CFA Curriculum Type of Blog Post: Efficient Market Line

Jul 02, 2014

When you study finance, you have to first learn the basic fundamentals of portfolio theory. When you eventually move to real life, you quickly realize how theory is only a starting point. Nevertheless, it is useful to know the "book theory" because it provides something of a very basic framework. That said, in the words of the great investor Mike Tyson "Everyone has a plan 'till they get punched in the mouth." First, here is the look of a list of ETFs that climb up the risk curve.

 

 

Note that this was posted on this given date covering this very specific time period. Using those precise assumptions, the book theory held up nearly perfectly -- a line going from lower left to upper right --- more return for more risk. But you have to remember --- that was using some very careful selections. Here is an example of a different time period where equity investors were punched in the mouth, Tyson-style:

 

The point is that the volatile ETFs that are towards the right side of the chart will be the ones to have large intermediate-term drawdowns and large intermediate-term returns.     The ETFs on the left side will have low drawdowns and low returns.     These are very generic ETFs.    Where this gets much more interesting is when you use other ETFs that track more interesting indices.

 

Watch our backtesting videos here:

 

ETFreplay Backtesting Videos

 

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Financials Sector Earnings Per Share

Jul 01, 2014

 

A look at Financial Sector Earnings. 

 

 

 

 

Understand the ETFreplay Backtesting Layout Here:

ETFreplay Backtesting Layout Video

 

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Country Funds vs Their Moving Averages

Jun 21, 2014 in Regions

It was interesting to read bearish stories in March and April given that the Global Market was at that very moment IMPROVING.    While U.S. has been in an unbroken bull market,  you can see how there may be better opportunities for new leadership elsewhere....

 

 

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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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