Final February Swings

Monday, February 26, 2018 - Through political turmoil, more fallout with the Russian interference of the Presidential election and continued grieving over the horrific mass shooting in Florida, markets still found a way to end Friday with a rally as investors poured money back into stocks after a slow start to the shortened work week. Major indices finished up for the week thanks to a 1.4% gain for the Dow Jones Industrial Average, a 1.6% gain in the S&P 500 and a 1.8% gain in the tech heavy Nasdaq Composite on Friday.

Stock and bonds have been going through a period of radical swings in February as investors are starting to worry about the uptick of inflation and the consequential rise in interest rates by the Federal Reserve. Some fear that the increase in rates can come as early as next month’s meeting which in turn has triggered redemptions throughout some of the major bond ETFs.

ETFG Fund Flow Summary - The SPDR Barclays High Yield Bond ETF (JNK) and iShares iBoxx Investment Grade Corporate Bond ETF (LQD) have suffered from major redemptions MTD in February both losing over $2.5B in AUM, according to the ETFG Fund Flow Summary. That net outflow makes up for almost 20% of JNK’s AUM which stands at a little over $11B and over 6% of LQD’s AUM which sits at about $36B.

Outflows haven’t only hit the bond ETFs this month. ETFs as a whole are actually on track for one of their worst months in recent years with net outflows already over $25B worth of AUM just in equity based products. The largest percent of that outflow comes from State Street’s S&P 500 ETF (SPY) which has lost over $19B of its AUM in February - this happening while the index is down just about 75 points for the month.

ETFG Quant Movers - In the ETFG Quant movers we saw non-US based ETFs take some largest hits to their overall scores with the iShares MSCI EAFE Small-Cap ETF (SCZ), SPDR S&P Emerging Markets Dividend (EDIV), and iShares Edge MSCI Min Vol Europe ETF (EUMV) losing 21.27%, 16.23% and 16.20% to their overall quant scores respectively.

The winners in our Quant model covered both the Preferred and Utilities sectors of the markets with PowerShares Preferred Portfolio ETF (PGX), John Hancock Multifactor Utilities ETF (JHMU) and the PowerShares S&P Small-Cap Utilities Portfolio (PSCU) seeing the largest % gain to their scores adding 32.05%, 28.89% and 17.25% to their overall grades respectively.

It will be interesting to watch how markets continue to play out over the next month if investors are guessing right and there is a rate increase in the near future. That along with the continued panic around government and gun control might cause the VIX to spike like it did earlier in the month but then again, the markets have seen to be quite resilient over this long running bull market.

Thanks 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: PPLC

Friday, February 23, 2018 - 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!

When we first began our “New-to-Market” series, it was with the intention of showcasing recently introduced funds from smaller sponsors that might have otherwise struggled to stand out in a crowded field. With 275 new funds coming to market in 2017 and 60 so far in 2018, the field has become very crowded indeed. Even new funds from the major players like Blackrock, State Street or Vanguard, can easily be overlooked. This why for our latest edition, we have decided to cast our eye backwards to a series of funds first launched in 2015 that have proven to be strong performers even without the complicated and tortured strategies that predominate today’s market. Let's take a deeper dive into the recently relaunched and expanded Portfolio+ series of “lightly levered’ funds where we attempt to answer the question of whether it’s time to start taking levered funds seriously.

Now might seem an odd time to be talking about levered funds; we’re just weeks removed from the first substantial correction in years which has even the most diehard bulls feeling a little skittish, but the truth is that Direxion, a leader in providing levered funds and the parent of Portfolio+, has had some proving to do about the practical application of its “lightly levered” series. Not that the concept of levered funds is anything new to ETP investors; the first levered fund was introduced way back in 2006 after three years of review by the SEC and today our ETFG Models now track more than 200 levered funds with over $43 billion in assets. While that might sound impressive, it also amounts to less than 2% of the total assets held in ETPs. Their failure to gain market share during one of the strongest bull-markets of all time stems from the fact that while the basic concept of a levered fund is immediately understandable, even the most sophisticated investors often have difficulty with the practical application.

Enter Portfolio+ with its suite of six “lightly levered” funds that offer 1.25x leverage to a wide range of the most common investment benchmarks including emerging markets, developed international ex. U.S and the Barclays U.S. Agg with two funds that can offer a three-year track record, the Portfolio+ S&P 500 ETF (PPLC) and the Portfolio+ S&P Small Cap ETF (PPSC).

