The Brave New and Evolving World of Alternative Betas: PowerShares’ Latest ETF Filing
November 1st, 2010 | Posted by Global InvestorsPowerShares is planning to launch five factor ETFs based on the S&P 500, according to an SEC filing. It’s one more sign that a new era is dawning for alternative betas and enhanced asset allocation opportunities.
The proposed ETFs from PowerShares:
There’s already a fairly intriguing lineup of funds targeting specific factors. A few examples include the S&P 500 VIX Short-Term Futures Index, AQR’s trio of equity momentum index funds, the PowerShares DB G10 Currency Harvest Fund, the Merger Fund, and the iPathUS Treasury Steepener and iPath US Treasury Flattener ETNs.
The latest PowerShares proposal suggests that we’ll be seeing more funds that mine previously untapped strategies/unconventional betas in the months and years ahead. Strategically speaking, an expanding menu of products targeting specific risk factors expands opportunity for asset allocation beyond the possibilities bound up with conventional betas. It’s hardly a free lunch, but for sophisticated investors who understand the risks it all adds up to a productive evolution in fund choices. Indeed, more is better when it comes to the beta menu because in theory additional funds boost the ability to generate better results and weather rough investment seas.
Securitizing new factors has, in fact, been going on for years. It’s old hat now, but once upon a time there was a new-fangled beta focus called small-cap and value equity funds, for instance. Over the years, the list has continued to lengthen, such as adding high-yield bond funds and emerging market equity funds. More recently, we’ve seen the first generation of index funds targeting foreign bonds denominated in foreign currencies. And, of course, there’s also been an explosion of forex funds proper.
Overall, it’s fair to say that fund companies have been filling out their product lines over the last decade or so in the basic corners of risk factors. As a result, there’s a broad array of index funds targeting stocks, bonds, REITs and commodities, along with numerous subsets of each. There’s also a niche arena with short and levered exposures as well. This phase of the securitizing standard betas is now nearly complete.
But the era of securitizing unconventional betas has only just begun. Why is this relevant? Because the trend of minting new funds that capture various factor exposures potentially opens the door to a wider menu of asset allocation possibilities. In theory, the ability to tap into an expanded set of betas enhances the possibility of juicing risk-adjusted return. Asset allocation benefits from additional choices, in part because investors can exploit the varying risk profiles and lower correlations between standard and alternative betas. As a 2009 research monograph published by MSCI Barra explained, an expanded palette of betas improves the strategic opportunities for raising return, lowering risk, or both.
The improved asset allocation possibilities are partly a function of lower correlations between alternative betas and their conventional counterparts. What’s more, correlations between alternative betas are often low or even negative. Consider a table from the MSCI Barra paper, which summarizes correlations between a select list of factors:
click to enlarge
The basic message is that alternative betas exhibit lower correlations with both standard asset classes and among themselves. The data in the table above, the MSCI Barra research observes, reflect that “most of the correlations are below 0.25 and confirm that the risk premia captured unique return characteristics and offered diversification over this period. Note the highly negative correlation of -0.47 between Momentum and Value – two factors that are often deployed in quantitative equity investing.” (A correlation of 1.0 indicates perfect positive correlation; a correlation reading of zero indicates no correlation, and -1.0 reflects perfect negative correlation.)
The accompanying challenge in this brave new world of alternative betas is that much of the common wisdom that’s been developed with standard asset allocation will require an upgrade. Although academic researchers have long toiled in this arena, moving portfolio strategy to the next level for the masses is still in its infancy.
One aspect of this learning curve is understanding how alternative betas interact with one another. It’s not always as intuitive as it is with standard betas. As such, mindlessly diversifying doesn’t necessarily add value when it comes to non-standard factors. For instance, as MSCI Barra notes, “the correlation between high yield and credit spread is high at 0.56, suggesting that these two factors are at least partially redundant.”
By contrast, you can be reasonably confident that diversifying among all the standard betas is generally a productive move. If you only own stocks, for instance, you don’t need to analyze a correlation matrix to rationalize the case for owning some bonds, REITs and commodities. Or, if you only only domestic stocks, expanding the portfolio into foreign equities is a no-brainer.
