Tag Archives: etfs

Lipper Fund Flows: Money Markets Gain While China Surprises

Lipper’s fund macro-groups (including both mutual funds and exchange-traded funds) had aggregate net inflows of $4.9 billion for the fund-flows week ended Wednesday, August 12. This marked the second consecutive week of overall positive net flows and the fourth week in the past six. Every group except taxable bond funds (-$2.0 billion) took in net new money. Money market funds (+$6.0 billion) paced the groups in net inflows and were followed by equity funds (+$936 million) and municipal bond funds (+$11 million). In market activity, the Dow Jones Industrial Average closed down 0.79% (-137.96 points), while the S&P 500 Index retreated 0.66% (-13.79 points) on the week. It was a volatile week of trading, with the Dow experiencing three days of triple-digit moves (two down and one up) and another day that saw it recoup almost all of its more-than-270-point intraday loss to close the day down less than one point. A good deal of the market’s uncertainty was triggered by China’s surprise move to devalue its currency on two consecutive days (August 11 and 12). China made these moves in response to a string of recent economic data that indicated the world’s second largest economy is slowing. The first devaluation shook the U.S. equity markets, with the Dow and S&P 500 closing down 1.2% and 1.0%, respectively, in direct response to the news. After the second currency devaluation, the Dow and the S&P continued their descent from the previous day, but both bounced back to finish virtually unchanged. The market rebounded on speculation the Federal Reserve might push back its highly anticipated September interest rate hike in response to fears that China might devalue its currency further as well as on buying of some recently oversold issues (Apple, energy stocks). The $6.0 billion of net positive flows into money market funds represented their second consecutive week and the seventh of the last nine weeks of taking in net new money. This streak reduced the group’s net outflows for the year to date to $55.0 billion. Institutional money market funds were responsible for $11.2 billion of the group’s net inflows for the week. For equity funds, ETFs accounted for the bulk of the net inflows (+$646 million) for the week, while mutual funds benefited from $290 million of the positive flows. The two largest individual net inflows for ETFs belonged to Deutsche X-trackers MSCI EAFE Hedged Equity ETF ((NYSEARCA: DBEF ), +$562 million) and Utilities Select Sector SPDR Fund ((NYSEARCA: XLU ) , +$382 million ) . Following the trend we’ve seen for most of 2015 among mutual funds, nondomestic equity funds (+$1.1 billion) took in net new money for the week, while domestic equity funds (-$466 million) saw money leave their coffers. ETFs were responsible for the majority of the net outflows (-$1.3 billion) for taxable bond funds, while mutual funds saw $759 million leave. The data indicated investors were running away from high yield in both mutual funds and ETFs. iShares iBoxx $ High Yield Corporate Bond ETF ((NYSEARCA: HYG ), -$524 million) and SPDR Barclays High Yield Bond ETF ((NYSEARCA: JNK ) , -$305 million) saw the most money leave among ETFs, while Lipper’s Loan Participation Funds (-$567million) and High Yield Funds (-$254 million) classifications had the largest negative flows on the mutual fund side. Municipal bond mutual funds had net inflows of just over $11 million for the week. Funds in the national muni debt classifications (+$28 million) were the beneficiaries of the largest positive flows. Share this article with a colleague

