Total Returns And Footnotes

Jul 21, 2011 in Total Return

Total return is a concept that is surprisingly misunderstood.  We get emails asking why does our moving average not match Yahoo or Tradestation?   

Most Internet data sources and brokerage software platforms don't track total return -- yet total return is how all index returns are stated.  In 2010, the SPDR S&P 500 index fund (SPY) was not +12.8%, it was up 15.1%.  Vanguards investment grade bond fund (VCIT) was not +5.1% in 2010, it was +10.0% (and had some nice tactical swings throughout the year).   The difference was distributions (which come in 2 forms:  dividends and capital gains distributions).  

One common thing we see is for various people to compare their performance to the price-only +12.8% and then footnote it saying 'dividends excluded'?   To us, this is just as bad as mutual funds that claim the expense ratio is 1.2% and then footnote it saying you will be charged a 3% redemption fee if you sell the fund in first 5 years.   There are no hidden fees with ETFs -- no sales loads, no purchase or redemption fees, no 12-b-1 fees.   The 'A-class' 'B-class' 'C-Class' 'H-Class' 'I-class' mutual fund system is non-sensical in the ETF world --- there is only a single class of an ETF.     


Here is another one: the Vanguard 60-40 stock-bond balanced fund returned +20.1% for the 10 years ended June 30th, 2011 [1]

[1] excludes dividends


Well, a large part of owning a bond in the first place is the coupon.   As it turns out, that index fund (VBINX) was +59.7%  INCLUDING dividends.  So it is entirely disingenuous to compare to a number that is one-third of the actual index return. 



While this is all obvious to some -- it is clearly still not understood by many.

We created a free Comparison Tool to make it easy to view this concept as we feel the only REAL way to truly understand something fully is to interact with it through an application -- rather than just read about in a paper or on a blog. 

Try a few out.  Be aware that even if its not a large dividend payer, any capital gains distribution will also affect the return.    

Bond ETFs:














Relative Strength vs Relative Weakness

Jul 19, 2011


Vanguard Europe ETF Country Weights

Jul 11, 2011 in Country Funds


Just information to note.   Greece is very small weight in even the regional Europe ETF.  However, Spain (EWP) and Italy (EWI) are 5th and 7th in the index:



According to PIMCO, "Italy has the 3rd largest amt of debt outstanding behind US & Japan. A bailout would require much more funding than PIGS combined."



$1 Billion ETFs

Jul 07, 2011

ETF asset growth continues to demonstrate the accelerating importance of exchange based products in modern portfolios.     Below shows the growth in the number of $1 billion asset products:


We find the media focus on ‘new ETFs’ to be 95% waste of time.  While some notable new ETFs occasionally come to market, these are not like IPOs --- these are indexes.   They are not intentionally priced low to create a short-term pop --- they price in line with the value of the underlying index.   The overwhelming focus by investors should be on the real meat & potatoes ETFs that represent the real portfolio drivers – the ones with assets and that have been around for many years.

On that note, rather than watch ‘new ETFs’ --- a ridiculously over-covered topic (driven by the ad budgets of ETF providers trying to market these products), we will instead begin to focus on ETF products gaining ‘asset traction.’   This is much more interesting.    Before Silver had its monstrous, wealth-creating run in 2010 --- its assets grew large and signaled to at least ‘pay attention’.

Below is a list of ETFs that in the first 6 months of the year went above $1 billion in assets (and started the year below it).   

Note that PIMCO now has its first two billion dollar products --- a very unexciting cash management ETF (MINT) -- as wells as a short-term Inflation Protected (TIPS) product (STPZ).  AMLP is another oil & gas master limited partnership product (first one out and to get traction was AMJ).   This MLP area is a group that should at least be on your radar as Oil & Gas MLPs are the ‘toll-roads’ of energy infrastructure in the United States – they own the pipes that transport energy and these assets are limited in supply --- who wants to approve new oil pipes through their countryside?    Another item of note is the currency theme – PCY, WIP and of course UUP all have strong currency components to them.   The investment landscape is going more global each and every year – this is a 20-year trend – embrace the investment implications of this secular move to globalization.

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Comparing Allocations Introduction

Jun 29, 2011 in Backtest | Video


A brief introduction to the versatile yet easy-to-use 'Compare Allocations' application located on the Backtest Page



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Gold Overweight

Jun 17, 2011 in Gold

Our commentary has focused on bonds for many weeks now.   Within this defensive portfolio level view ---  being overweight Gold makes sense to us.




We think a gold position can enhance return here --- with the added benefit that such a position will likely continue to reduce a bond portfolios variance.



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Advisor Perspective: Blackrock Global Allocation Strategy

Jun 03, 2011

Lets take quick look at this Global Allocation Fund to see what it is doing as it can give some ideas to consider.   We don’t need to copy it and we certainly have the very significant advantage of being more nimble than it – so let’s just try to learn something from a product that has proven itself (Sharpe Ratio > 0.50 over past 7 years).

First, let’s go back to 2006-2008 and look at Blackrock Global Allocation vs the Generic Balanced Index from Vanguard (VBINX) using the Free Portfolio Backtest App:

Blackrock Global Allocation Fund strategy is highlighted by these characteristics:

Global focus – obvious but important.  It can go outside the U.S. or stay within it.   Sometimes the United States will be the most attractive market – but more often than not, it isn’t.   It is certainly a major performance enhancer if you have the ability to both within and outside the U.S.

