Tag Archives: investing

Long/Short ETFs To Brave This Wild Market

What similarity between summer 2015 and winter 2016! The China-driven sell-off that crushed the global investing world last August-September suddenly starts chiming to start the new year. Basically, a wavering Chinese economy and the consequent burst of the Chinese stock market on the one hand and the Fed policy tightening as well as massive crashes in oil prices on the other sent the global markets into a difficult state. The contagion effect of the double whammy was strong enough to make global equities see the most horrible start to a year in 16 years. Grave economic releases out of China and heightened volatility in its stock market caught the global markets off guard lately. There was a trading halt on the key Chinese bourses, with the indexes diving 7% to start the new year. The decline was the worst single-day performance since the 8.5% decline on August 24, 2015, which was the root of the global market rout last summer. Hints of further shrinkage in the Chinese manufacturing sector in December were held responsible for the bloodbath in the market. The Caixin/Markit Purchasing Managers’ Index (PMI) for China declined to 48.2 in December, representing the 10th successive month of factory output contraction. The data was worse than the prior 48.6 and well below the market’s expectation for 48.9. Additionally, China’s central bank guided the yuan to a five-year low in offshore trading on Wednesday, which raised expectations of further weakness in the Chinese economy as well as sparked off fears of a currency war among export-centric Asian nations. If this was not enough, news of Saudi Arabia cutting off diplomatic ties with Iran joined China-led worries to start the year. While investors somehow started to digest fears of a hard landing in China, things seemed unsteady even in the U.S. Despite the Fed liftoff in December, subdued inflation is still a concern. From this global trend, we can easily say that the macroeconomic environment is anything but steady. Asian shares are approaching their largest weekly decline in over four years . Added to this, oil prices are stubbornly low, having slipped to below $34/barrel level lately on supply glut and global growth worries. The continued downward pressure on oil prices crushed several oil-rich nations during this course. Brent crude tested an 11-year low, while WT has seen a 7-year low in the first week of 2016. For the top U.S. ETFs, investors saw the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) lose over 5.8%, the SPDR Dow Jones Industrial Average ETF (NYSEARCA: DIA ) shed over 6% and the PowerShares QQQ Trust ETF (NASDAQ: QQQ ) move down by 7.5% in the last five trading sessions (as of January 7, 2016). So, it would be wise for investors to settle on safe ETFs while playing the U.S. Safety and value should be the investment mantra in this stormy market. If caution is the keyword, investors can take a look at these three long/short ETFs which beat the aforementioned broader U.S. ETFs in the first week of 2016. QuantShares U.S Market Neutral Anti-Beta ETF (NYSEARCA: BTAL ) Investors who want to shift their focus to investing in low-beta stocks during this uncertain market environment can consider adding BTAL ETF to their portfolio. This fund tracks the Dow Jones U.S. Thematic Market Neutral Anti-Beta Total Return Index, which is an equal-weighted, dollar-neutral, sector-neutral benchmark. The index identifies the lowest-beta stocks and goes long on them, while at the same time going short on the highest-beta stocks. Like MOM, this fund also invests in equal dollar amounts for both the long and short positions, and looks to profit from the spread return between low- and high-beta stocks. This is thin on AUM having amassed just $8.5 million in assets. The fund charges 99 basis points as expenses and gained 4% in the last five trading sessions (as of January 7, 2016). WisdomTree Dynamic Bearish U.S. Equity Fund (NYSEMKT: DYB ) The fund looks to track long equity positions or long U.S. Treasury positions and short equity positions. The long equity positions take care of about 100 U.S. large- and mid-cap stocks that satisfy eligibility criteria and have the best combined score based on fundamental growth and value signals. The stocks are weighted as per their volatility features. The short equity positions comprise the largest 500 U.S. companies designed to act as a market risk hedge. This $1.3-million fund charges 48 bps in fees and added 2.3% in the last five trading sessions (as of January 7, 2016). QuantShares U.S. Market Neutral Momentum ETF (NYSEARCA: MOM ) The fund looks to track the performance of the Dow Jones U.S. Thematic Market Neutral Momentum Index. The target index is equal-weighted, dollar-neutral and sector-neutral. The index takes the highest-momentum stocks into account as long positions and the lowest-momentum stocks as short positions, in almost equal measure within each sector. Thanks to its focus on momentum stocks, this low-volatility ETF offers a nice return even in a bull market. The basket of about 200 stocks that the fund is long on seeks to outperform the portfolio of about 200 stocks with short positions. Despite its solid strategy, the product has so far been overlooked by investors with AUM of $8.4 million. It charges a fee of 1.49% per year from investors and gained about 0.4% in the last one week. Original Post

