AAII Orange County Chapter

Monthly Meeting, August 20, 2011

Balearic Community Center

1975 Balearic Dr.

Costa Mesa, CA  92626


President Bob Welge brought the meeting to order shortly after 9 am. Beginning with preliminary announcements, Bob drew members’ attention to the availability of Chapter contact information and minutes for the May meeting on the side table, and of coffee at the back table. Bob acknowledged the efforts of the Chapter’s leaders: Facilities Chair Craig Stoddard, and Treasurer Dave McMillin.

Bob drew members' attention to the Southern California Investor Conference to be held from 8am-3:30pm on Monday, August 29, 2011 at the Island Hotel in Newport Beach. This event is free to AAII members and is highly recommended. Bob next announced the schedule of future chapter meetings. The next meeting will be on Saturday September 17th (contrary to earlier plans, it will be held at the usual date and time), when Matthew McCall will present Building a Portfolio for the Next Five Years; October, no meeting; on November 5th, Herb Farrington will present Federal and State Income Tax Law Update; and December, no meeting. Bob has already contacted Jonathan Lansner for next January and has high hopes Mr. Lansner will be able to present then. Further details on these future events, minutes of previous meetings, and other Orange County Chapter information can be viewed on Bob’s website http://www.robertsgeneral.com.

Bob then introduced today’s speaker, Benjamin Shepherd, who is with InvestingDaily.com and editor of Louis Rukeyser's Mutual Funds, and his presentation Implementing a Low-Cost Investment Strategy Using ETFs.

Mr. Shepherd began by listing the advantages of exchange-traded funds (ETFs):

1) ETFs have greater flexibility because they trade intraday, instead of only at the end of the day.

2) they are more versatile

3) they are more liquid (at least the larger ones)

4) ETFs offer better control of tax liability: as many have no or little portfolio turnover, their only tax liability is typically incurred only when the investor sells.

5) Better predictability of performance: portfolios of ETFs are either fixed and well defined, or their current makeup is readily obtainable; whereas, mutual fund portfolios need be published only twice a year. Furthermore, mutual fund managers not infrequently stray from the original strategy of the fund, often with little notice to shareholders; ETF benchmarks on the other hand, are fixed.

6) ETFs typically have lower fees than mutual funds.


In selecting an ETF, one needs to learn (1) what [index] the ETF tracks, (2) does the ETF trade with enough volume to assure one can dispose of it when it comes time to sell, (3) what are the ETF's management costs, (4) what are the typical bid/ask spreads, and (5) at what premium/discount from net asset value does the ETF typically trade.


ETF flexibility and versatility is assured by the ~1300 ETFs currently listed on US exchanges, with 10-15 new ones being added each month. Larger ETFs provide adequate liquidity, but the investor should check that at least 100-200 thousand shares trade daily when evaluating an ETF. This and much more information on ETFs has been compiled in the August AAII 2011 Guide to Exchange-Traded Funds. Such resources make it easy to create tight asset-allocation models using ETFs.


Ben then commented on current market conditions:

·         Now is a good investing opportunity news is too negative, but growth is still positive

·         Business confidence is now as high as before the '08 recession

·         There is marginal improvement in consumer confidence

·         Job creation is slowing improving

·         The Conference Board's Leading Economic Indicators is "very useful"

·         But, consumer debt outstanding continues to be a drag on economic activity


His favorite plays:

(1)  The new 'C-Note' the Chinese Yuan!

— Emerging market consumer spending is projected to increase from $6.9T currently to $20T in 2020

— Emerging markets have a younger demographic

— To take advantage of these trends, one can invest in ECON, an ETF consisting of 50 global consumer products stocks purchased in local currencies; ECON has a 2% dividend yield and a 0.63% expense ratio

(2)  The metal Palladium

— Platinum is too expensive and trades too much like gold

— PALL is the physical metal ETF equivalent to gold's GLD

— PALL tracks the spot price, and has an expense ratio of 0.6%

(3)  Nuclear energy

— Only minimal-carbon energy source with sufficient scale to meet the emerging economies' increased energy demand

— The NRL ETF yields 4.8%, is highly liquid, invests vertically from uranium mines to electric utilities, and carries a 0.57% expense ratio

(4)  VIX, the volatility index

— Has an almost perfect inverse correlation with the S&P [500]

— The ETN VXX has ~zero tracking error

— With a one month duration and a 0.89% expense ratio, VXX is appropriate for long-term holding as a hedge for market declines

— However, because VXX is based on futures, it has a negative roll


During the question and answer period, Ben mentioned the rare metal ETF REMX and Vanguard's REIT (real estate investment trust) ETF. His current asset allocation now is underweight emerging markets because he thinks there is better value in US stocks. However, he is bullish on two foreign ETFs ECH (Chile) and EWG (Germany). He mentioned the preferred stock ETF PFF currently yielding 6.5%. Finally Ben mentioned the Dividend Achievers ETF [PFM] currently yielding ~6%; the stocks in the index for this ETF are not cap-weighted and must have raised their dividends in each of the past 10 years.


For investors with further questions or wanting additional information, Ben can be reached by phone at 703-905-4645, or by email at BShepherd@InvestingDaily.com.

Following the conclusion of Mr. Shepherd’s presentation, President Bob Welge adjourned the meeting at 11 am. As a bonus, interested members were invited to continue discussion with Mr. Shepherd over lunch.



Minutes taken by Ed Sharman