Where The Volume At?

A common myth is that small ETFs, or those with low trading volume are, by definition, illiquid. While the intricacies of true ETF liquidity entails a deeper dive into the underlying securities, the purpose of this post is to simply provide a look at the where some of the most traded ETFs lie. Its important to keep in mind that this data is looking at the past 3 months so some of the trading seen could be a byproduct of what is happening in the broader capital markets.

The reality is that the majority of ETFs on the market are thinly trade and many investors may be restricting themselves and their available options by relying solely on trading volume. If we look the distribution breakdown by average number of shares traded, less than 50% of U.S. listed ETFs trade more than 50,000 shares a day. Many investors may use the 500,000 share threshold as a screen for potential ETFs, but as you can see, that narrows the universe down to only about 13% of the market. 

Below is a closer look at the most traded ETF by asset class. Overall, SPY is king but investors (or in this case traders ) sure do love those gold miner ETFs, as 4 of them make the top 15. Notice in fixed income that high yield bond ETFs are at the top, clearly sending a message that investors value the daily liquidity benefits of ETFs for assets classes that may be more difficult to access. 

*Volume data is 3-month ADV as of 3/17/2017 

Tom PsarofagisComment
Mind Your Factors

The proliferation of smart beta ETFs has prompted many investors to rethink their traditional investment allocations and consider new alternatives to achieve desired outcomes. Among one of the hottest trends is “factor-based” investing where an ETF identifies a basket of stocks to harness specific drivers of returns (momentum, quality, etc).

There are of course several ways in which investors can access a suite of factor based ETFs. They can purchase multifactor ETFs, which package multiple factors into one turnkey product. The other alternative is to pick and choose single factor ETFs based on market outlook. The multifactor approach is meant to take the guesswork out of choosing single factors by utilizing a rules-based process to combine an array of factors. The single factor approach allows for a bit more flexibility to mix and match factors, which allows for more explicit targeting of factors based on market views.

For this look, I wanted to look at the later approach where an investor would pick and choose his or her own factor ETFs. For these purposes, I used the suite of iShares Edge Single Factor ETFs

·       Momentum (MTUM) - Exposure to large- and mid-cap U.S. stocks exhibiting relatively higher price momentum

·       Value (VLUE) - Exposure to large- and mid-cap U.S. stocks with lower valuations based on fundamentals

·       Size (SIZE) - Exposure to large- and mid-cap U.S. stocks with a tilt towards the smaller, lower risk stocks within that universe

·       Quality (QUAL) - Exposure to large- and mid-cap U.S. stocks exhibiting positive fundamentals

The purpose here is not to take a definitive view on any specific factor, but rather highlight the performance of the ETFs and take a closer look at the underlying holdings.

While the academic support for factor investing dates back decades, for these purposes I went back to the inception dates of these ETFs in 2013, which is more indicative of what an actual investor would have access to.

The first chart highlights the cumulative performance of each factor ETF since 2013. MTUM has been the clear winner on a cumulative basis. 

The cyclicality of the factors is a bit more apparent on a rolling chart where you can easily see shift in trend between MTUM and VLUE.

One of the issues that requires addressing is that these factor ETFs are created independently of each another; meaning that there could be a instance where a stock is included in both a Momentum ETF and a Value ETF. In a multifactor ETF, duplicate holdings are netted out but for a “do-it-yourself” factor investor, it important to take notice of the overlap among varying ETFs.

For example, if we look at the aforementioned ETFs, we can see that all of the holdings in MTUM, QUAL, and VLUE are also included in SIZE. The numbers indicate what weight they have in SIZE, so for example, the names in MTUM account for 21% of the weight in SIZE, and so on. 

In addition, there is commonality among MTUM, QUAL, and VLUE.

  • MTUM/VLUE: 7% Overlap
  • MTUM/QUAL: 16% Overlap
  • VLUE/QUAL: 20% Overlap

Investors should be mindful of the overlap among their ETFs and the impact that has on correlations. ETFs that have significant overlap inherently means that investors could be doubling down on certain stocks and may not have the desired diversification across factors. 

The adoption and usage of factor ETFs (both single and multi) will continue to remain strong as investors continually seek more innovative approaches to building efficient portfolios. 

