Is Boring the New Sexy?

It was another 2016 first for equity markets as another weak Friday showing pushed the top exchanges lower for a third consecutive week that has many wondering if “sell-in-May” is on this year.  The bulls are quick to point out that the S&P 500 was only off .5% for the week and is still within spitting distance of recent highs (not to mention that earnings have nowhere to go but up from here right?).  Yet even the most ardent believer will experience a moment of doubt when they consider that Friday’s loss was widespread and tipped the S&P back below its 50 day moving average while long-term Treasury yields head back to their early April lows.  Normally, this is the part in the conversation when the typical prognosticator would encourage investors to look for safety and income in Consumer Staples but as our ETFG Quant report shows, this “safe bet” could be anything but.

The genesis of this week’s piece was the appearance of the PowerShares High Yield Equity Dividend Achievers Portfolio (PEY) in our list of top behavioral movers as its score rose almost 77% last week even though the fund underperformed the broader market on Friday.  In fact, most of the big gain came on Friday when the fund rose 55% despite that relatively weak showing and that’s what has us wondering how much longer the run-up in defensive names can go.  Last week we talked about how the high-flying “defensive” sectors were dominating our list of behavioral top scorers and that eventually they may become the biggest losers when sentiment changes or fundamentals again become important, but what we didn’t discuss was how they get on that list in the first place.  There’s no denying that funds with an income or low volatility focus are expensive right now; try re-orienting our fund universe based on their fundamental scores and you’ll see nearly every Consumer Staples, Low Volatility and Dividend Income fund we track is trading close to their all-time high multiples but what happens when investors begin looking for a better way to make money than collecting dividends?

Remember that our behavioral scores are a combination of price momentum and sentiment scores derived from factors like high short interest and implied volatility and as you can see from the ETFG Quant Report, it’s those sentiment scores that are keeping Consumer Staples and Low Volatility funds at the top of our behavioral lists and specifically short interest.  This makes sense as funds like the Consumer Staples Select SPDR (XLP) or the PowerShares S&P 500 Low Volatility Portfolio (SPLV) which had a great second half of 2015 had begun to see their momentum wane in February as investors decided that a bear market wasn’t imminent and instead looked for easy capital gains in beaten up industrials and energy stocks while trading at peak prices made them a hard sell for clients looking safety who instead turned to utilities.  The rising tide in equities helped lift these funds higher although they lagged the broader markets advance while weaker earnings made them even more vulnerable to short sellers who have been gearing up for the next pullback.  Try reordering the list based on short-interest and you’ll see that SPLV, XLP and now tiny PEY have their short-interest trading close to their highest levels while there’s been a clear drop off between their short-term and longer-term momentum scores.

And which momentum scores are through the roof right now?  Utilities funds dominate that list with the Fidelity MSCI Utilities Index ETF (FUTY) at #7 followed by the Utilities Sector Select SPDR at #9 and the Guggenheim S&P 500 Equal Weight Utilities ETF (RYU) at #10 respectively and for many, utilities are a slam dunk despite their weak earnings growth and dim prospects.  One major factor behind Consumer Staples recent fall from grace is that the financial media has become obsessed with the idea behind “disruption” or that when the economic outlook is so dim, it’s time to pay up for “growth” prospects and as an example, witness the spread between traditional retailer Wal-Mart, down over 4% last week while on-line competitor Amazon was up 5.3%.  XLP is dominated by “traditional” names facing issues whether it’s sugar drinks, big box stores or just good old-fashioned cigarettes, the space has none of the sexy names that seem to be the only ones capable of capturing investor attention.  And while no one will call utilities “sexy”, they do operate in heavily regulated markets and don’t have to worry about new competitors disrupting their business model.  In a volatile market like this one, that might be the sexiest thing going right now.

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.

Fall 2016 ETF Global Portfolio Challenge - Registration Opens Monday

Registration for the Fall 2016 ETF Global Portfolio Challenge opens this Monday, May 16^th.

Join to learn about investing and to compete for a myriad of exciting prizes!

What: The ETF Global Portfolio Challenge is a semester-long challenge offering college students 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 portfolios.

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 a university or college.

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 winners are awarded an array of cool prizes, including recognition at the ETP Forum during the portfolio challenge Awards Ceremony and networking opportunities with top-players in financial services.

During their experience at the ETP Forum, our inaugural Fall 2015 contest winners were interviewed and featured on Bloomberg's "Bloomberg:  ETF Report" and given a private tour on the floor of the New York Stock Exchange.  In addition, two of our winners were offered jobs at the ETP Forum!

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 Friday, September 16^th. The performance period begins on Monday, September 19th and ends on Friday, December 2^nd.  Winners will be announced on Monday, May 5^th.

