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Does The Rebalanced Barron 400 ETF Look Smarter?

The smart beta Barron’s 400 ETF (NYSEARCA: BFOR ) has made strategic shifts in its portfolio as part of the most recent semi-annual index rebalancing. The fund now seems to have superior fundamental attributes and be less susceptible to the current market turmoil due to increased weighting to the small cap stocks. Background of BFOR The ETF seeks to track the performance of the rules-based and fundamentals-driven Barron’s 400 Index. The benchmark uses the MarketGrader’s equity rating system to select America’s highest-performing stocks based on the strength of their financial statements and the attractiveness of their share prices. Notably, MarketGrader’s methodology assigns grades on a scale of 0-100 based on a proprietary combination of 24 fundamental indicators across growth, value, profitability and cash flow while it screens for size and sector diversification and liquidity. This approach has made BFOR superior to many other ETFs in the space with attractive fundamentals and growth prospects. The fund has been consistently crushing the ultra-popular broad market funds – the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) and the SPDR Dow Jones Industrial Average ETF (NYSEARCA: DIA ) – by wide margins. The fund gained nearly 23.3% since its June 2013 debut compared to gains of 20% for SPY and 8.9% for DIA. From the year-to-date look, the ETF is down 3.8%, which is better than the decline of 5.8% for SPY and 8.6% for DIA. Despite the strong performance, the product has not been able to garner enough investor interest as depicted by its AUM of $196.1 million. One of the main reasons for the unpopularity might be its expense ratio of 0.65%, which is one of the highest in the multi-cap ETF space. Further, it has a hidden cost in the form of wide bid/ask spread that increases the total cost of trading as it trades in a light volume of about 18,000 shares a day on average. Index Change and New Holdings During rebalancing of the index, sector allocation to the most beaten down energy sector was trimmed by more than half from 9.25% to 4%. Now, financials and industrials remain the top two sectors at 20% each. They are closely followed by consumer discretionary (19.25%), technology (13.75%) and health care (10.25%). In terms of security, 58 companies have found their way to the index and the ETF for the first time ever with the most notable names being GrubHub (NYSE: GRUB ), LendingTree (NASDAQ: TREE ), Blue Nile (NASDAQ: NILE ) and the recently merged Walgreens Boots Alliance (NASDAQ: WBA ). Some other big names that have been added to the holdings list are JPMorgan Chase (NYSE: JPM ), Verizon Communications (NYSE: VZ ), Altria Group (NYSE: MO ) and United Parcel Service (NYSE: UPS ). However, some marquee names such as Microsoft (NASDAQ: MSFT ), Facebook (NASDAQ: FB ), Wal-Mart (NYSE: WMT ), Celgene (NASDAQ: CELG ) and 3M (NYSE: MMM ) were booted from the portfolio. With these changes, the index currently has a total market capitalization of $18.28 billion post-rebalance versus $19.07 billion in March. The drop came on the heels of increased focus toward small cap stocks from 16% to 22%. Exposure to large cap stocks decreased from 27.25% to 25.5% while mid cap stocks saw a decline from 56.25% share to 52.5%. The fund currently holds 401 securities in its basket that are widely spread with nearly 0.25% share each. Bottom Line Though the new holdings suggest a modest change in the fund’s sector exposure, the reallocation to securities saw significant fluctuations in terms of market cap level. This is especially true as the tilt toward small caps suggests that BFOR will now be less exposed to the international markets, currently ruffled by China worries, a strong dollar and global slowdown concerns. As a result, the new portfolio now reflects increasing fundamental attractiveness of companies that earn the lion’s share of their profits in the U.S. The objective of the fund remains the same — offering quality exposure to investors seeking to stay invested in the broad market. The high quality stocks seek safety and protection against volatility in turbulent times and thus, outperform in a crumbling market. Overall, the Barron’s 400 Index and ETF seeks to take advantage of the improving U.S. economy with a heavy tilt toward the cyclical sectors and increased focus on small cap stocks. Link to the original post on Zacks.com

Can Google’s Search Volume Predict The Market?

The stock market is ultimately a mirror of investor sentiment. Another barometer of investor sentiment could be the number of times the ticker symbol for a company is used as a search term. Google Trends provides a tool that helps track search term volume and it appears to be a forward indicator. Much of human behavior is based on conditioning. Our years, months, weeks and days are clearly mapped out. Within that, our hours, minutes and seconds are all accounted for. You wake up, take a shower, make yourself look presentable, have a cup of coffee out of your favorite mug and you’re off to work. You arrive at work and don’t even remember how you got there. Then you can’t wait to get home where you can eat, relax, look at emails and prepare yourself to do it again the next day. I’ve heard it said that by the age of 35 most of us are on auto-pilot for 80% of our lives. Certainly, if there are patterns in human behavior, there might be some portion of this pattern that provides clues about the direction of the market. Now, I’m no advocate of technical analysis for stock selection, but it can tell you when to buy something you’ve already decided to purchase. In other words, it can help with timing. Measures of volume can give you an idea for the level of interest in the market. Volume, is in a sense, a measure of the market’s current emotion. When that volume lingers, it turns into a “mood”, often trending sideways, up or down over a period of time. Some stocks trend up or down in such predictable ways (within a range) over a long period of time that they can now be said to have a “temperament”. Ultimately, the market is also on auto-pilot. One great thing about being human is this gift of metacognition — the ability to think about the very thing you are thinking about. So let’s ask the question, is there a better way to think about the emotion, mood and temperament of the market? If there is, I’m sure Google has the answer. No, really. They do. Google provides a tool called Google Trends. It shows information on the number of searches for a given “search”. What exactly is a “search”? It’s when someone puts in a word or phrase and then clicks “search”. Easy enough, right? The goal of the “searcher” is to find information about the stock price. So these are presumably investors looking to find more information about a stock. This is a measure of investor interest — good or bad. And, it’s a better measure than volume and momentum, because “searches” are not commitments. This is where people go prior to making a commitment; they do research prior to the investment decision. When the number of searches is abnormally high it could be a sign of eminent change. So, in some ways it is a barometer for potential future action, like a voting poll. I cover banks so let’s look at the top 3 banks in size to see if a compelling trend emerges that can help predict entry/exit points. JP Morgan Chase (NYSE: JPM ), Bank of America (NYSE: BAC ) and Wells Fargo (NYSE: WFC ) are all compelling investments. Though my favorite is Wells Fargo, I also like JPM and BAC. Though WFC edged out JPM in net income again in Q2, JPM is still the largest US bank by assets. Here’s a price/net income chart. JPM data by YCharts And, here’s a chart of searches for the term “JPM” over roughly the same time period: (click to enlarge) Source: Google Trends I drew in the red line. The letters mark news events. You will notice that high search volume is negatively correlated with stock price, which suggests investors search for stock more when the price is going down, but can this be used as a forward indicator; does it have any predictive value? The end of month reading on January 2008 shot up above the red line — this was a change of investor emotion, a change in routine — auto-pilot has been turned off. If you looked at this Google Trends chart on February 1, 2008, you would have seen a spike above the red line. If you sold JPM on February 1, you would have also been one of the smartest people in the world. On August 2009, search volume dropped below the red line which was the start of an increase in price, a new trend. You will notice a spike at (“H”) around the middle of 2013. This is when a news story was put out about JP Morgan Chase in Barron’s. The story created a lot of interest in the stock, but did not result in a sell-off. Indeed, the stock has been fairly steady since August 2009. The dashed line at the end of the chart represents a forecast of future search volume for the term JPM. Based on the search volume forecast, JPM will be going up over the next 3 months, though I don’t know how reliable the forecast can be. The next highest bank in terms of assets is Bank of America . Unlike JPM, BAC’s price has not followed net income which explains the low earnings multiple. Here’s a price chart: BAC data by YCharts And here’s a chart of the search term “BAC” over the same time period. (click to enlarge) This is a little trickier because prior to November 2007, there were no searches for BAC. Suddenly, there’s interest. We go from 0 to 100 (literally) from December 2007 to April 2009. Had you sold BAC on January 1, 2008 (search volume passes above the red line) and purchased again on May 1, 2009 (search volume passes above the upper limit), you could have saved yourself an 80% drop in price. Then from May 2009 to May 2011, searches fell again. Only to have a sharp spike July 2011. Had you sold on August 1, 2011 you could have avoided a 50% sell-off. Here’s a chart of Wells Fargo’s price over the past 10 years. WFC data by YCharts And here’s a chart of the search term WFC on Google: (click to enlarge) January 2008 (just after the “N” mark) was a breakout month for WFC in search volume — this is when folks turned off the auto-pilot and the stock became increasingly volatile. If you sold WFC on February 1, 2008 you would have seemed a genius. The chart also provides a buy signal (folks went back to auto-pilot) when it crossed above the upper red line in February 2009 you would have purchased the stock between $8 and $13. A more prudent investor may want to wait until all “search volatility” has dissipated. Sometime around the beginning of 2011 the market returned to its pre-2008 search volume. At the time the price was around $30. Today’s it’s at $52. Incidentally, the dotted line at the end there looks to be telling us that WFC is trending flat, but again I don’t have much faith in the forecast. A few comments: I’ve noticed that the effectiveness of this tool is only as good at the search term. For instance, Citigroup’s (NYSE: C ) ticker is “C”. It would take some time to clean out the noise. Even a search for “C price” or “C quote” yielded mixed results. There appear to be no correlations between Google Trends and short interest. You might think that as searches go up, short interest would follow, but this is not the case. A big news story, press release (earnings report) will provide a false signal, but you can eliminate this with a quick search. If there are no big news stories, press releases, etc, and search volume is going up, it may be time to sell. While you can ask the chart to show news activity, it does not always pick up company press releases. For example, if we look at the WFC search volume chart (see below) for the past 90 days, we see a spike at July 14, which was an earnings announcement. However, the second spike was the sell off on Aug. 24. The next day WFC hit a price bottom. WFC’s price began trending down on August 19, but the search volume for the ticker symbol did not pass the red line until Aug. 23 (Sunday). So, to put some context on this, on Aug. 22, a Saturday, people woke up and instead of going on auto-pilot they checked on WFC’s price. And, on Monday morning, well, we all know what happened on Monday morning. Now we appear to be back on autopilot, but I’m monitoring closely. (click to enlarge) Google Trends provides data on a daily basis. The presentation here is a snapshot, but if you go to the actual website you will see more granular data. I have an email in to Google to see if I can get a raw data file to run correlations, but that may never happen. I will keep you posted. Each stock has its own temperament. This is not a one “rule” fits all. Finally, to all the critics, this is only research in progress. I am by no means calling this a definitive study, but it’s showing some promising signs. AIAB Subscribers : If you have a bank you would like me to research please send a direct message. I’ve also provided Google Trends charts for the top five non-banks for comparison. Disclosure: I am/we are long WFC, BAC, JPM. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Equity CEFs: A No Brainer In The Nuveen Dow 30 Dynamic Overwrite Fund

Summary The Dow Jones Industrial Average has been the worst performer of the three major US indices so far in 2015, down -5.8% through September 16th. However, a rebound in the global markets could help the DJIA the most since the index represents 30 of the largest multi-national blue chip companies in the US. One CEF that correlates with the DJIA has seen its market price also suffer even as its NAV outperforms the DJIA. This has created a no-brainer opportunity in my opinion. Four months ago I wrote this article, How To Buy The DJIA At A 10% Discount And A 6.9% Yield . Well, guess what? Now you can own that same fund, the Nuveen Dow 30 Dynamic Overwrite fund (NYSE: DIAX ) , $13.66 market price, $15.45 NAV, -11.6% discount, 7.8% current market yield, at an even bigger discount and yield. And if four months from now the fund is at a -13% discount and an even higher yield, I would tell you to buy more. But to me this already is a no brainer. Why? Because I believe institutional investors have got to take notice when an arbitrage opportunity this obvious presents itself. When you know you’re dealing with a pretty straightforward fund like DIAX, which only owns 30 large cap stocks and sells options against 50% of its positions, you can take a fairly large position even with limited liquidity if you know you can hedge the downside in more liquid ETFs. And when the spread is this large and involves index funds, I believe this becomes too juicy to ignore. Note: DIAX also owns a couple popular index ETFs, DIA and SPY , in which options are used as well. Index-based CEFs are the easiest funds to understand and more importantly the easiest to hedge if you want to have an arbitrage position. For this reason and the fact that index CEFs are so predictable in their NAV moves, their market prices usually don’t stray too far from their NAVs. But that hasn’t been the case with DIAX or really any of the four new Nuveen option income CEFs this year. Note: For some background on the four Nuveen option income CEFs, please read the above article link. All of the new Nuveen option income CEFs are index based and they all got started in late December 2014. Three out of the four new funds were the result of mergers between previous option income CEFs from Nuveen. However, DIAX has suffered the worst as it’s the only one tied to the DJIA as its benchmark. So a poor performing Dow Jones Industrial Average this year has just been amplified in a less liquid CEF that correlates to it. This is shown in the following Premium/Discount graph in which DIAX’s discount has continued to widen. So despite a defensive option strategy, DIAX has seen a continued valuation drop in its market price and the reasons for the widening discount I believe are two fold. One is because DIAX was the result of the merger between two old Nuveen option CEFs correlated to the DJIA and if you owned both funds (DPO) and (DPD) prior to the merger, which a lot of investors did including myself, you probably didn’t want to own all of the shares of the new fund simply because that would have given you a much larger exposure in just one fund. This, I believe, resulted in the initial steep drop in valuation shown. The second reason is that DIAX’s market price has fallen pretty substantially since the beginning of the year due to weakness in the Dow Jones Industrial Average, the increased market price discount of DIAX and then also because of the quarterly distributions which totals $0.80/share so far this year. So from a pure depreciation basis, i.e. not including distributions, DIAX’s market price has dropped from $16.38 when it started trading in late December to $13.66 today. As a result, I believe tax-loss selling has now further exacerbated DIAX’s discount as investors lock in a loss with perhaps the expectation that the Dow Jones Industrial Average might be even lower in mid October or later in the year when they could buy the fund back. This is all speculation of course but I can’t think of any other reason why anyone would be so shortsighted to sell DIAX now at a -11.6% discount, particularly when the DJIA is starting to look firmer as some of its weakest components, i.e. Exxon Mobil Corp (NYSE: XOM ) and Chevron (NYSE: CVX ) , show some life. But there’s another reason why this doesn’t make any sense. As an option income CEF, DIAX’s NAV will hold up better than the DJIA in a weak market environment. This is part of DIAX’s strategy to reduce volatility while paying an enhanced yield, something you generally don’t get with ETFs. In other words, the weaker the DJIA stays, the better DIAX looks even if it’s not showing up in the market price for the above mentioned reasons. This is reflected in DIAX’s NAV performance so far this year which is off only -3.5% on a total return basis compared to the DJIA being off -5.8%. That may not sound like a big percentage difference but in the eyes of an institutional investor who might take a larger position in DIAX if they knew they could arbitrage the position with a more liquid ETF that performance difference is compelling in a down market. But then there’s also just the common sense factor. Who would sell a fund that owns nothing but the 30 bluest chip companies in America at $13.66 when its liquidation value is a bona fide $15.45 per share currently? Unlike a fixed-income or leveraged CEF in which you can’t entirely be sure that the NAV would represent the liquidation value (certainly a lot closer than book value however), a $500 million CEF that only owns 30 heavily traded positions could be liquidated in a day at pretty close to its NAV. Now some people could argue that what good is the discount if you never get to realize the step up value? That is true, the liquidation of a CEF is a rare event that you certainly shouldn’t count on. But that’s not the reason you invest in heavily discounted CEFs even though it would be reason enough in a worst case scenario. No, the biggest reason why you invest in heavily discounted CEFs is simply because you receive a larger yield than what the fund is responsible for paying. In other words, the NAV yield of a CEF is what it has to cover. But funds at discounted market prices means you receive a higher yield than what the fund is paying. So in a case like DIAX, its NAV yield is a very reasonable 6.9% but its current market price yield is 7.8% because of the discount. Again, maybe not such a big deal to an individual investor but to an institutional investor, that’s a big difference if you have a large position. Conclusion So what could go wrong? Well, certainly if the global economy takes another leg down that’s probably not going to help the US multi-national companies that dominate the DJIA. And though DIAX’s NAV would continue to outperform the Dow Jones Industrial Average in such a scenario, investors could still drive down DIAX’s market price based on emotional selling and a lack of buyers. This has been happening a lot to CEFs over the summer, i.e. not heavy selling but just a lack of buyers. Nonetheless, I believe this is one of the more compelling opportunities I’ve seen in a while, especially if the Dow Jones Industrial Average component stocks start to perform better since you know DIAX’s NAV will perform close to that of the index, holding up better during flat to moderately down periods and lagging a bit during up periods. But you won’t get any surprises with DIAX and you can lock in a nice windfall yield to boot. On a market price basis, I suppose tax-loss selling could continue and that might keep a lid on the market price for awhile no matter what the DJIA index does but I’ve also got to believe that institutional investors would step up and take advantage of an arbitrage opportunity at these levels. An -11.6% discount to the Dow Jones Industrial Average is huge, comparatively like going back to 2013 when the DJIA was below 15,000. It also gives institutional investors an opportunity to play both sides in a more volatile market environment in which both arbitrage positions will probably be profitable at one time or another. For individual investors, I would not recommend an arbitrage and I believe the current discount and yield is opportunity enough. But if you did want to hedge a position, you could either short the SPDR Dow Jones Industrial Average ETF (NYSEARCA: DIA ) (though you would be responsible for paying a monthly dividend) or you could buy an inverse fund like the ProShares Short Dow 30 fund (NYSEARCA: DOG ) which is a 1X the inverse of the DJIA. Disclosure: I am/we are long DIAX, DIA. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.