Tom PsarofagisComment
Fee War

Vanguard cast another stone last week cutting fees across a wide array of its ETFs. In this post, lets take a closer look at the fee breakdown among some of the largest players in the space.

The chart below highlights the top 15 ETF providers along with some fee metrics. The average fee column is a simple average of all the sponsors’ products but the asset-weighted column helps to add a bit more context. 

As expected, Vanguard and Schwab have the lowest average fees among the top players in the industry. While you won’t find much in the way of smart beta offerings from Vanguard and Schwab (They do have the RAFI Fundamental ETFs), you can be sure to get one thing…cheap beta exposure. On an asset-weighed basis, it’s a tie among the two at 9 basis points… (that’s right, 9 basis points)

Other firms like First Trust and Proshares, tell a slightly different story. These firms have a wide range of products ranging from smart-beta to leveraged exposure. The average fee for a First Trust ETF is 73 bps (67bps on a weighted basis), which ranks among one of the highest for a sponsor of that size. This is a telling story especially around differentiation and how investors view your products. This also speaks volumes to the power of the distribution team at some of these ETF sponsors. Gone are the days of “build it and they will come” in the ETF ecosystem so a solid distribution network is imperative for success. Proshares has a rather robust offering of shorter-term trading vehicles (leveraged and inverse products), which tend to have higher fees.

Think of this as Walmart (Schwab, Vanguard) versus going to specialty retailer (First Trust, Proshares). When you go to specialized store, you have the understanding that a differentiated product may require a premium.  

And not to forget, what can be said about the king in the category, iShares. With an offering of over 300 ETFs, their lineup has an average fee of 36 bps (Asset-weighted 25bps)

Lastly, the breakdown below highlights the 10 least expensive and the 10 most expensive ETFs. 

While the goliaths look to do battle in the ETF arena, at the end of the day the ultimate victor is the end investor. 

Tom PsarofagisComment
A Brief ETF Industry Breakdown

In 1993, a U.S. investor had one ETF to choose from; SPY. In early 2017, that number has grown to nearly 2,000 options ranging across asset classes. While product development teams have been quite busy for decades, they really ramped things up over the last 5 or so years. Of the nearly 2,000 ETFs available currently, about half of those have come to market in 2011 or later. The table below breaks down the number of ETFs by launch year. 2015 and 2016 were particularly busy years accounting for 25% of all U.S listed ETFs

The asset breakdown by year tells a different story. Nearly 77% of the assets are sitting in products launched in 2007 or prior. The largest single portion of assets ($400B) are sitting in products that launched in the year 2000. 

While competition heated up in 2016, we can best classify 2016 as the year of the fee cut.  ETF sponsors like iShares, Vanguard, Schwab, and Fidelity all slashed fees, making the ETF arena that much more competitive. While the true cost of ownership for an ETF extends beyond just its expense ratio (tracking, bid/ask spreads, etc), we can see the lower cost ETFs are skewed towards the ETF veterans, who have the luxury of more assets. 

To Launch or not to launch?

ETF sponsors, both incumbent and new entrants, are vigorously analyzing trends to justify the bringing a new product to market. The threshold level to measure success for an ETF can be debated, but I broke down the industry into some key buckets.

Entrance into the “Billion-Dollar Club” is a luxury enjoyed by just over 300 ETFs. For 11 of those elite, they opened up shop in 2014 or later. An encouraging sign is that while although many ETFs are new to the market and have not left much runway behind them, over 1,200 products have reached the $30 million mark. 

Source: Bloomberg, Morningstar. Excludes ETFs that have closed. 

Tom PsarofagisComment
Gold

No secret that gold prices have been under pressure for several years and is marking its 3rd straight annual loss. The precious metal is seeing levels not seen since early 2010 and the future still looks uncertain at best.  Gold, which is traditionally viewed as an inflation hedge has fallen to the perfect storm of monetary policy and a strengthening dollar in 2015. Since gold offers no income to investors, it becomes less competitive, especially when rates move higher. The real question here is with the Fed rate hike behind us, has gold already priced that and perhaps set to move higher in 2016? The focus in 2016 will be if the Fed raises rates again and/or the pace of raising rates,  in other words, if the Fed doesn’t raise rates again or if this December rate hike fails, gold could see some strength on US dollar weakness.

