Reallocation in the Air

As millions of Americans gathered around the holiday table to celebrate Thanksgiving, nearly all had something for which to be grateful.  For many, it was low gas prices to help stretch the holiday budget but for investors, it was Tuesday’s strong GDP report that many hope all but guaranteed a rate hike next month.  While millions of savers will be thrilled to finally see a one-year CD rate above 1%, our weekly ETFG Quant Movers report shows that many have more than just visions of higher interests rates dancing through their heads.

While most international equity fund sponsors continue to hope that Santa might refrain from loading them up with coal for another year, Christmas came early for the Deutsche X-trackers MSCI Germany Hedged Equity ETF (DBGR) that saw a more than seventy five percent increase in its ETFG Behavioral score last week and pushed the fund into the 60^th spot.  Hedged German funds have been quite the rage this year and last week’s GDP report certainly helped the cause as the dollar fought its way back to recent highs and accordingly sent the Euro back to the mat giving European exporters hope for a better new year.  DBGR won’t be lonely on our list as the 50^th ranked fund is the WisdomTree Germany Hedged Equity Fund (DXGE).  You might wonder how many German-equity funds the world needs and investors thinking these two might be carbon copies would be disappointed.  The automotive industry unfortunately makes up the single largest sub-industry for both funds although maybe some of DBGR’s recent success is due to a much smaller Volkswagen allocation at 1.69% versus 2.72% for DXGE.  But when it comes to international equities, not all funds are created equal.

One trend that even a casual observation will show is that, whatever the currency situation, investors have a marked preference for country specific funds over broad-market products.  Chinese funds continue to have a place on our list of top 100 behavioral funds although Friday’s dismal showing by the Deutsche X-trackers Harvest CSI 500 China-A Shares Small Cap ETF (ASHS) has taken some of the wind out of their sails.  Maybe it’s a sign of surging investor confidence (if only in themselves) but the two hedged funds we discussed last week that dominated asset flows at the start of 2015, the WisdomTree Europe Hedged Equity (HEDJ) and Deutsche X-trackers MSCI EAFE Hedged Equity ETF (DBEF), continue to see their ETFG Behavioral scores slip with HEDJ just barely making the top 100 where only one other international fund with a multinational focus, the iShares MSCI Europe Small-Cap ETF (IEUS), currently resides.  What’s taken their place is an international grab bag with both the iShares MSCI France ETF (EWQ) and the iShares MSCI South Korea Capped ETF (EWY) seeing their behavioral scores surge last week while the iShares MSCI Spain Capped ETF (EWP) was one of the biggest losers thanks to an over 30% drop as the nation was encircled by anxiety over the long-simmering Catalonian independence movement and the potential for more discontent after recent leftist victory in Portugal.

Even though our list of weekly ETFG Quant movers was dominated by international funds, their recent performance remains very much an emerging trend as our behavioral 100 list continues to be ruled over by domestic funds which have their formerly strong price momentum to thank for bringing them to their current station.  Even as we close in on the year-end reallocation, the behavioral list continues to be made-up largely of prior winners as investors wait for more guidance before getting serious about moving capital.  For those asset allocators looking for a quick way to sum up the rally of the last nine weeks (if only so they can think about how to position themselves over the next few weeks), you don’t have to look much farther than the #1 fund on our list, the massive Vanguard 500 Index Fund (VOO), which only helps focus on the large-cap dominance that even now has begun to wane.  The shortened trade week and light volume always make the holidays a hard time to take the market’s pulse but last week’s strong performance by small-cap funds like the iShares Russell 2000 ETF (IWM) whose 2.4% gain last week versus VOO’s .11% return could signal a potential bottoming-out in the relative underperformance by small-cap stocks.  The question isn’t whether small-caps can begin to catch up but when and now the question becomes what further signals do investors need to become comfortable with smaller names?  Last Wednesday’s economic releases included a strong improvement in personal income and durable goods orders that convinced some investors that the economic outlook was improving but with nearly every major Fed player speaking this week (including Chairwoman Yellen on Wednesday), investors might find themselves holding onto their current allocation for another few weeks.

Thank you for reading ETF Global Perspectives!

__________________________________________________________________

Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice.  ETF Global LLC (“ETFG”) and its affiliates and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively ETFG Parties) do not guarantee the accuracy, completeness, adequacy or timeliness of any information, including ratings and rankings and are not responsible for errors and omissions or for the results obtained from the use of such information and ETFG Parties shall have no liability for any errors, omissions, or interruptions therein, regardless of the cause, or for the results obtained from the use of such information. ETFG PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO ANY WARRANTIES OF MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE.  In no event shall ETFG Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of the information contained in this document even if advised of the possibility of such damages.

