Why Invest in Mid-Cap Stocks via ETFs

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Thousands of mid-cap companies trade on the US markets. These companies generally tend to have small market caps of $1 billion to $5 billion. Though the actual definition of mid-cap companies varies,  they can be considered as firms that are neither huge such as the giants with multi-billion market caps or very small with a few million dollar market caps or start-up companies. Investing in these middle of the range companies is extremely tricky and investors are better off investing in them via ETFs.

Some of the reasons to invest in mid-cap stocks using ETFs are listed below:

  • Mid-cap stocks are extremely volatile and investing in ETFs reduces the volatility risk.
  • It is very difficult to follow and keep track of all the news and earnings releases from these firms.
  • Individual mid-cap stocks are very risky to invest since picking the winners from so many choices is not easy.
  • Some of these companies have low trading volumes which makes them volatile and difficult to trade.
  • Many of these mid-caps do not pay dividends or have very low dividend yields making them unattractive for dividend reinvestment for higher returns.
  • As the dividend yields are tiny or zero, they are not income producing investments. Hence they are not preferred by income investors.
  • Diversification benefits offered by an ETF are simply impossible to replicate for retail investors.
  • Investing in mid-caps through mutual funds is an expensive proposition as mutual fund companies charge higher fees for these funds.

Some of the ETFs to invest in the mid-cap space include:

  1. S&P MidCap 400 SPDR ETF (MDY)
  2. iShares Russell Midcap Index Fund (IWR)
  3. iShares S&P MidCap 400 Index Fund (IJH)
  4. iShares Russell Midcap Growth Index Fund (IWP)
  5. Powershares Dynamic Mid Cap Growth Portfolio Fund (PWJ)
  6. Powershares Dynamic Mid Cap Portfolio Fund (PJG)
  7. Schwab U.S. Mid-Cap ETF (SCHM)
  8. SPDR Dow Jones Wilshire Mid Cap ETF (EMM)
  9. SPDR S&P 400 Mid Cap Growth ETF (MDYG)
  10. Vanguard Mid-Cap ETF (VO)
  11. Vanguard Mid-Cap Growth ETF (VOT)
  12. Vanguard S&P Mid-Cap 400 ETF (IVOO)
  13. Vanguard S&P Mid-Cap 400 Growth ETF (IVOG)

Disclosure: No Positions

The 20 Most Popular UK Equity Income Stocks

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FE Trustnet recently published a research report listing the most popular UK income stocks held by UK Equity Income Funds. The 20 stocks in the list are all members of the FTSE 100 index. According to the report, AstraZeneca, Centrica and Imperial Tobacco are the highest-conviction plays among UK Equity Income managers.

The most popular UK equity income stocks are listed below with their ticker on the US market and the current dividend yields:

S.No.CompanyTickerDividend Yield as of Feb 8, 2013
1GlaxoSmithKlineGSK5.16%
2Royal Dutch ShellRDS-A5.10%
3VodafoneVOD5.56%
4BPBP5.00%
5HSBCHBC3.17%
6British American TobaccoBTI4.06%
7AstraZenecaAZN5.90%
8Imperial TobaccoITYBY4.63%
9BTBT3.30%
10CentricaCPYYY4.54%
11BHP BillitonBBL2.87%
12UnileverUL3.16%
13Legal & GeneralLGGNYX4.49%
14Rio TintoRIO2.88%
15BAE SystemsBAESY5.57%
16TescoTSCDY4.04%
17Reed ElsvierRUK3.15%
18National GridNGG5.79%
19BG GroupBRGYY1.41%
20DiageoDEO2.41%

 

Source: The most-popular stocks with UK Equity Income managers, FE Trustnet

British companies have traditionally paid out a larger portion of their earnings as dividends compared to US firms.The country dividend yield for U.S. and UK as of Feb 7 is 2.1% and 3.3% respectively per FT market data. The dividend yield of the S&P 500 has stayed around 2% for many years now. High dividend yields and no withholding taxes on dividends for US residents make British income stocks attractive to US investors.

Except HSBC none of the other top British banks appear in the list above. HSBC weathered the global credit crisis well and has a strong presence in the US market. Imperial Tobacco and British American Tobacco have consistently paid out high dividends and are perennial favorites for income investors and fund managers alike. Overall US investors looking to add British dividend stocks to their portfolios can use the stocks listed as a starting point.

