Posts tagged ‘etf’

ETF Slam Dunk: Mixing Jordan & Rodman

Players in the same game may use different strategies in the hunt for success. Take five-time NBA champ Dennis “The Worm” Rodman vs. Hall of Famer and fourteen-time All-Star Michael Jordan. Rodman’s bad-boy antics, tattoos, and loud hair colors more closely resemble the characteristics of a brash trader or quick-trigger hedge fund manager, which explains why Rodman played for five different NBA teams.  Jordan on the other-hand was less impulsive, and like a long-term investor, held a longer term horizon with respect to team loyalty – he spent 13 seasons with one team (Chicago Bulls), excluding a brief, half-hearted return to the Washington Wizards.  Despite their differences, they shared one common goal…the ambition to win.

In the investment world, traders and long-term investors in many cases could be even more different than Rodman and Jordan…just think Jim Cramer and Warren Buffett. But when it comes to the exploding trend of Exchange Traded Funds (ETFs) expansion, traders and investors of all types share the common appreciation for lower costs (management fees and trading commissions). Beyond the lower costs, ETFs also offer a wide and growing range of liquid exposures, regardless of whether a trader wants to hold the ETF for five hours or an investor wants to own it for five years. The benefits of low cost and liquidity, relative to traditional actively managed mutual funds, are two key reasons why this market has blossomed to $822 billion in size and is still strengthening at a healthy clip.

Source: SPDR

The flight to bonds and out of equities has been well documented (see chart below), but underneath the surface is a migrating investor trend out of active managers, and into lower cost vehicles for equity exposure (ETFs and Index Funds). The poster child beneficiary of this movement is the Vanguard Group (based in Valley Forge, Pennsylvania), which manages $1.4 trillion in fund assets, including $112 billion in ETFs (Bloomberg). Equity heavy fund management companies like Janus Capital Group Inc. (JNS) and T. Rowe Price Group Inc. (TROW) have felt the brunt of the pain from the disinterested investing public.

Source: Iacono Research

The migration away from expensive actively managed funds has created a cut-throat dog-fight for ETF market share. Competition has gotten so bad that discount brokerage firms like Fidelity Investments ($1.25 trillion in mutual fund assets) and Charles Schwab Corp. (SCHW) have begun offering free ETF trading. Just two days ago Schwab also purchased Windward Investment Management, Inc. (~$3.9 billion in assets under management), for $150 million in stock and cash.

At the end of the day, money goes where it is treated best. Irrespective of differences between long-term investors and short-term traders, the lower costs and improved liquidity associated with ETFs have shifted money away from more costly, actively traded mutual funds. At my firm, Sidoxia Capital Management, I choose to use a diversified hybrid approach via my Fusion investment products (Conservative, Moderate, and Aggressive). Fusion integrates low-cost, tax-efficient investment vehicles and strategies, including fixed income securities (including funds & ETFs), individual stocks, and equity ETFs. Regardless of the differing preferences of hair colors and tattoos, my bet is that Dennis Rodman and Michael Jordan could agree on the importance of two things…winning games and using ETFs.

Wade W. Slome, CFA, CFP®  

Plan. Invest. Prosper. 

*DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in JNS, TROW, SCHW or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

September 1, 2010 at 2:02 am 1 comment

Filet or Mac & Cheese? Investing for Retirement

The financial crisis of 2008-2009 placed a large swath of investors into paralysis based on a fear the United States and the rest of the world was on the verge of irreversible destruction. Regardless of what the newspaper headlines are reading and television pundits are spouting, individuals have to shrewdly plan for retirement no matter what the economy is doing. So then the question becomes, do you want to be eating macaroni & cheese in retirement, or does filet mignon or alternate five-star cuisine sound more appealing? I vote for the latter.

Despite what the government statistics are saying about the current state of benign inflation, you do not need to be a genius to see medical costs are exploding, energy charges have skyrocketed, and even more innocuous items such as movie ticket prices continue to rise. If that’s not a burden enough, depending on your age, there’s a legitimate concern the Social Security and Medicare safety nets may not be there for you in retirement. It is more important than ever to take control of your financial future by investing your money in a more efficient manner (see Fusion), focusing on long-term, low-cost, tax-efficient strategies. Whatever the direction of the financial markets (up, down, or sideways), if you don’t wisely invest your money, you will run the risk of working as a Wal-Mart (WMT) greeter into your 80s and relegated to eating mac & cheese (for lunch and dinner).

