Closer Look at the Rydex Small-Cap Pure Value ETF

Mar 22, 2010

A strong performing ETF this year is the Rydex Small-Cap Pure Value ETF.  Rydex came out with ETFs that track the 'S&P Pure Indexes' a few years ago.   What are these?

Index providers create growth and value indices out of their core index.  For example, Russell takes the Russell 2000 and divides it into 2 groups: growth and value.   They have developed rules for how to do this, such as price to book value and 'expected analyst earnings growth.'   For some companies -- it is obvious which index it qualifies for:  such as a company with a high price/book and high expected growth rate will obviously be a member of the growth index.   But there are many companies that sit more in the middle, companies where Russells construction rules are in a bit a conflict.   Russell in this case takes the weighting and divides it into part growth and part value,  such that if a given company has a 0.40% weight in the Russell 2000, it might have a 0.31% weight in the Russell 2000 growth and the remaining 0.09% goes into the Russell value index.

The S&P 'Pure Indexes' don't do this -- for these indexes, S&P uses only the companies that qualify 100% as value or growth.   This is not magic, it is just a different method of index construction backed by a major index provider (S&P).  ETF analysts should understand who the index provider is for any given ETF and their reputation when reviewing ETFs.  In this case, S&P is a major index provider and not a provider created out of thin air simply in an attempt to lay 3rd party credibility to financial products (ETFs).

Back to the point, what is the net effect of this different construction methodology?  

The Rydex funds become more concentrated with less securities in the index.  This concentration makes them more volatile than others.   You can't say its better or worse, its just a different method.  I ran the Rydex Small Cap Pure Value ETF in the backtest tab of ETFreplay ( http://www.etfreplay.com/combine.aspx ) just to look at the characteristics. 

Given the very large shift in overall market volatilties we have seen, I settled upon looking at volatility since June 30, 2009.  Why?   Because this is when the financial sector (XLF/KBE) seemed to normalize -- overall market volatility has come in a great deal since then and if you run charts back before that date, the net volatility number will be quite skewed.

 

 

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ETF Segment Review: Total Return vs Price-Only Return

Mar 18, 2010 in Total Return
The history of the stock market is that dividends make up a material component of equity index returns.  The one exception being the decade of the 1990s, where there was massive P/E expansion that dwarfed the impact of dividends.

But there is a more fundamental point, as long as you are going to invest in something like an ETF, which tracks an underlying index, you might as well use accurate data of the underlying index, which is always TOTAL return. The 'price-only' ETF return found on financial charting websites like yahoo and google can be quite different than the underlying index TOTAL return.

Emerging Market Bond Index:


Pharmaceutical Stock Index:


Preferred Stock Index:


Real-Estate Investment Trust Index:


Investment-Grade Bond Index:


Utility Stock Index:

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Total Returns (distribution adjusted) vs Price Returns

Mar 09, 2010 in Total Return

On the anniversary of the stock market low, these are trailing 12 month examples of how price charts that don't adjust for dividends & distributions are simply inaccurate for professional analysis. The total return for SPDR Junk Bond ETF (JNK) is over 20 percentage points better than its price return -- due to dividends. The Pharmaceuticals HOLDR (PPH) had 1) dividends and 2) a major payout distribution in 2009. If you are not watching total return, you are not getting the right impression in a chart.

 

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50% Stocks 50% Bonds 10-Year Total Return (including dividends)

Mar 06, 2010

A portfolio that actually sought to reduce risk. Return estimates are an individuals choice -- but it should be pointed out that the long-term return/risk (sharpe ratio) of the S&P 500 has never been attractive. You can do much better, if nothing else by simply lowering the standard deviation through diversification.

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Chinese Yuan vs other 'commodity currencies'

Feb 28, 2010 in Currencies | Emerging Markets

The Chinese Yuan is pegged to the US Dollar --- with occasional 'adjustements' or small revisions by the Chinese government.   This chart shows a general, vague idea of what 'may' be the movement of the currency if it were allowed to float.   Both the Australian Dollar (developed market) and the Brazilian Real (emerging market) are considered 'commodity currencies' and are in a way comparable to China.

To see other timeframes for this relationship,  type CYB BZF and FXA into the text boxes and push the 'Compare Returns' button here:

http://www.etfreplay.com/charts.aspx

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3 different ETFs off the general public radar

Feb 27, 2010 in Currencies

 These 3 'different' markets all showing remarkably similar return and risk profiles --- symbolizing broader forces at work:

 

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Consumer Staples as a defensive theme for a developing global marketplace.

Feb 26, 2010

Lower vol sectors like consumer staples outperform in down market and gives absolute return in up markets. Classic characteristics of absolute return strategies.

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Correlations During Crisis

Feb 24, 2010 in Commodities | Correlation

I know that this may be implied by others --- but its not enough that something simply be non-correlated to be included in a portfolio. It also needs to have positive expected return. 

Structurally speaking, commodities markets are both 1) quite volatile and 2) generally quite sensitive to the overall economy -- which is what the stock market is sensitive to. In times of crisis, its been shown over and over again that correlations generally rise, so that you thought you were getting non-correlation, but instead you just get a more volatile asset that delivers an even larger drawdown for your portfolio. An excellent example is what just happened with crude oil in 2008, see images:

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Europe vs S&P 500 --- its a matter of currency effect

Feb 22, 2010 in Currencies

European indexes have generally tracked the S&P 500 when adjusted for currency.

Alter time periods and/or change symbols here:

http://www.etfreplay.com/charts.aspx

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ETF Statistical Distributions

Feb 20, 2010 in Volatility

Examples of the statistical risk-profiles of the S&P 500 and the Aggregate Bond Market (AGG). I have added the 2x Leveraged S&P 500 ETF as an example of going the wrong direction. The goal is to create a portfolio with low standard deviation and relatively high returns. Sound familiar? Yes, these are the core components of the sharpe ratio. The S&P 500 has never had an attractive sharpe ratio.

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