Total Return vs. Price Return Chart for the Dow and SP 500: Chart

Investors invest for the long-term and traders trade for short-term gains. The distinction is important when it comes to success in investing. Since most retail investor invest in equities to meet a long-term goal such as a retirement it is important to focus on total returns of an index as opposed to price returns when bench marking one’s portfolio returns. Since total returns includes dividends reinvested generally the returns will be higher than simple price returns.

The following chart shows the total returns vs. price returns for the Dow Jones Industrial Average and S&P 500 for five years ending in Jan, 2017:

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Source: Index Basics: Calculating an Index’s Total Return by Reid Steadman, Indexology by S&P Dow Jones Indices

For the period shown above, the total return index for the Dow was ahead of its price return index by 13.5%. For the S&P 500 the difference was 11.3%.

Related ETFs:

  • SPDR S&P 500 ETF (SPY)
  • SPDR S&P Dividend ETF (SDY)
  • iShares Dow Jones U.S. Select Dividend ETF (DVY)

Disclosure: No Positions

 

Which Sectors Perform Well Over The Long-Term In Emerging Markets?

Many emerging market (EM) investors consider commodities and energy as the best sectors to invest in those markets. This seem logical since many emerging markets are commodity based economies especially materials and oil. For example, Russia is a major oil exporter while Brazil is major exporter of natural resources and agricultural products.

While investing in emerging markets it is common for investors to go with these two sectors, in the long run the best performing sectors are consumer discretionary, consumer staples and health and not energy and materials according to an article by Charles Wilson, PhD of Thornburg Investment Management.

From the article:

Over the last 10- and 15-year periods, the MSCI emerging market consumer discretionary, consumer staples, and health care sectors have massively outperformed energy and materials. This outperformance included the period when oil prices increased by more than six times at the start of the last decade. For each period, all three sectors outperformed materials and energy substantially (See Chart 1). Even the period from the start of 2002 to the end of 2007, when global commodities saw their largest rally in decades, the health care, staples, and consumer discretionary sectors delivered respective annualized total returns of 19.5%, 17.3%, and 22%, which was roughly in line with the index return at 20%, with substantially lower risk as measured by volatility than that experienced in the materials and energy sectors. While we acknowledge that from time to time this strategy can lead to underperformance, we try not to make decisions with short-term performance in mind and instead continue to evaluate the long-term ability of our holdings to compound through a variety of economic environments.

Source: What’s Worked Lately in EM isn’t What’s Worked Long Term, Thornburg Investment Management

I agree with Charles’ argument. Equating emerging markets to just commodity investing is a wrong thesis. Another point to be noted is that energy and materials account for just about 8% each in the MSCI Emerging Markets Index. So in total they account for less than one of the index composition. So even if one were to follow the sector allocation of the index, these two sectors should not be the main focus of EM investors.

Investing directly in emerging market equities may not be suitable for some investors. The simplest way to gain exposure to these markets is via an ETF such as the iShares MSCI Emerging Markets ETF (EEM).

Disclosure: No Positions

Dow: March 1999 vs. January 2017

The Dow crossed 20,000 for the first time last month. The graphic below shows the index components back in March 1999 and January 2017. In 1999, the dot-com was all the craze but now it has replaced by social media, e-commerce 2.0, etc.

Back then the constituent with the largest market cap was General Electric (GE).Now its Apple(AAPL).Eastman Kodak has disappeared  Though the Dow is widely followed and is supposed to represent the US economy, there are many problems with this index. I will post an article soon on some of the issues with this index.

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Source: WSJ

Disclosure: No Positions

Which Sectors Are Most Likely To Benefit From US Tax Reforms?

In a post earlier today, I wrote about the proposed reduction in US corporate tax rate by the current administration. Should the rates decline substantially which sectors will be the biggest beneficiaries?. One of the misconception among investors is that the tech sector will be a big winner of a lower tax rate since they have huge cash hoards stashed abroad.  However according to an report at Franklin Templeton, the sectors that are likely to benefit the most are financials, consumer staples and industries.

From the article:

Financials, Consumer Staples, Industrials Likely to Benefit

Potential US tax reforms are likely to have a wide range of impacts on different sectors and companies within the equity market, but ultimately it depends on an individual company’s situation. That said, as we look across sectors, we see some companies more likely to benefit and some less likely to benefit. In our view, financial-oriented companies with higher effective tax rates are among the likely beneficiaries. We also would put consumer discretionary, consumer staples and industrials companies in that category, particularly companies with high domestic production operations and/or a specific export focus. Companies competing with large importers of goods may see a competitive advantage.

Those that may see a less significant benefit include health care and technology companies; in these areas we may actually see an increase in cash or GAAP tax rates,1 particularly for companies that have been a bit more aggressive with tax-planning strategies and/or the offshoring of a significant component of their operations.

Overall, we think tax reform is likely to be positive for US equities in general. The benefit from lower tax rates is likely split between earnings and cash flow at the corporate level. Combined with the effects of higher spending and possible domestic investment and other stimulus measures, we see the potential for US GDP growth to accelerate between 0.5% and 1.0% over the next several years.

Source: The Sectors Most Likely to Cheer US Tax Reform by Ed Perks, CFA, Franklin Templeton Investments

Since the election, financials and industrials have soared but consumer staples have lagged. So investors may considering adding consumer staples stocks while waiting for lower prices in the other two sectors and then adding stocks selectively.

The Proposed US Corporate Tax Rate Compared To Other Countries

The US corporate tax rate is one of the highest in the world especially among developed countries. President Trump has proposed to cut this rate to 19% to make the country competitive globally. However according to a report at Schroders the eventual rate is likely to be in around 25%.

The chart shows the current US rate compared to other countries and the proposed rates:

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Source: Letter from America – part two: What will be Trump’s top legislative priorities? by David Docherty, Schroders