ETFG ratings and rankings are statements of opinion as of the date they are expressed and not statements of fact or recommendations to purchase, hold, or sell any securities or to make any investment decisions. ETFG ratings and rankings should not be relied on when making any investment or other business decision.  ETFG’s opinions and analyses do not address the suitability of any security.  ETFG does not act as a fiduciary or an investment advisor.  While ETFG has obtained information from sources they believe to be reliable, ETFG does not perform an audit or undertake any duty of due diligence or independent verification of any information it receives.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.  Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue.  Prices, values, or income from any securities or investments mentioned in this report may fall against the interests of the investor and the investor may get back less than the amount invested.  Where an investment is described as being likely to yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate.  Where an investment or security is denominated in a different currency to the investor's currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor.

New-to-Market: GSLC

New-to-Market - This blog series highlights ETFs that have recently gone public and reflect those strategies currently most in demand by investors.  While ETFs are not eligible for ETFG Risk Ratings until traded for 3 months and ETFG Reward Ratings for 12 months, our goal is to highlight the most cutting-edge investment strategies that have recently embraced the ETF structure – we hope you enjoy this special series of posts.

You can’t judge a book by its cover, but you can certainly grasp the furious pace of evolution taking place in the world of smart beta strategies by studying their names.  In the last few years, we’ve gone from something now seemingly prosaic like “minimum volatility” to the likes of the "International High Dividend Volatility Weighted Index."  Maybe dealing with this increasing complexity is the reason why we wrapped our minds around Goldman Sach’s first exchange-traded-fund, the Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF (GSLC), the premier offering of new products using their “ActiveBeta” strategy.  Coming from Goldman, we expected a complex strategy involving almost inconceivable factors (like a price-to-name recognition ratio) but instead were confronted with a 400+ holding, 9 basis point fee and a seemingly index hugging product.  In researching the strategy, we discovered that Goldman had attempted to do something truly evolutionary in the world of smart beta strategies; create something for the investment masses to be used not as a small satellite but as a core holding.

To fully grasp GSLC and Goldman’s new strategy, you must first acknowledge that while it does have the words “Active” and “Beta” in the name, the fund is unlike any other smart beta strategy and requires you to consider the target audience.  Smart Beta products typically start with a well-defined equity index and reweight positions to capture exposure to a specific “factor” or investment style such as high momentum, valuation or low volatility.  Focusing on a specific portfolio attribute generally means having a much smaller pool of securities in the fund.  While that might be a good way to add alpha, the concentrated exposure ultimately limits usefulness in your portfolio - would you really want to put 30% or 40% of your assets in a low volatility fund?

Any investment advisor would be hesitant if they compared the annual returns of different strategies as with smart beta, timing is everything.  Consider two of Blackrock’s latest offerings, the iShares MSCI USA Value Factor Fund (VLUE) and the iShares MSCI USA Momentum Factor ETF (MTUM) where MTUM outperformed VLUE by just under 200 bps in 2014 delivering a 14.6% return to VLUE’s 12.8% and 13.7% for the S&P 500.  So far, so good but fast forward to 2015 and VLUE is down 1.8% (through November 23^rd) while MTUM is up 9.5% in the same period and the S&P 500 is up 3.3%.  While that’s an impressive return for MTUM, the return was generated in no small part by a 44% allocation to consumer discretionary and technology stocks which could provide more exposure to that sector than the average portfolio might require.

Instead of back testing a strategy to deliver breathtaking alpha without concern for tracking error, Goldman’s focus is on trying to deliver a positive information ratio over an extended period of time by developing “core” holdings that provide diversification with the possibility of alpha versus a static benchmark for a reasonable cost.  While that might not be as sexy as outrageously high outperformance, it’s something that even the best active managers struggle to do.  How GS does that is through their “ActiveBeta” system.  Instead of trying to capture exposure to just one style, ActiveBeta incorporates four of the most popular smart beta strategies including value (looking at several common multiples), quality (gross profits divided by assets), low volatility and momentum.  Investors who are looking for more active alpha might consider this approach to be something akin to “crockpot” investing where you simply dump all the ingredients in at once and set it to simmer for eight hours hoping the end result is something edible, but Goldman believes that investors need to consider how a fund works within not only their portfolio but their personal investment style.  A pure factor fund requires a tremendous investment of time for research and due diligence (not to mention monitoring after you buy it) and which most investors simply aren’t willing to commit to and as our value to momentum example illustrates, could lead to very poor outcomes.

Knowing that these strategies were intended as core holdings will make the discussion about portfolio construction much easier to understand.  First, they’re passively managed and reconstituted quarterly. They begin building their benchmark by using a well-diversified index, for GSLC this is the Solactive U.S. Large Cap Index.  They then rank each component using the four factors to arrive at a “factor score” and then equally weight the scores to determine the weighting.  Seems simple so far, but those scores aren’t used directly to determine individual weightings as Goldman has a cut-off system where scores above the cutoff result in an overweight relative to the Solactive index while being below results in an underweight which as a long-only fund means the lowest possible allocation is zero.  Using a well-diversified benchmark of large-cap stocks might be enough for those investors concerned about taking on stock-specific risk or large sector overweight’s.  Goldman went the extra mile and added additional weighting criteria to each sub-index including keeping target weights for each industry within a specific percentage of the benchmark where no one industry can be more than 25% of the index and that the sum of all positions of more than 5% can’t be more than 25% of the portfolio.  In order to keep trade costs reasonable (and the management fee in-line with large-core funds), the fund’s managers employ a system of bands around individual positions rather than trading every stock to an exact model weight every quarter.

