ETFreplay Top 100 Trillion Dollar Real-Money Portfolio Update

Jan 12, 2014 in ETF Multi-Asset 100

ETF investors in the top 100 exchange-traded products made +$136 billion in 2013.  Actually, they made more than that if you count inflows -- but we calculate the ETFreplay 100 by locking in starting assets as this captures the big themes quite well.

We began the ETFreplay 100 project a year ago to try to show a proxy for how investors are ACTUALLY doing.   The fact of the matter is that most people with wealth do not hold just 1 type of investment -- they own a portfolio and that portfolio consists of more than just US Stocks and Bonds.   There is no universally accepted benchmark -- nor should there be --  your individual benchmark is dependent on various factors that differ:  ie,  your age, your risk tolerance, your liquidity needs, your time-horizon etc...

So investors in reality own an allocation of different assets that hopefully corresponds to their profile.   What we do with the ETF 100 is aggregate all those by using ETF asset levels and then monitoring that total return performance over time.    The $136 billion in profits equates to a +12.7% total return for the year.

Learning to ignore all the noise on financial TV and twitter about INDIVIDUAL investments and instead focusing in your own process is extremely important.  Differentiate between what 'sounds good' as a one-liner on TV or a blog vs what actually matters -- your PORTFOLIO total return.    In the end, the only question that actually matters is --- did you make progress against your financial goals?

The ETFreplay 100 covers well OVER $1 trillion in assets.   US Stocks were the star performers in 2013.   Below summarizes the results and the most significant contributors and detractors for the year:


For a side comparison,  we compare the results to the most watched hedge fund benchmark:

 

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SPY S&P 500 Index Total Return For 2013

Jan 01, 2014 in Total Return

 

Total return measures capital appreciation AND the return associated with dividends (and any other distributions -- such as capital gains distributions).     It is always surprising how many emails we receive saying our numbers are incorrect because people compare the year-end SPY price to the previous year-end. That is INCORRECT. The correct TOTAL RETURN for 2013 for SPY was +32.3%.    That is +2.6% higher than the price return.   For ETF's with higher yields -- (and/or for those with cap gains distributions) -- this difference will be higher.   

Over a few years, this difference really adds up to be a substantial amount.   

 

 

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Performance Update Of Real Money ETF Assets

Oct 07, 2013 in ETF Multi-Asset 100

How are investors as a whole doing in 2013?   If you think the U.S. investment world owns a lot of large-cap U.S. stocks, you would be right.   However,  if you think that is ALL there is to it -- you would be wrong.    There are large amounts of capital invested internationally (Europe, Asia, Pacific) and in non-equity markets (bonds, preferreds, MLPs, REITs etc...).   This reality is why we run the numbers for the ETFreplay 100 -- because it is a much better proxy for how real-world investors are doing than tracking a single asset like the S&P 500, which is just not the best proxy for how investors are allocated.

To give a little perspective,  Exchange Traded Products  (only those that trade on the US exchanges) reached $1.57 trillion in assets in September of 2013:

ETF investors in the top 100 (in assets) taken as a whole started the year with $1.07 trillion and on that base have made approximately +$75 billion (+7.0%) in 2013.   That is, if you held all the asset classes in the same proportions as the amounts actually invested with REAL dollars by investors in ETFs, your YTD total return is +7.0%.   Note that this figure INCLUDES the fees (expense ratios) of the products -- which are automatically removed from the funds and are reflected in total return.

September saw a strong outperformance by international stocks.   The largest International ETF (EFA) rallied +7.8% in September,  which was +460 basis pts (+4.6%) better than the S&P 500.   Brazil (EWZ), an emerging market, rallied +13.0% in September.   Precious metals and precious metals stocks have been a terrible investment in 2013.    Investors have lost over -$25 billion in the largest 5 ETFs in this segment (GLD, SLV, IAU, GDX & GDXJ).   

