Tag Archives: seeking

The Global X SuperDividend ETF Illustrates The Risks That Come With Yield Chasing

Summary The SuperDividend U.S. ETF has underperformed considerably this year posting a loss this year of 6.5% compared to a gain 0.6% for the S&P 500. The fund’s yield of over 7% may have been tempting for investors but the fund’s composition showed it took positions in riskier investments to achieve that yield. The fund increased its position in MLPs to around 15% of fund assets at the end of Q2 right around the time when losses in MLPs were accelerating. A heavier allocation to underperforming utility stocks also contributed to the fund’s poor performance. As Treasury yields remain near all time lows and bank products struggling to yield as much as 1%, investors often look to riskier products in search of higher yields. Corporate bonds sport modestly higher yields. That leaves a lot of people turning to much riskier equities for income. The SuperDividend family of ETFs from Global X was created to appeal to investors looking for a high yield product. The Global X SuperDividend ETF (NYSEARCA: DIV ) has been around since the beginning of 2014 tempting investors with yields as high as 6% and currently has a 30 day yield of over 7%. The fund has drawn nearly $300 million in total assets since its inception but some investors are now finding out the hard way that those high yields come with risks. High dividend equity ETFs like the Vanguard High Dividend Yield ETF (NYSEARCA: VYM ) and the iShares Core High Dividend ETF (NYSEARCA: HDV ) have performed roughly on par with the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) year-to-date but DIV has lagged considerably. DIV Total Return Price data by YCharts A big chunk of the blame could come from the composition of the fund itself. The Vanguard and iShares ETFs are well diversified broadly among the major sectors. DIV is much more concentrated. As of 10/23/15, utilities and real estate count for nearly half of the portfolio. Real estate has performed in line with the S&P 500 but utilities have lagged the index by about four percent. DIV Total Return Price data by YCharts The biggest offender however could be MLPs. MLPs have gotten hammered this year as the Alerian MLP Index is down 30% year-to-date. The index’s losses accelerated just as DIV begin piling in. DIV Total Return Price data by YCharts Consider some of the fund’s most recent quarterly fact sheets. The holdings as of the end of the first quarter indicate that about 8% of assets were committed to MLPs At the end of the second quarter, MLPs accounted for over 15% of fund assets. It’s right around this time that you can see losses in the ETF began to accelerate. Even now, taking a look at the fund’s current assets shows that about 12% of the fund is still in MLPs. The Alerian MLP Index’s total return is still sitting over 40% below its high reached in 2014 thanks to the fall in oil and other energy prices. The MLP Index rallied over 20% between the end of September and the middle of October but a chunk of that gain has been given back demonstrating again that some of these high yielding investments aren’t necessarily conservative. Conclusion The moral of the story here is pretty simple. Higher yields usually mean higher risk. As we’ve seen this year, risk isn’t always rewarded as there’s been a pretty sizeable shift out of riskier assets into more conservative investments. But maybe another reason is that the ETF has just plain old performed lousy. The relatively high exposure to MLPs at a time when their value was tanking doesn’t help the fact that year-to-date the ETF has lagged almost every sector that it has a reasonable exposure to. It’s understandable that income seeking investors are looking for ways to improve on the low yields that they’re seeing in just about every other corner of the market. But one of the primary principles of investing is that the chance at higher returns usually only comes when taking on additional risk. Sometimes that risk doesn’t pay off and some investors may be learning that rule the hard way.

How Will The Fed Impact GLD This Time?

