Friday, May 20th, 2016

ETF Deathwatch for May 2016: List Jumps to 450

By Ron Rowland
12:01 pm CDT

The quantity of exchange-traded funds (“ETFs”) and exchange-traded noted (“ETNs”) continues to zoom higher.  There are now 450 products on the list, and the growth trajectory is on a path to surpass 500 by the end of the year.

For May, there are 26 new names joining the list and 11 coming off.  Only seven of the removals were the result of improved health—the other four died and lost their listings.  The current membership consists of 342 ETFs and 108 ETNs.  Further segmentation of the ETF population reveals that 41 are actively managed funds, 151 have smart-beta labels, and the remaining 150 are traditional capitalization-weighted ETFs.

The surge of currency-hedged ETF introductions of the past two years continues to be problematic for the industry.  The brief nine-month surge of the U.S. dollar in late 2014 and early 2015 generated a slew of currency-hedged ETF launches that continues to this day.  However, with the dollar’s decline over the past 14 months, these funds have been at a performance disadvantage.  As a result, they are failing to attract new assets, losing some of the assets they had, and ending up here on ETF Deathwatch. This month, six of the additions are currency-hedged ETFs.

Twenty-six funds went the entire month of April without a trade, and 269 did not trade on the last day of the month.  Additionally, six products have yet to record their first trade of 2016.  It remains a mystery why some of these products exist and why the exchanges allow them to have a listing.

The NYSE did take action against one ETN issued by Deutsche Bank (DB) in April.  As outlined in ETF Stats for April, the NYSE suspended trading and delisted DB Commodity Long ETN (former ticker DPU) because its assets fell below $400,000.  However, DB left shareholders holding the bag because it has no intention of automatically liquidating the ETNs and returning money to shareholders.  Adding insult to injury, the notes do not mature for another 22 years.  If owners are not willing to wait that long, then they will have to pursue the monthly round-lot redemption process or a sale in the over-the-counter markets.  Keep this in mind before buying one of the 39 other DB-sponsored products that are currently on Deathwatch.

The average asset level of products on ETF Deathwatch increased from $6.6 million to $6.8 million, and the quantity of products with less than $2 million fell from 98 to 96.  The average age increased from 46.4 to 46.8 months, and the number of products more than five years of age surged from 148 to 177.  The driving force behind the huge jump in five-year-old products on the list is that unloved family of iPath “Pure Beta” ETFs have now been on the market that long.  Despite the lack of investor interest in these ETNs, Barclays continues to sponsor them, and the NYSE continues to collect a listing fee.

Here is the Complete List of 450 ETFs and ETNs on ETF Deathwatch for May 2016 compiled using the objective ETF Deathwatch Criteria.

The 26 ETFs and ETNs added to ETF Deathwatch for May:

  1. AlphaMark Actively Managed Small Cap (SMCP)
  2. CSOP China CSI 300 A-H Dynamic (HAHA)
  3. CSOP MSCI China A International Hedged (CNHX)
  4. Deutsche X-trackers CSI 300 China A Hedged Equity (ASHX)
  5. ELEMENTS Rogers ICI Energy ETN (RJN)
  6. ETRACS 2x Wells Fargo BDC Series B ETN (LBDC)
  7. ETRACS Mthly Pay 2x Mortgage REIT Series B ETN (MRRL)
  8. ETRACS UBS Bloomberg CMCI Series B ETN (UCIB)
  9. Guggenheim MSCI Emerging Market Equal Country Wtd (EWEM)
  10. iShares Currency Hedged MSCI South Korea (HEWY)
  11. John Hancock Multifactor Healthcare (JHMH)
  12. Morgan Stanley Cushing MLP High Income ETN (MLPY)
  13. PowerShares Developed EuroPacific Hedged Low Volatility (FXEP)
  14. PowerShares Dynamic Networking (PXQ)
  15. PowerShares Japan Currency Hedged Low Volatility (FXJP)
  16. PowerShares S&P 500 Momentum (SPMO)
  17. PowerShares S&P 500 Value (SPVU)
  18. PowerShares Zacks Micro Cap (PZI)
  19. RBC Yorkville MLP Distribution Growth Leaders Liquid PR ETN (YGRO)
  20. Reaves Utilities (UTES)
  21. SPDR MSCI China A Shares IMI (XINA)
  22. The Restaurant ETF (BITE)
  23. VanEck Vectors Solar Energy (KWT)
  24. WisdomTree BofA ML HY Bond Zero Duration (HYZD)
  25. WisdomTree Europe Local Recovery (EZR)
  26. WisdomTree Global ex-U.S. Hedged Real Estate (HDRW)

