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ETF Update: A Look Back At December And 8 Funds To Kick Off The New Year

Welcome back to the SA ETF Update. My goal is to keep Seeking Alpha readers up to date on the ETF universe and to gain some visibility, both for the ETF community, and for me as its editor (so users know who to approach with issues, article ideas, to become a contributor, etc.) Every weekend, or every other weekend (depending on the reader response and submission volumes), we will highlight fund launches and closures for the week, as well as any news items that could impact ETF investors. Recently, Zacks published a piece on the funds that launched in 2015 and gained in assets under management right away. They were the S PDR DoubleLine Total Return Tactical ETF (NYSEARCA: TOTL ), the SPDR S&P North American Natural Resources ETF (NYSEARCA: NANR ), the iShares Exponential Technologies ETF (NYSEARCA: XT ), the Goldman Sachs ActiveBeta Emerging Markets Equity ETF (NYSEARCA: GEM ) and the SPDR Russell 1000 Momentum Focus ETF (NYSEARCA: ONEO ). While all of these funds saw strong support from investors, none ended the year with positive returns. Overall, markets took a turn for the worse in end of Q3 and beginning of Q4 and had to spend the rest of the year climbing out of that hole (most sectors are still stuck). There were 23 launches in December and no closures for the month. December Total Launches Fund Name Ticker SPDR S&P 500 Fossil Fuel Free ETF SPYX MomentumShares U.S. Quantitative Momentum ETF QMOM SPDR Russell 1000 Momentum Focus ETF ONEO SPDR Russell 1000 Low Volatility Focus ETF ONEV SPDR Russell 1000 Yield Focus ETF ONEY Direxion Daily S&P Biotech Bear 1X Shares LABS Direxion Daily Natural Gas Related Bear 3X Shares GASX Daily Healthcare Bear 3x Shares SICK Tierra XP Latin America Real Estate ETF LARE Elkhorn FTSE RAFI U.S. Equity Income ETF ELKU iShares FactorSelect MSCI Emerging ETF EMGF Pacer Trendpilot European Index ETF PTEU Pacer Autopilot Hedged European Index ETF PAEU Guggenheim Dow Jones Industrial Average Dividend ETF DJD SPDR S&P North American Natural Resources ETF NANR JPMorgan Diversified Return Europe Equity ETF JPEU WisdomTree Dynamic Long/Short U.S. Equity Fund DYLS WisdomTree Dynamic Bearish U.S. Equity Fund DYB MomentumShares International Quantitative Momentum ETF IMOM Legg Mason Developed ex-US Diversified Core ETF DDBI Legg Mason Emerging Market Diversified Core ETF EDBI Legg Mason US Diversified Core ETF UDBI Legg Mason Low Volatility High Dividend ETF LVHD Only a couple of these funds ended December with positive returns; it was a hard month to jump into the market. Hopefully, our rocky start to 2016 doesn’t set any trends in motion, otherwise these new launches from the last two weeks could have a hard time finding traction. There were 12 funds launched in the last 2 weeks, including the last 4 funds on the December launch list above. With tons to cover, let’s jump right in. Fund launches for the week of December 28th, 2015 Fund launches for the week of January 4th, 2016 Reality Shares launches its second ETF (1/6): The Realty Shares DIVCON Leaders Dividend ETF (BATS: LEAD ) was launched just over a year after the company’s first offering, the Realty Shares DIVS ETF. “Unlike many dividend funds based on decades-old dividend history or yield, the new passive ETF features rules-based stock selection and weighting using a proprietary dividend health rating methodology, DIVCON, which systematically ranks companies’ future dividend growth prospects based on a weighted average of seven factors,” according to a press release on Reality Shares’ site. WisdomTree rolls out 4 new Dynamic Currency ETFs (1/7): The following newly issued funds offer currency hedged exposure to international equities, each indicated in their names, and weighted by dividend yield: The WisdomTree Dynamic Currency Hedged International Equity Fund (BATS: DDWM ), the WisdomTree Dynamic Currency Hedged International SmallCap Equity Fund (BATS: DDLS ), the WisdomTree Dynamic Currency Hedged Europe Equity Fund (BATS: DDEZ ) and the WisdomTree Dynamic Currency Hedged Japan Equity Fund (BATS: DDJP ). iShares launches 3 Adaptive Currency Hedged ETFs (1/7): The iShares Adaptive Currency Hedged MSCI Japan ETF (BATS: DEWJ ), the iShares Adaptive Currency Hedged MSCI Eurozone ETF (BATS: DEZU ) and the iShares Adaptive Currency Hedged MSCI EAFE ETF (BATS: DEFA ) are new additions to the iShares lineup. Like the WisdomTree funds launched on the same day, these funds offer currency hedged exposure to international equities, but weighted by market capitalization rather than dividend yield. All 7 of these funds were launched on the BATS exchange. There were no fund closures for the weeks of December 28th, 2015 or January 4th, 2016 Have any other questions on ETFs or ETNs? Please comment below and I will try to clear things up. As an author and editor, I have found that constructive feedback is the best way to grow. What you would like to see discussed in the future? How can I improve this series to meet reader needs? Please share your thoughts on this first edition of the ETF Update series in the comments section below. Have a view on something that’s coming up or a new fund? Submit an article.