The net result of those target weights and cut-offs is a large-cap portfolio with 433 holdings that some investors will assume bears too much similarity to a static benchmark to deliver on its smart-beta claims, but compare GSLC to most advisors preferred large-cap benchmark, the S&P 500 (we’ll use SPY), and you’ll find it’s a very different story.  Perhaps the most noticeable difference between the two is that while there is a significant degree of overlap in their holdings, GSLC has a much lower average market cap than SPY at $48.3 billion to the market’s $75 billion and it’s done by slightly trimming allocations to mega-cap stocks like Alphabet and Apple and increasingly the allocation to more attractively priced mid-cap names including some that are outside of the S&P 500.  One notable example is Lear Corp (LEA) that’s up over 16% since GSLC launched in late September thanks to its strong earnings outlook which earned it a .44% allocation in the fund.  Where that money came from illustrates how the principles of momentum and volatility factor investing interact within GSLC as the fund has a notable underweight towards energy stocks at just 3.6% of the portfolio compared to SPY’s 6.9% in favor of consumer discretionary names at 18% of the allocation versus 12% for SPY.  Retail stocks have outperformed broader equities for much of the year as a rising dollar adds gives consumers more purchasing power, but given the performance that some of GSLC’s overweight’s like Goodyear Tire and Activision have already delivered in 2015, investors could understandably be nervous.

GSLC may or may not be the high alpha generator you would have expected, but it might just be a perfect fit for that smart investor looking for a solid core fund that pays off over time.

Thank you for reading ETF Global Perspectives!

______________________________________________________________

Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice.  ETF Global LLC (“ETFG”) and its affiliates and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively ETFG Parties) do not guarantee the accuracy, completeness, adequacy or timeliness of any information, including ratings and rankings and are not responsible for errors and omissions or for the results obtained from the use of such information and ETFG Parties shall have no liability for any errors, omissions, or interruptions therein, regardless of the cause, or for the results obtained from the use of such information. ETFG PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO ANY WARRANTIES OF MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE.  In no event shall ETFG Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of the information contained in this document even if advised of the possibility of such damages.

ETFG ratings and rankings are statements of opinion as of the date they are expressed and not statements of fact or recommendations to purchase, hold, or sell any securities or to make any investment decisions. ETFG ratings and rankings should not be relied on when making any investment or other business decision.  ETFG’s opinions and analyses do not address the suitability of any security.  ETFG does not act as a fiduciary or an investment advisor.  While ETFG has obtained information from sources they believe to be reliable, ETFG does not perform an audit or undertake any duty of due diligence or independent verification of any information it receives.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.  Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue.  Prices, values, or income from any securities or investments mentioned in this report may fall against the interests of the investor and the investor may get back less than the amount invested.  Where an investment is described as being likely to yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate.  Where an investment or security is denominated in a different currency to the investor's currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor

Divergences in Play

While the bulls had reason to celebrate last week as the S&P 500 surged 3.27% and nearly recaptured all of the prior week’s losses, they were denied a final victory over the bears thanks to lighter volume and a muddled close on Friday as the lack of any economic releases left investors with no data points to trade.  For the second week in a row, our biggest quant score changes lacked any clear pattern or sign of a new trend to use as a weather gauge for the markets.  Instead of calling it a week and focusing on turkey and football, we’ve decided to go back to our list of top behavioral scoring funds to study the divergences, or what’s not on the list, to determine what holes might be lurking in investor portfolios.

Maybe the biggest disconnect on our list of top scoring behavioral funds is the lack of international funds that don’t have “China” somewhere in their name despite the possibility of the biggest divergence between global central bank policies in decades.  The U.S. dollar has been one of the more consistent winners over the last month thanks to the increasing sense of certainty that the Fed will initiate its first rate hike in December.  That has helped push the PowerShares DB US Dollar Index Buliish ETF (UUP) up another .7% last Friday and close to last spring’s highs.  With the ECB and PBoC locked in perpetual easing mode, it would seem like going long the dollar is a slam dunk but only one hedged currency fund made our behavioral quant movers list and its score was going in the wrong direction.  Even though the dollar has been pushing higher and unhedged international equity funds have felt the corresponding sting lately, there’s been no corresponding increase in behavioral scores for hedged international funds.  From their relatively low scores, you’d have a hard time recognizing the WisdomTree Europe Hedged Equity (HEDJ) and Deutsche X-trackers MSCI EAFE Hedged Equity ETF (DBEF) as the two biggest asset gather’s in 2015.  That success is probably what helped HEDJ make the 100 thanks to a strong short interest ratio while DBEF continues to have positive price momentum but little else going for it that would help push the fund into the top 300 funds.