On the other hand, deciding if merger arb and convertible arb, or the carry trade and currency momentum, are complimentary pairings requires deeper analysis. Greater complexity can be a friend, but it may be a foe, depending on the investor, the prevailing market and economic conditions, and the set of factors under consideration.
The details matter for the individual funds as well. Simply rolling out a new alternative beta ETF or ETN in and of itself isn’t a reason to buy the product. Expenses tend to be higher (perhaps dramatically higher) in this niche compared with the indexing of conventional betas, and so the stakes are higher for evaluating each fund on a case-by-case basis. The expected risk premium for certain alternative betas can look good on paper but end up as far less attractive (or even negative) in the real world after deducting expenses and navigating the extra layers of complication for mining these financial niches. Capturing the effects of some factors, in other words, can be costly and complicated compared with replicating standard betas.
Nonetheless, the future for asset allocation is evolving, one alternative beta product at a time. That’s generally a step in the right direction. If we think of asset allocation as a chess game, portfolio management is shifting from a conventional one-dimensional board to 3-D chess. Accordingly, we’re entering a new era of possibilities for minting superior results. But there’s also more complication and higher expenses to consider.
The core rule of investing, however, is unchanged. The opportunity for earning higher returns comes prepackaged with the possibility of suffering bigger losses. Risk and return are still closely linked in new world of betas, even if those connections are becoming more nuanced and varied.
Three ETFs Supported by U.S. Economic Growth
November 1st, 2010 | Posted by Global InvestorsThe US economy grew by 2 percent in the third quarter of this year and business activity accelerated in October, signs that corporate and consumer spending are holding up providing positive price support for the iShares Dow Jones US Industrials (IYJ), the Vanguard Materials ETF (VAW) and the PowerShares DB Base Metals (DBB).
According to the latest data from the Institute for Supply Management-Chicago Inc., economic expansion is at the forefront illustrated by its business barometer reading of a 60.6. Furthermore, data suggests that output climbed at the fastest pace in the third quarter as companies are upgrading equipment and boosting output to meet enhanced increased foreign and domestic demand.
The momentum behind this up-trend in manufacturing and industrials has been driven by improved capital investment, increases in output of business equipment and increases in consumer and investor confidence. As nations continue to recover, it appears that manufacturing and industrials likely will remain at the forefront of economic growth.
As previously mentioned, three ETFs that are directly correlated with the economic expansion include:
When investing in these ETFs, it is equally important to consider the inherent risks that are involved. To help mitigate the effects of these risks, the use of an exit strategy which identifies specific price points at which downward price pressure is likely to prevail is important.
Such a strategy can be found at www.SmartStops.net and updated data indicates that the price points for the aforementioned ETFs are as follows: IYW at $59.08; VAW at $71.90; DBB at $21.94. These price points are reflective of market volatility and change on a daily basis.
Disclosure: No positions
Three ETFs to Watch This Week: UUP, EWZ, BDH
November 1st, 2010 | Posted by Global InvestorsThe last week of October turned out to be a trick rather than a treat for investors, as the Federal Reserve’s upcoming policy meeting weighed on the markets. This ongoing debate over the merits of the program has left many traders unsure how the economy would cope with a smaller QE program, and also how the dollar would deal with another massive round of stimulus. Nevertheless, stocks managed to finish mixed thanks to moderating unemployment levels and a reasonably solid level of GDP growth which helped to soothe market fears to end out the month.
A few solid earnings reports also helped to boost markets, especially from ExxonMobil (XOM); the oil giant managed to grow its net income by over 55% when compared to the previous year’s period. However, not all the major components managed to please the markets; 3M (MMM), which handily beat estimates, managed to sink more than 6.5% after the company reported that it was cutting its profit forecast for the rest of the year helping to erase the goodwill built up by XOM’s solid forecast and report.
Looking ahead to next week in Washington, an extremely important midterm election looks likely to hand the House of Representatives back to the Republicans, possibly setting the stage for a divided government fraught with gridlock for the next two years. Investors are still trying to determine what this will mean for the overstretched federal budget and how this change will impact any further policies that come out of D.C. Investors will also digest the tail end of earnings season as a variety of important companies give quarterly reports, including Fannie Mae (FNMA.OB) and BP.
