Monday, January 27, 2020

Pervasive Virus Fears

Monday, January 27, 2020 - Growing concerns over the spread of the deadly coronavirus led all three major indexes to post losses for the week, as investors focused on the adverse global economic implications of this disease outbreak. These declines mark a departure from the steady rise upwards that stocks have experienced to start this year amid an easing of global trade tensions and encouraging economic data. For the week, the DJIA, S&P 500 and NASDAQ shed 1.2%, 1.0, and 0.8% respectively. These losses snapped the streaks of two-week gains for the DJIA and S&P and six-week gains for the NASDAQ.

ETFG Quant Movers - Those ETFs who have had the largest weekly change in their respective, overall ETFG Quant ratings.

ETFG Quant Winners: The top five gainers in ETFG Quant Total Score were the Cushing 30 MLP Index ETN due June 16 2037 (PPLN), Sprott Gold Miners ETF (SGDM), Invesco Dynamic Leisure and Entertainment ETF (PEJ), First Trust Brazil AlphaDEX Fund (FBZ), and iShares Currency Hedged MSCI Spain ETF (HEWP).

ETFG Quant Losers: The ETF experiencing the steepest weekly declines were the JPMorgan Alerian MLP Index ETF (AMJ), iPath S&P MLP ETN (IMLP), WisdomTree India Earnings Fund (EPI), SPDR MSCI Emerging Markets StrategicFactors ETF (QEMM), and VictoryShares International High Div Volatility Wtd ETF (CID).

ETFG Weekly Select List - The five most highly rated ETFs per Sector, Geographic Region and Strategy as ranked by the ETFG Quant model.

With the coronavirus outbreak dominating this week's headlines, we'd like to bring attention to the ETFs that our models favor in the increasingly turbulent Asia-Pacifc region - 1) iShares MSCI South Korea ETF (EWY), 2) iShares MSCI Malaysia ETF (EWM), 3) First Trust Chindia ETF (FNI), 4) Global X MSCI China Information Technology ETF (CHIK), and 5) Global X MSCI China Health Care ETF (CHIH).

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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.

Tuesday, January 21, 2020

The Rise Continues

Tuesday, January 21, 2020 – U.S. markets were closed yesterday in observance of Martin Luther King Jr. day. We wish our readers a happy holiday and hope that you enjoyed the long weekend.

The mixture of better than anticipated economic data, encouraging corporate earnings and the signing of the "phase-one" trade agreement pushed U.S. stocks to new record highs last week. The S&P 500 (+2.0%), Nasdaq Composite (+2.3%), and Russell 2000 (+2.5%) all rose at least 2.0%, and the Dow Jones Industrial Average (+1.8%) trailed right behind. In addition, six of the eleven S&P 500 sectors wrapped up the week with gains of at least 2.0%, including a 3.8% gain in the typically defensive leaning Utilities sector. The energy sector was the only sector to finish lower, dipping -1.1% as oil prices continued to fall.

Investors now turn their attention back to corporate earnings after solid results from the biggest banks on Wall Street. Netflix (NFLX) reports fourth-quarter results Tuesday, showing the effect of the new from Disney (DIS) streaming service. Texas Instruments (TXN) also reports Tuesday night, with chip names Intel (INTC), STMicroelectronics (STM) and Skyworks Solutions (SWKS) reporting later in the week. For investors looking to diligence which ETFs have the most exposure to these stocks, please take advantage of ETFG’s Grey Market Summary.

In looking at individual ETF flows, the Vanguard Small-Cap ETF (VB) topped inflows list, with a net flow of just under $1.5 billion. Also on the top five list was the iShares Core S&P 500 ETF (IVV), the iShares 20+ Year Treasury Bond ETF (TLT), the iShares ESG MSCI U.S.A. ETF (ESGU) and the First Trust Capital Strength ETF (FTCS). Each ETF brought in approximately $1 billion in new AUM respectively. In weekly outflows, we saw Vanguard Short-Term Corporate Bond ETF (VCSH) and SPDR S&P 500 ETF Trust (SPY) drop approximately $1.5 billion in redemptions.

