Tuesday, February 3, 2015

Bought Roth IRA: GE at $23.86 and the ETF VEU (Commission Free at Vanguard) at $46.96/Added to IEUR at $44.17 (Commission Free at Fidelity)

Stable Vix Pattern (Bullish):
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1. Bought 30 GE at $23.86-Roth IRA (see Disclaimer): I discuss this trade in a recent SeekingAlpha Instablog:

Bought General Electric In Roth IRA At $23.86 - South Gent | Seeking Alpha


Since I am buying ETFs in my brokerage accounts that are available commission free depending on the broker, I will buy anywhere from 5 to 20 shares whenever the spirt moves me. I am mostly averaging down on the foreign stock ETFs that have declined due to the strength of the dollar rather than the performance of the ordinary shares priced in local currencies. Since I do not know when the foreign currency declines will cease, I just nibble here and there, mostly on a random basis, thinking the brain dead dart throwing approach might work as well as the LB crunching a million variables and then reaching a decision sometime next year.  

2. Added 5 VEU at $46.96-Roth IRA (see Disclaimer): I have been adding low cost Vanguard international stock ETFs in my Roth IRA with cash flow. The parabolic rise in the USD has caused foreign securities priced in most major foreign currencies to plummet in value since May 2014. The ordinary shares prices in Euros, Canadian or Australian Dollars or British Pounds may have gone up in value, but the close to 20% across the bond currency declines against the USD would have overwhelmed gains and made share price losses in local currencies far worse. It is just a known peril of international investing.

I will generally step up my purchases of foreign securities after a parabolic rise in the USD, using my strong currency to buy assets that have depreciated in value in local currencies. That is what I am doing with these two ETF purchases in this blog, as well as several recent foreign stock purchases.

ETF Description: The Vanguard FTSE All-World ex-US ETF (VEU) is a low cost and broad international stock ETF.

The expense ratio is low at just .15%. Vanguard I can buy the fund in my Vanguard brokerage account without paying a commission.

As of 12/31/14, the fund owned 2,463 stocks.

The geographic allocation is shown in this pie chart:

The 6.8% North America exposure shown in that pie chart is to Canada. The big 3 in Switzerland will invariably be weighted in the top 5 when the selection process is based on market capitalization. The market capitalization of Nestle, for example, is about CHF 230B (NESN:SWL) and Novartis is currently around CHF244B, (NOVN:SWL). I own the ADRs for both companies.

Compared to an ETF for the total U.S. stock market (VTI), VEU has performed miserably since its inception in 2007 and has substantially underperformed VTI over the past 1, 3, and 5 years.

Total Annualized Returns 3 and 5 years Based on NAV:

Vanguard FTSE All-World ex-US ETF (VEU): 6.45% and  5.4%

Vanguard Total Stock Market ETF (VTI): 17.34% and 15.51

Without harping on the obvious, a 10%+ annualized difference over five years is just huge. I am glad that I have traded in and out of VEU.

Many investors would look at those numbers and simply avoid the poor performer and load up more on the best performing fund. Based on my experience, the outperformance of a broad stock index over a relatively long period of time is followed by lengthy period of underperformance. The past is frequently not prologue for the future. Over the next five years, international stocks could easily outperform the U..S. stock market just by shredding some of their existing problems and catching up in the valuation department.

Being naturally contrarian, I am drawn to underperforming asset classes and industry sectors. I am not exactly jumping off a cliff with my eyes closed with my current small adds in low cost foreign stock ETFs.

I do not believe that I have been discussing the small incremental adds in this ETF.

Prior Trades: I have discussed some more substantial trades here. The first round trip was part of the large sector rotation out of stocks in 2007 as previously described in this blog with snapshots.

2007 VEU 100 Shares +401.91

2010 VEU 100 Shares $862.98 

2011 VEU 100 Shares +$144.55

2013 VEU 50 Shares +$204.95
For this ETF, which has performed poorly compared to U.S. stocks since March 2009, trading has been the best option, but may not be going forward.

Total Realized Gains: $1,614.39

Rationale: The rationale is relatively simple. International stocks have substantially underperformed U.S. stocks over the past five years and are consequently less expensive in the aggregate.

When owned by a fund priced in USDs, those stocks have declined substantially in value just due to the parabolic rise in the USD, clipping close to 20% in price just on the currency exchange. Currency moves can last for several years, but recent up and down movements have been relatively short lived as shown in a ten year EUR/USD Chart

Unlike the ETF discussed below, VEU gives me broad exposure to all international stock markets including a significant allocation to emerging markets.

I achieve some worldwide diversification with this ETF and the one discussed below.