Many people might see the performance of the ETFreplay 100 at +7.0% YTD and think that is a bad number.  However, it should not be viewed as good or bad --- it should be viewed as simply the reality of achieved investor market returns.   Moreover, the ETFreplay 100 returned +5.4% for the third quarter of 2013 -- and that is +430 basis pts (+4.3%) better than the primary hedge fund index (HFRX Global), which returned just +1.1% in Q3.

Keep in mind, if you are comparing a portfolio of ONLY U.S. stocks to the S&P 500 (as mutual funds report), that is a useful comparison.   But if you are comparing a portfolio of many assets to the S&P 500, that is an apples to oranges comparison.    Even most of the purest index fund advisers that parade the media are they themselves materially underperforming the S&P 500 -- precisely because they are not fully invested in specifically the S&P 500 index.   The term 'index investor' should never be considered the equivalent of '100% invested in the S&P 500'.   

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Of Economic Trends, Surprises & ETF Investing

Sep 18, 2013

Some basic economic data:

 

 

But how do you use that to actually execute a portfolio strategy?   Bloomberg Economic Surprise Index hasn't been bullish,  yet market has gone persistently up --- including economically sensitive stocks like Industrials.

 

Well,  one important way is to watch the trends in the securities (and indexes of securities) themselves.    This guarantees you don't get too far out of sync with what is happening in the financial markets.   You don't invest in economic statistics after all, you invest in securities.    Just remember to keep tabs on your portfolio risk.

 

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Emerging Markets Index EPS vs S&P 500 Index EPS

Sep 01, 2013 in Earnings | Emerging Markets

 

Emerging Markets fundamentals as measured by earnings have been very weak.    Will this stay isolated or is it an indicator of weakness that will spill elsewhere?    S&P 500 earnings can be quite resilient to segment weakness -- but stay tuned to see how this plays out as this divergence may also be telling us something:

 

Source: Bloomberg

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S&P 500 Consensus EPS As Of Aug 9 vs Same Point Prior Years

Aug 09, 2013 in Earnings

 

Growth for S&P 500 index earnings has been a little north of 6% on a Compounded Annual Growth Rate (CAGR) basis since 1999.

 

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Total Return Performance of Top 100 ETFs Taken As Its Own Portfolio

Aug 06, 2013

Following a -2.9% loss in June (and -7.7% drawdown -- peak to trough daily),  the ETF Top 100 rallied back +4.0% in July.  Year-to-date,  ETF investors in these 100 are up +$59.8 billion.   Investors have made nearly $32 billion in SPY & IVV (S&P 500) and lost -$22.8 billion in various gold-related products (GLD, IAU, GDX, GDXJ).

The multi-asset index is a composite based on actual ETF asset levels.   It is a good proxy for what is held by ETF investors in aggregate -- and is a basic proxy for one logical look based on the proportions ownded in each.  

Exchange-traded securities are for the most part baskets of securities (some are single commodities like Gold or Copper).  These baskets represent factors and your decision as an allocator of your assets is which factors you want to emphasize in your portfolio.   The ETF multi-asset 100 was created as an objective way to try to understand what it is that investors are preferring with their investments in general.  It is not a perfect measure, but it is a logical proxy for such preferences as it weights each asset by its dollar value.

Below is the Year-To-Date performance through July 31:







91 ETFs made money in July with 9 showing losses.   Hedge funds lost -1.3% in June when most ETFs dropped and gained +1.0% in July when most ETFs rallied.   The global hedge fund indexes are a mix of many different types of strategies and utilize many different assets. 




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S&P 500 Total Return For 2013

Jul 19, 2013 in Total Return

People seem to get confused by this so let's just update the Total Return for 2013 here and explain a few things.  Below is a chart of our Free Total Return vs Price Return webpage with the same security below from a leading institutional platform.   The numbers are the same.  One of the key benefits of having an exchange is the data comes from the exchanges, not some proprietary source (which is unlike the bond 'market' -- where there is no exchange).