The 7 ETPs removed from ETF Deathwatch due to improved health:

  1. Barclays Return on Disability ETN (RODI)
  2. Global X Permanent (PERM)
  3. Global X Scientific Beta US (SCIU)
  4. IQ 50 Percent Hedged FTSE Japan (HFXJ)
  5. iShares Global Inflation-Linked Bond (GTIP)
  6. O’Shares FTSE Europe Quality Dividend (OEUR)
  7. PureFunds ISE Junior Silver (SILJ)

The 4 ETFs removed from ETF Deathwatch due to delisting:

  1. Highland HFR Equity Hedge (HHDG)
  2. Highland HFR Event-Driven (DRVN)
  3. Highland HFR Global (HHFR)
  4. DB Commodity Long ETN (DPU)

ETF Deathwatch Archives

Disclosure:  Author has no positions in any of the securities mentioned and no positions in any of the companies or ETF sponsors mentioned.  No income, revenue, or other compensation (either directly or indirectly) is received from, or on behalf of, any of the companies or ETF sponsors mentioned.

- Print This Page Print This Page




Tuesday, May 10th, 2016

ETF Stats for April 2016: Smart Beta ETFs Surpass 600

By Ron Rowland
17:08 pm CDT

Twenty-six new ETFs came to market in April, producing the briskest pace of the past six months.  Only five delistings occurred during the month, and the net increase of 21 results in a tie for the largest increase of the past nine months.  April ended with 1,884 listed products, consisting of 1,681 exchange-traded funds (“ETFs”) and 203 exchange-traded notes (“ETNs”).

Assets rose by $37.6 billion to a new high of $2.2 trillion.  Inflows accounted for $12.5 billion of the increase, while the other $25.1 billion were the result of market gains.  The year-to-date percentage increase in assets is relatively modest at 4.2%, and the year-over-year gain is just 3.7%.  Asset gains are not keeping pace with the 10.6% increase in product count the past 12 months.

Smart-beta, or alternative-beta, funds were once again prevalent among the new ETFs in April, numbering 16 in all.  Three of the closures fit the alternative-beta category, pushing the overall count 13 higher to 607.  Of the 69 new ETFs introduced so far this year, 47 (68%) are smart-beta funds, 10 are actively managed, and 12 track traditional cap-weighted indexes.  However, the dozen traditional ETFs aren’t all vanilla, as six are either leveraged or inverse funds, and three use adaptive currency-hedging techniques.

Actively managed ETFs took a big jump in April, increasing their ranks by seven to 143.  Two of the new actively managed ETFs are “gold hedged” from new sponsor REX.  They are both fund-of-funds ETFs that use an overlay of gold futures to effectively hedge away exposure to the U.S. dollar.  Although REX claims to be the “first” to offer gold-hedged ETFs, UBS has been offering the ETRACS S&P 500 Gold Hedged ETN (SPGH) for more than six years.  However, investors will likely prefer the ETF structure of REX Gold Hedged S&P 500 (GHS) over the ETN structure of SPGH.

The most notable closure during April was the forced delisting of the DB Commodity Long ETN (DPU).  It is notable because DB has no plans to liquidate the product and return the money to owners of the notes.  The NYSE suspended trading and delisted the product because DPU was not meeting the minimum market value of $400,000 required for continued listing.  The good news is that this ETN is so small that very few investors will be affected.  The bad news is the notes do not mature for another 22 years.  If owners are not willing to wait that long, then they will have to pursue a sale in the over-the-counter markets.  Additionally, if owners happen to hold 100 ETNs, or multiples thereof, then they can possibly partake in Deutsche Bank’s monthly small-lot redemption.  Good luck with that.

Trading activity declined 12.0% for the month, marking the third consecutive month of double-digit drops.  These three months combined to produce a 31.9% plunge in trading activity to $1.28 trillion from January’s $2.2 trillion in ETF dollar volume.  April’s activity saw just 10 products averaging more than $1 billion a day, although these 10 represented an impressive 48.7% market share.  The quantity of products averaging more than $100 million a day in trading activity dropped from 97 to 94 and accounted for 86.4% of trading activity.

