#ETF Scorecard, Vanguard Total World Stock ETF (VT: nyse)

January 31, 2014

The Vanguard Total World Stock ETF (VT) is an index fund that holds stocks and REITs issued by companies in the emerging and developed markets. Stocks from the frontier markets are excluded by the Fund. The following chart shows that VT is an established fund which efficiently manages its stock portfolio with the good prospect of sustaining its operations:

VTprofile

The following scorecard rates VT as a wealthy, tax efficient fund with several risks: 1) market volatility. 2) potential management error. 3) fluctuating exchange rates for foreign currency.

VTscorecard

Index

The FTSE All-World Index is derived from the FTSE Global Equity Index Series (GEIS), which covers 98% of the world’s investable market capitalizations. The FTSE All-World Index is a market-capitalization weighted index of the large- and mid-cap stocks listed in developed and emerging markets; frontier markets are excluded. The stocks are selected and weighted to ensure that the GEIS is an ‘investable’ index.

Fund operations

VT operated a $3 billion, diversified portfolio of 800 stocks in the year 2013. Most of the stocks had large capitalizations (77% large cap, 13% mid cap, 10% small cap) and most were issued in developed markets. The regional distribution of stock issuers was greatest in North America & Europe (78%) followed by Asia (19%), Latin America (2%), and Africa (1%).

According to the ETF.com website (1), VT’s major competitors in 2013 were ACWI, ACIM, ACWV, HECO, and ONEF. Among these, VT offered the lowest annual expense ratio, 0.19%. VT, ACWI, and ACIM operated in very similar ways to match the performance of their market indices; their returns were tax-efficient. In comparison, ACWV, HECO, and ONEF sought to outperform the global equities market.

The following chart was found in the ETF.com website (1). Visual inspection of the chart gives an impression that the net asset value (NAV) of VT’s portfolio closely tracked the performance of its index (the underlying FTSE index) and the market segment’s index (MSCI All World Investable Markets + Frontier).

VTtracking

According to the ETF.com website (1), VT’s operations were less transparent than the competitors’ due to Vanguard’s practice of reporting holdings on a monthly rather than daily basis. Similar to other competitors, VT lent its portfolio holdings to help offset the Fund’s expenses. Institutional investors incurred a higher cost for buying creation units from VT than from other Funds.

Recommendation

VT is a good long-term investment.

References
#01. http://www.etf.com/, © ETF.com 2014


#ETFscorecard: ETFS Physical Swiss Gold Shares (nyse: SGOL)

May 12, 2013

SGOL is a commodity fund that owns gold bullion.  It differs from other gold sector ETFs that invest in mining firms or gold futures.  The following profile shows that SGOL is a relatively new, but wealthy, fund that does not distribute cash dividends to investors.

SGOLprofile

The SGOL scorecard reveals several negative features: 1) inexperienced operation, less than 5 years; 2) increased tax burden; 3) no cash distributions; 4) gold bullion is susceptible to theft; and, 4) volatile share price.  The positive features are: 1) Fund operations are supported by plenty of wealth; and, 2) Fund shares can be held in a tax deferred account.

SGOLscorecard

Fund operations

The Trust does not insure its holdings of gold.  Rather, the custodian (JP Morgan Chase Bank NA) maintains insurance for its business, bullion holdings, and all bullion held by subcustodians.  One subcustodian is a Zurich bank that stores the gold bullion in a vault.  The gold vault is inspected twice a year, one scheduled and one randomly chosen by the sponsor.

Shareholders have limited recourse against the trust and custodians.  One of the Risk factors is that the custodian might not have sufficient insurance to cover any liability for the loss of gold holdings.

Gold price

Reference prices for gold trading are fixed in London at 10:30 am and 3:00 pm by 5 participating banks, all members of the London Bullion Market Association (LBMA).  The LBMA is an international trade group representing the wholesale market for gold and silver.  The price of Gold is determined by auction in the global market, which in turn is influenced by

  1. speculator attitude
  2. central banks  (announcements and gold-trading activity)
  3. political news
  4. economic news
  5. other forces of supply (e.g., mine production) and demand (e.g., gold futures investors).

Gold market1

Gold is traded in the over-the-counter spot market (physical gold) and derivatives markets.  The main physical gold markets are in London and Zurich.

The participants are miners, bullion bankers, central banks of gold-holding countries, investors, and manufacturers.  The average 5-year production of gold is 4,000 tons per year.  About 20% of the above-ground gold is held by central banks (including the Federal Reserve Bank of New York).  The demand for gold is high among jewelers and investors (especially ETFs).

INVESTMENT STRATEGY

The investor’s only source of income is from personal capital gains.  The gold price is cyclic as shown by the following chart1 .

GoldPrice

Reference

  1. Rob Curran.  Does a Big ETF Drive Gold’s Price? Some pros cite sales by SPDR Gold for the metal’s 2013 decline. JOURNAL REPORT: WEALTH MANAGEMENT, The Wall Street Journal, May 5, 2013.

