Tag Archives: ideas

The Double Edged Sword Of Trend Following ETFs

I’ve always been a big proponent of following the major trends in the market to serve as guideposts for sizing the stock allocation of my portfolio . Trend lines like the infamous 200-day moving average have never been a perfect predictor of stock market direction. However, using these types of technical indicators can serve as a useful tool for making incremental adjustments over time. Pacer ETFs is a relatively upstart company in the exchange-traded fund world that operates a suite of TrendPilot ETFs designed to automate the trend following process. Their lineup includes a range of well-known U.S. and European indexes with several hundred million in combined assets under management. The largest and most popular fund in their mix is the Pacer TrendPilot 750 ETF (BATS: PTLC ), which is based on the Wilshire U.S. Large-Cap Index. This includes a diversified basket of 750 large-cap stocks that aims for broader exposure than the stalwart S&P 500 Index. PTLC currently has $336 million in total assets and enough consistent daily trading volume to be considered liquid for most investor’s purposes. It also charges an expense ratio of 0.60%, which is on the high side for a typical ETF but not necessarily abnormal for a quasi-active approach. The basic premise behind PTLC is to participate when the stock market is going up and move to cash (or treasury bills) when it is going down. They accomplish this through a systemic, rules-based methodology that indicates when a positive or negative trend is established using the 200-day simple moving average. In an uptrend, PTLC owns 100% stocks. The fund then moves to 50% stocks and 50% treasury bills when the index falls below the trend line for five consecutive days. It then uses a final confirming indicator to move to 100% treasury bills if the simple moving average falls lower than its prior reading for five days. The process starts over again once the index regains its 200-day moving average on the upside. Simple. Logical. Automated. Sounds easy right? The obvious advantage of this strategy is that it is designed to keep your money safe during a prolonged bear market such as we experienced in 2008. Multiple months or even years of persistent selling pressure can be avoided by having your capital protected near the top quartile of a new down cycle. The goal is also to get you back into the market at a much lower point and with more starting capital than if you had held your way through on the downside. However, this trend following system also becomes a hindrance during periods of sharp corrections and subsequent rapid recoveries like we have experienced over the last year. The constant gyration from bullish to bearish momentum and back again creates a counter-productive effect on the strategy. When comparing PTLC versus the Schwab U.S. Large-Cap ETF (NYSEARCA: SCHX ) since inception, you can see how the trend following strategy moves to cash prior to the upswing in both 2015 and 2016. This means that you miss out on the recovery phase and end up rapidly falling behind the more conventional index. SCHX purely follows the Wilshire U.S. Large-Cap Index without the trend following component. The time period involved here is admittedly quite short and a proper analysis should be done over multiple cycles of the market. Nevertheless, it should be observed that this recent trading pattern does not sit well with a trend following strategy built to follow a long-term moving average . It may also result in some investors becoming frustrated with the timing component and jumping ship just prior to the market rolling over once again. The trend following ETF is ultimately doing exactly what its creators set out for it to do. The more recent price action should be considered a known risk of this type of enhanced index rather than a failure of the strategy altogether. The lesson is that there is always a double edged sword of opportunity cost that must be considered when you move to the safety of cash. This same risk is entrenched with the use of stop losses or physical sell orders for individual ETFs and stocks as well. They call it getting “whipsawed” and it is certainly an uncomfortable feeling when you are on the wrong end of it. 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. Additional disclosure: David Fabian, FMD Capital Management, and/or clients may hold positions in the ETFs and mutual funds mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell, or hold securities.

