Feeling-the-Bern

Thursday’s speech by Janet Yellen holding out hope for a rate hike before the end of 2015 may have helped breathe life into bank stocks but it seems that no amount of medical intervention could have saved healthcare stocks.  Privately held Turing Pharmaceuticals might have sparked the political furor among democratic presidential candidates over drug prices when it raised the price of Daraprim by 5,000 percent, but it was their publicly traded peers who felt the pain with most major biotechnology and pharmaceutical companies down by double digits last week.  Beyond the headline, the sector has been under significant selling pressure since the start of July as investors used the on-going market weakness as the justification for profit taking and for the first time in a long time, ETFG’s list of top behavioral movers isn’t dominated by biotech names.  This week we look at our data to see whether a case can be made to support the bullish hopes for biotech names even amid a correction or whether the bears will prevail.

It’s hard to argue against the idea that the bears are firmly in control of biotech’s fate with the sector heavyweight, the iShares NASDAQ Biotechnology ETF (IBB) down nearly 22% since its peak on July 20^th and now up a mere 2.29% in 2015.  Price momentum is one of the two major factors in our behavioral scoring model and that steep sell-off on increasing volume helped push IBB off our list of top behavioral scorers after having spent most of the last three years as one of its key members.  IBB has seen a more than 22% drop in its behavioral score over the last two weeks as its short-term momentum score dropped Friday into its lowest quartile while even the long-term momentum ranking is now below its long-time average, a pattern repeated among all the larger biotech ETF’s like the SPDR Biotechnology ETF (XBI) and the Market Vectors Biotech ETF (BBH).

Underpinning that technical weakness is a fundamentalist viewpoint that depends on two key arguments.  The first is the idea of mean reversion or that biotech stocks were primed to fall after four strong years from 2011 to 2014 that saw IBB consistently outperform the broad market and deliver a cumulative return of 227% to the S&P 500’s 63.7%.  The second argument speaks more to emotions than logic and was exacerbated by the debate over Turing’s price hike.  The debate over the Affordable Care Act and subsequent court battles acted as a major depressant on P/E multiples in the healthcare sector for a number of years with the Health Care Select Sector SPDR (XLV) underperforming the S&P 500 in 2009 and 2010 despite the stable and improving earnings outlook following the Great Recession.

And while the bulls like to meet fear with fear (of missing out on big future gains), we’ll start the bullish case by going back to our Quant Report.  While IBB and the rest of the biotech funds have seen a serious momentum shift over the last several months, they still have a long way to go before they’ll find themselves at the bottom of the heap with the emerging market and energy funds.  Price momentum is only one of the factors that makes up the behavioral score; the others are sentiment indicators like short interest and implied volatility and while the biotech funds might have momentum scores in their lowest quartiles, they still have elevated levels of short-interest that could add more fuel to the fire of a future rally.  Our technician friends would be the first to tell you that with three largest biotech funds all within spitting distance of oversold territory based on their 14 day RSI scores, there’s the reasonable chance for an oversold bounce before too long which could turn into something greater thanks to those oversold conditions.  However, the bullish case has more to it than just a short-term bounce and in fact it rests on the notion that the recent sell-off, like a good bloodletting, has in fact been a positive development for investors.  Record high valuations among healthcare names has been a regular topic here at ETF Global and many of the biotech bulls will be sure to point out that even large-cap biotech names like Gilead (GILD) or Regeneron Pharmaceuticals (REGN) can boast of double digit EPS growth rates that strongly outpace that of the broader market.

Ultimately what makes these bull/bear discussions so challenging is that it’s easy to see validity in both arguments with the sinking suspicion that both sides might be proven right, it’s just a matter of when and for how long, which is why the only advice we can offer is to check your fund exposure to know what exactly you’re buying.  Consider CVS Health Corporation (CVS), a stock found in ample quantities in every consumer staples fund but which lagged the rest of the staples category since last July in tandem with the broader healthcare sector due to its fundamental relationship to the healthcare stocks.  Investors concerned about (or looking to add) exposure to healthcare names should check their portfolio carefully and make sure they have the right exposure to the right factors.