First launched in 2015 under the Direxion label, the series can likely trace its genesis from the realization that while levered funds have earned a mixed reputation, the core concept behind them is rooted in the same basic investment principles that underlie the entire market structure including the low-cost, passive investments products that are increasingly dominating investor portfolios. Anyone who survived a first-year investment class is familiar with the capital market line and the concept that the market portfolio is the most efficient one (maximum return for the amount of risk) and that the only real dilemma facing investors is to determine their optimum exposure to the market and adjust accordingly via beta.

While that may have been a radical idea in the 1950s, the entire investment industry since then has been rebuilt around the idea that any investor is unlikely to outperform the market over an extended period of time. So if you can’t beat them, join them by investing passively and only paying pennies on each invested dollar. Passive investment products now control more than one-third of all investment assets in the United States and while levered funds have gotten a bad reputation, some are still passive products, built around the same efficient market hypothesis offering exposure to the same benchmarks that dominate most investor portfolios, just at an “enhanced” level. In fact, when the series was first launched they were often referred to as “enhanced beta” products in order to tackle the biggest problem holding back levered funds, namely marketing.

Until now, levered funds were designed as a tool for traders, not long-term investors. Although many might have thought they were guaranteed twice the return of the index for as long as they hold it, thanks to levered funds following the standard ETP protocol of combining investment strategy and benchmark. Here, typically a “2x” or “levered” or “ultra”, followed by a well-known index like the S&P 500. Instead, thanks to the process by which the levered fund must rebalance itself to adjust its index exposure to maintain a constant leverage ratio between the fund and the benchmark results in path dependency, or that an investor’s return is dependent on the path of the benchmark after they bought it. Someone who, for two consecutive weeks, bought a 2x S&P 500 fund on Monday and sold it on Friday could have two very different weekly returns even if the S&P 500 was flat overall depending on the direction the market traded each day and its overall volatility. This is why all levered fund literature comes with warning labels on holding periods and making it no surprise that investors looking to juice their portfolio returns preferred high beta and momentum funds to levered products.

Portfolio+ intends to transform levered funds from being strictly a trader’s tool to a core holding by using only a modest amount of leverage while retaining the underlying exposure to the most common investment benchmarks. Like their more aggressive kin, the 1.25x funds still feature a daily rebalancing to maintain the proper leverage ratio meaning they still have some degree of path dependency but the lower leverage ratio should reduce the impact on portfolio returns, making the fund potentially more suitable for investors with a timeframe longer than one day. And if you find the notion of a levered fund as a core holding somewhat laughable, ask yourself if some Financial Advisors might not already be doing something similar with smart beta funds.

First introduced in 2013, smart beta funds have quickly have grown to be considered an indispensable tool for Financial Advisors. Investment professionals often pair a smart beta fund with a passive benchmark replication in an effort to enhance returns, either by raising the overall portfolio beta or by seeking a different beta source all-together.  It seems that with over 1,000 smart beta funds and $1 trillion in assets, investors are clearly open to the idea of pairing funds to build a better beta. The question is whether they’re buying smart beta when they really want enhanced beta offering more of what they already own.

Two of the more common arguments in favor of enhanced beta begin with the fact that even while Advisors are picking passive strategic beta funds, they are still making an “active” decision to attempt to outperform the market.  This requires regular monitoring and often replacement as investment styles, or factors, come in-and-out of favor not unlike (or perhaps because of) traditional sector rotation and thus defeats the purpose of passive investing. Secondly, even with path dependency, levered funds apply a relatively straightforward system to a well-established benchmark.  A 2x levered S&P 500 fund should, on a day-to-day basis, produce twice the return of the S&P 500, whereas even with a “high beta” fund, the potential returns are entirely dependent on the underlying holdings.

Case in point is the largest fund in the Portfolio+ lineup, the Portfolio+ S&P 500 Fund (PPLC), which in the past was often compared to the PowerShares S&P 500 High Beta Portfolio (SPHB.) Both funds are linked to the S&P 500 and like PPLC, the PowerShares fund follows a straightforward strategy that every quarter selects the one hundred S&P 500 components with the highest beta over the past year and weights them by beta although without an explicit beta target for the overall portfolio like PPLC. What that can get you is often highly concentrated exposure to one sector well beyond its weighting in the S&P 500 resulting in an unpredictable return relative to a more straightforward levered fund. Despite having a beta of 1.37 over the last three years, SPHB often has drastically different performance from the S&P 500 first underperforming the S&P by 1,400 bps in 2015 then outperformed it by 1,400 bps in 2016.  In fact, SPHB has substantially underperformed the S&P 500 from inception through the end of 2017 to the tune of over 300 bps on an annualized basis according to literature on the PowerShares website and with substantially higher volatility than the market, offering a risk/return tradeoff substantially different than a levered fund.