High Dividend Sector ETFs Hitting All-Time Highs

A few days back, the market was abuzz with faster-than-expected rate hike bets in the U.S. on hawkish tip-offs from some Fed officials after a dovish meeting in mid March. However, recently Fed chair Yellen put all hearsay to rest by emphasizing global growth issues. Also, the Fed chair indicated a ‘cautious’ stance that may be adopted by the U.S. central bank on the policy tightening issue going forward. Following the dovish statements, stocks and bonds soared. Investors should also note that yields on U.S. treasuries dropped following Yellen’s remarks. Below we discuss a few ETFs that popped after Yellen’s speech and could remain in focus ahead. In a falling yield environment, investors rushed to tap every possible option that can cater to their income need. Along with broader dividend funds, high yielding sector ETFs have also been witnessing strong pricing performance lately. Below we highlight a few winning sectors and their ETFs that hit all-time highs reflecting Yellen’s comments. Utilities Utilities usually have strong yields and are embraced by investors when Treasury bond yields fall. Also, the utility sector is considered a safer option when volatility levels spike. This sector is less volatile in nature and relatively immune to the market peaks and troughs. Moreover, the space is less exposed to currency translation due to lack of foreign coverage (read: Protect Your Portfolio with These Utility ETFs ). By virtue of their stronger yields and defensive nature, the following utilities ETFs touched all-time highs lately. The Utilities Alphadex First Trust (NYSEARCA: FXU ) hit an all-time high on March 31 2016. The fund added over 2.7% in the last five trading days (as of March 31, 2016) and yields about 2.85% annually and FXU has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: Smart Beta ETFs That Stood Out Amid Market Volatility ). The Guggenheim S&P Equal Weight Utilities ETF (NYSEARCA: RYU ) hit an all-time high on March 31, 2016. The fund returned 2.6% in the last five trading days (as of March 31, 2016) and yields 3.20% annually and follows an index which is the equal weighted version of the S&P 500 Utilities Index. Real Estate Real Estate is also a highly interest rate sensitive sector. These firms are usually highly leveraged and face maximum interest rate risk in the REIT world. Now, REITs are required to distribute 90% of their annual taxable income through dividends which make them high dividend yield vehicles. With interest rates expected to remain subdued for longer and bond yields trending down, the Real Estate Select Sector SPDR ETF (NYSEARCA: XLRE ) hit an all-time high, adding about 2.2%, on March 29, 2016. The fund yields 2.06% annually (as of the same date). The fund was up over 3.7% in the last five trading days (as of March 31, 2016). Telecom Telecom, another defensive sector by nature, also offers investors solid dividend yields. The Fidelity MSCI Telecommunications Services Index ETF (NYSEARCA: FCOM ) hit an all-time high on March 31, 2016. The product advanced about 4.4% in the last five trading days (as of March 31, 2016). Consumer Staples Consumer staple stocks have been performing better in recent months as investors are slowly moving toward defensive sectors. Also, consumer staples stocks and ETFs are high yield in nature which put this sector in focus following Yellen’s speech. Also, many consumer staples stocks are rich in global presence and are likely to outperform amid falling dollar. The Fidelity MSCI Consumer Staples Index ETF (FTSA) touched an all-time high on March 31, 2016. The fund added about 1.5% in the last five trading days (as of March 31, 2016). The fund yields about 2.52% annually (as of March 31, 2016). Link to the original post on Zacks.com

The Riddle About Differing Fund Flows And Assets Under Management

By Detlef Glow Click to enlarge Looking at market statistics from different providers such as data vendors, associations, central banks, and others, one realizes that none of the providers state the same number for a fund’s flows or assets under management for a specific date. Even though this may sound a bit odd, it is normal and the nature of the beast. Since all data vendors, associations, and others have a different basis for the data they provide, flow numbers will be different from one provider to another. Data vendors calculate flows based on the funds in their database, while associations use the data on flows and assets under management they receive from their members. These data may include mandates and special-purpose vehicles such as pension funds, which are not mutual funds at all. In contrast, central banks use the holdings data from their associated banks to evaluate the holdings of mutual funds. Statistics calculated for the same topic and for the same market can vary widely, since the underlying data can be totally different. Good examples of the differences in databases for a market segment are the several reports available on the European exchange-traded fund (ETFs) market. While the Thomson Reuters Lipper report focuses only on ETFs, i.e., products that are funds and regulated as such, other reports focus on the whole market of exchange-traded products (ETPs), which means those reports also include structured notes such as exchange-traded commodities (ETCs). Another factor that always leads to differences in numbers is the currency in which the report is calculated, since some providers use euros, while others use the U.S. dollar for the denomination of fund flows and assets under management. But even if two providers of fund flows reports use the same data to calculate the flows for a given region, they may end up with totally different results. The employed methodology for the calculation of the flows might be different and would by definition lead to different results. In addition, all results are dependent on correct and timely data input from the fund promoters, since any inaccurate numbers in the database impact the quality of the statistics. Even though a data vendor might have quality checks in place for the incoming data, it may not find all the corrupted data. Even though quality checks do help to get the numbers right, some data may be missing and have to be estimated with an algorithm. This also explains why flows and assets under management data change over time, since it takes a while for all the fund promoters to deliver correct data. All in all, it can be said that the most recent fund flows and assets under management statistics published shortly after the end of month should be seen more as a guide to evaluate market trends than as a scientific result. Anybody who uses these kinds of statistics should make a decision about which statistics suit their needs best and then stay with those statistics. This does not mean that one should not question whether the displayed data are right, but one should realize that there always will be differences in flows data for any given month. The views expressed are the views of the author, not necessarily those of Thomson Reuters Lipper.