April 2016 Month EndETFsETNsTotal
Currently Listed U.S.1,6812031,884
Listed as of 12/31/20151,6442011,845
New Introductions for Month26026
Delistings/Closures for Month415
Net Change for Month+22-1+21
New Introductions 6 Months1076113
New Introductions YTD63669
Delistings/Closures YTD26430
Net Change YTD+37+2+39
Assets Under Management$2,184 B$23.2 B$2,208 B
% Change in Assets for Month+1.7%+9.8%+1.7%
% Change in Assets YTD+4.2%+8.0%+4.2%
Qty AUM > $10 Billion54054
Qty AUM > $1 Billion2585263
Qty AUM > $100 Million78536821
% with AUM > $100 Million46.7%17.3%43.6%
AUM Flows for Month $11.97 B$0.55 B$12.51 B
AUM Flows YTD $47.77 B$1.38 B$49.14 B
Monthly $ Volume $1,412 B$66.2 B$1,478 B
% Change in Monthly $ Volume-12.4%-2.6%-12.0%
Avg Daily $ Volume > $1 Billion9110
Avg Daily $ Volume > $100 Million88694
Avg Daily $ Volume > $10 Million31710327
Actively Managed ETF Count (w/ change)143+7 mth+6 ytd
Actively Managed AUM $25.1 B+1.6% mth+9.4% ytd
Data sources:  Daily prices and volume of individual ETPs from Norgate Premium Data.  Fund counts and all other information compiled by Invest With An Edge.

New products launched in April (sorted by launch date):

