Tag Archives: etf-hub

Benchmarks May Have Their Uses But Gauging Portfolio Risk Is Not One Of Them

By Nick Kirrage Here on The Value Perspective, we have nothing against market indices in themselves but we do worry about how investors sometimes use them. Say you wanted to measure the relative returns on your investments over a suitably long time period, then please – benchmark away. But if you were planning to use an index as a way of gauging risk on your portfolio, here is why you should think again. People tend to see benchmarks as neutral entities and so, in some way, as an indication of safety – yet they are anything but. The classic example here – as so often – is the tech boom of the late 1990s. As technology stocks rose in value to become an ever greater part of market indices, so any ‘benchmark-aware’ funds had to buy more and more of the sector. As we know, this did not end well. Clearly, buying more tech in early 2000 as a means of reducing your risk relative to a benchmark index was a pretty flawed strategy but this is hardly a one-off example in the world of equities – or indeed in investment as a whole. In the fixed income sector, for example, index-relative global funds end up increasing their exposure to countries with the greatest amount of debt, regardless of the inherent risks. The reason we are revisiting the issue here is because of the recent decision by index provider MSCI not to include ‘A-Shares’ – those traded on China’s mainland stock exchanges of Shanghai and Shenzhen, as distinct from the ‘H-Shares’ traded on the Hong Kong exchange – within its principal global emerging markets benchmark. The last 18 months or so have seen an extraordinary bull run in Chinese equities and, while there have recently been some signs that has started to stall, China – by virtue of those H-Shares – now accounts for roughly 25% of the entire MSCI Global Emerging Markets Index. Had MSCI decided to include China’s A-Shares too, then that weighting would have jumped to around 45%. Presumably it is only a matter of time before MSCI deems all Chinese shares to be part of its emerging markets universe but, to our way of thinking, that is the rather farcical aspect of this debate – after all, regardless of whether MSCI or any other organizations reckons China to be an emerging market, it clearly is one. Where it becomes dangerous – and why we see MSCI’s decision as a near-miss (or perhaps a stay of execution) for benchmark-aware investors – is, the moment A-Shares are included in the index, these people will feel compelled to redirect yet larger quantities of money towards Chinese stocks because they apparently believe it would be a ‘risk’ to be so underweight China relative to their benchmark. But is that not perverse? It is not as if some huge new risk will have been revealed the day China’s weighting moves up from, say, 25% to 45%. Either it was always a risk to hold 25% in China or it was never one. The reality will not have changed, only some of the rules – but those rules can become hugely distorting. After all, if A-Shares had received the nod from MSCI and China now made up almost half the index, benchmark-aware investors would have had to scale back their exposures to other important emerging markets – for example, to 11% in Korea, 5.5% in Brazil and just 5% in India. This may not be quite as stark as our earlier tech boom example but it could have similarly unwanted consequences. Mind you, it could also throw up some similarly inviting possibilities for investors who prefer, as we do here on The Value Perspective, to think about risk in absolute as opposed to relative terms and for whom, in many ways, benchmark indices represent an opportunity more than they do a threat.

