Tag Archives: lightbox

Asset Class, Sector, And Country Returns For 2015

Every chart tells a story. Which story depends on what you choose to see. The asset class tables tell stories of best returns, worst returns, or a middle ground that avoids both. Maybe it’s the tale of mean reversion and infinite cycling of markets. Or randomness. Unpredictability. Irrationality. I’ve explained it before here , here , and here . This time, I’ll hold off till the end because most people will see what they want to see and ignore the rest. As usual, I’ll point out a few things I see in the tables, along with some other year-end data that was left out. Let’s get started. It was a lackluster year. For the most part, assets went nowhere in 2015. Emerging markets are the sole exception finishing the year with a double-digit loss. Emerging markets lost money four of the last five years, including losses three years in a row. A track record like that is a solid reason to dump an asset…or buy one. Depending on how you see things, emerging markets could be the best or worst investment going forward. Emerging markets lost money four of the last five years, including losses three years in a row. A track record like that is a solid reason to dump an asset…or buy one. Depending on how you see things, emerging markets could be the best or worst investment going forward. REITs are the best performer five of the last six years, the best annual returns over the last 15 years, and finished positive seven years in a row. Dividends drove a lot of that performance. REIT dividend yields are half of what they were in 2001. High-yield bonds were in the red for the first time in seven years. High-yield bonds were actually positive through June, though not by much. Then, the Fed raised rates for the first time in a decade. I’m sure many high-yield bond funds did worse. I’m certain many investors were caught by surprise. They wanted to boost their bond yield by 1-2% without realizing they were taking on more risk for the return. A diversified portfolio lost money for the first time since 2008, underperforming cash. The range of returns, from best to worst, was the smallest it’s been over the last 15 years. It’s hard to complain about a 1% loss when the best performer in the portfolio earned 2.8%. I guarantee many will complain anyway because it didn’t live up to the last few years. The S&P 500 is now positive for seven straight years, along with 12 of the last 15 years. That has only happened twice before – an eight-year stretch from ’82 to ’89 and a nine-year run from ’91 to ’99. Back in 2008, how many people predicted a positive S&P 500 for seven years straight? My guess – nobody. The S&P 500 sectors were split evenly last year with five winners and five losers. Those five winners haven’t seen a losing a year since 2008. Collectively, the sectors have performed great since the crisis. Every sector was positive in four out of the last seven years. It could have been five, if it wasn’t for the energy sector’s 2014 loss. Of course, energy was considered cheap at the end of 2014 (even I thought so). Then, it got cheaper in 2015. As a group, the developed markets aka MSCI EAFE basically broke even. For developed countries, Denmark actually had the best returns of 2015, at 24%, while Canada was the worst. Finland, Denmark, Belgium, and Switzerland each extended their gains to four years in a row while Ireland hit its fifth. If you were ranking developed countries based on highest CAPE ratio, the U.S. would be #4. Only Denmark (#1), Ireland (#2), and Japan (#3) are higher. As for consecutive losses, six developed countries – Germany, U.K., Spain, Australia, Sweden, and Norway – now have two losing years in a row (none have three). Of those six, Norway and Spain have the lowest CAPE ratio. As I said at the top, emerging markets have seen the worst of it the past few years. The table only tells half the story. Only two emerging market countries – Russia and Hungary – were positive for 2015, out of 23 in the MSCI EM index. And consecutive gains don’t exist. Hungary had the best year at 36%. Greece was the worst with a 61% loss, following a 40% loss in 2014. Buying a Greece ETF to start 2015 was an expensive lesson. Markets that fall far can still fall a lot further. Greece wasn’t alone. Four other countries – South Korea, Mexico, Malaysia, and Poland – have two losing years in a row. And four – Brazil, Chile, Colombia, and Czech Republic – sit with a three-year losing streak. With all that carnage, it’s no surprise that emerging markets have the lowest CAPE ratio and highest expected returns than any other asset class to start 2016. Remember If you shoot for the best performers every year, you risk ending up with the worst. While the worst performers, the hardest to buy into, can sometimes produce the best results…for those with patience and a high tolerance for pain. However, if you try to avoid the worst, you’ll likely miss out on the best, while ending up somewhere in the middle. And if you expect greatness every year, you’ll be disappointed often. Just look at 2015.