Summary The price of GLD declined in the past few days as the U.S. dollar rallied. The FOMC meeting will convene again this week. How will the upcoming FOMC meeting impact the price of GLD? The U.S. dollar has changed course and rallied in the past few days, which also dragged back down SPDR Gold Trust ETF (NYSEARCA: GLD ). In times when central banks aim to provide more liquidity: The ECB may expand and extend its QE program and cut rates in December, People Bank of China reduced again its rates, and Bank of Japan may ramp up its QE program this week (although the chances are low for this upcoming meeting); it becomes less likely for the FOMC to raise rates. And as long as the Fed delays its rate hike to a later date, precious metals are likely to benefit from it. This week, the FOMC will convene again for its penultimate meeting for the year. This meeting won’t include an economic update or press conference. The current market expectations , as derived from the bonds market, are for only 6% chance of a hike announcement in the coming meeting. The most likely scenario is for the Fed to publish a succinct statement with little changes to the wording in order to keep the possibility of raising rates in December. If so, GLD isn’t likely to have much of a reaction. But what does it mean about the December meeting? The two mandates of the Fed relate to labor and inflation. Since the last meeting, the reports related to these two mandates aren’t making the decision any easier. From the labor market perceptive , the NFP and JOLTS weren’t impressive. And even though unemployment rate is low, wages aren’t picking up any faster with a steady growth rate of 1.9%. When it comes to inflation, the last CPI report showed the core CPI reached 1.9% – very close to the Fed’s target inflation of 2%. It still seems that the Fed may decide to err on the side of caution and maintain its rates low this year and only raise rates around Q1 2016. If the next two NFP reports show another slow growth in jobs (fewer than 150,000 jobs per months) and little change to growth of wages, these reports will make it a bit easier for the Fed to delay it decision to next year. The changes in market expectations over the timing of the Fed’s rate hike is demonstrated in the rise and fall of short-term interest rates in recent months, as you can see in the following chart. (click to enlarge) Source: U.S Department of Treasury and Google finance The latest rally of GLD isn’t only related to the depreciation of the U.S. dollar. But that’s not all. Its rally is plausibly related to the decline in interest rates. In the past few months, the changes in the market expectations of short-term interest rates are strongly correlated with the daily shifts in the price of GLD – the linear correlation is around -0.41 over the last four months. The gold market has benefited from the recent weakness of the U.S. dollar and fall in interest rates. And if the Fed issues another dovish report or even keep its statement unchanged, this could provide another short-term boost for GLD. But as other central banks aim to turn more dovish by cutting rates or increasing QE programs, the upward pressure on the U.S. dollar will intensify, which is likely to bring down GLD. Therefore, even if GLD were to rally in the near term as the Fed delays its rate hike, the actions taken by other central banks could bring back down GLD in the coming months. For more please see: ” GLD Continues to lose its appeal “.