Tactical Asset Allocation – July 2015 Update

“}); $$(‘#article_top_info .info_content div’)[0].insert({bottom: $(‘mover’)}); } $(‘article_top_info’).addClassName(test_version); } SeekingAlpha.Initializer.onDOMLoad(function(){ setEvents();}); Here are the tactical asset allocation updates for July 2015. All portfolio updates are online as part of Paul’s GTAA 13 Portfolio New sheet. First, for the basic portfolios – the GTAA5 and the Permanent Portfolio. There was one change in the GTAA5 portfolio. Bonds (via the iShares 7-10 Year Treasury Bond ETF (NYSEARCA: IEF )) went to cash this month. GTAA5 is now 40% invested and 60% cash. For the timing version of the Permanent Portfolio there were no changes this month. The TAA version of the Permanent Portfolio is 50% invested and 50% in cash just like last month. Now for the more aggressive GTAA AGG3 and AGG6 portfolios. There is one change for AGG3 this month. The Vanguard Value ETF (NYSEARCA: VTV ) has replaced the Vanguard Small Cap Value ETF (NYSEARCA: VBR ) in the top 3 although not by much. For AGG6, there is no change this month. While the Vanguard Intermediate-Term Government Bond Index ETF (NASDAQ: VGIT ) replaced the Vanguard Long-Term Government Bond Index ETF (NASDAQ: VGLT ) in the top 6, VGIT is below its 200 day SMA and thus there in no investment in the ETF. AGG6 like last month only has 5 holdings for July. Performance for the portfolios so far this year is in the table below. Numbers are for each month. The figures are estimates taken from a variety of sources. I don’t do detailed performance tracking until the end of the year. (click to enlarge) If you’re a fan of the Antonacci dual momentum GEM and GBM portfolios, GEM continues to be invested in U.S. stocks (via the Vanguard Total Stock Market ETF (NYSEARCA: VTI ) ), and the bond momentum option of the GBM portfolio continues to be invested in U.S. long term gov’t bonds (via the Vanguard Long-Term Government Bond Index ETF ( VGLT )). No changes from last month. That’s it for this month. These portfolios signals are valid for the whole month of July. As always, post any questions you have in the comments. Share this article with a colleague

Has CEFL Done As Badly As It Looks?