Most Factor Anomalies Are Not Persistent

Smart-beta indices are constructed to exploit “anomalies” that reward exposure to risk factors beyond what would be expected as “necessary compensation” under the Capital Asset Pricing Model (“CAPM”). Of course, any factor that results in nominal outperformance must be considered on a risk-adjusted basis, since taking on higher risk should engender a greater reward – and investment researchers at S&P Dow Jones Indices think at least some factor “anomalies” aren’t anomalies at all, but just rewards for greater-than-understood risk-taking. Even still, among the remaining anomalies, the researchers think many are “disappearing,” “statistical,” or “attenuated” – and only a few are truly “persistent.” Writing on behalf of S&P Dow Jones, academic Hamish Preston and S&P Dow Jones Index Investment Strategy professionals Tim Edwards and Craig Lazzara express these views in an October 2015 research paper titled ” The Persistence of Smart Beta .” Disappearing Anomalies Disappearing anomalies don’t last. A great example shared by the paper’s authors is the so-called “Weekend Effect” that was popularized by Frank Cross in 1973. Mr. Cross discovered that if investors had bought stocks at their closing prices each Monday and sold them at their closing prices each Friday – avoiding the weekend and the Monday trading session – they would have dramatically outperformed a “buy and hold” strategy from 1950 to the time of his research. But then, almost immediately after the Weekend Effect became well known, the anomaly didn’t just disappear, it reversed. The Weekend Effect rebounded in 1984, only after another academic research paper called it into question – and then, when a paper called “The Reverse Weekend Effect” was published in 2000, the old Weekend Effect returned. As soon as investors gained knowledge of the Weekend Effect, it reversed. When knowledge of the reversal became widespread, the reversal reversed. Now, it’s taken as a given that the Weekend Effect was a coincidence – hence, it was a disappearing anomaly. Statistical Anomalies Perhaps a better approach is for investors to keep knowledge of anomalies they discover secret – that way, they may be less likely to disappear. This is what David Dolos did when he discovered that applying the price movements of the 1720 South Sea Bubble – second only to Tulip Mania in episodes of old-school irrational exuberance – to the Dow Jones Industrial Average inexplicably produced outsized returns. Mr. Dolos never told anyone about his discovery, and he reaped the rewards in anonymity until 2007, when the system broke down. Why? Well first off, David Dolos didn’t exist. The story is made up, and although the 1720 South Sea Bubble was real, the South Sea Bubble effect was data-mined into existence. As the paper’s authors note, modern computing power can easily produce “false positives” – i.e., anomalies that are purely statistical in nature. In order for an anomaly to be persistent, it must make logical sense. Attenuated Anomalies Momentum is one of the most popular factors. Academic research supports its outperformance, and the concept of momentum stocks – stocks that are going up – outperforming non-momentum stocks makes logical sense. The momentum anomaly is known to anyone who cares to know about it, and yet this knowledge hasn’t caused the anomaly to disappear – instead, it has reinforced it. The downside is that since investors have become aware of the momentum anomaly, its drawdowns have been bigger. This is what the S&P Dow Jones authors mean by an “attenuated anomaly.” In 1997, Mark Carhart published a study that showed adding momentum to the famous Fama-French three-factor model boosted returns. This caused more money to flow into momentum stocks, ultimately leading to bigger drawdowns during crashes. Persistent Anomalies Are there any truly persistent anomalies? The authors say there is at least one: Low volatility. But they conclude with a word of caution: “So far, the investment and attention directed toward low-volatility strategies has not been sufficient to temper their returns or attenuate their risk/return profile.” So far. As the well-known disclaimer goes: ” Past performance does not necessarily predict future results. ” For more information, download a pdf copy of the white paper. Jason Seagraves contributed to this article.

