News Mentions & Press Releases
When most investors think of Asia, they consider China first; everything else is an afterthought. They go straight for the $3.7 billion iShares China Large-Cap exchange-traded fund (ticker: FXI), or opt for a big diversified fund like the $2.4 billion iShares MSCI All Country Asia ex Japan (AAXJ), which has 35% of its assets invested in China.
Given that China is in the midst of a slowdown, that strategy hasn’t worked well recently. iShares China is down 9.5% in the past year, while All Country Asia ex Japan is down 0.7%.
So why paint the region with one brush? “People usually isolate Japan and China as if they are the only two countries that matter, when ultimately that’s not the case,” says Konstantin Etus, co-manager of the AdvisorOne CLS International Equity fund (CLHAX). “ETFs are great vehicles for getting more granular in the region.” Etus’ tiny, $19.2 million mutual fund invests solely in ETFs, and has 44% of its assets in Asia. According to Morningstar, it has beaten 92% of its peers in the past year and 90% of them in the past five.
How risky can bonds be? They have only declined in three of the last 23 years, as measured by the Barclays U.S. Aggregate Bond Index and shown in Chart 1. Negative performance less than 13% of the time doesn’t seem very risky. Only two of those years, 1994 and 2013, posted returns lower than -2%, and all three negative years were followed by excellent returns. Hardly any risk there.
Factors have become widely-agreed-upon drivers of risk and return, backed by academia and practitioners alike. Explanations for outperformance have been cataloged from both a fundamental and behavioral perspective. Factors have transitioned from anomalies to truths in many circles. One market anomaly recognized for decades (perhaps longer) has been the idea of seasonality in the stock market. The “Santa Claus Rally,” “January Effect,” and “Summer Swoon,” have all been recognized patterns of persistence. Seasonality, however, has not taken on the same academic truth as factors; nonetheless, it’s possible they can coexist.
Seasonality can prompt a variety of behaviors, whether avoiding Mondays or capitalizing on turn-of-the-month effects. But, perhaps the most visible imprint of seasonality on the markets is the relative slowdown of the summer months. Whether measured since the turn of the century, post-World War II, or Volcker era, the S&P 500 and global stock market (measured by MSCI ACWI) have outperformed during the November to April period.
Banks haven’t delivered much bang for the buck in the past year, and are trying ETF investors’ patience some more.
The financial sector crumbled to the bottom of the S&P 500 heap Friday after Brexit — the U.K.’s exit from the European Union — came to pass. That plunge came on the heels of upbeat news for Wall Street banks: Bank of America (BAC), Citigroup (C), Goldman Sachs (GS),JPMorgan (JPM), Morgan Stanley (MS), Wells Fargo (WFC) and 27 other banks passed the first round of Federal Reserve stress tests, an annual rite of passage that puts them through the wringer.
All 33 banks showed they could absorb serious market shocks and maintain their capital cushions even in a “hypothetical firestorm of 10% unemployment, negative interest rates, deflation, etc.,” said S&P Global Market Intelligence analyst Erik Oja
Now financial companies are being seriously challenged on another front. The Brexit result will likely create several headwinds for U.S. banks, according to Oja.
“We now see a further decline in long-term U.S. interest rates, a stronger U.S. dollar, and low probability that the Fed will raise short-term rates in the foreseeable future,” he wrote Friday. “This will further pressure net interest margins at banks, and lead to lower oil prices — with negative credit effects on banks’ energy lending.”
This past May 18 stands out among trading days. It was special because a minimal number of variables affected markets.
On that day, the Federal Reserve dominated the news by finally convincing investors to raise their expectations (at least temporarily) for a rate hike in June or July. British polling data released the same day showed polls trending against the Brexit. And that was about it.
Rarely does one day provide such clarity regarding how asset classes were influenced by expectations of rate hikes from the Federal Reserve. The performance that day also gives insight into why bonds have performed well since the first rate hike and how market expectations would need to adjust if the Fed follows through with two hikes and the economy continues to improve.
There’s a chart on factor investing that I love to use for investor presentations, but I’ve been cautioned many times not to. I’ve heard it’s “too busy” or “too confusing,” and while I totally understand that feedback, I still love it – and I think it works. To me, it’s the most powerful and succinct way to explain why money managers should emphasize factor investing (and all you have to do is follow the colors of the boxes; the words aren’t even necessary to know).
The chart (below – click to enlarge) shows what we at CLS deem the “Big Six Equity Factors” on the basis of a calendar year going back 25 years. It is prepared by iShares, and the equity factors used have been studied and white-papered by MSCI.
Alternative investments, or simply alternatives, have become buzzwords in the industry, namely for their perceived benefits beyond traditional stocks and bonds. Alternatives range from highly liquid commodities to hedge funds and even nontraded vehicles that may not be investments at all. Not all investments can fit into the exchange-traded fund (ETF) wrapper; however, a subset of these alternatives dubbed “liquid alternatives” has seen a wave of issuance and growth in the ETF space. These typically include strategies such as managed futures, long/short, merger arbitrage and multistrategy funds, among others.
Many of these ETFs have come under scrutiny for their lack of effectiveness or liquidity. But if you stick to what I call the “three C’s of liquid alts” – correlation, comprehension, and cost – then you and your clients will likely have a better experience with alternative ETFs.
Since the beginning of time – or, rather, the beginning of time for RIAs – financial advisors have faced competitive challenges, no different from any other industry. These challenges could come from discount brokerage firms, day traders, tax law changes or even softer challenges like keeping up with best practices – all of which pose separate threats that advisory firms eventually adapted to overcome.
The robo “threat” today is no different. In fact, just like all of the threats before it, the robo has caused advisors to think differently and strategically to carefully refine their business models to ensure that they will win — again. They have done this by utilizing a tool, typically developed by a third party, to add value to their clients as well as their firm. This approach does not have to be limited to technology.
In factor investing with ETFs, the sum may be more than the parts.
To be sure, single-factor exchange traded funds have dominated recently. Specifically, strategies to smooth the ride in a bumpy stock market.
Investors have poured $5.28 billion in new money into iShares Edge MSCI Minimum Volatility USA (USMV) so far this year — or more than a third of the $12.97 billion in assets that it holds. That’s made it the No. 1 equity ETF in terms of net inflow.
However, the average investor may not fully grasp the risk-reward trade-off tied to single factors, says Rob Nestor, head of iShares smart beta.
Low volatility ETFs tend to underperform in market rallies, taking away from their returns over a full market cycle. An investor seeking to beat the market may end up feeling short-changed.
Even concentrated exposure to the value factor may be less safe than an investor might imagine.
Market bubbles occur when the price of an asset significantly deviates from its intrinsic value. There have been numerous bubbles predicted in my 20 years as a professional investor. Fortunately, only two, from the perspective of U.S. investors, came to pass. The technology bubble in 2000 and the financial crisis in 2008.