Consumer Confidence Rebounds: 2 Top-Ranked ETFs To Buy

Consumer Confidence Index – an important indicator of consumer sentiment – increased in the final month of 2015, rebounding strongly after its November decline. The Conference Board reported that the index rose to 96.5 from November’s upwardly revised reading of 92.6. It was also higher than the consensus estimate of 93.5. Meanwhile, consumers remained optimistic about the present economic environment and also confident of the economic scenario over the next six months. The Present Situation Index improved to 115.3 this month from last month’s level of 110.9. Also, the Expectations Index increased from November’s 80.4 to 83.9 in December. The survey showed that the share of consumers who believe that the current business conditions are “good” increased significantly to 27.3% in December from last month’s share of 25%. Also, the share of consumers who believe that there are “plentiful” job opportunities gained to 24.1% from 21%. Consumers who think that the job market will remain favorable also rose from 12% to 12.9%. Lynn Franco, Director of Economic Indicators at The Conference Board said: “As 2015 draws to a close, consumers’ assessment of the current state of the economy remains positive, particularly their assessment of the job market. Looking ahead to 2016, consumers are expecting little change in both business conditions and the labor market… but the optimists continue to outweigh the pessimists.” Favorable Economic Scenario Though the U.S. economy expanded at a slower pace of 2% in the third quarter compared with the 3.9% growth rate witnessed in the second, the economy remained steady for most part of the year whereas other major economies struggled with sluggish growth conditions. A gradual increase in consumer spending, which contributes nearly 75% to economic activity, along with healthy labor and housing market conditions boosted the U.S. economy through the year. Meanwhile, the lift-off that came this month after nearly a decade underlined the Fed’s, “confidence in the economy,” as cited by Fed Chair Janet Yellen herself. The Fed also indicated that “solid” consumer spending, a rebound in the housing market and strong business fixed investment played an important role in the decision (read: Top ETF Stories of 2015 ). 2 Consumer ETFs to Buy Consumer discretionary is considered to be one of the key sectors that attract a major portion of consumer spending, which is believed to increase at a gradual pace given the rise in confidence. Moreover, the slump in oil prices and strong labor market conditions will play an important role in boosting spending at least in the near term. The positives have been reflected in this year’s holiday season, with an e-commerce bonanza and a surge in last-minute shopping cheering the retailers. It has been reported that overall U.S. holiday retail sales (excluding autos and gas) climbed 7.9% year over year between Black Friday and Christmas Eve (read: Consumer ETFs & Stocks Riding High on Holiday Spirit ) Also, when the major benchmarks were grappling with manifold concerns, the consumer discretionary sector succeeded in posting healthy gains this year. As of Dec 30, 2015, the broader consumer discretionary sector – the Consumer Discretionary Select Sector SPDR ETF (NYSEARCA: XLY ) – gained 9.4% in the year-to-date frame. In this scenario, we have highlighted two Zacks Rank #1 (Strong Buy) retail ETFs that are poised to gain from this favorable environment and investing in them may prove to be profitable in the near term. Market Vectors Retail ETF (NYSEARCA: RTH ) This fund tracks the Market Vectors US Listed Retail 25 Index and holds about 26 stocks in its basket. It is a large cap centric fund and is heavily concentrated in the top 10 holdings with 65.6% of assets – the top shares going to Wal-Mart (NYSE: WMT ), Home Depot (NYSE: HD ) and Amazon.com (NASDAQ: AMZN ). Sector wise, specialty retail occupies the top position with around 29% share with Internet & catalog retail occupying the next spot. The fund has amassed $159.7 million in its asset base while average daily volume is moderate at 65,153 shares. The product has an expense ratio of 0.35% with a Medium risk outlook. RTH returned 6.2% and 9.6% in the past three-month period and in the year-to-date frame, respectively. Vanguard Consumer Discretionary ETF (NYSEARCA: VCR ) This product tracks the S&P Retail Select Industry Index, holding 385 securities in its basket. The fund charges only 12 bps in fees. It is also heavily concentrated in the top 10 holdings with 40.7% of assets. Large cap stocks dominate more than half of the portfolio while the rest have been split between the other two market cap levels. Sector wise, specialty retail takes the top spot at 19% share while Internet & catalog retail and restaurants occupy the next two positions. XRT currently has $2 billion of AUM and average daily volume of nearly 175,000 shares. The fund has a Medium risk outlook. VCR returned 4.3% and 5.7% in the past three-month period and in the year-to-date frame, respectively. Link to the original article on Zacks.com