Thank you for reading ETF Global Perspectives!

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

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

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

New-to-Market SPYB

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.

For this edition of our “New-to-Market” series, we investigate the latest fund to offer exposure to share buybacks and the newest addition to State Street’s line-up of smart beta funds focused on shareholder yield, SPDR S&P 500 Buyback ETF (SPYB).  So join us while we learn more about the fund, it’s chief competitor and while from the outside the fund might just appear to be a “better mousetrap,” once you get under the hood, you discover it’s all together a different animal.

What makes SPYB’s quiet introduction so interesting is that the buyback sphere is dominated by the first fund to enter the space with the Powershares Buyback Achievers ETF (PKW) controlling the bulk of the assets.  It’s always hard to compete with an established fund.  Since its inception, SPYB and its larger rival have both underperformed the S&P 500, with SPYB down 8.4%, PKW down 6.66% to the market’s 5.8% loss. For most investment committees, that performance and a quick glance at a holdings report would seem to be all the information they’d need for a decision, but getting past the one sheet reveals two very different products.

Both funds are passively managed, so we begin by comparing their respective benchmarks which draw from very different universes. SPYB is built to track the performance of the S&P 500 Buyback Index, rebalanced (and reconstituted) quarterly, that tracks the 100 components of the S&P 500 with the highest buyback ratio for the trailing twelve months, measuring the amount of money spent on share repurchases in the prior four quarters divided by the total market capitalization at the start of the period.  There’s no specific target ratio or other portfolio constraint to consider, keeping it simple and focusing on the most liquid stocks helps keep the funds expense ratio to an attractive 35 bps.  PKW could be said to have the more elaborate strategy as the fund’s NASDAQ based-benchmark provides a much broader universe of stocks to choose from but unlike SPYB, which buys the 100 stocks with the highest buyback ratio, PKW uses a buyback threshold of 5% that potential investments must meet to be included in the portfolio while also holding a much larger number of positions, currently 208, which gives you two very different portfolios.

What truly sets these funds apart is their weighting systems where SPYB allocates to its 100 stocks using an equally weighted system that leads to the inclusion of smaller names (the smallest market cap included in the fund currently is just over $2.8 billion) and gives the fund more a mid-cap feel with an average market cap of $19 billion.  PKW uses the more familiar market cap weighting system that puts over 35% of the allocation into the top 10 holdings and brings the average market cap of the fund to more than $27 billion.  And yes, the two funds do share certain names but those different weighting systems lead to different portfolios.  A good example of how their different portfolio construction processes work is the current buyback king, Apple, which despite having one of the largest share buyback programs in the world was only included in PKW’s portfolio for the first time at the end of January after their record spending in 2014 helped push the stock above the 5% cutoff.  Under the rules governing SPYB’s portfolio, Apple would’ve been included after it first began its share repurchase program, but the fund’s equally weighted system would have given a much smaller 1% allocation to Apple compared to PKW’s 4.75%.  Considering Apple’s loss since the introduction of SPYB is 120 bps less than that of the broader market and that larger market cap weighting starts sounding more attractive.

While using an equally weighted system might sound like a minor evolution of PKW’s already successful strategy, the potential returns going forward between the two methodologies could be very different.  There’s been a pronounced trend of those S&P 500 components who didn’t buy back shares (Amazon, Netflix, Google) consistently outperforming those who did since March of 2014.  Turning again to the performance of PKW does offer some clues.  After strongly outperforming the S&P 500 from 2011 to the end of 2013 82% to the S&P 500 TR index’s 56.8%, the fund began to slightly lag the broader market in the first quarter of 2014 and since has delivered a more market like return from April 1^st 2014 to yesterdays close of 6.1% to the S&P 500 TR’s 8.45%.  To confirm suspicions, a back test of different strategies bundling companies who repurchased shares into different quartiles depending on their buyback yield, discovered that the weighting system used was one of the key differences between whether the strategy delivered positive and consistent alpha.  When share repurchasers were weighted equally rather than by market cap, they tended to outperform both the broader market and those companies that have yet to repurchase shares on a consistent basis over an extended period of time compared to a traditional market cap weighted portfolio.

