ETF Top 100 Multi-Asset Real-Money Portfolio

Mar 06, 2013 in ETF Multi-Asset 100

In portfolio management, the concept of the 'market portfolio' is discussed frequently.  As the textbooks go, if the world were 100% efficient, the only choice for investors would be in what proportion to hold the market portfolio vs the risk-free rate (T-bills).   You could take less risk by holding more cash and more risk by adding leverage to the market portfolio and so its just a risk preference.   Of course, the world is not efficient or else well-proven concepts like relative strength would not work.   Nevertheless, it's always fun to go re-visit the textbook with a real world example portfolio.  

The market portfolio theoretically consists of all assets.   There are problems with doing that in reality but in the end, we can probably create a decent proxy for all assets by making a few assumptions about what it is that dominates the movement of the overall market portfolio.

We will use actual ETF assets for this exercise.   ETFs make this so much easier to calculate because we don't have to worry about so many different mutual fund share classes that are inaccessible to different segments of people.  Trading on a public exchange makes the security available to all --- and competitive forces make it so that if you try to rip people off with high fees, your ETF will lose (or never get) assets.   If you aren't on a public exchange, then you can do all sorts of things --- charge 5% purchase/redemption fees, charge 20% performance fees etc... You can't get away with things like that when you have to compete on a public exchange (or at least not over the long-run).

The top 100 ETFs in assets (real money from real investors -- both individuals and institutions use ETFs) represented $1.07 Trillion (yes, with a 'T') as of December 31, 2012.    Using over a trillion in assets in value is an appealing figure.   We can be pretty sure that there will be some error between this trillion in ETF assets and the 'market portfolio' described in textbooks --- and that is fine.   What we are trying to do is get something that is just a proxy and acknowledge and discuss the differences.  Exchange traded products are especially appealing because assets outside of US large cap stocks are well-represented.  

This portfolio based on real-world multi asset-class weightings has a total return (including dividends) through March 6th 2013 of +3.6%,  which would be a gain of +$39 billion on top of the $1.07 trillion starting amount. That includes everything, from stocks to bonds to alternatives like MLPs, REITs, Preferreds, EM Bonds etc...

US stocks are obviously doing well and providing strong returns above the overall portfolio aggregate.  To the extent you are overweight US stocks, you are surely doing better than this portfolio.  This portfolio is getting held back by gold/silver, gold mining stocks, emerging markets -- and to some extent fixed-income.   Note that fixed-income is not losing much money, its just not making money  (junk bonds are up slightly and treasuries are down a little this year).

The return is what it is -- what might be a more interesting figure is the amount of volatility this portfolio represents and how it compares to various indexes.

Below is the same Top 100 Asset-Weighted return vs the HFRX Global Hedge Fund index.   The returns are pretty close for the year.  Hedge funds obviously own a lot of US equities -- but they are short a lot of US equities as well.   Gold is a popular vehicle in hedge funds, which would be hurting the HF index return this year --- but very likely hurting the hege fund index a lot less than GLD/IAU/GDX are hurting this ETF portfolio return.  

 

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Total Return For Top 100 ETFs (Assets)

Feb 27, 2013 in ETF Multi-Asset 100

 

Visual snapshot of ETF returns for YTD period (1 day left in February).    The median for the top 100 is +3.2%.   In general; bonds, commodities and select Int'l ETFs are below the median.   US equities are above.   The largest MLP ETF (AMJ) leads the top 100 in total return (note AMJ went ex-dividend today so adjust price up by $0.51).

 

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Technology Sector ETF Briefing

Feb 08, 2013 in Earnings | Sectors

Technology was ground zero of the 2001 recession.   It also took a big hit in 2008 but it was housing & financials that were the central problems in 2008.    In 2013, at first blush Tech once again has an ominous feeling to it:

 

 

Tech is 20.8% of S&P 500 estimated EPS and the largest component -- so this is obviously important.   Here is the present breakdown of the current ~$111.00 S&P 500 estimate:

 

And here are the largest market cap companies within the tech sector:

This situation is not much like 2001-2002, many components of tech are doing quite well (QCOM, ORCL, V etc..).   Apple took a big hit in earnings but its hard to imagine a scenario where it melts down from here like Cisco and others did back in 2001.   Cisco rode the telecom bubble up and then crashed.   Apples customer base isn't in crash mode so from that perspective it is not at all comparable.   Companies like Microsoft & IBM are very large net income contributors and have stable businesses and in no way can you say they have benefit from any type of telecom/internet bubble in recent years.

As we scan this list, it is remarkable how balanced it seems.  Indeed, a company like Hewlett-Packard is only 3.0% of the technology SECTOR net income and far less than that in terms of overall S&P 500 earnings.   But that doesn't mean something unforseen can't develop which sinks a lot of these companies earnings -- and we should continue to monitor where problems develop and how likely that could be to cause problems in overall economy.  

