New ETF in Advance of Memorial Day: BBQ–Contributor Column Reply

Contributed by Chris Hempstead, Head of ETF Execution for WallachBeth Capital

Chris Hempstead, WallachBeth Capital

This week we saw 2 large creates in funds we don’t hear much about. The first was FBG (FI Enhanced Big Cap Growth ETN) with what looks to be about a $600mm creation on Monday. The second worth mentioning was the ESR (iShares MSCI Emerging Markets Eastern Europe) with a roughly $100mm creation on Tuesday.

There were some very heavy directional flows today despite lighter volume on the pre-holiday Friday.
Equities: Inflows today were clear in VUG (Vanguard Growth), VTV (Vanguard Value), IJH (iShares Core S&P MidCap and XLP (Consumer Staples Select Sector SPDR).

Where there are inflows there are also outflows and here they are: EEM (iShares MSCI Emerging Markets), VWO (Vanguard FTSE Emerging Markets), FXI (iShares FTSE China 25), AAXJ (iShares MSCI Asia Ex-Japan), EPP (iShares MSCI Pacific Ex-Japan) and EWH (iShares MSCI Hong Kong).

Fixed Income: The fun didn’t stop at the equities level. MINT (Pimco Enhanced Short Maturity), SHY (iShares Barclays 1-3 Year Treasury) and HYG (iShares Iboxx High Yield Corp); all had nice inflows today.
On the flip side, we saw heavy outflow in EMB (iShares JP Morgan Emerging Market Bond), SHV (iShares Barclays Short Treasury) and JNK (SPDR Barclays High Yield).

Given the Memorial Day Weekend and Holiday, I wanted to be one of those stock market guys who throw out stats that don’t actually tell you anything except what markets did in the past.  So I looked at the S&P performance for 1 month following the Memorial Day Holiday back to 2005. Do you know what I saw?  Nada!  Except for a rough patch in 2008 (-7.5%), I wasn’t really sensing anything worth analyzing and little or no trend. SO, just in case you were wondering, now you know.

My gift to you for the start of grilling season is a special dish I invented during a power outage (I had to cook the stiff that was defrosting): A few lbs of thick cut or slab bacon, seasoned heavily with Cajun spices.

·        Place the seasoned and dry rubbed bacon slices on a grill over medium heat and slowly cook, and regularly flip.

·        Move the slabs and lower the heat if flare ups get out of control. You can also use foil to avoid flare ups but you will lose some charring if you choose this method. Do your best to avoid burning these babies. The true magic is the slow and steady cooking.

·        Bring a cold beer outside and work the grill. You will not believe how delicious a well-done seasoned piece of slab bacon tastes.

I am reading a book about anti-gravity. I can’t put it down.
Happy Memorial Day!

The Risk On Rally That Keeps on Ticking: Benzinga Reply

Courtesy of Marketwatch/Benzinga.com

It seems like whenever the rally in the S&P 500 is discussed, at least when it is talked about in positive terms, it is associated with favorite Wall Street vernacular such as “risk on” and “animal spirits.”

With the SPDR S&P 500 SPY -0.39% up almost 41 percent in the past three years, including dividends paid, it is not illogical to think risk on has ruled the roost over that time.

A closer examination of sector ETFs paints a different picture. As was highlighted on Monday, the Consumer Discretionary Select Sector SPDR XLY -0.62% has been the standout of the nine sector SPDRs funds over the past three years. Thing about XLY is the ETF has a beta of one against the S&P 500 and annualized volatility of 16.88 percent.

Said another way, XLY is not the most volatile, nor is it the riskiest ETF out there. Simply put, this has been a risk off rally and it has been that way for three years. Returns accrued by sector ETFs prove as much.

High Beta Disappoints…Sort Of. Here is a trivia question: Excluding XLY, which is the only sector SPDR that is perceived as a high-beta play to outpace SPY over the past three years? Answer: The Energy Select Sector XLE -0.13% . XLE has topped SPY by 350 basis points over that time while being 660 basis points more volatile.