Broaden Your Horizons

The last decade has been tough for domestic equities. It’s true that not a lot of compounding of returns has occurred in the domestic equity markets over the last decade (see Lost Decade), but that weakness is not necessarily representative of the next decade’s performance or the past relative strength seen in areas like emerging markets, materials and certain fixed income markets. These alternatives, including cash, would have added significant diversification benefits to investor portfolios during previous years. Rather than focusing on what’s best for the investor, so much financial industry attention has been placed on high cost, high fee, high commission domestic stock funds or insurance-based products. Due to many inherent conflicts of interest, many individual investors have lost sight of other more attractive opportunities, like exchange traded funds, international strategies, and fixed-income investment vehicles.

Rule of 72

Depending on your risk profile, objectives and constraints, the “Rule of 72” implies your retirement portfolio should double from a $100,000 investment now to roughly $200,000 in seven years (to $400,000 in 14 years, $800,000 in 21 years, etc.), assuming your portfolio can earn a 10% annual return. Unfortunately, this snowballing effect of money growth does not work if you are paying out significant chunks of your returns to aggressive brokers and salespeople in the forms of high commissions, fees, and taxes (see a Penny Saved is Billions Earned). For example, if you are paying out total annual expenses of 2-3% to a broker, advisor, or investment manager, the doubling effect of the Rule of 72 will be stretched out to 9-10 years (rather than the above mentioned seven years).  If you do not know what you are paying in fees and expenses (like the majority of people), then do yourself a favor and educate yourself about the fee structures and tax strategies utilized in your investments (see also Investor Confusion). If you haven’t started investing, or you are shoveling out a lot of money in fees, expenses, and taxes, then you should reconsider your current investment stretegy. Otherwise, you may just want to begin stockpiling a lot of macaroni & cheese in your retirement pantry.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 


*DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds and shares in WMT, but at the time of publishing SCM had no direct positions in any security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on the IC “Contact” page for more information.

April 21, 2010 at 11:34 am Leave a comment

Beating off the Financial Sharks

There is blood in the water and financial sharks will do their best to consume any weak, floating prey. Now, greater than ever, investors are looking for answers in these perilous economic waters, so it behooves investors to arm themselves with the knowledge and questions necessary in dealing with financial predators.

Unlike other professions, like medicine, law, or accounting, the hurdle in becoming a “broker,” “advisor,” “financial consultant,” or other glorified title is much lower than some other professions. Basically, if you pass an exam or two, you are ready to do business and handle the financial future of virtually anybody.

Not all practitioners are evil, and there is a segment of investment professionals that take their craft very seriously. Separating the wheat from the chaff can be very challenging, so here is a list to follow when reviewing the management of your finances:

1)      Experience Matters: Find an advisor with investment experience. Someone who has actually invested money. Don’t partner with a financial salesperson good at shoveling high-cost, high-commission products and strategies. When you fly in a plane, do you want an inexperienced stewardess or veteran pilot flying the plane? If you were ever to need surgery, would you want the nurse using the knife, or a trained, educated surgeon? Your investment future is a serious proposition, but many investors do not treat it that way.

2)      Education and Relevant Credentials Matter: Find an advisor with credible, relevant investment credentials. Not all investment letters are created equally, and interpreting the alphabet soup of financial industry designations can be thorny. Two credentials in the investment industry that rise to the top are the CFA (Chartered Financial Analyst) and CFP® (Certified Financial Planner) designations. Less than 10% of the industry has one of these credentials and less than a few percent have both. An advanced degree like a master’s degree wouldn’t hurt either.

3)      Low-Cost & Tax Efficiency: Find an advisor who uses a low-cost, tax-efficient strategy, including the integration of passive investment vehicles, such as exchange trade funds (ETFs), index funds, and/or individual securities that are invested over long-term investment horizons (read more about passive investing). Not only are low-cost products important, but low-cost activity is vital too – meaning there should be no churning of the account with high commissions or transaction costs.