Not that history always repeats itself, but if we look back at the last period of Fed tightening (June 2004 – June 2006), we can see that gold rose steadily so higher interest rates doesn’t necessarily bode poorly for gold.

From a long-term technical perspective, gold prices continue to remain above the psychological $1000 level. This level served as strong resistance in 2008 and 2009 but reversed roles after prices broke out above in late 2009. 2015 is the only real significant time this level has been tested since early 2010.

On a short time scale, prices seem to be consolidating between 1050-1080. Prices are below the downward sloping 50 and 200 day moving averages so there isn’t any significant indication of an uptrend. On the margin, there is a bullish development worth noting in that as prices remain stagnate, momentum (RSI) is starting to build upwards which could signal a move to the upside.

All things considering, gold actually held up quite well when compared to other commodities like oil (-29%) and copper (-24%). 

Tom PsarofagisComment
Hong Kong's Wild Ride

Ignoring Venezuela’s unprecedented Bolivar related performance, Chinese stocks are the world’s top performers. The Shanghai Composite has propelled higher by over 39%, compared to the 2% gain from the S&P 500 year to date. Thanks in part to strict ownership laws in China, as well as the recently established trading link, the Hong Kong equity markets have garnered much attention. The benchmark Hang Seng Index is up roughly 14% year to date.

Due to the unique structure of the Chinese equity markets, A-Shares are listed in China and largely available only to domestic investors. H-Shares on the other hand, are Chinese companies listed in Hong Kong and available to non-domestic investors. With strong momentum in place for the Chinese markets, analysts and traders are beginning to hone in on valuation spreads between the classes of shares.

The Hang Seng AH Premium Index is used to measure the spread between A-Shares and H-Shares of the same company dually listed on both exchanges.  Despite the strong rally in Hong Kong, their A-Share counterparts are trading at high premiums not seen since 2011, according to the index

The premium gap presents an attractive opportunity for investors wanting to ride the coat tails of the strength in China but seeking more “attractive” valuations. Comparing the P/E Ratios of both the Hang Seng and the Shanghai Composite, Hong Kong stocks offer remarkably “cheaper” valuations by traditional metrics. With no shortage of global catalysts on the horizon (Central banks, Greece, etc), the premium gap will be worth monitoring. 

Source: Bloomberg

Tom PsarofagisComment
Greenback and Small-Caps

Greenback and Small-Caps

Perhaps one of the most intriguing stories of 2014 was the explosive rally in the U.S. Dollar relative other other world currencies. As we are approaching Memorial Day weekend, the tune in 2015 is quite different for the greenback. Recent weak retail sales figures for the month of April has left investors second guessing the timing of a Fed rate hike, thus translating into additional weakness in the U.S. Dollar Index. Since reaching an 11-year high on March 16th, 2015, the mighty dollar has corrected over 7%.

Rewinding a bit back to 2014 (and early 2015) the strengthening U.S.  Dollar was taking a toll on the profits of large U.S. multinational corporations. In late 2014 and the early part of this year, there was a rush to own stocks with as little dollar exposure as possible, so it was small and mid-cap stocks with the advantage. Now we are seeing that pendulum swing back to the other direction and investors are flooding back into large and mega cap names… The S&P 500 hit a record high today

Chart below highlights the U.S. Dollar Index along with the relative performance of the Russell 2000 to the S&P 500. Not to state the obvious here, but the correlation of the greenback to relative performance is pretty apparent. Overall, it’s clear the intermediate trend of the dollar is up and correction doesn’t seem all that farfetched given the explosive move. As the Federal Reserve is probably one of the only central banks expecting to raise rates in 2015, it will be interesting to watch the behavior of small-cap stocks.  

Tom PsarofagisComment
Weekly Sector Snapshot

A weekly recap of the S&P sectors for the week ending 3.13.15

U.S stocks lost ground for the third straight week, as worries about the strength of the dollar worried investors more than the prospect of the Fed raising interest rates.

Weekly Sector Leaders: Healthcare, Financials, Utilities

Weekly Sector Laggards: Energy, Info Tech, Materials

Healthcare has now cemented itself as the top performing sector for the year, while Utilities continue to be the laggards. Discretionary continues to looks strong as the 2nd best performing sector. Financials also showed signs of relative strength last week. 