De-emphasize individual security selection.    The Global Allocation managers believe in making larger asset class calls and also want to avoid individual company problems.  So they diversify greatly across individual securities while still making substantial active calls.    Hey, sounds exactly like a strategy based on ETFs doesn’t it?    Except in our case, we can make tactical moves as soon as we feel its necessary – no need to ‘work orders’ for millions of shares of AIG (a security which this fund had a 1% position in when it got nationalized in 2008 at a 90% haircut).    ETFs can be traded for almost nothing --- extremely low expenses/trading-costs with very often a one-penny bid/ask spread.

Below shows one basic idea here.   While Global Allocation has done well over longer-term, it can and will underperform even a generic benchmark like the Vanguard 60-40 Balanced index when the U.S. market leads.


Despite large long-term outperformance, investors that chased this performance have now lagged for the past 2 years:


Below shows 2 basic ETF performances for the same period.  


Summary lesson:

This fund is a good example of how investors/advisors can use ETFs.   There can be significant differences in portfolio performance without large efforts made in security-selection.   The bigger issue is which MARKET do you want exposure to?    Stocks vs bonds?  ---   If stocks,  U.S. vs International vs Emerging?   If bonds, intermediate treasuries or corporates  -- or both?     Then of course you can look to add significant value dropping down to the next level --- country funds, sector funds, small cap funds, precious metals, preferred stocks etc etc….     This is how modern portfolios should be viewed ---   not just on stock ABC vs stock XYZ. has applications that are designed to show shifts in these large forces.   We have shown examples using both moving averages and relative strength.    In May, we blogged a fair bit about strongly overweighting bonds.     While many high-profile managers were publicly saying bonds were no good, they were not going with the obvious flows of the market --- they were just talking their book.   The research process is ongoing and never-ending --- stocks may go down a little or a lot from here ---  the point is to build good models and get the big picture right --- and watch your back.    In the end, you are the risk manager responsible -- not some talking head on TV.


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Sampling of ETFs With Distributions Made Today

Jun 01, 2011 in Total Return

When doing comparisons and analysis, it is obviously important to make sure that data is correct in the first place.    This means consistency.   Below are a sampling of 1-day performance for ETFs that had distributions today (June 1, 2011).  Note that TIP (iShares TIPS ETF) had a nearly 1% distribution today ($1.04 was taken out of the price and the cash will arrive in accounts that hold this security on the payable date:   June 7, 2011).




Backtest Strategy Enhancement. The Use Of 'First Date' Of New Period.

May 27, 2011

In response to feedback we have improved the suite of Relative Strength backtesting applications.  The "Use Next to Last Day Pick(s)" option, which some users found confusing, has been replaced by an option to "Invest on first day of next period". 

This change has two benefits:

A) Consistency throughout the site - because the "first day" option still uses the Screener’s end of period picks, the ETFs chosen will always match those shown on the Screener Ranks and RS Reader pages

B) Because the "first day" option invests in exactly the same ETFs, the performance is generally much closer to that of the standard backtest

To be clear, does not use opening prices in any of its backtesting apps.  This is because opening prices can often be skewed quite significantly.   Closing prices cannot be manipulated nearly as much because the final 30 mins is a very volume-intensive time and anyone trying to set a price could easily get 'run-over' trying to do it.  By contrast, opening prices are somewhat guesswork.  The underlying securities of an ETF haven't opened either - so it is impossible in some cases to precisely know how all the various gaps will play out in terms of the overall index.  Moreover, market makers can sometimes manipulate the opening price to fill existing market orders and then let the price go back to its natural point.   This is especially true on options expiration.  Sometimes the opening price might print a small number of shares and then move quickly in the other direction to a more natural price.   Consequently we think it's best, as a rule of thumb, to avoid trading the open.

In addition, it should be clear that if you trade on the first close of a month, then the comparison index return should also be set from the first close of the month.   You should not compare an entry on the first close to an index return that uses a prior day -- it is an unfair comparison.   You want to go for consistency and match the time periods.

Let’s go through one example using the 'Sample' Portfolio.   This portfolio was added to member’s lists to show an example of a few different ideas -- everyone got the same portfolio since we launched this idea in the Spring of 2010.

First note not only the raw return -- but the difference between the return and the index.   +12.0% vs +6.2% for a spread of +5.8%:


Then view using the first close to track performance for both the strategy return as well as the benchmark:


And then finally,  take note of the fact that the dates are offset by 1 day.   We go deep into the issues of dates throughout our site as there are many problems with dates in most financial databases.  If you 'miss' dates, your output will be garbage.  We make sure there are no missing dates for any ETF through the use of SQL database queries.


If we leave the "Invest on first day of next period" option unchecked, then the back test will invest in the chosen ETFs on the close of the last day of the period.  If we use the checkbox, two things happen: 

 1) the 'update' period will now be the first closing price of the new period 

2)  the comparison index will be tracked from the matching date.

 Since the picks are the same regardless of method, this tightens up the performance greatly.  The only difference is the performance on the first day of the period and the performance of the extra closing day on the update date.   These will affect the overall result -- but they treat both the chosen ETF and the comparison index the same.

Note the slight difference in year-to-date returns between the standard (unchecked) backtest and the first day option backtest. It will be better sometimes and worse sometimes and over time, some of the differences will offset each other.  To the extent the first day of the month goes up, you will be long the pick from the previous month and will benefit from this.   To the extent it goes down, so too will the comparison index.  We think this consistency will clarify some of the issues we've been having in email.


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Forward Test Review From Nov 2010 to Now

May 19, 2011 in Relative Strength | Video

Exactly 6 months ago we released the Relative Strength Reader application.    We review the example done then in the video below:



(original video is on the Tools Tab if didn't see the original).


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