Note that if you look at a equal-weighted version of Tech (RYT),  rather than an AAPL weighted version -- it is a much different look.

 

 

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Financials vs Technology Sector Earnings

Jan 20, 2013 in Earnings | Sectors

In the last blog post, we showed how S&P 500 earnings were tracking vs past years.  This blog looks at 2 of the major sectors that generate those earnings.

All of the major banks have reported earnings for Q4 and given guidance for 2013, so estimates for those companies are up to date.   Meanwhile, tech companies for the most part will be reporting over the next 2 weeks.   Nevertheless, in the chart below you can see how tech is pulling the overall S&P 500 earnings down while Financials have been a positive influence since Sep 30.

 

Below is a comparison of the recent returns for these 2 key sectors:

 

 

 

Since many XLF components have reported earnings recently, here is a look at the components:

 

 

Note how Goldman Sachs is the leader here.   The largest negative contributor to S&P earnings has been Apple -- having missed the September quarter and analysts have continued to cut estimates since.   Below compares GS to AAPL for a striking difference:

 

Feedback is welcome -- please let us know if you like this kind of detail on key ETF holdings or if you have any comments or questions: Contact Us

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S&P 500 Index Earnings Relationship to S&P 500 Is Not Straightforward

Jan 03, 2013 in Earnings | S&P 500

As we head to earnings season, let's look at what has happened in past years EPS progression for the S&P 500.   We have indexed everything to begin on Sep 30 of each year and show the change coming from that starting point.

 

2009 was a massive outlier so we excluded it ---- earnings estimates totally collapsed that year in delayed fashion to the 2008 financial crisis.  Stocks that year of course cratered from January to March and then turned hard and  ended 2009 with a very big up year.    A financial crisis of that magnitude isn't going to happen again anytime soon and it is certainly nothing like the set-up we have coming into 2013.   Someday maybe again -- and if it does begin tracking that during the next few months, we will be sure to let you know. :)

The point of the above is to show that the relationship between earnings and the stock market should not be taken so confidently.    Said another way,  the volatility of the P/E multiple dwarfs changes in actual fundamentals (as defined by something like index earnings estimates).    Whenever you have something very volatile, it will be hard to make precise sense of it from a pure fundamental basis.    Fundamentals are important --- but there are good reasons why the market is much more volatile than underlying earnings and this has to due to so many other factors --- including behavioral issues dealing with confidence, fear, greed,  missing out etc...

Here is a snapshot of S&P 500 and 2012 earnings overlaid on the same chart to see what happend in the most recent year relative to what are now historical earnings.

 

 

 

 

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S&P 500 Total Return For 2012: 16%

Jan 02, 2013 in S&P 500 | Total Return

There is always confusion over this so we'll just answer it here rather than responding to a lot of emails.

The S&P 500 is a total return index  (all indexes are total return indexes).  If you want to refer to the S&P 500 without dividends --- you call this the 'S&P Cash Index' (or just 'price return') --- that is not the S&P 500 though.    SPY is the ETF version of the S&P 500 index and varies very slightly due to the nuances of an actual traded investment product on a public excange that you trade during open market hours vs an index value that is determined based on official closing prices and isn't finalized until after the close.

You don't have to take our word for it though, this is from Standard and Poors itself (we continually run reports to check our returns vs key sources, we take data integrity seriously):

 

We have a free page so that you can understand ETF distributions as many charting services have architectural issues with displaying this correctly.    Note that the vast majority of technical services were built for short-term traders, not investment managers.   Dividends might not seem important to you -- but 2-3% a year compounds into a big number over a lifetime of investing.   Moreover, there are many ETFs that pay much higher than 3% -- you need to compare investments based on the total return series.

Total Return vs Price Return Free Page

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2+20% To Reduce Volatility? Uhh, No.

Jan 01, 2013 in Volatility

One of the silliest things we read in the media is how some investors are paying 2+20% to hedge funds in order to reduce volatility.    This is very likely just financial writers that don't know what they are talking about --- nobody pays high fees just to reduce volatility --  you pay a high fee because the manager is actually going to deliver a strong (risk-adjusted) return.    Some managers are worth such fees --- but most aren't and investors are just making a bunch of fund managers rich via their own clients money by overpaying.   The old saying 'you get what you pay for' is just not true in the financial industry --  there are countless examples where the same exact product can cost 20 basis pts if purchased through one particular channel and 3%+ if purchased through an alternate sales channel.  

Back to a simple vol-reduction example.   Our allocations board portfolios were long financials during the 2nd half of 2012.  We liked financials because of their improving fundamentals, low valuations and attractive relative strength characteristics.   While we weren't long KBWB in particular, let's look at how you could effectively take something you like fundamentally -- and overlay a risk-reducing strategy that would fit more in line with a hedge fund profile.

We use KBWB -- a bank ETF from PowerShares for this.   We observe the most recent volatility and reduce our position until that volatility equals 10%  (these calculations are automated using dividend-adjusted total return series within the app).   We chose as a default to mix the selected ETF (KBWB) with SHY,  a low duration fixed-income ETF from iShares.   