4)      Find an Advisor Who Eats Cooking: It is important to find an advisor who eats his/her own cooking (i.e., he/she is invested in the same investment products and strategies as the client). Commissions can often be the number one motivation for the advisor, rather than what is best for the client’s future. When offered a new investment product, one way to cut to the chase is by asking, “Oh, that’s great you will make an immediate $10,000 commission off the sale of this product to me, but do you own this same investment in your personal portfolio?” It is crucial to have someone in the bunker with you as you invest.

5)      Fee-Only – The Way to Go: Find a “fee-only” advisor with a transparent fee structure who can honestly answer what fees you are paying. A fee-only investment advisor mitigates the conflict of interests because if the client portfolio declines, then the investment manager’s compensation is also reduced. There is a built-in incentive for the advisor to preserve and grow the client portfolio in accordance with the client’s risk-tolerance and objectives.

6)      Find an RIA (“Fiduciary Duty”): Find out if the advisor is working with an RIA advisory firm (Registered Investment Advisor), which is required by law to have its advisors make investment decisions in the sole interest of the client. Most brokers/advisors/financial consultants (or other euphemism) – working at firms such as UBS, Merrill Lynch, Wells Fargo/Wachovia, Edward Jones, and Morgan Stanley/SmithBarney, have a much lower “suitability” standard in managing client money.

7)      Don’t Become Chopped Liver: Find out how many clients the advisor serves. Some brokers attempt to service a client list of 100 or more (many brokers have hundreds of clients). Typically the highest revenue-generating clients are given service, and the smaller accounts are treated like chopped liver or swept under the rug.

8)      Get References: You will likely not be forwarded bad references, but see if you can get beyond, “Johnny is such a nice broker” talk and find out how the portfolios have performed versus the relevant benchmarks. Getting this data can be difficult, but you can ask the advisor for an anonymous sample of an appropriate portfolio that you would be invested in.

9)      Background Check:  With proper research, investors can become more comfortable with the professional chosen and the status of the firm employing the manager/professional. Several government and professional regulatory organizations, such as the National Association of Securities Dealers (NASD), the Securities & Exchange Commission (SEC), your state insurance and securities departments, and CFP Board keep records on the disciplinary history of the investment and financial planning advisors. Ask what organizations the professional is regulated by and contact these groups to conduct a background check.

Getting all this information may take time, but protecting yourself from the masses of financial predatory sharks is imperative. Compiling data from the checklist will act as a shark cage, helping safeguard you from potential harm.

Remember, it’s your financial future, so invest wisely!

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at time of publishing had no direct positions in UBS, Merrill Lynch (BAC), Wells Fargo/Wachovia (WFC), Ameriprise (AMP), Edward Jones, and Morgan Stanley/SmithBarney (MS). No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

February 9, 2010 at 11:00 pm 4 comments

China: The Trade of the Century?

So it goes, Britain was the country of the 19th century, the United States was the country of the 20th century, and China will be the country of the 21st century. Is investment in China hype or reality? Here are some points in China’s favor:

  • Large Labor Force: With a  population exceeding 1.3 billion people, China has plenty of labor available to expand GDP (Gross Domestic Product).
  •  No Nonsense Government: An authoritarian government has its advantages. While pornography (see article) and unrest may be problems, infrastructure projects are not.
  • Education: Chinese culture values education. As a result, China is slowly shifting away from its roots as the globe’s manufacturing and piracy capital. Intellectual property is appreciated more now that China is becoming a leader in emerging technology areas, such as solar power.
  • Trade Surplus & Currency Reserves: Must be nice to have trade surpluses and massive currency reserves (~$2.3 trillion). This is what happens when you are in a position to export more than you import.
  • Manageable Debt: China’s Debt/GDP ratio is less than 25%. You can compare that to the U.S. at around 100% and Japan at over 200%. Disciplined fiscal management provides the Chinese government with more options in dealing with the global slowdown (e.g., stimulus).
  • Long Runway of Growth (Read More):  China’s long runway of growth has allowed it, and should continue to allow it, to grow at above average growth rates – in the 3rd quarter of 2009 the Chinese economy grew at a very healthy +8.9% rate.