Investors will also have to keep an eye on other big names in the oil industry, as Transocean (RIG) and Apache (APA) group both look to report solid earnings thanks to robust demand for natural gas and onshore drilling projects. Investors can’t forget about some big names in the pharma sector, as Israeli generic giant TEVA and Pfizer (PFE) will also deliver Q3 results. With this multitude of data points the first week of November looks to be an extremely interesting one for investors and seems highly likely to put the following three ETFs in focus:
Why UUP Will Be In Focus: This week could be one of the most important periods for the U.S. in all of 2010 and is likely to lead to volatile trading for the most popular currency ETF, UUP. Thanks to the midterm election results on Tuesday night and the Fed’s meeting on Wednesday, the dollar could either continue its recent downward trend or finally begin a move to the upside. For the elections, Republicans are widely expected to overtake the House and should severely cut into the Democrats’ lead in the Senate. If this happens and a more fiscally conservative position is adopted by the legislative branch, it could be a net positive for the dollar. Shortly after that, investors will look to the Fed in order to see what their plans are for another bout of QE. If the program turns out to be extensive, investors will likely take this as a sign of weakness for the dollar and sell off greenbacks. If however, the QE program turns out to be relatively small, U.S. equities look likely to plunge but the dollar could rebound.
Why EWZ Will Be In Focus: The successor to wildly successful and popular Brazilian President Luiz Inacio Lula da Silva was determined over the weekend, a development that will likely put the country’s financial markets into focus. Dilma Rousseff, Lula’s former Cabinet chief, won the election handily over Jose Serra. Although Rosseff is the handpicked successor to Lula, it remains to be seen if she will be as pragmatic given her leftist past. She is also relatively unknown in Brazilian politics and has never held an elected office before, and only started to make waves in political circles after Lula picked her to be his preferred successor after several other possible candidates had to withdraw due to scandals. For this reason, markets will likely weigh on her initial comments and minister selections to see where she will govern from. Of particular concern to investors will likely be her comments on the country’s surging currency, the real. Lula had put into effect several capital controls in the form of new taxes in an effort to curb the real’s rise so it will be of interest to investors to see if she plans to continue or extend these programs once her term begins.
Why BDH Will Be In Focus: BDH will be in focus this week thanks to both of its top components reporting earnings: Qualcomm (QCOM) and Corning (GLW). While having the top two components report earnings in the same week is always an important and market moving event for a fund, it is especially so for BDH; the two companies combine to make up close to two-thirds of the fund’s total assets, with over 53% going towards Qualcomm stock. Due to this enormous allocation to these two securities, look for BDH to be in for an extremely choppy week.
QCOM’s earnings report is due out after the bell on Wednesday and analysts expect the company to post profits of 59 cents a share on $2.84 billion in revenues. The company has been riding high on shipments of its in-demand CMDA-based integrated circuits which are crucial components of a variety of smartphones including the iPhone. By some analyst estimates the company has supplies two million CDMA basebands to Apple alone in the fourth quarter and many are hoping for solid guidance for the end of the calendar year and 2011 as consumers continue to buy up high tech goods despite the sluggish economy.
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.
Weekly ETF Rewind: Agriculture Now an ETF Leader
November 1st, 2010 | Posted by Global InvestorsBy Jeff Pietsch
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| (Click Image to Enlarge/ ETF Rewind Glossary) |
The major U.S. indices put in a flat week with the S&P 500 (SPY) finishing higher by +0.1%. Notable outliers, including Real Estate (IYR -1.9%), Midcap Growth (PWJ +2.3) and Agriculture (DBA +2.0), underscored the low volatility in their slight absolute magnitude.
Interestingly, Agriculture now represents the ten-month relative strength leader, followed closely by Precious Metals (DBP) – but there is no inflation, right?
Week Forty-Four of 2010 features national elections on top of an extremely busy economic reporting calendar, including a Wednesday Federal Open Market Committee (FOMC) rate decision and a monthly Friday Jobs Report, as follows:
Click to enlarge:
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October Monthly Summary
October provided an odd and assorted mix of sluggish economic reports, generally strong third quarter earnings, positive low-volatility price action fueled at times by the prospect of further quantitative easing, and yet diverging breadth and momentum.
