Monday, April 27, 2015

Back to the Future

Last week the NASDAQ Composite hit a new high for the first time in fifteen years, the Shiller P/E touched its highest levels since the tech boom and both Microsoft and Amazon were up sharply on earnings or in true 90’s style, lack of earnings in the case of Amazon.  With a two-term democrat in the White House and six years into a bull cycle, does anyone else feel like they’re stuck in a time machine and reliving all of the highlights of the past bull market?

To see if we’re doomed to repeat the lessons of the past, we did a deep dive into our Quant Movers hoping to discover if that old adage about those who fail to learn from history has definitely been taken to heart by investors in 2015.

We noticed a conspicuous absence of technology funds in either the Behavioral or Fundamental categories this week and while heartening at first glance, checking out the “Fund Statistics” for two of the largest tech funds quickly changed our opinion.  The reason the Technology Select Sector SPDR Fund (XLK) and Vanguard Information Technology Index Fund (VGT) didn’t make the short list was that investors had already began putting new capital in the funds prior to the start of earning season with XLK adding $55 million and VGT pulling down nearly $230 million which starting on March 27th sent their Behavioral scores soaring and their Fundamental scores crashing.  The overall effect on their ETFG Quant scores has been mixed with XLK declining from 64.6 on March 27th to 55.70 on April 24th, largely due to the decline in the fundamental score although the behavioral score has become decidedly more choppy. And choppy definitely describes the daily changes in the score for VGT as the lack of telecom exposure held by rival XLK offers investors a more pure play tech sector darling.

If the shade of 1999 makes you want to sit down and watch “Office Space” you can stop yourself right there because at least when compared to the other select sector SPDR’s, XLK isn’t the most richly priced or sought after fund, that title continues to be held by the Consumer Discretionary Select SPDR (XLY).  Not only does XLY have the highest behavioral score by based on both momentum and sentiment but XLY is easily the most richly priced fund.  Tech stocks represented by XLK have a similar fundamental score to the utilities where XLU also outperformed the broader market last week.  Some of that rich pricing is surely due to XLY’s large position in Amazon (6.32%) but large allocations to Disney, Starbucks and Netflix have added nearly as many basis points to the returns (although those four stocks make up the bulk of the year to date return.)  One thing that XLK does have going for it relative to XLY is a larger relative short interest so short sellers beware.

But for those investors who’ve decided that history might just repeat itself and looking for a single fund that offers the opportunity to short Amazon and Microsoft, our ETFG Equity Market Grey Reports says that you are out of luck.  While there might be an ETF for nearly every fancy, no one has yet to develop a nifty fifty of the internet-era darlings although the First Trust Dow Jones Internet Index Fund (FDN) might come closest.  Besides offering a 8.91% weighting in Amazon, FDN also has large weightings in some of the year’s top performers like Netflix (4.71%) and Twitter (3.9%) that have helped put in near the top of the tech heap in 2015 with a YTD return of 11.56%.  And if you want late 90’s style pricing, you’ve come to the right place as our ETFG scanner shows the fund’s P/E ratio is trading close to the highest it has ever been.  But investors looking to short FDN might be early to the party as the short interest is in its historical lowest quartile although the contrarians out there interpret that as meaning there’s less gas in the tank for another push higher.

Thank you for reading ETF Global Perspectives!

Monday, April 20, 2015


The Energy Sector Select SPDR (XLE) may have ended the day down on Friday, but it still managed a feat unimaginable during the worst days of last year’s sell-off in crude, outperforming the S&P 500 for five straight weeks with positive returns in four of those five weeks.  With XLE now up 10.5% since March 16th compared to a relatively anemic 1.35% for the S&P, we were more than a little surprised how few energy stocks were making our lists of top Behavioral Quant Scores despite the strong outperformance by the energy sector.  While there has been a strong energy presence on our ETFG Global Equity Indices for some time, only one fund makes the top 25 Behavioral list with the SPDR S&P Oil & Gas Equipment & Services ETF (XES) coming in at number 10.  So pardon our pun but this week we’re going to drill down further into the action to determine whether we are still in the early stages of an oil rally or whether the well has already run dry.

Unlike the doom and gloom reporting that seems to dominate the broad markets, it’s been nothing but positive news for the energy sector for some time now.  The likely (or easiest to identify) culprits behind the strong price action for energy stocks over the last two weeks were the announcement of the largest merger to hit the energy sector since 1998 with Royal Dutch Shell acquiring BG Group for 47 billion pounds as well as Citi’s release of a revised outlook last week for the energy sector where they anticipate prices stabilizing in the second half of 2015 with Brent crude trading in a range between $60 and $70 per barrel.  While megamergers are always good for stoking the speculative fires (not so much on delivering value to shareholders), concerns over whether Shell can maintain its current dividends have weighed on the stock.  Far be it from us to doubt wisdom of Citi but the Brent spot price was already trading just under $60 when they issued their report which only seems to confirm the rising trend that began in mid-March.  With the U.S. Energy Information Administration reporting last week that crude stocks have risen nearly 25% since the start of the year, we might be waiting sometime before the much hyped drop in production arrives.