 

 

 

A few comments:

First,  an index does not have shareholders.   Indexes are uninvestable --- what you are investing in (be it an index mutual fund or an ETF) is a financial PRODUCT that tracks (or attempts to track) an index.

Since an index does not own any shares of the companies in the index,  companies in the index do not owe the index any cash like a regular shareholder is entitled (dividends).   This creates a difference in those securities that are investable (ETFs) and those securities that are not (indexes that aren't total return).

Now, you can buy options and futures based on an INDEX --- but those are derivatives and thereby do not need underlying securities.   It should be pointed out that ETFs are not derivatives any more than a mutual fund is a derivative.   In fact, most ETFs are registered under the very same 1940 Securities & Exchange Commision (SEC) act as mutual funds.   The basic structure is the same --- though the mechanics are different.

Some people mistakenly think that since when you buy an ETF and you are therefore getting ETF shares, that represents a derivative.  It most certainly does not.   When you buy a piece of property, you get a deed (a legal contract).   When you buy a stock, you get a stock certificate.   When you buy a mutual fund you get mutual fund shares.    These are not derivatives.   The vital difference is that derivatives do not hold the underlying securities ----  ETFs DO hold the underlying securities, which makes them regular pooled investment funds.

Now, since ETFs hold various numbers of shares, they are paid cash when companies make those distribution payments (dividends) to shareholders. It is important that you account for these distributions as when you go to rank securities,  the entire ranking process will be compromised unless you are using the same process across all securities in the list.    In fact, one error in a list of securities can impact the entire rank order and actually affect the chosen securities to be included in a backtest,  meaning you cannot have ANY errors.   

Since ETFreplay covers nearly 1000 securities, we took great care in building our processes -- and importantly, how you cross-check data.   Good thing for us is that modern databases (such as the most recently released SQL database our service provider runs on) were architected precisely to address the inherent problems in data management.    (databases have very rigid rules relative to something like a spreadsheet, which was created for the masses).  

As a sidenote, because it is frankly amazing ---- the use of Excel has been the source of two very high-profile finance-related errors in the past year ---  the London Whale incident at JP Morgan --- as well as the influential Reinhart-Rogoff economic paper used to justify the adoption of Austerity.    We maybe are less surprised that academics would makes  such an error --- but the JP Morgan case is amazing because of the mere fact that they would ever run such massive amounts of money without a more architecturally secure product than Excel.    Did nobody in the JP Morgan london office ever study the benefits of using a relational database management system (RDBMS)?    Running a database enables many levels of cross-checks and reporting that is impossible in a spreadsheet.   Caveat emptor. 

See Also:  Other Total Return Blog Posts

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A Real-Money Aggregate Allocation: Update on the Multi-Asset ETF 100

Jul 03, 2013 in ETF Multi-Asset 100

The Multi-Asset ETF 100 uses the real money asset levels invested in ETFs to serve as a proxy for how the overall investment world is allocated.  By definition, this is what ETF investors as a whole actually own and in the proportions they own them.   By observing the contributors and detractors to this portfolio (with a starting value over $1 trillion), we can get a good sense of where the world at large is getting (losing) performance.

 

95 of the 100 ETFs in the index declined in June as interest rates rose and equities fell.   That said, US stocks (the largest component of the ETF 100) were down only modestly.   If you think it was a really bad month -- you probably haven't been involved in the markets very long -- it wasn't.   (And you will likely then be shocked speechless then when a real correction does eventually hit).

 

Some media attention focused on the losses experienced by 'risk-parity' funds -- it should be noted that many risk-parity strategies call for using a fair bit of leverage.  Typical unlevered risk-averse allocations were only slightly down for the month. 

 

Another interesting development is that of the TIPS market (Treasury Inflation Protected Securities).   It is estimated that PIMCO as a firm owns 10% of the entire TIPS universe.  The problem with TIPS is that they have interest rate risk (duration) --- and when you don't have inflation, you are just left with exposure to a general move up in rates.  Underweighting duration (or zero duration with cash-like securities) has been the play in the bond market.