#ETF-scorecard

June 28, 2012

Click on this link, ETF scorecard, to download a spreadsheet-program for appraising the strengths and weaknesses of an exchange-traded fund (ETF).  The program is not designed to appraise mutual funds, exchange-traded notes, and closed-end funds.  If the program gives an incorrect appraisal, please send a comment at the end of this article and I will make an appropriate update.  The latest version is dated 7/18/2012.

The ETF scoreboard is programmed to:

  1. recommend a general trading strategy appropriate for the ETF’s primary risk
  2. guide you through the fund’s prospectus and/or annual report with a sense of purpose
  3. provide a no-cost rating that’s independent of vendors’ fee-only ratings 1,2

Instructions

The do-it-yourself ETF Scorecard requires you to enter essential information from easily accessible regulatory documents.  That information is automatically translated into a profile of risks and benefits.  The famous ETF called “SPY” is used as an example.  Begin by opening the program to the SNAPSHOT spreadsheet.

The first column lists the information that can be found in websites (next paragraph).  The second column contains “INPUT CELLS” that are white for keyboard entries –“(click here to make an entry)”– and black for multiple choice entries –“(click here for drop-down list)”–.  A third column of “WARNINGS” (not shown) contains error messages that disappear when the required information is entered.

Websites.  Open the home page of XTF.com1 and type the ETF’s trading symbol (in this example it’s SPY) into the Search cell in order to access the appropriate Ratings tab.  There you will find the ETF symbol, ETF name, inception date, geography, underlying index, index composition (weighting), and (majority) asset class.  The sub tab Structural integrity provides the date of information, legal structure, annual yield, and net asset value.  The sub tab Fund holdings provides an accounting of the majority of assets which is useful for the investor, but not a required entry.

Now open the Welcome page of Morningstar.com 2 and type SPY into the Quote cell in order to access the quote page.  The Quote tab provides the ETF’s name and symbol, today’s total assets (an approximation of net asset value), and top holdings (an informative accounting of the majority of assets).  The Fees & Expenses tab provides the recent net asset value, primary benchmark (Index), (portfolio) turnover ratio, leverage, (annual) 12 month yield, legal structure, inverse/short, investment strategy, and inception date.  The Filings tab provides access to the prospectus and annual report filed with the SEC.  The filings usually provide additional information about the minority of assets, portfolio diversification, and tax structure.  The filings also provide more detailed information about the investment strategy, portfolio management, and risks of investment.

Risks and benefits.  Turn to the SCORECARD spreadsheet to read the program’s appraisal of SPY.

  • Net worth- Funds with very low net asset value are at high risk for an unplanned termination of operations 3,4.  More information is available in the article on fund experience and size.
  • Strategy- The widely accepted strategies of “replication” and “sampling” are forms of passive management that seek to match the performance of the fund’s benchmark index.  Higher-risk strategies involve the use of derivatives and/or active management to either underperform or outperform the benchmark index.  Information is available in the article on investment strategy.
  • Experience- Inexperienced management may enhance any losses incurred by high-risk strategies.
  • Tax burden- Taxes on ETF returns are paid by the shareholder unless the ETF is held in a tax deferred brokerage account.  More information is available in the article on tax burden.
  • Tax advantage- Most passively managed ETFs have a tax advantage over mutual funds by avoiding unrealized capital gains.
  • Portfolio- The fund’s legal structure determines whether the investment portfolio is “managed” or “unmanaged”.  A managed portfolio is more likely to commit an investment error than an unmanaged portfolio.  The managed portfolio can incur risks of lending, borrowing, and rebalancing assets to the extent that management error reduces the fund’s net asset value and subsequently reduces the share price in the stock market.  Supplemental information is available in the article on management.
  • Asset risk- The majority of the portfolio’s assets form a unique risk of investment.  The minority of assets may contribute to management error when used for hedging purposes.  A brief description is given in the article on assets.
  • Geographic region- Funds that invest in foreign markets provide diversification to the shareholder’s investment portfolio.  But foreign markets are risky with respect to the fluctuation of currency exchange rates, possible nationalization of private companies, and a variety of trading barriers.
  • Index- The Index is constructed by use of one or more weighting factors that affect the index value.  The weighting factors also affect the investment performance of passively managed ETFs.

The table of PRIMARY RISK AND BENEFIT renders an opinion about the main disadvantage and advantage of investing in the ETF.

The Fund’s PRIMARY RISK of uncertain investment returns is selected from the following risk factors that are listed in a descending order of priority:

  1. A portfolio of derivatives (e.g., ‘geared’ fund, leveraged fund, inverse fund) with net asset value below $25 Million offers the greatest uncertainty of returns.
  2. Even without the portfolio of derivatives, a very small fund is at risk of unplanned termination.
  3. Either a portfolio of derivatives or an actively managed portfolio is a high risk investment.
  4. Fund’s that require special tax reports or have a high turnover of portfolio assets can increase the shareholder’s tax burden and erode the shareholder’s investment profit.
  5. The managed portfolio may acquire derivatives and/or illiquid collateral assets that diminish the net asset value.
  6. An inexperienced fund is at risk of making management errors that diminish returns.
  7. The capital markets of developed economies are less risky than those of emerging and frontier economies.
  8. The class of majority assets in the portfolio determines the shareholder’s returns.  The uncertainty of returns varies among asset classes.
  9. The composition and fluctuation of the Index are strong determinants of portfolio composition and performance.
  10. The infrequent cash distributions of some funds can delay the shareholder’s opportunity to benefit from reinvested dividends (a familiar risk called “dividend drag”).

