Vanguard eyeing smart beta strategies: CEO

Leslie Shaffer | Writer for CNBC.com

Wednesday, 26 Mar 2014 | 10:23 PM ET

CNBC.com

Vanguard: This is how you 'own the market'

 

Wednesday, 26 Mar 2014 | 8:14 PM ET

William McNabb, Chairman & CEO of Vanguard, says the firm's strategy of building a diversified portfolio while keeping costs down is the best way for investors to succeed.

Vanguard, one of the world's largest mutual fund managers, is closely watching the development of smart beta strategies as a complement to its index fund mainstays, its CEO said.

"It's just another way of doing active management. It's maybe a lower cost way of doing active management and that's what gets our interest," William McNabb, chairman and CEO of Vanguard told CNBC.
Vanguard said it doesn't have plans to introduce a smart beta product any time soon.

Smart beta strategies essentially "soup up" indexes. Rather than creating and index-based portfolio weighted by market capitalization, a smart beta fund would use weightings based on other factors such as earnings, dividends and cash flow.

The oldest and simplest versions used equal-dollar weighting, or putting the same amount of money into every company in an index.
Vanguard, which manages around $2.75 trillion, has built its business on offering extremely low-cost index funds, sometimes with expenses of as little as five basis points.
But McNabb noted around 40 percent of Vanguard's assets are in its active funds.

Tim Boyle | Bloomberg | Getty Images

 

William McNabb, chairman, president and chief executive officer of Vanguard Group

"We think active and passive can work together, but the key point is we believe in low-cost active," McNabb said. "If you have a high-cost active fund, it's a loser's game."

But for now, Vanguard is keeping its focus on its core, passive index funds, with McNabb noting it's "very difficult" for active management to offer value.


"Even in a situation where you see negative news coming from one particular stock or another … analysts don't get that right all the time," McNabb said. "The market tends to move in short bursts. A lot of investors get caught up trying to time that and it's almost impossible to do it," he said.
"Our view is own the market. And over a long period of time, if you own the market at very low cost you'll actually outperform," McNabb said.

Fund performance data don't appear to offer much support for pursuing actively managed funds.
Around 60-69 percent of active fund managers for U.S. stocks underperformed their benchmark indexes over the 12 months to mid-2013, with the result equally bad over three- and five-year horizons, according to the Standard & Poor's Indices Versus Active Funds Scorecard, or Spiva.

Over the previous five years, around 63 percent of global funds, 66 percent of international funds and 75 percent of emerging market funds got beaten by their benchmark indexes, according to the Spiva results.
In addition, the cost difference between Vanguard's index funds and actively managed funds can be large.

Vanguard's Total Stock Market Index fund – which last year surpassed Pimco's Total Return fund to become the world's largest – charges a 0.17 percent expense ratio, while its exchange traded fund (ETF) based on the same index has an expense ratio of 0.05 percent.
By comparison, actively managed funds typically charge fees of 1 to 2 percent, in addition to sometimes charging a "sales load" or upfront sales charge to enter the fund, which can run as much as 5 percent of assets.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1

The best and worst states for taxpayers

Hate paying taxes? Then consider a home on the range, and keep as far away from New York as possible.
The tax burden the average American pays varies tremendously, and depends a lot on where you live, according to a study by financial social media company

The study ranked all 50 states and the District of Columbia.

An American making the median national income, driving an average car and living in the median-priced home could end up paying either 60 percent less or almost 40 percent more than the national average, based only on the state one calls home.


The study's analysts created a profile of the "average American" based on median income ($65,596), median home price ($174,600) and other data, and then calculated how much the person would spend on taxes living in every state. It drew on data from several sources, including the Census Bureau, the Internal Revenue Service, the Tax Foundation, and even the National Institute on Alcohol Abuse and Alcoholism (for taxes paid on liquor).

Your tax 'what ifs' answered

 

Viewers sent us questions on Twitter, Facebook and via email. CNBC's Sharon Epperson asks tax expert Elda Di Re, a partner at Ernst & Young, for answers.