  1. Dhando Junoon ETF (JUNE), launched 4/4/16, seeks to track a rules-based index of approximately 100 U.S. securities selected from three event-driven categories: Share buybacks will receive a 75% allocation, select value manager holdings via 13F filings will get a 20% weighting, and spin-offs get the remaining 5%.  The ETF has an expense ratio of 0.75% (JUNE overview).
  2. JPMorgan Diversified Return Europe Currency Hedged ETF (JPEH), launched 4/4/16, seeks to track the performance of the FTSE Developed Europe Diversified Factor 100% Hedged to USD Index.  Its top-down risk allocation framework equally distributes portfolio risk across 10 sectors.  The bottom-up multi-factor stock-ranking process combines value, quality, and momentum factors.  The fund hedges out the currency exposure and has an expense ratio capped at 0.49% (JPEH overview).
  3. JPMorgan Diversified Return International Currency Hedged ETF (JPIH), launched 4/4/16, seeks to track the performance of the FTSE Developed ex North America Diversified Factor 100% Hedged to USD Index.  Its top-down risk allocation framework equally distributes portfolio risk across 40 regional sectors.  The bottom-up multi-factor stock-ranking process combines value, size, momentum, and low volatility factors.  The fund hedges out the currency exposure and has an expense ratio capped at 0.49% (JPIH overview).
  4. REX Gold Hedged FTSE Emerging Markets ETF (GHE), launched 4/5/16, is an actively managed fund-of-funds ETF that holds Vanguard Emerging Markets (VWO) and overlays the portfolio with gold futures contracts via a Cayman subsidiary.  The ETF will issue 1099 tax forms and caps its expense ratio at 0.65% (GHE overview).
  5. REX Gold Hedged S&P 500 ETF (GHS), launched 4/5/16, is an actively managed fund-of-funds ETF holding Vanguard S&P 500 (VOO) and overlays the portfolio with gold futures contracts via a Cayman subsidiary.  The ETF will issue 1099 tax forms and caps its expense ratio at 0.48% (GHS overview).
  6. Direxion Daily Energy Bear 1x Shares (ERYY), launched 4/7/16, seeks investment results that are 100% inverse the daily performance of the Energy Select Sector Index.  The new ETF caps its expense ratio at 0.45% (ERYY overview).
  7. Direxion Daily Financial Bear 1x Shares (FAZZ), launched 4/7/16, seeks investment results that are 100% inverse the daily performance of the Financial Select Sector Index.  FAZZ will cap its expense ratio at 0.45% (FAZZ overview).
  8. Direxion Daily Technology Bear 1x Shares (TECZ), launched 4/7/16, seeks investment results that are 100% inverse the daily performance of the Technology Select Sector Index.  The fund caps its expense ratio at 0.45% (TECZ overview).
  9. WisdomTree Emerging Markets Dividend Fund (DVEM), launched 4/7/16, tracks a fundamentally weighted index that measures the performance of dividend-paying stocks selected from 17 emerging-market nations.  It weights companies by annual cash dividends paid.  The fund has an estimated yield of 3.8% and an expense ratio of 0.32% (DVEM overview).
  10. WisdomTree International Quality Dividend Growth Fund (IQDG), launched 4/7/16, tracks a fundamentally weighted index that provides exposure to dividend-paying developed-market companies.  It is composed of the top 300 companies from the WisdomTree International Equity Index with the best-combined rank of growth and quality factors.  The growth factor ranking focuses on long-term earnings growth expectations. The quality factor ranking is based on three-year return on equity and return on assets.  It then weights companies by annual cash dividends paid.  The new ETF has an estimated yield of 2.4%, and its expense ratio is capped at 0.38% (IQDG overview).
  11. First Trust RiverFront Dynamic Asia Pacific ETF (RFAP), launched 4/14/16, is an actively managed ETF holding equity securities of developed-market Asian Pacific companies while utilizing a dynamic (0-100%) currency-hedging strategy.  The manager quantitatively scores geographies on fundamental and technical momentum, and combines this with a qualitative assessment.  A geographic and thematic rotation strategy is established, and a proprietary valuation model gauges markets for relative and absolute value.  The portfolio manager combines the outputs of the quantitative and qualitative processes to select the most attractive regions and securities.  The fund has an expense ratio of 0.83% (RFAP overview).
  12. First Trust RiverFront Dynamic Developed International ETF (RFDI), launched 4/14/16, is an actively managed ETF holding equity securities from developed markets outside of North America while utilizing a dynamic (0-100%) currency-hedging strategy.  The manager quantitatively scores geographies on fundamental and technical momentum, and combines this with a qualitative assessment.  A geographic and thematic rotation strategy is established, and a proprietary valuation model gauges markets for relative and absolute value.  The portfolio manager combines the outputs of the quantitative and qualitative processes to select the most attractive regions and securities.  RFDI currently holds more than 400 stocks and has an expense ratio of 0.83% (RFDI overview).
  13. First Trust RiverFront Dynamic Europe ETF (RFEU), launched 4/14/16, is an actively managed ETF holding equity securities of developed-market European companies while utilizing a dynamic (0-100%) currency-hedging strategy.  The manager quantitatively scores geographies on fundamental and technical momentum, and combines this with a qualitative assessment.  A geographic and thematic rotation strategy is established, and a proprietary valuation model gauges markets for relative and absolute value.  The portfolio manager combines the outputs of the quantitative and qualitative processes to select the most attractive regions and securities.  The ETF has an expense ratio of 0.83% (RFEU overview).
  14. SPDR DoubleLine Emerging Markets Fixed Income ETF (EMTL), launched 4/14/16, is an actively managed ETF that seeks to provide high total return from current income and capital appreciation.  The five-step investment process combines bottom-up research with sovereign macro overlays.  The fund’s manager, DoubleLine, links credit fundamentals with market valuation to guide portfolio construction and investment decisions.  It uses a research-driven process with a focus on countries, sectors, and companies believed to have improving fundamentals and ratings.  EMTL has a current yield of 5.3%, an effective duration of 5.4 years, and an expense ratio capped at 0.65% (EMTL overview).
