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Surprise ETF Winners Post Job Data

The U.S. labor market latched on to strong job gains in November, sealing the chances of a Fed lift-off as early as in two weeks. The ‘headline’ jobs number came in at 211,000 for November, breezing past the estimated 200,000. In fact, the data for September and an already-sturdy October were also upgraded to reflect 35,000 additional jobs than earlier revealed. Notably, wages and the unemployment rate were also steady in November. The unemployment rate remained unchanged at 5% – a more than seven-year low level. The monthly tally for the last three months now averages at 218K. However, the labor market has room for further improvement. This is because the underemployment rate, which reflects part-time workers who’d wish a full-time placement and people who want to work but have stopped searching, inched up to 9.9% in the month from 9.8% in October, per Bloomberg . The labor forces’ participation rate remains at a multi-year low of 62.5% (minutely up from October). Average hourly earnings are rising off late but are far from creating wage inflation. The nudge in the underemployment metric, widely viewed as the Fed chief Yellen’s preferred benchmark for measuring the labor-market condition, hints at a slower rate hike trajectory once the Fed embarks on this path. After all, the economy is yet to attain the Fed’s 2% inflation goal. The economy has failed to reach that target after April 2012. Fed officials now expect a 74% probability of a hike, while the effective funds rate post hike is likely to be 0.375%, per Bloomberg. Market Impact While the broader market has already settled in with the looming liftoff this month, it has now started analyzing the pace of the rate hike. As a result, a good-but-not-outstanding job report, laden with a few loopholes, has strengthened the chance of a slow and small rate hike trail ahead. This produced a handful of surprise winners and losers post November job data. The belief is that when rates rise or a chance of a rise is higher, the greenback strength puts pressure on commodities and the bond market underperforms. But after the November job report, we noticed certain changes in sentiments in the investment dynamics as the market is now focusing more on a sluggish rate hike, not just the hike itself. Given this, we have highlighted ETF winners and losers from the November payroll report. Winners SPDR Gold Shares (NYSEARCA: GLD ) Gold bullions plunged to a six-year low level on a rising greenback and muted inflation globally. However, the bullion tested many lows already and the lift-off seems almost priced in, the bullion reversed its trend post job data. The bulls are back in the gold market as many analysts believe that the Fed will not react fast after initiating the policy normalization process. This gave the gold bullion ETF GLD a gain of over 2.2% on December 4, the day a steady job report published, defying the traditional investing theme. The fund added about 0.1% after hours. GLD is down over 8.4% so far this year (as of December 4, 2015). GLD has a Zacks ETF Rank #3 (Hold). iShares 20+ Year Treasury Bond (NYSEARCA: TLT ) This is a beneficiary of the positive economic momentum. Yield on the benchmark 10-year Treasury note dipped 5 basis points from the previous day to 2.28% on December 4 whereas yield on the 20-year note declined 7 bps to 2.65% on the same date. As a result, treasury bonds rose after the payroll data. Long-term U.S. bond ETF TLT was up about 0.9% in the key trading session. The fund has a Zacks ETF Rank #2 (Buy). iShares Select Dividend (NYSEARCA: DVY ) This high dividend ETF also flouted the traditional conviction that income investing slackens in a rising rate environment. Since yields on longer-term treasury bonds fell, investors rushed toward high income instruments. DVY yields about 3.29% (as of December 4, 2015) and gained about 1.6% on December 4, 2015. PowerShares DB US Dollar Bullish ETF (NYSEARCA: UUP ) A healing job market and economic improvement are attracting more capital into the country and appreciating the U.S. dollar. UUP is the direct 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. Though further strength in the greenback now looks limited after months of steep ascent, UUP advanced over 0.7% on December 4. iShares MSCI Emerging Markets (NYSEARCA: EEM ) Emerging markets normally fall out of favor in a rising rate environment as investors dump these high-yielding, but risky, investing tools for higher yields at home. However, the emerging market ETF EEM was up about 0.7% on December 4 and lost about 0.1% after hours. EEM has a Zacks ETF Rank #3. Loser SPDR Barclays 1-3 Month T-Bill ETF (NYSEARCA: BIL ) This product offers exposure to the short end of the yield curve by tacking the Barclays 1-3 Month U.S. Treasury Bill Index. Since the Fed hikes the short-term interest rate, yield on the benchmark 6-month Treasury note rose 4 basis points to 0.49% on December 4 and will likely to remain stressed in the coming days. Original Post