 

Wyoming had the lowest taxes for residents. That state's taxpayers shell out 66 percent less than the national median. Alaska came in closely behind, and Nevada rounded out the top three.
On the other hand, New York ranked dead last—its residents pay 39 percent above the national average. California is right behind at 37 percent above the average, followed by Nebraska's 36 percent.


The study accounts for everything from income taxes to alcohol and vehicle taxes, so individual results may vary. Higher taxes can also mean more social services and benefits for residents, so their impact on metrics like quality of life and social mobility may make the expense worth it.


—By Robert Ferris, special to CNBC.com.

Do you have to pay the AMT? Find out

 

Published: Wednesday, 19 Mar 2014 | 8:00 AM ET

By: Shelly K. Schwartz, Special to CNBC.com 

 

It's bad enough that you might get stuck paying the alternative minimum tax (AMT). That it takes a tedious calculation to know for sure is salt in the wound.

Indeed, IRS Form 6251, which is used to calculate taxable income under the AMT, requires 60 lines of mind-numbing computation using a different set of tax rates, income "addbacks" and rules. Ultimately, the parallel tax system, which was instituted to prevent the wealthy from sheltering too much of their income, eliminates many of the personal and standard deductions available under the ordinary tax system.

John Lamb | Photodisc | Getty Images

Taxpayers who may be subject to the parallel tax must calculate their liability using both the standard method and the AMT and pay whichever is higher.

"It's very painful as far as filling out the form," said Melanie Lauridsen, a technical manager on the tax staff for the American Institute of CPAs. "The first time you fall into AMT is a little bit of a shock."
Generally speaking, taxpayers on either end of the income spectrum are immune from AMT, says Lauridsen.
High-income earners are already subject to the top 39.6 percent tax bracket and are ineligible for many deductions under the regular tax system. Thus, they pay more under their standard tax system than they would under the AMT.
"At the end of the day, the amount of money the super rich pay in taxes ends up higher under the ordinary tax system, so they're not generally subject to the AMT," says Lauridsen. "A lot of people think they're getting away with it because they're not paying the AMT, but that's not the case."
Lower-income taxpayers are also generally exempt.

(Read more: Are you a target for the alternative minimum tax?)

Filing your taxes? Avoid these common mistakes

 

CNBC's Herb Weisbaum on the most common mistakes people make on their tax forms and the quickest way to get your refund.

 

It's the millions of taxpayers that fall somewhere in between who increasingly get ensnared.
Middle-income taxpayers most vulnerable to AMT include those with many children, since personal exemptions disappear, married taxpayers, since the "marriage bonus that applies to regular income tax is disallowed, and those who claim miscellaneous itemized deductions, such as medical or dental expenses. Taxpayers who exercise incentive stock options, realize significant capital gains or live in a high-tax state are also often subject to the AMT, since state and local tax is not deductible under the AMT.

In 2013, for example, a married couple earning $400,000 with two children and $80,000 in itemized deductions, including $20,000 in property taxes and $23,000 in state income taxes, would be subject to AMT of $8,890 on top of their ordinary income tax, according to Mark Luscombe, principal tax analyst for CCH in Riverwoods, Ill. But a taxpayer with property taxes of $5,000 and state and local sales taxes of $5,000 would be exempt from the AMT.

Any taxpayer could be caught by the AMT, but Lauridsen said households earning $75,000 or more that claim at least one of the deductions that are excluded under the AMT should err on the side of caution and fill out the form.

Households earning more than $150,000, regardless of how many exemptions and deductions they claim, should also fill out the form.
If you owed AMT last year, chances are you'll owe it again, said Luscombe.
If you've never paid it before but fear you've tipped the scales this year with higher income or a set of triplets, grab a pencil, your 1040 and a double shot of espresso. It's time to get busy.

 

 

For those who use tax-preparation software or pay a tax professional to file their income-tax returns, the AMT calculation is done automatically on their behalf, whether or not they're aware it's happening.
If you file a paper return, you'll have to do the legwork yourself.