The path for future rate hikes is likely to be shallow as the Fed has yet to achieve the two percent inflation target it set for itself several years ago.  While the U.S. economy has been strong enough to endure a minor rate hike, the weak global outlook has many turning to the “one-and-done” policy outlook where the Fed raises rates only once or follows a very gradual and shallow rate hike path.  That belief (or lack thereof) may explain why UUP has pushed close, but not all the way back to, its former highs and on declining volume, potentially signaling that a further push higher for the dollar is problematic at best.  The end result is emerging market and natural resource heavy nations that suffered the worst capital outflows have been among the strongest performers.  Consider that while the Deutsche X-trackers MSCI Brazil Hedged Equity ETF (DBBR) managed a strong 2.5% gain last week, the unhedged iShares MSCI Brazil Capped ETF (EWZ) delivered a stunning 9.6% gain that kept it at the #23 spot as the dollar lost over 3.5% to the Real last week.

While some traders are looking forward, a lot more are looking behind them.  Even though a number of other Latin America and natural resource funds make the top 100, the list still has a decidedly American (and also Chinese) feel to it as domestic investors decide to go with what they know heading into a traditional low volume time of year.  In fact, “going with what they know” might be the perfect name for the list of top scoring funds given that they reflect some of 2015’s biggest winners although the Market Vectors Retail ETF (RTH) that we recently discussed failed to crack the top 100 despite a strong 4.9% advance although the consumer discretionary sector is well represented with three funds in the top 25.  Then again, so is the biotech sector with three funds not to mention an assortment of funds devoted to pharmaceuticals, technology stocks, bank stocks and of course, China.  The only consistency among the top 25 is that each fund represents a sector or theme that at some point dominated the headlines in 2015 but there time at the top might be coming to an end as those emerging market and natural resource funds we talked about in our post “Leaning into the Wind” last July that made up the bottom of the behavioral list have seen their scores steadily improving leaving an assortment of energy funds in their place.

So before the tryptophan and football take hold on Thursday, stop and consider whether your portfolio is positioned for the future or the past.

Thank you for reading ETF Global Perspectives!

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Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice.  ETF Global LLC (“ETFG”) and its affiliates and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively ETFG Parties) do not guarantee the accuracy, completeness, adequacy or timeliness of any information, including ratings and rankings and are not responsible for errors and omissions or for the results obtained from the use of such information and ETFG Parties shall have no liability for any errors, omissions, or interruptions therein, regardless of the cause, or for the results obtained from the use of such information. ETFG PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO ANY WARRANTIES OF MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE.  In no event shall ETFG Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of the information contained in this document even if advised of the possibility of such damages.
ETFG ratings and rankings are statements of opinion as of the date they are expressed and not statements of fact or recommendations to purchase, hold, or sell any securities or to make any investment decisions. ETFG ratings and rankings should not be relied on when making any investment or other business decision.  ETFG’s opinions and analyses do not address the suitability of any security.  ETFG does not act as a fiduciary or an investment advisor.  While ETFG has obtained information from sources they believe to be reliable, ETFG does not perform an audit or undertake any duty of due diligence or independent verification of any information it receives.
This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.  Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue.  Prices, values, or income from any securities or investments mentioned in this report may fall against the interests of the investor and the investor may get back less than the amount invested.  Where an investment is described as being likely to yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate.  Where an investment or security is denominated in a different currency to the investor's currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor.

Press Release: "Registration Open - Spring 2016 ETF Portfolio Challenge"

New York, NY—November 18, 2015 - We are pleased to announce that registration for the Spring 2016 ETF Global® Portfolio Challenge is open as of Monday, November 16^th!

With undergraduate and graduate students from four continents competing in the inaugural investment challenge this past fall, the ETF Global Portfolio Challenge now offers a streamlined registration process and increased rebalancing opportunities!

ETF Global has established a near-term goal of 1 million participants in 2018. Given young investors’ mounting interest in ETFs coupled with ETF Global’s track record of achieving scale in its initiatives, this goal certainly seems attainable – who knows how many participants they can reach in the long term!

Reginald Browne, Senior Managing Director of Cantor Fitzgerald’s ETF Group and a founding Sponsor of the ETF Global Portfolio Challenge stated that, “ETFs are poised to become a dominant investment vehicle for emerging investors. It is critical, therefore, to ensure that future investors have the knowledge to invest in ETFs and achieve their financial goals. ETF Global understands this. Their portfolio challenge is an interactive way to help familiarize collegians with ETFs and instill in them investment and portfolio management skills that will benefit them far beyond the classroom.”

