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Sizemore Capital Allocation Change: Dividend Appreciation

Sizemore Capital is making a strategic allocation shift for all ETF portfolios with U.S. large cap exposure.  This affects the Tactical ETF Portfolio and the Strategic Growth Allocation.

To be consistent with Sizemore Capital’s focus on dividend growth, we are eliminating our long-term positions in the iShares S&P 500 Index (NYSE:$IVV) and replacing them with the Vanguard Dividend Appreciation ETF (NYSE:$VIG). 

The Vanguard Dividend Appreciation ETF tracks the performance of the Dividend Achievers Select Index, which consists of U.S. stocks that have long history of raising their dividends.  Every stock in the portfolio must have raised its dividend for a minimum of 10 consecutive years.

Much of our research and investment in recent years has focused on income and income growth, and for good reason.  Capital gains can be ephemeral, and the only way that investors can realize their returns is by selling shares.  Rather than enjoying the milk in the form of dividends, you end up slaughtering the cow. And continuing this analogy, once the cow is gone investors are left with nothing to eat.

I should note that both the Tactical ETF Portfolio and Strategic Growth Allocation are long-term growth models with current income as only a secondary objective. But even for growth-oriented investors with years or decades until retirement, a dividend-growth strategy makes sense, and the Vanguard Dividend Appreciation ETF is very consistent with a growth strategy.

Remember, the Vanguard Dividend Appreciation ETF does not have current income as its primary objective.   With a current dividend yield of 2.0%, it doesn’t pay significantly more than the S&P 500’s 1.9%.

Its focus on dividends is instead a focus on quality.  When a company raises its dividend, it sends a powerful message that management sees better days ahead. The discipline required to consistently pay a dividend also has a way of discouraging management from wasting shareholder money on quixotic empire building or on overpriced mergers that fail to deliver value.  It forces management to be efficient.  And importantly, it also helps to keep management honest.  Paper earnings can be manipulated, but dividends have to be paid in cold, hard cash.  Dividends don’t lie.

My good friend Albert Meyer of Bastiat Capital refers to his own strategy as “an index fund, but without all the rubbish.”  (It sounds classic in his professorial South African accent.)

This is how I like to think of the Vanguard Dividend Appreciation ETF.  With a portfolio turnover of only 14% per year and a management fee of only 0.13%, VIG enjoys the best aspects of an index fund—tax and fee efficiency—but without the baggage of the lower-quality companies that bog down most indices.

The Strategic Growth Allocation currently already has a position in the iShares Dow Jones Select Dividend ETF (NYSE:$DVY). It is fair to ask whether an additional position in the Vanguard Dividend Appreciation ETF is redundant.  But to this question, I would give an emphatic “no.”

DVY is primarily an income-focused ETF with a heavy allocation the utilities sector.  VIG is a growth-focused ETF with greater exposure to the consumer and industrial sectors.  Though they both have “dividend” in their titles, their strategies are vastly different (see “Dividend ETFs for Growth and Income”).

Disclosures: IVV, VIG and DVY are positions in Sizemore Capital accounts.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Sizemore on International ETF Investing

Writing for The Wall Street Journal’s SmartMoney, Alex Tarquinio discusses the pitfalls of international ETF investing: 

The ETF industry now offers 73 single-country funds, almost double the number from two years ago, with $47 billion under management. But having a thriving economy doesn’t mean that a country’s ETF won’t get crushed. One problem: Very few of these ETFs use hedging strategies to compensate for the movements of local currency. Those fluctuations can clobber a U.S. investor’s returns, especially when a currency drops in value against the dollar. Swiss bank UBS reports that from 2000 to 2010, while Taiwan’s economy had an average annual growth rate of 4.2 percent, its stock market barely budged in U.S. dollar terms, because of currency moves. Angus Shillington, director of international equities at Van Eck Global, a brokerage that offers single-country ETFs, says predicting which countries’ markets will avoid such problems “is more difficult than picking stocks.”

ETF defenders respond that hedging would make their products more expensive. Money managers who use the single-country products say that over the long term, currency fluctuations tend to even out. Charles Sizemore, a Dallas investment adviser, says he’s seen European ETFs benefit recently from the falling euro: “The lack of hedging is not necessarily a bad thing.”