The more likely culprit behind the strong price action in crude oil and the energy ETF market is the weakening of the U.S. dollar.  The rally in oil prices wasn’t the only major event on March 16th, it also represented the high water mark for the U.S. dollar where the spot price closed over a $100 before retreating as the sea of later comer money began considering comments from the FOMC that the much anticipated rate hike cycle might be much gentler and shallower than previously thought.

While the PowerShares DB US Dollar Bullish Fund (UUP) has only seen a slight $10 million outflow since then, that represents a major change in momentum considering the $352 million the fund has brought in over the last three months.  That massive momentum shift caused by uncertainty over Fed policy can be easily observed through the ETFG Fund Flows Report where March saw major inflows into the energy and natural resource sectors which has been confirmed by the month-to-date fund flows where XLE is the only sector SPDR to show strong inflows in April.  Although the rest of the list may still be dominated by currency hedged international funds, the amount going into unhedged products has begun to expand as investors contemplate whether the powerful move by the U.S. dollar has become overextended.

Investors looking for quick profits have helped push the assets of the ProShares Ultra Oil & Gas (DIG) up 10% in the last month, but those using leveraged funds for bullish or bearish confirmation signals will have to continue to wait as that 10% increase is only about on par with the one month increase for XLE and the Vanguard Energy Index Fund (VDE) and pales when compared to the 65% increase in assets for the First Trust Energy AlphaDEX Fund (FXN).  It’s not hard to see why investors have come to love FXN; while the strong interest in energy funds has pushed their behavioral scores higher, rising prices dinged their previously strong fundamental scores as investor hopes for future earnings overcome their concerns over the weak energy market in the present.  Both XLE and VDE trade for P/E multiples over 25 while FXN trades at a more reasonable 14.36 (and SPY is at 18.51) making it the most reasonably priced broad energy sector fund we track and subsequently giving it a higher ETFG Reward ranking than either of it’s bigger rivals.

What is our highest ranking fund?  Why none other than XES coming in with a Reward Score of 9.72 thanks to the strong increase in the behavioral score and a fundamental score that while off from its recent highs is still well above those for the broader sector funds like XLE.  Being a broad sector fund is what’s kept XLE off our behavioral list; over the last month its score has risen 24% compared to the 80%-100% increase for most of the funds in the top 25 including a 122% increase for XES as it comes back from the investor graveyard.  So overall, investors may still be choosing hope over reality in the energy sector but those watching the dollar and market valuations may be setting up the next phase of the rally.

Thank you for reading ETF Global Perspectives!

Wednesday, April 15, 2015

New-to-Market: SBUS

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.

One trend that became clear during the recent Spring 2015 ETP Forum was that smart beta has been seen by many large investors as a natural progression from the first indexed ETFs.  And while John Bogle may question just how “smart” smart beta actually is, the factor exposure and transparency these funds offer larger investors has helped draw billions into the new asset class.  So for this “New-to-Market” post, we’re investigating the ETFS Diversified-Factor U.S. Large Cap Index Fund (SBUS), a fund that seeks to bridge the divide between the worlds of smart beta strategies and actively managed ETF’s and might just be the first step in the next evolution of the strategy.

Like most “smart beta” funds, SBUS offers a transparent, rules-based system and clear methodology that distinguishes it from a passive investment but the similarities between the fund and its peers end there.  Since the dawn of smart beta funds, most were typically built either as an equally weighted fund or offered exposure to a specific factor such as momentum or low volatility, but the developers of SBUS decided to use a best ideas approach and create a fund that combined those two methodologies in a single fund.

Starting with a universe of 500 of the most liquid securities, the fund’s benchmark, the ‘Scientific Beta United States Multi-Beta Multi-Strategy Equal Weight Index’, first screens based on the four most academically accepted violations of the efficient market hypothesis: low valuations, low volatility, size and momentum.  Once the universe has been ranked, the fund uses a unique weighting system that seeks to maximize the Sharpe ratio by focusing on both minimalizing volatility and tracking error from market benchmarks like the S&P 500 or the Russell 1000.  While the number of index holdings (currently 485) might lead some to conclude that the fund follows a simple equally weighted approach investors expecting the fund to closely track the S&P 500 from day-to-day are likely to be disappointed as the fund’s allocation differs significantly from the S&P 500.