ETFG Quant Movers - Those ETFs who have had the largest weekly change in their respective, overall ETFG Quant ratings.

ETFG Quant Winners: The top five gainers in Quant Total Score were Vanguard S&P Mid-Cap 400 Value ETF (IVOV), iShares Core S&P Small-Cap ETF (IJR), First Trust Developed Markets ex-US Small Cap AlphaDEX Fund (FNX), Vanguard S&P Small-Cap 600 ETF (VIOO), and First Trust Nasdaq Transportation ETF (FTXR). Each ETP added well over 18% to their overall Quant.

ETFG Quant Losers: Honorable mentions in the loser category were Invesco DWA Consumer Staples Momentum ETF (PSL), WisdomTree Japan SmallCap Dividend Fund (DFJ), iShares Dow Jones U.S. ETF (IYY), Invesco DWA Emerging Markets Momentum ETF (PIE) and Vanguard Communication Services ETF (VOX). The reasons for the drop in quant scores can be traced to fundamental and behavioral factors.

ETFG Weekly Select List - The five most highly rated ETFs per Sector, Geographic Region and Strategy as ranked by the ETFG Quant model.

Considering the sector’s success, we’d like to highlight the top ETFs within the Utilities sector in this week’s Select List. John Hancock Multifactor Utilities ETF (JHMU) moved from the 3rd position to claim 1st followed by Fidelity MSCI Utilities Index ETF (FUTY) which jumped two spots from 4th to 2nd. Newcomers to this week’s Select List were Global X MSCI China Utilities ETF (CHIU) in 3rd, Virtus Reaves Utilities ETF (UTES) in 4th and iShares Global Utilities ETF (JXI) in 5th.

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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.

Monday, January 13, 2020

Settled Tensions Lead to Strong Rise

Monday, January 13, 2020 – U.S. stocks scored a solid weekly gain in the first full week of trading for 2020. The large cap indexes pushed further into record territory, as the prospects for armed conflict between the U.S. and Iran appeared to diminish. Last week we saw the Dow Jones Industrial Average flirt with an all-time high of 29,000 but later fell 133 points (0.5%) to 28,824 on Friday. For the week, the Dow was up 0.7%, the S&P 500 rose 1.0% and the NASDAQ rose 1.8%.

The technology sector outperformed, led by continued strength in Apple (AAPL) following a report of strong sales in China. A sharp rise in the stock price of cloud software firm Salesforce.com (CRM) also contributed to the sector’s success. The stabilizing situation in the Middle East reversed the previous week’s spike in oil prices and weighed on energy shares. As a result, oil declined 6% on the week. The small cap benchmarks also lagged and recorded modest losses for the week. In addition, a host of relatively favorable reports on activity in the global services sectors also likely delivered some support and helped the markets shrug off Friday's weaker than expected U.S. labor report.

In ETFs, 2020 kicked off with great inflows continuing a trend from the previous year. In total, last week registered over $15 billion in new assets. Sector based ETFs topped the list of weekly inflows. The Industrial Select Sector SPDR Fund (XLI), the Consumer Discretionary Select Sector SPDR Fund (XLY) and the Financial Select Sector SPDR Fund (XLF) each made the list bringing in approximately a billion dollars in flows a piece. On the other hand, SPDR S&P 500 ETF Trust (SPY) saw an outflow of over $1 billion while SPDR Gold Trust (GLD) and iShares Russell 2000 ETF (IWM) lost over $600 million in AUM.

ETFG Quant Movers - Those ETFs who have had the largest weekly change in their respective, overall ETFG Quant ratings.

ETFG Quant Winners: The top five gainers in Quant Total Score were AdvisorShares Vice ETF (ACT), SPDR S&P Health Care Services ETF (XHS), iShares U.S. Healthcare Providers ETF (IHF), The Obesity ETF (SLIM) and SPDR S&P Fossil Fuel Reserves Free ETF (SPYX) respectively. Each ETP added well over 10% to their overall Quant.

