S&P 500 Total Return For 2013

Jul 19, 2013 in S&P 500 | 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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