By comparison, PPLC’s return has been more predictable with the fund up 14% in 2016 and 27% in 2017 compared to 12% and 21.8% respectively for the S&P 500 which astute readers will note is very close to the 1.25x return goal of the fund as even lightly levered funds still suffer from beta slippage although like all levered funds, the extended period of low volatility helped reduce the magnitude of the daily rebalances and thus lowers the beta drift. PPLC even managed to hold its own during the recent correction as the S&P 500 lost 8.82% from January 29^th to the close on February 9^th after which the market recovered over 3% from the 10^th through the 21^st leaving it down 5.9% overall.

Faithful to their natures, both PPLC and SPHB were down over 10% as the market began to break but followed very different paths as it began a cautious recovery.  Both have outperformed the S&P 500 since it bottomed on the February 9^th with SPHB delivering a solid 4.4% return from February 10^th to the 21^st while PPLC managed a more substantial 5.1% which has left it almost neck-to-neck with the unlevered market return.  Although to point out again, this is a relatively short time frame and the drop-in market volatility has helped lower the portfolio’s path dependency and beta drift.  However, it still seems an impressive turn for a relatively new fund strategy that only charges .34% for its enhanced exposure.   

Ultimately, some might think that this long period of a steadily climbing market and low volatility might not be a fair test of enhanced beta, but the Portfolio+ suite of lightly levered funds have seemingly delivered on their promise of offering a more predictable tool for asset allocation to stay on top of the nuances of smart beta funds and portfolio construction. Levered funds ultimately might not be the most exhilarating development among ETP enthusiasts, but the rise of enhanced beta might be the next big thing for those in the front lines of portfolio management.

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.

Data vs. Emotion?

Tuesday, February 20, 2018 – Perhaps the most important lesson investors can draw from history is that the stock market behaves in unpredictable ways. The fickle nature of human emotion often leads the market to swing in irrational and inconsistent ways and makes tying to predict the short-term movements an exercise in futility. As the vicissitudes of the past two weeks have demonstrated, this should lesson should never be lost on investors.

The last two weeks shared a similar backdrop. Robust corporate earnings and synchronized global economic growth were counterbalanced by signs of faster inflation and tightening monetary conditions. During the prior week, the Dow and the S&P 500 suffered their worst week in over two years and plunged into correction territory, after the US monthly jobs report showed inflation was gathering momentum. The specter of inflationary pressure and faster than anticipated Fed interest rate hikes sent shock waves through the market and helped unleash heavy volatility.

New data this past week lent further credence to the notion that inflation is accelerating, with a greater than expected rise in consumer prices in January and an uptick in producer prices. Yet, despite the persistence of higher inflation signals that had just sent the major indexes into a correction, the S&P 500 and NASDAQ enjoyed their best week since 2013 and 2011 respectively, with 4.3% and 5.3% gains, while the DJIA rose its most in two years with a 4.3% advance. In contrast to the previous weeks, jitters about the threat of rising inflation gave way to the benign picture of strong global economic growth and healthy corporate earnings. Taken together, the divergent movements of the past two weeks underscore the unpredictable nature of the markets and the importance of remaining disciplined in the midst of short-term volatility.

ETFG Quant Ratings - Currently, the highest rated funds according to our Quant reward model are those expected to benefit from rising yields, lower corporate taxes, and a continuation of strong global economic growth. As of now, the First Trust Chindia ETF (FNI) is our highest rated fund, followed by other cyclical and growth oriented funds, like Direxion NASDAQ-100 Equal Weighted Index Shares (QQQE), SPDR Portfolio S&P 500 Growth ETF (SPYG), First Trust Nasdaq Bank ETF (FTXO), iShares Edge MSCI Multifactor Industrials ETF (INDF), and Fidelity Dividend ETF for Rising Rates (FDRR).

Our ratings are updated daily. Visit our Quant and Quant Movers pages to monitor our ratings changes and gain insights as to how funds are affected by the latest news developments.

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: OCIO

Thursday, February 15, 2018 - 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!

