%. KBWD s holdings are comprised of income-producing funds, with no individual position consisting of more than 4.66% of total holdings as of this time. The top 10 holdings themselves make up 38.58% of KBWD s total assets under management. Its top three holdings are: Medley Capital Corporation (MCC), 4.66%; Anworth Mortgage Asset Corp. (ANH), 4.63%; and PennyMac Mortgage Investment Trust (PMT), 4.55%. 16

17 Top Dividend ETF #8: ALPS US Equity High Volatility Put Write (HVPW) This non-diversified fund is unique among the 11 within this report, as its returns aren t tied directly to the performance of stocks or bonds. Its results correspond to an index called the NYSE Arca U.S. Equity High Volatility Put Write Index, which measures the return of a hypothetical portfolio consisting of exchange-traded put options which have been sold on each of 20 stocks and a cash position. The difficult first half of 2015 was kinder to HVPW, as it lost only 0.44%. Meanwhile, HVPW still offers a robust 9.86% dividend yield. The fund s top 10 holdings are all put options on 20 stocks and several bond positions. There is no weighted apportionment to any specific sector or industry. Currently, some of these 20 stocks are GoPro Inc., OPKO Health Inc. and Newmont Mining Corp. 17

18 Top Dividend ETF #9: SPDR Wells Fargo Preferred (PSK) This non-diversified fund tracks the performance of the Wells Fargo Hybrid and Preferred Securities Aggregate Index. PSK invests at least 80% of its total assets in the securities comprising the index. The index is a modified market-capitalization-weighted index designed to measure the performance of non-convertible preferred stock and securities that are functionally equivalent to preferred stock. As reflected in the chart below, PSK rallied significantly at the start of the new year and cooled off a bit to wind up losing 0.89% in the first half. This fund currently pays a 5.55% dividend. This ETF s holdings are predominately in the financial services sector, which makes up 85.93% of total assets held. No position currently is larger than 2.47% of total assets. PSK s top three holdings are PNC Financial Services Group preferred stock, 2.47%; HSBC Holdings preferred stock, 2.03%; and Goldman Sachs Group preferred stock, 2.01%. 18

19 Top Dividend ETF #10: Global X Superincome Preferred (SPFF) This non-diversified fund tracks the performance of the S&P Enhanced Yield North American Preferred Stock Index. It invests at least 80% of total assets in the securities of the underlying index, American Depository Receipts (ADRs) and global depositary receipts (GDRs). The underlying index tracks the performance of the highest-yielding preferred securities in the United States and Canada, as determined by Standard & Poor s. The chart below shows that SPFF went on a nice run early in 2015 before running into summer doldrums, ending in a loss of 2.81% for the first half of the year. It currently offers a 7.02% dividend yield. This ETF s holdings are 100% in the financial services sector. Its top 10 holdings reflect 36.57% of total assets, with no individual position accounting for more than 5.54%. SPFF s top three holdings are Wells Fargo & Co. Preferred, 5.54%; Gmac Capital Preferred, 4.05%; and Southwestern Energy Preferred, 3.82%. 19

20 Top Dividend ETF #11: IQ US Real Estate Small Cap (ROOF) This non-diversified fund tracks the investment results of the IQ U.S. Real Estate Small Cap Index. The fund employs a passive management style to track the performance of the underlying index, which was developed by Financial Development Holdco LLC, the parent company of Index IQ Advisors LLC, the fund s investment advisor. The underlying index is a rules-based, modified-capitalization-weighted, float-adjusted index intended to let investors track the overall performance of the small-capitalization sector. As the chart below reflects, ROOF has been on a downswing. ROOF finished the first six months of 2015 with a loss of 8.21%. The fund currently pays a 5.63% dividend yield. This ETF s holdings are 100% in the real estate sector and comprised of 99.4% stocks. The fund s top 10 plays constitute 29.67% of total assets, with no individual play accounting for more than 4.18%. The top three investments are New Residential Investment Corp. (NRZ), 4.18%; Hudson Pacific Properties, Inc. (HPP), 3.14%; and Medical Properties Trust (MPW), 3.13%. 20

21 Conclusion I hope this report encourages you to invest in exchange-traded funds. For my recommendations, see the latest issue of Successful ETF Investing (or go to Fabian.com to sign up for a risk-free trial subscription) To the best within us, Doug Fabian, Editor, Successful ETF Investing Doug Fabian Doug Fabian is the Editor of the free weekly e-letter, Weekly ETF Report plus his paid financial newsletter Successful ETF Investing. Both are published by Eagle Financial Publications. He also publishes the web site ETF University (ETFU.com), designed to educate investors about the benefits of exchange-traded funds. Doug has helped his readers successfully navigate bull and bear markets for more than 30 years. His flagship advisory service, Successful ETF Investing, has produced double-digit annualized returns since Doug often appears on CNBC, CNN and Fox News, and he has been featured in The Wall Street Journal, USA Today, The New York Times, Fortune, Smart Money and Barron s. Doug became a member of the SmartMoney 30 in 1999 a listing of the most influential individuals in the mutual fund industry. In the feature, SmartMoney magazine exclaims that Doug is the best-known trend follower among the $56 billion (and growing) group of financial advisers. In 2001, Doug wrote Maverick Investing, published by McGraw-Hill. Doug has become known for his expert knowledge and timely use of innovative tools like exchange traded funds, bear funds and enhanced index funds to profit in any market climate. 21

22 Eagle Products, LLC 300 New Jersey Ave. NW #500 Washington, DC / CAMF