The negative start for equity markets in 2016 is undeniable. Finding positive returns among traditional equity-investment strategies is a difficult task. Investors with large allocations to U.S. Treasury securities and gold are faring better than equity holders. The year-to-date return on a 10-year Treasury fund is more than 2%, and gold bullion is up more than 4% for the year with today’s advance. Meanwhile, the Down Jones Industrial Average has lost more than 11%, and the small-cap stocks of the Russell 2000 Index have plunged 15%.
Today, I’ve included a ranking chart of various investment strategies using the same criteria and methodology I use in constructing my usual sector, style, and global charts. I identified a dozen popular investment strategies that could be represented by an ETF, and then calculated each fund’s intermediate-term momentum. This quantifies the trend, and the displayed number is an annualized calculation of its current trend. These 12 are by no means an exhaustive list, just a representative sampling of the infinite possibilities.
Buy & Hold is a strategy, and it is represented by the capitalization-weighted Vanguard Total Stock Market ETF (VTI). It serves as a good reference point, and can be found in eighth place on the list, trending downward at the rate of 42% per year.
As you might expect, Short-Selling strategies are performing quite well in this environment. This category is represented by AdvisorShares Ranger Equity Bear (HDGE), which is an actively managed fund, not an inverse index product. Short selling is not for the faint of heart, and long-term positive returns can be difficult to achieve. However, it is the only one of these strategies in the green today.
Market Neutral, as represented by the IQ Hedge Market Neutral Tracker ETF (QMN), tries to balance out long and short positions. Its momentum score is nearly neutral, which is good enough for second place. ProShares RAFI Long/Short (RALS) represents the Long/Short category, and is also an above-average performer at this time. The PowerShares S&P 500 Downside Hedged ETF (PHDG) employs a dynamic hedge with VIX Volatility futures. Although not in a positive trend, Volatility Hedging strategies have mitigated losses in this market.
Hedge Fund Replication strategies use attribution analysis in an attempt to mimic the performance of hedge funds by holding varying combinations of other ETFs. The IQ Hedge Multi-Strategy Tracker ETF (QAI) is the benchmark used for this category. You’ve heard me mention defensive sectors many times. Guggenheim Defensive Equity (DEF) packages these into one ETF, but as you can see, Defensive is not always the same as profitable.
Covered Call strategies are also touted as a way to mitigate losses. The PowerShares S&P 500 BuyWrite ETF (PBP) buys the stocks of the S&P 500 and then writes option contracts on those positions. The income received from the options helps to cushion the downside. Hedging the currency risk in international portfolios has been a popular strategy the past couple of years. That is the strategy used by iShares Currency Hedged MSCI EAFE (HEFA), and while it eliminates the currency risk, the approach still subjects owners to equity risk.
Equal Weighting is a popular alternative to capitalization weighting. It helps reduce single-security risk and tilts the portfolio toward smaller-capitalization stocks. The Guggenheim S&P 500 Equal Weight ETF (RSP) has a long-term track record of outperforming the S&P 500 Index, but there are still times when an Equal Weight approach can underperform for extended periods.
Sector Rotation is a popular strategy, and I am an avid practitioner. However, there are also an infinite number of ways it can be implemented. Performance can be very different based on sector definitions, time frame, number of holdings, and whether or not cash or inverse positions are used. The First Trust Dorsey Wright Focus 5 ETF (FV) takes a longer-term approach and remains fully invested, characteristics which are hurting it in the current environment.
The Global X Guru Index ETF (GURU) attempts to mimic the performance of successful hedge funds and star managers by copying their holdings. Large institutions and funds are required to disclose their holdings through 13F Filings with the SEC. However, these only occur quarterly and with substantial lag time. Sometimes it works, and sometimes it doesn’t. 13F Filings is currently the weakest strategy on the list.
Just like the various sector, style, and global categories, each of these strategies will have periods when they are in favor and times when they are out of favor. There is no single strategy that works all the time under all market conditions.
The Utilities sector is the only equity category that was able to buck the negative trend over the past week. Somehow, Utilities boosted its momentum by five points, firmly entrenching it in first place. The sector is benefiting from cheap fuel costs and low interest rates. It has the additional advantages of kicking off high dividends and a reputation as a defensive sector. These attributes don’t always work in its favor, but they are helping in the current environment. The relative order of the top-five sectors is the same as last week. With the exception of Utilities, the other four have sunk deeper into the red. Technology, Industrials, Consumer Discretionary, and Financials remain tightly bunched in the sixth-through-ninth-place spots. Materials and Energy are again on the bottom, extending their stay there to six weeks.
You will have to look hard to see any changes in the relative strength ordering of the style categories. The only change took place near the middle with Mid-Cap Value and Mid-Cap Blend swapping places. Market capitalization continues to be the primary determinant of relative strength, with bigger being better. Although there have been nearly undetectable changes in the ordering, the dispersion of scores has widened considerably since the beginning of the year. Two weeks ago, the difference in the momentum scores between Mega-Cap and Micro-Cap was just 20 points. A week ago, the spread had widened to 33 points, and today there is a huge 43-point gap between them. The Mega-Cap category is performing poorly, but the others are performing even worse.
The world’s equity markets are painted in red. Much like the sector and style rankings, the global categories fell into steeper downtrends and had only a minor change in the relative ordering. Japan is at the top again, and it hasn’t been ranked any lower than third for 11 weeks. The U.S. is also doing better than average, but that isn’t very comforting given the sorry state of being average in this environment. Economic news out of China continues to drive stocks there lower, causing China to slip another notch in the rankings and allowing Emerging Market to move a step higher. There are no bright spots for global equities, although there are winners and losers among the currencies. In early 2016 action, the Japanese yen has gained strength against the U.S. dollar, while the British pound, Australian dollar, and Canadian dollar have lost ground.
“Every investment has risk. It cannot be avoided, only managed.”
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