 

Emerging markets dropped more than -5% for the second consecutive month with many popular individual country funds obviously doing much worse than the EM index.    On a higher level, do you recognize a theme in all of these examples?  The weak coming into May and June all got a lot weaker.   TIPS, Gold/Silver/Mining, Emerging Markets...   these all were making new multi-month lows in March, April and/or May prior to dropping more seriously in June.   One of the primary benefits in proactive relative strength analysis is in missing big problem areas.  Mining equities and various commodity ETFs have been an unmitigated disaster.  In some ways, it is shocking to see the YTD figures on things like GDX/GDXJ and SLV.  On the other hand, these have consistently been some of the most volatile ETFs in the marketplace.    And naturally, high volatility tends to get larger drawdowns.

 

With regard to US stocks, we have seen this all occur before.  In past years, the US market has at times been viewed as a safe haven, immune from world events.   This divergence can remain in place for sometimes longer than you think --- as investors left underinvested in US stocks see the pain in their performance comparison vs the S&P 500 and capitulate by buying more US stocks.  But ultimately,  the US market goes back to doing its thing --- getting volatile and drawing down.... and those who had believed in decoupling get burned.   Said another way --- stick to your process.

 

We compare the ETF 100 to the hedge fund index as another comparison of a large pool of assets.   After a long-run of poor performance by the hedge fund index, a small losing month shows up as a solid result and the HFRX Global Hedge Fund Index has moved ahead of the ETF 100 for the YTD period thru June.    As noted in past months,  we expect this index to outperform when global equities (and US equities in particular) fall -- as happened in June.   The very low volatility of this index helps cushion it from large drops.   The trick of course is to produce attractive returns, not just low volatility.   Low volatility/low returns can be created by anyone for (almost) free through the use of short-duration bond funds.

 

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Multi-Asset Real Money Benchmark Backtest

Jun 04, 2013 in ETF Multi-Asset 100

The ETF 100 is a measure of real money performance.   Rather than pick a single index --- like the S&P 500 ---  we use a mix of assets that is weighted in proportion to how investors actually hold their assets.    We do this because this is reality --- how is the overall multi-asset-allocated world doing on a high-level basis?    This portfolio owns a lot of S&P 500, it is the biggest holding by far --- but it is not the majority.

We make as few assumptions as possible and we sought to benchmark a meaningful chunk of assets.   We think over $1 trillion is a meaningful starting point to represent a multi-asset portfolio benchmark.

Below is the path for 2013 beginning with the actual starting asset levels for the top 100 ETFs.

 

 

This benchmark allocation has made $48 billion for investors this year (total return includes dividends). It was down a bit in May and this highlights the divergence that has occurred between many different kinds of assets vs the S&P 500.    Indeed, while this portfolio has made +~24 billion on SPY/IVV,  it has lost -$14.5 billion in GLD/IAU.     That said, Gold had gone up 12 years in a row and was frankly long overdue --- investors who don't know the longer history of gold have paid the price in 2013  (see Gold Blog From December.)

As a sanity check, we also check in on the multi-asset HFRX hedge fund index.    These have drawn even in 2013.   Hedge funds have seen very poor performance for multiple years now but in relation to this broad portfolio,  the underperformance is put into better context.   Multi-asset portfolios don't go up and down with the S&P 500.

 

 

 

Lastly, think about the past 10+ years from a higher level.   Money managers who exposed their clients to international markets greatly outperformed US equities.    US-only managers went through a tough time but now have major wind at their back.    The decision of which proportions to own international vs US equities is a very important decision.    If you have been exposed to US this year --- as relative strength has guided  --- you are doing a lot better than the broad benchmarks above.   

The chart below uses our Free Portfolio Combination Tool to show the changing out/underperformance of US stocks vs rest of world.

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