Republicans Eye McCain’s Millions Unspent In 2008
August 31st, 2010 | Posted by Global InvestorsSen. John McCain’s victory in the Aug. 24 Arizona Republican primary was fueled partly by transfers of $7.5 million from his 2008 presidential campaign compliance fund — an account GOP Congressional strategists are now eyeing as they look to finance a growing list of competitive midterm races.
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Equities: The Shift From Active to Passive
August 31st, 2010 | Posted by Global InvestorsSam Mamudi has found a new way to slice mutual-fund data, and the results are very interesting: the flows aren’t just from domestic funds to international funds, as we can see from the monthly ICI data, but also from actively-managed mutual funds to index funds.
Since the end of 2005, actively run U.S. stock funds have seen net outflows every year, totaling $369 billion, while indexed counterparts — not including exchange-traded funds — have seen net inflows of $112 billion, according to fund-industry trade group the Investment Company Institute.
I went one further, and had a look at the ICI’s data on ETF flows. After all, to a first approximation, all ETFs are index funds rather than actively-managed.
Here’s how the numbers break down: total actively-managed mutual funds, both domestic and international, saw a net outflow of $37.7 billion in 2009, and of $24.1 billion in the first seven months of 2010. Meanwhile, passively-managed index funds saw a net inflow of $22.9 billion in 2009, and of $22.4 billion in 2010 so far. But get this: equity ETFs saw net inflows of $69.3 billion in 2009, and another $21.4 billion in 2010 to date.
Those numbers aren’t publicized by the ICI: I had to calculate them using their spreadsheet of monthly ETF data. But if you add it all together, there was a net inflow into equities of $60.5 billion in 2009, and another net inflow of $19.8 billion in the first seven months of 2010. People aren’t pulling their money out of the stock market, they’re just pulling their money out of actively-manged mutual funds in general, and actively-managed domestic mutual funds in particular.
If you look at growth rates, the numbers are even starker. Actively-managed domestic mutual funds saw an outflow of $44 billion in the first seven months of 2010, which was 1.45% of their total value. Equity ETFs, by contrast, saw an inflow of $21.4 billion, which was 3.12% of their total value. If you go back to 2009, the numbers are -2.07% and +10.78%, respectively. Yes, in 2009, the net inflow into equity ETFs (I’m not even including bond or commodity ETFs, here) was greater than 10% of their entire year-end value. Mutual funds, it’s fair to say, never see those kind of net inflows.
This shift is only just beginning. There’s more than $3 trillion invested in actively-managed domestic mutual funds, compared to just over $1 trillion in domestic index funds and domestic equity ETFs combined. On the international side, there’s $1.2 trillion in actively-managed mutual funds, compared to $218 billion in international ETFs, and just $97 billion in international indexed mutual funds.
So in terms of long-term investments, people are still massively overweight actively-managed strategies. But they’re sensibly rotating out of those funds, and into passive ETFs. As that trend continues, and I see no indication of it slowing down at all, one can only expect that correlations between different stocks will continue to rise. And as correlations rise, of course, it becomes increasingly difficult to justify an active strategy.
ICI chief economist Brian Reid says that “considering historical investor patterns for the last 20 years, we are currently seeing weaker investor demand for domestic equity mutual funds than those patterns would lead us to expect.” Too right we are. And there ain’t gonna be no mean-reversion, either. That $3 trillion is going to end up reallocated, sooner or later. And if your business model is based on managing domestic mutual funds and getting a steady flow of new investments, you’re not going to find life easy going forwards.
Eli Y. Adashi: The Incredible Inedible Egg: 500 Million Reasons for Senate Action
August 31st, 2010 | Posted by Global Investors One would not normally expect anything of value to come out of rotten eggs. The case of the tainted Iowan shell eggs may well be the exception.
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Pounding the Table on U.S. Large Caps
August 31st, 2010 | Posted by Global InvestorsSeveral money mangers and strategists are pounding the table when it comes to US large-cap stocks. Actually, they are jumping up and down on the table, screaming at the top of their lungs that US stocks are a buy.
