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Market Neutral Funds: Best And Worst Of December

Market neutral mutual funds and ETFs returned an average of -0.06% in December and -0.10% for the entire year of 2015. The combined category’s annualized three-year returns stood at +1.01% through December 31, with 4.16% annualized volatility (“standard deviation”) and a 0.09 Sharpe ratio. The funds, which are designed to move irrespective of the broad stock and bond markets, have done their job in terms of their three-year beta relative to the Barclays U.S. Aggregate Bond Index, which stood at 0.04, and generated 0.98% alpha over that time. Click to enlarge Best Performers in December The three best-performing market neutral mutual funds in December were: BTAL, which initially launched in September 2011, returned +3.35% in December, making it the top-performing ’40 Act market-neutral fund for the month. For the year, however, BTAL gained just 0.15%, and for the three-year period ending December 31, its annualized returns stood at -2.10%. Its three-year beta of 1.04 means it had a high correlation to the Barclays U.S. Aggregate Bond Index. However, its -2.75% alpha was put you behind the index, and its above-average volatility (8.63% three-year standard deviation) resulted in a -0.15 three-year Sharpe ratio. FXMAX ranked second among market neutral funds in December, with monthly gains of 2.93%. But over the one- and three-year periods ending December 31, the fund’s returns were unattractive at -7.72% and -4.42% (annualized), respectively. Its three-year beta (0.46) and standard deviation (5.41%) were better than BTAL’s, but its three-year alpha (-5.07%) and Sharpe ratio (-0.82) were worse. Finally, the popular MNA ETF ranked third in December, with returns of +2.41%. In 2015, the ETF gained 1.45%, easily beating its peers. Its three-year annualized returns of +4.36% were comprised entirely of alpha (4.62%) relative to the Barclays U.S. Aggregate Bond Index, since the fund did its job by producing a three-year beta of 0.00 on the nose. MNA’s three-year standard deviation of 3.65% was by far the lowest of any fund reviewed this month, and its three-year Sharpe ratio of 1.27 towered above the competition. Worst Performers in December The three worst-performing market neutral mutual funds in December were: TFSMX was December’s worst performer among market neutral mutual funds and ETFs, returning -3.78% and dropping its returns for the full year into negative territory at -2.96%. The fund launched in 2004 and returned an annualized 0.83% for the three years ending December 31, with a fair 0.24 beta, 0.55% alpha, and 4.96% volatility. Its three-year Sharpe ratio stood at 0.18 as of year’s end. QuantShares’ SIZ and MOM both ranked in the bottom three, somewhat offsetting the firm’s first-place finish with BTAL. But while SIZ and MOM posted respectively disappointing one-month returns of -2.95% and -2.50% in December, MOM’s annual gains of 17.42% in 2015 made it the clear standout of the six funds reviewed this month. Indeed, MOM’s three-year annualized returns of 4.19% were only slightly bested by the more-famed MNA, but on the negative side, its 1.14 three-year beta may be less than appealing to investors looking to diversify away from fixed income. By this basis SIZ, which returned an annualized -5.07% for the three years ending December 31, looked better with its 0.13 three-year beta. SIZ and MOM had respective three-year alphas of -5.26% and +2.46%, with respecitve volatility of 6.25% and 8.45%, resulting in Sharpe ratios of -0.81 for SIZ and 0.48 for MOM. Past performance does not necessarily predict future results. Jason Seagraves and Meili Zeng contributed to this article.