In the end, nevertheless, the bulls prevailed, leaving the S&P 500, Dow Jones Industrials and NASDAQ 100 cash indices markedly higher on the month by +3.69%, +3.06%, and +6.33%, respectively. This left the three major indices likewise higher on the year by+6.11%, +6.62%, and +14.20%, with style and sector performances provided below: (Click to enlarge)
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The Style-Box was calculated using the following PowerShares™ ETFs: Small-Growth (PWT), Small-Value (PWY), Mid-Growth (PWJ), Mid-Value (PWP), Large-Growth (PWB), and Large-Value (PWV). The Sector-Ribbon was calculated using the following Select Sector SPDR™ ETFs: Materials (XLB), Industrials (XLI), Energy (XLE), Staples (XLP), Discretionary (XLY), Financials (XLF), Technology (XLK), and Healthcare (XLV). The Standard & Poors 500, Dow Jones Industrial Average and NASDAQ 100 may be traded through ETF proxies, including the SPY or IVV, DIA and QQQQ, respectively.
Disclaimer: Never investment advice
ProShares Short S&P 500 ETF – Should You Own It?
November 1st, 2010 | Posted by Global InvestorsOne of my favorite Seinfeld episodes is the one where George realizes that his instincts are generally wrong and the “bee line” to success is from his doing the opposite of his better judgment. In the episode it’s like he played a country song backwards; he got the good job and the better girl.
Doing the opposite, meaning to invest with the intent of the market going down is the opposite of traditional investing and goes against the instincts of most investors. Thankfully, many investors’ minds rule their hearts when it comes to investing. These investors have learned the hard way that in times of bad or shaky markets or for those of us seeking a broad hedge, ProShares Short S&P500 (NYSEArca: SH) on its surface seems like a good way to play the general market — short.
Without investing hours with its prospectus, I am presenting my observations about SH as an investment tool and its two obvious flaws. Before pointing out these flaws, Pro Shares presents on its web site the same issues in its buyer beware.
This ETF seeks a return of -100% of the return of an index (target) for a single day. Due to the compounding of daily returns, ProShares’ returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period. Investors should monitor their ProShares holdings consistent with their strategies, as frequently as daily.
The reason for this warning and that I site the issue, is because I have found the daily return over the last 40 trading days has been off pretty consistently at 4 basis points, and 4 bps is nothing to sneeze at. In fact, 4 bps if it was alpha, times 250 trading days = 1,000 bps. That size added to market returns would make a mutual fund manager a rock star. If SH is deployed over longer periods of time and slipped 4 bps/day, as a hedge, SH could kill a strategy.
The second flaw is the expense ratio. This is clearly explained on the Pro Shares site and even on Yahoo Finance. At 92 bps it is one of the more expensive ETFs on the market. Based on such full and fair disclosure I hold this as not a negative but simply a fact that must be factored into any strategy seeking to short the S&P 500 through SH. The reason it is so notable is that SPY, the most popular S&P 500 long ETF, has an expense ratio of 9 bps or >1/10th of SH. VOO, which is a newer S&P500 ETF by Vanguard, has an expense ratio of only 6 bps.
For an example, one only needs to look at the last market day. Friday the S&P 500 Index closed down 4bps, so based on a one day change, SH should have (in the spirit of the fund) been up 4 bps. Unfortunately, it ended flat, or off by 4 bps.
So the characteristics of SH include: poor tracking as advertised, and its high expense ratio also as advertised, and yet the ETF had almost 3 million shares traded Friday with a 3 month average of over 3.5 million shares and AUM of approximately $2,101,347,000 (source Google Finance; number of shares multiplied by closing price on 10/29/10).
How could this be? Losing 1,000 bps over a year makes SH only a tactical tool at best. My opinions to explain this phenomenon is that there is little competition, not every account that can use ETFs can short directly (like many retirement accounts), and that many individual investors do not fully understand the product despite the clear disclosures made by its sponsor, Pro Shares.
People want to see that the product’s “intent” is to be the inverse of the S&P 500, thus providing a hedge. People want the ease of being long a single ticker to accomplish this task and in many instances have no other product choice. Too many people close their eyes and think, hey 4 bps is nothing. Open your eyes and do the math, do the research and implement this tactically useful ETF wisely. Authorized Purchasers, the folks that create and dissolve blocks of ETF shares along with arbs love this spread. The question for each individual is: should you own SH? The answer is different based on product availability, tactical goal and time frame holding the ETF.