Portfolio Rebalancing – A Potentially Golden Opportunity

For a variety of reasons, gold is a widely-held asset class within investment portfolios. Many investors include gold in their asset allocation mix for its perceived ability to act as both a diversifier and as a potential store of value in times of uncertainty; these perceptions contribute to the concept of gold as a “core holding” in many diversified portfolios. Indeed, with the notable exception of Warren Buffett , 1 some of the investment community’s most distinguished names currently maintain investments in gold. 2 Like any investment, gold is subject to rebalancing or reallocation when its value relative to other portfolio components shifts significantly. Examining quarterly data from the beginning of 1976 (the year that gold started trading freely in the United States) through the quarter ended December 31, 2015, suggests that gold is overvalued relative to historical price relationships with the major agricultural crops of corn, wheat, soybeans and sugar. 3 In fact, at quarter-end December 31, 2015, the gold/corn ratio, defined herein as the number of bushels of corn an investor could buy with the proceeds from selling one troy ounce of gold, was 296 bushels versus a 39-year average value of 169 bushels. Gold investors attempting to maximize portfolio performance through disciplined quarterly or annual rebalancing may want to consider adjusting their gold holdings in tandem with their existing or anticipated agricultural sector portfolio investment mix. For example, the historical data for the gold/corn ratio suggests that a mean reversion 4 from December 31, 2015, levels of 296 bushels to the 39-year mean value of approximately 169 bushels of corn for each ounce of gold (bu/oz) could benefit an investor rebalancing gold for corn within their portfolio. Click to enlarge As illustrated in the chart above, at 296 bu/oz, the gold/corn ratio is approximately 75% above its nearly four decade average of 169 bu/oz. Hypothetically, if an investor sold gold and purchased corn at the current 296 bu/oz level, and the ratio subsequently retraced to its historical mean value of approximately 169 bu/oz, the investor would then be able to sell the corn and buy back 75% more gold than was originally sold to make the temporary reallocation from gold into corn. While the gold/corn ratio was historically above its 39-year mean at the end of Q4 2015, other major agricultural crops were also very near all-time historic highs for the same time period. Charts for the gold/wheat, gold/soybean, and gold/sugar ratios are shown below. The gold/wheat ratio was 80% above its 39-year mean value, the gold/soybean ratio was 77% above, and the gold/sugar ratio was nearly 47% above its historical 39-year mean average value. Click to enlarge Click to enlarge Click to enlarge The current availability of both futures contracts and futures-based exchange traded products for gold, corn, wheat, soybeans, and sugar makes rebalancing the gold and agricultural components within a portfolio easier than ever before. Investors and advisors need to make an assessment of the relative value of gold versus their other portfolio constituents, including agriculture, and appropriately adjust their allocations to suit their individual investment needs and objectives. 1 ” Why Warren Buffett Hates Gold .” NASDAQ 15 Aug. 2013: Web. October 9th, 2014. 2 Based on the 13-F filings for holders of the SPDR Gold Trust (NYSEARCA: GLD ) as of 12/31/15, and found using Bloomberg Professional, January 4th, 2016. 3 Analysis & corresponding charts were prepared by Teucrium Trading, LLC, using Bloomberg Professional, January 4th, 2016. All supporting detail available upon request 4 Mean Reversion : A theory suggesting that prices and returns eventually move back towards the mean or average. This mean or average can be the historical average of the price or return or another relevant average such as the growth in the economy or the average return of an industry. Additional disclosure: I have held in the near past, and may purchase in the near future, shares of DGZ as a proxy for short gold against my long agricultural holdings of corn, wheat, soybeans and sugar.