Now if you’ve stuck with us for this long, you’ve clearly recognized the merit of a buyback strategy and are wondering where SPYB might fit within your broader portfolio strategy and while the idea of replacing your core SPY position with a relatively new fund might cause you to go pale, the fund does have a number of attributes that could make it a valuable supporting player in any portfolio.  Consider that the funds benchmark was built using a large and diversified equity index like the S&P 500 while retaining a relatively larger number of stocks in its portfolio and the equal weighting system that keeps individual positions from becoming too concentrated although the fund doesn’t have a system in place to keep sector weights in-line with the S&P.  As we mentioned before, what it does have is a quarterly rebalancing system that helps the fund stay on-top of changes in buyback plans while preventing individual positions from drifting too far from where they started, an all for 35 bps compared to the 64 bps charged by PKW. Considering the dearth of new investment opportunities for some of America’s largest corporations, 35 bps might prove be a small price to pay for a diversified portfolio of disciplined companies devoted to returning capital to their shareholders.

Thank you for reading ETF Global Perspectives!

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

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

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

Take the Money and Run

In 2014, investors would have greeted the news of easy monetary policy by the Fed by heaping praise on the venerable institution and sending equities to a new high.  Truly we’re living in a brave new world when instead of shouts of praise and thanksgiving, the FOMC announcement and it’s increasingly dovish dot plot were met by confusion over the Fed’s new global outlook.  Markets responded to the increasing uncertainty of Janet Yellen’s Fed by following the old mantra, “when in doubt, get your money out” and sending the S&P 500 down nearly 2% in the two days after the announcement.  While most market quarterbacks had predicted the Fed wouldn’t hike on Thursday, hardly anyone predicted the market’s response to the Fed’s dovishness.  Our ETFG Quant Report shows more than a few traders had already positioned themselves in the weeks before the announcement for more uncertainty at the highest levels by reversing course on two different asset classes most likely to benefit (or not) from the new regime.

No one benefited more from the possibility of higher rates than those bank stocks we first discussed last March as they looked forward more to a return to a normal interest rate policy after years of tightening their belts and getting by on razor thin net interest margins.  During the spring, the Financial Sector Select SPDR (XLF) and Vanguard Financials Index Fund (VFH) saw strong momentum than helped push up their overall quant scores while the big winners were those regional bank ETFs like the SPDR S&P Regional Banking ETF (KRE) whose average market capitalization of just $2.7 billion (compared to XLF’s $40 billion) reflected its exposure to those smaller banks likely to get the biggest boost from a rate hike.  None of these three funds made our list of biggest quant losers last week because the wind has been slipping from their sails since early August when investors first began to suspect a rate hike might not be forthcoming and the fallout has been extreme.  Measured simply on price momentum (our technical score component), XLF is the worst performing select sector fund and would make a list of 100 worst performing funds, with XFH and KRE close behind.  What keeps them off a list based on our total behavioral scoring process is their relatively high put/call and implied volatility, where VFH would be the lowest ranking fund with a behavioral score of 29.7 thanks to its much lower average market cap than XLF.  However the fund outperformed its larger rival last week thanks to a large REIT allocation, over 20% of its portfolio, that helped it outperformed XLF by over 100 bps.

And while REIT’s managed a to keep Friday’s loss to a negligible .35%, Friday’s big winners were gold mining stocks that ate up the increasingly dovish dot plot as a gift from heaven with the Market Vectors Gold Miners fund adding on another 1.54% on Friday to take its weekly gain to 9.5%.  While the more dovish dot plot is sure to make the front page of every gold bug newsletter, the strong reversal by the gold miners has been anything but sudden.  The miners have been a regular topic here at ETFG where as recently as July 20^th, after having been stuck in a downtrend channel for over two years, they finally broke below the lower boundary to all new lows and leaving many of the gold mining funds to occupy the bottom rungs of our behavioral reports.  Like the bank stocks however, GDX doesn’t appear on our list of top weekly movers as the fund has been steadily gaining momentum since the global volatility picked up shortly after our article.  GDX made strong gains against the broader equity market in the first two weeks of August before slowly giving up the ground it won back over the rest of August and early September as the market mayhem in China began to subside.  Despite that, GDX’s overall quant score continued to steadily improve and the fund now ranks as #11 although that high position has more to do with the fundamental and quality scores rather than pure momentum.  Even last week’s stunning reversal is just a drop in the bucket compared to that prior history that once saw GDX become one of the largest ETFs.