You may not be able to judge a book by its cover, but anyone who follows the ETP industry as closely as we do, knows that when it comes to ETPs, that is exactly what you are supposed to do. There is a set formula to naming a fund; first, you add the benchmark, then throw in the investment style or what was being excluded from the fund, maybe a pinch of something trendy and voila, you no longer have to even read the one-pager! Silly as that may sound, with 276 new products launched in 2017, it’s more important than ever to find a way to standout from the crowd. However, we believe in going the extra mile which is why for our first “New-to-Market” post of 2018, we decided to focus on a fund with the most abbreviated name in the most overlooked sector to hit our desk in a long time, the ClearShares OCIO ETF (OCIO) to see if you really can judge a book by its cover.

Allocation funds, specifically multi-asset funds, probably seem a strange place to start another year of New-to-Market posts given our focus on finding new and innovative strategies, something most investors would consider to be sorely lacking in a space they think is dominated by passive 60/40 funds charging pennies in fees. Allocation funds have long been a backwater of the ETP universe for any number of reasons, but chief among them is the combination of performance and cost that has left many of their intended users looking for alternatives. Originally intended as low-cost core holdings, most allocation funds are built as fund-of-funds products, layering in an additional level of fees that often leaves the allocation ETP at a disadvantage to their less-expensive mutual fund peers in the fee-sensitive market. Throw in that the retail Financial Advisor has long been conditioned to either using in-house products or those offering trailing fees and the inability of multi-asset funds to find an audience begins to come into focus.

Still, the sector has seen a steady stream of new funds come to market in the last few years, many of them actively managed, although the clear trend has been away from offering core allocation funds in favor of more specialized products. The focus has been on unique strategies that help smaller sponsors stand out in a space where potential buyers will either stay with the largest funds or those offered by their custodian. Most are either focused on producing income, managing risk or are more tactically minded for those brave souls not willing to go 120% in equities. Add in the fact we’re nine years into a strong bull market that has investors chasing returns, not planning for 20 years out, and now would seem to be an odd time to bring a new fund to this space.

Enter OCIO, which as you can guess stands for “outsourced chief investment officer,” the first fund offering from Clearshares, a subsidiary of Clearbrook Global Advisors. What do they bring to the table?  A long history both as a money manager and consultant who in recent years has seen a steady increase in demand for their outsourced CIO services as more institutional investors realize that the key to long-term performance is more about recognizing what you don’t know and how to plan around that. While trying to grasp the size of the OCIO market is difficult, Clearbrook has found a working formula as the company is currently advising over $28 billion in assets while OCIO itself has already taken in $100 million to make it one of the larger funds with a broad mandate in the multi-asset space in less than a year of trading.

That level of commitment would serve as a major vote of confidence for a new fund in any category, but for a fund like OCIO, it could prove to be the key to survival in a very competitive arena. Like many of the funds in the allocation space, OCIO is an actively managed product which for most ETP investors is a big enough challenge to embrace, but the fact that fund doesn’t have a well-defined benchmark and you can see why we might think of OCIO as revolutionary. In fact, OCIO is missing most of the attributes investors think of as common in new funds; no formulaic investment strategy, no limited universe to draw investments from and no preset dates for rebalancing. What a brave new world indeed.

Instead Clearshares had a simple goal when they decided to bring this product to market; to marry the asset allocation expertise and independence of the outsourced Chief Investment Officer with the price and efficiency of the ETP and without each acquiring the worst traits of the other. How that translates into a working product begins with the benchmark where instead of comparing their performance to a specific index, the focus is on outperforming the naïve 60/40 portfolio, here using MSCI ACWI and the Barclays U.S. Agg for the equity and fixed income positions. As you would expect with active management, there are no preset rebalancing dates or formula, instead the fund has a broad mandate that allows it hold onto strong performers although no one fund can be more than 5% of the fund.  Instead of rebalancing the fund by calendar which can lead to less-than-ideal developments like selling stocks to buy bonds in a bull market, OCIO has a certain latitude to let those winners keep riding. Equities can make up anywhere from 40%-70% of the fund while bonds can be up to 50%, while alternatives, including REITs and MLPs, can be up to 20%.

To turn the old adage on its head, “While that may all sound good in theory, how does it work in practice?”  Our new-to-market posts typically feature funds long on promise but short on track records and OCIO is no exception, although we think comparing OCIO with a more traditional core allocation fund, here the iShares Core Growth Allocation ETF (AOR), can offer valuable insights for going forward. AOR is the epitome of a passive core fund which makes it the perfect contrast to OCIO. Not only does it follow a formulaic strategy, but it also has set rebalancing dates and relies on a handful of broad-based iShares products with no ability to use more specialized sectors.