Fair Value, Like A Reliable But Tardy Guest, Is Always Late And Always Arrives

Many investors like to repeat John Maynard Keynes’ overquoted quip about how the market can remain irrational longer than you can remain solvent. There are numerous problems with this saying, especially when taken out of context, since as long as you don’t use margin you should always remain solvent. Those who go overboard with investing, as with anything else in life, will sometimes be rewarded in the short run but will inevitably fail in the long run. Those who bet on extremes becoming more extreme will similarly often prosper for some unknown period of time, but will eventually lose in the end because all assets eventually revisit fair value. After doing so, whatever had been previously wildly trendy and overvalued usually ends up becoming roughly equally despised and underpriced. Thus, if you can consistently buy gradually into whatever has become the greatest percentage below its fair value, and sell whatever has become the most stretched above its fair value, you will have a method, which will be highly successful in the long run. It will also be consistently unpopular for others to follow, because you will be buying near the end of an extended bear market when everyone is gloomy and you will be selling anything when its recent outperformance encourages almost everyone to anticipate indefinite additional future gains. If we look at U.S. equity indices through the decades, there is a pattern in which nearly all bear markets and especially the most severe ones often begin with underperformance by thousands of small-cap shares. IWM tracks the Russell 2000, which represents U.S. companies 1001 through 3000 by market capitalization. IWM moved above 120 in early March 2014, having enjoyed a powerful bull market for just about exactly five years. Since then, it has fluctuated in both directions and briefly set a new peak in June 2015, but is now trading below 120. Most investors are unaware of this development, but ignorance is certainly not bliss as this persistent underperformance by small-cap U.S. equities relative to their large-cap counterparts is classically how bull markets transition to bear markets. Until nearly the end of 2015, investors responded to this divergence by crowding increasingly intensely into fewer and fewer advancing securities – much as they had previously done in years including 1929, 1972, and other periods when buying U.S. stocks was especially popular and ultimately disastrous. Even in 2007, small-cap U.S. indices peaked in the spring and early summer while many of the most popular names continued to climb until almost the end of that year. If investors believe they can remain ahead of the game by shifting from small caps to large caps, it is similar to switching into a first-class cabin on the Titanic instead of heading for a lifeboat. You will enjoy fine luxury for a while, but in the end, you won’t survive. Those who have been buying the “fang” stocks (Facebook (NASDAQ: FB ), Amazon (NASDAQ: AMZN ), Netflix (NASDAQ: NFLX ), Google (NASDAQ: GOOG )) did wonderfully in recent months, but will end up in the poorhouse because wildly overvalued and trendy names in each generation end up just like the “Nifty Fifty” did during 1973-1974, collapsing far worse than the broader market during a sustained downturn. Already in 2016, we are getting a taste of what is in store for the next two years or so for what had been the most popular securities of 2015. This is appropriate, since the high-dividend favorites of 2014 including utilities (NYSEARCA: XLU ), REITs (NYSEARCA: IYR ), and U.S. Treasuries (NYSEARCA: TLT ) slumped throughout most of 2015 after having briefly climbed to even more overvalued peaks in January 2015. If money is coming out of nearly all of these former investor favorites, where is it going to go? Real estate has also become irrationally overvalued and will eventually suffer the same fate as Netflix and Amazon. Even the relatively steady S&P 500 Index has been repeatedly unable to set new all-time