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New Trades: Income Equity Strategy

The purpose of this post is to provide an update on several new trades in the Blue Harbinger Income Equity strategy. Specifically, we have added several new attractive closed-end funds (CEFs) that offer very healthy yields. We also sold one of our biggest yielding individual stocks, and we provide a rationale for the sale.

Our 28 Favorite Stocks: July Performance Review & Outlook

In this week’s Blue Harbinger Weekly, we provide a brief performance review and outlook for each of the 28 holdings across our Blue Harbinger strategies. We also provide access to a members-only report on our “Top 3 Covered Call Stocks.” Lastly, you’ll notice we’ve updated performance though the end of July, and all three Blue Harbinger strategies continue to significantly outperform.

Active vs. Passive: Fees Matter Either Way

According to data from Morningstar, the average expense ratio among passively managed index funds and exchange traded funds (ETFs) is 0.69%, and for actively managed funds it is 1.21%.  And while this level of expense may seem reasonable to some, we believe it is a complete and total rip-off that can cost the average investor hundreds of thousands of dollars over the course of an investment lifetime.  Blue Harbinger’s passive “Lazy Person” ETF strategy and active “Blue Harbinger 15” strategy will show you how to be a better, smarter and more profitable investor.  This week’s Blue Harbinger Weekly reviews specific holdings within each of these strategies.

2016 Outlook: Own Selective Small Cap and High Dividend Stocks

There is a long history of mean reversion in the stock market.  And considering the soon-to-be dueling monetary policies of the hawkish US Fed and the dovish ECB, combined with 2015 year-to-date performance, small-cap value stocks with high dividend yields look very attractive heading into 2016.

Large Value ETF (IWD) Update – Great Time to Own Value

It was a great week for our large cap value ETF (IWD), as it gained 4.0%.  Value stocks (such as the ones in our ETF) have a long history of outperforming growth stocks over the long term (e.g. 10+ year periods).  And now is a great time to own value stocks given that they have been underperforming growth in recent years.  Said differently, now is a great time to buy low.


Growth stocks have performed well over the most recent market cycle because of the accommodative monetary policies in the US.  With the fed setting interest rates so low, it’s been easier for risky growth companies to borrow money to fuel cheap growth.  However, it will be bad news for growth stocks when the fed eventually starts to raise interest rates as they are widely expected to do within the next several months.  It’s unusual for growth stocks to outperform value for as long as they have (see the chart above) but when it does happen it usually ends badly for growth stocks.  For example, it ended very badly for growth stocks when the tech bubble burst in the early 2000’s.  As contrarian investors, we believe now is a great time to own value stocks such as the ones in our large cap value ETF (IWD).

U.S. Value Stock ETF (IWD) - Thesis

iShares Russell 1000 Value ETF (ticker: IWD)
Expected Return: 8.75% per year
Expected Volatility: 18.0% per year
Rating: BUY

As long-term investors, we believe the equity markets will increase over time, and the “value” portion of the equity markets will increase at a slightly better rate than the rest of the market.  Value stocks are defined as stocks with lower price-to-book ratios and less aggressive earnings growth expectations.  They’re basically stocks that are on sale.  Empirical research has shown that value stocks have outperformed the rest of the market over the long-term (10+ year periods).  Additionally, value stocks have moderately under-performed the rest of the markets over the last several years which makes them even more attractive (because they’re on sale).  We believe the reason value stocks have underperformed in recent years is because the accommodative monetary policies of the U.S. Federal Reserve since the great recession in 2009 have favored “growth” stocks.  Specifically, stocks that need to borrow more money to grow have been able to borrow it at attractively low rates because of the low interest rates set by the Fed.  As the Fed raises rates over the coming market cycle (they next three to 10 years) this will be a headwind to growth stocks and it will favor value stocks.  Regardless of where we’re at in the market cycle, value stocks tend to outperform over the long-term, and the Russell 1000 Value ETF (ticker: IWD) offers reliable exposure to the returns of value stocks while avoiding the many pitfalls that are common among other ETFs and among other equity investments in general.

IWD invests in over 650 large US companies classified as “value” stocks.  At least 90% of its assets are invested in securities of the Russell 1000 Value Index.  The fund may invest the remainder of its assets in certain derivatives such as futures, options, swap contracts and cash equivalents.  The index is one of the most commonly followed equity indices in the World, and is largely considered the standard benchmark for U.S. large company value stocks.  The performance of IWD has historically matched the performance of the Russell 1000 Value Index very closely, and it should continue to track closely in the future because of its construction methodology.  Investors cannot purchase the actual index, and IWD is the next best thing.

Volume and Liquidity:
As a standard ETF, IWD has significant volume and liquidity (total IWD assets exceed $23.5 billion).  Because of the volume and liquidity, the bid-ask spread is small (the bid-ask spread is the difference in price at any given time for someone buying the security and someone selling it.  There is a difference because the middle man takes a very small cut).  A small bid-ask spread is good because it saves you money when you trade.  Second, IWD trades very close to its net asset value (NAV) because of the large volume and liquidity.  NAV is the actual value if you add up the value of all the securities held within IWD.  For many less liquid ETFs, the NAV may vary from its actual market price (the price the ETF trades at in the market).  This makes IWD much less risky for investors compared to other ETFs that may vary widely in price versus NAV.  Additionally, small investors don’t have to worry about some big investor coming in, buying or selling an enormous amount of IWD, and subsequently adversely moving the market price away from its NAV because the volume of IWD is already so great that this risk is essentially non-existent.

Low Fees:
The net expense ratio on IWD is currently 20 basis points (0.20%).  This is extremely low for value stock exposure; it is good for investors because it allows them to achieve better returns on their investment.  For comparison, value mutual funds (a common competitor to ETFs) may charge over 150 basis points (1.5%) per year, and they tend to deliver worse performance over the long-term.  Additionally, there is no expensive sales charge or separate investment advisor fee because IWD can be purchased directly through a discount broker (e.g. Scottrade, E*TRADE, TD Ameritrade, Interactive Brokers, etc.).  The discount broker may charge you a one-time trading fee of $8 or less, but this is much better than the 2-5% sales charge/management fee you’d get charged by a full service financial advisor.  Additionally, there is no hidden 25 basis point (0.025%) annual 12b-1 fee paid to someone for “servicing your account.”  The bottom line here is that IWD is a very low cost way to get great exposure to the equity market and to build considerable wealth over the long-term.

Dividend Reinvestment:
One last point of consideration, IWD pays a quarterly dividend (around 2.49% per year), and this dividend is NOT automatically reinvested back into IWD (this is standard protocol for ETFs and stocks).  This means you’ll build up a cash balance in your account if you don’t withdraw it or manually reinvest it.  As a long-term investor, cash is generally a drag on investment performance.  Unless you plan to withdraw and use the cash, we highly recommend you develop a process to reinvest it.  Most discount brokers (Scottrade, Interactive Brokers, etc.) offer automatic dividend reinvestment programs.  We highly recommend you sign up for these programs to avoid the situation where cash builds up in your account and becomes a drag on your long-term investment performance.  Reinvesting dividends is important.

IWD is a very low cost, relatively low risk, security that allows investors to build significant wealth over the long-term.  We consider IWD to be a basic building block for long-term wealth, and we rate IWD as a “Buy.”  For more information, you can view the fact sheet for this ETF here.

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