Disclosure: Mr. Corn is Chief Investment Officer of E5A Funds LLC. Through various equity strategies under his supervision he is occasionally long SH and SPY.
Junk Bond ETF Yields Hang Onto Their Appeal – For Now
October 31st, 2010 | Posted by Global InvestorsWith fixed-income yields as low as they are now, the yields on junk bonds are looking quite attractive. However, junk bond ETFs might be at risk of crumbling if the economy takes another hit.
Junk bonds have been hugely popular for a big chunk of this year, and the market has shown few signs of tapering off. Case in point: junk bond mutual funds have only had one week of outflows since early July, The Wall Street Journal reports.
Robert Huebscher for Advisor Perspectives remarks that you should avoid junk bonds if you believe there is a greater than 21% chance that a severe economic downturn is coming. Still, high-yield bonds have been a good diversifier when combined with equities and investment-grade corporate bonds.
Historically, high-yield bonds have performed well when default rates remained low – which they are right now. Moody’s factored in a recovering economy and projects a default rate of 2.2% for the U.S. market. However, the market’s estimated default rate is 2.97%.
Additionally, interest rates and the spread to the Treasury market are also factors that affect high-yield bonds. Currently, spreads on most higher-quality junk bonds are wider than their historical means.
Full disclosure: Tom Lydon’s clients own shares of JNK.
Max Chen contributed to this article.
October ETF Performance Report: Another Solid Month
October 31st, 2010 | Posted by Global InvestorsOn the heels of the best September in decades came another solid month for the markets and ETFs.
In October, the Dow Jones Industrial Average rose 2.6%. The S&P 500 gained 3.4% and the NASDAQ added 5.5%. All in all, it was the best October for the Dow since 2006 and the best for the S&P since 2003.
Much of the market’s gains this month came as a result of anticipation that the Federal Reserve will do more to prop up the flagging U.S. economy in the form of quantitative easing. There is also an expectation that the midterm elections next week will end in a Republican takeover of the House.
Click here to view our complete October performance report (pdf).
October’s Top Five Leveraged ETFs
October 31st, 2010 | Posted by Global InvestorsIf you’re looking for clues about what ETF investors want and what’s really moving in the markets, leveraged and inverse funds are a good way to take the pulse.
Wall Street has further stabilized this month, and no one asset class dominated. Investors sought havens in precious metals, took refuge overseas and were bullish on Treasuries and energy. Here are some of the top leveraged ETFs in the last month:
ProShares Ultra Silver (NYSEArca: AGQ)
It’s little wonder that a leveraged silver ETF would do so well. The poor man’s gold is much cheaper than the yellow metal while still handily outperforming it. Primarily driving the price now is safe-haven buying, driven by beliefs that governments around the world will enact more stimulus and weaken their currencies. There also may be less of the metal to go around here, too. Silver exports from China, the world’s largest, may drop about 40% this year as domestic demand from industry and investors climbs.
Direxion Daily Energy Bull 3x Shares (NYSEArca: ERX)
Energy got a nice boost from a host of solid earnings for big players in the sector. Exxon Mobil (NYSE: XOM), for example, saw its profit surge in the third quarter thanks to higher oil prices. Shell, ConocoPhillips and others have reported similar results.
Direxion Daily 30-Year Treasury Bull 3x Shares (NYSEArca: TMV)
Although whispers of a bond bubble just won’t go away, investors appear to be undeterred right now. Lackluster economic news kept them in the safety of Treasuries, even as they dipped a toe into riskier waters. The prospect of more quantitative easing by the Federal Reserve, however, could have a negative impact. Be on the alert.
Direxion Daily China Bull 3x Shares (NYSEArca: CZM)
China’s economy continues to be a juggernaut. Even though the country’s government has taken steps to cool off some of that growth in order to prevent a disastrous overheating scenario, their growth rate is still something that has developed nations green with envy now.
ProShares UltraPro QQQ (NYSEArca: TQQQ)
TQQQ is designed to give three times the daily performance of the NASDAQ-100 index, which gives exposure to some of the best-known names in technology, including Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT) and Google (NASDAQ: GOOG). Silicon Valley has staged something of a comeback in recent months, thanks to its willingness to diversify beyond information technology into other forms of technology – such as alternative energy.
