Tag Archives: etfs

New Trend-Following Fund Limits Your Downside

By Alan Gula, CFA Paul Tudor Jones (PTJ), a legendary trader and hedge fund manager, essentially predicted the stock market crash of 1987. In a PBS documentary, PTJ asserted, “There will be some type of a decline, without a question, in the next 10 to 20 months… it will be earth shaking… it will create headlines that will dwarf anything that’s happened up to this point in time.” On October 19, 1987 the S&P 500 dropped 20.5% in a single day. Many investors were eviscerated, and some traders were completely wiped out. That month, PTJ’s fund was up an astonishing 62%. PTJ is an ardent proponent of trend following. That is, you always want to be positioned with the prevailing price trend. If a security or futures contract is trending higher, then be long. If it’s trending lower, get flat (no position) or be short. So how do we determine the predominant trend? In an interview with Tony Robbins for Money: Master the Game , PTJ revealed that his preferred metric is the 200-day moving average of closing prices. Regarding the 1987 crash, Robbins asked, “Did your theory about the 200-day moving average alert you to that one?” PTJ responded, “You got it. It [equity index] had gone under the 200-day moving target. At the very top of the crash, I was flat.” The following chart helps illustrate what PTJ saw: Trend following has been around for ages. But now funds are popping up that automate the process. For example, the Pacer Trendpilot 750 ETF (BATS: PTLC ) was launched in June 2015. This exchange-traded fund (ETF) alternates exposure to the Wilshire U.S. Large-Cap Index (Index) or U.S. Treasury bills (T-Bills) depending on the trend indicators. Here are the allocation rules: Positive Trend Established: When the Index closes above its 200-day simple moving average (NYSE: SMA ) for five consecutive trading days, the exposure of the fund will be 100% to the Index. In other words, the fund will be fully invested in equities. Negative Trend Established: When the Index closes below its 200-day SMA for five consecutive trading days, the exposure of the fund will be 50% to the Index and 50% to 3-month T-Bills. Negative Trend Confirmed: When the Index’s 200-day SMA closes lower than its value from five business days earlier, the exposure of the fund will be 100% to 3-month T-Bills. These rules are designed to keep the fund invested when the stock market’s trend is up but to protect capital with the safety of T-Bills during down trends. Also, the rules attempt to minimize fund turnover during periods of high volatility. PTLC seeks to replicate the performance of a trend-following index. The chart below shows its back-tested results. The trend following index has outperformed over the long term with much smaller drawdowns (peak-to-trough declines). The benefits of trend following as a form of risk management can clearly be seen during the equity bear markets in 2001-2002 and 2008-2009 (yellow circles). The expense ratio of 0.6% for PTLC is a bit high, but the ETF does conveniently simplify the trend-following process. It’s worth noting that the ETF’s current exposure is 100% T-Bills, meaning that a stock market downtrend has been confirmed. The 200-day moving average is such a simple indicator that few people believe it offers valuable information. Also, with so much focus on daily catalysts and short-term moves in the media, the big-picture trend gets lost amid the din. The last time the S&P 500 crossed below its 200-day SMA was at the very end of 2015. I doubt PTJ was caught off guard by this year’s 10.5% decline through February 11.

