International Quant Movers

After their strong performance on Friday and since domestic equities failed to maintain their daily highs, it’s not surprising that the ETFG list of Behavioral Quant Movers would include some of the larger international ETFs.  

Call it “Central Bank Friday” beginning in the east where the PBOC cut rates for the first time since 2012 amid slowing growth to Europe where Mario Draghi’s statements that inflation needs to be brought back to 2% “without delay” lit a fire under European equities that had already been trending higher following his press conference on 11/6.

The larger iShares MSCI EMU ETF (EZU) saw its behavioral score rise 16.5 points while the Euro-hedged WisdomTree Europe Hedged Equity Fund (HEDJ) was up nearly 25 points and has risen all the way to number 11 on our list of top 25 ETF’s behavioral scoring ETFs where it joins 7 other international ETFs.

And while China may have been the only emerging market on anyone’s mind last Friday, the real action was south of the border where the ETFG Latin America Index was up 5.41% as investors found a whole bunch of new reasons to love Brazil again.  In many ways, the story of Brazil and Mexico closely resemble the European model; in Brazil the story of rising rates, weak growth and political uncertainty surrounding the re-election of Dilma Rousseff contrasts sharply with Mexico where a stronger economy with its deep ties to the U.S., combined with the election of Enrique Peña Nieto and promises for major reforms to the state-dominated energy sector has helped make the country a darling for international investors.  

Mimicking the relative underperformance of perennial problem child Italy to relatively more stable Spain, before Friday’s rally the iShares MSCI Mexico Capped ETF (EWW) is up .68% in 2014 compared to a negative 3.41% for the iShares MSCI Brazil Capped ETF (EWZ) while over the last three years EWZ has an annualized return of-5.97% to EWW’s 10.41%. 

What prompted this stunning reversal of relative momentum?  On the surface, EWW enjoyed a solid 1.44% advance on Friday as investors digested lower economic growth forecasts for 2014 and 2015 while EWZ rallied sharply, up 6.83% and with the Real gaining ground against the dollar for the first time in almost a month on news that President Rousseff may be close to a new economically savvy finance minister.  

But on deeper inspection, the real story may be the shift in political instability from Brazil to Mexico. President Peña Nieto continues to deal with the fallout from allegations of crony capitalism as well as the murder of 43 student teachers while the instability surrounding the recent elections in Brazil as well as alleged corruption at Petrobas begins to fade.  Given the weight of Brazil in the largest Latin American tracking ETF, the iShares Latin America 40 ETF (ILF), at 45% compared to Mexico’s 31.7% and the relative underperformance of EZW to EWW over the last three years (-5.97% to 10.41%), a change in relative momentum could help lift ILF from its multiyear momentum lows versus the S&P 500.       

While the recent outperformance of Brazil among Latin American markets may yet prove to be short-lived, it does raise the question of whether Mexico can expect to trade-in line with its peers to the south or its larger trading partner to the north.  Given the highly integrated nature of our two economies, Mexican stocks could find themselves lagging other international markets if U.S. equities do begin to lag as investors seek out markets with more liberal monetary policies.  Porfirio Diaz may have it right after all.

Thank you for reading ETFG Perspectives!

Wow - What an Event!

It was an honor for our firm to Chair Wednesday’s “Fall 2014 ETP Trading & Investing Forum NYC”  The event registered just over 300 participants during the day and for those that we unfortunately could not accommodate on the waiting list due to space constraints, the videos of the day’s activities soon will be available on the event producer’s website at www.expertseries.org. Those folks will also be offered complimentary admission to the upcoming spring event.

Because of the overwhelming interest in this event, The Expert Series has secured a few potential dates at a much larger midtown venue to host the next event in April/May - the New York Athletic Club will accommodate 400-500 attendees and include an adjoining room for sponsor exhibits and booths.  Shortly, we will circulate a save-the date notice with all the details for the upcoming “Spring 2015 ETP Trading and Investing Forum NYC.”

In order to provide you with additional benefits, The Expert Series has partnered with Harvest to provide a private portal exclusively for you and the other industry experts with interest in the conference.  The conference benefits of networking, education and discussion have been transformed from a 1-day event into a perpetual and fully secure experience exclusively for you and other conference attendees.  Please click here to confirm your access to the Expert Series private page via Harvest (or copy this URL to your browser: http://www.hvst.com/referrals/wkw5AsEqex4

We thank you again for your interest in the ETP space and wish you and your families a wonderful Thanksgiving.