ETFG Quant Losers: Honorable mentions in the loser category were First Trust Developed Markets ex-US Small Cap AlphaDEX Fund (FDTS), Sprott Gold Miners ETF (SGDM), WisdomTree India Earnings Fund (EPI), iShares MSCI United Kingdom Small-Cap ETF (EWUS) and Global X MSCI SuperDividend EAFE ETF (EFAS). The reasons for the drop in quant scores can be traced to global themes and behavioral factors.

ETFG Weekly Select List - The five most highly rated ETFs per Sector, Geographic Region and Strategy as ranked by the ETFG Quant model.

Considering the sector’s success, we’d like to highlight the top ETFs within the Technology sector in this week’s Select List. ALPS Disruptive Technologies ETF (DTEC) moved from the 5th position to claim 1st followed by Global X MSCI China Information Technology ETF (CHIK) holding on to 2nd. Newcomers to this week’s Select List were Global X E-Commerce ETF (EBIZ) in 3rd, KraneShares Emerging Markets Consumer Technology Index ETF (KEMQ) in 4th and iShares Exponential Technologies ETF (XT).

Thanks 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.

Tuesday, January 7, 2020

1Q 2020 Rebalance - ETF Global Dynamic Model Portfolios

Tuesday, January 7, 2020 - Another quarter has come to an end and with it, one of the best years for investors! The S&P 500 was up over 30% while the ten-year trailing return rose to nearly 13.5% on annualized basis. The fact that the markets did so as earnings stagnated, the Federal Reserve turned dovish and the dollar began to weaken only exacerbated a trend that has persisted throughout this bull market. Deep and at times almost paralyzing confusion has mounted about the direction and longevity of this bull market.  CIOs and strategists have been sending mixed messages from the very beginning but as this cycle continues into its second decade and nears the end of its third presidential term, even the most oblivious investor is wondering if this is the year when it finally breaks.

Global markets might be debating whether this time is truly different but time and tides wait for no man. So while investors wait for more direction, the ETFG Dynamic Model Portfolios including all 4 of the base portfolios and the 8 “tilts” were updated on January 6th with major changes happening in all three sleeves of the portfolio.  Our ETFG Quant model may have ended the year with a firm value orientation, but it begins 2020 with a focus on growth, at least in the international allocation.

First is the domestic allocation where the SPDR S&P 400 Mid Cap Value ETF (MDYV) remains for another quarter to be joined by mid-cap fund, the iShares Russell Mid-Cap ETF (IWR), a frequent portfolio holding that gives the portfolio a more core feel.  Joining the strategy is the SPDR S&P 600 Small Cap ETF (SLY) which helps further define the domestic allocation in terms of exposure to smaller and more core names.

Shaking up that mix is another new fund making its first appearance in the portfolio, the SPDR MSCI USA StrategicFactors ETF (QUS), a relatively small fund that differs markedly from the other names in the domestic line-up.  While the other holdings are all core or s style funds, QUS is a “broad equity” offering smart beta exposure to a wider swath of stocks than its new siblings in our strategy.  What exposure is it providing?  First, to larger names along with a slight bent towards value stocks although its weights to the markets different sectors isn’t substantially different than other funds in the large-core space.

Our ETFG Quant model also favored a smaller flavor within our international allocation with the replacement of the iShares Edge MSCI Min Vol Europe ETF (EUMV) and ProShares MSCI Europe Dividend Growers ETF (EUDV) with the iShares Currency Hedged MSCI EAFE Small-Cap ETF (HSCZ) and the iShares Edge MSCI Multifactor Intl Small-Cap ETF (ISCF.)  It’s not hard to understand why investors might be favoring hedged international funds but the change-up in the international allocation is even more significant.  Both funds are focused on smaller and more volatile growth names compared to their value-oriented predecessors leaving us to wonder if investors are doing more than just reappraising the direction of the dollar.

