Author Archives: Scalper1

Reducing Volatility While Staying In The Stock Market With USMV

During February, we think investors should consider iShares MSCI USA Minimum Volatility ETF (NYSEARCA: USMV ). In ranking approximately 860 equity ETFs, we combine holdings-level analysis with ETF-level attributes, such as bid/ask spread, expense ratio and volatility. According to Sam Stovall, US equity strategist for S&P Capital IQ, since 1946, there have been 56 pullbacks, or price declines of 5.0%-9.99%. They fell an average of 7% over a little more than one month and took fewer than two months to get back to breakeven. There have been 20 corrections (-10.0% to -19.9%) since WWII, erasing an average 14% from the value of the S&P 500. They typically took a bit more than four months to go from peak to trough and a similar number of months to recover fully. We think USMV is strong ETF for consideration for investors wanting to reduce the risk considerations of their overall U.S. equity exposure. We expect the market to remain volatile in February due in part to sluggish earnings and modest economic prospects, but we look to the S&P 500 index to end 2016 much higher than where it is currently trading. As such believe this ETF allows investors to stay fully invested while reducing the risk profile of their overall portfolio. Now is a good time, according to S&P Capital IQ, to look at low-volatility strategies. Yet it is important to understand how USMV is constructed. The ETF is diversified across all 10 sectors, but holds the least volatile securities within the sector. iShares, working with an MSCI benchmark, uses sector bands (+/- 500 basis points relative to a parent MSCI index at the semi-annual rebalance). As such, at year end, financials (22% of assets), health care (20%), information technology (15%) and consumer staples (15%) are the largest sectors. Relative to the parent MSCI index, tech is underweighted, while the other three are overweighted. Other sectors underweighted are industrials (4.5%) and energy (1.9%). From a sector perspective, USMV is different than its peer from PowerShares. That ETF has no sector bands and as such has more in financials (27% of assets) and less in tech (2%). USMV ranks favorably to S&P Capital IQ for all four risk consideration inputs to our ranking. Three of these, S&P Capital IQ Quality Rankings and Qualitative Risk Assessments, along with Standard & Poor’s Credit Ratings, are tied to the holdings. The relatively low risk of these holdings are well suited, we think, in the current choppy market. For example, Johnson & Johnson (NYSE: JNJ ) has an A+ Quality Ranking, a low risk assessment and AAA credit rating. S&P Capital IQ equity analyst Jeff Loo, who has a buy recommendation on the shares, view its capital deployment strategy of acquisitions and stock buybacks positively. In October 2015, JNJ announced a $10 billion stock buyback, and the shares currently have a 3% dividend yield. S&P Capital IQ sees earnings per share growing to $6.50 in 2016 and $6.82 in 2017, driven by pharma growth and restructuring efforts. Meanwhile, McDonald’s (NYSE: MCD ) has an A Quality Ranking, a medium risk assessment and BBB+ credit rating. S&P Capital IQ equity analyst Tuna Amobi, who has a buy recommendation on the shares, noted MCD reaffirmed its capital allocation initiatives after relatively encouraging Q4 results — including a 5% increase in global comparable sales — amid early positive signs on its multi-year turnaround strategy. After last year’s sweeping organizational changes Amobi sees further gradual progress on the turnaround initiatives, including an accelerated pace of global refranchising. S&P Capital IQ sees earnings per share in 2016 rising to $5.39 due to operating margin expansion and share repurchases. In addition, USMV earns a favorable ranking input for its below-average three-year standard deviation of 9.1 (ETFs tracking the S&P 500 index have 10.5). Daniel Gamba, managing director and head of BlackRock’s iShares Americas Institutional Business, told S&P Capital IQ in late January that the increased volatility in equity markets has made institutional investors more tactical in using minimum volatility products to lower risk. We think the increased usage of USMV by institutional investors has been a positive for all investors. The average daily trading volume in the past month spiked to 3.3 million, up from 2.0 million during the past six months. The bid/ask spread is $0.01, lower than most ETFs. In addition from a cost perspective, USMV has a modest 0.15% expense ratio. Year to date through January 27, USMV declined only 3.8%, falling less than half as much as the S&P 500 index. In 2015, during a relatively flat year with the broader index up 1.4%, USMV rose 5.5%. We like USMV based on its underlying holdings and from a cost/liquidity perspective. However, should the market volatility diminish quickly and equities to climb higher, this and other lower-risk strategies are prone to underperform in our opinion. Additional disclosure: http://t.co/AHwSBhyHHt

