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The Double Edged Sword Of Trend Following ETFs

I’ve always been a big proponent of following the major trends in the market to serve as guideposts for sizing the stock allocation of my portfolio . Trend lines like the infamous 200-day moving average have never been a perfect predictor of stock market direction. However, using these types of technical indicators can serve as a useful tool for making incremental adjustments over time. Pacer ETFs is a relatively upstart company in the exchange-traded fund world that operates a suite of TrendPilot ETFs designed to automate the trend following process. Their lineup includes a range of well-known U.S. and European indexes with several hundred million in combined assets under management. The largest and most popular fund in their mix is the Pacer TrendPilot 750 ETF (BATS: PTLC ), which is based on the Wilshire U.S. Large-Cap Index. This includes a diversified basket of 750 large-cap stocks that aims for broader exposure than the stalwart S&P 500 Index. PTLC currently has $336 million in total assets and enough consistent daily trading volume to be considered liquid for most investor’s purposes. It also charges an expense ratio of 0.60%, which is on the high side for a typical ETF but not necessarily abnormal for a quasi-active approach. The basic premise behind PTLC is to participate when the stock market is going up and move to cash (or treasury bills) when it is going down. They accomplish this through a systemic, rules-based methodology that indicates when a positive or negative trend is established using the 200-day simple moving average. In an uptrend, PTLC owns 100% stocks. The fund then moves to 50% stocks and 50% treasury bills when the index falls below the trend line for five consecutive days. It then uses a final confirming indicator to move to 100% treasury bills if the simple moving average falls lower than its prior reading for five days. The process starts over again once the index regains its 200-day moving average on the upside. Simple. Logical. Automated. Sounds easy right? The obvious advantage of this strategy is that it is designed to keep your money safe during a prolonged bear market such as we experienced in 2008. Multiple months or even years of persistent selling pressure can be avoided by having your capital protected near the top quartile of a new down cycle. The goal is also to get you back into the market at a much lower point and with more starting capital than if you had held your way through on the downside. However, this trend following system also becomes a hindrance during periods of sharp corrections and subsequent rapid recoveries like we have experienced over the last year. The constant gyration from bullish to bearish momentum and back again creates a counter-productive effect on the strategy. When comparing PTLC versus the Schwab U.S. Large-Cap ETF (NYSEARCA: SCHX ) since inception, you can see how the trend following strategy moves to cash prior to the upswing in both 2015 and 2016. This means that you miss out on the recovery phase and end up rapidly falling behind the more conventional index. SCHX purely follows the Wilshire U.S. Large-Cap Index without the trend following component. The time period involved here is admittedly quite short and a proper analysis should be done over multiple cycles of the market. Nevertheless, it should be observed that this recent trading pattern does not sit well with a trend following strategy built to follow a long-term moving average . It may also result in some investors becoming frustrated with the timing component and jumping ship just prior to the market rolling over once again. The trend following ETF is ultimately doing exactly what its creators set out for it to do. The more recent price action should be considered a known risk of this type of enhanced index rather than a failure of the strategy altogether. The lesson is that there is always a double edged sword of opportunity cost that must be considered when you move to the safety of cash. This same risk is entrenched with the use of stop losses or physical sell orders for individual ETFs and stocks as well. They call it getting “whipsawed” and it is certainly an uncomfortable feeling when you are on the wrong end of it. 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. Additional disclosure: David Fabian, FMD Capital Management, and/or clients may hold positions in the ETFs and mutual funds mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell, or hold securities.

