Tuesday, September 30, 2014

Fund Flow Summary

After a brief glimmer of hope last Wednesday, the market resumed its sell-off on Thursday, pushing equities lower and leaving a trail of destruction in its wake.  As of the 25th, the S&P 500 was down 2.21% for the week and 3 points above where it started the quarter.  The brutal sell-off in small caps continued to wreak havoc on the Russell 2000 and has confirmed the consequences of the “death cross” signal of Friday the 19th.  Before we attribute this pullback to anxiety about comments by the Dallas FED, let’s look at the fund flows to see any other indications of things to come.

Looking at the ETFG Fund Flow Summary, the list is dominated by a few categories such as Emerging Markets, REIT’s and Precious Metals.  All are categories immediately impacted by the prospect of either rising rates, a strengthening dollar or both.  Excluding IEF from the list for issues related to the Good Harbor reallocation, GDX has seen the biggest % drawdown on the list as falling inflation expectations have continued to negatively impact demand for inflation hedges which is best demonstrated by looking at GLD and TIPS on this list.  In fact, only one broad market ETF, the SPDR MidCap 400 ETF, makes the cut for biggest percentage outflows and perhaps offering some indication of how oblivious the markets might have been to any risk rumblings.

One theory on last Thursday’s pullback was that the selling pressure over the last few weeks on small-cap names spilled over to high yield bonds and from there to large-cap equities.  So what can we learn from the fund flows reports?  Starting with the iShares Russell 2000 ETF (IWM) the trailing fund flows as of 9/24 over the last 3 months had followed performance into negative territory to the tune of $1.88 billion although the outflows had eased somewhat and were in fact positive for the month of September at around $844 million (before Thursday’s sell-off anyway.)

Was this dip buying or the start of a more sustained trend?  To answer that question, we should look at a favorite equity proxy, junk bond ETF’s, which show a similar story with the iShares iBoxx High Yield Corporate Bond ETF (HYG) showing an outflow of over $1.1 billion or more than 10% of AUM for the 3 months ending 9/24 - but like IWM, the picture had improved recently with the trailing one week flow of $557.67.  Given the % drawdown compared to IWM, investors looking for a risk proxy sign are better off keeping their eyes on HYG going forward.

Thank you for reading ETF Global Perspectives!

Monday, September 22, 2014

A Week for the Markets to Remember!

Janet Yellen delivers the anticipated press conference of 2014 - Scotland decides that it and the England really are better together - Alibaba sets a new IPO record by raising over $25 billion.

While many large IPO’s have unexciting first days, Alibaba was up over 38% opening day and now has a larger market cap than rival Amazon or consumer staple Proctor & Gamble.  With a steep forward P/E ratio and an eighth of the sales of Amazon, it sent a shiver of the great tech bubble down our spine and made us curious as to what sort of values you could find in the ETF world.

Those cruising the list of the ETFG Fundamental Top 25 ETF’s had better come prepared to invest overseas as 8 of the top ten and (and seventeen of the overall list) have an international focus, primarily in emerging markets.  East Asia takes the top spots with PowerShares Golden Dragon (PGJ), iShares MSCI South Korea Index (EWY) and First Trust Hong Kong AlphaDex (FHK) with all three trading close to relatively historic lows on at least one valuation metric or offering a yield close to their all-time high.  And before you get too excited about buying hot names on the cheap, remember that Alibaba listed in the U.S. to access not just a bigger market for its IPO but so it could be included in the largest tech ETF’s to keep that share price higher going forward.

What about those looking for something closer to home?  If you’re willing to go overseas but want to stay in the Western Hemisphere, better look way south of the border at Brazil.  Remember all the fuss about how the Scottish Independence referendum was weighing down the pound and iShares MSCI UK ETF (EWU)?  Well if you missed that move, then Brazil could be another chance to play the election theme as the country prepares to go to the polls on October 5th and its neck and neck between the two challengers both campaigning on a promise to restore Brazil’s slowed economic growth.  Holding near recent support and with a fundamental score higher than nearly any other ETF we rank is the First Trust Brazil AlphaDex ETF.  But with the election just weeks away and with a second round almost guaranteed, be prepared for high volatility.

Finally, what if you just want buy America on the cheap and you want more than just a deep value?  For something a little more diverse, check out the ELEMENTS Linked to the Morningstar Wide Moat Focus Total Return Index (WMW), an ETN designed to track an index compiled by Morningstar analysts of companies that have proven to have a sustainable advantage over their competitors.  Not only has the shift from small to large cap names in 2014 helped lift this ETN over the market (10.45% YTD compared to 8.77% for the S&P 500 as of 9/19, but that momentum helped  pushed its technical scores to near the top of our lists.