If you look at a typical hedge fund marketing slidedeck, it will often give a target of 5-10% volatility with a return objective of 10-15%.    In this example, we liked financials and believed in an annualized return objective above 10%.  (The reason hedge funds and their investors like low volatility is because drawdowns are lower).  

We know financials have been the most volatile sector around -- but that doesn't make it uninvestable.   You don't have to do any risk-parity calculations here between SHY and KBWB (though you could, risk-parity is an option within our core-satellite app).    In this case, we simply reduce the dollar amount invested until the mix of KBWB and SHY is close to our risk objective of 10% (again, we chose 10% as that is a common benchmark within the hedge fund community --- its just an example -- you could instead choose 8% or 12%)

 

Note that the actual achieved volatility here was 11.1%, above the 10% target.   This is because we are using historical volatility as an estimate for the next period and dynamically re-weighting the pair.   If you wanted to be more exact and come closer to the target, you could choose to do your updates on a weekly schedule  -- or daily for that matter.   However, that will generate a huge amount of trades that are needless.   In this case, the max drawdown for this strategy was -8.5%.    Note that banks in past years have been stuck with enormous drawdowns, much higher than in 2012 -- so that is not meant as a worst case scenario, that is only what happened in a relatively calm year like 2012.  The max drawdown for 100% KBWB stock was -18.0%.    

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Top 20 Countries In Q4

Dec 28, 2012 in Country Funds

Final 2 days of the year and S&P 500 is the only index of the top 20 countries that is down in Q4.  Taken as a portfolio since end of September (equal-weight) --- the return is +6.8%.

 

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Gold Since 1982

Dec 13, 2012 in Gold

Below is price of Gold from 1982 to 2002.   Yes, it underperformed even T-bills and it was obviously a time of great prosperity for the US economy.

 

 

Now let's look at it annually, since 1982 with the larger bold years being those that are the only years the GLD etf has been in existence:

 

 

There have been no negative calendar years yet for GLD (the ETF).    So the big question is:  do you consider Gold a core portfolio holding or a tactical holding?  

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Taking A Simplistic High-Level Look at S&P 500 Earnings

Dec 10, 2012 in Earnings | S&P 500

The S&P 500 is expected to earn about $110-$112 in earnings in CY 2013.   With the S&P 500 cash index closing at 1,418 yesterday, the P/E is 12.7x.

In January, you can be sure to hear a lot about earnings and speculation on what will happen to that ~$111 figure.   It is probably too high given that is the norm.  That is,  estimates usually start high and then move down somewhat throughout the year.   That has not been bearish in the past -- that is the normal 'expected' result (there are many, many examples of the market doing well as earnings dropped). What is significant is if it falls sharply -- or rises even modestly-- those are not normal.

Recessions cause S&P earnings to drop sharply so that is of course the ultimate in concerns.   What is always interesting is for an earnings report from XYZ company to come out and then various commentators will try to extrapolate a forthcoming big disaster for the economy based on that result.   Those people have been consistently run over in this bull market.  

With that all in mind, here are some high level numbers to help keep it in perspective -- just the S&P 500 companies alone are projected right now to do about $1.04 trillion in net income (with a 't').   So that means that each $1 in S&P index earnings per share is about $9.3 billion in actual after-tax income dollars.   Next time you hear about some company that is going to drive the economy off a cliff, think about that statistic.   Is it so bad as to take -$93 billion off S&P aggregate earnings --- if it is, then that will cost the S&P -$10 of its ~$111.

Taken a step further, a recession might cause EPS to drop back well below $100. But to get from $112.00 down to say $90.00 (a -$22 per share) --- that works out to be about ~$202 billion less in net income.

That is quite a drop.   Wal-mart is projected to do about $18 billion in 2013 so we need the equivalent of 11 Wal-Marts to all simultaneously become profitless.  

We will have another profit downturn someday because we will have another recession someday -- but that is about all you can say as there is nothing right now that would indicate this is happening.  Indeed, financial sector earnings have actually increased over the last 90 days -- led by Bank of America, a company expected to do $11 billion of earnings in 2013 -- which is still down by about 50% vs expectations ~5 years ago.   Yes, tech earnings have weakened and energy has had a very poor earnings year -- so of course we will continue to pay attention to those developing situations.

Then again, you don't need any of that to happen just to have a market correction.   Be diligent and manage risk of course --- but keep this all in mind next time you hear how Caterpillar is taking its profit estimate down by $300 million for 2013 --- which is not even the equivalent of a nickel of the ~$111.00 S&P index earnings per share.   For S&P earnings to drop real materially,  you need a major sector to pretty much implode (like Tech in 2001 and Financials in 2008) ---  and then for a real doozie of a drawdown, you need the problem child sector to also drag others down with them into the abyss.   That is what causes the largest market drawdowns. 

 

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