Its share price is trading lower than during the depths of the last bear market, it has a yield greater than the 10-year Treasury note, trades at a multiple well below the market, has returns on capital above the market, has grown the dividend over 9% per year the past 5 years, and uses its prodigious free cash flow to shrink its shares outstanding by between 300 and 400 million shares per year.
Perhaps it’s time to tell fear and panic to take a hike — especially if September and October live up to their reputation as among the worse months for stocks? And maybe it’s time to rebalance toward US equities?
Disclosure: No positions
Tuesday ETF Roundup: EWZ Soars, JJC Falls
August 31st, 2010 | Posted by Global InvestorsAfter slumping to start the day, equity markets stayed in positive territory only to fall back after the FOMC minutes were released in the final hour of trading. While stocks may have finished the day where they started, bonds and commodities experienced a more volatile day with yields on government debt once again plunging as the 10 year note sank below 2.5% and the 2 year fell below 0.5%. Meanwhile, precious metals continued their ascent with gold finishing the day just under $1,250 oz. and silver rising to $19.3/oz. Oil was not as lucky; prices of crude for October delivery fell by almost $3/bbl., or close to 4%.
Today’s rocky session was thanks in large part to the minutes released by the Federal Reserve regarding the last policy meeting. The minutes said the Fed panel agreed it would “need to consider steps it could take to provide additional policy stimulus tools if the outlook were to weaken appreciably further.” The vote on continued easing was 9-1 with the only opposition coming from Kansas City Federal Reserve President Thomas Hoenig, who felt that plowing expiring mortgage loans back into Treasury Bills would only further complicate the Fed’s eventual exit from the market. Once this news was released, equity markets immediately fell as the Dow lost more than 50 points in a matter of minutes.
The ETFdb 60 Index inched higher by 1.02 points, but still finished the month of August deep in the red.
One of the biggest gainers on the day was the iShares MSCI Brazil Index Fund (EWZ), which rose by 1.3%. This jump comes thanks to weaker data on the manufacturing side and a moderate inflation rate, which could prevent the Brazilian central bank from raising rates later this week. The mid-month inflation reading was just 4.4%, slipping under the 4.5% target for the Central Bank. Meanwhile, output at mines and factories rose 8.7% compared to analyst predictions of a 9.5% increase. “We think there is a chance of a 25 [basis points hike], but after that should be an extended wait and see period,” said Win Thin, senior currency strategist at Brown Brothers Harriman, who went on to discuss market expectations for rates to hold at just under 11%. “We note that the weekly central bank survey shows analysts are now looking for a year-end policy rate of 10.75%.”
One of the biggest losers in the ETFdb60 was the iPath DJ-UBS Copper ETN (JJC), which fell by 1.3% in Tuesday trading. Today’s losses were due to weak economic data which tempered investor demand for the popular industrial metal. Business activity in New York City fell while activity slowed down in the Midwest region as well, further confirming the Fed’s gloomy outlook for the rest of 2010. Additionally, several analysts cited ‘book squaring’ at the month end for heavily impacting the prices, suggesting that today’s drop may have just been temporary in nature.
Disclosure: Author is long EWZ
Disclaimer: ETF Database is not an investment advisor, and any content published by ETF Database does not constitute individual investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. From time to time, issuers of exchange-traded products mentioned herein may place paid advertisements with ETF Database. All content on ETF Database is produced independently of any advertising relationships.
Venice Gears Up for 67th Film Festival
August 31st, 2010 | Posted by Global InvestorsVENICE — The new Palazzo del Cinema on the Lido, to replace the one built in the 1930s for the world’s oldest international film festival, was due to be unveiled in 2011, its inauguration planned to coincide with the 150th anniversary of the unification of Italy. But the discovery of a dump of asbestos during the excavation of the site has delayed the projected opening of the multi-screen Palazzo until 2012.