EM investors have been burned over the years which is why the one position change in our EM line-up is so significant as the FlexShares Morningstar® Emerging Markets Factor Tilt Index Fund (TLTE) was replaced by the John Hancock Multifactor Emerging Markets ETF (JHEM) while the First Trust Chindia Fund (FNI) remains for another quarter.  The replacement of TLTE by JHEM is a good lesson in which factors investors are hungering thanks to a dovish Fed. TLTE with a clear preference for small value names is being replaced by a fund with a taste for more Large-Cap “core” holdings.  But those core holdings typically skew towards more Low Vol and Quality names signaling that not all is quite yet forgiven by EM investors.

To learn more about our ETFG model portfolio strategy, please email us at sales@etfg.com or call us at (212) 223-ETFG (3834).

Thanks 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.

Monday, January 6, 2020

Will Volatility Greet Investors in the New Year?

Monday, January 6, 2020 - We wish our readers a Healthy and Prosperous New Year! The Santa Claus rally extended into the first trading day of the new year. However, news of the assassination of the Iranian General Qassem Soleimani quickly put an end to the rally as investors woke up on Friday to find a new reality in the Middle East and Oil Geopolitics. As we head into a new week, investors find higher oil and gold prices and slumping markets in Asia. Let’s see where this goes.

Looking at the markets, the major indexes closed out the year 2019 with the S&P 500 finishing up 28.99% and the Nasdaq Composite a respectful 35.2%. The broad market as measured by the S&P 500 closed the week at 3234.65. The NASDAQ Composite broke thru 9000 to close at 9020.77. Both indexes ended the week largely flat due to Friday’s selloff but still had respectable gains from November to the end of December.

Our readers will note that despite all the worrisome news headlines we wrote during the year, returns were surprisingly great. The change in the geopolitical oil markets got us thinking that investors are probably underinvested in Energy, so we decided to reach out to our friends Nick Colas and Jessica Rabe at DataTrek and get their view on 2020. Here is what they sent us giving their views on corporate earnings, stock prices and global interest rates. We strongly encourage you to check out a free trial at datatrekresearch.com
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2020 Market Outlook: Do’s and Don’ts

The “Hemline index” is an old – but profoundly flawed – measure of societal risk tolerance and, by extension, stock market valuations.  It first appeared in the Roaring 20’s flapper era and returned during the miniskirt age of the 1960s.  Lost on those who created the measure: the fact that US women finally got the right to vote in 1920 and that the 1960s generation embraced gender rights more than any previous cohort.  Changing hemlines signaled social shifts, yes, but they had nothing to do with “risk” and everything to do with the US population shedding outdated ideas.

Now, investing does of course have its “fashions”.  Tech stocks come in and out of vogue.  Small caps can occasionally be the “new black”.  And who among us has not been tempted to pick up the latest creation from the investment houses of Blackrock, Vanguard and State Street?  Even when our portfolio closet is already full…

In that vein, we’ll borrow from the front pages of Elle, Vogue and Cosmo to offer up our top “Dos” and “Don’ts” for investing in 2020:

Do: Understand that US equity valuations are toppy just now and expectations are high for 2020.

The S&P 500 trades for 18.3x forward year earnings according to FactSet’s latest analysis.  That compares unfavorably to a 5-year average of 16.7x and a 10-year average of 14.9x.

FactSet also notes that Wall Street expects the S&P 500 to post 9.6% earnings growth in 2020 after no growth in 2019.  On the plus side, that does give 2020 the benefit of easy comps.  But we’re in the camp that believes earnings growth will be more like 5%, and loaded in the second half of the year.

US small cap equities are not much cheaper: the S&P 600 trades for 17.8x forward year earnings and the Russell 2000 goes for 25.4x.  (Source: Yardeni Research)

Don’t: Anchor off 2019’s 29% price gain for the S&P and assume it means anything about 2020.