Thank you for reading ETFG Perspectives.

Setting up for a Low Vol Heartbreak?

Despite the record highs the S&P 500 made last week, the market rally that began so powerfully on such depressed momentum in mid-October seems to be maturing.  With a light Veteran’s Day helping set-up the weakest weekly volume since mid-September, behind the scenes sector rotation helped keep the overall breadth healthy and took pressure off some of the more “defensive” sectors that have carried the load so far in the 4^th quarter.  Healthcare and Consumer Staples lagged the broader market while financials and REIT’s saw slight declines as Utilities pulled back on strong selling pressure.  Could sector rotation be setting up one of the most popular ETF asset gather’s for some serious heartbreak?

Currently, iShares MSCI USA Minimum Volatility ETF (USMV) has the lowest ranked volatility of any ETF we track with our Red Diamond Risk Ratings.  Having grown to over $350 billion, 2014 might be remembered as the year of the “Smart Beta” ETF with one of the most popular strategies being low volatility.  Along with the PowerShares S&P 500 Low Volatility Portfolio (SPLV), USMV gathered hundreds of millions in new assets while outperforming the S&P 500 in 2014 - SPLV has performed in-line with the broader market, but as their names implied, both did so with less volatility and significantly less drawdown.

The secret to their success is being concentrated in large cap stocks with a strong focus on the traditionally defensive sectors that have powered the market higher in 2014, but that success put the funds in “expensive camp.”  Both are trading at levels that have pushed their ETFG Quant Fundamental Scores down to among their lowest levels with USMV trading at a trailing P/E of 25.23 and SPLV at 23.49 versus 19.32 for the iShares Core S&P 500 (IVV) and pushing their ETFG Green Diamond Reward rankings into the “Underperform” zone.

Even with large cap stocks continuing to hold their ground despite the weakness in small and mid-cap names, one of the chief concerns over USMV and SPLV is their mutual heavy exposure to those sectors that have enjoyed the strongest performance in 2014 and have seen recent weakness as the market rally matures.  SPLV currently has over 20% of its assets concentrated in the utilities where the Utilities Select Sector SPDR fund dropped 2.83% last week amid a clear loss of momentum against the S&P 500 and picking up only slightly more than 50% of the market’s gain in the last month.  USMV has more marginal exposure to utilities, but has its largest sector positioning in healthcare care names, currently 17.9% of the portfolio - leaving it vulnerable in the event that recent blip in relative performance extends into the New Year.  Both funds share a large concentration towards consumer staples names at about 15% of their respective assets.

While we at ETFG will be the first to applaud the development of new ETF products and tools to help investors expand their range of portfolio options, that doesn’t mean we won’t encourage you to do your research first.  Investors seeking low volatility and a high Sharpe ratio haven’t been disappointed with these funds so far in 2014, but is their good fortune about to change?

Thank you for reading ETFG Perspectives!

Last call for next Wednesday, 11/19 ETP Forum

Here’s a quick post from our partners at the Expert Series regarding next week’s conference - the Fall 2014 ETP Trading & Investing Forum which ETFG will Chair:
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We are exactly one week from the Fall 2014 ETP Trading & Investing Forum NYC on Wednesday, November 19^th and the response to this event has been terrific.  We are already approaching capacity and therefore will have to close registration this Friday 11/14 at 5:00 PM ET.  For those who plan on attending but have yet to sign-up, please do so immediately.  The agenda, all-star line-up and registration may all be found at www.expertseries.org

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Below are the confirmed speakers for the conference, see everyone next week and thank you for reading ETFG Perspectives.

Confirmed Speakers:

·         Jeff Macke, Host of Breakout, Yahoo Finance

·         Josh Brown, CEO, Ritholz Wealth Management

·         Nick Cherney, CIO, Velocity Shares

·         Joe Anthony, President - Financial Services, GREGORY FCA

·         Matthew Tuttle, CIO, Tuttle Tactical Management

·         Mike Boucher, Portfolio Manager, Fidelity Investments

·         Christopher Hugar, Portfolio Manager, Nottingham Advisors

·         Thomas Mosel, Managing Director, Windhaven Investment Management

·         Justin Sibears, Quantitative Strategies Group, Newfound Research

·         Randy Bullard, ETF Solutions Group, Cantor Fitzgerald

·         Jason Lichten, Director of Equities and Listed Derivatives, Wolverine Execution Services

·         Robyn Misiano, Head Equity Trader, Boston Advisors

·         Steve Sachs, Head of Capital Markets, ProShare Advisors

·         Scott Dooley, CIO, Fusion Investment Management

·         Dodd Kittsley, Head of ETF Strategy & National Accounts, Deutsche Asset & Wealth Management

·         Eric Balchunas, ETF Analyst, Bloomberg L.P.