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HUFFPOST HILL – AUGUST 31ST, 2010
August 31st, 2010 | Posted by Global InvestorsAn eclectic variety of teats dominated the mediasphere today. Deficit commission co-chair Alan Simpson — who took a break from heckling the Muppets with Statler and Waldorf to label Social Security a “milk cow with 310 million tits” — garnered more negative attention. GOP lawmakers continue to suckle from the bosom of health care reform, despite calling for its repeal. And Wall Street bankers are still nourishing their own kind by sneakily awarding bonuses before W’s tax cuts for the wealthy expire. We’ll see you tomorrow, when the Alaska Elections Division will have given us a better idea of whether we can implement our terrible nickname idea: Lisa MurKStreet (ehhhh?). This is HUFFPOST HILL for Tuesday, August 31st, 2010:
SUPPLEMENTAL VOTE COUNTING UNDERWAY IN GOP ALASKA SENATE CONTEST – Of the first 2,400 votes accounted for in Lisa Murkowski-friendly Anchorage, the incumbent received a healthy 57 percent of the vote. Murkowski also won three districts she originally lost on primary day while Joe Miller underperformed in Mat-Su. Tallying will continue until 6:00 pm local time (10:00 pm Eastern) at which point roughly 14,000 votes are expected to be sorted through. While the counting won’t be entirely finished tonight, we should have a better idea by the end of the day whether Murkowski or Joe Miller will be the Republican nominee. At the time of publication, Miller lead by 1,294 votes. A plaid, fleece-lined hunter’s hat tip to @alexgutierrez at Alaska Public Radio for being our eyes and ears and generally helping us make sense of the tabulation. http://bit.ly/aZlSvn
The latest results, from Alaska’s Division of Elections: http://bit.ly/9xFziP
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HUFFPOST HILL – AUGUST 31ST, 2010
August 31st, 2010 | Posted by Global InvestorsAn eclectic variety of teats dominated the mediasphere today. Deficit commission co-chair Alan Simpson — who took a break from heckling the Muppets with Statler and Waldorf to label Social Security a “milk cow with 310 million tits” — garnered more negative attention. GOP lawmakers continue to suckle from the bosom of health care reform, despite calling for its repeal. And Wall Street bankers are still nourishing their own kind by sneakily awarding bonuses before W’s tax cuts for the wealthy expire. We’ll see you tomorrow, when the Alaska Elections Division will have given us a better idea of whether we can implement our terrible nickname idea: Lisa MurKStreet (ehhhh?). This is HUFFPOST HILL for Tuesday, August 31st, 2010:
SUPPLEMENTAL VOTE COUNTING UNDERWAY IN GOP ALASKA SENATE CONTEST – Of the first 2,400 votes accounted for in Lisa Murkowski-friendly Anchorage, the incumbent received a healthy 57 percent of the vote. Murkowski also won three districts she originally lost on primary day while Joe Miller underperformed in Mat-Su. Tallying will continue until 6:00 pm local time (10:00 pm Eastern) at which point roughly 14,000 votes are expected to be sorted through. While the counting won’t be entirely finished tonight, we should have a better idea by the end of the day whether Murkowski or Joe Miller will be the Republican nominee. At the time of publication, Miller lead by 1,294 votes. A plaid, fleece-lined hunter’s hat tip to @alexgutierrez at Alaska Public Radio for being our eyes and ears and generally helping us make sense of the tabulation. http://bit.ly/aZlSvn
The latest results, from Alaska’s Division of Elections: http://bit.ly/9xFziP
View full post on The Full Feed from HuffingtonPost.com
HUFFPOST HILL – AUGUST 31ST, 2010
August 31st, 2010 | Posted by Global InvestorsAn eclectic variety of teats dominated the mediasphere today. Deficit commission co-chair Alan Simpson — who took a break from heckling the Muppets with Statler and Waldorf to label Social Security a “milk cow with 310 million tits” — garnered more negative attention. GOP lawmakers continue to suckle from the bosom of health care reform, despite calling for its repeal. And Wall Street bankers are still nourishing their own kind by sneakily awarding bonuses before W’s tax cuts for the wealthy expire. We’ll see you tomorrow, when the Alaska Elections Division will have given us a better idea of whether we can implement our terrible nickname idea: Lisa MurKStreet (ehhhh?). This is HUFFPOST HILL for Tuesday, August 31st, 2010:
SUPPLEMENTAL VOTE COUNTING UNDERWAY IN GOP ALASKA SENATE CONTEST – Of the first 2,400 votes accounted for in Lisa Murkowski-friendly Anchorage, the incumbent received a healthy 57 percent of the vote. Murkowski also won three districts she originally lost on primary day while Joe Miller underperformed in Mat-Su. Tallying will continue until 6:00 pm local time (10:00 pm Eastern) at which point roughly 14,000 votes are expected to be sorted through. While the counting won’t be entirely finished tonight, we should have a better idea by the end of the day whether Murkowski or Joe Miller will be the Republican nominee. At the time of publication, Miller lead by 1,294 votes. A plaid, fleece-lined hunter’s hat tip to @alexgutierrez at Alaska Public Radio for being our eyes and ears and generally helping us make sense of the tabulation. http://bit.ly/aZlSvn
The latest results, from Alaska’s Division of Elections: http://bit.ly/9xFziP
View full post on The Full Feed from HuffingtonPost.com
Talking ETF Liquidity, Flash Crash Fallout and More With Street One’s Paul Weisbruch
August 31st, 2010 | Posted by Global InvestorsPaul Weisbruch is the VP of ETF/Options Sales and Trading at Street One Financial, a firm that specializes in educating, evaluating, and trading ETFs, equities, and options. He recently took time out of his busy schedule to share his thoughts on the liquidity of ETFs, fallout from the “Flash Crash,” and more.
ETF Database: There seems to be a notion that an ETF needs to trade a certain amount of shares on a daily basis–usually 100,000 shares average daily volume–and/or cross a minimum asset threshold–typically $100 million, before it is “liquid” and “investable.” Are these metrics a valid way to screen out potential ETF investments?
Paul Weisbruch: These metrics aren’t necessarily valid indicators of liquidity, but they certainly are prevalent among the investment advisor community and especially in the institutional world. And that presents a major hurdle for ETF issuers trying to raise assets. That is especially the case for some of the upstart providers, because if they can get an institution or a high end investor RIA type to invest in their funds, that would create safety and comfort in numbers–seeing some volume hit the tape and seeing some assets flow into the funds. It is often the case of the chicken and the egg: investors are waiting for the volume to appear before they invest in a particular fund.
So we usually try to explain to investors that the underlying liquidity comes via the index or just the methodology of the fund. And there are a great number of examples of funds that are very liquid from a trading standpoint–as long as executed properly–despite the fact that they don’t trade much volume. Investors are waiting for the 100,000 share mark to be crossed on an average daily basis and/or the $100 million mark as far as AUM. But crossing those thresholds really means very little for the liquidity of the ETF—again, as long as executed properly.
For those that voice concerns about crossing those thresholds–and there are many popular misconceptions in the press and in the investment advisor community–we also advise them to address the viability of the issuer themselves. For instance, if PIMCO rolls out new products it is nonsensical to wait until those ETFs reach a certain asset threshold or wait until they reach a certain volume before they can trade. And the reason it’s nonsensical is that it is PIMCO behind the product. If it is a company that is a start-up operating in the red, perhaps that would be a valid way to screen out ETFs as far as putting them on a “watch list.”
Long story short, these types of “liquidity filters” aren’t valid due to the pricing nuances of how ETFs trade. But it definitely happens and it is definitely a major obstacle in making sound decisions when it comes to building a portfolio of ETFs.
ETFdb: You mentioned that instead of looking at the trading volume it makes more sense to look at the index and the underlying holdings. Explain why that is important in connection to “spontaneous liquidity.”