First, remember that 2018 was a tough year, down 4.2% on a total return basis for the S&P. Therefore, the 2-year compounded annual growth rate for the S&P for 2018-2019 is just 12%, not far from its 11.1% 50-year CAGR.

Going back to 1928, there is only 1 example where a large up year (+25%) was then followed by a dramatic down year.  That was in 1936 (+32%) and 1937 (-35%) during the second phase of the Great Depression.

S&P returns of 25% or greater are not even that uncommon; they have occurred in 25% of the years since 1928.

The average return in the year after the S&P posts a +25% gain is still positive 10%.

Bottom line: US stocks are expensive, but we should see enough earnings growth to see the S&P 500 rally by 10% this year.

Do: Embrace rising global interest rates in 2020.

Low long-term rates were the cause of the mid-year 2019 global recession scare.  German 10-year bond yields troughed in late August at -0.72% and US 10-year Treasuries at 1.5%.

The causes: a US-China trade war that had ground the German economy to a halt, combined with still sluggish economies in France, Italy and Spain.

The market feared this slowdown would spill over to the US.  Both 30-day/10-year and 2-year/10-year Treasury spreads went negative, elevating concerns that these time-proven recession indicators augured tough times ahead.

With the US and China set to sign a Phase I trade agreement later this month, global economic uncertainty should ease in 2020.  This should keep global rates moving higher.

Don’t: Assume the Federal Reserve is done cutting rates.

Yes, the latest Fed Dot Plot shows a remarkable level of agreement among FOMC policy members that short rates will remain unchanged in 2020.

But September 2020 Fed Funds Futures are pricing in a 50/50 chance of a rate cut next year.

The issue: even with the US economy running strong, the Fed’s favored measure of inflation (core PCE) is only up 1.6% over the last year.  Moreover, core PCE has only met the Fed’s 2% target in 11 months over the last 10 years…

Bottom line: bonds are unlikely to post anything like 2019’s positive returns in 2020.  For yield sensitive investors we recommend shortening duration modestly.

Do: Understand the important sector differences and fundamental drivers between seemingly analogous equity index investments:

With Tech’s outsized gains in 2019, the S&P 500 is very heavily exposed to this industry group.  Tech plus Amazon (in Consumer Discretionary), Google and Facebook (in Communications) is now 31.2% of the S&P 500.  Even energy in the late 1970s/early 1980s never got to those levels…

By contrast, the Russell 2000 is heavily exposed to politically sensitive Health Care (18.0%), yield curve exposed Financials (17.5%) and trade war influenced Industrials (15.9%), with Tech just 13.8% of the index.  Also, since a third of Russell companies are unprofitable, access to/cost of junk debt capital is a critical valuation driver.  Spreads here are historically tight, with not much room for improvement in 2020.

The MSCI EAFE index of European/Japanese stocks has just 7% exposure to Tech; the heavyweights here are Financials (18%), Industrials (14%) and Health Care (12%).

The MSCI Emerging Markets index actually looks more like the S&P 500, with Tech plus Alibaba (Consumer Discretionary), and Tencent/Naspers (Communication) at 26.4% of the index.  Financials are a large component as well, at 22%.

Therefore Don’t: Think EAFE or Emerging Markets are “cheap”.

Yes, both EAFE and EM stock indices are cheaper than the S&P 500, at 14.8x and 12.8x forward year earnings respectively. (Source: Yardeni Research)

But… the S&P has (as noted) a much heavier concentration of US Tech stocks, with a proven track record of innovative disruption and long run growth.  Apple, Microsoft, Google, Amazon and Facebook are collectively 17.0% of the S&P 500.

While EAFE has no such Tech concentration, the MSCI Emerging Markets index does, and it is anchored around Chinese Tech.  Alibaba and Tencent/Naspers are collectively 11.5% of EM.

The MSCI Emerging Markets index is heavily weighted to China (32%), Taiwan (12%) and South Korea (12%), collectively 56% of the total.