·         Darshan Bhatt, Co-Founder/Deputy CIO, Glovista Investments

·         Morgan Harting, Senior Portfolio Manager, Alliance Bernstein

·         Phil Mackintosh,  KCG Holdings

·         Francis Rodilosso, Portfolio Manager, Van Eck Global

·         Matthew Kerfoot, Partner, Dechert LLP

·         Christian Hoffmann, Director, Liquid Alternatives, Credit Suisse Asset Management

·         Kim Flynn, SVP, Head of Product Development, Nuveen Asset Management

·         Dennis Bowden, Managing Director, U.S. Mutual Fund Research, Strategic Insight

·         David Katz, President & Chief Operating Officer, Larch Lane Advisors

·         Mark Yusko, CEO & CIO, Morgan Creek Capital Management

·         Alex von Obelitz, ETF Strategist, PIMCO

·         Bob Kricheff, Portfolio Manager, Shenkman Capital

·         Brian Good, Portfolio Manager, THL Credit

·         Ronnie Jaber, Portfolio Manager, Carlyle Group

·         Lee Shaiman, Senior Portfolio Manager, GSO

·         Frank Paone, Partner, Director of Institutional Investor Services, Lord Abbott

·         Edgar Sullivan, Ph.D., Senior Strategist, SECOR Asset Management

·         Paul Joss, Investment Strategist, Hartford Investment Management

·         Eric Alexander, Investment Committee Chairman, Emerson College Board of Trustees

·         David Abner, Head of Capital Markets, WisdomTree Asset Management

·         Will Wall, Senior Trader, Riverfront Investment Group

·         Jay Fraser, Head of Business Development, IEX Group

·         Haddon Kirk, Head ETF Trader, UBS Securities

·         Thomas Picciochi, Multi-Asset Portfolio Management & Trading, QS Investors

·         Chris Romano, Director of Research Applications, ETF Global

Earnings Scorecard

With nearly 90% of the S&P 500 having reported earnings, now seems to be the perfect time take a look at the earnings scorecard for the 3^rd quarter of 2014.  While it’s been a while since anyone really got themselves worked up too much over earnings season outside of big names like Apple, the end of QE3 means that the financial media will have to find a new topic to gravitate towards and this week is going to be light on major economic news.

If there’s been one sector that surprised all forecasters with its performance in 2014, it's utilities where the Utilities Select Sector SPDR (XLU) began outperforming the broader market in January and now is up 24.99% YTD versus 9.93% for the S&P 500.  In the third quarter, the utilities sector saw their earnings grow 2.8% compared to the broader market’s 7.6% and while the market typically does not reward the sluggards, in this case it’s made an exception.  If earnings are going to be more important going forward, why are utilities outperforming so handily in 2014?  Partly because among the companies that have offered forward guidance, their expectations for future growth are among the most stable.

So far 55 companies have offered negative guidance versus 18 with a positive outlook for the next quarter. The spread between positive/negative outlooks is skewed with tech stocks having the widest ratio (7.5x) while the lowly utilities sector has only one name offering forward guidance and of course, it’s positive.  Given that analysts have trimmed their 4^th quarter earnings forecasts since the end of the 3^rd quarter by 53%, this stability clearly offers a lot of attractions in this brave new world without a backstop from the Federal Reserve but it comes with a heavy price. 

Factset now estimates that utilities are one of the most expensive sectors based on the 12 month forward P/E ratio (16.9 versus 15.8 for the S&P 500.)  While this strong performance, along with that of REITS, was attributed to either annual sector rotation or a quest for yield, the Factset Earnings Insight Report leaves little room for doubt that consistent earnings and expectations for more of the same are also playing their parts.

Using a list of ETFs with the biggest fundamental % gain last week shows another way to think about the power of dividends AND stable earnings in this market.  ETFs offering exposure to preferred stocks and high dividends were among the biggest gains with the PowerShares Preferred Portfolio (PGX) and iShares S&P US Preferred Stock Fund (PFF) both making the short list and offering dividend yields in excess of 5.5% compared to the 1.8% offered by SPDR S&P 500 ETF (SPY).  They also have heavy exposure to financials in common, 63% and 74% respectively and the earnings variability has weighed on both.  