  15. SPDR DoubleLine Short Duration Total Return Tactical ETF (STOT), launched 4/14/16, is an actively managed ETF that seeks to maximize current income with an effective duration between one and three years.  The fund’s manager, DoubleLine, believes that active asset allocation is of paramount importance in its efforts to mitigate risk and achieve better risk-adjusted returns.  DoubleLine also believes an active approach is best suited to navigate the divergence and uncertainty in global interest rates and economic activity.  The lower duration (one to three years) seeks to limit drawdowns relative to a global broad market fixed income portfolio.  STOT has a current yield of 3.4%, an effective duration of 2.4 years, and an expense ratio capped at 0.45% (STOT overview).
  16. Deutsche X-trackers FTSE Emerging Comprehensive Factor ETF (DEMG), launched 4/19/16, tracks an index designed to provide core exposure to emerging-market equities based on five factors: quality, value, momentum, low volatility, and size.  The value score is calculated on a company’s valuation ratios, including cash-flow yield, earnings yield, and country relative sales to price.  The momentum score is calculated on each company’s cumulative 11-month return. The quality score is calculated from a company’s leverage and profitability.  The low volatility score is calculated from the standard deviation of five years of weekly local total returns.  DEMG has an expense ratio of 0.50% (DEMG overview).
  17. Global X S&P 500 Catholic Values ETF (CATH), launched 4/19/16, tracks an index that excludes companies involved in activities perceived to be inconsistent with Catholic values as set out by the U.S. Conference of Catholic Bishops, including screens for weaponry and child labor.  It seeks to minimize tracking error by matching the sector weightings of the broader S&P 500 Index, and its expense ratio is capped at 0.29% (CATH overview).
  18. Guggenheim Large Cap Optimized Diversification ETF (OPD), launched 4/19/16, will track the Wilshire Large Cap Optimized Diversification Index, which combines differentiated return streams from low-correlated stocks.  The benchmark index is methodically constructed via a proprietary algorithm where individual stocks are added only up to the point that they contribute to diversification.  The fund seeks to manage risk by constraining stock and sector levels relative to the parent index.  OPD has an expense ratio of 0.40% (OPD overview).
  19. Sprott BUZZ Social Media Insights ETF (BUZ), launched 4/19/16, tracks the BUZZ Social Media Insights Index, which identifies the 25 most bullish U.S. stocks based on investment insights derived from social media.  It processes more than 50 million unique stock-specific data points from social media comments, news articles, and blog posts on a monthly basis.  The data is filtered through an analytics model composed of patented natural-language processing algorithms and artificial-intelligence frameworks.  BUZ has an expense ratio of 0.75% (BUZ overview).
  20. Amplify Online Retail ETF (IBUY), launched 4/20/16, is a portfolio of companies generating significant (70%) revenue from online and virtual sales.  The underlying EQM Online Retail Index segregates holdings into three categories: traditional retail, marketplace, and travel.  The index is equal-weighted with a maximum of 25% exposure to non-U.S. stocks and ADRs.  Any excess weight will be allocated equally to all U.S.-domiciled index members.  The expense ratio is 0.65% (IBUY overview).
  21. iShares Sustainable MSCI Global Impact ETF (MPCT), launched 4/22/16, seeks to track the investment results of an index composed of positive-impact companies that derive a majority of their revenue from products and services that address at least one of the world’s major social and environmental challenges as identified by the United Nations Sustainable Development Goals.  The ETF currently has 93 holdings and an expense ratio of 0.49% (MPCT overview).
  22. CrowdInvest Wisdom ETF (WIZE), launched 4/26/16, seeks to track the CrowdInvest Wisdom Index, which is composed of U.S.-listed equities weighted by sentiment built by an independent, diverse crowd.  It will attempt to harness “the wisdom of the crowd” from user votes on the CrowdInvest mobile app.  The users’ bullish or bearish opinions on any U.S.-traded stock determine which equities will be included.  The ETF has an expense ratio of 0.95% (WIZE overview).
  23. WisdomTree Fundamental U.S. Corporate Bond Fund (WFIG), launched 4/27/16, tracks a rules-based alternatively weighted index designed to capture the performance of selected issuers in the U.S. investment-grade corporate bond market that are deemed to have attractive fundamental and income characteristics.  The methodology employs a multi-step process that screens on fundamentals and then tilts to those with attractive income characteristics.  The new ETF has an estimated yield of 2.7%, an effective duration of 6.8 years, and an expense ratio capped at 0.18% (WFIG overview).
  24. WisdomTree Fundamental U.S. High Yield Corporate Bond Fund (WFHY), launched 4/27/16, tracks a rules-based alternatively weighted index designed to capture the performance of selected issuers in the U.S. high-yield corporate bond market that are deemed to have attractive fundamental and income characteristics.  The methodology employs a multi-step process that screens on fundamentals and then tilts to those with attractive income characteristics.  WFHY has an estimated yield of 6.2%, an effective duration of 4.5 years, and an expense ratio capped at 0.38% (WFHY overview).
  25. WisdomTree Fundamental U.S. Short-Term Corporate Bond Fund (SFIG), launched 4/27/16, tracks a rules-based alternatively weighted index designed to capture the performance of selected issuers in the U.S. investment-grade corporate bond market that are deemed to have attractive fundamental and income characteristics.  The methodology employs a multi-step process that screens on fundamentals and then tilts to those with attractive income characteristics.  Selected debt securities must have fixed coupons and a remaining maturity of at least one year but not more than five years.  SFIG has an estimated yield of 1.6%, an effective duration of 2.3 years, and an expense ratio capped at 0.18% (SFIG overview).
  26. WisdomTree Fundamental U.S. Short-Term High Yield Corporate Bond Fund (SFHY), launched 4/27/16, tracks a rules-based alternatively weighted index designed to capture the performance of selected issuers in the U.S. high-yield corporate bond market that are deemed to have attractive fundamental and income characteristics. The methodology employs a multi-step process that screens on fundamentals and then tilts to those with attractive income characteristics.  Selected debt securities must have fixed coupons and a remaining maturity of at least one year but not more than five years.  SFHY has an estimated yield of 6.6%, an effective duration of 2.5 years, and an expense ratio capped at 0.38% (SFHY overview).