ETFs To Gain Or Lose After Strong Jobs Report

Wall Street had a strong start to the second quarter courtesy of encouraging data released on April 1. In particular, a solid March job report injected further optimism into the economy, driving stocks higher. This is especially true as U.S. hiring continued its strong momentum with 215,000 jobs added last month following the revised 245,000 job additions in February. This is much above Reuters’ expectation of 205,000 (see: all the Large Cap ETFs here ). The majority of the additions were seen in retail, health care, and construction that more than offset the decline in the manufacturing and mining sectors. Notably, the economy has been creating over 200,000 jobs per month since 2014. Average hourly wages grew by 7 cents to $25.43 in March bringing the year-over-year increase to 2.3%. This is much better than the 2-cent decline in February but lower than the 2.6% year-over-year wage growth in December that marked the strongest improvement since 2009. However, the unemployment rate ticked up slightly to 5% from an eight-year low of 4.9%. Meanwhile, the labor force participation rate, which indicates the percentage of working-age people who are employed or looking for work, climbed to the highest level since March 2014 at 63%. The robust pace of job creation suggests that the U.S. is one of the healthiest economies in the world that will be able to withstand global uncertainty. However, the data failed to alter the cautious expectations for a rates hike. Given this, a few ETFs will severely impact by the solid jobs data while some are expected to gain in the weeks ahead. Below, we have highlighted some of these that are especially volatile post jobs data: ETFs to Gain PowerShares DB USD Bull ETF (NYSEARCA: UUP ) A healthy job market and the resultant improving economy are expected to pull in more capital into the country and lead to appreciation of the U.S. dollar. UUP is the prime beneficiary of the rising dollar as it offers exposure against a basket of six world currencies – euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. This is done by tracking the Deutsche Bank Long US Dollar Index Futures Index Excess Return plus the interest income from the fund’s holdings of the U.S. Treasury securities. In terms of holdings, UUP allocates nearly 57.6% in euro and 25.5% collectively in Japanese yen and British pound. The fund has so far managed an asset base of $818.6 million while sees an average daily volume of around 1.7 million shares. It charges 80 bps in total fees and expenses, and lost 0.04% on the day following the jobs report. The fund has a Zacks ETF Rank of 2 or ‘Buy’ rating with a Medium risk outlook (read: ETF Winners & Losers Following Yellen Comments ). SPDR Homebuilders ETF (NYSEARCA: XHB ) Solid labor market fundamentals along with affordable mortgage rates will continue to fuel growth in a recovering homebuilding sector, creating a buying opportunity in housing-related stocks and ETFs. The most popular choice in the homebuilding space, XHB, follows the S&P Homebuilders Select Industry Index. In total, the fund holds about 37 securities in its basket with none accounting for more than 5.73% share. The product focuses on mid-cap securities with 65% share, followed by 27% in small caps. The fund has amassed about $1.5 billion in its asset base and trades in heavy volume of about 3.6 million shares. Expense ratio comes in at 0.35%. XHB added 0.7% on the day and has a Zacks ETF Rank of 2 with a High risk outlook. SPDR S&P Retail ETF (NYSEARCA: XRT ) Retail will also benefit from accelerating job growth and modest wage growth that will lead to increased spending power. XRT tracks the S&P Retail Select Industry Index, holding 100 securities in its basket. It is widely spread across each component as none of these holds more than 1.47% of total assets. Small-cap stocks dominate about three-fifths of the portfolio while the rest have been split between the other two market-cap levels. XRT is the most popular and actively traded ETF in the retail space with AUM of about $605 million and average daily volume of around 4.4 million shares. It charges 35 bps in annual fees and lost 0.1% on the day. The product has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with a Medium risk outlook. ETFs to Lose SPDR Gold Trust ETF (NYSEARCA: GLD ) An upbeat jobs report dampened the appeal for gold as it reflects strength in the economy and boosted investor risk sentiment. As a result, the strongest Q1 rally of the yellow metal in nearly three decades could come to a halt and the product tracking this bullion like GLD will lose. The fund tracks the price of gold bullion measured in U.S. dollars, and kept in London under the custody of HSBC Bank USA. It is the ultra-popular gold ETF with AUM of $31.9 billion and average daily volume of around 8.7 million shares a day. Expense ratio came in at 0.40%. The fund was down 0.6% on the day and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook. iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ) The U.S. government bonds would be badly hit as strong hiring led to speculation that the economy can withstand a tighter monetary policy. This would lead to higher Treasury yields and lower bond prices. In particular, bonds and ETFs tracking the long end of the yield curve would be impacted the most. The ultra-popular long-term Treasury ETF – TLT – tracks the Barclays Capital U.S. 20+ Year Treasury Bond Index and has AUM of $8.1 billion. Expense ratio came in at 0.15%. Holding 32 securities in its basket, the fund focuses on the top credit rating bonds with average maturity of 26.61 years and effective duration of 17.77 years. The fund is up just 0.05% following the jobs report and has a Zacks ETF Rank of 2 with a High risk outlook. Link to the original post on Zacks.com

The Riddle About Differing Fund Flows And Assets Under Management

By Detlef Glow Click to enlarge Looking at market statistics from different providers such as data vendors, associations, central banks, and others, one realizes that none of the providers state the same number for a fund’s flows or assets under management for a specific date. Even though this may sound a bit odd, it is normal and the nature of the beast. Since all data vendors, associations, and others have a different basis for the data they provide, flow numbers will be different from one provider to another. Data vendors calculate flows based on the funds in their database, while associations use the data on flows and assets under management they receive from their members. These data may include mandates and special-purpose vehicles such as pension funds, which are not mutual funds at all. In contrast, central banks use the holdings data from their associated banks to evaluate the holdings of mutual funds. Statistics calculated for the same topic and for the same market can vary widely, since the underlying data can be totally different. Good examples of the differences in databases for a market segment are the several reports available on the European exchange-traded fund (ETFs) market. While the Thomson Reuters Lipper report focuses only on ETFs, i.e., products that are funds and regulated as such, other reports focus on the whole market of exchange-traded products (ETPs), which means those reports also include structured notes such as exchange-traded commodities (ETCs). Another factor that always leads to differences in numbers is the currency in which the report is calculated, since some providers use euros, while others use the U.S. dollar for the denomination of fund flows and assets under management. But even if two providers of fund flows reports use the same data to calculate the flows for a given region, they may end up with totally different results. The employed methodology for the calculation of the flows might be different and would by definition lead to different results. In addition, all results are dependent on correct and timely data input from the fund promoters, since any inaccurate numbers in the database impact the quality of the statistics. Even though a data vendor might have quality checks in place for the incoming data, it may not find all the corrupted data. Even though quality checks do help to get the numbers right, some data may be missing and have to be estimated with an algorithm. This also explains why flows and assets under management data change over time, since it takes a while for all the fund promoters to deliver correct data. All in all, it can be said that the most recent fund flows and assets under management statistics published shortly after the end of month should be seen more as a guide to evaluate market trends than as a scientific result. Anybody who uses these kinds of statistics should make a decision about which statistics suit their needs best and then stay with those statistics. This does not mean that one should not question whether the displayed data are right, but one should realize that there always will be differences in flows data for any given month. The views expressed are the views of the author, not necessarily those of Thomson Reuters Lipper.