PW: It is best illustrated when there is a robust, liquid index as the underlying to a newer ETF to market that has perhaps wide bid-ask spreads. No one likes wide bid-ask spreads, whether they are nickel wide or ten cents wide or, potentially, a dollar wide. But at the same time, you do not have to trade at the bid or at the ask, and that is what investors fail to realize; they tend to look at the screens and assume that what they see is what they get. They end up crossing a potentially wide bid-ask spread and it eats into their performance.
The concept of “spontaneous liquidity” that you mentioned comes out of the fact that there is an underlying index value for every product out there. Whether it is something that tracks commodity futures or an equity basket or an inverse product, there is a tangible product to that index at all times during the day because those securities are trading in the open market. An ETF may not trade for days or weeks, depending on the popularity of the product, but that index value moves in real time with the market. Regarding “spontaneous liquidity,” investors need to be cognizant of what is in the index and potentially how those individual instruments are behaving in the given time frame they are looking at. They should be trading according to that as opposed to what they see on the screen, as far as bid-asks and a potentially quieter product.
ETFdb: Explain the role that Street One Financial fills in the market; when the order to buy an ETF comes in from a client, what exactly do you do?
PW: Our objective is to access the best possible execution price at the lowest possible cost of the customer, and part of that is examining what exactly the product is. If it is a “vanilla” product like SPY or IWM or GLD, there is a lot of activity on the screen–a lot of trading volume and rather tight bid-ask spreads. In that case, it becomes a mechanism of what the market is doing and what the objective of the investment advisor is. Some investors are very comfortable, at the time of entry of their order, getting the trade executed as quickly as possible. In that case that is generally what they look at as far as their execution report.
Then there are some who do not have a strong opinion of what the market might do. They want to establish a position in an ETF and they basically lay off the trading responsibilities on us. They are trying to beat some quality metric on the execution piece of it. So if you are a buyer and we see that the futures are coming in, we are not going to just stick a limit out there and fill the order and be on with our day. Instead, we are going to try and scale that weakness and provide a lower average price for the buyer.
Again, it takes a comprehensive understanding of what is inside of the ETF and how those underlying securities are behaving in the context of the overall market. There are times where we might use limit bids or limit offers ourselves, obviously hiding the size and trying to stealthily accumulate or sell shares. And then any combination of transacting block trades at or near what we think the underlying index value is as well. It is a combination of smart order routing and also sourcing liquidity for larger block trades to get the order done in the most intelligent manner.
ETFdb: When does it make sense to turn to someone like S1F? If I want to buy 100 shares of SPY, I’m not going to have much of a problem executing that efficiently on my own. When does it make sense to get some assistance that may add value in the execution process?
PW: It has a lot to do with how that investment advisor currently trades. Most tend to trade through their custodian desk, whether it is a TDA or Fidelity or Schwab, and we find that custodians perform that role rather well. However, it does make sense to turn to a specialized ETF desk for orders that are time sensitive or orders that are sensitive as far as size or if you just want to lay off the trading responsibilities on a desk that is going to help you recapture basis points.
The threshold for size is probably 5,000 shares and greater where it becomes a value add if you have an ETF specialist desk working your orders for you. Most will say, “I can trade 5,000 shares of SPDRs myself.” And that is generally true, but again that goes back to the point where investment advisors are buying and selling at the point of entry. What we are trying to tell people is that you should be aiming to outperform some benchmark, whether it is the VWAP or the TWAP or just the rival price of the order.
Having said that, most of these desks are not working your orders. They are just putting them out there in the marketplace getting them filled, charging a commission, and moving on. That is where we differ as far as actually working the order with some intuition behind it–trying to anticipate what the market might do, and trying to get the best possible outcome for the customer. It seems to be from a cost standpoint that custodians tend to charge miscellaneous fees when you trade outside of their platform; 5,000 shares tends to be the sweet spot where they can recoup any of their miscellaneous costs in return for better execution quality. So for smaller lots, the value added might be there as far as better execution, but there are some costs that they may not be able to avoid just by the limitations of what custodians let you do.