With all these positives, it’s no wonder China is the darling of the world. Given the constructive outlook, how can investors take advantage of the Far East opportunity in China?  Our good friend at Investing Caffeine (figuratively speaking), Burton Malkiel (Princeton Professor of Economics and Chief Investment Officer at AlphaShares), is bullish about China and is sharing his preferred participation method…an all-cap China exchange traded fund (ticker: YAO)  – Read more about Malkiel and Active vs. Passive Investing (12/8/09 Post).

Just how bullish is Professor Malkiel?

I think China will continue to have the highest growth rate of any major country in the world, and within 20 years, China will be the world’s leading economic power.”


And he puts his money where his mouth is. Last year the professor shared his Chinese exposure in his personal portfolio:

“My portfolio is probably 20 percent Chinese, and that includes not only indices but also individual companies.”


Risks: The Price to Play

Professor Malkiel is not blindly diving into China – he researched the markets for years before taking the plunge. In an article from last year (From Wall Street to the Great Wall), he highlighted some of the inherent risks:

1) Foreign Neighbors:  China continues to have tense, although cordial, relations with some of its neighbors like Taiwan and Japan. Their dealings are stable now, but the future is uncertain.

2) Social Unrest: An uneven distribution of income can lead to serious social unrest, especially in the rural parts of the country. If the government can’t keep the economy humming along, those left behind may fight back.

3) Environmental Degradation: China is building nuclear, wind, and solar projects at a frenetic pace, but China is also the globe’s largest emitter of greenhouse gases (relies on dirty coal for 70% of its energy), according to CNN. If China becomes an irresponsible power hog, there could be damaging effects to the economy.

4) Corruption: This continues to be a problem, but Malkiel points out the case of Zheng Xiaoyu, a former director of China’s FDA (Food and Drug Administration) equivalent. In 2007, he was executed after being found guilty of taking bribes.

5) Banking System:  Malkiel notes that China continues to have a fragile banking system with a lot of bad loans. Due to political reasons, certain government owned entities may receive risky loans in the name of creating jobs – even if it means keeping unhealthy zombie banks alive.

Trading Strategies:

Beyond investing in AlphaShare ETFs (YAO), Malkiel advocates considering the other options, such as the “A”, “H”, and “N” shares. Unfortunately, the more inefficient “A” shares, which trade in Shanghai and Shenzen, are largely unavailable to investors outside of China. However, the “H” shares and “N” shares are available to international investors. “H” shares are listed on the Hong Kong Stock Exchange and the listed companies follow globally accepted accounting principles. The “N” shares come from companies registering with the SEC (Securities and Exchange Commission) and trade either on the NYSE (New York Stock Exchange) or NASDAQ exchanges.

 Lastly, Malkiel knows he is not the only investor to pick-up on the China growth story. Multinationals are investing heavily in China, and these domestically based companies can serve as indirect investment vehicles to benefit from the attractive fundamentals as well.

Professor Malkiel calls China the “growth story of the world.” Simple math shows us that this Asian juggernaut (the third largest country in the world by GDP) will soon pass Japan in the number two position and the U.S. is likely only a few decades ahead after that.  Having explored and studied China firsthand, I concur with many of Malkiels conclusions, which opens the possibility that China could reasonably be the top country (and top trade) of the 21st century?

Full Malkiel Article: From Wall Street to the Great Wall – Investment Opportunities in China

Read More Regarding YAO

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, like FXI, at the time of publishing. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

December 9, 2009 at 1:45 am 4 comments

Strong Advice from Super Swensen

Muscle Man

Playing the financial markets is a challenging game, and over the last decade we’ve witnessed events we will never see again in our lifetimes. Through these muscle aches and pains, listening and paying attention to powerful, seasoned industry veterans, like David Swensen, becomes paramount. Mr. Swensen has proven his durability – he has managed the Yale endowment for 24 years and has overseen the growth of the university’s portfolio from $1 billion to $17 billion. For the decade ending in June 2008, the Yale portfolio averaged an incredible 16.3% annual return.

