Tag Archives: events

Will Consumer Staples ETFs Continue To Shine In 2016?

Despite a moderate recovery in the U.S. economy, investors are skeptical about the global issues that have been haunting the markets lately. The global economic slowdown and financial mayhem in China are the main reasons behind the stock market volatility and the decline in the global commodity complex. Also, stronger U.S. dollar, lower traffic and weakness in oil and other commodity sectors are adding to the woes. In fact, consumer confidence – a key determinant of the economy’s health – declined drastically in February, marking the lowest in seven months, signaling that the overseas turmoil is taking a toll on the U.S. economy. According to recent Conference Board data , the Consumer Confidence Index dipped to 92.2 in February from January’s revised reading of 97.8. This indicates the lowest level since July 2015. A slump in consumer confidence would definitely impact consumer spending, which accounts for over two-thirds of U.S. economic activity. The overall tone of the global market remains soft, as we can estimate from the GDP figures, according to the advance estimate released by the Bureau of Economic Analysis . GDP struggled at 1%, after advancing 1.9% and 3.8% in the third and second quarter of 2015, respectively. Nevertheless, market experts anticipate GDP growth of 2% for the January-March quarter on the back of an improving job scenario – with the unemployment rate hovering around 4.9% – and low gas prices that will help increase household wealth and eventually boost consumer spending. In addition to this, improving home sales, higher business and government spending and a buildup in inventories are some favorable economic indicators that play a key role in raising buyers’ confidence. We expect this positive sentiment to translate into higher consumer spending in 2016. Needless to say, the equity markets have become extremely volatile and the overall economic picture is quite bleak. However, we expect to witness a slow but steady recovery in the consumer staples industry, owing to the gradual improvement in consumer spending. Playing the Sector through ETFs Owing to its defensive nature, this sector is likely to outperform when equity markets are bearish and underperform when bullish. The instability in the sector due to factors like U.S. and global exposure can be countered with a wide array of ETFs. The ETFs can act as an excellent investment medium for those who are interested in a long-term exposure within the consumer staples sector. For those interested in taking a look at consumer staples, we have highlighted a few ETFs tracking the industry, any of which could be an attractive pick: Consumer Staples Select Sector SPDR ETF (NYSEARCA: XLP ): Launched on Dec. 16, 1998, XLP is an ETF that seeks investment results corresponding to the S&P Consumer Staples Select Sector Index. This fund consists of 40 stocks of companies that manufacture and sell a range of branded consumer packaged goods. The top holdings include The Procter & Gamble Co. (NYSE: PG ), The Coca-Cola Company (NYSE: KO ) and Philip Morris International, Inc. (NYSE: PM ). The fund’s expense ratio is 0.14% and it pays out a dividend yield of 2.50%. XLP had about $9.345 billion in assets under management as of March 1, 2016. Vanguard Consumer Staples ETF (NYSEARCA: VDC ): Initiated on Jan. 26, 2004, VDC is an ETF that tracks the performance of the MSCI US Investable Market Consumer Staples 25/50 Index. It measures the investment return of large, mid, and small-cap U.S. stocks in the consumer staples sector. The fund has a total of 100 stocks, with the top three holdings being Procter & Gamble, Coca-Cola and PepsiCo, Inc. (NYSE: PEP ). It charges 0.12% in expense ratio, while the yield is 2.53% as of now. VDC managed to attract $3.1 billion in assets under management till Jan. 31, 2016. First Trust Consumer Staples AlphaDEX (NYSEARCA: FXG ): FXG, launched on May 8, 2007, follows the equity index called StrataQuant Consumer Staples Index. FXG is made up of 41 consumer staples securities, with the top holdings being Tyson Foods, Inc. (NYSE: TSN ), Hormel Foods Corp. (NYSE: HRL ) and Constellation Brands, Inc. (NYSE: STZ ). The fund’s expense ratio is 0.62% and the dividend yield is 1.67%. It had $2.44 billion in assets under management as of March 1, 2016. Guggenheim S&P 500 Equal Weight Consumer Staples (NYSEARCA: RHS ): Launched on Nov. 1, 2006, RHS is an ETF that seeks investment results corresponding to the S&P 500 Equal Weight Index Consumer Staples. This is an equal-weighted fund and constitutes 38 stocks, with the top holdings being Tyson Foods, Campbell Soup Company (NYSE: CPB ) and Reynolds American, Inc. (NYSE: RAI ). The fund’s expense ratio is 0.40% and dividend payout 1.75%. RHS had about $622.9 million in assets under management as of March 2, 2016. Fidelity MSCI Consumer Staples ETF (NYSEARCA: FSTA ): FSTA, launched on Oct. 21, 2013, is an ETF that seeks investment results corresponding to MSCI USA IMI Consumer Staples Index. This is a cap-weighted fund and constitutes 102 stocks, with the top holdings being Procter & Gamble, Coca-Cola and PepsiCo. The fund’s expense ratio is 0.12% and the dividend yield is 2.84%. FSTA had about $257.6 million in assets under management as of Jan. 31, 2016. Original Post