The IRS offers a simple AMT Assistant tool on its website that helps taxpayers determine whether they need to complete Form 6251 at all. The tool offers a series of prompts based on your 1040 return.
You may have to pay the AMT if your taxable income, plus certain adjustments, is more than the AMT exemption amount for your filing status. If your income is below this amount, you usually will not owe AMT, said Rick Norris, a certified public accountant with The LA CPA in Los Angeles.
Norris said taxpayers who calculate the AMT themselves can lessen the pain by using IRS e-file to prepare and file their tax return. E-file software will figure AMT for you if you owe it.
There's also a worksheet in the instructions for Form 1040 that can help you determine whether you'll need to complete Form 6251.

The formula to estimate the amount of AMT you may owe is also fairly straightforward, but you'll need to use Form 6251 to determine your actual tax liability.
Start with line 41 on your Form 1040, which is your AGI after deducting your standard deduction or itemized deductions but before subtracting your personal exemptions. Add to that your total tax-benefit items, including tax preferences and adjustments, to arrive at your AMT income (or AMTI).
Adjustments include standard and personal exemptions, certain itemized deductions, mortgage interest, taxes, medical expenses and investment interest. Preference items, which get added back into taxable income after the adjustments are made, include tax-exempt interest from municipal bonds, exercise of an incentive stock option, depreciation and percentage depletion/excess intangible drilling costs, according to the IRS.
Next, subtract your AMT exemption amount to determine the amount of your AMTI that is subject to tax at the AMT rates.

For tax year 2013, the maximum AMT exemption amounts are $51,900 for single taxpayers and heads of household, $80,800 for married taxpayers filing jointly and $40,400 for married filing separately. The AMTI exemption phases out above $153,900 for married joint filers, $115,400 for singles and heads of household and $76,950 for married taxpayers who file separately.
After subtracting your exemption amount, multiply the remainder by your AMT rate, which will be either 26 percent or 28 percent. AMTI at or below $179,500 is taxed at 26 percent, while AMTI above that threshold falls into the higher 28 percent.

The resulting figure is your tentative minimum tax, or TMT. If your regular tax is higher than your TMT, you won't owe AMT. If your regular tax is lower, the difference between the two taxes is the amount you owe in AMT in addition to your regular tax.
Thus, if your regular income tax is $30,000 and your AMT is $45,000, you must pay $15,000 on top of the $30,000 you owe for ordinary income tax.

There's no avoiding the AMT if you owe it, but there are ways to minimize the pain of Form 6251.
"It's complicated to calculate," said Luscombe, noting that taxpayers who rely on software to file their returns are generally better off. "Start by looking at last year's return. If you used software, it should be able to show you the AMT calculation and give you some indication as to whether you're on the bubble this year."

—By Shelly K. Schwartz, Special to CNBC.com

US poised to become world's only superpower

 

Published: Wednesday, 12 Mar 2014 | 1:26 PM ET

By: Ron Insana

The U.S. is poised to become the sole economic superpower in the world.
I call it "Fortress America."

I've been traveling around the U.S. for the past 18 months and have noticed enormous changes. They're not driven by the Federal Reserve's easy money policies, although many of the positive changes taking place in energy, manufacturing, technology and retail sales could not have happened if the Fed, namely Ben Bernanke, had not saved the economy from another Great Depression.

Getty Images

A gas flare is seen at an oil well site on July 26, 2013 outside Williston, North Dakota.

I was happy to find, on Sunday, as I moderated a panel of top performing hedge-fund managers that, they too, see good things for the U.S. in the years ahead.

I base my outlook on four legs of an economic stool:

* The energy revolution
* A manufacturing renaissance here at home
* Rapid technological innovation
* A major recovery in residential real estate

Many of these factors are beginning to get the appropriate recognition for their contribution to a more durable, sturdy and long-lasting economic expansion, which, I believe, will also be supported by a secular bull market in U.S. stocks.

I believe the current period to be analogous to 1949 to 1968, when the U.S. was winding down government spending in the post-World War II environment … one in which the government got smaller, but the private sector, ripe, and rife, with new innovations, pent-up consumer demand and manufacturing excellence drove the economy into a pre-eminent position in the world economy.
In both relative, and absolute terms, the U.S. economy is gaining supremacy in its competitive, and comparative, economic advantages.