Additionally, Wharton Research Data Services (WRDS), the award-winning data research platform and business intelligence tool from the Wharton School of the University of Pennsylvania, immediately saw the educative value of the ETF Portfolio Challenge. “Most students lack a basic understanding of investing in general,” said Robert Zarazowski, Managing Director of WRDS, “The ETF Portfolio Challenge is an innovative way of extending investment and ETF education into the classroom. We are thrilled to promote this effort to educate the next generations of investors about investing and ETFs.”

Registration for the spring 2016 semester is open and will close on Friday, February 12th. For more information about the contest, please visit www.etfportfoliochallenge.com

Thank you for reading ETF Global Perspectives!

Fall 2015 ETP Forum-NYC

Here’s a quick post from our partners at the Expert Series regarding tomorrow’s conference:

We look forward to another terrific event on Friday in partnership with ETF Global.  Check-in and breakfast begin at 8:00 AM at the New York Athletic Club on the 9th floor.

Kevin O'Leary will be arriving about 8:30 AM to meet attendees and will take the stage at 9:00 AM.

The attire is business casual and the response to the event has been terrific with another full house. The agenda, speaker bios and all event information may be found on the event website at www.etpforum.org

Thank you for reading ETF Global Perspectives and we look forward to seeing everyone tomorrow!

Follow the Leader

As we extend our deepest sympathies, the twists and turns of the equity markets might seem almost callous amidst the scenes of carnage and almost unimaginable horror that overtook Paris this weekend.  The more bullish market watchers will point to that violence as one cause for further volatility which seems almost guaranteed.  It seems that the seeds of last week’s sell-off were planted long before terrorists set out to destroy the eternal city of lights.  No one fund can serve as a sort of market “canary in the coalmine” but we can begin to detect a pattern and combining a few data points has us wondering whether a major shift in the markets’ dynamic has taken place.

Last week’s action could best be summed up by the Market Vectors Retail ETF (RTH), a highly concentrated portfolio of some of America’s largest names that saw a nearly 70% increase in its ETFG Fundamental score (remember, a rising fundamental score means the fund’s price is falling) as those biggest names like Amazon, Apple, and Nike that make up the bulk of the most-common equity indices felt the worst of the pain.  We don’t often talk about the ETFG Fundamental score, partly because valuations are a better predictor of “Long-term” value, but some will say that the pain inflicted on mega-caps stocks was long overdue.  From the trough on September 29^th to the peak on November 3^rd, size definitely mattered with titans like Amazon and Microsoft up 25% and pulling large-cap funds including the SPDR S&P 500 ETF (SPY) or the iShares S&P 100 ETF (OEF) up double digits (12.2% and 13.3% respectively) while their small-cap brethren such as the iShares Russell 2000 Index (ETF) languished with a 9.3% return.  Those double digit moves helped pull large-cap stock prices right back to the old highs and dragged their valuations into nosebleed territory, but while last week’s pullback might be simple profit taking to some, a major larger shift was going on behind the scenes.

Profit taking is, after all, a normal behavior following a strong run-up, however in the case for something more widespread is the Guggenheim S&P 500 Equal Weight ETF (RSP) whose 3.77% loss last week exceeded its market cap weighted brother SPY despite having a fraction of the exposure to Amazon and Apple.  For the more visually inclined we suggest looking at the ETFG heat map for last week’s performance by the S&P 500 which would show a few pockets of green with only the utilities sector on the whole managing to end the week in positive territory and demonstrating just how widespread the selling pressure has actually been.  Nearly every sector from healthcare plans through retail had a number of companies with high single digit losses with the exception of the financial sector where nearly every bank was down 3%-4%.  In fact, in the eight days since the recent market peak, SPY has shed nearly 4.11% which is only slightly worse than the 3.62% loss that small-cap focused IWM has experienced.  Small wonder then that the percentage of companies trading above their 50 or 200 day moving averages continues to fall after reattaining heights not seen since the fall of 2014.  After peaking at over 80% on November 2^nd, slightly more than 50% of S&P 500 components are now trading above their 50 day moving average while fewer than 40% are above their 200 day.

So small-cap stocks lagged on the way up and have suffered almost equally on the way down, a sure sign of a top-heavy rally if there ever was one and if there’s no safety to be had even in mega-caps, is it time to batten down the hatches and swap stocks for bonds to ride out the storm?  No investor likes to see their gains fade but before pushing the sell button, we’d ask you to consider that while that 3.5% loss eroded nearly all the gains of the prior four weeks, the situation remains far from desperate.  The S&P 500 sitting just 20 points above the 2000 level has acted as a key support zone recently while other indicators followed by the more-technically inclined would suggest that the market is hovering well outside of overbought levels.  The real action will be parsing Fed speak as three voting FOMC members will be giving speeches this week while the minutes of their last meeting will be released on Wednesday. With last week’s disappointing retail sales and Producer Price Index report, the focus will be on searching out any hints that FOMC members are having second thoughts about raising rates or that any rate hike might be a “one and done.”  Market safety might be difficult to come by in the week ahead.