3.  Added 5 IEUR at $44.17-Commission Free in Fidelity Taxable Account (see Disclaimer): My last purchase was at $48.24 last September. The Euro has declined since that purchase on 9/9/14, going from about 1.2932 to 1.13 or 14.52% which will flow through into the values of Euro priced shares owned by a fund priced in USDs. So, that is a good lick just on the EURO currency devaluation.

Snapshot of Trade: 

Fidelity's confirmation contains the caveat that I must own these shares for 30 days before selling or I will be retroactively charged a commission:

Security Description: The iShares Core MSCI Europe ETF (IEUR) attempts to track an index composed of large, mid and small capitalization European equities.

The fact sheet shows that the three large Swiss firms are in the 1-3 largest weighted positions, with Nestle being the largest weighting at 2.67%. Since this index has a large number of holdings, the top ten positions represent only 18.62% of the index weighting as of 1/30/15.

Others in the top 10 include Novartis at 2.44%, Roche at 2.06%, SNY, GSK, SAN, HSBC, BP, TOT, and RDS (weighted at 2.13% when both share classes are totaled)

iShares Core MSCI Europe ETF | IEUR (expense ratio .14%; 983 holdings as of 1/30/15)

Index Data Sheet From MSCI  (as of 12/31/14: Dividend Yield 3.22%/Forward P/E 14.01)

TOP 25 Holdings:

Rationale and Risks: There are a number of reasons to go easy on a European stock ETF priced in USDs. I will just briefly discuss the risks first. Best to look down before engaging in star gazing, imagining what I will do with all of the riches bestowed upon me by an investment before I even achieve my first dollar in unrealized gains.

1. Currency Risk Is Front and Center Now: The European Central Bank has adopted monetary policies intended to drive the Euro down in value against the USD and other major currencies. So far, that campaign has been successful. EUR/USD Currency Conversion Chart A European stock ETF will also have securities priced in British Pounds, which has also been losing ground recently to the USD. GBP/USD Currency Conversion Chart There will also be some exposure to other European currencies including Norway's Krone and the Swiss Franc. The Swiss France did rise in value against the USD after the Swiss National Bank dropped its €1.2 peg.

In attempting to deal with this kind of risk, I chop my potential 200 share position into multiple small lots and will add to the position during price dips.

The decline in the Euro is a two edge sword. There are benefits to European companies that may offset the currency caused stock decline that will happen to a USD priced security that owns European securities priced in depreciating currencies. The currency decline will give many European exporters a price advantage compared to their competitors located in stronger currency nations and could consequently improve their revenues and profits.

2. Sluggish Growth Even During Recoveries/Increasing Odds of More Frequent Recessions: Most developed nations have a slew of long term structural problems. Europe has more than the U.S. and probably less than Japan. I would anticipate sluggish growth during the best of times and more frequent slippages into recession than in the past.

While growth in European markets will remain challenged, many of the large European companies are multinationals and derive an increasing percentage of their revenues and profits from faster growing markets.

The Prospectus contains the usual discussion of the "principal" risks starting at page S-3. Country risks are rising (moves toward country break-ups, increasing regulation, socialist tendencies). A break-up of the EU and the abandonment of the EURO as a common currency are also a risks.

The rationale for buying this security is primarily diversification, which is achieved at a very low cost given the negligible expense ratio and the ability to buy shares commission free at Fidelity.

Over the long term, I would expect that multinationals in Europe and the U.S. to benefit from growth opportunities in emerging markets, so I want some exposure to those large European multinationals, going beyond Unilever, Nestle and Novartis which I already own. The dividend yield is higher than SPY too.

The recent 20% or so devaluation in the Euro will give European multinationals an earnings and revenue lift when converting sales in stronger currencies back into the devalued Euro for reporting purposes. Those who manufacture product in a weak currency have a competitive advantage over those producing goods or services in a strong currency like the USD now.

Future Buys: With this ETF, I will simply be looking for an opportunity to average down in small lots, assuming that I can buy those lots commission free. I am currently substantially underweight Europe, and small adds to this ETF will not change that positioning.

In my Vanguard Roth IRA, I will be adding 5 share lots in their low cost European stock ETF, using cash flow and profits from my bonds as funding sources. I can buy Vanguard ETFs commission free in my Vanguard brokerage accounts. I am anticipating a recovery at some point in the Euro and British Pound that will create a tailwind rather than the current headwind.

I will be buying small lots (5 or 10 shares) of these Vanguard ETFs in my Roth IRA:

Vanguard FTSE Europe (VGK)(expense ratio .12%)
Vanguard FTSE World ex-US (VEU)(expense ratio .15%)
Vanguard FTSE Emerging Markets ETF (VWO)(expense ratio .15%)

Sometime during the market day, I took a snapshot of my current Roth IRA positions in these three Vanguard ETFs, which are being bought with cash flow:

While I am substantially underweight in European stocks, I am overweighted in Switzerland.

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