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Why Popular Investments Are Usually Wrong

By Alan Gula Oscar Wilde, the 19th century poet and playwright, once said: “Everything popular is wrong.” The Irish wordsmith wasn’t referring to the financial markets, but he may as well have been. That’s because investors should be very wary of the popular stocks, sectors, and exchange-traded funds (ETFs) du jour. While it’s true that momentum can persist, more often than not, popularity is the kiss of death. In finance, the degree of popularity is typically referred to as sentiment. Fundamentals matter in the long term, but sentiment is what really drives short- and intermediate-term moves in the financial markets. Caution is, therefore, essential when sentiment reaches a bullish extreme. The Texas Hedge It was a no-brainer, can’t-lose trade. Pundits on CNBC and Bloomberg TV were supremely confident in the outcome. Fund flows poured in to take advantage of its inevitability. This was a “layup” – a sure thing. The Bank of Japan (BOJ) was going to depress the value of the Japanese yen, and Japanese equities would rise due to exporters benefiting from a cheap currency. Naturally, everyone wanted to be long Japanese stocks, but short the yen, and the WisdomTree Japan Hedged Equity ETF (NYSEARCA: DXJ ) provided an easy way to do just that. Except now investors are realizing that they aren’t hedged at all. Ironically, the yen has gone through the roof ever since the BOJ implemented a quasi-negative interest rate scheme. The U.S. dollar/Japanese yen exchange rate (USD/JPY) recently hit its lowest level since October 2014 (a decline in USD/JPY represents dollar weakness, yen strength). Thus, anyone betting on a decline in the yen is getting bludgeoned in the market. Not only that, Japanese equities are, unsurprisingly, falling in tandem with USD/JPY. This is a lose/lose situation for DXJ holders. Since April 2015, when I warned that investors in currency “hedged” ETFs were essentially speculating on currency movements, DXJ has lost 26% of its value (including distributions). Going back even further to early 2014, DXJ has produced a total return of negative 6%. Alas, it was so popular! Over the same time frame, the S&P 500 has returned a positive 16%. Shifting Sentiment To be sure, DXJ now offers a far better risk-reward proposition than it did a year ago. Basically, the fund may excel because the trade is not nearly as popular. We’re even seeing currency futures speculators, in aggregate, bet on yen appreciation . The last time this group had a net long position in the yen was 2012, right before the yen plummeted as “Abenomics” was introduced. In other words, the sentiment of this crowd is a contrarian indicator. Sentiment notwithstanding, the fundamentals for Japan, in general, remain poor. Japan has a shortage of the most precious natural resource on the planet: children. Do the central planners really think that burning their currency at the stake is going to solve anything? Well, they certainly shouldn’t. Nonetheless, the short-term swings will continue, as prices are determined – at the margin – by human behavior and emotions. This is why serially buying the most popular investments is a great way to destroy wealth. Meanwhile, the fundamentals for U.S. Treasuries remain strong. The real trick, however, will be knowing when they, too, have become overly popular. Original Post

