Author Archives: Scalper1

How To Avoid The Worst Style ETFs: Q1’16

Question: Why are there so many ETFs? Answer: ETF providers tend to make lots of money on each ETF so they create more products to sell. The large number of ETFs has little to do with serving your best interests. Below are three red flags you can use to avoid the worst ETFs: Inadequate Liquidity This issue is the easiest issue to avoid, and our advice is simple. Avoid all ETFs with less than $100 million in assets. Low levels of liquidity can lead to a discrepancy between the price of the ETF and the underlying value of the securities it holds. Plus, low asset levels tend to mean lower volume in the ETF and larger bid-ask spreads. High Fees ETFs should be cheap, but not all of them are. The first step here is to know what is cheap and expensive. To ensure you are paying at or below average fees, invest only in ETFs with total annual costs below 0.48%, which is the average total annual cost of the 298 U.S. equity Style ETFs we cover. The weighted average is slightly lower at 0.17%, which highlights how investors tend to put their money in ETFs with low fees . Figure 1 shows that the AdvisorShares Madrona Domestic ETF (NYSEARCA: FWDD ) is the most expensive style ETF and the Schwab U.S. Large Cap (NYSEARCA: SCHX ) is the least expensive. Absolute Shares Trust ( WBIB , WBID , WBIC , and WBIG ) provides four of the most expensive ETFs while Schwab ( SCHX and SCHB ) and Vanguard ( VOO and VTI ) ETFs are among the cheapest. Figure 1: 5 Least and Most Expensive Style ETFs Click to enlarge Sources: New Constructs, LLC and company filings Investors need not pay high fees for quality holdings. The State Street SPDR S&P 500 Buyback ETF (NYSEARCA: SPYB ) earns our Very Attractive rating and has low total annual costs of only 0.39%. On the other hand, a fund such as the iShares Core U.S. Growth ETF (NYSEARCA: IUSV ) holds poor stocks. No matter how cheap an ETF (0.08% TAC), if it holds bad stocks, its performance will be bad. The quality of an ETFs holdings matters more than its price. Poor Holdings Avoiding poor holdings is by far the hardest part of avoid bad ETFs, but it is also the most important because an ETFs performance is determined more by its holdings than its costs. Figure 2 shows the ETFs within each style with the worst holdings or portfolio management ratings . Figure 2: Style ETFs with the Worst Holdings Click to enlarge Sources: New Constructs, LLC and company filings PowerShares ( EQAL , PXMV , and EQWS ) appears more often than any other providers in Figure 2, which means that they offer the most ETFs with the worst holdings. The ProShares Ultra Telecommunications ETF (NYSEARCA: LTL ) is the worst rated ETF in Figure 2. The PowerShares Russell MidCap Pure Value ETF (NYSEARCA: PXMV ), the PowerShares Russell 2000 Equal Weight ETF ( EQWS ), the Vanguard Russell 2000 Growth Index Fund (NASDAQ: VTWG ), the Global X Super Dividend U.S. ETF (NYSEARCA: DIV ), and the Guggenheim S&P Small Cap 600 Pure Value ETF (NYSEARCA: RZV ) also earn a Dangerous predictive overall rating, which means not only do they hold poor stocks, they charge high total annual costs. Our overall ratings on ETFs are based primarily on our stock ratings of their holdings. The Danger Within Buying an ETF without analyzing its holdings is like buying a stock without analyzing its business and finances. Put another way, research on ETF holdings is necessary due diligence because an ETF’s performance is only as good as its holdings’ performance. PERFORMANCE OF ETFs HOLDINGs = PERFORMANCE OF ETF Disclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, style, or theme. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Market Lab Report – Premarket Pulse 3/29/16

Major averages finished a quiet day yesterday as they closed roughly flat on lower volume. For the most part, the indexes appear to be consolidating their prior upside moves off of the February lows. However, investors should be alert to the nature of any pullback as it could develop into a potential rally failure at any time. Fed Chair Yellen speaks today at 12:20 p.m. EDT. The upwardly revised GDP and core PCE, the Fed’s favorite measure of inflation, which is closing in on 2% may give her room to support the two additional rate hikes planned for this year. That said, keep in mind that these are just two data points in a sea of evidence that still points to an unhealthy economy. Thus, she can continue to suggest higher rates in the future, but actually pulling the trigger is unlikely until the global economy starts to show definitive signs of recovering. This could be a long way off given the corner into which central banks have painted themselves as negative rates in the few countries that have pushed rates that low have yet to show growth, and more likely, are inviting a whole host of new troubles. Progress has remained slow among individual leading stocks, with names like MXL and SWHC getting hit with selling pressure that has thrown them out of their previously orderly patterns. Other names remain slightly extended. and we would exercise caution with respect to our entry points on the long side. Investors should seek to use constructive weakness rather than chasing strength.

My ‘Wisdom’ On Robo Advisors

Tadas Viskanta has put together a nice collection of opinions regarding the new “Robo Advisor” trend. Here’s my general view: “Robo “advisors” aren’t really advisors. They’re robo asset allocators. The robotic allocations are susceptible to flawed risk profiling and inefficient portfolio management for most people with a sophisticated financial plan. The business of asset allocation is too personal and customized to ever become fully automated so the best solution is some integration between the human and robot sides.” These are great new services, but you have to be careful with them. When there’s no advisor involved, you’re highly susceptible to poor risk profiling and behavioral problems along the way. After all, a robo advisor doesn’t help you stick to an asset allocation or help you manage it along the way. And I’ll be blunt about the risk profiling process for many of these services – it’s dangerously insufficient. While these are fantastic low-cost options for many investors, I do think they carry their own unique risks if they’re not utilized appropriately. In summary, I’d argue: If you have trouble with your own behavioral biases and maintaining an appropriate asset allocation, then you might consider a low-cost advisor to help you implement the appropriate plan and maintain it. Additionally, if you’re in need of more planning services, then it’s worth bundling a low-cost advisor with your portfolio management services. What’s “low-cost” in today’s world? I’d argue it’s anything less than 0.5% per year. If you don’t have trouble with your own behavioral biases and maintaining an appropriate asset allocation through market gyrations, then you should just buy a simple Vanguard or Schwab ETF allocation and perform annual maintenance, thereby cutting out the extra fees the robos or advisors charge for rebalancing and harvesting tax losses. If you don’t have trouble with your own behavioral biases and maintaining an appropriate asset allocation through market gyrations, but you’re too disorganized or busy to rebalance and harvest losses , then you should consider one of the human PLUS robo options, such as the Vanguard or Schwab offering. I wrote much more about this topic a few years back.