ETFs Don’t Kill Investors, Investors Kill Investors

There was a good piece in the WSJ today discussing potential “flaws” in Exchange Traded Funds (ETFs). ETFs are a relatively new product that have amassed huge quantities of assets in the last few decades, but are still dwarfed by the mutual fund space (roughly 2.1 trillion in assets, versus 12.6 trillion in mutual funds). The SEC recently said “It may be time to re-examine the entire ETF ecosystem.” That sounds a bit hyperbolic to me. ETFs aren’t necessarily dangerous unless you misunderstand them or misuse them. Unfortunately, a lot of behavioral bias appears to be driving the misguided fears about ETFs. 1. ETFs can be dangerous when misused. The first exchange-traded fund founded in 1993 was the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) which was designed to track the S&P 500. It’s a remarkably tax- and fee-efficient product that has served its investors very well since its founding. This was a very simple product designed for passive indexing, but the ETF space has morphed substantially since 1993. Much like the mutual fund space, it has morphed from a simple indexing product into a series of products that feed investor impatience and desire for rapid profits. And so we’ve seen a substantial surge in “active” ETFs, leveraged ETFs, “hedged” ETFs and other similar products. Many of these products abuse the efficiencies of ETFs by being tax-inefficient and fee-inefficient. They sell the diversification of indexing, but saddle investors with all the negatives that result in higher fees, tax inefficiencies and poor performance. I’ve written substantially on the dangers of leveraged ETFs and how fund companies sell high-fee closet indexing ETFs in exchange for empty promises about hedging and “market beating” returns. These products, in my opinion, are often dangerous and sold on false premises. But that does not mean we should make sweeping generalizations about the entire ETF space. The fact that some ETFs are bad does not mean they are all bad. ETFs are dangerous when misunderstood and misused. As Warren Buffett says, never invest in something you don’t understand. 2. ETFs traded precisely as they should have during the August Flash Crash. One of the primary drivers of the fears around ETFs was the morning of the Flash Crash in August, when many ETFs declined by 30-40% for no reason. We should be really clear about what happened earlier this year during the Flash Crash. ETFs traded precisely how they should have during this event. ETFs are liquid trading instruments designed to reflect the aggregate performance of their underlying holdings. On the morning of the Flash Crash, there were a huge number of stocks that were halted or illiquid. An ETF trades with a market price (the price you see) and an intra-day indicative value (the price the market maker sees). The market maker will try to keep the IIV as close to the market price as they can by making a market in the ETF. But when most of the underlying holdings are halted, there is no reliable IIV, and so, the price of the ETF is basically unknown until the underlying holdings open again. This problem was exacerbated during the Flash Crash because there are fewer human traders there to identify the sorts of issues that I identified in real time: Unfortunately, a lot of people didn’t understand this or implemented stop loss orders that resulted in sales well below where the ETF should have actually been trading. I watched this happen in real time, and was even able to execute buy orders at a 25%+ discount, due entirely to these behaviorally biased investors. Make no mistake, this was not a flaw in the way ETFs work. It was purely user error. ETFs are not inherently dangerous, but like many investment products, they can be abused by people who don’t understand them or misuse them. This isn’t a product flaw. It is a human flaw as old as the financial markets themselves. If you want to better understand ETFs I recommend reading the following primer from ICI or this one from BlackRock . Well informed is well armed.

HYG Junk Bond ETF Continues Lower As Oil Prices Fall

The high-yield junk bond ETF (NYSEARCA: HYG ) continues to trend lower, and Monday’s drop of 0.7% left it at a new multi-year low. As HYG’s price moves lower, its yield moves higher, but at 5.8%, the yield is still half of what it was at the start of the equity bull market in early 2009. Investors look for the “risky” equity market to trend in the same direction as the junk bond market, but clearly that hasn’t been the case over the last 18 months or so. As “junk” has fallen, the S&P 500 has continued to trend slightly higher. The reason is because of the drop in oil prices. High-yield debt in the Energy sector accounts for a large portion of the drop in the broad high-yield debt market, but stock price drops in the Energy sector haven’t been enough to move the needle significantly lower for the broad S&P 500. Below is a chart of the price of oil compared to the HYG junk-bond ETF. They have tracked each other very closely recently. We covered this topic in more detail in Monday’s Chart of the Day (subscription required). (click to enlarge)