Saturday, January 18, 2014

Not three weeks into the year and up 1.16%

I track what I call a Rocking Chair Portfolio designed for old geezers like me. It uses TD e-funds. These are mutual funds sold by the TD bank that are only available online. The MERs are quite low. I have set up a phantom portfolio composed of about 45 percent of a Canadian bond fund blended with about 15 percent of each of the following indexes: Canadian, U.S., and International, plus about 10 percent in cash sitting in a cash fund paying 1.25 percent interest. The Rocking Chair is up 1.16 percent so far this year.

My simple fall back investment, the TD Monthly Income, is up about .7 percent.

Another faux fund I have created is is composed of three iShare ETFs plus a the same cash fund I used above. This is the TD Investment Savings Account fund (TDB8150). I use this fund in my own portfolio. It doesn't pay a lot but 1.25 percent is better than many of the alternatives. The mix of this iShares portfolio is about 30 percent bonds (XSB), about 35 percent Canadian equities (XIC), about 15 percent U.S. equities and the remaining 20 percent in cash. This very conservative portfolio is up .92 percent.

Another portfolio which contains a big whack of REITs in the form of iShares XRE along with both Real Return Bonds (XRB) and the XSB ETF and a sampling of equities from Canada, the U.S. and the International markets is up .85 percent.

And me? How am I doing? Duh, not so well. I'm up maybe .4 percent. I have strayed a long way off the ETF path and, at the moment, I am not being rewarded for my daring investment adventures. My gold stock, BTO, is showing signs of life but nothing is soaring to new, great heights at the moment.

It will be interesting to see how these funds are doing three months from now. At that time I should have a clear idea as to how much dividend income is being produced by both my portfolio and by may faux portfolios.

Setting up these faux funds was easy using WebBroker. And the software even tracks the dividends. Very nice.

It should be noted that some mutual funds are up more than three percent today. These funds are blowing the socks off my little no-brainer portfolios. The downside to some of these funds is the large amount of return of capital (ROC) contained in their distributions. Here is an interesting link: 2013 Target Distribution Rates. Some are disconcertingly high.

Still, the big winner of the year is my barbell portfolio. This big risk taker is up something in the range of a full five percent.

Thursday, January 16, 2014

Has REM found a bottom?

Has REM found a bottom?

As a retired fellow, I need cash. Some good stocks may be climbing in value but they do not pay an adequate dividend. Some ETFs are naturals in a "couch potato" type portfolio but they, too, don't pay a big enough dividend for a man in retirement. Think of iShares XIC.

So taking a page from the barbell portfolio approach, I have about one percent of my investments in iShares REM. I have written about this ETF in the past. According to its profile, REM attempts to track the investment results of an index composed of U.S. real estate investment trusts ("REITs") holding U.S. residential and commercial mortgages. I think of these as mREITs with the 'm' standing for mortgage.

Morningstar gives REM one star. I don't think its possible to have a lower rating. Morningstar also claims that REM has a low return. Yet, it's double digit yield has made it a nice addition to my portfolio. Today it is yielding 15.61 percent.

A mere $12,000 invested in REM pays a big enough dividend to balance my books for a month. $144,000 would pay me enough in dividends to get me through an entire year in retirement. I don't have $12,000 in REM. I could but I don't. REM is the extreme investment in my Barbell porfolio. It's yield is a nice shot of financial adrenalin but if it wilted I wouldn't lose sleep.

The other day MarketWatch looked at the mREIT market in an article by Ruth Mantell: The bear and bull cases for mortgage REITs in 2014. Mantell reports that investors sold off the group indiscriminately in 2013, and now there may be buying opportunities. Those aren't her exact words, for those read the article, I could not bring myself to be more positive about something that puzzles me so.

If REM, and the effect the ending of qualitative easing will have on the mREIT market, leaves you shaking your head in confusion, think of MORL, ETRACS Monthly Pay 2X Leverage Mortgage REIT ETN. (ETN stands for exchange traded note.) MORL is from UBS AG, a Swiss financial services company headquartered in Basel and Z├╝rich, Switzerland, but with tentacles reaching around the globe. MORL, like REM, is a mREIT based investment but thanks to leveraging is yielding 25.44 percent today.

Its profile says that this is an investment seeking to link to the Market Vectors® Global Mortgage REITs Index. The Securities are senior unsecured debt securities issued by UBS AG (UBS). The Securities provide a monthly compounded yield two times leveraged with a long exposure to the performance of the Index, reduced by the Accrued Fees.

In recent months MORL has had more of the stuffin' kicked out of it than REM. REM is down roughly 20 percent in the past year. MORL is down a little more than 30 percent. Both are huge drops when one remembers that the American market had a stellar year in 2013.

When I bought REM at around $11.50 I blogged about the purchase. I was betting REM was at or near a bottom. I was betting that I would make more in yield than I would lose on the dropping unit value. So far, the theory has been good. I'm well up on both the price of the units themselves and the big dividends are just gravy.

The question that I now must ask is: Has MORL found a bottom? For a look under the hood of MORL read the article by Michael Johnston on ETF Database: UBS Launches Mortgage REIT ETN With A 24.8% Yield.

In the past year, MORL has traded for 15 percent less than its present unit price. This gives me pause. REM, on the other hand, is within about 5 percent of its low for the past year and maybe of its all time low. There is an investment seminar coming up at TD Waterhouse downtown in London, Ontario, that will take an in depth look at ETFs. A fellow at the bank advised me to attend and bring along my questions about both REM and MORL.