While the post-Fed sell-off may feel a lot like “the last shall be first,”  at least some small part of that shifting dynamic is explained by the lack of any major news releases on Friday to provide direction to the market which the coming week might help correct.  Leading up to Friday’s GDP print, we have the preliminary Chinese PMI report on Tuesday in addition to Durable Goods and Chicago Fed activity index on Thursday.  The real excitement will be a speech by Chairwoman Yellen on Thursday afternoon where she’s sure to be put under a microscope about the recent meetings.  With the president of the SF Fed already talking about the “close decision” and saying a 2015 rate hike is still appropriate, volatility will be the order for another week.

Thank you for reading ETF Global Perspectives!

______________________________________________________________

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

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

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

Due to high demand, registration for the Portfolio Challenge extended to Sunday, September 20th at 11:59 p.m. ET

Contest registration for the Fall 2015 ETF Global® Portfolio Challenge has been extended, and will close on Sunday, September 20^th at 11:59 p.m. ET.

Spanning three continents, this inaugural investment challenge has quickly generated a global appeal, attracting hundreds of contestants (both graduate and undergraduate) from a diverse array of academic institutions.

Additionally, the ETF Global® Portfolio Challenge has drawn several notable sponsors, including Life Stage Investing (www.lifestageinvesting.com) and The Expert Series, who hosts the renowned ETP Forum (www.etpforum.org)

What: The ETF Global Portfolio Challenge is a hands-on semester long challenge offering student investors the opportunity to construct a virtual portfolio utilizing four-to-ten ETFs with an initial balance of $100,000. Participants compete on the investment performance of their respective virtual portfolio.

Who: While anyone is welcome to participate, to be eligible for the prizes offered in the ETF Global® Portfolio Challenge you must be an undergraduate or graduate student enrolled in an accredited university or college.  Russell Minetti, the contest program director at ETF Global, notes that roughly 74 percent of participants are undergraduate students, followed by 16 percent graduate students and 10 non-students.

Why: The ETF Global Portfolio Challenge offers students a unique, immersive opportunity to learn about investing in ETFs and network with mentors and potential employers from top financial services firms.

The top five investors will be awarded an array of cool prizes, including on-line recognition, in-person recognition, eligibility for micro-internships with top-players in financial services, and a private lunch with Wall Street mentors.

Where: For more information regarding registration, eligibility, timeline and prizes, please check out the ETF Global Portfolio Challenge website and follow along with @ETF_Global and the hashtag #ETFWizards

When: Registration ends on Sunday, September 20th. The performance period begins on Monday, September 21 and ends on Monday, November 30. Winners will be announced the week of December 2.

In addition to this semester’s inaugural competition, the second edition of the ETF Portfolio Challenge will be taking place at the beginning of the spring semester, with enrollment opening in October. ETF Global is also currently working on a version of the challenge directed towards professionals. We encourage all students to avail themselves of this exciting opportunity to sharpen their investment skills and position themselves for a career in financial services!

Who will emerge from this competition on top?

Calm Before the Storm

Portfolio strategists released a collective sigh of relief last week as the lack of market mayhem in China and the Fed’s quiet period before the next FOMC meeting helped global equity markets break the “all or nothing” pattern that’s been so dominant over the last several months.  As we often say at ETF Global, when calm is restored, the last shall be first and in this case the results were almost predictable with some of the most beaten down sectors finally showing signs of life.  A nearly 11% rally by the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR) was nothing to sneeze at but we hope you enjoyed it while it lasted because that sense of calm is sure to be shattered later this week when Janet Yellen faces the media on Wednesday afternoon. Before that happens, we’re turning back to our ETFG Quant report to find out where the action was strongest and who could stand to benefit the most if the Fed does or doesn’t hike this week.