So what commanding advice does Mr. Swensen have to share? Here are a few nuggets regarding equities as discussed in his May interview published in The Guru Investor (TGI):

“With a long time horizon you should have an equity orientation, because over longer periods of time, equities are going to deliver better results,” he says. “If they don’t, then capitalism isn’t working. And we could well be at a point where investments in equities are going to produce returns going forward that are higher than what we’ve seen in the past five or ten years.”


I find it difficult to argue with him. Perhaps we still have a ways to go, but the equity markets had an explosion after the 1966-1982 hiatus. Perhaps the 2000-2009 period isn’t long enough to mark bottom, but at a minimum, the spring is coiling based on history.

When it comes to diversification, TGI summarized Swensen’s asset allocation as follows:

“He recommends that investors have 30% of their funds in U.S. stocks, 15% in Treasury bonds, 15% in Treasury Inflation-Protected Securities, 15% in Real Estate Investment Trusts, 15% in foreign developed market equities, and 10% in emerging market equities. As investors get older, they should keep this type of allotment for a portion of their portfolio but begin to decrease the size of that portion, putting part of their portfolios into less risky assets like cash or Treasuries.”


Many investors were taking excessive risk in 2008 (within their asset allocations), and they were not even aware. Let’s hope valuable lessons have been learned and investors adjust the risk levels of their portfolios as they age.

David Swensen (Michael Marsland/Yale University)

David Swensen (Michael Marsland/Yale University)

Mr. Swensen has some choice words for the mutual fund management industry as well:

“The problem is that the quality of the management in the mutual fund industry is not particularly high, and you pay an extraordinarily high price for that not-very-good management,” he says. Swensen cites one study performed by Rob Arnott that measured mutual fund performance over a two-decade period. The study found that you’d have had a 15% chance of beating market after fees and taxes by investing in mutual funds — and that includes only funds that were around for the entire period; many other weaker funds didn’t last, meaning the results have a survivorship bias.


Tough to disagree, and as I’ve written in the past, I believe there are only so many .300 hitters in baseball (a study in 2007 showed only 12 active career .300 hitters in the Major Leagues – highlighted in my previous Ron Baron article). Outside of baseball, there are consistent alpha generators in the market too. However, I’d make the case that identifying the alpha generators in the financial markets is much more difficult because of the extreme fund performance volatility. Even the best managers can string some bad years together.

Swensen doesn’t stop there. He expands on the reasons behind mutual fund manager underperformance:

Taxes and fees are the big culprits, Swensen says: “Why are the tax bills so high? Because turnover’s too high. The mutual fund managers are trading the portfolios as if taxes don’t matter, and taxes do matter. And they’re trading the portfolios as if transactions cost and market impact don’t matter, and they do matter. And as they trade the portfolios, basically what’s happening is Wall Street is siphoning off its slice of the pie … and that’s at the expense of the investor.”


One thing we learned from the real estate and financial bubble that burst over the last few years is that incentive structures were misaligned. Manager compensation, whether you are talking hedge funds or mutual funds, is based on too short a time horizon, and therefore incentive structures encourage abnormal risk-taking. In baseball terms, you have those that take excessive risk and swing for the mega-bucks fences (loose cannons) and the bunters (benchmark huggers) who seek the comfort of “lower” mega-bucks. Swensen is a much bigger believer in passive strategies (as am I), using passive investment vehicles like ETFs (Exchange Traded Funds).

Mr. Swensen continues his critical perspective by targeting investors too:

Individuals and institutions who buy mutual funds “take this mutual fund industry which produces a bunch of products that are not great to start with, and then they screw it up by chasing hot performance and selling after things turn cold.”


The 1984-2002 John Bogle data (Vanguard) included in my “Action Dan” article hammers that point home.

Where should investors go now?

Asked what the one recommendation he has right now for investors is, Swensen cited TIPS. “We’ve had this massive fiscal stimulus, massive monetary stimulus, and it’s hard to see how that doesn’t translate into pretty substantial inflation, or at least pretty substantial risk of inflation … down the road at some point,” he said.