Thank you for reading ETF Global Perspectives!

_______________________________________________________________

Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice.  ETF Global LLC (“ETFG”) and its affiliates and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively ETFG Parties) do not guarantee the accuracy, completeness, adequacy or timeliness of any information, including ratings and rankings and are not responsible for errors and omissions or for the results obtained from the use of such information and ETFG Parties shall have no liability for any errors, omissions, or interruptions therein, regardless of the cause, or for the results obtained from the use of such information. 

ETFG PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO ANY WARRANTIES OF MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE.  In no event shall ETFG Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of the information contained in this document even if advised of the possibility of such damages.

ETFG ratings and rankings are statements of opinion as of the date they are expressed and not statements of fact or recommendations to purchase, hold, or sell any securities or to make any investment decisions. ETFG ratings and rankings should not be relied on when making any investment or other business decision.  ETFG’s opinions and analyses do not address the suitability of any security.  ETFG does not act as a fiduciary or an investment advisor.  While ETFG has obtained information from sources they believe to be reliable, ETFG does not perform an audit or undertake any duty of due diligence or independent verification of any information it receives.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.  Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue.  Prices, values, or income from any securities or investments mentioned in this report may fall against the interests of the investor and the investor may get back less than the amount invested.  Where an investment is described as being likely to yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate.  Where an investment or security is denominated in a different currency to the investor's currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor.

Fall 2015 ETP Forum - Next Friday, 11/20

We are just one week from the Fall 2015 ETP Forum-NYC on Friday, November 20^th at the New York Athletic Club!

Registrations for the event continue at a record pace and you should know that we are conducting a comprehensive study to determine which of the two celebrity players below may be driving this – thus far the study has been inconclusive :)

           

Chris Romano                   Kevin O’Leary

Director of Research            Shark Tank Actor

ETF Global                          Founder/Chairman - O’Shares

We anticipate closing registration on Tuesday and providing a waiting list. For those who plan to attend, please register immediately - the agenda, all-star line-up and registration may all be found at:  www.etpforum.org

See everyone next week and thank you for reading ETF Global Perspectives!

MIT Enterprise Forum of NYC

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Thank you for reading ETF Global Perspectives!

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Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice.  ETF Global LLC (“ETFG”) and its affiliates and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively ETFG Parties) do not guarantee the accuracy, completeness, adequacy or timeliness of any information, including ratings and rankings and are not responsible for errors and omissions or for the results obtained from the use of such information and ETFG Parties shall have no liability for any errors, omissions, or interruptions therein, regardless of the cause, or for the results obtained from the use of such information. ETFG PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO ANY WARRANTIES OF MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE.  In no event shall ETFG Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of the information contained in this document even if advised of the possibility of such damages.

ETFG ratings and rankings are statements of opinion as of the date they are expressed and not statements of fact or recommendations to purchase, hold, or sell any securities or to make any investment decisions. ETFG ratings and rankings should not be relied on when making any investment or other business decision.  ETFG’s opinions and analyses do not address the suitability of any security.  ETFG does not act as a fiduciary or an investment advisor.  While ETFG has obtained information from sources they believe to be reliable, ETFG does not perform an audit or undertake any duty of due diligence or independent verification of any information it receives.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.  Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue.  Prices, values, or income from any securities or investments mentioned in this report may fall against the interests of the investor and the investor may get back less than the amount invested.  Where an investment is described as being likely to yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate.  Where an investment or security is denominated in a different currency to the investor's currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor.

A Hawkish Thanksgiving

Friday’s Payroll report offered investors the one Christmas present they’ve wanted for over a year, certainty, as the strong job growth and increase in hourly earnings convinced all but the most dovish economists that the time has come to raise interest rates.  The S&P 500 suffered a case of accelerated sector rotation on Friday thanks to the rapid repricing of risk as the Fed Fund futures now price in a 70% chance of a hike next month.  However, even as it recovered most of the losses suffered at the open, the day ended with a wide gap between the best and worst performing sectors that could signal the shape of things to come (at least until after the Fed pulls the trigger.)

It shouldn’t come as any surprise to our readers that the biggest winners on Friday were those funds devoted to smaller regional banks that stand to benefit the most from rising rates including the PowerShares KBW Bank Portfolio (KBWB), the PowerShares KBW Regional Bank Portfolio (KBWR) and the First Trust NASDAQ  ABA Community Bank Index Fund (QABA) all of which had returns in excess of 2.5% and with all three finding a home in our list of Top 100 Behavioral Scoring Funds.  In fact, thanks to its focus on micro and small cap names, QABA has risen all the way to the sixth spot on the list while delivering a 2015 return of 15.4%.  Bank funds were hit hard last summer thanks to waning momentum as investors began to despair over rates ever rising again and they continued to lag after September’s FOMC meeting.  October was much kinder with the funds but if you’re wondering why you haven’t seen them on a list of top ETFG Quant movers before now, it’s because their behavioral scores have been steadily rising over the last few weeks as investors began to readjust their internal playbooks to the possibility of a rising rate environment while correspondingly punishing those domestic sectors most likely to suffer the worst fallout when rates begin to rise.

