by Aaron Levitt | January 22, 2014 3:12 pm
Mutual fund and ETF sponsors aren’t a stupid lot. They know exactly how to get the products retail investors are clamoring for into their hands in a quick and efficient manner. And with the market up big during the past few years and equity valuations (perhaps) getting stretched, the name of the game for many investors is finding quality and value among the herd.
And what could be considered higher on the quality scale than firms that have lasted the test of time?
That’s what the new PowerShares NYSE Century Portfolio ETF (NYCC) aims to do — track U.S.-based companies that have thrived for more than a century.
While that claim is certainly admirable, investors shouldn’t be jumping for joy and plowing all of their retirement savings into the fund just yet.
Because investors willing to dig a little deeper into the underlying portfolio will see that NYCC falls flat on a number of metrics, and seems more like a shrewd attempt at fund marketing than a game-changing product.
The concept behind the new NYCC ETF does certainly sound appealing. The fund’s underlying index — the NYSE Century Index — seeks to capitalize on some of America’s largest and oldest companies. Thus, to be eligible for inclusion in the index, a firm:
Given these requirements, investors in NYCC should expect to find the bedrock of America — blue-chip stocks like Coca-Cola (KO) and cereal maker Kellogg (K).
But certainly not private equity player Kohlberg Kravis Roberts & Co. (KKR), which was founded in 1976.
Well, KKR is in there too … and that’s the first step toward understanding why the underlying portfolio of NYCC is a bit wonky.
Not every stock in the Century Portfolio ETF has even been around for a century.
According to the official explanation of the fund, the nitty-gritty of the ETF is that if a firm buys a business that that fits NYCC’s underlying criteria, it can be in the index. Because KKR purchased businesses like industrial compressor maker Garner Denver and produce firm Del Monte — both founded in the late 1800s — the private equity player can be included in the ETF.
A few other examples in NYCC’s portfolio — such as Level 3 Communications (LVLT) — fit this loose definition of a being a century leader. That’s something to keep in mind when looking at the ETF. Garner Denver might be a “century” business, but it’s only one small piece of KKR’s private equity empire.
Another thing is not all the firms in NYCC have been publicly traded for 100 years.
For example, while Abercrombie & Fitch (ANF) T-shirts proudly display its 1892 origins, Abercrombie didn’t trade until 1996, when ANF hit the market. The same can be said for UPS (UPS), which has only been trading since 1999.
The potential issue there is that firms can and do operate differently when not under the guise of public investors. If you’re private, business decisions can be made with more of a long-term focus rather than just a few quarters ahead.
Try convincing today’s analysts that you’re building your brand for the next 100 years.
Perhaps the most serious hit to NYCC’s “century” portfolio is that it is incredibly (but unsurprisingly) backward-looking. Problem is, what worked during the past hundred years might not work for the next hundred. The rise of new technology, e-commerce, unconventional resources and other factors have completely changed various markets and sectors.
Based on their age, both struggling retailers Sears Holdings (SHLD) and JCPenney (JCP) are included. Odds are SHLD and JCP won’t even be around in five years.
The new NYCC ETF isn’t necessarily a bad portfolio of firms and you can’t blame PowerShares for trying something new. The ETF’s equal weighting does provide plenty of small- and mid-cap exposure, which has helped it in the return department over the course of its short history (36.85% in roughly a year).
Yet, at 372 different stocks and 0.5% in expenses (or $50 annually per $10,000 invested), you’re basically buying a kind-of-expensive index fund.
And there are better index funds that don’t have the “century” gimmick.
PowerShares uses the S&P 500 as the benchmark for NYCC. But with nearly 72% of its portfolio in small caps and midcaps, comparing it with a completion index could be a better benchmark. The Vanguard Extended Market Index ETF (VXF) basically tracks all the small-cap and midcap stocks not included in the S&P 500. For just 0.14% in expenses, investors would have gotten a NYCC-beating return of 38.11% over the last year.
Add in a dose of the practically free-to-own Vanguard S&P 500 ETF (VOO), and you have roughly the same return for the NYCC, but with broader diversification and reduced ownership costs.
And if you really like the idea of owning a “century” portfolio,” fellow InvestorPlace contributor Will Ashworth’s favorite mutual fund could be a better bet. At its founding in 1935, the ING Corporate Leaders Trust Series B (LEXCX) purchased 30 of the leading American blue-chip corporations of the day. No new stocks can be purchased, and the holdings only change because of spinoffs or mergers.
The passively managed fund now holds just 22 different stocks, and a $10,000 investment would be worth around $635,000 if held over the last 40 years. That performance has simply destroyed both the S&P 500 and Dow Jones Industrial Average.
Plus, at 0.52% in fees, it’s only slightly more expensive than the new, untested NYCC.
The new NYCC ETF is an interesting concept, but investors’ money is best used elsewhere.
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As of this writing, Levitt was long VXF.
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