So how have they matched up so far?  Starting with its historical performance, OCIO was launched in late June of last year, giving it slightly better than a six-month history but during the period there were several significant developments in financial markets including rising Treasury yields and a weakening dollar which could help an actively managed fund outshine its passive peers. OCIO managed to deliver with an 11% return from inception to the end of January, compared to a 10% return for its blended benchmark thanks in no small part to the funds ability to keep equity exposure close to 70% while the bond portfolio had slightly less duration than AGG. That might seem anemic to some but compared to the iShares Core Growth Allocation ETF (AOR) which while charging a slightly lower fee (.25% compared to OCIO’s .67%) delivered a 10% return with the roughly same equity exposure and you start to get a very different perspective on OCIO.

A tiebreaker would obviously come down to who did better with less risk, something vitally important to all long-term investors, but we would offer that it might be important to consider whether an active or passive strategy is more likely to have excess risk going forward. It’s impossible to determine these things ex ante, but given the recent rise in bond yields while equities have become so choppy would suggest that the ability to tactically shift between not just sectors but between markets and investment products could offer a better risk-adjusted return going forward. Only time will tell, but the launch of OCIO could signify that much needed change is finally coming to a long-overlooked space.

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.

Registration open for the Spring 2018 ETP Forum on Tuesday, April 24th!

Wednesday, February 14, 2018 - Registration is now open for the Spring 2018 ETP Forum on Tuesday, April 24^th at the New York Athletic Club. Our Director of Research, Chris Romano, will again serve as the event Chair for this terrific conference.

Now in its 6th year, this one day symposium convenes some of the most widely recognized experts in Exchange-Traded-Funds and the brightest minds in Capital Management. The ETP Forum features renowned speakers addressing cutting-edge topics within a vibrant and intimate learning atmosphere.  In addition to thought leadership, the event provides a unique opportunity to network with an eclectic audience comprised of 400-500 financial professionals.

All information is available on the event website at www.etpforum.org and registration is now open here: http://etpforum.org/etp-forum/registration

Please take a look at the Agenda and the video footage from the previous ETP Forums: videos-from-the-event

We look forward to seeing you there and 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.

Vol Awakens

Monday, February 12, 2018 – Volatility awoke from its long slumber in disruptive fashion this past week, rousing investors from their complacency and sinking stocks to their worst weekly decline in two years. Nine years into the current bull market, investors have grown accustomed to a unique set of conditions: unprecedented global central bank stimulus, rock-bottom borrowing costs, modest economic growth and subdued inflation. This supportive backdrop helped usher in an era of record low volatility and rising equity valuations. As signs began to emerge that these long uninterrupted conditions may be shifting, investors were caught wrong-footed and unexpectedly forced to adjust to a new market environment.

The protracted lull in volatility was abruptly ended last Friday when a sharp rise in hourly earnings, revealed in the Labor Department's latest monthly job report, conjured up fears of higher inflation and faster than expected Fed rate increases. Inflation and rising borrowing cost worries carried over to this week and were exacerbated by further signs of accelerating global economic growth, tightening monetary policy and a widening federal deficit. Amid this turbulence, the DJIA, S&P 500, and NASDAQ plummeted 5.2%, 5.2%, and 5.1% respectively this week.

Algorithmic trading strategies and exotic investment products also appeared to have compounded this week's selling pressure. Many market observers noted that drawdown may have been inflamed by systematic models that need to balance their risk or rely on technical signals. One cited example was the spike in selling after the S&P 500 and other major indexes broke below key technical indicators such as their 50 and 100-day moving averages, which likely triggered automatic selling activity.

Another notable development and the biggest headline in ETF news was the explosion in volatility and its impact on volatility-linked products. In a reversal from last year's historically low volatility levels, the VIX registered its largest one day increase on Monday and continued its wild price swings throughout the week. This had ruinous implications for ETPs tied to one of 2017's most popular and profitable trades: shorting volatility. A sustained period of market calm had lured investors into arcane investment products that benefit from declines in volatility: inverse VIX ETPs.

The ways in which inverse VIX ETPs are designed and function made them untenable in periods of such heightened volatility. Through selling short futures on the VIX, they had profited from the recent stretch in market calm in two ways: 1) The decline in volatility to record lows and the profits that arose from pursuing a short strategy tied to this decline. 2) Reaping gains from contango in the VIX market, whereby longer-dated futures had the tendency to be higher priced than the VIX spot price. By constantly rolling over positions to sell more distant futures, these strategies had a secondary source of profit.