ALFA Underwhelms As Hedge Fund Darlings Crater Plus An Untimely Hedge

Summary ALFA’s hedge was triggered for the first time at the start of last September. Unfortunately, ALFA’s recent performance has been uninspiring. This analysis reveals two likely reasons for ALFA’s underperformance since the hedge was activated. In my Aug. 31, 2015 article entitled ” ALFA: A Market-Beating ETF About To Go Market-Neutral ” I reported that the AlphaClone Alternative Alpha ETF (NYSEARCA: ALFA ) was about to go market-neutral for the first time since its inception due to the S&P 500 closing below its 200-day moving average at month-end. I also commented on the fact that ALFA has had significant wire-to-wire outperformance vis-a-vis the SPDR S&P 500 Trust ETF ( SPY) since inception (see chart below), suggesting that investors in ALFA benefited from being able to “invest with the best.” Recall that ALFA uses a proprietary “Clone Score” methodology in order to aggregate the ideas of hedge funds which have strong historical performance. Alas, ALFA can no longer lay claim to this achievement. Its total return performance since inception now trails SPY by some 15% (55% vs. 70%). ALFA Total Return Price data by YCharts Zooming up to the time frame since the hedge was triggered at the start of September (it was actually activated at the market close on Sep. 2nd) reveals that most of the relative underperformance occurred over the last month. ALFA Total Return Price data by YCharts Reconstructing ALFA’s return without the hedge Recall that when the hedge is triggered (caused by the S&P 500 closing below its 200-day moving average at month-end), ALFA shorts the S&P 500 in an amount equal to the notional value of its long holdings. In other words, ALFA becomes market-neutral. Obviously, given that SPY has (as of last week) reclaimed its 200-day moving average in a brief span of two months, the hedge appears to be ill-timed. Nevertheless, investors in ALFA must be prepared to accept the fact that this hedging strategy will likely underperform in whipsaw situations, such as what was observed over the past two months, as part of the cost of protecting oneself from the worst of bear markets. I wanted to see whether the severe underperformance of ALFA was due to the hedge being triggered, or something else. Therefore, I reconstructed the total return of ALFA since the start of September to visualize what the return profile of ALFA would have been if the hedge had not been activated. We can see from the chart above that had the hedge not been activated, the hypothetical 100% long ALFA (denoted ALFA-L in the graph above) would have returned -1.95% since Sep. 1st, compared to -8.14% for the actual ALFA. While this alleviates the underperformance a bit, it is still far below that of SPY at 8.69%. So what can the rest of ALFA’s underperformance be attributed to? Hedge fund darlings crater In my previous article, I compared the top 10 holdings of ALFA and SPY. ALFA SPY Stock Ticker % Assets Stock Ticker % Assets Apple Inc. (NASDAQ: AAPL ) 7.25 Apple Inc. AAPL 3.75 Valeant Pharmaceuticals (NYSE: VRX ) 7.19 Microsoft Corporation (NASDAQ: MSFT ) 2.03 Celgene Corporation (NASDAQ: CELG ) 2.55 Exxon Mobil Corporation Common (NYSE: XOM ) 1.78 Horizon Pharma plc (NASDAQ: HZNP ) 2.53 Johnson & Johnson Common Stock (NYSE: JNJ ) 1.49 Allergan PLC (NYSE: AGN ) 2.41 Wells Fargo & Company Common St (NYSE: WFC ) 1.46 The Priceline Group Inc. (NASDAQ: PCLN ) 2.36 General Electric Company Common (NYSE: GE ) 1.41 Transdigm Group Incorporated Tr (NYSE: TDG ) 2.22 Berkshire Hathaway Inc. Class B (NYSE: BRK.B ) 1.4 Oracle Corporation Common Stock (NYSE: ORCL ) 2.05 JPMorgan Chase & Co. Common St (NYSE: JPM ) 1.37 Biogen Idec Inc. (NASDAQ: BIIB ) 1.79 Pfizer, Inc. Common Stock (NYSE: PFE ) 1.19 Skechers U.S.A., Inc. Common St (NYSE: SKX ) 1.5 AT&T Inc. (NYSE: T ) 1.15 How have the top 10 stocks of ALFA fared over the past two months? Answer: not pretty. AAPL Total Return Price data by YCharts As can be seen from the graph above, only 2 of ALFA’s top 10 holdings at the start of September, PCLN (+12.44%) and AAPL (+10.55%), have outperformed SPY. There are three massive losers: SKX (-30.5%), HZNP (-41.2%) and VRX (-48.2%). Assuming that the weightings of those three stocks did not change over this time period, they would have contributed a total of -6.24% to the total return of ALFA over this time period. That actually accounts for over half the entire difference between the hypothetical unhedged ALFA-L (-1.95%) and SPY (8.69%) during this time! Now, I am aware that ALFA’s holdings are not static, and hence the above calculation is merely an estimate. Nevertheless, it is clear that ALFA has been hit by a “doubly-whammy” of an untimely hedge, plus the underperformance of hedge fund darlings such as Valeant Pharmaceuticals (see this comically-timed Forbes article ” Hedge Fund Superstars Stocking Up On Valeant Pharmaceuticals ” that was published the day before VRX’s price came crashing down). This illustrates an important fact: even the best and brightest in the industry can sometimes get it (very) wrong. Due to ALFA’s heavy concentration in tech and biotech, one might say that SPY is not an appropriate benchmark for ALFA. The following chart therefore also shows the total return of the PowerShares QQQ Trust ETF (NASDAQ: QQQ ) and the iShares Nasdaq Biotechnology ETF (NASDAQ: IBB ) since the start of September, as well that of another hedge fund-following ETF, the Global X Guru Index ETF (NYSEARCA: GURU ). Unfortunately, ALFA still lags the other four ETFs, although the hypothetical ALFA-L (-1.95%) would have outperformed IBB (-5.12%) and closely trail GURU (-0.37%). ALFA Total Return Price data by YCharts Summary The last two months has not been kind to ALFA holders. Not only was the timing of the hedge unfortunate, but a number of the fund’s largest holdings have suffered tremendously, particularly VRX and HZNP, whose pricing practices have come under intense scrutiny. Will ALFA rebound in the future? I don’t know. As of today, VRX and HZNP are still two of ALFA’s top 10 holdings, at 3.30% and 2.00% weights, respectively, suggesting that ALFA’s future performance may still be somewhat tethered to the fates of those two specialty pharmaceutical companies. Moreover, note that while ALFA is currently in market-neutral mode, this will change if the S&P 500 manages to remain above its 200-day moving average for one more week, as the end of the month is near.