A directionally correct oversimplification: the S&P 500 is a global (ex-China) tech index, EAFE is non-Tech cyclicals, and EM is China (especially Chinese Tech).

Bottom line: we continue to favor US large caps over any other equity asset class.

Do: Vote if you are a US citizen, but Don’t: Worry about the election informing stock prices.

The US economy is doing well enough that the Democratic nominee will likely be a centrist rather than from the left wing of the party.

That will make the 2020 US Presidential election more about personalities than economic ideas.  If we’re wrong about the prior point, markets will rightly assume that the Democratic candidate will have a very tough time winning the general election.

Until November, you can safely expect President Trump to do everything possible to keep the current economic expansion going. That includes signing a Phase II trade deal with China in time to help with his reelection campaign.

Bottom line: the 2020 Presidential election will be close, but markets will be able to live with either candidate.

Do: Expect the unexpected, but Don’t: Panic.

Recent Middle East events are a good example.  The S&P 500 was down all of 71 basis points on Friday despite the news out of Baghdad.

Incremental US oil production over the last 10 years has fundamentally shifted industry economics in favor of lower structural prices.  Don’t forget: since 1970 the US has never seen a recession without oil prices first rising by 90% within a year.

Bottom line: no doubt 2020 will bring other curve balls, but in the end we believe US and global equity prices will end the year higher and rates will remain low.

Thank you for reading the 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.

Monday, December 30, 2019

A Few Thoughts on the Next Decade

Monday, December 30, 2019 – We wish our readers a good holiday and a Healthy and Prosperous New Year! Looking at the markets as we close out the year, US investors can breathe a sigh of relief as we appear to have made it through the year without any significant bruises. In fact, 2019 has been a good year to US Investors with 2 trading days to go.

Despite all the worrisome news headlines about which we wrote, US Equity and Global Markets climbed their climb last week. The broad market S&P 500 closed the week and hit a high of 3240.02. The NASDAQ Composite broke thru 9000 to close at 9006.62. Both indexes hitting new all-time highs. In Europe, the STOXX Europe 600 hit an all-time high – up almost 25% YTD. One item that grabbed our attention was the drop in negative yielding bonds since August til now -- $17 trillion down to $11 trillion.  Our readers know our thoughts on the consequences of negative interest rates, so we view this development as a big positive.

While investors are betting on an economic pickup, a trade deal with China and subsequently, higher corporate earnings, we started to think about what the new decade of 2020 might mean for investors....

We expect more volatility in US Markets in 2020. Why? We see a highly polarized election in the US and suspect investors to be sensitive to ever shifting election poll numbers especially the first half of the year. Secondly, structural shifts in the marketplace with limited liquidity from market makers and the newly instituted “free trading” of stocks and ETFs from the retail electronic brokers will encourage more short-term trading in and out of positions due to nearly no frictional costs except tax liabilities. Despite an apparent positive for investors, a friend and an old sage of Wall Street observed “free is usually not good.” We agree in this case.

We note an interesting commentary by Richard Bernstein who sees a trend toward inflation and with that higher interest rates. Quantitative easing, increased use of fiscal policy (i.e., tax cuts, increased military (i.e., space) spending, rising compensation for low paid workers and increased tariffs on goods generally are inflationary, even if the increased costs have not yet shown up in official statistics. All this favors emerging markets and gold according to Bernstein. We agree. In fact, Emerging Markets have had meager returns for investors over the past decade compared to the S&P 500.

This got us thinking about the US Dollar and its dominance in international finance and trade. The US has long enjoyed the benefits since WWII of the role that the US Dollar has offered in borrowing to finance the trade and budget deficits. In the new multipolar world, its dominance is going to be chipped away by the EU, Russia and of course China. The consequence of this will be higher interest rates for US Dollar borrowers including the US Treasury. Our readers know from previous writings what we believe the consequences will be for investors - a shift to higher rates. So, stay turned in the coming decade.