If the old market adage, “buy the rumor, sell the fact” continues to hold true, financials could enjoy stronger performance at least until the next FOMC gathering, but before you hit the buy button, consider how far we’ve come already.  For many funds, Friday’s big gains were just the icing on the cake with QABA up 6.73% and fellow small-cap player KBWR up 7.48% for the week and both up double digits for 2015!  And for those investors who like to consider the long-term view through the lens of fundamentals, those heady gains have translated into very rich valuations.  In fact, if you reorder the ETFG Quant tables by their fundamental scores, QABA and KBWR would rank as the 40^th and 41^st most highly priced funds (relatively to their prior price history) respectively which offers more insights into why KBWB saw such a strong increase in its behavioral score.  Not only was the fund not as richly priced but it has been lagging the smaller funds due to its focus on larger cap names although it is more highly concentrated, with just 24 holdings, than the Financial Sector Select SPDR (XLF).

Of course you can’t have winners without losers and with the exception of the gold miners (who seem born for pain) no one suffered as much last Friday as the utilities with the Utilities Sector Select SPDR Fund (XLU) down nearly 3.5% on the day.  Having seen nearly all of its September gains eroded over the last three weeks, many wonder why the utilities have lost so much ground and so quickly.  Traditionally a defensive sector, their recent underperformance is due in no small part to the market’s increasing certainty on the timing of the Fed’s first rate hike, but while the market hates uncertainty more than anything, there’s more at play than just improving sentiment.  When Treasury yields are below a certain level (5% according to J.P. Morgan’s Guide to the Markets) there is a well demonstrated, positive relationship between Treasury yields and stock prices so as yields rise (and bond prices fall), equity prices should as well.  Historically, the utilities sector has a negative correlation with changes in Treasury yields, so the price of XLU and other utility funds could have further to fall as rates continue to rise in anticipation of future hikes.  Not helping the situation is the nature of the funds in the space; XLU is highly concentrated with just 31 holdings as well as market-cap weighted with 60% of the assets in the top ten names.  Compare that with the Guggenheim S&P 500 Equal Weight Utilities ETF (RYU) which has many of the same names but its equally weighted allocation offered much better downside protection with the fund down 1.58% over the last month compared to XLU’s 3.12% loss.

No matter which way your investing inclinations lie, the markets will be entering a brave new post-ZIRP world in the near future and your portfolio will have to adjust accordingly.

Thank you for reading ETF Global Perspectives!

_______________________________________________________________

Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice.  ETF Global LLC (“ETFG”) and its affiliates and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively ETFG Parties) do not guarantee the accuracy, completeness, adequacy or timeliness of any information, including ratings and rankings and are not responsible for errors and omissions or for the results obtained from the use of such information and ETFG Parties shall have no liability for any errors, omissions, or interruptions therein, regardless of the cause, or for the results obtained from the use of such information. ETFG PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO ANY WARRANTIES OF MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE.  In no event shall ETFG Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of the information contained in this document even if advised of the possibility of such damages.

ETFG ratings and rankings are statements of opinion as of the date they are expressed and not statements of fact or recommendations to purchase, hold, or sell any securities or to make any investment decisions. ETFG ratings and rankings should not be relied on when making any investment or other business decision.  ETFG’s opinions and analyses do not address the suitability of any security.  ETFG does not act as a fiduciary or an investment advisor.  While ETFG has obtained information from sources they believe to be reliable, ETFG does not perform an audit or undertake any duty of due diligence or independent verification of any information it receives.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.  Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue.  Prices, values, or income from any securities or investments mentioned in this report may fall against the interests of the investor and the investor may get back less than the amount invested.  Where an investment is described as being likely to yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate.  Where an investment or security is denominated in a different currency to the investor's currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor.

Land of Confusion

Another week and another push higher by the S&P 500 but as tempting as it might be to say that the pattern that’s dominated the markets over the last few weeks remains unchanged, a subtle shift is beginning to take over investor behavior.  We’re keeping a close eye on a number of trends, but the weak action in the markets last week serves as a symptom of the shift. Instead of the strong late week rally we’ve come to expect, the entire gain for the week came from Wednesday’s powerful move after the FOMC report.  Profit taking later in the week then left the S&P 500 up just .2%.  Maybe investors are just tired of feeling like travelers in a land of confusion but we’ve noticed a common thread in our list of biggest ETFG Quant Movers, a focus on fundamentals like earnings growth that has us wondering whether the market is beginning to look beyond the Fed and back to fundamentals.