Before you buy leveraged and inverse ETFs, read our special report to find out how they work, who they’re for and what the risks are.
Disclosure: None
CEF Weekly Review: Is The Fed Here to Help?
October 31st, 2010 | Posted by Global Investors
Outlook: This week’s outlook article is entitled, “Housing Prices Wouldn’t Go Down and the Fed is Here to Help” (10/29/10). The article explores the two financial myths of our time.
Summary: As the Fed embarks on its QE II printing press exercise in an effort to craft the great “maybe”, you have to be somewhat sympathetic to the plight of its duel mandate of price stability and full employment.
If they take their jobs seriously, and I’m sure they do, they are doing what is being asked—despite the prospects of unintended consequences.
Little Choice: Given this configuration of the data (see article), the Fed really has little choice in an environment low inflation and high unemployment but to “pump up” the economy through additional monetary easing to fuel job growth. This is its job!
Unintended Consequences: However, the Fed is subject to the law of “Unintended Consequences” which historically has seen inflation and higher interest rates follow monetary easing. The trick for the Fed will be not only to bring inflation down as it begins to flare, but also “game” Wall Street with regards to managing investors’ expectations. And as we all know, Wall Street is a very perverse group.
Inflation Genie: With commodity prices already elevated, the “Inflation Genie” will likely get out of the bottle sooner than expected and be more difficult to get back in. The Fed’s record at fine tuning inflation has not been good. The Fed had to resort to a mallet in the early ‘80’s to bring inflation under control.
Seeding the Portfolio: I view an investment portfolio in three year increments; seeding investments that will germinate in each of those years so that there is the potential of rolling annual gains. It’s like “pulling a rabbit out of your hat” each year.
Given this philosophy, I continue adding to my position in ProShares Short 20+ Year Treasury ETF (TBF) on any significant declines as a way to play the re-inflation trade and the pricking of the bond bubble—which at best is a 2011 harvest.
Don’t Try This At Home: I would not recommend this strategy for those faint of heart because it could be a while for this investment to materialize. Expect further decline in the stock price—which is the opportunity.
Remember: Housing prices were rising just prior to its collapse. Most professionals thought housing prices would never go down. Now, they’re telling you the Fed is here to help.
CEF Weekly Review: The 13 closed-end fund (CEF) types on average posted a 0.2% increase for the week ending 10/29/10. The high-low spread was +0.8% versus +1.9% the previous week on an average price appreciation of 0.2% versus 0.1%, respectively. On an aggregate, unweighted basis, the weekly average price change for the 500 plus CEFs was up 0.2%.
The PowerShares CEF Income Composite (PCEF), an ETF that invests in taxable income CEFs, was down 0.1% for the week. The S&P 500 was flat for the week and maintained its positive YTD performance of 6.1%.
(Click here for YTD CEF Performance. The table is based on a smaller CEF sample size as all the data fields are not available for the CEF universe.)
The Eqcome CEF Fear Index for the week eased. The average price was up 0.2% while NAV was down 0.1%. The CBOE Volatility Index (VIX), which typically moves inversely with the stock market—but is mostly a measurement of volatility based on stock options’ premiums—jumped 13.2% to register above 20 at 21.2. The VIX climbed throughout the week spiking on Wednesday.
The VIX is still near its lowest point since April. It is now at a point of being regarded as a contra indicator suggesting investors exercise caution with regards to any big upside equity bets.
The S&P 500’s average daily share volume again exceeded the 4 billion shares mark for the third week in a row—although off 10.1% from the previous week to 4.1 billion shares.
Money Flow: “Money Flow” into the DJ US Total Stock Market was up 0.13% for the week and up 3.53% for the month. The up/down ratio eased to 0.98 for the week and 1.02 for the month. The Basic Materials sector experienced the greatest weekly change, up 1.37%–the biggest loser the previous week; the Industrial sector the least, down 0.53%.
The total inflows into mutual funds for the week ending 10/20/10 increased 20% from the previous week to $9.5 billion. Investors’ added $2.0 billion into equity funds—almost entirely into foreign stock mutual funds. Of note, domestic outflow have been tapering off and may turn positive.