To see the full article on SmartMoney.com, see “Wilting ETF Returns

Over longer time horizons, currency fluctuations tend to have a minimal impact on investment returns.  But in any given year or even decade, currency moves can mean the difference between earning a respectable profit or suffering a loss. 

The impact on investors is more complicated than simply translating the foreign stock price into dollars, however.  Consider the case of European exporters.  A falling euro makes European exports more attractive, which boosts sales.  And when your foreign revenues are coming in a stronger currency than your domestic expenses, that is a recipe for a nice little boost to earnings, all else equal.  This was certainly the case for American multinationals throughout the 2000s.  As the dollar sank against most world currencies from 2000 to 2008, revenues from overseas boosted earnings.  (This has since gone into reverse with the dollar rising as a safe haven currency.)

Currency risk is not something that should necessarily be avoided, but rather something that investors should acknowledge and manage (and at times even embrace).  At current prices, we consider the weakness of the euro to be a positive for the European stocks recommended by the Sizemore Investment Letter.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Charles Sizemore Discusses Actively-Managed ETFs

Charles Sizemore gave his thoughts on actively-managed ETFs to Jane Wollman Rusoff in the October issue of Research Magazine.  Here are a few highlights from the article:

That new kid on the block with the monogram “ETF” isn’t just passing through town — the exchange-traded fund is here to stay. And what’s been hyped for three years as the next big thing in the hot ETF market, actively managed ETFs, may soon spark major change… Alongside the immensely popular passive ETFs that track indexes, there are currently trading at least 36 active ETFs, whose managers seek to outperform the indexes…

In a perfect world, passive and active ETFs will coexist. “There’s room for both,” says Charles Sizemore of Sizemore Capital Management, in Dallas, and editor of The Sizemore Investment Letter. “If you find a good manager, an active ETF can definitely add a couple of points to your return every year. But there will be times when passive index exposure — in bonds or stocks — is exactly what you want.”

But as efficient as ETFs are, if invested with imprudence or using inappropriate funds, the vehicle can backfire.

“An ETF is like a gun — in the right hands, it can be used effectively and efficiently. In the wrong hands, it can be deadly and lead to financial destruction,” Sizemore says. ETFs’ famed liquidity is double-edged. “The flip side to being able to get in and out of the market quickly is the tendency to overtrade, and that’s one of the biggest detriments to long-term investing success. Financial advisors get lured into it, and they do so at their own risk.”

Sizemore considers leveraged ETFs “more of a gambling tool that encourage Mom and Pop investors to take risks they can’t afford.”

Mostly, there’s plenty to cheer about in the ETF space; for example, the availability of emerging markets’ sector funds.

“They enable you to invest in emerging markets and also cherry-pick the sector you want to get into. So, for example, you can get direct exposure to emerging markets’ consumers,” says Sizemore. “Emerging Global Shares has a suite of ETFs that includes an emerging markets’ consumer ETF ($ECON).”

Though providers continue to bring out an endless parade of new ETFs, some may be suitable only for short-term trades: that is, if narrowly focused, they might be thinly traded and have little chance of longevity.

Sizemore once invested in a luxury goods ETF but, never attracting enough assets, the fund closed.  In 2009, Stevens launched a family of faith-based ETFs — for the five largest Christian denominations in the U.S. — but FaithShares is now defunct too. “Not enough assets were gathered to make it profitable,” he says.

To read the article in its entirety, please see “The New Wave of Active ETFs.”

 

 

 

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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How to Choose the Right Dividend ETF

The stock market hasn’t returned a single red cent in over twelve years, as measured by the S&P 500. Twelve years is a long time to go without earning a return on your investment, particularly if you are close to retirement.

With the boom years of the 1980s and 1990s now a distant memory, it is not shocking to see investors losing faith in the cult of capital gains and gravitating instead to dividend-paying stocks and ETFs. In a world in which paper gains can be ephemeral, it’s good to be paid in cold, hard cash.

In many ways, this is simply a return to the basics of investing. Historically, before federal capital gains taxes and Modern Portfolio Theory shifted the industry to a focus on growth, dividends were the primary source of investor returns (see Figure 1), and over the past twelve years dividends have been the only source of investor returns.
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Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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