Ditto, once again – I’m a believer in having some inflation protection in your portfolio. Of course there is no free lunch in the investment world, and so there are certainly some risk factors in Swensen’s alternative investment strategy (e.g. hedge funds, private equity, and real estate). Certainly, due to significant illiquidity and other factors, many of these areas got absolutely hammered in 2008.

The best investors prepare their portfolios for these strenuous times. Do yourself a favor and work on your muscle tone too – and listen to the strong advice of David Swensen.

Read the Full TGI Article Here

Wade W. Slome, CFA, CFP

Plan. Invest. Prosper.

DISCLOSURE: Sidoxia Capital Management and client accounts do have direct long positions in TIP at the time article was originally posted. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

October 2, 2009 at 12:59 am 2 comments

Bernanke Portfolio Takes Painful Hit

Groin Kick

As a former tenured economics professor at Princeton University, I would believe Ben Bernanke would understand and appreciate the power of diversification, but apparently not. The bulk of his $1.2 million to $2.5 million (only a broad range was disclosed) was invested in a large-cap stock fund and a fixed-rate annuity from TIAA-CREF. Some would say his portfolio could use a higher dosage of small-cap, mid-cap, international and alternative asset classes, including real estate. With arguably the highest ranking finance job in the universe, wouldn’t you expect him to have a smoking hot portfolio? The data paints a different picture.

According to publicly disclosed data, Bernanke’s assets were down -29% (about -$600,000) in 2008, better than the S&P 500, but not comparable since his portfolio also included fixed income securities like Canadian treasury bonds and an annuity fund. For whatever reason, the global money czar couldn’t or wouldn’t use his knowledge to outmaneuver the markets. Why didn’t he use the Yen carry trade to buy crude oil up to $140 per barrel, then short emerging markets during 2008 before going long technology stocks beginning on March 9, 2009?

Certainly, Bernanke does not want to create a conflict of interest, whether real or implied. I’m sure Bernanke is not day trading options and shorting levered Exchange Traded Funds (ETFs) on E-Trade, because the headaches it would create for him would undoubtedly outweigh any short-term financial benefits earned from his investment ideas. Even if Bernanke felt he could exploit profit opportunities, the real bucks will come from speaking events and consulting prospects after he leaves his position of Federal Reserve Chairman. If Bernanke does a better job with his portfolio, perhaps he can retire at a younger age…

Read Article on Bernanke Portfolio

Wade W. Slome CFA, CFP®

Plan. Invest. Prosper.

August 18, 2009 at 4:00 am Leave a comment

Water…the Next Oil?

Water engulfs our daily lives – we drink, bathe, wash clothes, soak our lawns and brush our teeth with it on a consistent basis. We notice our reliance in our monthly water bills. The earth is covered by approximately 70% water, so if this commodity is so abundant, then how could it be such a scarce, valuable resource? Water is so important; the majority of our body mass consists of the fluid (about 60% in males and 55% in females). Although our planet is covered with this liquid, the main problem surrounding the issue is that only about 2% of the water supply is considered fresh water (predominantly located in Antarctica). Desalinization of salt water is one solution to the limited amount of fresh water, but unfortunately the current technology and energy requirements make it a cost prohibitive process. As a result of the inadequate supply, over an estimated 1 billion people do not have access to clean water and 2.4 billion people are subject to stressed water conditions.


In the “Golden State” of California, budgetary problems are not the only concern on people’s minds – the state is in the middle of a water shortage. Certain water jurisdictions are escalating prices by upwards of +15%. Regardless of your view on “climate change,” objective data points to declining water levels and heightened scarcity. By 2030, OECD predicts that half of the world’s population will live in areas under severe water stress.

I’m certainly not the only believer in this theme as an investment opportunity. T. Boone Pickens, renowned commodity investor, is spending over $100 million on water investments (including access to water rights) because he believes that H2O is the next oil. Water, like oil, is a depleting resource that will experience intensified demand over time.