ETF Update: 4 New Launches And 2 Closures

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. So far January has not been the best month for buy and hold investing. As a long term investor I know stock dips are really opportunities to buy into strong companies that will not just recover but bloom again. However, even having studied behavioral portfolio management, I still get that flight response that all investors will feel at some time. As you can see in the fund flows YTD tables below, I am not the only person feeling this way. Top Redemptions Fund Name Net Flows in USD Millions SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) -4,073.29 iShares Russell 2000 ETF (NYSEARCA: IWM ) -2,108.65 PowerShares QQQ Trust ETF (NASDAQ: QQQ ) -1,996.87 iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA: HYG ) -1,648.93 iShares MSCI Emerging Markets ETF (NYSEARCA: EEM ) -1,349.74 Data Source: ETF.com Top Creations Fund Name Net Flows in USD Millions iShares Short Treasury Bond ETF (NYSEARCA: SHV ) -4,073.29 Vanguard S&P 500 ETF (NYSEARCA: VOO ) -2,108.65 iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ) -1,996.87 iShares 7-10 Year Treasury Bond ETF (NYSEARCA: IEF ) -1,648.93 iShares 1-3 Year Treasury Bond ETF (NYSEARCA: SHY ) -1,349.74 Data Source: ETF.com Inflows and outflows can be a great reflection of what investors and money managers actually think is happening in the markets. As I don’t offer investment advice, and none of my articles should be seen as advice, I will leave it to readers to decide what these data points mean in the comments section below. However, I do want to point out that most of the top new creations are Treasury ETFs, while the redemptions are funds tracking the popular U.S. equity indices. It is up to you to decide how (or if) this information from 3 weeks of market activity will affect your portfolio strategy. Even with the churning markets there were 4 new funds launched in the last 2 weeks, so let’s jump in: Fund launches for the week of January 11th, 2015 Van Eck launches the first generic pharmaceuticals ETF (1/13): The Market Vectors Generic Drugs ETF (NASDAQ: GNRX ) focuses on companies that make the majority of their revenues from generic medication. While there are other pharmaceutical ETFs avaliable to investors, the largest being the Dynamic Pharmaceuticals ETF (NYSEARCA: PJP ), GNRX is the first funds to highlight companies focused on the generic medication market. The fund currently holds 84 companies and the top holdings feature names biotech investors are likely already familiar with; Allergan Plc (NYSE: AGN ) (8.69%), Teva Pharmaceutical (NYSE: TEVA ) (8.60%) and Baxalta Inc (NYSE: BXLT ) (5.83%). Reality Shares launches 2 more DIVCON ETFs (1/14): Last week saw the launch of the Reality Shares DIVCON Leaders Dividend ETF (BATS: LEAD ) and the company already has two more out of the gate. However, the Reality Shares DIVCON Dividend Defender ETF (BATS: DFND ) and the Reality Shares DIVCON Dividend Guardian ETF (BATS: GARD ) are both long/short portfolios, which is new for the firm. As a refresher, the DIVCON methodology “rates companies’ dividend health based on seven weighted factors our research shows are correlated with dividend growth.” According to each ETFs homepage, DFND seeks to provide long-term capital appreciation through the use of a hedged equity portfolio, while GARD provides exposure to large-cap U.S. companies with the highest probability of increasing their dividends, as measured by their DIVCON Scores. However, GARD has some twists as well. It dynamically adjusts its market exposure based on the firm’s Guard Indicator market strength gauge, making it a much more complex fund. State Street (NYSE: STT ) rolls out its innovation ETF (1/14): The SPDR FactSet Innovative Technology ETF (NYSEARCA: XITK ) tracks an index of companies selected by FactSet meant to represent the most innovative segments of the technology and electronic media industries. As described on the fund homepage, “the Index Provider considers the most innovative segments of the Technology sector and Electronic Media sub-sector to be those with the highest revenue growth and believes that these companies are often involved in cutting edge research, innovative product and service development, disruptive business models, or a combination of these activities.” Top holdings include Rovi Corporation (NASDAQ: ROVI ) (2.22%), Super Micro Computer Inc. (NASDAQ: SMCI ) (1.49%) and CyberArk Software Ltd. (NASDAQ: CYBR ) (1.42%). There were no fund launches for the week of January 18th, 2015 There were no fund closures for the week of January 11th, 2015 Fund closures for the week of January 18th, 2015 ETRACS 2xMonthly Leveraged S&P MLP Index ETN (NYSEARCA: MLPV ) UBS ETRACS 2x Leveraged Long Alerian MLP Infrastructure Index ETN (NYSEARCA: MLPL ) 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.

WisdomTree Makes Early Splash In 2016

Despite market volatility, 2016 looks to be a big year for WisdomTree (NASDAQ: WETF ). The New Year’s confetti had hardly been cleared when the firm announced it had completed its acquisition of GreenHaven Commodity Funds, the managing owner of the GreenHaven Continuous Commodity Index Fund (NYSEARCA: GCC ) and GreenHaven Coal Services. The news came on January 4, the first business day of 2016, and it was quickly followed up by another big announcement: the firm’s launch of a four-fund suite of dynamic currency-hedged ETFs: WisdomTree Dynamic Currency Hedged Europe Equity Fund (BATS: DDEZ ) WisdomTree Dynamic Currency Hedged Japan Equity Fund (BATS: DDJP ) WisdomTree Dynamic Currency Hedged International Equity Fund (BATS: DDWM ) WisdomTree Dynamic Currency Hedged International SmallCap Equity Fund (BATS: DDLS ) “WisdomTree’s dynamic currency hedged strategy limits the need to make a call on currency by utilizing a data-driven, rules-based approach that assesses the picture of developed market currencies relative to the U.S. dollar on a monthly basis,” said WisdomTree Director of Research Jeremy Schwartz, in a statement. “This offers the potential for an attractive strategic and baseline exposure for long-term portfolios.” Move Into Commodities The GreenHaven acquisition also involves alternative investment funds. In addition to the GCC ETF, WisdomTree’s acquisition of GreenHaven Coal Services also includes the GreenHaven Coal Fund (NYSEARCA: TONS ), which GreenHaven Coal Services sponsors. GreenHaven has been retained by WisdomTree as the sub-advisor to both funds. “The acquisition of these ETFs represents WisdomTree’s first foray into the commodities space and exemplifies our commitment to growing an innovative, differentiated and diversified product platform,” said WisdomTree CEO Jonathan Steinberg. “Today in the U.S. alone we offer 88 ETFs across traditional equities and currency-hedged equities, domestic and international fixed income, currencies, and alternatives strategies including commodities.” GCC returned -18.99% in 2015, a very tough year for commodities, ranking in the top 12% of its Morningstar category. TONS launched in February 2015 and returned -20.90% in the final six months of 2015, but that was good enough for it to rank in the top 1% of its category. The two funds have respective net-expense ratios of 0.85% and 1.23%. Three of the new currency hedged equity ETFs – DDEZ, DDJP, and DDLS – have net-expense ratios of 0.43%. DDWM has a net-expense ratio of 0.35%. Past performance does not necessarily predict future results. Jason Seagraves contributed to this article.