ETF Trends For 2016: Part 2, Robo-Advisors

In part 1 of this series we reviewed the growth of the ETF market in 2015 and introduced the series by covering currency hedged products. In part 2, we are going to take a brief look at a well-covered topic that could have a huge impact on the way ETFs are utilized: Robo-Advisors Robo-Advisors & The Rise Of The Machine In the last few years investors have not only embraced ETFs but the ways by which they manage their ETF investments. Robo-Advisors are, according to Investopedia: Online wealth management services that provide automated, algorithm-based portfolio management advice without the use of human financial planners. While older, wealthy investors have traditionally been wary of putting their money in non-human hands and valued human guidance, younger clients are more and more frequently selecting robo-advisors. According to a recent Spectrum study : 17% of investors 35 and younger and 11% of those ages 36-44 currently use a robo-adviser, compared with 6% of those 45-54, 4% of those 55-64 and 4% of those 65 and older. Younger investors are, as a rule, more willing to shift where their money is invested and try new technologies. If one platform doesn’t work out, they won’t waste time to see if the company improves next year, and there are more than enough platforms to try something different. Firms like Betterment and Wealthfront have exploded on this relatively new scene, with over $3 billion and $2 billion in AUM, respectively. However, well established financial firms like Schwab (NYSE: SCHW ), BlackRock (NYSE: BLK ), Fidelity and Vanguard have all seen the benefits of creating their own robo-platforms as a new source for revenue. After attending the 20th Annual IMN Global Indexing and ETFs conference in Scottsdale this December, Josh Brown of Ritholtz Wealth Management summarized the audience’s feelings on robo-advisors: The crowd here is very curious about how to implement the technology; there isn’t any concern about the B2C robos as competitors. The prevailing feeling is that their AUM growth has already peaked while Vanguard and Schwab have stolen their thunder. While the conference audience, mostly made up of RIAs and financials advisors, might think this market has reached its peak, market research data tends to disagree. Below is the expected growth in AUM by robo-advisors from consulting firm A.T. Kearney, as reported by Bloomberg . Click to enlarge Clearly, this is a trend to watch in the coming years, but what will it mean to ETF investors and issuers? During an interview with FinancialPlanning.com, Dodd Kittsley, head of ETF strategy and national accounts at Deutsche Asset & Wealth Management of Deutsche Bank (NYSE: DB ), stated the following when asked how robo-advisors affect ETFs: It really opens an avenue to a different investor base. I think certainly that’s going to be a continued catalyst for growth in the industry. For these robo-advisors, certainly much of their objective is to deliver strategic allocation models for long-term investors; and ETFs, when you think about it, are the purest way to execute on an asset allocation strategy. If you just finished this piece and find yourself wondering if robo-advisors are for you, I would refer you to David Fabian ‘s advice from 2014, when robos were just starting to gain traction in the market: At the end of the day, each investor considering a robo-advisor over a traditional asset manager should compare the cost savings with any additional value-added services that may be offered. In addition, an asset manager may have a unique philosophy that aligns more closely with your own method of investing. This can lead to peace of mind when choosing a third party to be the steward of your hard-earned nest egg. Robo-advisors lower the barriers to entry that existed in financial markets, much like online trading platforms opened up markets for part-time trading. As with part-time trading, this is not a one-fits-all solution, but another tool for investors to consider. As someone who watches the development of the ETF market for a living, I see robo-advisors as another gateway for exposing a new generation of investors to ETFs, significantly strengthening ETFs’ position as the fund vehicle of choice in the market. Stay tuned for part 3 next week, which will focus on the ETF fee war and concluding thoughts for the ETF industry trends in 2016.