Tag Archives: etf-hub

WisdomTree Plans Another Small-Cap Hedged Europe ETF

WisdomTree Investments (NASDAQ: WETF ), the industry’s fifth largest ETF provider, has been stuffing up its product pipeline with hedged products. Already a reputable issuer with rich experience in rolling out successful currency hedged products, WisdomTree was quick to spot new opportunities latent in the international arena. Presently, WisdomTree dominates the space with the WisdomTree Japan Hedged Equity ETF (NYSEARCA: DXJ ) and the WisdomTree Europe Hedged Equity ETF (NYSEARCA: HEDJ ) having AUM of $13.5 billion and $10.6 billion, respectively. Other issuers like Deutsche Bank and iShares are far lagging the WisdomTree funds. However, the loose money market policies have now encouraged WisdomTree to file for a new hedged ETF targeting the small-cap European space. Newly Filed Product in Focus The passively managed fund looks to provide exposure to small companies across Europe by tracking the performance of the WisdomTree Europe Hedged SmallCap Equity Index. The index has a tilt toward dividends and rules out the weakness in euro against the greenback. To do so, the concerned index takes into account the dividend paying companies in the bottom 10% of the total market cap of the WisdomTree Dividend Index of Europe, Far East Asia and Australasia. Selected stocks trade in euros and are domiciled in a European country. The utmost weight of any single security is sealed at 2%, whereas the ceiling for the maximum weight of any one sector and any one country remains at 25% . The fund looks to charge 58 bps in fees. How Does It Fit in the Portfolio? The newly launched ETF can be a good choice for investors seeking exposure to the small cap companies within the Europe while avoiding current risks. For the U.S. investors, a descending euro affects total returns, when repatriating to dollars. Following the recent QE launch in the Eurozone and negative interest rates prevailing in several economies, the euro has weakened to multi-year lows versus the U.S. dollar. For this reason, investors wanted to consider a hedged euro play while intending to stay exposed in the likely recovery of Europe. This is especially true given that small cap companies are closely tied to the European economy and generate the majority of their revenues from the domestic market. Moreover, they pick up faster than their larger counterparts in a growing economy. Also, focus on dividends will benefit investors as the region is presently seeing an ultra-low interest rate environment. So monetary easing and currency weakness should support European consumption and may in turn boost small cap stocks. This clearly explains why WisdomTree’s recent filing is well timed. ETF Competition The newly launched fund is likely to face competition from other WisdomTree products such as the WisdomTree Europe Small Cap Dividend ETF (NYSEARCA: DFE ), the iShares MSCI Europe Small-Cap ETF (NASDAQ: IEUS ) and the SPDR EURO STOXX Small Cap ETF (NYSEARCA: SMEZ ). Among the trio, DFE emerged as a popular player as it has amassed as much as $734.5 million in assets and tracks the WisdomTree Europe SmallCap Dividend Index, a fundamentally weighted index that measures the performance of the small-capitalization segment of the European dividend paying market. DFE also charges 58 bps in fees. WisdomTree’s prior success in similar themed products should translate into recognition for the recently filed ETF, if approved. Plus, the new product has a hedged treatment unlike others, calling for additional gains in the current environment.

Have Bonds Lost Their Safe Haven Status To Gold?

Summary Price correlations have changed. Bonds no longer trade inversely to stocks. Bonds are no longer the safe haven. Gold is the new market safe haven. Traditionally speaking, bonds and stocks have traded inversely to each other . This is evident if one looks at these charts below. In 2008, the TLT (a bond ETF) went up in value, whereas the Dow crashed. In 2009, the TLT declined in value, whereas the Dow began its new bull market. But in 2011, that traditional correlation changed. In 2011, the bond market started to rise in correlation with the stock market. The bond market didn’t rise in an esclator like fashion such as the stock market, but it did rise in correlation with the stock market. This new correlation can be attributed to foreigners buying US assets , combined with the fact that the Federal Reserve was buying US treasuries, thus suppressing interest rates. Foreigners weren’t just buying US stocks, they have also bought US real estate as well . This form of flight capital and QE, has now made all US assets rise contemporaneously. In 2011, this wasn’t the only correlation that changed, as the two charts below show. As you can see from 2005-07, the price of gold rose in correlation with the stock market. Then in 2008, during the financial crisis, the price of gold declined with the stock market. From 2009-2011, Gold and the Dow, both rose in value. In 2011, however, that correlation changed. Gold started to decline in value, while the stock market keep rising. In my opinion, the one correlation that hasn’t changed, is the one between gold and bonds. Looking at the two charts below, I think they have always traded inversely of each other. From 2005 to 2007, gold rose in value, while the bond market remained relatively flat. During the ’08 crisis, bonds rose almost vertically, while the price of gold declined briefly. After the 08 crisis, the price of gold rose drastically, while the bond market declined. Lastly, in 2011, the bond market started to rise in value, while gold started its decline. Conclusion As stated above, one can see the price correlations have changed, this is likely due to global quantitative easing . If there is another crash, or foreigners loose confidence in the US markets, stocks and bonds will have a high a probability of declining in value at the same time, and unlike previous market panics, gold will be the new safe haven, and not bonds. I am not saying there will be a market crash soon, but if there is, it won’t be bonds that will perform well (like they did in 2008), it will be gold. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