Given that two of the documented market anomalies used in the funds construction are low volatility and value as well as the weighting scheme that favors low correlation, it doesn’t come as much of a surprise that a large percentage of the index is made up of more “defensive” names with utilities representing nearly 11% of the index compared to a mere 3% for the S&P 500 with much of the difference coming at the expense of highflying healthcare names trading close to peak valuations.  That lower weighting helped cushion the downdraft in the market that began on March 20th and bottomed out on April 6th when the Healthcare Select Sector SPDR (XLV) lost 3.31% while SPY lost .8% and SBUS a mere .3%.   Like well-known low volatility funds such as the PowerShares S&P 500 Low Volatility Portfolio (SPLV), the low volatility/low valuation focus isn’t expressed solely though defensive holdings as the largest sector allocation goes to the financials that comprise nearly 20% of the index compared to 14.6% of the S&P 500.

While the fund’s performance history is limited, it has so far shown signs of living up to its creator’s intentions.  After a lackluster first month in February where the overweight towards utilities had weighed down performance relative to its peers, that same position helped lift the fund far above the market in March with the fund up .15% compared to a 1.58% loss for the S&P 500 while most of the funds in its category delivered an uninspiring -1.10%.  What remains to be proven is whether the fund can deliver on lower volatility with only minor tracking error.  The ETFG Red Diamond Risk System does show SBUS having a reduced deviation score of 5 compared to 6.46 for SPY, but lower tracking error might be beyond the funds reach.  Thanks to the focus on non-correlation, the fund’s NAV has been fairly steady since late February while the market has been gyrating wildly as sector rotation takes hold.  The jury is still out for those investors seeking both lower volatility and tracking error but for those who can afford to stray from the benchmark; this might be a fund worth watching.

Thank you for reading ETF Global Perspectives!

*Please note that ETFs are eligible for ETFG Red Diamond Risk Ratings following 3 months of trading and ETFG Green Diamond Reward Ratings following 12 months of trading.

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, April 13, 2015

Follow the Fund Flows

Investors have every reason to feel like a tennis ball as the debate over when the FOMC might raise rates continues to rage.  Despite weak first quarter economic data, the FOMC meeting minutes along with statements by the various Fed presidents have confirmed that a rate hike as early as June remains on the table.  Rather than sending investor expectations spiraling downwards, equities have continued to push higher with the S&P 500 gaining an additional 1.75%.  While it could be that the possible certainty over the rate hike is easing investor anxiety, we’ll review our ETFG monthly fund flows data to analyze whether we’re in the midst of a much larger trend.

One domestic sector that has continued to push higher despite the more bullish dollar outlook is the Energy Sector where strong inflows have helped push the Energy Sector Select SPDR up nearly twice the S&P 500’s gain in April.  While the recent shift in language to a more “data dependent” outlook from the FOMC on future rate hikes may have helped add to UUP’s bounce off the 50 day moving average, the recent pullback from the peak in early March has helped breathe new life into the energy sector with $1.8 billion in positive flows last month.  While always tempting to point to the ongoing troubles in the Middle East for the stabilization in crude oil, the additional inflows into the broader natural resources ($82m) sector has us suspecting that the weaker dollar is more to blame which only raises our caution as the FOMC continues to stress that the recent weakness in the economic outlook and inflation is more likely to be “transitory” and that much of the dollar strength has more to do with Euro weakness.  The question we're asking is how much further can it run without another demand driver?

Much of the Energy Sector inflows have come from the Healthcare Sector where an additional $1.44 billion in assets fled the sector in March on top of the $1.36 billion that fled in January.  With valuations close to their historical peak, investors fearful about how those rising rates could affect investors required rates of return are seeking out opportunities amongst the more deeply discounted and little loved sectors.  Energy stocks were an obvious fit for investors looking to pick up negative correlations to the dollar but funds have also been flowing into the financials where the rising rates offer a glimmer of hope to regional bank stocks crushed by tighter interest rate spreads thanks to the Feds zero interest rate policy.  Over $300 million has flowed into the sector in March with the biggest asset gather has been the SPDR S&P Regional Banking ETF (KRE) where over $111 million in new funds have been put to work gaining exposure to these smaller banks.

Those shifting market expectations might also explain the $1.16 billion in positive flows that have pushed emerging market equities higher despite the rise in the dollar and lifted the largest EM fund, the Vanguard Emerging Markets VIPERS (VWO) up 9.28% over the last two weeks compared to a 1.99% bump for both UUP and the S&P 500.

Thank you for reading ETF Global Perspectives!

Wednesday, April 8, 2015

Thank You - Spring 2015 ETP Forum - NYC

It was an honor for our firm to once again Chair last Wednesday’s “Spring 2015 ETP Forum-NYC” at The New York Athletic Club!

We registered just over 500 participants during the day and the videos of the day’s activities soon will be available on the event producer’s website at

We want to express a special thanks to all of the wonderful Sponsors, Supporters and Speakers who helped make this event so terrific. Shortly, we will be out with a save-the-date for the Fall 2015 ETP Forum-NYC which will be in November.

Also, our friends at The Expert Series have been invited to collaborate with IIR to produce this year's ETF Managed Portfolio Summit in Chicago on June 10th & 11th at The Standard Club – all info is available here 2015 ETF Managed Portfolio Summit - Chicago

We thank you again for your interest in the ETP space and if you have any questions or if we can be of further assistance, please feel free to contact us.

Thank you for reading ETFG Perspectives.

Monday, April 6, 2015

Softer Rate Hike Cycle Ahead?

The “Good Friday” Jobs Report may be one of the most anticlimactic in memory as the sharp slowdown in the jobs growth rate ran smack into a market closed for the holiday weekend and while it truly was a good Friday for anyone still long the PowerShares DB US Dollar Index Bullish Fund (UUP), what sort of situation will investors face at this morning’s opening?

The lack of trading on Friday meant that reporters had more time than usual to debate how a weakening economy might impact the Fed’s plans to raise rates and giving investors of all stripes time to debate how to position themselves.  But at ETF Global, it provided us a chance to peruse our ETFG Quant movers report to learn how investors have already been positioning themselves for a potentially softer rate hike cycle.

Starting with the weekly changes in the ETFG Behavioral Quant Movers Report, 8 of the 10 biggest % gainers for the week have some degree of negative correlation to changes in the dollar that could help propel them higher in the event that dollar sell-off continues into next week.  The biggest percentage gainer was the FlexShares Morningstar Emerging Markets Factor Tilt Index Fund (TLTE) whose Behavioral Quant score rose by over 106% as the fund continues to outperform vastly larger rival iShares MSCI Emerging Markets Index ETF (EEM) by over 150 bps year-to-date.  With over 2000 holdings, investors might be more than a little curious how this fund differs from average EM ETF and for that, you need to lift the hood a little.  Compared to the average EM fund, TLTE is weighted towards smaller cap stocks with over 15% in small cap positions compared to a meager .47% for EEM and giving the fund an average market cap of $8.5 billion compared to $20 billion for EEM.  A tilt towards small caps isn’t the only defining feature of the fund as the portfolio is also skewed towards value stocks that have seen weaker earnings growth than those found in EEM leaving investors with a portfolio heavily exposed to those stocks that could potentially see strong price appreciation as the dollar liftoff continues to falter.

TLTE isn’t the only fund with small cap EM exposure to see a strong pick-up in momentum last week as the EGShares Beyond BRICs ETF (BBRC) and the WisdomTree Emerging Markets Small Cap Dividend ETF (DGS) both saw their behavioral quant scores rise by more than 50% last week.  Like TLTE, both funds are intentionally bent towards a focus on smaller companies than are found in EEM although investors should consider BBRC a more “conservative option” as it has an overall higher average market cap ($13.7 billion) than TLTE.  BBRC also eschews a focus on value stocks, favoring a more balanced approach built around gaining exposure to a more diverse range of nations than are currently found in EEM.  BBRC has no exposure to more developed Asian markets like China, Taiwan or South Korea instead focusing on markets like Indonesia, Malaysia and Qatar that were up 2%, 2.45% and 5.2% respectively last week.  Prospective investors also need to come prepared with an opinion on the South African Rand as one of last year’s biggest losers against the dollar makes up the single largest currency exposure of the fund.  Investors looking for a more “aggressive” fund like TLTE have found DGS more to their liking as the fund concentrates almost exclusively on small and micro-cap names leaving the fund with an average market cap of a mere $1.3 billion compared to $8.5 billion for TLTE although it carries a much higher ETFG volatility ranking as a result.

So if an emerging market flavor permeates some our biggest behavioral winners for last week was there anything that defined the biggest losers?  So far the only clear trend has been one that might be best called “the first shall be last” as the healthcare rally that began in late February continues to run on fumes with two healthcare funds among the biggest losers last week.  Leading the advance in the opposite direction were the PowerShares Dynamic Pharmaceuticals Portfolio (PJP) and the Market Vectors Biotech ETF (BBH) where the serious loss of momentum has left many wondering whether the end has come.  The Healthcare Select SPDR (XLV) has underperformed but the worst of the pain has been saved for biotech sector with the iShares NASDAQ Biotechnology Index (IBB) down an astounding 7.32% in the last two weeks compared to a negative 3.89% for XLV and a 1.95% loss for the S&P 500.  PJP and BBH merit special mention for their heavily concentrated portfolios with both funds holding a mere 26 positions compared to 149 holdings for IBB while PJP’s use of ‘Pharmaceuticals’ in its name can’t obscure the fact that its allocation to biotechnology is larger than BBH’s.  With one of the biggest leaders of the bull market losing steam while long despised emerging market stocks continue to gain favor, this might be the last “good Friday” for investors with a U.S. only focus for some time to come.

Thank you for reading ETF Global Perspectives!