Author Archives: Scalper1
Robo-Advisors Are Desperately Clinging To A Dangerous Dogma
I’ve recently argued that the success of passive investing potentially sows the seeds of its own demise . Patrick O’Shaughnessy also made a similar point recently and probably a bit more eloquently. But, to dig deeper into the push towards passive, there’s one big problem I have with virtually every one of the major robo-advisors that very few folks seem to be talking about. That is they all seem to advocate a heavily overweight position in equities, and for the most part, this is skewed towards U.S. equities. For example, below is the allocation Wealthfront would put me in. It’s 91% in stocks, 49% U.S. stocks and 42% foreign, and 9% muni bonds (This is its taxable allocation, but the retirement allocation is very, very similar). Click to enlarge I assume this massive equity overweight is simply based on the, “stocks for the long run,” dogma that everyone has bought into in recent years. The trouble with this is that it fails to take into account the simple fact that, in recent years and across a wide variety of time frames, bonds have outperformed stocks and with far less volatility, or what some might call, “risk.” As The Economist points out , “there was a point in 2011 when equities had lagged Treasury bonds over the previous 30 years.” 30 years! Intrigued, I decided to run some of the numbers myself. The chart below tracks the difference in performance between Vanguard’s S&P 500 index fund versus its long-term treasury fund. It dates back to the start of 1999; that’s as far as StockCharts.com will let me go. Notice that since then, bonds have nearly doubled up on the performance of stocks, and this includes some of the greatest years in stock market history! This time frame is especially compelling to me because stocks are currently valued, according to the Buffett yardstick and a few other valuable measures, just as highly today as they were back in 1999-2000 . Click to enlarge We can also just look at the past 10 years. Stocks have had an incredible run recently; surely they’ve outperformed bonds over the past decade. Nope. Bonds win again and, if you owned them instead of stocks, you felt much better about your investments during the financial crisis and were thus much more likely to stick with your investment strategy through that difficult period. Click to enlarge So it’s fascinating for me to see so many hang on so fiercely to the idea that buying and holding U.S. stocks over any and all time frames is the way to go despite their much greater volatility and lagging performance in recent years. And to see this dogma take form across every robo-advisor I’ve found just validates how deeply ingrained this dogma has now become. In fact, Wealthfront is so in love with the idea it wouldn’t put any of my money at all into long-term treasuries. Why not? Because it’s clinging to a dogma that perhaps worked at one point a long time ago, when stocks were more consistently fairly valued. But this dogma hasn’t worked for quite a long time now. Maybe this is why Ray Dalio’s firm, which has adopted just the opposite dogma – overweight bonds versus stocks because they offer better risk-adjusted returns over the long term – has become the largest hedge fund firm by assets in the world. Now I’m not saying you should forget stocks and put all your money in bonds. But there is a wonderful case to be made for diversifying across a variety of asset classes. Wealthfront makes it appear as if it’s doing so. It’s not. In fact, it would just put all my money in the stock market and say, “good luck!” True diversification is something very, very different and also something far more valuable. Sadly, it may take another painful bear market in equities before the robos learn this important lesson.