The 23.1 percent gain for the Materials Select Sector SPDR XLB -0.85% only look good in comparison to the 19.4 percent gain for the Financial Select Sector SPDR XLF -0.49% . Those ETFs have betas of 1.22 and 1.23, respectively, against the S&P 500.

Does Size Really Matter? (with ETF Returns) Reply

According to Benzinga.com’s ETF Professor, its not necessarily the size of the ETF, but the motion when it comes to investor returns.

From Benzinga’s April 23 edition:

“..There are plenty of instances in life when bigger is better. When it comes to exchange-traded products, bigger isn’t always associated with better [4]. At least when it comes to what should be investors’ primary consideration: Returns.

It has been documented that ETFs and ETNs with low average daily volume [5] and an assets under management number that may not be viewed as impressive by the so-called experts can outperform. In fact, all investing in an ETF with a bigger AUM total does is lead investors to a bigger fund, not larger returns [6].

Fortunately, a move away AUM and average daily volume as the primary determinants of an ETF’s worth is already under way.

“Some of the traders we talk to are using AUM and ADV a lot less now,” said Chris Hempstead, head of institutional sales and trading at WallachBeth Capital. “Some hedge funds using ETFs to hedge might use the larger ETFs because they just need short-term exposure, but buy-side traders are using AUM and ADV less and less.”

The statistics back up the assertion that bigger isn’t always better with ETFs. In an interview with Benzinga, Hempstead noted that in the case of the nine Select Sector SPDRs, all have been outperformed by a comparable fund of smaller stature on a year-to-date basis.

Mega Millions Winner’s ETF Model Portfolio Reply

The “ETF Professor” over at Benzinga has already constructed his ETF portfolio in advance of winning the now, $640 million jackpot scheduled for drawing tonight.  The model portfolio comprises a nice mix representing energy, gold, emerging market, consumer staples, high yield bonds, blah blah blah…

Here’s the verbatim extract courtesy of Benzinga On Line:

Consumer Staples Select Sector SPDR (NYSE: XLP [FREE Stock Trend Analysis]) The Consumer Staples Select Sector SPDR is of course low-beta and almost downright boring in the world of sector ETFs, but just because one has $360 million to play with doesn’t mean that they should be taking on excessive risk. At least one of your new ETF positions should be something for the long-term and something that won’t cause lost sleep at night.

A stake in XLP would make your grandad and Warren Buffett proud. Rounding up a bit, 1 million shares of XLP would run about $34 million, leaving the Mega Millions winner with $325 million, some of which can be devoted to the…

WisdomTree Emerging Markets Equity Income Fund (NYSE: DEM) Of course some of the winnings should go to an emerging markets fund, but we can do better than standard fare such s the Vanguard MSCI Emerging Markets ETF (NYSE: VWO). There’s a lot to like with DEM, including a yield approaching 4% and that the fund is up 12% year-to-date, just be advised Brazil and Taiwan account for over 43% of the fund’s country allocation.

Expert ETF Trader: Liquidity Is There; Just Look Beyond the Screens Reply

Other than the ETF market “go-go names”, one of the more commonly-voiced, and according to many, often-misguided observations regarding most ETFs is  “won’t trade it, there’s no liquidity in that name,”  or “the screens are only showing 1000 shares offered and I have to pay up 50 cents to buy a lousy 25,000 shares?!”

As a consequence, any half-smart portfolio manager often quickly (if not wrongly) concludes that the “lack of liquidity cost” is a deterrent to their positioning what is otherwise a very compelling “basket” of underlying securities.

The editors here don’t buy into the lack of liquidity notion, and after getting our hands on desk notes published today by Chris Hempstead, Head ETF Trader for WallachBeth Capital (one of the more prominent players in the ETF space), we couldn’t resist the opportunity to re-publish.