Monday, April 15, 2019

Back and Forth

Monday April 15, 2019 – A mix of dispiriting and encouraging news led to an uneven week in the markets and a largely flat performance across the major indexes. Global economic growth concerns were brought to the fore on Monday after the IMF's downward revision to its 2019 global growth forecast to 3.3% from 3.5%. These concerns avoided further exacerbation with the extension of the Brexit deadline to October 31st, new Chinese exports and bank lending data showing a slight uptick in activity, dovish commentary from the FOMC's March minutes, and the ECB's reaffirmation of its accommodative monetary policy. In the absence of any further negative catalysts, markets received a boost on Friday with a positive start to Q1 earnings season from the banking sector, a major M&A development in the energy space, and warm reception to the unveiling of Disney's upcoming streaming service.

JP Morgan's record revenue, net income, and positive loan growth, along with higher profits from Wells Fargo and PNC Financial Services, helped counteract slowdown fears from earlier in the week. Banks serve as a bellwether for broader economic activity so this positive performance could augur well for the rest of the Q1 earnings season, with the caveat that this upward momentum may reverse or grind to a halt with the Fed's recent rate hike pause and its consequent impact on net interest margins. Chevron's announced acquisition of Anadarko Petroleum for $33 billion provided a further lift to the markets by fueling speculation of addition industry consolidation and, as a result, gains in many smaller energy companies viewed as likely takeover targets. Disney's streaming service announcement provided the final stimulus, as the service's broad content offering and industry-low pricing were viewed as competitively positioned for today's crowded and rapidly evolving streaming media and entertainment landscape.

By week's end, this balance of negative and positive news led to muted moves in the DJIA, S&P 500, and Nasdaq with them rising 0.0%, 0.5%, and 0.6% respectively.

In ETFs news, a potential industry-changing development took place this week. On Monday, the SEC gave approval to Precidian Investments for a new type of structure that trades and operates like an ETF, but without the transparency and disclosure requirements that ETFs are widely known for. After getting the greenlight following 10 years of regulatory scrutiny, Precidian will be allowed to license its nontrasparent actively managed structure to other asset managers if no objections are raised between now and May 3rd. The "ActiveShares" framework will permit the disclosure of daily holdings only to Authorized Participants to facilitate creations & redepemtions. In a sharp break with the daily transparency ETF investors are accustomed to, the portfolios of ActiveShares funds would be presented to the public very similar to the way mutual funds currently operate - on a quarterly basis with up to a 60 day lag. However, despite this portfolio opaqueness, the funds would also be required to publish intraday indicative value figures every second so that investors can monitor whether a fund's price is staying in line with its underlying assets.

Precidian's framework could potentially open the flood gates to other active managers who been eager to tap into the popularity of ETFs, but unwilling to surrender their intellectual property and proprietary investment strategies. The ActiveShares structure has already been licensed by asset management giants like BlackRock and American Century. While this approval will likely be greeted by active managers with alacrity, the key issue will be whether these funds can attract sufficient assets by overcoming investor's growing aversion to non-transparency and perception of the inefficacy of actively managed strategies.

ETFG Weekly Select List - the five most highly rated ETFs per Sector, Geographic Region and Strategy as ranked by the ETFG Quant model.

Due to the upward momentum emanating from the financial and energy sectors this week, we'd like to feature the current top-rated ETFs within these respective groups according to our model. In the financial sector, SPRD S&P Insurance ETF (KIE) currently resides as the top-rated fund. KIE is followed by iShares MSCI Europe Financials ETF (EUFN), Davis Select Financial ETF (DFNL), iShares Global Financials ETF (IXG), and John Hancock Multifactor Financials ETF (JHMF). This group was unchanged from the previous week, with the exception of the 4th and 5th ranked positions where IXG and JHMF supplanted Fidelity MSCI Financials Index ETF (FNCL) and Financial Select Sector SPDR Fund (XLF). Our current financials top 5 represents an eclectic way of tapping into the sector, with a more targeted sector subgroup ETF in KIE, a regionally focused fund in EUFN, an actively managed strategy in DFNL, a broad-based globally oriented fund in IXG, and a smart beta approach in JHMF.

Within the energy sector, VanEck Vectors Oil Service ETF (OIH), Invesco DWA Energy Momentum ETF (PXI), First Trust North American Energy Infrastructure Fund (EMLP), John Hancock Multifactor Energy Fund (JHME), and VanEck Vectors Oil Refiners ETF (CRAK) currently rank as the top 5 rated funds. This group largely held steady from last week, with little change other than JHME replacing SPDR S&P Oil & Gas Equipment & Services ETF (XES). As with the financial sector, these group of funds illustrate the myriad ways of slicing and dicing different sectors. Our select list enables you to uncover the wide set of opportunities available by sector, geography, and investment strategy available within the ETF wrapper.

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