The Bond Bubble Express continues raking it in. Both taxable and muni funds in total increased $6.5 billion versus a $5.7 billion inflow the previous week. Money market funds increased with a contribution of $24.6 billion to a total of $2.8 trillion reversing the previous week’s decline of $17.0 billion. Taxable government and non-government split the increase; tax exempt funds decreased by $0.25 billion. Institutional funds are twice the size of retail at $1.86 trillion.
CEF Weekly Fund Type Performance: The 13 CEF fund types weekly performance was bias towards the equity-oriented fund types although there was a narrow price change among the fund types.
USMrtgBndFnds rebounded from the previous week as the foreclosure documentation problem seemed to fade from investors’ field of vision with all eyes focused on the Fed’s action in the open markets. NatlMuniBndFnds on average saw its price change lag its NAV (0.2% vs. 0.8%). ConvSecFnds which took the lead last week drifted lower this week.
Weekly CEF Winners and Losers: Several SingleStMuniFnds were among those that experienced the greatest positive PrcNAVSprd*. The CEF with the greatest positive PrcNAVSprd was BlackRock Virginia Muni Bond Trust (BHV) with a price advance of 7.0% and a decline of 0.4% in its NAV per share generating a positive PrcNAVSprd of 7.5%.
BHV is a small CEF of $37.9 million in total net assets and with $11.7 million of ARPS financing yielding 1.1%. The current pre-tax yield 5.0% and it is trading at a 25.5% premium. Its average daily volume is 3,000 shares.
The CEFs having the greatest negative PrcNAVSprd for the week was Cornerstone Strategic Value Fund (CLM) whose price declined 4.7% while its NAV was flat generating a negative PrcNAVSprd of 4.7%.
CLM and its sister CEF (Cornerstone Total Return Fund (CRF)) are both engaged in a non-transferable 1 for 3 rights offering. The record date was declared November 1, 2010 and is dilutive for non-subscribing shareholders.
Both these CEFs are the silliest investments in the whole CEF market segment for non-insiders. You essentially pay a premium to get your own money back after management has deducted a fee. Nice work if you can get it. Investment stupidity is not against the law and that’s why investments like this exist.
I’ve written on the Cornerstone funds lack of investment merit for the past year. So, for those of you who are tired of hearing me on this point let me offer another opinion that seems to support my sentiment: Two Closed End Funds at Irrationally High Prices, by SL Advisors.
Eqcome CEF Portfolio™: Joe maintains three separate CEF portfolios that have different investment objectives: CEFBig10™, CEFMuni10™ and CEFDisc10™ (see website). The first is a balance equity-income portfolio, the second a tax-exempt income portfolio and the third a portfolio whose objective is capital gains with a secondary objective of current income.
These portfolios will soon be available to retail investors at a nominal fee to maximize equity-income for retirees and retail investors.
Portfolio Allocation: Joe allocates among the different portfolio strategies based on maximization of total return based on his perspective of what portfolios would perform best in different phases of the investment cycle.
Joe has reduced his allocation to the CEFMuni10™ from 25% to 20% and has boosted the percentage allocation to the CEFDisc10. (See website for further details.)
Economic & Earnings Outlook: (Click here for next week’s economic calendar; click here for earnings’ announcements and estimates.)
ETFs: For a more detailed EFT performance by sectors, click here.
Insider Trading: Rodney F. Dammeyer, a director of several of the Invesco Van Kampen CEFs, continued his insider buying spree. He added an additional $1.275 million to his cumulative holdings this week culminating in a $3.44 million investment this month. Mr. Dammeyer has dominated CEF insider buying for the month.
Mr. Dammeyer significantly added to his position in Invesco Van Kampen Trust for Investment Grade Munis Fund (VGM) and accumulated approximately $2.0 million in share value during the month. He’s also accumulated approximately a half-a-million dollars each in Invesco Van Kampen California Value Muni Income Trust (VCV) and Invesco Van Kampen Muni Trust (VKQ) during the same period of time; a quarter of a million dollars each in both in Invesco Van Kampen Trust for Insured Munis (VIM) and Invesco Van Kampen Select Sector Muni Trust (VKL). Some of the recent share purchases have been for the DRD Family Partnership, LP.
(Click here for a hyperlink to the Joe Eqcome’s CEF Weekly Insider Report.)