Leaning Into the Wind

If there’s one thing that’s clear (or maybe not) from last Friday’s disappointing (or secretly positive) jobs Report is that America is back (or doomed!)  Confused?  Well then, you’re in good company as money managers appear evenly split into two opposing camps; the first wonders whether April’s Employment report signified that the economy is close to full employment that further big gains are unlikely indicating that rates should begin to rise while the second believes the dip in participation and flat lining earnings growth indicates that it’s too soon for the Fed to take off the training wheels.  After sorting for clues to which side is strong in our ETFG Quant Movers and Top Behavioral Funds Reports, the one thing that actually is clear to us is that someone is setting themselves up for serious disappointment.

It’s easy to lose sight of the bigger picture when you’re stuck in the minutiae of earnings seasons or debating what the Fed should or shouldn’t do, but while most investors were busy reading headlines they missed out on a major sector rotation that’s been underway for several weeks.  Friday’s late rally may have helped stocks end Friday on a positive note but the S&P 500 has now closed down for two consecutive weeks, something that hasn’t happened since the rally started in February, as a strong showing by materials and tech stocks couldn’t undo the damage inflicted by healthcare stocks that still can’t find their footing.  But while healthcare stocks and high yield bond funds are licking their wounds, gold mining funds were off at the bar celebrating as the Market Vectors Gold Miners Fund (GDX) rose over 3.9% on the day while it’s junior miners counterpart, GDXJ, was up almost 5.5%.  Gold bugs will tell you that the miners have nowhere to go but up from here and while that may prove true, that they desperately needed that win to prevent an embarrassing momentum reversal.

While we’ve been talking about Apple and Tesla, defensive favorites like utilities, consumer staples but especially the gold miners have been quietly taking over the top spots in our ETFG Behavioral Top Scorers Report as the great 2016 rally looks increasingly overdone.  The S&P 500 might be off just 1.65% in the last two weeks but there’s been a substantial decline in the percentage of stocks trading above their 50 day moving average as investors decide to sell in May and go away or just rotate back into old favorites which is one reason why the Utilities and Consumer Staples Select Sector SPDR Funds (XLU and XLP) are up 3.1% and 2.5% respectively while GDX is up an astounding 11.2%!  In fact, visitors to our ETFG Behavioral Top 50 will note that 14 of the funds on that list are in one of those three categories with XLU and XLP holding down the second and third spots respectively (behind a junior gold miner of course) with even more funds focused on low volatility or high dividend payers helping further boost the presence of defensive names.  Of course, the only problem with being on top of the list is that it never lasts.

Now we’re not talking about karma or the wheel of fortune, just that defensive funds have had the wind at their back and are now richly priced and investors can be a fickle lot, never more so than in late-stage bull markets.  Consider that all three of those categories had a spectacular start to 2016 after the Fed’s first rate hike only to see their momentum slow when the broader market began to find its footing in February when investors realized that the end was not indeed nigh.  By then the “defensives” had pushed their way into overbought territory and needed time to cool off with XLU and XLP both experiencing drawdowns that were saved by bouncing of the fifty day moving average but neither fund has gotten back to their 2016 high.

It’s a different story for GDX who kissed the fifty-day goodbye in February and hasn’t looked back although its most recent move higher that began in April is far less steep than it was at the start of the year.  And while they may sit at the top of the Behavioral Charts, the “defensives” performance was generally spotty last week with the exception of XLP which logged a series of steady advances while XLU and GDX have been experiencing more volatility.  In fact, before Friday’s rally GDX was down almost 6.4% while a big rally after Wednesday’s ADP report helped XLU close higher than the market for the week although the spread between the two was much narrower than the prior week’s.

Even Friday’s rally that helped the miners narrow the gap was a bit of a headscratcher as the more bullish side of the market decided to take a more positive view of the big “miss” as a sign of potentially reaching “full employment” and a signal that traders are underestimating the possibility of further rate hikes in 2016.  Those comments gave a boost to the PowerShares DB US Dollar Index Bullish Fund (UUP) which despite breaking a prior support level several weeks ago has been slowing its descent and trying to find a base.  But those looking for an equity sector that could stand to benefit the most from shifting expectations should take another look at financials and bank stocks whose behavioral scores have been plummeting towards rock bottom as investors gave up any hope for another rate hike in 2016.

The reigning sector heavyweight remains the Financial Select Sector SPDR Fund (XLF) which not only made our list of biggest behavioral score losers for last week but also has the notoriety of having one of the lowest ranked behavioral scores of any product in our database.  Not far behind on that list are two bank stock funds we’ve often discussed in these pages, the SPDR S&P Bank ETF (KBE) and Regional Bank ETF (KRE) both of which, along with XLF, saw a .4% move on Friday as investors cautiously eyed up a sector they had left for dead just weeks before.  Only time will tell which side will be proven right, but for now it certainly does seem those adventurous bullish investors are leaning into the wind.

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.

Swimming Naked?