How to Invest in Water:

Not everyone has millions of dollars like Pickens to invest in land and water rights, so there are different ways for the average investor to participate in the rising demand for water. For example, investors, like Sidoxia Capital Management, can invest in ETFs (exchange traded funds) with a water focus. ETF options include, PowerShares Water Resources (PHO), PowerShares Global Water ETF (PIO), and/or Claymore S&P Global Water (CGW). For those wishing to invest in individual stocks, some water related companies include, Nalco Holding Company (NLC), Danaher Corporation (DHR), Itron Inc. (ITRI), and Valmont Industries, Inc. (VMI).

Water Demand Drivers

  • The globe’s population of approximately 6.5 billion people is growing and becoming thirstier. Water demand is expanding much faster than population growth.
  • Climate change exacerbates the growing water supply problem.
  • Agriculture and irrigation needs are driving the majority of global water demand.
  • There is no substitute for water at any price.

Conservation, technology, and efficiency are tools to improve the usage of our finite water resources. As the water problem becomes more acute, profiting from water investments is a way to offset the inevitably higher costs of usage. Now if you’ll please excuse me, I’m thirsty for a glass of water.

Wade W. Slome, CFA, CFP®

DISCLOSURE: At the time of publishing, Sidoxia Capital Management and some of its clients owned certain exchange traded funds (including PHO & CGW), but had no direct positions in PIO, CGW, NLC, DHR, ITRI, VMI, or any other security referenced. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

June 26, 2009 at 10:15 am 2 comments

The Dirty Little Secret Shrinking Your Portfolio


There’s a dirty little secret in the investment industry and it’s called “fees”. I constantly interact with investors from all walks of life and inevitably the topic turns to fees.  Although they may know the daily price of the Starbucks coffee they buy down to the penny, when I ask them about the hundreds or thousands of dollars they are paying in fees and expenses, I get the proverbial deer in the headlights glare. Who can blame them when they are effectively forced to hire a lawyer to decipher the layers of costs buried in thick legal client documents? These fees and expenses include, but are not limited to, load fees, management fees, 12b-1 fees, trading commissions, soft dollars, surrender charges, administrative charges, bid-ask spread, impact costs along with other kitchen sink charges (enough to make your head spin).

Are the fees worth the price? The short answer is NO. On average 75% of professional managers underperform the benchmarking strategy, which I call the “do-nothing” or passive indexing approach. Standard & Poor’s SPIVA division (S&P Indices Versus Active Funds) discovered the following over the five year market cycle from 2004 to 2008: 

  • S&P 500 outperformed 71.9% of actively managed large cap funds;
  • S&P MidCap 400 outperformed 79.1% of mid cap funds;
  • S&P SmallCap 600 outperformed 85.5% of small cap funds.

Most individuals would be better served by purchasing a diversified basket of low-cost, tax efficient index funds or ETFs (Exchange Traded Funds). Unfortunately, the deafening noise and chest thumping from the ever-changing top 25% of investment managers muddies the waters for rational investment decision makers. Proprietary algorithms, can’t-lose strategies (ala Bernie Madoff), pretty pie charts, and a rosy story explaining a path of future outperformance are typically used as smoke and mirrors to confuse unsuspecting investors into unwanted decisions. For the day-trading addicts, financial intermediaries peddle their unique software in commercials with flashing light and hip music, touting the newest bells and whistles that will catapult the masses into riches.

What’s the solution? Well, if you have the time, discipline, and emotional make-up then you should call the manufacturers of low-cost index funds and ETFs (Exchange Traded Funds) like Vanguard Group, PowerShares or iShares and construct a diversified equity and fixed income portfolio. I recommend rebalancing client portfolios periodically subject to your objectives, constraints, risk tolerance and changing circumstances.

If you don’t have the time, discipline, or emotional make-up necessary to manage your investments, then interview a group of “fee-only” advisors who have no conflicts of interest and subscribe to a diversified, low-cost, tax efficient strategy (for disclosure purposes, Sidoxia Capital Management is a fee-only advisor).

Regardless of portfolio management choices, do yourself a favor and ask your broker/advisor or investment company what you are paying in fees/expenses. It’s your money and you deserve answers, despite the dirty little secret that pervades the industry.

June 17, 2009 at 5:30 am 1 comment

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