CEF Distribution Announcements This Week: The following is a link to a table of CEF distribution announcements this week as well as the previous week’s with yet expired ex-dividend dates. The list is not intended to be inclusive. (Click here for Joe Eqcome’s Weekly CEF Distribution Announcements)
Significant CEF Corporate Events: DWS Dreman Value Income Edge Fund (DHG) and DWS Global High Income Fund (LBF) each announced the commencement of a seemingly economically non-sensical self-tender offer to purchase up to 25% of its issued and outstanding shares of common stock at a 1% discount the Fund’s NAV per share as of the its close on NYSE on the next business day after the date on which the offer expires. The offer will terminate at 11:59 p.m. Eastern Time on November 19, 2010, unless extended.
CEF Focus Stock(s) for the Week: The focus of this week is on the CEF muni funds. After a terrific multi-year run its time to consider whether we’re at a point of the momentum waning and the stock prices may be getting to “roll-over”.
There are four reasons for this perspective:
Wildcard: The wildcard factor is the pending change in tax policy. If taxes do go back to the Clinton years, then investors may take shelter in tax-exempt muni bonds. The common wisdom is that we’re likely to get some kind of extension of the Bush era tax-cuts which may on a near-term basis reduce the demand of munis. (See, “Are Muni CEFs Rolling Over?” (10/28/10). The article includes two CEFs that may be “sell” candidates if you have them in your portfolio.)
Disclosure: Author owns a diversified portfolio of CEFs and ETFs and is long stocks in the CEFBig10™, CEFMuni10™ and CEFDisc10™
UNG: Why I Consider This ETF a Frightening Investment
October 31st, 2010 | Posted by Global InvestorsFrom overleveraged Delta Petroleum (Nasdaq: DPTR), to overhyped Houston American Energy (Nasdaq: HUSA), to over-the-hill Energy Conversion Devices (Nasdaq: ENER), there’s no shortage of spooky investments in the energy sector. These are all relatively small companies, though, and unlikely to draw in space-monster-sized amounts of money.
For me, the most terrifying investment vehicle in the space is an ETF that has vaporized untold amounts of wealth since some mad scientists of Wall Street brought it to life in 2007. I’m talking about the United States Natural Gas Fund (NYSE: UNG) exchange-traded fund.
The ETF’s popularity is easy enough to understand. Like the SPDR Gold Trust (NYSE: GLD) or the Powershares DB Agriculture Fund (NYSE: DBA), UNG provides investors a way to bet on the direction of a commodity (or basket of commodities, in the case of the agriculture fund) without having to accept company risk, dabble in futures contracts, or take delivery of a silo full of grain.
With commodities increasingly viewed by investors as an asset class, such funds are all the rage with pension funds, hedge funds, and retail investors alike. UNG trades more than 20 million shares daily, or well over $100 million by dollar volume. The liquidity here is tremendous, keeping the fund price closely in line with daily net asset value. Nothing frightening so far, right?
The problem with UNG, as well as countless other ETFs that invest in near-month futures contracts, is that the fund’s value gets chewed up like a zombie victim as the contracts get rolled from month to month. Compounding this issue of "roll yield" is that the larger the fund gets, the harder it gets to nimbly exit expiring contracts and enter new ones. The fund spreads its roll dates over four days, which in theory should help to minimize the impact of its trading, but I still suspect that other savvy market players are able to game this pattern.
After the past few years’ performance — shares are off roughly 85% since inception — you’d think that investors would have run away screaming by now. For some reason, though, they just keep getting lured back in. Perhaps there’s a mind-control device at work here. That, or investors think they can actually time a recovery in natural gas with great enough precision to avoid getting their faces ripped off by the Negative Roll Yield Mutant.
If you want to trade in and out of this ETF in a matter of minutes or hours, that’s your prerogative. For those investors out there who, like me, anticipate an eventual recovery in natural gas prices but want to be able to ride out another year of depressed prices if need be, I’d suggest ditching this frightening fund in favor of a low-cost producer who can survive the current rig invasion. Two companies that potentially fit the bill are Range Resources (RRC) and Southwestern Energy (NYSE: SWN). You can read my case for the latter company — one of the premier shale gas operators here.
Disclosure: No positions
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