Tom PsarofagisComment
Weekly Sector Snapshot

A weekly recap of the S&P sectors for the week ending 3.6.15

U.S stocks closed sharply lower on Friday, pushing the S&P 500 into negative territory for the week. S&P sectors across the board were in the red for the week.

Weekly Sector Leaders: Financials, Discretionary, Healthcare

Weekly Sector Laggards: Utilities, Energy, Staples

Historically, the month of March has been favorable to the Financial and Energy sectors, whilst its been unfavorable towards Staples and Healthcare. Utilities continue to get clobbered (worst performing sector YTD) as 10-year yields have moved over 30% since the beginning of February. The Consumer Discretionary sector is the top performer on the year with a 4.5% gain. 

Tom PsarofagisComment
Market Sentiment

The latest weekly market sentiment data from the National Association of Active Investment Managers and the American Association of Individual Investors for the week ending 3.4.15

The National Association of Active Investment Managers Exposure Index, measures the average U.S. Equity exposure by active investment managers. As the name indicates, the NAAIM Exposure Index provides insight into how investment managers are adapting and viewing the current market environment. In spite of the S&P 500 hitting yet another all-time high this week, active investment managers took some exposure off the table as the NAAIM Exposure Index dropped from 99.2 to 92.1

The American Association of Individual Investors Sentiment Survey measures the percentage of individual investors who are bullish and bearish on the stock market. Bullish investors took the side of caution week-over-week, as the percentage of bullish investors dropped from 45.4% to 39.8%. Despite the drop in bullish sentiment, it still remains slightly above its long-term average

The Volatility Index, or “fear index,” is a key measure of the markets’ expectation of volatility. With all-time highs in the headlines, the VIX index is well off the heightened levels we witnessed earlier in 2015

Tom PsarofagisComment
Solar Power

It’s been a hot week in the solar sector following the partnership of First Solar and SunPower Corporation. As investors continue to digest the news, both names saw significant pops in their stock price and have given a boost to solar names across the board.

Investors looking for exposure to solar names have two solid options. The Guggenheim Solar ETF (TAN) and the Market Vectors Solar ETF (KWT). Both products have similar holdings and track rather closely, but for charting purposes, we will take a look at TAN, the larger of the two products.

2013 was quite the door busting year for solar energy, with TAN posting a mind-blowing 127% return on the year.  Despite hitting a peak in 2014, last year was uneventful, barely changing on the year. Thus far, 2015 is shaping up nicely for solar names (+15%) but the charts are saying the party could be short lived. Since peaking in March of 2014, prices have developed a subsequent pattern of lower highs. Recent momentum has driven TAN back above its 50 and 200-day moving averages but prices are about to bump heads with a major trend-line ($40). To add salt to the wound, on a relative strength basis versus the S&P 500, TAN is also hitting a major resistance line.

One important characteristic is the latest short interest number in TAN. As of February 13th, nearly 3.7M shares of TAN were held short, which translates to an extremely high short interest ratio of 19.1. If prices in TAN can break through that significant resistance line, a short squeeze could be in order, boosting prices higher. $40 is an important inflection point here and shouldn’t be ignored by investors. 

Tom PsarofagisComment
Lightning McQueen

A trip to Michigan this past weekend sparked my interest to look back at the auto industry.  Despite some of the bad press surrounding the auto makers with respect to recalls, that did not detour buyers in 2014 but instead, gave the industry one its best sales years in recent memory.  A rebounding economy, ultra-low buyer financing costs, a dash of falling gas prices...and auto makers are driving to higher returns.

Luckily for investors, there is a pure play automotive ETF product. The First Trust NASDAQ Global Auto Index Fund (CARZ). The product currently has 36 holdings and includes securities that are classified as automobile manufacturers. In terms of country exposure, Japan, the United States, and Germany account for 79% of the holdings. The ETF hasn’t really garnered as much attention as some of the other transportation products (IYT and XTN, both of which have no auto exposure)

After and explosive 37% year in 2013, CARZ was rather stagnant in 2014, barely changed on the year. Following the brief broader market correction in October of 2014, CARZ has since rallied 18% and is vast approaching the all-time high level from summer of 2014. The ETF has been trading in a narrow consolidation range between $36-41. The all-time high of $41.36 is a significant resistance level ahead, but it could be pedal to the medal with a meaningful breakout above that. 