Value And Momentum: A Beautiful Combination

Asset allocation should be a dynamic process. Value-based asset allocation can serve as a long-term investment guide. Momentum can potentially add value by allowing tactical shifts. In our most recent articles, Diversification Is Not Sufficient and Value Based Asset Allocation , we documented two simple strategies for asset allocation. The strategies are based on two seemingly opposed factors, value and momentum. We illustrated in each article the historical results of following each strategy. Empirically, each demonstrated superior results to a static allocation approach. This article illustrates the benefits of combining the two strategies. The value-based asset allocation system (Value Allocator) is a robust enough system on its own to help you navigate the uncertain markets and avoid getting caught in the next crash. The problem is that the system is most likely behaviorally impossible to apply. Using momentum to complement the strategy is an important enhancement that provides participation in further growth and protection in the down markets. The momentum strategy appears to deliver the best results historically. However, we did not examine the impact of transaction costs (most likely negligible) and taxes (significant). We have no way to estimate the tax ramifications of any system as it is obviously only successfully analyzed at the individual level. The momentum-based strategy, because of the short-term gains, is most likely the least tax efficient. Momentum strategies are also difficult to follow year in and year out. Momentum trading does not always resemble the overall stock market. In fact, these types of strategies often look much different from the traditional stock indices like the Dow Jones Industrial or the S&P 500. Since the bottom in 2009, the Barclays CTA Index (a common benchmark for trend following) has been down in every year except for 2010 and 2014. The stock market has not had a negative year since 2008. Again, momentum strategies in isolation are extremely difficult to follow over a long period. In efforts to remain pragmatic, we have combined the value based strategy and a simple momentum strategy to provide a comprehensive asset-allocation system. From this point forward, we will reference the Value Allocator as the strategic component of our asset allocation, and the momentum strategy as our tactical overlay. The combination of the two strategies keeps an investor from moving the entire policy portfolio tactically and keeps a portion in a passive, strategic posture. The strategic component is based on the assumption that markets revert to the average. The problem is that mean reversion occurs over a period of seven to ten years. Valuations tell us very little about what is going to happen over the subsequent one to three years. Our strategic asset allocation process is based on long-term value and contrarian positioning. Tactical asset allocation is the process of taking positions in various investments based on short to intermediate term opportunities. Our tactical overlay is therefore based on reacting to the trend. This is an interesting relationship as the two strategies can offer up diametrically opposed recommendations. For instance, when the US stock market is overvalued, the Value Allocator would recommend rotating to a more conservative portfolio. At the same time, if the trend was positive but the market still overvalued, the tactical overlay would recommend overweighting. You can see the conflicts that can arise, and we assure you they have surfaced in the past. The Value Allocator-as illustrated in Value Based Asset Allocation -can rotate between 30 percent stocks and 70 percent bonds and 70 percent stocks and 30 percent bonds. The tactical portfolio is either 100 percent in stocks or 100 percent in the US 10-year Treasury bonds. The following matrix embodies all possible allocations when the two strategies are combined in equal proportions: Undervalued Market Overvalued Market Positive Trend 85% stocks /15% bonds 65% stocks/35% bonds Negative Trend 35% stocks /65% bonds 15% stocks /85% bonds The investor can have as little as 15 percent in stocks and as much as 85 percent. The wide range allows the investor to adapt to all market conditions, protecting when the odds are poor and growing when the odds favor return enhancement. Instead of fixing the allocation on a static portfolio, investors are allowed the flexibility to adapt their risk tolerance to the current environment. For instance, if the current market environment is undervalued, and the trend is positive, the environment is favorable for stocks. Thus, the investor would be positioned heavily in that asset class. (click to enlarge) The combination of the Value Allocator and momentum strategy outpaced the S&P 500 and fifty-fifty (stocks-bonds) benchmarks by a large degree. The advantage of the combination of these two strategies is quite clear. The worst loss the combination strategy experienced from 1972 to 2014 was 9 percent in 1974 when the market was down almost 26 percent. The Value Allocator, when analyzed in isolation, was down almost 18 percent during that same year. The momentum system added an extra layer of protection when the Value Allocator arrived early to the party. In addition to providing an extra layer of protection, the combination strategy provided growth that would have otherwise been missed during the late 1990s and from 2003 to 2007. The market stayed overvalued from 1990 until the beginning of 2009. If you had followed the Value Allocator during this period, you would have been disappointed. The combination strategy would have minimized the underperformance to the benchmark by keeping you at a higher equity position throughout the 1990s. In the chart depicted below, you can see the market outperform the combination strategy over this period. (click to enlarge) The market outperformance was only temporary, however, as the 50 percent decline from the peak in 2000 was largely avoided. In addition, instead of keeping the allocation conservative from 2003 to 2007, tactical positioning kept investors engaged in the markets. Following the Value Allocator alone from 2003 to 2007 would have had the investors conservatively positioned in 30 percent stocks and 70 percent bonds-largely missing the rebound from the tech wreck. The tactical component of the portfolio would have allowed investors to maintain 65 percent in stocks when the trend was positive, despite the overvalued conditions of the market. Astute investors would most likely diversify their strategic asset allocation with tactical positions. Value and momentum are two of the strongest factors of market returns, and their significance remains rather stable over time. Combining both value and momentum strategies in a disciplined fashion can create desirable investment results. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) 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: HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. PAST RESULTS DO NOT GUARANTEE FUTURE RETURNS. HYPOTHETICAL PERFORMANCE FOR ILLUSTRATION PURPOSES ONLY.