The PRIMARY BENEFIT of investing in an ETF is either the opportunity to trade ETF shares in the stock market or hold them as a long-term, frugal investment.  This program assigns the trading opportunity to high-risk funds and the investment opportunity to comparatively low-risk funds.

Editing

The scorecard spreadsheet is programmed to automatically provide a risk-benefit analysis.  You can edit the SCORECARD by un-protecting the spreadsheet (there is no password).  For example, you might wish to edit the scorecard’s automated output for SPY by changing the phrase “infrequent cash distributions” to “quarterly cash distributions”.  Beware that editing deletes the formula embedded in tan colored cells.  If one or more cells are corrupted beyond use, simply start over by downloading a new scorecard and re-entering data into the SNAPSHOT spreadsheet.

Conclusions

This App is free software dedicated to the do-it-yourself appraisal of ETFs.  There’s sufficient information in internet websites to perform the appraisal in a couple of hours.  A broader discussion of the ETF Scorecard is available in Appraising ETFs with a scorecard.

Copyright © 2012 Douglas R. Knight

References

1.  XTF ETF EXPERTS.  © 2012 XTF Inc., all rights reserved.    http://xtf.com/Ratings/

2.  Morningstar®,  © 2012 Morningstar, all rights reserved.    http://www.morningstar.com/Cover/ETFs.aspx

3.  J. Alex Tarquinio.  Should more ETFs shut down?  SmartMoney.com.  ETF Watch, September 28, 2011.  Copyright ©2012 Dow Jones & Company, Inc. All Rights Reserved http://www.smartmoney.com/invest/etfs/more-etfs-should-shut-down-1315932598095/

4.  Ron Roland.  ETF deathwatch criteria for 2011.  InvestWithAnEdge.com.   January 5, 2011.  Copyright © 2012 · AllStarInvestor.com, Publisher of InvestWithAnEdge.com  http://investwithanedge.com/etf-deathwatch-criteria-for-2011


ETF #scorecard, ProShares VIX Short-term Futures (VIXY: nyse)

June 13, 2012

Introductory comments:

ETF: The majority of the fund’s assets are VIX futures contracts that call for a future cash settlement.  Investors buy VIX futures if they belive the S&P 500 will become more volatile and sell if they believe the S&P 500 will become smooth.  The ETF is intended for use as a short-term investment, or for investment diversification, but not as a long-term investment.

Index: The VIX futures short term index (Bloomberg SPVXSPID:IN) measures the rolling position of first & second month VIX futures contracts.  The VIX futures Index is not identical to the well known “VIX”.

CAUTION: The VIX is not the fund’s underlying index.  Don’t expect the fund to track either the VIX or the volatility of the S&P 500.

Investment Strategy: Management’s propietary model determines the trades needed to achieve daily returns that match the performance of the index.

Scorecard:

The following tables describe the fund and its primary risk-benefit.  References to the data are provided at the end of this article.

SNAPSHOT, December 31, 2011

SCORECARD

SCORECARD

Copyright © 2012 Douglas R. Knight

References

1.  ETF snapshot in XTF.com

2.  ETF snapshot and SEC filings in Morningstar.com

3.  Explanation of ETF scorecard with references


ETF #scorecard, Vanguard Total Stock Market (VTI: nyse)

June 12, 2012

Vanguard’s Total Stock Market ETF (VTI) is a low-risk investment designed for tracking the growth in market capitalization of all U.S. stocks.  The main risk of the fund’s managed portfolio is that management may reduce the liquidity of the portfolio by borrowing a minority of the portfolio’s assets and lending other assets to outsiders for a fee.

The following tables provide a summary and risk-benefit analysis of the fund.  References provide background information on the risks and benefits.

SNAPSHOT, June 7, 2012

SCORECARD

SCORECARD

Copyright © 2012 Douglas R. Knight

References

1.  ETF snapshot in XTF.com

2.  ETF snapshot and SEC filings in Morningstar.com

3.  Explanation of ETF scorecard with references


ETF #scorecard, SPDR Gold Trust (GLD) & United States Oil Fund (USO)

November 15, 2011

Scorecard

Scorecard summary

SPDR Gold Trust (GLD) is a successfully operated commodity fund that tracks the price of gold bullion at the investor’s risk of incurring a 28% tax rate on capital gains from precious metals.

United States Oil Fund (USO) is a limited partnership that tracks the price of sweet-crude oil at the investor’s risk of incurring an increased tax cost from accountant’s fees and loss linked to leverage.

Copyright © 2011 Douglas R Knight


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