The bank chap agreed both investments look appealing when used as little booster engines kicking one's portfolio yield up a notch. But the fellow at the bank, couldn't get his head around how exactly these two magic investments could crank up their yields well into the double digits without taking on totally unacceptable risk.

Saturday, January 11, 2014

Too good to be true: MORL and maybe REM

I have money in REM, the iShares mREIT ETF. It's a spooky thing to own. It is a very heavily leveraged mREIT investment where the 'm' stands for 'mortgage'. I have looked at MORL, but the leverage needed to deliver the yield frightens the devil out of me.

I found this article: Mortage REITs: Does Doubling the Leverage Make Them a Good Investment? David Schawel makes a strong case for keeping one's distance from these ETFs and ETNs. The leverage necessary for something like MORL to deliver a yield in the 30% range is downright frightening Schawel agrees. He writes:

"I’d be scared to own mortgage REITs even before you double the leverage . . . "

Some of my early REM purchases were made when REM was selling for a little more than today. If and when REM climbs back to those previous high levels, I am selling those shares. I don't need that much risk.

Why don't I simply sell all my REM and get out of the mREIT game completely? Answer: The yield. I take the yield and reinvest it in safer places. It has just been too good a game to quit.

I may get burned.

Friday, January 10, 2014


This is a post I should have had up in late December. Two weeks ago the best time to assemble one or more benchmarks was passing. It's not too late though. Finding the closing prices of stocks and ETFs is still easy. A lot of sources will post closing values for 30-days before dropping them into historical files.

I have a number of benchmarks that I like to best. The first three benchmarks are ones created for the Financial Post. I've talked about these in the past.

The following is not a true benchmark but as a retired fellow living partially on his investment income, I like to judge how well my portfolio is doing compared to the TD Monthly Income fund. TDB622 is a balanced fund heavily weighted to the financials, followed by energy and utilities. At the moment, fixed income is the fund's biggest component. If I were designing the ideal couch potato portfolio, the TDB622 mix of investments would just about hit the mark. For that reason, my next benchmark is:

There are a number of popular approaches to personal investing. One approach often mentioned is a version of the couch potato portfolio. The goal here is either an ETF mix or mutual fund mix that gives one a balanced portfolio that after buying is held and allowed to appreciate and compound. This is the buy it and forget approach to investing. Many claim this is a winner.

Using the TD Waterhouse Portfolio Manager, I've set up a number of phantom portfolios. Each one emulates a couch potato derivative. I have five imaginary portfolios:

  • Barbell (not so much a benchmark as a canary in the coal mine)
  • Classic No Work
  • Hi-Yield Lazy Dude
  • Strategy for Retired Canadians
  • TD e-funds Classic

I am not going to say too much here as you can come up with your own faux portfolios that you, for whatever reason, believe represents a successful approach to auto-pilot investing and which mimic the approach you aim for with your actual portfolio allocation . I will say this: A classic, conservative approach is a balanced portfolio with approximately 40% bonds and 60% equities. The equities are split between Canadian, American and International investments. Some folk weight this towards the Canadian equities and some weight this towards the American equities. It is your call.

My retirement strategy puts a lot of attention in dividend paying investments. From 10% to 20% may be invested in REITs. For more insight into retirement portfolio management, google David Swensen, manager of Yale University's endowment fund. I don't have 20% of my retirement money in REITs but I do have a lot. Certainly more than 10%. When I get concerned, I think of Swensen and then I feel I am in good company.

So, are there any surprises hidden in my benchmarks? As a matter of fact, there is. My Barbell Portfolio is a mix of one ETN (exchanged traded note) and two ETFs: 15% MORL ETN, 30% REM ETF, 50% XMI ETF, plus about 5% in a cash saving fund paying 1.25% interest today. I simply picked a couple of the riskiest investments with the highest paying dividends and mated these with a classic conservative ETF plus a little cash. And the surprise? The surprise is how well this benchmark is doing. It is already up more than 4% in the first ten days of 2014.

I'm going to an investment meeting sponsored by TD Waterhouse and I'm going to inquire about both MORL and REM. They are both, I believe, based on the mREIT market in the States. I own REM and enjoy the 15% dividend but it worries me. I don't own MORL. The 30% payout really frightened me. Until I know more, when it comes to MORL I am keeping my distance.

Having benchmarks sharpens one critical eye. A portfolio might look like it has a winning mix but if it is not rising in value as fast as a no-brainer portfolio, the portfolio has problems. On the other hand, one's portfolio might be losing value, but if it is falling slower than one's benchmarks, then one might want to put one's concerns on hold.

Sunday, January 5, 2014

REM may have farther to fall

I like REM. I take some of the income and reinvest it with caution. The remaining income I spend. I'm retired. I need money to live. (REM, if you don't know, is a U.S. mortgage REIT from iShares.)

I didn't pay too much for REM, I paid in the $12 range, and my wife paid even less. Even with today's low unit prices, my wife is in the black with her REM investment. Many investors cannot say the same. Some paid as more than four times today's unit price just a few, short years ago.

The saying "a rising tide raises all boats" doesn't seem to hold for REM. As the market booms, REM has been wilting.

With the Federal Reserve stopping their quantitative easing program of buying bonds, interest rates should start to climb. This will impact adversely on both the bond market and the REITs sector. REM may be in for another kicking. I have a chunk of my portfolio in various REITs but I didn't buy at the peak of the market. I have a cushion.

Still, one has to wonder how much damage raising rates will inflict on my portfolio. I have begun considering buying on dips and selling on little pops to make a little money in what I believe will be a falling market where REM shares are concerned.

Whatever I do, I will keep my overall exposure to this sector manageable. Don't risk what you can't afford to lose, I like to say.