Oracle Beats On Earnings, Ups Buyback: Tech ETFs In Focus
After the closing bell yesterday, tech bellwether Oracle (NYSE: ORCL ) reported mixed third-quarter fiscal 2016 results. The company beat the Zacks Consensus Estimate for earnings but missed on revenues due to negative currency translations and persistent weakness in traditional software sales. Additionally, Oracle boosted its share buyback program by $10 billion (see: all the Technology ETFs here ). Oracle Q3 Earnings in Focus Earnings per share came in at 59 cents (accounting for stock-based compensation), a penny ahead of the Zacks Consensus Estimate. Revenues declined 3.4% year over year to $9.01 billion and were below our $9.17 billion estimate. While the company’s long process of shifting to the Web-based cloud computing business is paying off, it is unlikely to make up for the decline in the software business. Additionally, a strong dollar is continuously posing challenges to the company’s performance. Excluding the impact of unfavorable currency rates, revenues would have grown 1%. Cloud software platform sales climbed 57% from the year-ago quarter and accounted for 6% of the total revenue. Notably, Oracle is selling more cloud software platforms than any other company in the world, providing it an edge over the software ace Salesforce.com Inc. (NYSE: CRM ). For the fiscal fourth quarter, the world’s largest database software maker expects revenues to be down 2% to up 1% in constant currency and earnings per share between 82 cents and 85 cents. The lower end of the earnings guidance is well above the Zacks Consensus Estimate of 78 cents, reflecting some optimism in the company’s future growth. Currency headwind is expected to impact 2% growth in revenues and dilute earnings per share by a couple of cents. Impressed by solid cloud computing growth and an earnings beat, the Board of Directors of Oracle authorized additional repurchase of as much as $10 billion of stock under its existing buyback program. As per Bloomberg, it is the first expansion of the repurchase plan since September 2014 (read: Face-Off: Dividend Growth & Buyback ETF ). As a result, Oracle shares climbed as much as 5.4% in after-hours trading. Smooth trading is expected to continue in the days ahead given that the stock has a Zacks Rank #3 (Hold) and a solid Industry Rank in the top 27%, suggesting room for upside. Given this, ETFs with the highest allocation to this software giant will be in focus in the days ahead. Investors should closely monitor the movement in these funds and avoid these if the stock drags them down: iShares North American Tech-Software ETF (NYSEARCA: IGV ) This ETF provides exposure to the software segment of the broader U.S. technology space by tracking the S&P North American Technology-Software Index. The fund holds a basket of 58 securities with Oracle taking the top spot at 9.3% of total assets. It is quite popular with AUM of $639.1 million while volume is moderate as it exchanges nearly 201,000 shares a day. The product charges 48 bps in annual fees and has lost 6.3% so far this year. IGV has a Zacks ETF Rank of 1 or ‘Strong’ rating with a High risk outlook. First Trust ISE Cloud Computing Index ETF (NASDAQ: SKYY ) This fund provides exposure to cloud computing securities by tracking the ISE Cloud Computing Index. Holding about 34 stocks in the basket, Oracle takes the fifth spot at 4.2% of assets. Software firms dominate this ETF, accounting for 37.5% share while Internet software services (16.7%) and communication equipment (13.5%) round off to the next two sectors. The product has been able to manage $531.3 million in its asset base while sees good volume of about 102,000 shares a day. It has 0.60% in expense ratio and has a Zacks ETF Rank of 2 or ‘Buy’ rating with a High risk outlook. First Trust NASDAQ Technology Dividend Index ETF (NASDAQ: TDIV ) This fund provides exposure to the dividend payers within the technology sector by tracking the Nasdaq Technology Dividend Index. The product has amassed about $482.9 million in its asset base while trades in volume of around 83,000 shares per day. The ETF charges 50 bps in annual fees. In total, the fund holds about 96 securities in its basket. Of these firms, ORCL takes the seventh position, making up roughly 4.0% of the assets. In terms of industrial exposure, the fund is widely spread out across semiconductor and semiconductor equipment, diversified telecommunication services, technology hardware, storage & peripherals, and software. The fund has added 3.2% so far this year. PureFunds ISE Big Data ETF ( BDAT ) This product targets the niche corner – the big data and analytics industry – in the broad technology space. The fund follows the ISE Big Data Index, holding 32 securities in its basket. Of these, ORCL takes the sixth spot with 4% allocation. The U.S. firms dominate the portfolio with 81% share while Germany, Israel, Canada, and China make up for a decent exposure. The fund has accumulated $1 million in its asset base so far and charges a bit higher fee of 0.75%. Average daily volume is paltry at nearly 1,000 shares and BDAT is down 13.8% in the year-to-date timeframe. Link to the original post on Zacks.com