While the financial sector theoretically has the third highest earnings growth this quarter at 16.4%, if you removed J.P. Morgan it would drop to 2.8% putting it in-line with the utilities and even with a 5/4 positive to negative announcement ratio, investors aren’t feeling too generous to the banks.  Continuing uncertainty over future lawsuits and settlements including the FOREX scandal has led to more cash hoarding to build up reserves while also lowering investor optimism.  Factset’s 12 month forward P/E estimate for the financial sector is currently 13.5, the lowest for all the sectors of the S&P 500.   Clearly, dividends are still king.

In honor of Veterans Day tomorrow, a heartfelt thanks to all of those servicemen and servicewomen who have served our country.

Happy Veterans Day and thank you for reading ETFG Perspectives.

Euro View

Following yesterday's post and walk through of how to identify products of interest in Japan, we had some requests to look at the Euro players. With Japan having gone nuclear with its monetary policy, it seems natural that eyes now shift towards the ECB Governing Council meeting this week in Frankfurt which will feature Mario Draghi doing his best to convince you that the ECB will actually attempt something, someday.

Consumer prices have ticked up slightly by .4% in October, core inflation remains significantly below the 2% threshold while EU unemployment remains high at 11.5%.  While the ECB has been reluctant to put the pedal to the metal, we remember the old adage to “buy the rumor and sell the fact.”

So how can we use the ETF scanner to find ways to play the Euro trade?  The ETFG Scanner can help you find the right ETF - start by clicking on the filter and setting Category/Currency/Euro to find all of the ETFs offering straight euro exposure.  Via this currency search for Euro exposure, you can see there are a handful of options available under the “currency ETF” category including the recently added ProShares Short Euro (EUFX) up 8.75% year-to-date.  If that’s not enough to get your blood racing, try the Ultrashort version (EUO) but make sure your heart is healthy enough first.

Reset the scanner and switch from “Geographic Regions” to “Developed Markets” and “Europe” and you’ll find a long list of all products with a European orientation.  Reordering the list to use our ETF Quant rankings you’ll find a truly solid performer at #4 Deutsche X-trackers MSCI Europe Hedged Equity ETF (DBEU).  Besides offering hedged equity exposure, you’ll find it also offers strong momentum.

Thank you for reading ETFG Perspectives.

Japan

Wednesday’s FOMC press release may have brought the much anticipated ending of QE3 and a lot of debate about the exclusion of the word “significant” but Japan stole the show on Friday.

Japan decided to expand the total amount of quantitative easing in 2015 to around 15% of GDP (while lengthening duration) plus the Government Pension Investment Fund finally decided to shift its asset mix to a more equity heavy posture which FT calculates could result in nearly $200 billion being reinvested in domestic and foreign equities.

So it was no shocker that Japanese equities knocked the cover off the ball with the iShares Japan (EWJ) ETF up 4.96% on Friday and back into the black at .03% YTD.  While more than a few prognosticators on Monday will tell you that the easy money has already been made, given the positive correlation between equity returns and quantitative easing, the ETFG Scanner can help you find the right ETF for those who want to help themselves.

Start by clicking on the filter and setting Category/Currency/Japanese Yen to find all of the ETF’s offering straight Yen exposure.  As you can imagine, QE hasn't been kind to the Yen now down over 6% in 2014, and back to levels last seen in the second half of 2008.  While FXY might be oversold after Friday with a weekly RSI (14) score back to 26.21, it has been trapped beneath its 50 week moving average since 2013 and those Friday press releases won’t be adding any lift to the Yen anytime soon.  But after years of little investor interest, only 4 funds targeting currency exposure are currently marketed.

For equity investors, reset the filters for geographic region and checking “Developed Markets” and “Asia-Pacific.”  If you sort the list based on our Quant filters, you’ll find some of the strongest performers as Friday’s rally boosted their momentum scores.  #2 on the list is the WisdomTree Japan Hedged SmallCap Equity Fund (DXJS) which besides having nearly 25% of its equity exposure in small-cap industrials that in theory should benefit the most from a weakened Yen offers hedged exposure to prevent further declines in the Yen from hitting your portfolio statement too hard.  If you think the currency doesn't matter, compare DXJS to its non-hedged equivalent the WisdomTree Japan SmallCap Dividend Fund (DFJ) up 1.78% YTD after Friday compared to 7.78% for DXJS.

Thank you for reading ETFG Perspectives.