highs since it had topped out on May 20, 2015. Investors have been continuing to abandon the least popular sectors of recent years, making all-time record outflows from nearly all assets involved with commodity production and emerging markets. However, even the worst bear markets end eventually, and since they represent a high percentage of the bargains, which are currently available, they will ultimately rebound enough to attract the attention of momentum players and many others who don’t like to buy into the cheapest prices but wait until they observe that a recovery has been “confirmed.” Of course, there is no such thing as true confirmation, since anything can rise or fall at any time. However, whenever any asset has become so cheap that it could double or triple and still be below fair value, then it will often behave in a subsequent bull market by being among the top performers and eventually becoming as irrationally overvalued, as it had been previously undervalued. It works the other way too, so that the most popular assets often become the least popular a few years later. The U.S. dollar is a classic example of a wildly loved currency that climbed to its highest point in 2015 since April 2003, but has been unable to remain above its highs from March 2015. The U.S. dollar index has repeatedly climbed towards or above 100 and has failed to hold above that level. Investors have flooded into bets on a higher greenback while sentiment has rarely been more bullish, but market behavior hasn’t responded by staging an appropriate rally extension. Instead, resistance keeps reappearing and investors keep getting more optimistic. This is how major tops are formed. Instead of rising further to 110 or 120 as most observers currently expect, an equal move the opposite way to 90 and then 80 is a far more likely scenario for the U.S. dollar index in 2016 and perhaps the early months of 2017. Even mentioning to someone that you are anticipating a significantly lower U.S. dollar will get people seriously questioning your sanity, which thereby makes it far more likely to occur. Ultimately, whatever is last shall be first and vice versa. Expect to see the least popular assets of recent years finally enjoying a year or more in the sunshine of strong bull markets, while the most sought-after assets of recent years will severely disappoint holders with losses generally exceeding half. Probably most investors can’t imagine their Nasdaq favorites or San Francisco/Vancouver/Tel Aviv real estate losing more than half their current valuations, but that is what is going to happen. Fair value seems elusive and unachievable, until it is inevitably achieved and usually far surpassed in the opposite direction. Disclosure: Whenever they have appeared to be especially depressed, I have been buying the shares of funds, which invest either in emerging-market assets or in the shares of commodity producers, since I believe these are among the two most undervalued sectors in a world where real estate and U.S. equity indices remain dangerously overvalued. As the extremely popular U.S. dollar stuns investors by suffering a bear market instead of continued gains as almost everyone is expecting, this will lead to a major upward revision in global inflationary expectations. From my largest to my smallest position, I currently own GDXJ, KOL, SIL, XME, HDGE, COPX, GDX, EWZ, RSX, REMX, GLDX, URA, FCG, IDX, GXG, VGPMX, ECH, VNM, BGEIX, NGE, RSXJ, PLTM, EPU, TUR, SILJ, SOIL, EPHE, and THD. I expect the S&P 500 to eventually lose roughly two thirds of its May 20, 2015 peak valuation of 2134.72, with its next bear-market bottom perhaps occurring in late 2017 or early 2018. The Russell 2000 Index and its funds including IWM are trading below their levels from the first week of March 2014; small-cap U.S. equities typically lead the entire U.S. equity market lower as they have done in past decades including 1928-1929, 1972-1973, and 2007. Those who have “forgotten” or never learned the lessons of previous bear markets are doomed to repeat their mistakes.