Disclosure: Long LGGNY

Why Invest In Oil Well Services and Equipment Companies

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One of ways to profit from the growth of oil industry in the U.S. is to invest in companies that supply the tools and services needed by the industry. This strategy is similar to the one followed by some investors that became rich by investing in picks and shovels rather than the gold miners during the great California gold rush of the 1800s.  Here are five reasons why investing in oil well services and equipment providers is a sound idea:

  • The big oil majors such as ExxonMobil (XOM), BP Plc (BP), Chevron (CVX),  etc. prefer to contract out work related to servicing of their rigs, maintenance of pipelines, construction, etc. to other companies who specialize in those areas
  • The services and technology offered by the service and equipment providers are hi-tech and cannot be easily replicated by new entrants in the field.
  • In addition to the U.S. market firms in the industry have presence abroad and have the potential from growth in overseas markets.
  • New discoveries of oil sources by the oil exploration and producing companies provide additional opportunity for growth.
  • Natural disasters, man-made disasters, terrorism,  etc.  affecting oil wells and pipeline systems offer additional businesses to these firms on a regular basis.

Five randomly-selected oil well services and equipment providers are listed below for further research:

1.Company: Baker Hughes Inc (BHI)
Current Dividend Yield:1.31%

2.Company:Diamond Offshore Drilling Inc (DO)
Current Dividend Yield: 0.67%

3. Company: McDermott International Inc (MDR)
Current Dividend Yield: N/A

4. Company: Nabors Industries Ltd (NBR)
Current Dividend Yield: N/A

5. Company: Transocean Ltd (RIG)
Current Dividend Yield: N/A

Disclosure: No Positions

U.S 10-Year Treasury Yields Since 1790

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Investors rushed into bonds in 2012 pushing the yield on the 10-year US Treasury bonds to under 2%, their lowest level since George Washington was president.

 

Click to enlarge

Us-interest-Rates-Since-1790

Source: Desperately Seeking Safety, Seth J. Masters, Alliance Bernstein

From the research report by Seth:

These extraordinarily low yields primarily reflect the Federal Reserve’s concerted efforts in recent years to stimulate the economy by buying Treasuries and mortgage bonds.

De-risking by individual and institutional investors alike has also pushed down bond yields. Bonds are now richly priced relative to expected economic growth and inflation.

It is interesting to see how the yield has varied over such a long period.The 10-year US Treasury yield stood at 1.95% as of Feb 8, 2013.The ultra-low yields hurt income investors who seek the safety of these bullet-proof investments. Rates below 2% also does not help offset the soaring real inflation that consumers are dealing with year after year.  One silver lining to the low rates is that investors may finally dump bonds and invest in equities to earn decent returns. That should give a further boost to the rising stock prices this year.

Related ETFs:

iShares Lehman 7-10 Year Treasury Bond Fund (IEF)
iShares Lehman 10-20 Year Treasury Bond Fund (TLH)
SPDR Lehman Long Term Treasury ETF (TLO)
SPDR Lehman Intermediate Term Treasury ETF (ITE)
iShares Lehman TIPS Bond Fund (TIP)
Vanguard Long-Term Government Bond Index Fund (VGLT)

Disclosure: No Positions

For a Guide to U.S. Government Bond ETFs click here.

For Fantastic Returns Should Investors Dive Into Frontier Markets?

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I recently came across an article on frontier markets in which Franklin Templeton’s Carlos von Hardenberg, the deputy manager of the $1.2bn Templeton Frontier Markets fund  stated that for sky-high returns investors should consider frontier markets. According to him, investors focusing on just the emerging markets for growth are missing the opportunities in frontier markets. However this trend seems to be changing with investors now more interested in frontier markets. These seems to be true based on a piece in Barron’s magazine today. More that below.

First let me summarize some of the key points mentioned by Carlos von Hardenberg:

  • Based on GDP growth, of the last world’s 10 fastest-growing countries in the world in the last decade just one of them is an emerging market. The rest are frontier markets.
  • Emerging markets are trading at a big premium compared to frontier markets. Frontier markets are trading at just 7.-5 times earnings relative to emerging markets’ 13-times earnings.
  • Frontier markets such as Nigeria are interesting. As an example, Guinness is selling more beer in Nigeria than in Ireland.