Product closures in April and last day of listing:

  1. Highland HFR Equity Hedge (HHDG) 4/11/16
  2. Highland HFR Event-Driven (DRVN) 4/11/16
  3. Highland HFR Global (HHFR) 4/11/16
  4. DB Commodity Long ETN (DPU) 4/15/16 – delisted but not liquidated
  5. Global X GF China Bond (CHNB) 4/18/16

Product changes in April:

  1. ProShares 30 Year TIPS/TSY Spread (RINF) became ProShares Inflation Expectations ETF (RINF) with a new underlying index effective April 15.

Announced product changes for coming months:

  1. Van Eck Global will unite all of its investment products under the VanEck brand with the Market Vector ETFs becoming VanEck Vectors ETFs effective May 1.
  2. First Trust Indxx Global Agriculture ETF (FTAG) and First Trust ISE-Revere Natural Gas (FCG) will undergo 1-for-5 reverse splits effective May 2.

Previous monthly ETF statistics reports are available here.

Disclosure: Author has no positions in any of the securities, companies, or ETF sponsors mentioned.  No income, revenue, or other compensation (either directly or indirectly) is received from, or on behalf of, any of the companies or ETF sponsors mentioned.

- Print This Page Print This Page

Thursday, April 28th, 2016

What Is Your Sell Criteria?

By Ron Rowland
8:37 am CDT

Every stock market cycle has its darlings—the stocks investors believe can do no wrong.  I remember 1999 all too well.  Microsoft (MSFT) and Dell (private since 2013) were two of the stocks that investors fell in love with during that era.  However, those investors soon learned that loving a stock could have nasty consequences, because it is difficult to part with something you love.

These stocks, and many others, were devastated in the ensuing months and years.  The “unattached” owners of these stocks disposed of their holdings as prices dropped or earnings failed to materialize.  These disciplined investors had pre-defined criteria to alert them it was time to sell.  The stock lovers lacked such discipline and went through various stages of denial, justification, rationalization and other emotions as they watched their beloved stocks sink lower and lower.

In the current market cycle, it’s hard to imagine a stock that is more loved than Apple (AAPL).  Back in 1999, it was despised, and many analysts were not convinced the company would even survive, let alone flourish.  Fast forward to 2012, it became the most valuable company in history in terms of market capitalization, surpassing Microsoft’s December 30, 1999 valuation.  Yesterday, it was still the largest component of the S&P 500 Index, accounting for 3.17% of the Index.

However, Apple’s stock price peaked 14 months ago at $133.  On Tuesday, it closed below $105, and yesrterday it closed below $98.  That is more than 26% drop in 14 months.  Apple released its quarterly earnings report, which is the reason for the new down draft.  Earnings fell short of expectations by coming in at $1.90 per share, which was 10 cents below expectations and 18.5% below a year ago.  Revenue fell by 13%, marking its first revenue decline in 13 years, and the first ever since the stock achieved “darling” status.  Apple also reported that iPhone sales fell for the first time in history.

Now might be a good time to ask yourself if you are an investor or lover of Apple stock.  It is already in a bear market, so if you haven’t sold it yet, then when will you sell it?  You didn’t sell when it dropped 15%, and you didn’t sell when it dropped 25%.  What will it take?  A 50% drop?  A 70% drop?  Two quarters of declining revenue?

Many people are selling their Apple shares, perhaps because it posted its first revenue decline in 13 years or perhaps because its price dropped below $100.  Then again, an equal number of shares are being bought.  It’s a high volume day for Apple.  I’m not predicting further demise for Apple stock, as this could turn out to be a great buying opportunity.  What I’m suggesting is that you objectively consider your criteria for selling Apple or any other stock.  Be sure to have an exit plan, preferably before you buy.

As expected, the Federal Reserve took no action at the conclusion of its FOMC meeting yesterday.  Analysts are parsing the contents of the press release, so you can expect to see some forecast revisions for when the Fed will make its next move.