The energy revolution is making the U.S. economy energy self-sufficient and bringing down the cost of manufacturing so much that U.S. companies are bringing jobs back home and enticing foreign firms, particularly, auto, chemical and petrochemical companies to come here to benefit from cheaper energy costs and a more competitive, flexible and educated American work force.
The U.S. is now the largest producer of natural gas in the world, thanks to fracking and horizontal drilling technologies.

In 2020, the U.S. is projected to overtake Saudi Arabia and Russia as the world's largest producer of crude oil and will likely be a net exporter of both crude and refined energy products, turning our current trade and balance of payments deficits into surpluses. (The situation in Ukraine will likely hasten approval of new licenses to export liquified natural gas (LNG) and even crude oil itself.)
Over 600,000 jobs have been created in the sector, with many more to come.
For the first time in over six decades, the U.S. is a net exporter of refined energy products already.

That energy revolution, the nation's second in about 150 years, is leading to radical changes in the manufacturing platform that globalization gutted in the last 40 years.
With 3.8 million open jobs in the U.S., many in advanced manufacturing, the U.S. middle class may be re-built, as high-paying, high value-added jobs are there for the taking, especially for those worker who have the requisite software and robotics training necessary on today's factory floor.

3-D printing is revolutionizing manufacturing and health care, changes that will lead to be a better economic quality of life and longer and better lives for the average American who, some experts say, will also benefit from lower healthcare costs, thanks to the benefit of technological advances.
The recovery in real estate, though it slowed recently, will re-accelerate as millennials form households and start their own families. True, we may never see a real-estate boom like the one we witnessed in the last decade. But, like the baby-boom period, we may also see a steady and prolonged bull market in real estate as the 100-million strong cohort takes its place as a drive of economic growth in the decades ahead.

I was quite heartened to hear that four top hedge fund managers, that I spoke with over the weekend (event and manager names withheld since it was a private event), largely agreed that the U.S. remains the best place in the world in which to invest, even if you would like overseas exposure.
U.S. multinationals are best poised to profit from overseas growth. Brazil, Russia, India and China will continue to disappoint investors, they say, while emerging markets, from Turkey to Thailand and from Australia to Argentina, have too many troubles to be good investments, for now.

True, U.S. stocks could suffer a meaningful 10 to 20 percent correction this year, amid geopolitical turmoil, shifting monetary policy in the U.S., UK and elsewhere, and simply take a break after a 170-percent advance after a five year bull-run, the pullback, they say will offer a significant buying opportunity to benefit from the next leg in a secular bull market.

Glad to know I am not alone in my thinking. For those asking, "what do I do now," if I missed the big rally so far? Get your pencils out, pick the stocks you like and buy 'em when their down, but in this scenario, they are certainly not out!

— By Ron Insana
Ron Insana is a CNBC and MSNBC contributor and the author of four books on Wall Street. He also delivers a daily podcast, "Insana Insights," and a long-form weekly version, both available on iTunes and at roninsana.com. Follow him on Twitter @rinsana.

Where there's a will, there's a way

 

Published: Sunday, 2 Mar 2014 | 6:59 AM ET

By: David Mendels, Special to CNBC.com 

 

Estate planning is not just for the rich.

If you don't make arrangements for what will happen after you are gone, the government will step in and make all those decisions for you—and they may not be the decisions you'd choose. The process will also be more difficult and costly for your family, so it's important to do it yourself while you still can.

Image source: DNY59 | E+ | Getty Images

 

The most basic estate-planning document is your will. This is where you leave instructions on who should handle your affairs—and how they should be managed—after you are gone. Although it may sometimes be possible to make arrangements that get around the need for a will, it is a good idea to have one anyway, just to be sure that you have covered everything.

Clients often ask if they have to go to a lawyer to prepare their wills. While even a scribbled note is better than nothing, the answer is yes, you do need to go to a lawyer. Although downloadable forms are available online, a lawyer will make sure that you have addressed every concern. A good trusts and estates lawyer will also be able to point out problems and pitfalls that you may not be aware of.