Thank you for reading ETFG Perspectives!

Sunday, September 14, 2014

ETFG Behavioral Scores/End of 3rd Quarter

Tick, tock and that is not the sound of the new Apple iWatch (does it even make a sound?) but of the 3rd quarter that is rapidly drawing to close.  The end of a quarter is a magical time for managers who have outperformed their benchmark but for those with ground to make up, it can be terrifying.  With only a little more than three months to go before year end, some managers will stick to their playbook while others will start looking at the market’s strongest performers to add to their portfolio in hopes of making up lost ground.  At ETFG, we have an app (or whatever) for that, so let’s take a look at the ETFG Behavioral 25 to see what’s trending well.

It’s been a while since we talked about the Behavioral score, so as a quick refresher; the score is composed of two separate but equal groups of indicators:
  • Technical Scores - measure momentum, the strength of any recent moves and stretched the price of the ETF has come relative to its history.  Despite what you hear about efficient markets in Investing 101, momentum has been demonstrated to persist for extended periods of times or put another way; strong outperformers will often continue outperforming over an extended period of time.
  • Sentiment Scores - where we look at put/call ratio, short interest and implied volatility for their value as contrarian indicators.

Looking at the list of the 25 ETF’s, that score highest on the behavioral factors, there are a few clear patterns worth noting - let's review one of them: 

After a challenging period in March and April that saw much of the early 2014 gains wiped out, biotechnology names continue to dominate with three names in the top 10 with iShares NASDAQ Biotechnology ETF (IBB) in first place with a score of 81.4, SPDR S&P Biotech ETF (XBI) in second place and the Market Vectors Biotech ETF (BBH) in 9th place.  What propelled them to take so many of the top spots?  Their strong performance has been a factor with IBB, XBI and BBH up 6.76%, 5.37% and 11.96% respectively this quarter compared to a broader healthcare ETF such as Vanguard Healthcare ETF (which happens to be number 10 on the list of top 25 names) which is up 5.81% or when compared to the broader S&P 500 up 1.81%.  Even beyond the top ten you’ll find more healthcare and biotechnology names such as the SPDR S&P Pharmaceuticals ETF (XPH) or the PowerShares Dynamic Biotechnology & Genome Portfolio (PBE) might be worth a look.

Biotechnology names have been outperforming the healthcare sector and broad equity markets for several years as M&A activity has heavily reduced the numbers of outstanding biotech companies.  IBB has delivered annualized returns of over 43.29% over the last 3 years compared to 22.48% for SPY and while performance in 2014 has been strong, IBB’s momentum scores are still below their old highs indicating that fund might continue to push higher.  And since all three of the top biotech ETF’s are showing similar technical scores, their sentiment scores are what determine their overall rankings at least for now.  IBB takes the number one slot thanks to its high short interest ratio as more “investors” go short IBB with the expectation that its outperformance will soon end.  As recently as August 29th, NASDAQ showed that the short interest was over 11 million shares compared to an average daily volume of 914,000 shares giving a short interest ratio of 12.09 (or days to cover all those shares) and close to the highest levels seen for IBB.  Remember, the higher the short interest, the higher the ETF could go in the event that “investors” decide to cut their losses and buy back shares to cover their positions.

As we have said before, you can’t use just single out one factor when making investment decisions but as the 3rd quarter begins to wind down, are you willing to wager on underperforming managers deciding to stand out from the herd?

Thank you for reading ETFG Perspectives.

Tuesday, September 9, 2014

Fall 2014 ETP Trading & Investing Forum NYC - Save the Date!

The Expert Series recently announced that ETF Global had again been selected to facilitate the Fall 2014 ETP Trading & Investing Forum – NYC on Wednesday, November 19th

For those who were not in attendance in April, this symposium convenes the most widely recognized experts in Exchange-Traded-Funds and some of the brightest minds in Capital Management from both Asset Managers and Asset Owners.  With its roots steeped in research, the ETP Trading & Investing Forum is a very different type of industry meeting that features renowned speakers addressing cutting edge topics within a vibrant and intimate learning atmosphere. 

This forum generally attracts about 400 financial professional attendees and is comprised of two half-day sessions - the morning session addresses the Wealth Management audience and the afternoon session addresses the Institutional audience.  Both sessions will be held on Wednesday, November 19th at the NYSSA conference center in Times Square (1540 Broadway/West 45th Street).

For more information, please visit www.expertseries.org and here is a link to Add to Calendar.

We look forward to seeing you there!