The Backtest Called Buy And Hold

A backtested strategy is one that looks at historical market behavior and cycles, creates a trading rule, and then repeats that rule in a disciplined quantitative way. Buy and Hold is a backtest. All backtested strategies have cycles. “The one size fits all approach of standardized testing is convenient but lazy.” – James Dyson In my travels around the country presenting to and meeting with hundreds of financial advisors and individual investors, I’ve been fortunate to really get a clearer understanding of how people in the business of portfolio management think. Those who have attended my various Chartered Financial Analyst (CFA) and Market Technicians Association (MTA) Chapter presentations on our award winning papers come out of the sessions with a deeper understanding of how Utilities and Treasuries can help with predicting stock market corrections and volatility. The presentation has evolved over the past six months, now hitting on topics related to behavioral finance, false positives, anomaly persistence, and discipline in sticking to an investment strategy beyond the small sample we all live in. Occasionally in my one on one meetings with advisors discussing our research I receive a degree of skepticism about the strategies outlined in those papers. Some simply do not believe in backtesting market behavior, whereby historical price movement is analyzed and a strategy is created to better position for that path of equity or bond returns. Whenever I encounter disbelief in backtested results, I end up asking that person if he or she believes in buy and hold instead of backtested strategies. The answer is always yes. The next question I then ask is a simple one – isn’t buy and hold itself a backtest? Think it through. A backtested strategy is one that looks at historical market behavior and cycles, creates a trading rule, and then repeats that rule in a disciplined quantitative way. The results either show a persistent anomaly exists which can be exploited (momentum, small-cap effect, mean reversion, etc), or the backtest fails. Buy and hold is nothing more than a backtest as well. It is a trading rule with one decision: buy. In addition, one can argue buy and hold is an anomaly throughout time as well given how persistently doing nothing seems to outperform the vast majority of traders and investors who act on noise and not signal. Every backtested strategy, and every anomaly of course has its own cycles. No strategy works all the time. Even in the 2014 Dow Award winning paper on Beta Rotation (click here ), we show that the backtest of a rotation around Utilities (NYSEARCA: XLU ) and the stock market (NYSEARCA: SPY ) underperforms the stock market going back to 1926 around 20% of the time on a rolling 3 year basis. The anomaly documented in that paper which is what we attempt to take advantage of in our alternative and equity mutual funds and separate accounts itself has cycles, just like buy and hold does. This leads us to today. As mentioned in my last week in review writing (click here ) I alluded to the idea that rates may finally rise and the yield curve could steepen, simply as a contrarian trade to an unrelenting trend. That indeed has happened. Our inflation rotation strategy nicely took advantage of the January Treasury strength and held on to it as buy and hold of Treasuries (NYSEARCA: TLT ) so far in 2015 has largely given back those gains. Our beta rotation strategy was among the few US equity approaches positive in January as everything else fell hard, and continues its lead. Why? Because the cycle of volatility and risk management appears to re-asserting itself. Our entire approach is built on proven leading indicators of exactly those types of environments over time. There are some very powerful trades that we believe we have the ability to take advantage of this year as the indicators that drive our models begin to reassert themselves in a normalizing environment. If indeed our cycle is about to return, then the buy and hold backtest will itself have its own period of weakness. The timing of this makes some sense given the likelihood of the Fed raising rates this year. Perhaps the complete love of passive indexing which everyone seems to want now, but no one wanted in March 2009, is due to work less well. Diversification is nothing more than the process of combining low or uncorrelated backtests in a portfolio, attempting over time to smooth out returns and generate wealth. Some backtests in certain periods work better than others. That’s exactly why combining multiple strategies and asset classes in a portfolio over long periods of time tends to be superior to the trade of the moment. To that end, we are at the moment very excited for how intermarket relationships are now finally behaving. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article. Additional disclosure: This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.