(Read more: Don't treat your home like a cash cow)

One of the most important parts of any will is the designation of a guardian for young children in the event both parents die before a child turns 18. Both parents may not see eye to eye on this matter, and these discussions are often difficult, but while the chances of this happening are slim, the consequences of not documenting a guardian are great. Informal arrangements don't count for much, and a judge can appoint anyone—relative or not—that they deem appropriate.

I have personally seen it happen: When two married friends died in a plane crash, leaving behind a young daughter, both of their extended families immediately came forward.
They were all good people focused on nothing more than what was best for this little girl, but they didn't agree on what that was. And so the squabbling began.

(Read more: Investors take shine to rare coins)


Fortunately, it turned out that the couple had, in fact, signed their wills before leaving on their trip, and the documents named the wife's brother as legal guardian to their daughter. Once that fact became common knowledge, the arguing stopped and everyone fell into line. From that point on, they all knew what to do.
If you have young children, you absolutely must address this issue in your own will. Even if you and your spouse have trouble reaching an agreement, leaving it to the courts and warring relatives would be a worse scenario.

"How do you find a good estate-planning attorney? . . . I suggest getting recommendations from people you respect and trust."

Your plans might also include providing for a trust. Trusts come in two varieties—revocable and irrevocable—and yes, both require an attorney. A revocable trust is one you set up when you are alive and that you can cancel, revoke or change any time you want to.
A revocable trust can be used to help manage your affairs while you are alive and distribute assets when you are gone. They tend to be popular in some states but less useful in others.

An irrevocable trust generally cannot be changed once it is set up. It can be created either while you are still alive or later, through your will. Irrevocable trusts can offer transfer tax, creditor protection and management advantages but also can have significant drawbacks. Since these trusts are, true to their name, irrevocable, it is very important to get good legal advice if you are thinking about creating one.

Everyone over the age of 18 should have a health-care proxy—a legal document designating someone to make health-care decisions for you if you are not able to. We used to think of these only for the elderly—until, that is, the Virginia Tech shootings of 2007, when parents of unconscious victims were excluded by medical privacy laws from being involved in critical medical decisions.

Older or younger, we all need to have a health-care proxy. These forms can be prepared by an attorney but are also commonly available online and via health-care providers.


So how do you find a good estate-planning attorney? While the Web provides many search opportunities, I suggest getting recommendations from people you respect and trust. You can also check with your local bar association for a listing of estate-planning attorneys in your area. You don't need the most high-priced, sophisticated attorney, but you don't want someone who "also does wills," either.
Instead, seek a lawyer who specializes in wills and does this routinely.

—By David Mendels, Special to CNBC.com. David Mendels is a certified financial planner and director of planning for Creative Financial Concepts in New York.

The millennials' rut: Why it costs all of us

Published: Saturday, 22 Feb 2014 | 9:00 AM ET

By: Nia Hamm, special to CNBC.com

Steve Debenport | E+ | Getty Images

 

They're called the "invincibles" and the "lost generation." Today's young American adults have had to endure one of the worst recessions in 70 years and then watch as their futures seemingly evaporate before them.


Many are educated, stuck in dead-end jobs or unemployed, living with their parents and seeking government assistance.

"If these persons are not quickly reconnected with the economy and the workforce, we are truly looking at a lost generation in terms of upward mobility and productivity," said Joe Minarik, director of research for the Committee for Economic Development, a nonprofit, public policy research group.

A recent report by the Federal Reserve Bank of New York sheds some light on just how severe the jobs crisis is for young adults.


Using Census data, the researchers found that the percentage of unemployed young adults—currently about twice the national average—and those who are underemployed or working in jobs that don't require the degrees they hold, has risen steadily since the 2001 recession.
Research indicates that through 2012, about 44 percent of young, working college graduates were underemployed and the quality of jobs held by those underemployed has declined, with today's recent graduates increasingly accepting low wage jobs or part-time work, sometimes pushing other low-skilled workers out of the labor market.


What it costs
 
The youth jobs crisis is costing the U.S. economy and may continue to do so for years, further hindering this generation's ability to contribute to economic growth.