Traders are keeping a close eye on the U.S. dollar in the run-up to the next announcement by the FOMC and while macro titans like Mohamed El-Erian say it’s a toss-up, you certainly couldn’t tell by looking at the Power Shares DB US Dollar Index Bullish Fund (UUP) which dropped nearly 1.2% last week and has seen over $200 million in assets leave the fund in the last month.  And if the dollar is dropping, the Euro must be rising and while the CurrencyShares Euro Trust (FXE) was up 1.75%, the biggest winners last week were unhedged European equity funds with the iShares MSCI EMU Index (EZU) and the Vanguard FTSE Europe ETF (VGK) both making our short list for strongest weekly behavioral score gains.  In terms of momentum, it’s been a roller coaster year for both funds with EZU’s short-term momentum in its lowest decile within the last two weeks as overseas investors fled home seeking safety and helped stabilize the dollar, but the negative economic data points released on Thursday and Friday helped knock uncle Buck’s legs out from under him and EZU and VGK were there to take advantage of it with their behavioral scores surging 81% and 65% respectively.  But they weren’t the only funds hog piling on the dollar as a number of country specific funds pushed their way back onto our top behavioral funds list with one frequent visitor, the iShares MSCI Italy Capped ETF (EWI), reappearing at #15.

Strategists got a further reprieve as foreign stocks weren’t the only ones to stage a comeback last week with the performance spread between the best and worst performing domestic sectors (technology and not surprisingly energy stocks) reaching 361 bps last week although even that fails to tell the full story.  While the Energy Sector Select SPDR may have been down .66% last week, the fallout from Goldman Sachs latest missive lowering their expectations for crude and natural gas prices was severe.  Among the worst hit was the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) which ended the week down 1.96% as Goldman speculated in its note that the financial woes from cratering energy prices could spread to older and more financial established operators rather than being limited to their younger and more heavily levered counterparts with higher production costs.  But the worst pain was felt by MLP funds as investors fled en masse.  See the contrast in the performance of the largest MLP ETF, the Alerian MLP fund (AMLP), which ended the week down 2.94% with the another old favorite that found favor during the Fed’s quiet period, the iShares Nasdaq Biotechnology ETF (IBB), that ended the week up 5.23%, a spread of over 800 bps in one week!

The life of the strategist isn’t an easy one, always combing through data looking for trends and patterns, wondering if whatever relationship you find will hold true in the future which is one reason why we’re excited to see what happens when the Fed does hike rates, whether this month or another.  The lowest rungs of our behavioral models are dominated by funds hit hardest by the anticipated fallout from an eventual rate hike, as we mentioned last week funds whose names contain the words “global” or “emerging” tend to predominate.  But what will happen when the Fed does hike?  The Fed has one surprising group advocating for a hike, emerging market central bankers who argue that continuing to do nothing is worse than a hike itself.  According to a September 9^th article in the Financial Times (“Emerging markets call on Fed to lift rates and end uncertainty”), central bank governors in Indonesia, Peru and India all feel that the sooner that Fed acts, the sooner certainty and direction can be restored to the market.

Thank you for reading ETF Global Perspectives!

_______________________________________________________________

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

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

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

ETF Portfolio Challenge Update

Contest registration ends this Friday, September 18^th and we encourage all undergrad and graduate college students to sign up at www.etfportfoliochallenge.com before it’s too late!

Our inaugural investment challenge has already proven to have a strong national and global appeal attracting a diverse array of students and academic institutions across 3 continents.  Since our last update, we are pleased to welcome students from these 20 new schools:

·         University of Virginia

·         State University of New York at Geneseo

·         University of Toledo

·         St. John’s University

·         Manhattan College

·         University of Pittsburgh

·         University of Wollongong (Australia)

·         University of St. Andrews (Scotland)

·         Fairfield University

·         University of Paris (France)

·         Coastal Carolina University

·         Stevens Institute of Technology

·         Central Michigan University

·         University of New Mexico

·         North Carolina A&T State University

·         University of the Pacific

·         University of Washington

·         Duquesne University

·         California State Polytechnic University, Pomona

·         Duke University

Again, registration ends this Friday, September 18^th and we encourage all students to sign up at www.etfportfoliochallenge.com

Thank you for reading ETF Global Perspectives!