ETFdb: How has the ETF industry responded post “Flash Crash” to these sudden critics of ETFs, including the mutual fund industry? What measures can investment managers take to protect their portfolios against these potentially very costly trading errors?
PW: From a rudimentary standpoint, the first change is to an investment strategy that avoids just straight stop orders. Obviously, ETFs are made to trade intraday, and if you are a technically-based manager or just a good risk manager, using stops in your portfolio process is a prudent thing to do. However, I think you need to replace all your stops with stop limits and be pretty generous with those limits, so as to actually get executed when the market might crater one way or the other. So if investors build into their expectations 10 to 25 cents away from their initial stop target and establish stop limits there, at least they will get protected and they won’t have any executions go far away from the actual NAV of the funds, which happened on May 6th.
The basic issue is that if you are being really stingy and trying to save a few pennies in a falling market, you may not get filled at all at a stop-limit and the market runs away from you. And what ends up being a few pennies turns into dollars lost. So that is probably the first thing investors should adjust as far as their trading methodologies.
The second thing goes right back to understanding the construction of ETFs and ETNs as far as the underlying index. On May 6, people were trading based off what they saw on the screens. And again the bid, the ask, and the prices that are kind of spit out as data on machines are not always accurate. There are trading errors in the market, whether on May 6th or any other day. Every day there is a bad execution and a handful of ETFs that are traded well above or well below the actual reference value of the ETF. That kind of shows that people are not cognizant of how ETFs are priced. If someone is looking at an ETF that is based on the S&P 500 that is trading $20 below where it was trading a few minutes ago and the S&P has not moved that much, there is no reason to take action if you are a seller. You should know with confidence what that holdings are because they are published daily to the fund’s Web site and then know that it is some kind of data error.
That is what we have found people doing on May 6th; investors traded on what they thought were real prices because that is what was on the screens. They panicked and lost the concept that ETFs are not like stocks where news can come out and the supply and demand aspects of the stock rule the day. The NAVs were way out of whack from where the tangible values of the funds were for a brief amount of time, and anyone selling into that just got taken advantage of. If anything, people should have been buying knowing what is inside of the indexes and how the ETFs are priced, but probably far and few between actually did that.
ETFdb: So it seems that in your opinion, some lessons have been learned and there are some things that can be done to prevent a similar event from unfolding again.
PW: If you were trading in a smart manner, you would have put limits out there. And if you did not get filled, it is not the end of the world. Once the glitch gets cleared up the ETFs will go back to somewhat near their fair value. People did not do that; they just kept chasing and things did trade at some point where others stepped up and said “Wow, this is a really appealing trade because it is trading $10 below the NAV of the fund.” And those trades, unfortunately, did not get busted. So some investors now have a really bad experience in their memory that does not accurately reflect how ETFs are supposed to work and why they make sense as investment vehicles.
I hope they do look into what caused the meltdown across the board. However, on that day we did have inquiries with people questioning what was going on, asking for advice and saying “Should I be selling into this?” And the answer is “no.” And that answer was based on having some degree of confidence in where the index value was versus where the ETF looked like it was trading on the screen. If anything, we were telling people that they should probably be buying and be ready to hold that security, because if you immediately buy something and then try to sell it one side of those trades may be busted. And that is exactly what happened; traders who tried to buy a security at discount and then quickly flip it ended up having the buy busted and were basically short something and had a disadvantageous price the next day. For long-term holders looking to accumulate something, that was a fine opportunity to do so. But for short-term traders it was a free-for-all.
ETFdb: Very interesting thoughts—thanks for sharing with us!
For registered investment advisors, Street One Financial also offers S1F ETF Daily, a daily publication focusing on general market technical commentary, actionable ETF trade ideas, and ETF options trends/recaps. Sign up for the free subscription here.
Disclaimer: ETF Database is not an investment advisor, and any content published by ETF Database does not constitute individual investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. From time to time, issuers of exchange-traded products mentioned herein may place paid advertisements with ETF Database. All content on ETF Database is produced independently of any advertising relationships.
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