However, as this week's events demonstrated, these products are ill-equipped to weather periods of sharp spikes in volatility. After the VIX surged a record 116% on Monday, the NAV of these products plunged to zero and triggered trading halts and certain liquidation clauses. For example, Credit Suisse, the sponsor of the $2 billion VelocityShares Daily Inverse VIX Short-Term ETN (XIV), stated in the fund's prospectus that it reserved the right to "accelerate" the product if the underlying futures contracts increase by more than 80% in a day and its intraday indicative value was equal to or less than 20% of the closing day's indicative value. Without the recourse of margin call, Credit Suisse had to quickly cover all of its positions and liquidate the product before being on the hook itself. The record rise in the VIX left Credit Suisse scrambling to hedge itself in afterhours trading to keep the ETN's value above zero. This forced buying of VIX futures following such market turmoil added further upward pressure on the VIX and led to now what is an unrecoverable loss for the fund. XIV lost over 90% of its value that day, while another similar product, the ProShares Short VIX Short-Term Futures ETF (SVXY), lost over 75% and was halted for trading. XIV received a 17.05% bump in its ETFG risk rating this week, while SVXY's risk rating rose 12.2%

The chaos surrounding these products serves as yet another reminder to carefully read a fund's prospectus before making an investment decision and avoid esoteric products whose risks you do not fully understand.

Did this week's market action presage a paradigm shift? Or will the backdrop of robust corporate earnings and synchronized global economic growth help tame market volatility and resume the upward march of equities? Investors will have to reconcile these conflicting signals as we enter the week ahead.

It could be another eventful week in the markets, please consult our Quant Model for daily updates to Ratings and Rankings.

Thank you for reading ETF Global Perspectives!

ETFG 21 Day Free Trial:  https://www.etfg.com/signup/quick

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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.

Market Reaction

Monday, February 5, 2018 – Congratulations to the Philadelphia Eagles for bringing home their first Lombardi Trophy! They certainly performed better than the equity markets this past week with the first weekly drop in major U.S. stock indexes of 2018. The Dow Jones Industrial average dropped 4.1%, the S&P 500 index dropped 3.9% and NASDAQ dropped 3.5%.  All eyes are on the markets' reaction today after Friday's big sell off. Initial indicators point to continued selling on the opening this morning and we'll have to see if it persists throughout the day.

Perhaps driven by newfound concerns over future interest rate increases, last week every sector had a negative return, unlike the previous week where every sector was in the green. The worst performing sectors were Energy, Materials and Healthcare which was down 6.52%, 5.66%, and 5.02% respectively. Energy stocks’ loss was due to the lower-than-expected earnings results from leaders Chevron and ExxonMobil. Healthcare shares dropped after news that Amazon, Berkshire Hathaway and JPMorgan were planning to establish a healthcare provider for their US employees - a new threat that may cut the profits of current healthcare providers.

ETFG Equity Exposure Report - In the ETF Global exposure report, we can see what ETFs have the biggest exposure to Chevron. There is 17.66 Billion of Chevron stock that is held in all ETFs. ERGF, iShares Edge MSCI Multifactor Energy ETF, XLE, Energy Select Sector SPDR Fund, and VDE, Vanguard Energy ETF, have the biggest concentration in Chevron. They hold 17.94%, 16.48% and 14.9% respectively.

ETFG Quant Movers - This week, in the ETF Global Quant Movers, EZA, iShares MSCI South Africa ETF had the largest score increase of 29.35%, PXH, Powershares FTSE RAFI Emerging Markets Portfolio, increased by 23.69% and EWI, iShares MSCI Italy Capped ETF, increased by 22.98%. On the flip side, PEY, Powershares High Yield Equity Dividend Achievers Portfolio, lost 20.53% DTN, WisdomTree Dividend Ex-Financials Fund, lost 15.53% and SILJ, ETFMG Prime Junior Silver ETF, lost 15.04%.

ETFG Weekly Select List - In the ETF Global Select List this week the biggest gainers in their respective categories were IXP, iShares Global Telecom ETF, which went from 4^th to first this week in the  Telecommunications  category and SPDW, SPDR Portfolio World ex-US ETF, which also moved from 4^th to first this week in the Global Ex-U.S category.

It could be an eventful week in the markets after Friday’s plunge.  Please consult our Quant Model for daily updates to Ratings and Rankings.

Thank you for reading ETF Global Perspectives!

ETFG 21 Day Free Trial:  https://www.etfg.com/signup/quick

_______________________________________________________

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.