Soaring to New Heights

Friday’s Jobs Report, like modern art, was subject to much interpretation with the fall in the unemployment rate to 5.1% contrasting sharply with the much lower than anticipated growth in private payrolls.  And while there might have been something for doves and hawks alike to love in the report, it capped an already disappointing week of economic data that failed to shift the market out of its well-established rut; up one week, and then down again the next.  It may be nothing but doom and gloom in the financial media with the S&P 500 unable to manage two up-weeks in a row since the beginning of May, but some pockets of strength have recently emerged in strange places as investors reorient themselves - perhaps opening new opportunities to brave stock pickers.

The Jobs Report may not have provided any support to the utilities and REIT sectors that underperformed the broader market for a second straight week but one new fund did manage to take-off even in those trying circumstances, the recently launched U.S. Global Jets (JETS) ETF which has nearly 85% of its portfolio in those high flying (pun intended) airline stocks that have pulled away from the broader equity market.  Airlines have historically been among the least profitable sectors of the economy but crashing oil prices have helped drastically reduced the cost of operations while the slight increase in hourly earnings might give a boost to the slow but steady increase in real disposable personal incomes that has already been recorded in 2015.  JETS is a concentrated portfolio of 34 names and part-of last week’s 1.66% gain was due to the strong performance of two names, American Airlines (AAL) and  JetBlue (JBLU), that make up 11.6% and 4.3% of the portfolio respectively as increases in passenger traffic combined with lower fuel expenses to create strong lift for the stocks.  Our technician friends are likely to point out that with JBLU less than 4% away from its 52 week high compared to the S&P 500’s 10%, gravity might soon take hold of the situation.

Airline stocks weren’t the only winners last week as back here on the ground, the prospect of higher consumer incomes help bring investors back to the table to sample select restaurant and gaming stocks.  The biggest winner for the week was the adult Chuck E Cheese, Dave & Busters Entertainment (PLAY), which experienced a 6.6% surge as investors continued to look at the 17.6% drop the stock experienced in the first half of August as a buying opportunity after Piper Jaffray reaffirmed its $55 price target.  With a market cap of just $1.5 billion, PLAY isn’t a major component of many ETFs, but one fund where it is prominently feature is the PowerShares Dynamic Leisure and Entertainment Portfolio (PEJ) which in addition to having a 2.8% allocation to the stock also has nearly 32% allocated to airlines giving it a sector weighting to the greater than transportation funds like the iShares DJ Transportation Average ETF (IYT) or even the SPDR S&P Transportation ETF (XTN).  While airlines and restaurants helped lift PEJ up .71% last week, there’s more to the fund with one of the biggest gainers in its portfolio last week being Isle of Capri Casino’s (ISLE) whose strong quarterly earnings release help push the stock up 9.6% last week to take the YTD gain to 130%.

Thanks to that powerhouse lineup that includes some of last week’s biggest winners, PEJ has quickly climbed into the ETFG Behavioral Top 25 list although the fund’s overall ETFG Quant score changed only slightly for the week due as the rising price reduced its fundamental attraction.  IYT is the only one other airline heavy fund makes the top 25 with much of the list being dominated by biotech and other healthcare fund with the only other major trend being a strong domestic focus.  For those investors who believe that the run-up to the next FOMC meeting is an opportunity for the board members to talk down the possibility of a rate hike and looking for the most oversold funds hoping for a quick bounce should rate hikes not materialize; you might want to readjust the ETFG Quant report to examine the funds with the lowest behavioral scores and then re-rank the report to just study price momentum.  Emerging market exposure is the common characteristic of the worst performers with the lowest of the low being the WisdomTree Emerging Markets Consumer Growth Fund (EMCG), a diversified fund hit hard by a large allocation to China.  With the outflows coming from the EM sphere so strong even the Fed might not be able to stop them, investors might be better off keeping their dollars closer to home and enjoying a strong drink at Dave & Buster’s instead.

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