A word about the world of ETFs in the next decade. Look for ETFs to become the dominant investment vehicle worldwide. In the US, the long-awaited ETF Rule and related guidelines recently issued by the SEC will result in a streamlined and less costly process to issue “traditional ETFs.” Investors should expect to see a rush by traditional mutual fund companies to issue non-transparent, actively managed ETFs. Lastly, look for large electronic BDs to offer investors fractional share ETF investing. This is significant as it will be an assault on traditional providers in the 401K market.

All of this creates opportunities for traders and active investors who can use ETFs to take advantage of real-time market volatility – both up and down! To take advantage of this, we suggest looking at our ETFG Weekly Select List.

To best support the ETF selection process, The ETFG Weekly Select List highlights the 5 most highly rated ETFs per Sector, Geographic Region and Strategy as ranked by the ETFG Quant model.

We suggest keeping a mindful eye on tools like our Select List and Risk and Reward Ratings that can be used to evaluate the vast set of opportunities in the ETF marketplace. Today’s market realities require a new approach to macro investing, one in which individual investors now have access to tools via ETPs to customize risk and return profiles in their portfolios. Use our Scanner to find those funds.

Thanks for reading ETF Global Perspectives!

ETFG 21 Day Free Trial:  https://www.etfg.com/signup/quick

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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.

Monday, December 23, 2019

In the Face of it All, Record Highs

Monday, December 23, 2019 - In the wake of further political tension, impeachment hearings and uncertainties regarding next year’s election, the markets are dancing to the beat of their own drum as once again they are hitting record highs.

For the week, the Dow Jones Industrial Average rose 78 points finishing at a record high of 28,455. The S&P 500 gained 53 points to 3,221 and the Nasdaq Composite also finished up, gaining 190 points to close week at 8,924 both record highs.

In ETFs, we saw 3 funds take in over $1B this week, all of which track the S&P 500. SPY, the SPDRS S&P 500 ETF, led the way gaining over $3.8B in assets for the week. That was followed by RPG, the Invesco S&P 500 Pure Growth ETF and VOO, the Vanguard S&P 500 ETF which gained over $1.6B and $1.2B in assets respectively. In outflows, investors pulled money out of the Invesco Q’s, QQQ, which lost over $1.5B in assets the last week. That was followed by VO, the Vanguard Mid-Cap ETF, which lost over $1.1B, all according to our ETFG Fund Flow Summary.

In the ETFG Quant Movers, we had an assortment of products add the most percent to their overall scores. The VictoryShares International High Dividend Volatility Weighted ETF, CID, gained the most percent to its overall score with the addition of 23.33%. That was followed by the Invesco S&P 500 Equal Weight Utilities ETF, RYU and the SPDR MSCI Emerging Markets Strategic Factors ETF, QEMM, which added 23.13% and 17.64% to their overall Quant scores respectively.

On the loser’s side, we saw Preferred Stock focused ETFs drop their overall scores. This was led by the Global X SuperIncome Preferred ETF, SPFF which lost 16.15% to its overall score. That was followed by the First Trust Preferred Securities and Income ETF, FPE which lost 15.67% to its overall score.

Because of this sector’s success, we’d like to highlight some substantial movement in the Natural Resources portion of this week’s Select List. The FlexShares STOXX Global Broad Infrastructure Index ETF, NFRA and the DJ Brookfield Global Infrastructure ETF, TOLZ held firm at the top two positions respectively. FTRI, the First Trust Indxx Global Natural Resources Income ETF moved up two spots to the 3rd overall position displacing TBLU, the Tortoise Water Fund which is now the 5th rank ETF. Coming in 4th place this week, and keeping its position firm on the list was PAVE, the Global X U.S. Infrastructure Development ETF.

Thanks for reading ETF Global Perspectives!

ETFG 21 Day Free Trial:  https://www.etfg.com/signup/quick

_______________________________________________________
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.