Summary CEFL’s share price has reached all-time lows. After accounting for reinvested dividends, CEFL’s total return doesn’t seem all that bad. If we exclude the two “rebalancing months” at the turn of this year, CEFL has actually done pretty well. Introduction The UBS ETRACS Monthly Pay 2xLeveraged Closed-End Fund ETN (NYSEARCA: CEFL ) is a 2X leveraged fund of close-ended funds [CEF] that sports a juicy 21.8% yield, according to Lance Brofman’s recent article . However, recent events have caused CEFL’s share price to fall to an all-time low since its inception in Dec. 2013, something that is frequently mentioned in the comment streams of articles on CEFL. The following chart shows the price return of CEFL compared to two other funds from Jan. 1st, 2014 to May 31st, 2015 (the reason for this date range will become apparent later). The YieldShares High Income ETF (NYSEARCA: YYY ) tracks the same index, the ISE High Income Index, as CEFL, but is unleveraged. The PowerShares CEF Income Composite ETF (NYSEARCA: PCEF ) is also a fund-of-CEFs but it tracks a different index. The broader U.S. market SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) is shown for comparison. YYY data by YCharts As can be seen from the above chart, Jan. 1st, 2014 to May 31st, 2015, CEFL declined by -16.1%, which is approximately twice that of YYY at -8.45%, whereas PCEF declined by only -2.02%. SPY had a price return of 15.66%. Undoubtedly, CEFL’s price-only action has been ugly. Effect of reinvesting dividends What if dividends are accounted for? The following chart shows the total return of the same four funds, i.e. with dividends reinvested. YYY Total Return Price data by YCharts We can see from the above graph that if dividends are accounted for, CEFL’s total return becomes positive, at +7.89%. YYY had a total return of +3.81% over this period, while PCEF had a total return of +9.70%. SPY’s total return was +18.21%. Effect of last year’s rebalancing shenanigans As I have written about previously ( I , II , III ), CEFL/YYY holders were seemingly shafted during the index’s annual rebalancing event in Dec. 2014. The CEFs that were to be added to the index exhibited unusual increases in both price and volume, whereas the CEFs that were to be removed from the index exhibited unusual increases in volume but decreases in price. This apparent “frontrunning” caused CEFL/YYY to sell low and buy high, resulting in significant losses for the funds (and ergo, its investors) upon rebalancing. Moreover, CEFL/YYY continued to underperform in Jan. 2015 as the newly-added CEFs, whose prices were artificially inflated to aberrant levels, exhibited mean reversion. All of this discussion can be found in greater detail in my previous articles linked above. The following chart shows the monthly total returns for the four funds from Jan. 2014 to May 2015. Data were obtained from Morningstar . (As of time of writing, monthly return data for Jun. 2015 were not yet available). We notice that from the above chart that YYY/CEFL had their worst performances in Sep. 2014 and Dec. 2014. However, to get a better feel for the effect of rebalancing, the following chart shows the monthly returns for only YYY and PCEF (as both are unleveraged), with the difference being drawn as a line. From the above chart, the effect of the rebalancing shenanigans on YYY/CEFL becomes clear. Although YYY showed the lowest absolute performances in Sep. 2014 and Dec. 2014, the two months where it underperformed most on a relative basis (compared to PCEF) were Dec. 2014 (-2.48%) and Jan. 2015 (-2.78%), i.e. the two months associated with the rebalancing event. Given that both YYY and PCEF are CEF fund-of-funds, this underperformance lends further credence to my hypothesis that YYY/CEFL holders were significantly disadvantaged by the rebalancing event. Total return profiles with and without rebalancing shenanigans From the monthly return data, I reconstructed the total return profiles for the four funds from Jan. 2014 to May. 2015. Note that the final total return percentages for the funds are within 1% of the numbers reported by YCharts shown above (see second chart of this article), indicating that the reconstruction methodology I used was reasonably accurate. Now, let’s pretend we were living in an alternate universe where YYY/CEFL holders were not shafted by the rebalancing event. To model this, I changed YYY’s monthly returns for Dec. 2014 and Jan. 2015 to be the same as PCEF’s (since both are fund-of-CEFs), and made CEFL’s monthly returns for those two months twice that of YYY’s. The following chart shows the reconstructed total return profiles for the four funds. Wow! What a difference two months makes! Instead of languishing with a +7.4% total return from Jan. 2015 to May. 2015, CEFL jumps to the top of the pack with a total return of +18.3%, edging out even SPY. An alternative approach is to assume that the months of Dec. 2014 and Jan. 2015 never happened . The following chart shows the reconstructed total return profiles for the four funds, except that Dec. 2014 and Jan. 2015 are skipped. In other words, the monthly total return for Feb. 2014 was applied to value of the funds at end-Nov. 2014. Similar results are observed with the two rebalancing months skipped. CEFL again comes out on top with a 23.2% total return, beating SPY by nearly 2%. Additionally, the two graphs above both show that once we account for rebalancing shenanigans using either of the two approaches, YYY and PCEF have very similar total returns, which might be expected because both funds screen for high-yielding CEFs for inclusion. Discussion and conclusion In many comment streams of articles regarding CEFL, many commentators opine that CEFL is a broken product due to its poor price performance, not to mention its high fees and inclusion of return of capital [ROC]-paying CEFs. While it is true that CEFL’s price has declined by 20% since inception and is currently at all-time lows, its total return, which includes reinvested dividends, has been positive. (This is true even when accounting for CEFL’s horrendous performance in Jun. 2015, which was not included in this analysis). Moreover, this article showed that a significant part of YYY/CEFL’s underperformance can be explained by the rebalancing shenanigans that occurred in Dec. 2014, followed by further underperformance in Jan. 2015 as the artificially-inflated CEFs in the index reverted to the mean. Accounting for those two rebalancing months using either one of two approaches resulted in a vastly improved total return profile for CEFL that was superior even to that for SPY over the period of Jan. 1st, 2014 to to May 31st, 2015. Additionally, we showed that YYY and PCEF had very similar total return profiles once those two rebalancing months were accounted for as well. Based on this analysis, I would conclude that CEFL is not an inherently broken product – except for its current rebalancing mechanism. My opinion is that UBS should really do something about the rebalancing protocol to ensure that CEFL/YYY holders do not get ripped off again this year. As for myself, I will be selling all of my CEFL in early December or even before that, and watch events unfold from afar. Further analysis on the constituents and properties of CEFL can be found in my three-part series “X-Raying CEFL”. Disclosure: I am/we are long CEFL. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.