Are Robos Fiduciaries When They Provide Financial Advice And Services For Fees?

Very few investors, individual or institutional, know there are two ethical standards for financial advisors and firms . The higher ethical standard is known as “fiduciary.” Financial advisors, who are registered investment advisors (RIAs) or investment advisor representatives (IARs), are held to this higher ethical standard. It requires advisors and firms to place the financial interests of their clients ahead of their personal interests (make more money). The lower ethical standard is known as “suitability.” Salesmen, for example stockbrokers, are held to this lower standard. They are supposed to make suitable recommendations based on their knowledge of the investors’ circumstances and goals. However, this lower standard is subject to interpretation. For example, three salesmen could have access to the same investor information and make three totally different recommendations. Wall Street prefers a vague ethical standard that is difficult to enforce. Investors are better off with a clear ethical standard that is easy to enforce. Securities and Exchange Commission The SEC is questioning whether robos are financial fiduciaries. This should be a relatively simple decision. The SEC is responsible for regulating financial service firms (RIAs) that provide advice and services for fees. Consider the following: Robos are registered investment advisors (RIAs) Robos provide advice in the form of model portfolios Robo algorithms manage the portfolios Robos have discretionary relationships with their clients Robos are compensated with fees Based on SEC regulations, RIAs are classified as financial fiduciaries. It does not matter if the RIA is a traditional, brick and mortar firm or a robo that delivers advice and services over the Internet. The Robo Exemption Should robos be exempt from fiduciary standards? Absolutely not! They invest client assets in exchange traded funds and other types of pooled investments. In this capacity a robo is acting as a virtual financial advisor; the ETF is the money manager. Financial advisors, who may be RIAs or IARs, are fiduciaries. Therefore, robos are financial fiduciaries. Department of Labor The DOL also has some skin in the fiduciary game. It wants fiduciary status for all advisors who provide investment advice and services to 401(k) plans and IRAs. The DOL believes this requirement will protect American investors from unscrupulous business practices that jeopardize their chances for comfortable, secure retirements. Robos are beginning to provide investment services for 401k plan assets. They also provide robo services for assets in IRAs. Therefore, this DOL mandated ethical standard would apply to robos. Computer Programs Robos did not invent model portfolios. Most financial advisors have used model portfolios to manage their clients’ assets for decades. In fact, the models of robos and advisors are strikingly similar — based on age, risk tolerance, investment horizon, and return objective. What is new is the sophistication of the computer models that run the robos’ model portfolios. Computers are more efficient than humans. Conflicts of Interest Robos will have to act in their clients’ best interests . Models cannot be programmed to buy more expensive, under-performing products Turnover (buys and sells) have to benefit the investor and not the robo There cannot be any hidden or unnecessary expenses The use of proprietary products must be fully disclosed to investors Robo portfolios should not be used as loss leaders Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