Indexing Pioneer Vanguard Skeptical Of Smart Beta

Vanguard revolutionized investing with its low-cost, passive indexing products. But after the TMT (tech, media, and telecom) blowup of 2000-2002, when cap-weighted indexes became overstuffed with overvalued dot-coms, critics began maligning cap-weighted index funds as “dumb beta.” The alternative, in their view, was to weight stocks according to factors other than market cap – so-called “smart beta.” Smart-beta strategies have been hailed as the “new paradigm” in passive, index-based investing. But Vanguard, the indexing pioneer, disagrees: The firm’s Don Bennyhoff, Fran Kinniry, Todd Schlanger, and Paul Chin – authors of an August 2015 white paper titled ” An Evaluation of smart beta and other rules-based active strategies ” – insist that smart-beta strategies are in fact active strategies, and that market cap is still the best basis to weight the components of an index. How Active is Smart Beta? In Vanguard’s view, smart-beta strategies should be considered “rules-based active strategies,” by definition , since their security-selection and -weighting methodologies can produce “meaningful security-level deviations” – i.e., “tracking error” – versus a broad cap-weighted index. In the August 2015 white paper, Mr. Bennyhoff and his co-authors looked at the “active share” of smart beta ETFs and index funds. “Active share” is a measure of how much an index’s holdings deviate from a cap-weighted baseline, which in this case was the Russell 3000 – an index of the 3000 largest U.S. stocks, including the mid-to large-cap Russell 1000 and the small-cap Russell 2000: Source: Vanguard. All data as of December 31, 2014. In general, the more stocks in the index or portfolio, the less the “active share.” Smart-beta ETFs and funds had “active share” that ranged from a bit less than 30% to roughly 60%, generally much more than cap-weighted indexes, but less than “traditional, actively managed equity funds.” Smart-beta strategies also had less “active share” than ETFs focused on specific risk factors like value, momentum, and size – and its exposure to these factors that provides much of smart beta’s appeal, in Vanguard’s analysis. Which Factors and When? Vanguard admits that the performance of alternatively weighted indexes has been “compelling” over time. For instance, the alternative FTSE RAFI Developed Index returned an annualized 7.2% from 2000 through 2014, with a Sharpe ratio of 0.42. The cap-weighted FTSE Developed Index, by contrast, returned just 4.2% per year with a Sharpe ratio of 0.26. This relationship holds for most regions, too. But particular risk factors fall into and out of favor, and as a result, the performance of smart-beta strategies – relative to the broad market – has deviated substantially over time. Should investors only concern themselves with certain factors, such as dividends, cash flow, book value, sales, and volatility? Or should they consider all factors, which are too numerous to list? Vanguard says market cap-weighting captures all of these factors through the market-pricing mechanism – a compelling argument. Taking the Gloves Off Near the end of the white paper, Bennyhoff et al. take off their gloves: Smart beta doesn’t represent a “new paradigm” of indexing nor a “smarter” way to invest. The strategies’ excess returns can partly – in some cases largely – be attributed to “time-varying factor exposures,” which make smart-beta strategies effectively active and not passive. “We found little evidence that such smart-beta strategies have been able to capture any security-level mispricings in a systematic and meaningful way,” the authors wrote. An index of securities is supposed to represent “the risk-and-reward attributes of a market” or segment thereof. In Vanguard’s view, market-cap-weighting isn’t broken, and therefore isn’t in need of fixing. For more information, download a pdf copy of the white paper . Jason Seagraves contributed to this article.