Top 5 Mutual Fund Sectors In 2015

While most of the major mutual fund sectors struggled to finish 2015 in the green amid concerns stemming from China-led global growth worries and the slump in oil prices, some succeeded in coming out with flying colors. The strong rebound in the fourth quarter, after a declining trend till the third quarter, primarily boosted these funds. The Dow and the S&P 500 posted their worst yearly performances since 2008, and cash flows were also on the discouraging side. Mutual funds witnessed huge cash outflows in 2015, which hit record highs multiple times. While US-focused mutual fund categories failed to register double-digit gains in 2015, only the Japan Stock category registered growth. Mutual funds started the year 2015 on a positive note, with 87% of funds finishing in the green in the first quarter. But their performance deteriorated in the second quarter, when only 41% of funds succeeded in registering gains. The performance in the third quarter was the worst in four years. While only 17% of mutual funds finished in the green in the quarter, the Bear Market funds category, which bet against the market uptrend, emerged as the top gainer in both August and September, adding 9.1% and 4.2%, respectively. However, mutual funds recovered significantly in the fourth quarter, which also included October – the best month in four years. Meanwhile, foreign mutual funds, including those focused on acquiring Japanese stocks, outperformed domestic mutual funds last year. In such a scenario, we present the top 10 mutual fund categories in 2015: Mutual Fund Category 2015 Return (%) Japan Stock 11.97 Health 8.05 Foreign Small/Mid Growth 7.04 Technology 5.21 Consumer Defensive 4.15 High Yield Muni 4.09 Foreign Small/Mid Blend 3.79 Muni California Long 3.72 Large Growth 3.6 Preferred Stock 3.18 Source: Morningstar Major Concerns As mentioned earlier, mutual fund cash flows remained weak in 2015, mostly due to the overall negative tone of the U.S. markets. As a matter of fact, in the first half of 2015, fund inflows slumped 36% year over year to $143 billion. This drastic fall was largely due to the dismal second quarter, wherein inflows declined to $41 billion through June 17, comparing unfavorably with $102 billion of inflows in the first quarter. The markets were affected all-year round by several concerns, such as sluggish growth in major economies, including China and the eurozone, the slump in oil prices, a strong dollar and rate hike fears. Worries emanating from Grexit concerns, the plunge in biotech stocks following price gouging concerns and geopolitical tensions in regions like Yemen and Syria also dealt huge blows to the major benchmarks. Additionally, in the week that the Fed finally decided to hike rates, bond mutual funds witnessed massive outflows. According to Lipper, for the week ending December 16, $15.4 billion was pulled out of taxable bond funds. Also, high yield junk bond funds witnessed the largest outflow of $3.8 billion since August 2014 in the same week. An outflow of $5.1 billion from investment-grade bond funds was the biggest since Lipper started recording data in 1992. 5 Best-Performing Fund Categories in 2015 In this section, we have highlighted the five best-performing mutual fund categories of 2015 and also recommend one mutual fund from each category that has a Zacks Mutual Fund Rank #1 (Strong Buy) and other strong fundamentals. Japan Stock Japan opted for several economic stimulus measures last year, which proved to be more effective than the steps taken by China and the eurozone. The economy rebounded strongly in the third quarter to register a GDP growth rate of 1%, contrary to the second quarter’s contraction of 0.5%. Japan’s key index, Nikkei, hit an 18-year high in 2015. Hence, the Japan Stock category, which was also the best gainer in the first half of 2015, finished right at the top with nearly 12% gains last year. Fidelity Japan Smaller Companies Fund No Load (MUTF: FJSCX ), which invests most of its assets in securities of Japanese small-cap companies or other instruments that are economically connected with Japan, was one of the top performers of this category. The fund returned 12.6% last year. It also has a 3- and 5-year annualized return of 16.6% and 10.2%, respectively. Moreover, FJSCX’s expense ratio of 0.97% is lower than its category average of 1.43%. Healthcare The healthcare category, which is considered as a consistent performer, came in second in 2015. A massive sell-off in biotech stocks through August and September, and concerns regarding Hillary Clinton’s plan to prevent “price gouging” for specialty drugs had a negative impact on the category. However, a strong rebound in the fourth quarter helped the sector to finish the year on a positive note with a modest gain of 8.1% in 2015. Encouraging third-quarter earnings results, merger and acquisition activities, product approvals and encouraging pipeline updates were mainly behind the rebound. Vanguard Health Care Fund Investor (MUTF: VGHCX ) invests in healthcare companies, including pharmaceutical firms, medical supply companies and companies engaged in operations related to medical and biochemical. The fund returned 3.8% in 2015 and has an expense ratio of only 0.34%, compared to the category average of 1.37%. VGHCX also has a 3- and 5-year annualized return of 24.8% and 20.3%, respectively. Foreign Small/Mid Growth Although concerns regarding sluggish growth throughout the globe had a negative impact on markets in most of 2015, the Foreign Small/Mid Growth sector managed to register healthy gains. Investors found foreign countries attractive, as the central banks of major regions opted for economic stimulus measures. As a result, the sector occupied the third position with more than 7% yearly gain. AllianzGI International Small-Cap Fund A (MUTF: AOPAX ) primarily invests in securities of companies having market capitalization similar to those included in the MSCI World Small-Cap Index. The fund returned 9.8% last year. It also has a 3- and 5-year annualized return of 9.8% and 6.1%, respectively. AOPAX’s expense ratio of 1.45% is lower than its category average of 1.53%. Technology Though several concerns, including a stronger dollar and weak global growth, negatively impacted the technology sector, it was one of the few bright spots in 2015. Broad-based gains in the sector helped the tech-heavy Nasdaq to clearly outperform the other major benchmarks in 2015. Meanwhile, the sector was one of the best performers in the third-quarter earnings season. These factors boosted the category to increase 5.2% in 2015. T. Rowe Price Global Technology Fund No Load (MUTF: PRGTX ) invests the majority of its assets in companies expected to derive a large proportion of their revenues from the development and application of technology. It returned 10.4% in 2015 and has an expense ratio of 0.91%, which compares favorably to the category average of 1.45%. The fund also has a 3- and 5-year annualized return of 24.4% and 17.3%, respectively. Consumer Defensive This is one of the main categories that gained from the low oil price environment. Also, a steady increase in consumer expenditure played an important role in boosting the U.S. economy throughout 2015, helped the category to finish in the positive territory. Additionally, a strong job market, which includes healthy job gains and a declining unemployment rate, also boosted the category for most of the year. As such, Consumer Defensive returned nearly 4.2% in 2015 and finished in the top five. Fidelity Select Retailing Portfolio No Load (MUTF: FSRPX ) invests a large chunk of its assets in securities of firms involved in merchandising finished goods and services to consumers. The fund returned 17.8% last year. It also has a 3- and 5-year annualized return of 21.4% and 19.1%, respectively. FSRPX’s expense ratio of 0.81% is lower than its category average of 1.41%. Original Post