Tom PsarofagisComment
Weekly Sector Snapshot

A weekly recap of the S&P sectors for the week ending 2.13.15

The S&P 500 posted a 2% gain, completing its second consecutive week in positive territory

  • Weekly Sector Leaders: Info Tech, Materials, Energy, Discretionary
  • Weekly Sector Laggards: Utilities, Staples

The Discretionary, Materials, and Telecom sectors continue to build on the relative strength we have been seeing over the last few weeks. Utilities and Staples are underperforming as yields continue to spike higher. Materials is the top performing sector on the year followed by Telecom. Utilities and Financials are the worst performing sectors, and the only 2 sectors to be negative on the year. 

Tom PsarofagisComment
Market Sentiment

The latest weekly market sentiment data from the National Association of Active Investment Managers and the American Association of Individual Investors for the week ending 2.11.15

The National Association of Active Investment Managers Exposure Index, measures the average U.S. Equity exposure by active investment managers. As the name indicates, the NAAIM Exposure Index provides insight into how investment managers are adapting and viewing the current market environment. As the market chugged higher week-over-week, active investment managers barely changed their exposure, only slightly decreasing it from 88% to 84%

The American Association of Individual Investors Sentiment Survey measures the percentage of individual investors who are bullish and bearish on the stock market. Despite the uncertainty in Europe, bears have run for the hills. Bearish sentiment sharply dropped from 32% to 20% while bullish sentiment ticked up from 35% to 40%, and is now above its long-term average.

The Volatility Index, or “fear index,” is a key measure of the markets’ expectation of volatility. We greeted the new year with heighted volatility but since then, the VIX index continues to make a serious of lower-highs, as a sign of investors becoming more optimistic. 

Tom PsarofagisComment
Weekly Sector Snapshot

A weekly recap of the S&P sectors for the week ending 2.6.15

What a difference a week makes, after a 2.8% loss the previous week, the S&P 500 rallied 3% for the week ending 2.6.15. With the exception of Utilities, all sectors traded higher on the week.

  • Weekly Sector Leaders: Telecom, Energy, Financials, Materials
  • Weekly Sector Laggards: Utilities, Healthcare, Staples

On a relative basis, the “risk-on” sectors like Discretionary, Materials, and Energy have been displaying strong relative strength.  Utilities and Staples were among the weakest performers as Treasury yields had a massive upwards move. Seasonally, Energy and Materials are the strongest sectors in February, while Financials and Info Tech are the worst. Telecoms have taken command as the top performing sector YTD, while Financials are the weakest. 

Tom PsarofagisComment
Energy Breadth

The percentage of stocks trading above a certain moving average is a common breadth reading which measures the participation of stocks in an underlying index. Given all the heightened volatility surrounding crude oil, I couldn’t think of a better sector to focus on than the energy. The energy sector was the worst performing sector in 2014, losing over 8% on the year, but dropping 25% from its peak in June 2014.

The chart below depicts the Select SPDR Energy ETF (XLE) and the percentage of the stocks in the ETF that are trading above their respective 50-day moving averages. (Given the sharp decline in XLE, it didn’t really make sense to look at the 200DMA just yet). XLE currently has 43 holdings with the top 5 consisting of:

  • Exxon:                 16.5%
  • Chevron:             13.2%
  • Schlumberger:  7.1%
  • Kinder Morgan:  4.3%
  • EOG Resources:  4.0%

Looking back in retrospect, it’s easy to spot the “warning” signals. In April 2014, the % of stocks above their 50DMA was at 100%, yet the XLE continued higher and peaked in late June. In other words, breadth was deteriorating months before the collapse in the XLE. There was a period between September & October 2014 where all the components were below their 50DMA, so there was really nowhere for breadth to go but upwards. Seasonally, February is a strong month for XLE so it is interesting to monitor the trend of the underlying names. I am not one to call bottoms, but the rapid waterfall in XLE has seemed to lighten up and prices are consolidating. In terms of recent breadth, nearly 56% of the underlying components are above their 50DMA 

Tom PsarofagisComment
Market Sentiment

The latest weekly market sentiment data from the National Association of Active Investment Managers and the American Association of Individual Investors for the week ending 2.4.15

The National Association of Active Investment Managers Exposure Index, measures the average U.S. Equity exposure by active investment managers. As the name indicates, the NAAIM Exposure Index provides insight into how investment managers are adapting and viewing the current market environment. In spite of the market moving higher, investment managers slightly trimmed back their U.S. equity exposure from 92.2% to 88.2%.