S&P 500 Again Shows Weakness: Go Short With These ETFs

After the furious rally since February 12, the S&P 500 has again lost momentum and slipped into the red from a year-to-date look. This is especially true, as investors are apprehensive as to whether the stocks will be able to sustain their gains in the coming weeks given the bleak corporate earnings picture and renewed concerns on global growth uncertainty (read: Top and Flop Zones of Q1 and Their ETFs ). As we are heading into a weak Q1 earnings season, volatility is expected to increase though stabilization in energy prices and the dollar could act as a catalyst. According to the Zacks Earnings Trend , earnings growth will be deep in the negative territory for the fourth consecutive quarter with 10.9% estimated decline. In fact, the magnitude of negative Q1 revisions was the highest among recent quarters with 14 out of the 16 Zacks’ sectors witnessing negative revisions over the past three months. Utilities and retail were the only two exceptions. Revenues will likely be down 2.2% on modestly lower net margins. The release of minutes this week showed that the Fed is unlikely to raise interest rates in April, signaling that weak global growth could hurt the ongoing recovery in the U.S. economy. Further, continued rise in the Japanese currency dampened investors’ faith in central banks’ ability to boost growth across the globe. All these factors coupled with relatively higher valuations have led to risk-off trade, pushing the safe havens higher (read: Q1 ETF Asset Report: Safe Havens Pop; Currency Hedged Drop ). Added to the downbeat note is the International Monetary Fund warning. The agency stated that problems in emerging markets, such as China, could lead to poor stock performance in the U.S. and other developed countries. Given this, the S&P 500 will likely see rough trading ahead and investors could easily tap this opportune moment by going short on the index. There are a number of inverse or leveraged inverse products in the market that offer inverse (opposite) exposure to the index. Below, we highlight those and some of the key differences between each: ProShares Short S&P500 ETF (NYSEARCA: SH ) This fund provides unleveraged inverse exposure to the daily performance of the S&P 500 index. It is the most popular and liquid ETF in the inverse equity space with AUM of nearly $2.5 billion and average daily volume of nearly 7 million shares. The fund charges 90 bps in annual fees. ProShares UltraShort S&P500 ETF (NYSEARCA: SDS ) This fund seeks two times (2x) leveraged inverse exposure to the index, charging 91 bps in fees. It is also relatively popular and liquid having amassed nearly $2 billion in AUM and more than 13.5 million shares in average daily volume. ProShares Ultra S&P500 ETF (NYSEARCA: SSO ) With AUM of $1.6 billion, this fund also seeks to deliver twice the return of the S&P 500 Index, charging investors 0.89% in expense ratio. It trades in solid volumes of more than 4.6 million shares a day on average. ProShares UltraPro Short S&P500 (NYSEARCA: SPXU ) Investors having a more bearish view and higher risk appetite could find SPXU interesting as the fund provides three times (3x) inverse exposure to the index. Though the ETF charges a slightly higher fee of 93 bps per year, trading volume is solid, exchanging more than 6.6 million shares per day on average. It has amassed $728.3 million in its asset base so far. Direxion Daily S&P 500 Bear 3x Shares (NYSEARCA: SPXS ) Like SPXU, this product also provides three times inverse exposure to the index but comes with 2 bps higher fees. It trades in solid volume of about 6.6 million shares and has AUM of $476.8 million. Bottom Line As a caveat, investors should note that such products are suitable only for short-term traders as these are rebalanced on a daily basis. Still, for ETF investors who are bearish on the equity market for the near term, either of the above products could make an interesting choice. Clearly, a near-term short could be intriguing for those with high-risk tolerance, and a belief that the “trend is the friend” in this corner of the investing world. Original Post

U.S. Broker-Dealer And Japan: 2 ETFs To Watch On Outsized Volume

In the last trading session, U.S. stocks ended on a weaker note thanks to renewed global growth concerns. Among the top ETFs, investors saw the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) go down 1.2%, the S PDR Dow Jones Industrial Average ETF (NYSEARCA: DIA ) lose 0.99% and the PowerShares QQQ Trust ETF (NASDAQ: QQQ ) shed 1.44% on the day. Two more specialized ETFs are worth noting as both saw trading volume that was far outside of normal. In fact, both these funds experienced volume levels that were more than double their average for the most recent trading session. This could make these ETFs the ones to watch out for in the days ahead to see if this trend of extra-interest continues: iShares U.S. Broker-Dealers ETF (NYSEARCA: IAI ) : Volume 3.73 times average This U.S. broker-dealer ETF was under the microscope yesterday as nearly 417,000 shares moved hands. This compares to an average trading day of 117,000 shares and came as IAI lost about 3.3% in the session. The movement was due to the dovish Fed minutes as lower rates hamper the income for broking companies. However, the fund has a Zacks ETF Rank #3 (Hold). IAI was down about 3.8% in the past one-month period. iShares MSCI Japan ETF (NYSEARCA: EWJ ) : Volume 2.36 times average This Japan ETF was in focus yesterday as roughly 117.6 million shares moved hands on that day compared to an average of roughly 50.9 million. We also saw some share price movement as shares of EWJ lost 0.5%. The movement can largely be blamed on the strengthening of the yen against the dollar. It could have a big impact on Japan stocks that we find in this ETF portfolio. For the past one month, EWJ was down 3.4%. The fund currently has a Zacks ETF Rank #3 with a Medium risk outlook. Link to the original post on Zacks.com