USO: A New Way To Think About Your Oil Investments

The surprising plummet in petroleum prices over the past 12 months has caught a lot of people off-guard, and has presented a variety of consequence. For investors, It has created downward pressure on most, but not all petroleum-related equities. For many Americans with less of a vested interest in the matter, the drop has meant a quasi-tax-cut, with a gallon of gas falling from $4-$5 a gallon to something a bit more tolerable. Those employed by the industry may be fearing for their position or may have already been told they are out of work. Foreign economies dependent on oil exporting are vulnerable to economic collapse. The integrated oil giants such as Chevron (NYSE: CVX ), Exxon (NYSE: XOM ), and BP (NYSE: BP ) tend to be core holdings in many long-term portfolios. While perpetual optimists – sometimes referred to as “perma-bulls,” seem steadfast in the view that oil prices will “come back,” I would caution against that assumption. “Forever” investors – those that buy and generally never sell a stock – have no choice but to think in optimistic terms since they, either voluntarily or involuntarily, lock themselves into ownership. The fact of the matter is we don’t know that oil will “come back.” We may never see $100 a barrel oil again in our lifetimes. Near-term we are swimming in a veritable glut of the stuff. Supply imbalance combined with bullish speculator abandonment of petroleum, has created, as is typically in today’s fluid financial markets, a frenzy of attention. OPEC has not helped those looking for a price reprieve and seems keen on keeping production level, and prices low. The price of the United States Oil Fund LP ETF (NYSEARCA: USO ) has fallen 28 percent in six months. Whether you think the price action is justified or not should not be a huge consideration, although a forward thesis can help you keep focus on how your approach energy investment. As an investor you must learn to cope with varying situations. To assume you know what the price of oil will do in the coming months, years, or decades, is foolhardy. Uncertainty of financial markets is why diversification, amongst asset type, sectors, stocks, and investment style is such a strong risk management tool. For some investors, adding to these kinds of stocks may make sense here, for others, taking their lumps and decreasing net exposure to oil may be the proper move. Opportunistic investors should avoid obsession over the decline in oil stocks , instead focusing in on industries that might benefit from prolonged cheap oil. Instead of adding to a position in Exxon, which is being pressured, how about investing in airlines – an industry where fuel is a significant expense. How about cruise lines – again, an industry that sees fuel as a significant input and where tame pricing leads direct to the bottom line. Automakers stand to benefit the longer oil prices stay low . With more disposable income in their pocket, consumers may opt for bigger gas guzzlers that means higher margins for auto companies. How about trucking companies? Get out of the box and start thinking where profits may be soaring. While Exxon has dropped 25% the past year, Southwest Airlines (NYSE: LUV ) has risen 25 percent. That disparity could continue. Don’t short USO, when there’s safer plays that could be just as rewarding out there against an oil collapse. There are certainly other areas in the market where waiting around for something to happen has not been the wisest of bets. For years there have been those thinking that the bond market has been in a bubble. Most of these investors have sat on the sidelines, most likely in cash, waiting for a massive rise in interest rates that has yet to materialize. It may never materialize . As I write this, the 10-Year Treasury sits at 2.15% after briefly brushing up against 2.5 percent. While even I have cautioned against getting too slap happy with long-term bonds – those with bond exposure have earned their coupons without issue, while those who’ve sat in cash have suffered tremendous opportunity cost. Even if the Fed moves to tighten this year, which is starting to seem rather likely, it’s possible that long rates continue their dovish pattern. Who benefits from low rates? Highly levered companies with solid business models that can obtain low cost capital. Again, instead of focusing on when rates will rise, take advantage of what is, and has been, on the table for quite some time now. Might that end tomorrow,? Perhaps. But don’t invest like you absolutely know how things will shake out. Hedge yourself and manage risk. Indeed, leveraging an entire portfolio to one idea can pose disastrous risk. The investor less exposed to energy over the past year or leveraged to ideas premised on falling oil prices (airlines, cruise lines) has made out like a bandit. Your great-grandfather who has pledged absolutely allegiance to oil stocks, not so much. Instead of guessing when things might happen or sitting on an industry or idea that has obvious headwinds, learn to embrace what the economy and financial markets afford you. It’s one thing to be optimistic. It’s another thing to pretend you know more than you really do. Disclaimer: The above should not be considered or construed as individualized or specific investment advice. Do your own research and consult a professional, if necessary, before making investment decisions. Adam Aloisi was long shares of Southwest Airlines, Norwegian Cruise Line, Exxon, and General Motors at time of writing, but positions can change at any time. 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