Source: How to tap into the world’s fastest-growing regions, Trustnet

From the Barron’s article Braving the Frontier Markets by Ben Levisohn:

Frontier markets are surging this year. Investors, however, should think twice before plunging headlong into stocks from countries as far-flung as Argentina, Bangladesh, Botswana, Slovakia, and Sri Lanka.

The appeal is obvious: The MSCI Frontier Markets Total Return Index has risen 8% since the start of the year, besting the MSCI Emerging Markets Total Return Index’s 0.4% return by 7.6 percentage points.

But frontier markets today are essentially what emerging markets were more than a decade ago—in both positive and negative respects. There’s the outsized growth, sure, but that comes with higher-than-average risks. Most frontier-market stocks trade infrequently, are expensive to enter and exit, and come with idiosyncratic factors that can cause markets to plunge or freeze up completely. It’s not a bet for the faint of heart—or an easy market to play. “It makes sense to have some exposure,” says David Romhilt, head of manager research for the Americas at Barclays in New York. “But there are real risks in the space.”

FRONTIER MARKETS HAVE A lot to recommend them. HSBC strategist John Lomax points to their high expected-growth rates and hefty dividends, which average about 5%, compared with just a 2.7% yield in emerging markets. Even better, frontier markets generally outperform emerging markets as investors feel comfortable heading for the more remote reaches of the world’s stock markets—which would be right about now.

So should investors simply dive into frontier market stocks with now?

The answer to the above question is an absolute no. Frontier markets are in general not for the faint-hearted. For example, the MSCI Frontier Markets Index fell over 67% during the global financial crisis. The benchmark indices of many individual countries fell even more.  The 5-year and 10-year return of this index are -13.07% and 6.08% respectively.

Frontier stocks are especially not worth the effort for retail investors. Investing directly in individual frontier market stocks is an extremely ill-risky proposition due to some of the reasons mentioned in the Barron’s article above. However this does not mean individual investors should stay clear of those markets. In order to profit from the growth in those markets one can assign a small portion of their portfolio’s assets to these markets. The actual percentage of allocation that one can allocate depends on a variety of factors such as portfolio size, goal, age, investment horizon of an investor. Some investors should simply avoid frontier markets at all costs. An example of such investor would be an average senior citizen depending on dividend income from a moderate-size portfolio.

If an investor is able to take the risk, the best way to gain exposure to frontier markets is via ETF. Some of the ETFs to access these markets are listed below:

Guggenheim Frontier Markets ETF (FRN)
iShares MSCI Frontier 100 Index (FM)
Market Vectors Africa Index ETF (AFK)
Market Vectors Gulf States (MES)
PowerShares MENA Frontier Countries ETF (PMNA)

Stock picking has become less attractive in the recent years after investors have been hit with one crisis after another. The dot-com implosion, the global financial crisis, the European soverign debt crisis, the Greek crisis, the Enron, Wamu, CountryWide frauds and uncovered frauds at money other companies have made stock picking a futile and losing exercise for retail investors. However stock picking can still pay off big if an investor is able to select stocks with thorough research. The stock picking strategy works extremely well in frontier markets according to an article in the latest issue of Bloomberg BusinessWeek.

From “Frontier Markets: Where Picking Stocks Is Paying Off“:

Fund managers who focus on the world’s least-developed markets are trouncing their benchmark index—something most investors routinely fail to do. Mark Mobius’s Templeton Frontier Markets Fund and 12 similar funds investing in countries from Vietnam to Nigeria and Romania earned an average 24 percent last year, topping the 8.4 percent gain in the MSCI Frontier Markets Index. Their edge comes from uncovering undervalued stocks in markets where there aren’t crowds of well-informed investors. “The companies are overlooked and under-owned,” says Carlos von Hardenberg, an Istanbul-based money manager at Franklin Templeton Investments who helped the firm’s $1.3 billion Frontier Markets Fund (TFMAX) post a 24 percent gain last year.

The lack of information about frontier market companies creates opportunities for managers who do on-the-ground research. “Sometimes companies wonder why I’m there—they’ve never had a foreign investor visit before,” says Stephen Mack, who manages the Frontaura Global Frontier Fund, which returned about 18 percent in 2012. “You’ve just got to do the legwork.”

Top-Countries-in-MSCI-Frontier-Market-Index

 

Disclosure: No Positions