On The Statistical Significance Of The Knowledge Factor

Over the last week or so we’ve been highlighting how factor investing is not as cut and dry as advertised . The traditional simple factors (value, size, momentum, quality, low volatility) sometimes work and sometimes don’t so investors are left to make educated guesses about which factors will work in any given year. Here we’re defining “work” as these factors’ outperformance, or not, of the broad equity market. But the Knowledge Factor (the Gavekal Knowledge Leaders Developed World Index) doesn’t appear to have this same limitation. As we’ve shown already two times in the last five days, the Knowledge Factor – the tenancy of highly innovative companies to realize excess stock market performance – is the only factor that delivers consistent outperformance vs the global stock market. In the first chart below we show the yearly binary relative out/under performance of each MSCI Factor index relative to the MSCI World Index itself. A blue line and a +1 represents a year of outperformance for that factor and a red line and a -1 represents a year of underperformance. The results speak for themselves as it’s clear that there is no discernible trend in the out or underperformance of the five MSCI simple factors on a yearly basis. Said differently, sometimes the factor exposures outperform and sometimes they don’t. The top line that shows the Knowledge Factor’s relative performance is as stable as it gets, returning less than the MSCI World Index only twice in 16 years. Click to enlarge This next chart shows the cumulative performance since 2000 for each of the MSCI simple factors and the Knowledge Factor (the bars) and the yearly hit rate of outperformance relative to the MSCI World Index (the stars). Over time, the stable outperformance of the Knowledge Factor has resulted in by far the highest total return of any factor over the last two full market cycles. Click to enlarge Having laid out the above, we then analyzed the performance of the Knowledge Factor to see if there were certain market environments which were not supportive of the Factor’s outperformance. We looked at bull markets and bear markets, periods of rising and falling interest rates, periods of rising and falling commodity prices, and periods of rising and falling inflation trends. We observed no market environment in which the Knowledge Factor did not outperform the MSCI World Index, leading us to conclude that the Knowledge Factor is the gift that keeps on giving . Statistical Analysis: Today we want to take a slightly different tack to try to understand the sources of performance of the Knowledge Factor (the Gavekal Knowledge Leaders Developed World Index). We’re going to decompose the return of the Knowledge Factor to see if underlying simple factor tilts are the sole reason for this factor’s outperformance. If the Knowledge Factor is just an intelligent combination of the simple factors, then the return stream could be easily replicated and the relative performance of the Knowledge Factor described above would lose significance. To test the hypothesis that the Knowledge Factor adds value (aka Alpha) even after taking into account of any underlying factor exposure, we show a multiple regression of the since 2000 return stream of the Knowledge Factor (dependent variable) vs the all the MSCI simple factors (the independent variables). Given the below ANOVA table we observe the following: This factor exposure model does a good job explaining the return stream of the Knowledge Factor (the Gavekal Knowledge Leaders Developed World Index) because the adjusted r-square is .95, meaning that 95% of the Knowledge Leaders Index return stream is explained by this model. All of the beta coefficients except the Size Factor coefficient are in the single digits and none of the individual beta coefficients are statistically significant. In other words, there are no large factor tilts in the Knowledge Leaders Index returns and any factor tilts observed in the model cannot be statistically relied upon given the low t-stats and high p-values. Said even differently, none of the MSCI simple factors, in isolation or combined, can explain the returns of the Knowledge Factor. Even after taking into account the incredibly small and insignificant factor exposures, the Knowledge Factor has a highly statistically significant unexplained annualized alpha of 3.18%. We know the 3.18% alpha is statistically significant because the t-stat is greater than 2 and the p-value is close to zero. These results indicate that the Knowledge Factor is not simply an aggregation of the simple factors. The returns of the Knowledge Factor are all-together different than the return streams of the simple factors. This goes a long way in explaining why the Knowledge Factor consistently outperforms global stocks on a yearly basis and outperforms in all the market environments studied. There are no underlying factor tilts dictating the performance of Knowledge Leaders except the Knowledge Factor itself, which is the systematic mispricing of highly innovative companies. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.