The American Association of Individual Investors Sentiment Survey measures the percentage of individual investors who are bullish and bearish on the stock market. According to the most recent data, the percentage of bullish investors dropped week-over-week from 44.1% to 35.5%. Despite the drop in bullish sentiment, it is ironic that the S&P is on track for one of its best weeks of the year. In addition, bullish sentiment is now below its long term average of 39%.

The Volatility Index, or “fear index,” is a key measure of the markets’ expectation of volatility. Volatility continues to remain heighted in 2015 but is trading in a tighter and tighter range. 

Tom PsarofagisComment
Weekly Sector Snapshot

A weekly recap of the S&P sectors for the week ending 1/30/15

U.S. stocks ended the week lower by 2.8%. The S&P 500 has posted a weekly loss in four of the last five trading weeks. All ten S&P sectors ended the week in negative territory.

Weekly Sector Leaders: Materials, Discretionary, Energy

Weekly Sector Laggards: Info Tech, Staples, Financials, Telecom

On a relative basis, Materials gained the most ground relative to the S&P last week. Although grossly underperforming for quite some time, a bottoming pattern seems to be forming. Financials continue to underperform the broader market and have cemented themselves as the worst performing sector year to date. Utilities and Healthcare continue to look strong and remain the only two sectors in positive territory in 2015.

Tom PsarofagisComment
Market Sentiment

The latest weekly market sentiment data from the National Association of Active Investment Managers and the American Association of Individual Investors for the week ending 1.28.15

The National Association of Active Investment Managers Exposure Index, measures the average U.S. Equity exposure by active investment managers. As the name indicates, the NAAIM Exposure Index provides insight into how investment managers are adapting and viewing the current market environment. Week-over-week, active investment managers aggressively increased their exposure to U.S. equities, up to 92.6% (vs 76.2% last week).

The American Association of Individual Investors Sentiment Survey measures the percentage of individual investors who are bullish and bearish on the stock market. With the Greek elections in the rear view mirror and the meat of earnings season underway, bullish investors put their toes back in the water. Week-over-week, the percentage of bullish investors increased from 37.1% to 44.2%. More importantly, the percentage of bullish investors is now back above its long term average of 38.9%

The Volatility Index, or “fear index,” is a key measure of the markets’ expectation of volatility. Volatility continues to remain heighted in 2015 as the market continues to digest a slew of earnings and central bank news. 

Tom PsarofagisComment
Diagnosis: Gold/Copper Ratio

Copper is a metal that is utilized in almost every part of global industry and has thus been given the title “Dr. Copper” because of its ability to forecast the health of the global economy. Gold on the other hand, isn’t an industrial metal; rather, it is utilized as a hedge and safe-haven asset. Thanks to our good friends the ECB, all this talk of quantitative easing has undermined investor confidence in the currency market, forcing them into gold as currency alternative.

Gold peaked in 2011 at nearly $1,900 an ounce, and has since been in a multi-year downtrend, trading now at $1,285. Gold has been trading sideways since the summer of 2013, hugging the support level of $1,190. In November of 2014, prices broke below this level, but it turned out to be a fake out, as prices have rallied nearly 14% since then. Copper, like gold, has also been in a steady downtrend since 2010, and recently breaking down to levels not seen since 2009.

In many ways, the gold/copper ratio is similar to the consumer discretionary /staples ratio as a risk-on/risk-off metric. If the ratio line is in a downtrend, investors are more optimistic about global growth and vice versa when the ratio is trending upwards.

The ratio isn’t as simple as a risk-on/risk-of switch because the increased involvement of central banks has jumbled the underlying fundamental signals of the ratio. The one important thing to take away is the sharp spike and resistance break-out of the ratio, reaching levels last seen in 2011. One signal alone isn’t enough to run for cover, but the ratio is giving a worrisome reading to say the least. 

Tom PsarofagisComment