One report from a youth advocacy group called the Young Invincibles, measuring only lowered tax revenue and safety net costs, found that high unemployment among millennials, ages 18-34, costs the U.S. more than $25 billion annually. And jobless rates for millennials have been in double digits for nearly six years with the youngest among them, ages 16-24, experiencing the highest rate at 15 percent.

Other studies put the cost of youth unemployment at several hundred million dollars a year. Experts say this trend could undo many gains of the economic recovery.

"At a time of tight budgets when we're already trying to recover from the recession and invest in things like education, … having so many people out of work, we're really shooting ourselves in the foot here," said Rory O'Sullivan, Young Invincibles' policy director and chief author of the report.

To be fair, higher unemployment and underemployment for young workers isn't unusual as they generally have a tougher time in the labor market because they're the least connected to the workforce. But some economists believe this is more than a cyclical labor trend.

Recent figures suggest there has been a reversal in demand for cognitive skills. A report published by the National Bureau of Economic Research found that since 2000, businesses have needed fewer people to perform high-tech jobs that initially drove the information economy.

Hiring of college graduates sank after the information technology revolution of the 1990s reached maturity, according to the report. Demand for cognitive skills subsequently fell during the first decade of the 2000s, forcing college graduates farther down the occupational ladder.

"The demand for this group is slowly going down, but we're also educating still more people, and so that makes the situation very difficult when you don't have a lot of demand," said Paul Beaudry, co-author of the report.

Ph.D.s and food stamps
 
Nobody knows that situation better than 30-year-old Rachel Bolden-Kramer, who graduated from Harvard in 2006 with a major in social studies. After graduating, she started a nonprofit but lost funding within a year. She attempted to enter the labor market, but like many of her peers she did not have much luck.

Bolden-Kramer eventually became a yoga and a so-called mindfulness instructor, moved to New York City and has been self-employed ever since.

"That's kind of what kept me out of searching for jobs and continuing with the entrepreneur track. I didn't feel very encouraged by what other people, my peers, were finding with jobs. It didn't seem like they were getting much more of an advantage financially even if they found a job."

To make ends meet, Bolden-Kramer used food stamps. This experience inspired her to write what she calls a "food stamp cook book" that explains how to have a nutritious diet on a limited income. She is trying to get it published.


"I have friends who are Ph.D. candidates that are food stamps eligible," she said, "or in medical school, or whatever it is, or just like brilliant 28-year-olds who are living in New York (where) rent is so high."


Don't blame it all on the recession


Contrary to popular belief, the data show that the jobs crisis cannot simply be ascribed to the Great Recession.

(Read more: A record 21.6 million millennials live with Mom and Dad)

This presents a bleak outlook for this group of young workers who, according to economists, are already more likely to see permanent negative effects on their wages because they began their careers in a weak labor market.


"Once the larger economy is fully recovered from the after-effects of the Great Recession, this cohort will still be feeling the effects because the effects of entering the labor market during a downturn are severe and last a long time," said Heidi Shierholz, an economist for the Economic Policy Institute.
And it may be too late to reverse some of the policy and fiscal impacts of the jobs crisis for America's youth.


Recession-impacted millennials tend to believe that success in life was more a matter of luck than hard work, according to a study from UCLA Anderson School of Management economist Paola Giuliano and International Monetary Fund advisor Antonio Spilimbergo.
"This can make them less entrepreneurial," Giuliano said. "Perhaps as a result of believing that luck is important, they also want more government intervention in the economy."

(Read more: Millennials' ball and chain: Student loan debt)

College still does matter
 
This doesn't mean college students should just drop out of school and graduates should burn their degrees.

New York Fed researchers also found that while the labor market is much worse for young people who do not have a college degree, college graduates as a whole fare the best, experiencing unemployment rates at about half the rate of all workers, though unemployment was consistently higher for recent graduates, ages 22-27.

Certain majors, especially those in fields providing technical training such as engineering or math and computers or those geared toward growing parts of the economy such as education and health, have also done relatively well.


That, however, does not account for the huge remainder of young adults in other fields with bleak prospects and mounds of debt, which economists believe could be a huge drag on the economy for years to come.

—By Nia Hamm, special to CNBC.com.