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June 2018 Performance Review & Trade Announcement

July 3, 2018

June was a respectable month for U.S. stocks (though you wouldn't know it from our portfolios…) but a down month for bonds and foreign stocks. Emerging market stocks were the big loser among foreign stocks — down 4.44% — primarily on trade war fears .

Our Conservative portfolio declined 0.52% in June. Our Aggressive portfolio fell 0.84%. Benchmark Vanguard funds for June 2018 were a­s follows: Vanguard 500 Index Fund (VFINX) up 1.22%; Vanguard Total Bond Market Index Fund (VBMFX) down 0.33%; Vanguard Developed Markets Index Fund (VTMGX) down 0.83%; Vanguard Emerging Markets Stock Index (VEIEX) down 4.44%; Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 0.12%.

U.S. growth stocks were hot while value-oriented stocks lagged again. In an odd turn interest rate sensitive funds with higher yields were top sectors even though value stocks in general lagged.

Real estate funds jumped 4.6% (though still down for the year) while utilities and communication funds were up 3.15% and 2.85% respectively. Other than our short on gold (which had a good month) only our holdings in these three areas beat the S&P 500 last month, with Vanguard Telecom Services ETF (VOX) and Vanguard Utilities (VPU) scoring 2.83% and 1.53% returns respectively.

These gains could be because recent weakness in these sectors created bargains, but could also be because interest rates stopped rising (by and large) with a strange 3% ceiling forming across the treasury yield curve at most maturities. This is relevant to our positions in telecom funds which we are in the process of changing to global telecom funds because U.S telecom indices are evolving to include tech stocks like Facebook and Google.

At the end of June we made some trades in the Conservative portfolio largely because one of our holdings, ETRACS 1xMonthly Short Alerian MLP (MLPS), was liquidated for lack of investor interest.

The trade brought two new holdings to the Conservative portfolio: iShares Global Telecom ETF (IXP) and Dodge & Cox Global Bond Fund (DODLX).

iShares Global Telecom ETF (IXP) is a new global telecom fund, an index fund based on a global telecom index. The yield is attractive if interest rates don't rise significantly and will offer extra benefits over a domestic telecom fund should our dollar fall.

Dodge & Cox Global Bond Fund (DODLX) was added because it's becoming a good time to consider low fee active management in general as indexing takes over the investing landscape. In addition, our previous no-transaction fee ETF in this area is no longer NTF at TD Ameritrade (the brokerage platform we use for our real money model portfolios and client accounts). This is a global fund so there is significant US exposure. We went with a larger allocation here (30%) but are getting some currency oomph from global telecom stocks as well.

The very low fee choice that is NTF iShares Core International Aggregate Bond ET (IAGG) for us at TD Ameritrade is hedged to the dollar which defeats the main purpose of owning non-US dollar denominated bonds which is diversification and protection from a slide in the U.S. dollar. Otherwise, unless you go with a higher risk emerging markets bond fund you wind up with 1% yielding government bonds. We can do better than that in yields from our own debtor nation which is paying near 3% as our deficit widens (while other major economies are seeing shrinking debt to GDP levels in this strong global economy).

With this trade we removed 4 holdings (not including the fund company liquidation and cash settlement in ETRACS 1xMonthly Short Alerian MLP (MLPS) which would make it 5):

It was time to cut back on junk bonds, which have been doing well, and our pick in this area, Artisan High Income Fund (ARTFX), was in the top 10% of this category for much of the fund's existence (including this year). At $3 billion in assets the top percentile returns and 5-star rating are no longer likely given the high 1% fees.

Artisan Global Equity Fund Investor Class (ARTHX) has been a solid performer and is still smallish but is too expensive at 1.40%

SPDR Barclays Intl. Treasury (BWX) is no longer transaction-fee free at TD (where we keep our real-money portfolios), and it's too expensive for a non-NTF fund. Recent weakness could get you a tax loss. In general active management with low fees should do slightly better than indexing in coming years.

We're trying to get away from higher credit risk yield though may come back to this on weakness. The iShares Mortgage Real Estate ETF (REM) mortgage REIT ETF, which owns mortgages purchased with borrowed money, has been a decent performer for us with a roughly 41% return (with dividends reinvested) since January 7th 2016.

We also rebalanced some holdings to slightly different allocations just to make the trade more cost efficient: Vanguard Mortgage-Backed Securities (VMBS) from 14% to 12%, Vanguard Long-Term Bond Index ETF (BLV) from 20% to 19% and Homestead Value (HOVLX) from 6% to 7%. These ETFs (but not HOVLX) also stopped being NTF for us at TD so small trades don't make sense at this time and we may eventually move out of some of these for this reason.

Alternates to consider here:

For iShares Global Telecom ETF (IXP): Because domestic telecom indexes are getting tech stock updates, this category is about to get noticeably higher risk and lower yield. You might try Fidelity Select Telecommunications Portfolio Fidelity Select Telecommunications Portfolio (FSTCX) and you can stick with Vanguard Telecom Services ETF (VOX) if need be but don't also own tech funds. The ETFs in this area are heading in the direction of T. Rowe Price Comm & Tech Investor (PRMTX) which already went tech years ago and has big stakes in Amazon (AMZN) so you won't be worse off than in Vanguard Telecom Services ETF (VOX) after the changes. In general we’re not in telecom to increase tech exposure – rather to avoid it - which you already get plenty of in regular stock indexes and just about everything these days.

For DODLX you can continue to use SPDR Barclays Intl. Treasury (BWX) or the cheaper iShares International Treasury Bond ETF (IGOV). Those who want more risk and higher yield could consider iShares J.P. Morgan EM Local Currency Bond ETF (LEMB) which is NTF at TD Ameritrade. In active management, if you can avoid the sales load one of the classes of Strategic Global Bond Fund (MAWIX) can work. AB FlexFee International Bond Advisor (FFIYX) is cheap and new and small and the flex fee is interesting (at 0.20% for now until the fund performs well against a benchmark) but the dollar hedging is unappealing right now PIMCO Foreign Bond (Unhedged) (PFUIX) if you can avoid the sales commission or load and get a cheaper class no more than 0.75% a year.

Stock Funds1mo %
Gold Short (DZZ)7.94%
Vanguard Telecom Services ETF (VOX)2.83%
Vanguard Utilities (VPU)1.53%
[Benchmark] Vanguard 500 Index (VFINX)1.22%
Vanguard Value (VTV)0.21%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)-0.83%
Vanguard European ETF (VGK)-1.22%
Homestead Value (HOVLX)-1.34%
Proshares Ultrashort Russel2000 (TWM)-1.40%
Vanguard Europe Pacific ETF (VEA)-1.64%
iShares MSCI Italy Capped (EWI)-1.88%
Proshares Ultrashort NASDAQ Biotech (BIS)-2.99%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)-4.44%
iShares MSCI BRIC Index (BKF)-4.91%
PowerShares DB Crude Oil Dble Short (DTO)-19.41%
Bond Funds1mo %
Vanguard Extended Duration Treasury (EDV)1.35%
Vanguard Mortgage-Backed Securities (VMBS)0.08%
[Benchmark] Vanguard Total Bond Index (VBMFX)-0.33%
Vanguard Long-Term Bond Index ETF (BLV)-0.58%
SPDR Barclays Intl. Treasury (BWX)-1.02%