Sectors:  Signs of a significant sector rotation are visible again this week.  The smokestack group of sectors, discussed here a week ago, are firmly in the leadership role again today.  Energy and Materials swapped the top two positions, with Energy now completing its climb from last to first in the span of three weeks.  Materials, now in second, has been no lower than fourth place for eight consecutive weeks.  The Industrials sector rounds out the trio by maintaining its third-place position.  Financials was a big upside mover, jumping from eighth to fourth.  Health Care also climbed four spots higher to grab sixth.  These ascents forced the higher yielding sectors lower with Telecom sliding one place to fifth, Real Estate dropping to eighth, and Utilities plunging to tenth.  Technology lost momentum, but it was able to hang on to its ninth-place ranking.  Consumer Staples is now the weakest sector and sits on the bottom for a second week.

Styles:  Small-Cap Value assumed the lead, ending Mid-Cap Value’s seven-week stint at the top.  Small-Cap Value has been the most volatile of the style categories, bouncing between second and sixth during these past seven weeks.  Mid-Cap Value did not fall far, easing just one spot lower to second, while remaining prepared to resume the lead if Small-Cap Value’s volatility returns.  Micro-Cap was the big upside mover, climbing three spots to third after being in last place just two weeks ago.  Mid-Cap Blend fell four places to seventh, becoming the largest casualty of the relative strength rankings.  However, it only gave up two momentum points in the process, while Mega-Cap lost six points and held its decline to a single spot.  Large-Cap Growth is on the bottom for a second week.

Global:  The upper tier of the global rankings remains very steady with Latin America and Canada supplying the one-two punch for nine consecutive weeks.  Pacific ex-Japan and Emerging Markets have not been as consistent as the top two, but the third and fourth place duo have held those spots the majority of these nine weeks.  The top three are all resource-rich regions, and they are benefiting from strength in the Materials and Energy sectors.  Fifth through tenth-place categories are compressed, allowing Japan to jump four places higher without much effort.  A week ago, China was above this grouping, but it plunged six places lower and now sits at the bottom.

Disclosure:  Author has no positions in any of the securities mentioned and no positions in any of the companies or ETF sponsors mentioned.  No income, revenue, or other compensation (either directly or indirectly) is received from, or on behalf of, any of the companies or ETF sponsors mentioned.

- Print This Page Print This Page

Thursday, April 21st, 2016

Sector Rotation: Defensive to Smokestack

By Ron Rowland
10:24 am CDT

Sector analysis often reveals insightful information about the state of the economy, or at least investors’ perception of the economy.  However, it can often be confusing because the stock-market cycle is out of phase with the economic cycle.  We’ve all been told that the stock market is a discounting mechanism, but that does not mean it prices stocks at a discount to their true value.  No, in this context, discounting means the market is already considering future economic events.

If you enter “sectors and economic cycles” into your favorite search engine, you will see numerous graphic examples of the economic cycle overlaid with the stock-market cycle.  The charts segment the stock-market cycle into sectors and groups, showing which ones typically perform best during various phases of the economic cycle.  They make it all look so easy and academic.

While visually appealing, there are many obstacles with using these charts to time your sector buy and sell signals.  The first problem is obvious to any investor that has been through a complete cycle: the stock market and the economy never move as smoothly and predictably as illustrated.  Another hurdle is that many of these charts do not agree with each other.  In other words, many of the actors are reading from different scripts.

There are also many instances of sectors going off-script, going rogue, or otherwise not behaving as expected.  Early 2016 was a good example.  The market was declining, and the script called for “defensive” sectors to take the leadership.  Historically, that would mean Utilities, Consumer Staples, and Health Care would be the top performers.  However, Health Care was at the other end of the performance spectrum this time around.

Another major obstacle is the discounting nature of the market as discussed above.  Because of this, an investor cannot determine which sectors to buy and sell based on the state of the economy, because the economy will not be in that state for another six to 12 months.  You can try to predict where the economy will be in the future, but keep in mind that many professional economists have a poor record of doing that.

Instead of using these charts to let the state of the economy generate sector buy and sell signals, the typical usage has been just the opposite: using current sector strength and weakness help decipher where we are in the economic cycle.  It’s the classic chicken-and-egg conundrum, but when it comes to this subject matter, sector rotation usually occurs first.

I tend to have my own sector groupings and definitions.  You’ve probably heard me refer to the “defensive trio” of Utilities, Consumer Staples, and Health Care many times.  These three sectors typically produce the best relative strength during times of market weakness.  As shown above, this is not always the case.  Additionally, the high-dividend yields found in the Real Estate and Telecom sectors often allow them to be included in the defensive group.