It’s that time of year when investors descend on Nebraska to honor the “Sage of Omaha” and display a reverence usually reserved for religious figures or the Green Bay Packers, but the timing of Berkshire Hathaway’s annual meeting amidst the worst earnings season since 2009 is pure gold both to Buffet devotees and writers.  Buffet has a lot of traits that “modern” money managers despise like avoiding tech stocks and hoarding cash not mention his penchant for pithy quotes. While it may not apply to them, we think ETF investors can learn a lot from this old gem, “Only when the tide goes out do you discover who's been swimming naked.” The fallout from Apple’s big miss continues to rattle tech funds, especially those with market-cap weighted allocations and while you will find just one of those on our weekly list of biggest quant movers, Apple and its outsized impact on the sector means that it could be a long-time before tech stocks find their mojo help to push the markets higher.

Has anyone has ever backtested an indicator that measures market sentiment by the number of articles calling for Warren Buffet to “enhance” shareholder value through dividends and buybacks?  Not that it really matters as the debacle surrounding Apple’s latest earnings release makes it very clear, it’ll be Buffet who ultimately winds up having the last laugh.  Apple has had a volatile run since the company announced it was resuming its dividends and starting a new buyback policy way back in March of 2012.  Since April 1^st of that year, it’s up a mere 18% compared to a 47% return for the S&P 500 and a nearly 80% return for Berkshire Hathaway.  Obviously, we cherry-picked that example and growth investors will line-up to point out that Apple’s stock is up an astounding 9,787% since January 1^st, 2003 while Berkshire is up a mere 200% but that extreme performance which coincides with the inception of many of today’s most popular technology ETFs is weighing heavily on their performance in 2016.

The simple reason why is that most technology funds employ the same market capitalization-weighted systems which have been the mainstay of broader equity indices for decades but when used with a relatively more limited universe of stocks to choose (at least compared to a broader market like the S&P 500) allows a strong long-term outperformer to drastically outweigh the rest of a broader portfolio. At the end of Q1 2015, Apple had a market cap of over $724 billion, around 4% of the S&P 500 and more than Exxon and Berkshire put together!  Only a handful of companies have ever been large enough to make up 4% of the market and their subsequent performance tends to be fairly depressing but tf course no one really cared that such a “sure thing” was now such a significant part of the S&P 500 that analyst’s had to present earnings growth figures both normally and “ex-Apple!” But some investors were paying attention and remembered that it’s impossible to post double digit growth figures for infinity as the stock only managed to tread water after its February 2015 peak and is now down over 26% compared to a 2% loss for the S&P 500 and a 16.8% gain for the #2 holding in most tech funds, Microsoft.

Even after that mighty sell-off Apple is still the largest single position in the Technology Sector Select Fund (XLK) with an allocation of 12.92% while the iShares Technology Sector Fund (IYW) has a 15.99% position and the Vanguard Information Technology Fund (VGT) has nearly 14% in Apple.  In fact, as a sign of how far the stock has fallen, way back in February of 2012 XLK had a 16% allocation to Apple while IYW was over 18% while it still makes up just under 3% of the S&P 500 to retain the largest single allocation although another few weeks of this and Exxon might take back its title.  Not surprisingly, charts of tech sector outperformance relative to the broader market depend heavily on whether or not Apple was advancing until late 2015 when strong showings by Microsoft and other names helped reduce Apple’s weighting in most funds.

So now that the tide, which in this example is Apple if that still isn’t apparent, has receded, we have the chance to pick through the debris left behind to find out which tech funds are still in favor and the short answer is “not many.”  The party is definitely over at least from the perspective of fund flows where most of the larger funds have seen a substantial drop in new assets with the exception of XLK with a $475 million inflow over the last month although we should also note a substantial increase in its short interest ratio as its more than 20% allocation to Apple and Google left long investors primed for disappointment.  But even a rising short interest ratio wasn’t enough to stem the tide of weakening momentum that has pushed XLK’s behavioral score from over 70 on April 7^th to just under 50 last Friday although XLK has a long way to go before hitting rock bottom.  That spot is reserved for VGT whose overall ETFG behavioral score has collapsed over 48% last week which brought the fund into a hypothetical list of 100 LOWEST ranked behavioral funds, something almost inconceivable for an over $8 billion fund.

But the real genius of Buffet’s quotes is their ability to capture timeless truths and there’s nothing as timeless as playing a game of “chase the leaders” as investors rush to move their capital out of Apple to someone who can justify their earnings multiples, like Facebook and Amazon.  Amazon is typically not included in tech funds with one notable exception, the First Trust Dow Jones Internet Index Fund (FDN) which not only has more than 10% in both stocks but also underweights Google relative to other tech funds and has no Apple exposure of any kind.  The net result was the fund managed to close in the green last week with a .14% return while simultaneously being the only tech fund to make our ETFG Behavioral Top 100 list.  Buyers should be aware that FDN is even more concentrated than XLK or IYW with just 42 positions versus 74 for XLK and 140 for IYW.

Finally, investors need to ask themselves where does Apple go from here?  While earnings and revenue disappointed, Apple has pulled back to support at $93 and now sports a P/E multiple below ten while FB’s is over 91 and Amazon’s is still a mind boggling 531.  Then again, investors aren’t likely to be in a forgiving mood after such a strong advance over the last decade and thanks to those market-cap weighting systems, most tech funds are like in for a lot more pain before this is over.

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.