While our list of 25 Top Behavioral Scoring Funds again is dominated by biotech names, our list of funds with the biggest % change in their weekly behavioral quant score reflects the shifting investor focus on profitability with four funds seeing major momentum changes.  Three of the four funds have a pharmaceutical focus with the PowerShares DWA Healthcare Momentum Portfolio (PTH), PowerShares Dynamic Pharmaceuticals Portfolio (PJP), iShares U.S. Pharmaceuticals ETF (IHE) being joined by only one broad based fund, the Fidelity MSCI Health Care Index ETF (FHLC.)  Critics can be forgiven for thinking this is just an overdue bounce after all the negative press the sector has endured thanks to Valeant and Turning Pharmaceuticals, but there may be more to this move than just sentiment.  Quarterly earnings growth for the S&P 500 is currently a negative 2.2% with nearly 70% of the constituents having reported, but it’s a very different story for the healthcare sector which leads the market in the number of companies reporting upside earnings surprises and which is only trailing the tiny telecommunications sector in earnings growth!  Thanks to strong earnings from names like Pfizer, Gilead and Amgen, the quarterly earnings growth rate is now at 13.6% so small wonder that investors funneled over $247 million into healthcare funds in October, outpacing every other equity sector that month!

Even more interesting to us than the amount of money flowing into the healthcare sector or the number of funds on our list of quant movers is the nature of the funds that make it up.  All four of the funds on the weekly behavioral movers list held large allocations to Allergan (AGN) although given that stock is a large component of even the much broader XLV it would be more remarkable if they didn’t own it.    However only FHLC held an allocation to the week’s biggest mover, AbbVie Inc. (ABBV), up 18.3% last week on a major earnings blowout.  That exposure for FHLC reflects the fact that it’s the only fund of the four to offer broad healthcare sector exposure with the other three major movers all being highly concentrated pharmaceutical funds with anywhere from 23 (PJP) to 46 (PTH) holdings.  Concentration like that usually is a cause for concern given the amount of stock-specific risk that it adds to the portfolio but the common holdings among the funds is hardly a pharmaceutical rogue’s gallery.  The common holdings are mega-cap names like Johnson & Johnson, Pfizer and Bristol Meyers Squibb meaning either investors are buying funds without carefully examining the holdings or that they are looking to add exposure to the more consistent earnings of the top names in the sector.  Adding that exposure has paid off this earnings season as companies with upside earnings surprises have delivered strong outperformance in the two days leading up to the earnings release and in the two days after the announcement.

But if there’s one sector that’s feeling the pinch it’s the financials where the Financials Select Sector SPDR (XLF) continues to struggle for traction.  XLF and the broader sector lost ground after a promising start to the week when the somewhat hawkish FOMC statement was seen improving the odds for a future rate hike ran smack into more weak data points including Thursday’s GDP report and Friday’s Personal Income release.  Even the possibility of a bout of merger mania couldn’t ignite investor interest with Thursday’s announcement by Key Corp (KEY) of its acquisition of First Niagara Financial (FNFG) sent Keys’ stock plummeting down 10.65% in the next two days and dragging large holders like the PowerShares KBW Bank Portfolio (KBWB) down with it.  But investor pragmatism is again on display as the financial sector has failed to “wow” with its third quarter earnings reports.  While earnings have grown slightly faster than many analysts forecasted on September 30^th, none have reported sharply higher earnings surprises (which capture investor enthusiasm) like healthcare stocks while disappointments from titans like Morgan Stanley and Goldman Sachs remind investors of the troubled state of the industry.  Investors looking for one sector that could stand to benefit the most from improving sentiment need look no further.

Thank you for reading ETF Global Perspectives!

_______________________________________________________________

Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice.  ETF Global LLC (“ETFG”) and its affiliates and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively ETFG Parties) do not guarantee the accuracy, completeness, adequacy or timeliness of any information, including ratings and rankings and are not responsible for errors and omissions or for the results obtained from the use of such information and ETFG Parties shall have no liability for any errors, omissions, or interruptions therein, regardless of the cause, or for the results obtained from the use of such information. ETFG PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO ANY WARRANTIES OF MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE.  In no event shall ETFG Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of the information contained in this document even if advised of the possibility of such damages.

ETFG ratings and rankings are statements of opinion as of the date they are expressed and not statements of fact or recommendations to purchase, hold, or sell any securities or to make any investment decisions. ETFG ratings and rankings should not be relied on when making any investment or other business decision.  ETFG’s opinions and analyses do not address the suitability of any security.  ETFG does not act as a fiduciary or an investment advisor.  While ETFG has obtained information from sources they believe to be reliable, ETFG does not perform an audit or undertake any duty of due diligence or independent verification of any information it receives.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.  Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue.  Prices, values, or income from any securities or investments mentioned in this report may fall against the interests of the investor and the investor may get back less than the amount invested.  Where an investment is described as being likely to yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate.  Where an investment or security is denominated in a different currency to the investor's currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor.