Chicago, June 10-11!

Here’s a quick post from our friends at the Expert Series:

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Please join us as we collaborate with event producers IIR for their 2015 ETF Managed Portfolio Summit in Chicago on June 10^th & 11^th at The Standard Club.

The Expert Series will feature three expert panels and a lunch speaker on the morning of Wednesday, June 10^th which is the first day of this two day conference.  Updated event information including Agenda, Speakers and Topics can be accessed via the event website at:  ETF Managed Portfolio Summit

We would like to extend an invitation for ETF Global followers to be our guest and receive complimentary admission to this terrific event.  We have a limited number of complimentary passes, so for any ETFG followers who would like to attend, please email Francis Hagan at fxhagan@expertseries.org for the complimentary registration instructions.  These complimentary passes will be provided on a first-come, first-served basis until they run out.

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We should also mention that the above conference will feature our own Chris Romano, Director of Research Applications at ETF Global.

Thank you for reading ETF Global Perspectives and we hope to see you in Chicago on June 10^th!

New-to-Market: FFTY

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.

Discipline is the key to long-term investment success and while there’s a lot to be said for learning-by-doing, we at ETFG are big believers in not reinventing the wheel which is why we’re excited about the recently introduced Innovator IBD 50 Fund ETF (FFTY) built around the CAN-SLIM philosophy developed by investment great William O’Neil and popularized by his most famous publication, Investor’s Business Daily.  FFTY’s focus on growth and momentum might not make it a slam-dunk for every investor portfolio, but investors looking to tap into the wisdom of a market guru and a focus on limiting losses will find a lot to like in this fund.

Investor familiarity might be one of the reasons why FFTY has met with such a positive reception as the fund pulled in over $27 million in assets since its launch on April 9th.  Potential investors worried about buying a watered down version of William O’Neil’s famous investment philosophy can take heart that this fund is the real deal and strongly adheres to his famous discipline.  The core of the strategy is finding stocks with strong quarterly and annual earnings growth as well as anticipated product developments and combining it with a strong technical outlook based on momentum.

Although no one would confuse CAN-SLIM with buying penny stocks; O’Neil favor’s stocks with a relatively limited float, institutional ownership (but not at extreme levels) and rising prices supported by strong volume.  The official benchmark for the fund is the IBD 50 Index, a price-weighted index that is reconstituted every week after the close of business on Friday, however, the fund’s weighting system is actively managed and won’t match the published benchmark although it will hold the same fifty securities as the benchmark, tracking error should be expected.

With a focus on a strong track record of earnings growth, potential investors shouldn’t be expecting a lot of value oriented names in this portfolio because for FFTY it’s all growth, all the time.  The CAN-SLIM philosophy and its focus on strong earnings growth and momentum doesn’t leave a lot of room for diversification, so buyers should note that the portfolio is heavily concentrated in a few sectors with technology stocks making up over 50% of the portfolio followed by healthcare stocks at close to 20% and consumer discretionary names making nearly 15%.  And while O’Neil’s system eschewed low-priced stocks due to their lack of attractiveness to institutional owners, the focus on strong earnings growth has led to a large concentration of small-cap stocks in FFTY with nearly 42% of the fund in small-cap stocks and an average market capitalization around $5.4 billion compared to $5.6 billion for the fund’s most likely rival in this space, the iShares S&P 400 Midcap Growth fund (IJK.) The biggest difference between the two (besides number of holdings) is that FFTY has a nearly equal amount spread out between mid, large and giant cap names versus IJK’s overwhelming focus on just the mid-cap market.

But that heavy allocation to the small-cap space makes for one very wild ride at times and investors in FFTY should be braced for volatility.  While the funds track record is still limited, FFTY is down 1.2% since inception on April 9th compared to a positive .54% for IJK but that overlooks the volatility investors experience along the way; during the two weeks from April 23rd to May 7th the fund dropped 5.45% compared to slightly more than 2% for IJK and 2.69% for one of the largest small-cap growth funds, the Vanguard Small-Cap Growth ETF (VBK.) Given that the benchmark can be reconstituted on a weekly basis, we haven’t been entirely successful in determining who the biggest culprits were but that might be another reason for investors to put this fund on their watch list.

Like many traders, O’Neil was a firm proponent of limiting losses, typically when positions suffered a 7% to 8% loss below the initial purchase price and trimming the losers while letting the winners run and the managers of FFTY seem to be embracing that philosophy.  Unlike the IBD 50 Index, the managers have the discretion to weight positions (the largest is no more than 3.5% of the portfolio) based on the models conviction level and not on price and the most current holdings report found at the Innovator Funds website shows that less than 50% of the portfolio dates to positions acquired before the fund began trading while nearly 18% were added on 5/12.  While the turnover might seem high, the fund charges a relatively high 80 bps management fee and the portfolio protection provided by reducing drag from losing positions might be well worth the fee.

As we said in the introduction, FFTY might not be a core holding essentially for every investor portfolio but for those investors looking for a growth manager who actually trades and manages their portfolio to a set of time-tested rules, this might be worth watching.

*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.

Real Return

After weeks of back-and-forth economic data, the overall trend broke to the side of weaker growth late last week and the outcome for the markets was obvious thanks to a trifecta of bad data on Friday…all new highs for the S&P 500 as investors wager rates will stay lower for longer resulting in the PowerShares DB US Dollar Bullish ETF (UUP) being pushed lower and the iShares 20+ Year Treasury Bond ETF (TLT) soaring up over 2% on the day to help the fund stay above its 50 week moving average.  And while Treasury funds were big winners thanks to the ten and thirty year bond yields plummeting over 4% on Friday, those lower yields offered serious succor to real estate investors who have been pummeled since the market turned against the interest rate sensitive sectors at the end of January.  With weaker growth and benign inflation forecasts, has the time come for a shift back to the real asset plays?

After a strong 2014 where the Vanguard REIT Index Fund (VNQ) dominated the S&P 500, delivering a 30.36% return to the S&P 500’s 13.69%, investors could almost be forgiven for hoping that such strong momentum would carry on in 2015 and why wouldn’t they?  Real estate had benefited from not just strong economic growth that reduced vacancy rates but an incredibly low interest rate environment where steadily declining Treasury yields made even relatively anemic cap rates seem attractive.  By mid-2014 top markets were seeing cap rates at or below 5% (close to the pre-Lehman lows) with Dallas standing out at a record low of 3.2%, a scant 70 bps higher than the ten year Treasury yield of 2.51% on June 30th.   With seemingly poor compensation for the amount of risk property investors were taking on, investors told themselves that the Fed would stay accommodative indefinitely and with higher dividends, the sky was the limit for REIT’s.  And while the asset allocators continued to pour money into the sector at year-end, January 2015’s strong return quickly faded as hopes that rates would stay low indefinitely faded and investors fled to less-rate sensitive sectors, sending VNQ on a downward spiral of underperformance with the fund down 11.29% from January 28th to May 6th compared to 2.49% for the S&P 500.

But for the observant investor there were glimmers of hope during the long period of underperformance earlier this year.  Every speech by a Dovish Fed Governor or weak economic data point gave REIT’s a shot in the arm although it was going to take more than a few individual data points to convince traders that the story was changing.  The increasing desperation in the sector drew the early bottom feeders to VNQ a week before the dollar topped out on March 16th after strong selling pressure on March 6th with a gap open down and a close just off the lows of the day.  And while REIT’s traded higher with the broader market over the following weeks, by late March the strong selling pressure had resumed as the economic data continued to point to a shallow rate hike later in 2015.  But with the increasingly negative economic becoming more apparent over the last two weeks, REIT’s and their defensive brethren utilities have finally begun to shine again.  VNQ has managed to put on 1.39% in the last two weeks compared to the S&P 500’s .68% gain with the largest REIT twice finding support along its 50 week moving average at $78.25.  Given the extensive technical damage, traders will need some convincing that REIT’s are worth another look, so it could take several weeks of consolidation before VNQ puts in a firm bottom.

However if you’re one of those investors looking to strike a balance between yield, capital gains and who can tolerate some volatility to boot you might want to focus on the much-despised subsector of mortgage REIT’s.  Once the darling of investors looking for a non-correlated asset class offering higher yields than traditional real estate products and without the systematic risk of traditional REITS or other equities, funds like the iShares Mortgage Real Estate Capped REM delivered solid performance while lagging the broader REIT category during the great real estate recovery of 2009 to 2013 when concerns over the policy outlook at the Fed began to weigh on the space.  With mortgage rates at record lows as we hover over the zero rate boundary, REM’s volatility was far higher than the broader sector or market and dragged on performance with REM up 6.11% over the last year versus 13.88% for VNQ and the subsequently lower alpha and Sharpe ratio’s sent investors scurrying away from the sector.  Currently sporting a category high yield of 12.84%, REM has begun to steadily attract new investors as confusion at the Fed has helped push the fund into the top quartile of REIT performers YTD although potential investors should take our warning about volatility seriously.

Thank you for reading ETF Global Perspectives!

Is it all relative?

All eyes may have been on the Jobs Report last Friday but the biggest winner of the day was the United Kingdom, where the overwhelming victory by the Conservative Party in last week’s general election helped send British-oriented funds soaring.  Two of our biggest Quant movers last week can thank the election, the First Trust United Kingdom AlphaDEX Fund (FKU) and the iShares MSCI UK Small Cap Index (EWUS), but diving deeper gave us more reason to be cautious than optimistic as we scoured the ETF globe to find strong momentum that might face troubling times ahead.

Both FKU and EWUS saw their weekly ETFG Behavioral scores skyrocket last week, but they didn’t make that list based on the change on a % basis.  There’s been strong bias towards the buy side since the general election on March 30th.  FKU and larger rival iShares MSCI UK Index (EZU) were down 4.86% and 5.71% respectively compared to a loss of 1.46% for the broader iShares MSCI ACWI ETF (ACWI) in March but both funds poured on gasoline as punters took the position that the uncertainty over the outcome was confined mostly to the media and helped both funds outperform ACWI by a factor of 2 from April 1st through May 8th. With the elections behind us, will uncertainty over the role of the Scottish National Party and the possibility of a British exit from the Eurozone provide enough of a damper to help keep the strong momentum going or will the fire burn itself out as investors look for the next overlooked market?

One country that’s sure to be on traders lips is China where on Sunday the PBoC announced the third rate cut since last November, taking lending and deposit rates down another 25 bps.  While the headlines around the rate cut have emphasized the need to add more liquidity to China’s faltering economy where protracted economic weakness has put the 2015 GDP target of 7% in doubt (or not if you take the official statistics with a grain of salt), the real speculation is on whether the real prime mover is the Federal Reserve.  Thursday and Friday’s data releases may have helped UUP put in a floor close to $24.75 and the news could be very troubling for the Chinese Yuan, still pegged to the U.S. dollar.  The dollar’s strength against the Japanese Yen has helped their competitiveness against China and was just one of the reasons why the A-share market funds like the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR) cooled off in the first quarter as the dollar made strong gains.  Our ETFG Behavioral Quant scores have steadily cooled off over the last month for most A-share funds but short interest remains high and it remains to be seen if the rate cut can counteract the power of the Fed.

Unfortunately, there’s no neat bow to put on last week’s market action here at home as Friday’s powerful move across global equities put nearly the entire S&P 500 into the green for the day with only a few observations to be gleaned from the performance of State Street’s select sector funds. Energy stocks (XLE) and materials (XLB) both outperformed nearly every other sector on the day although only XLE closed near the high while those traditional defensive plays like utilities (XLU) and consumer staples (XLP) both underperformed the broader market and closed well off their highs as did the SPDR Dow Jones REIT ETF (RWR) despite as the gap open higher proved too tempting to sellers.  The only strong change worth noting among the select sector funds were the financials (XLF) where the Jobs report restored hopes that rates might be rising sooner (and higher) than investors had been anticipating and taking the pressure off net interest margins at some of the country’s largest institutions.  XLF’s quant score has been steadily rising as investor enthusiasm (and momentum) returns to the financials and with the long term score still below the short-term, maybe bank stocks will finally have their day.

Thank you for reading ETF Global Perspectives!

New-to-Market: XT

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.

At long last, there’s an ETF that feeds your addiction for companies on the cutting edge of technological breakthroughs that doesn’t require you to commit to a specific sector, market cap or even country the iShares Exponential Technologies ETF (XT.)  If you’re like us and your first instinct when you get a new shiny gadget is to play with it before reading the manual, stop and settle in for our latest “New-to-Market” post where we’ll explore what makes XT so unique and test whether this fund will truly help you live on the edge.

What helps XT stand out from the crowd of thematic funds is that the fund isn’t investing in one specific trend, say electric vehicles or privately-funded space flights.  Instead the funds benchmark, the Morningstar Exponential Technologies Index, utilizes nine different themes they feel offer investors exposure to the most likely drivers for future economic growth.  Think about the productivity revolution that was unleased by the advent of the personal computer and the exponential (had to get that in here somehow) earnings growth companies like Microsoft experienced.  And while networks/computer systems and big data are two of the theme’s the fund pursues, it also includes companies at the leading edge of breakthroughs in bioinformatics, 3D printing, nanotechnology, and alternative energy systems.  Morningstar ranks every stock currently covered by their analysts based on their exposure to each of the themes and then selects “leaders” in each field for inclusion in the benchmark with preference for inclusion given to stocks that score highly across multiple themes and discards any stocks with a market cap of less than $300 million or less than $2 million in average daily volume.

The net result is a portfolio of 200 equally weighted stocks offering exposure to some of the best known trend setters with another positive feature in that Morningstar has gone global in their search for best ideas, with the fund having only 66% of its positions in the U.S.  But before you open your wallet, consider the portfolio construction process and how it might put you at a disadvantage.  First, you’re only buying stocks covered by Morningstar’s analyst teams and how many big research firms cover small-cap stocks or recent IPO’s?  While there are a number of smaller names among their current positions (looking at you Portugal Telecom), the bulk of the equity exposure comes from giant and large cap names although the funds average market cap is close to $22.6 billion compared to $88.02 billion for the Technology Sector Select SPDR (XLK.)  So if you’re looking for newly-listed companies with a first mover advantage, this might not be the fund for you.  Another feature of sticking with established companies trying to exploit new technologies is that stocks you might not think of as on the ‘cutting edge’ will be in the portfolio.  For example, Portugal Telecom isn’t the only telecom stock on the list with the largest single telecom position being held by Mobile Telesystems ADS followed by T-Mobile.  In fact, telecom is the fourth largest sector weighting at slightly more than 10% of the portfolio!

And while you might be worried about how telecoms might drag on the performance, it certainly hasn’t held the fund back in its short life so far.  Down .62% since its inception on March 19th and slightly underperforming XLK and the S&P 500 (-.37% and -.44% respectively), the fund has showed the merits of a more balanced and equally weighted approach since the broader equity market began turning on April 28th.  While the fund is still down 1.58% since then, it compares favorably to the 2.64% loss of XLK and is only 18 bps worse than the broader market.  What’s been keeping the fund out of the worst of the action?  Partly those telecom positions where Mobile Telesystems is up 1.66% since the fund’s inception but searching out innovative companies across all sector classes has paid off with healthcare names making a strong contribution over the last few days.  Seattle Genetics (SGEN) beat analysts’ expectations  on rising revenue and is up over 6.27% in the last five days while fellow biotech stock BioMarin Pharmaceutical (BMRN) is doing its part for the cause by rising nearly 4% in that time frame.  Does that mean XT is just a stealth biotech fund?  XT is outperforming the iShares NASDAQ Biotechnology ETF (IBB) since the 28th and the idea of theme leaders is partly responsible.  The two funds share a nearly identical weighting towards smaller stocks like SGEN while XT avoids the heavily concentrated exposure in names like Celgene that has weighed down IBB.

So for those investors looking for a way to play global themes without wagering all their chips on a microcap name like Plug Power, the iShares Exponential Technologies ETF might be worth keeping on your radar.

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.

"Transitory"

Investors have quickly come to fear “transitory” as last Wednesday’s advanced GDP report showed a drastic slowdown in economic growth and was followed by the FOMC rate decision and press release that stated FOMC members see this weakness as transitory. Thursday’s weekly jobless claims report drove home the fear that rates could be going higher soon as the economy hurtles towards full employment which sent the market into a tailspin.  Yes rates might be going higher, but given the state of the economy, investors are wondering how shallow the rising rate cycle might be and Friday’s action may have softened the blow for equity investors but what about bond investors who saw the ten year yield jump over 10% last week?

From time-to-time, we like to reference work that we feel adds value to the current topic and to the investor’s decision process and therefore encourage you to check out our friends at The Credit Strategist at www.thecreditstrategist.com

2015 overall hasn’t been kind to the billions in new dollars that flowed into the iShares 20+ Year Treasury Bond ETF (TLT) last year as the promise of both tighter fiscal and monetary policy sent the dollar surging and bond yields plunging.  Beginning on April 1st, TLT has been rocked by the same uncertainty (and of course volatility) that has plagued the equity markets since mid-March, with the fund down 4.73% since then with the bulk of those losses coming just in the last week.  Even the more diverse and less interest rate sensitive iShares Core U.S. Aggregate Bond ETF (AGG) is down over .6%, offering little comfort to those seeking protection in traditional safe havens.  And while TLT saw only a minor asset outflow last week of approximately $246 million (4% of assets), the fund has seen a drop in assets of over 17% in the last three months!

So where have these prudent investors been putting capital to work?  The bulk has continued to flow to the usual suspects such as floating rates, TIPS and ultrashort duration but a few intrepid investors must be regular visitors to the ETF Global blog because money has begun to flow into some of the funds offering the most sensitivity to changes in the dollar.

The shifting outlook by the Fed has sent investors fleeing from the PowerShares DB US Dollar Bullish ETF (UUP) into anything offering unhedged currency exposure.  First, it was pure currency funds then emerging market funds offering pure country exposure to some of those markets hardest hit by the dollars meteoric rise last year.  Now investors seeking foreign currency exposure with potentially less volatility have those bond funds that saw the worst performance in 2015.  One little fund we talked about at the end of March, the Wisdom Tree Australia & New Zealand Debt Fund (AUNZ) has seen an 18% increase in assets over the last month thanks to its local currency exposure that helped propel the fund to 150 bps of outperformance over AGG since March 30th.

Among the early winners in the asset gathering race is the iShares Global ex USD High Yield Corporate Bond Fund (HYXU).  With the fund’s assets up nearly 5% in the last month, it’s not hard to see why the fund is up over 4.2% in the last month compared to a loss of nearly 1% for AGG. Some of that strong performance could simply be mean reversion; during the great dollar rally that began on July 1st and ended March 13th, HYXU was one of the biggest losers in the world bond arena, down over 20.6% in just nine and a half months.  Like all of the strongest bond fund performers over the last month, HYXU offers a substantial amount of unhedged Euro exposure (not to mention a heap of credit risk) but for those also looking for a more investment grade focus, there are other funds to watch.  The SPDR Barclays International Corporate Bond ETF (IBND) has a great emphasis on double and single A credit quality, but consequently has more dollar denominated debt reducing the potential boost from currency exposure.  Those investors who like to live a little closer to the edge might want to consider a fund that was down nearly as much during the dollar rally as HYXU despite its focus on ultrashort duration, the iShares 1-3 Year International Treasury Bond ETF (ISHG.)  With three quarters of the currency exposure in the Euro and Yen, this fund might not offer much of a coupon, but could provide that inverse dollar exposure for the more proactive bond investor’s portfolio.

Thank you for reading ETF Global Perspectives!