“High growth” is another mode or sector grouping I use.  As you probably expect, Technology is the primary member of this group.  Strength in Consumer Discretionary is also usually evident when the market is in this mode.  The late 1990s was a great example, and the explosive Technology sector growth of that period produced outsized gains for Health Care and Telecommunications—two sectors mentioned above as belonging to the defensive group.

This week, our intermediate-term sector rankings suggest the market is now in what I refer to as “smokestack mode.”  Basic Materials, Energy, and Industrials are the sectors comprising this group.  Analysts often refer to these three as the sectors representing the old economy, the manufacturing economy, or the smokestack economy.  They represent the basic ingredients of a growing industrial base including raw materials, fuel, transportation, and manufacturing.  Analysts have suggested that the oil production boom in the U.S. of the past few years could lead to a resurgence of U.S. manufacturing strength, and perhaps we are now seeing the early signs of that.

If the market is indeed shifting from defensive to smokestack mode, then it is one more reason not to let sector and economic-cycle charts guide your investments.  Most of them say that strength in Energy and Materials occurs immediately before strength in Utilities and Consumer Staples—not afterward as current evidence suggests is now happening.  Instead, let the market be your guide.

Sectors: The sector rankings are displaying significant changes in leadership this week.  Materials rose to the top a week ago and continues to occupy that position today.  Energy, which was on the bottom just two weeks ago, climbed three more rungs of the ladder to land in second place.  Materials and Energy are currently displaying much larger momentum scores than the other sectors, providing them with a significant advantage.  Industrials jumped four places higher to grab the third spot, completing the smokestack mode of sector strength described above.  The defensive mode sectors have all moved to the lower half.  Utilities dropped three places to sixth, Health Care held steady in tenth, and Consumer Staples plunged from sixth to last.  However, Consumer Staples is still sporting a momentum score of 20, so being last does not equate to being in danger at this time.  It means it is moving up, but it is doing so at a slower pace than the other sectors.  Other notable changes include the fall of Real Estate from second to fifth, the two-notch improvement for Consumer Discretionary, and the three-place jump out of last place for Financials.

Styles: All style categories gained strength, and since the lowest-ranked style has a momentum score of 24, it signifies a currently strong and healthy market.  Except for Mid-Cap Value, which held on to its first-place ranking for a seventh week, all of the other categories changed positions.  Upside movers included the five-spot jumps of Small-Cap Value to second, Small-Cap Blend to fourth, and Micro-Cap from last to sixth.  It was a show of strength for the smaller capitalization segments as even Small-Cap Growth managed a two-place climb.  Therefore, it was the Large-Cap categories giving up the most relative-strength ground.  Large-Cap Growth plunged from third to last, although it actually boosted its momentum in the process.  Mega-Cap dropped five places to ninth, and Large-Cap Blend slipped two spots lower.

Global: Changes to the global rankings were minimal compared to sectors and styles, although a similar theme is evident.  Latin America and Canada are occupying the top-two spots for an eighth week.  Today, Pacific ex-Japan joins them in third place.  The common denominator across these three categories is that they are all physically large and rich in natural resources.  In fact, this group is known by the acronym ABC, which stands for Australia, Brazil (the largest economy and land mass in Latin America), and Canada.  They are the global regions you would expect to be on top when Materials is the strongest sector.  The U.S. and the U.K. had the largest declines in relative strength despite gaining absolute strength.  The U.S. posted a 10-point increase in momentum, and the U.K. outdid that with an 18-point jump of its own.  However, they both fell three spots, with the U.S. now in seventh and the U.K. dropping to last.  Japan was the lone category remaining in the red last week. Its huge 27-point jump in momentum put an end to that and allowed Japan to move two places out of the basement.

Disclosure:  Author has no positions in any of the securities mentioned and no positions in any of the companies or ETF sponsors mentioned.  No income, revenue, or other compensation (either directly or indirectly) is received from, or on behalf of, any of the companies or ETF sponsors mentioned.

- Print This Page Print This Page

Read More Commentary Here>>>>

Free Special Report

With interest rates near zero, how can you generate income with your nest egg? Our free special report shows you how. cover art
You will also receive our weekly market commentary and unique analysis based on our Edge Charts. Privacy

The Market Today

Subscribe to Commentary

Sign up HERE to get breaking news from Invest With An Edge & other updates.