The Role Of Quality In Long-Term Value Creation

By Kelly Tang This is the third in a series of blog posts relating to the launch of the S&P Long-Term Value Creation (LTVC) Global Index . In the last blog, we discussed how long-term investing requires looking at metrics that go beyond the standard GAAP financial accounting measures and why the Economic Dimension (ED) score from RobecoSAM was the sustainability score that best complemented the long-term aim of the S&P LTVC Global Index. While the ED score may be a key metric of a firm’s long-term focus on its goals, it is also important to the index to identify how these policies have translated themselves and are reflected in the quality of a company’s earnings, balance sheet, and profitability. It is safe to say that the definition of quality and the characteristics of a high-quality company will generate numerous and varied responses from academics and analysts alike. In addition, the difference in opinion will persist in not only the definition, but also the number of metrics that should be used to gauge quality. Our colleagues previously examined the quality debate and presented their findings and S&P Dow Jones Indices’ stance in ” Quality: A Distinct Equity Factor? ” (Ung and Luk). The paper presented the framework for defining quality, which included categories such as profitability, earnings quality, and strength in balance sheet. The report included back-tested performance results, which showed that the proposed quality factor was beneficial in contributing to excess long-term investment returns. For the S&P Quality Indices, the following three metrics are used to define a quality company. Return on equity (ROE) was selected as the preferred metric for profitability, and companies with higher ROEs have sustained competitive advantages such as branding or competitive positioning, which help them maintain their profitability. Quality of earnings was another criterion to determine quality as measured by the balance sheet accruals (BSA) ratio (change in net operating assets/average operating assets). The BSA provides a way to measure how a firm scores in its earnings management; higher accruals are a potential red flag as higher levels of noncash items may lead to financial statement revisions. Finally, the financial leverage ratio was selected as the third metric to gauge balance sheet strength, with the rationale that high-quality companies have the ability to finance their ongoing business activities without having to incur excessive debt levels, protecting them in times of crisis. One of the key findings from Ung and Luk’s paper was that although quality strategies have performed well on their own, they appeared to work well when combined with other factor strategies as well. This was the basis for our thinking to combine quality with economic sustainability factors to create the S&P LTVC Global Index. In our final blog of the series, we will dig deeper into the unique structural aspects and performance attributes of the S&P LTVC Global Index. Disclosure: © S&P Dow Jones Indices LLC 2015. Indexology® is a trademark of S&P Dow Jones Indices LLC (SPDJI). S&P® is a trademark of Standard & Poor’s Financial Services LLC and Dow Jones® is a trademark of Dow Jones Trademark Holdings LLC, and those marks have been licensed to S&P DJI. This material is reproduced with the prior written consent of S&P DJI. For more information on S&P DJI and to see our full disclaimer, visit www.spdji.com/terms-of-use .

How You Can Beat The Market With Dividend Aristocrat ETFs

With stocks down across the board to start the year, many investors are scrambling to find better selections for today’s more uncertain market environment. While utilities and consumer staples are becoming more popular thanks to this sentiment, there are also non sector-specific ways to improve performance relative to the market. One outperforming strategy has been to focus on higher quality dividend-paying companies. Stocks in this area haven’t seen incredible returns, but they have done far better than the broad market over the past few months. But not just any dividend-paying stock will do, as a focus on the so-called ‘dividend aristocrats’ should be a go-to strategy for investors in this market environment. What is a Dividend Aristocrat? A dividend aristocrat stock is a company that has a long track record of increasing dividend payments year after year. The number of years required varies depending on who you ask, but at least ten consecutive years of dividend increases is usually required to get into this select bunch. A company that fits this bill is a rare breed since it has been able to boost payments no matter what is happening in the broader economy. This shows an impressive ability to manage capital effectively, while also taking care of shareholders too. How to Invest While you can find a few specific stocks that are in the dividend aristocracy, an easier way to play this trend might be with ETFs. There are actually a few funds tracking this corner of the market, and all have been outperforming the broad S&P 500 in this recent rough patch. That’s right, the SPDR S&P Dividend ETF (NYSEARCA: SDY ) , the ProShares S&P 500 Aristocrats (NYSEARCA: NOBL ) , and the Vanguard Dividend Appreciation ETF (NYSEARCA: VIG ) have all easily outperformed the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) over the past three months, while the trio are also outperforming from a one-year outlook as well. Clearly, a focus on quality has been the way to go in this uncertain market environment. What’s The Difference? While all three have managed to beat out broad markets, investors have to be wondering what are the key differences between the three main dividend aristocrat ETFs? Well, for the most part, the key difference is how exclusive of a club the funds make the aristocrats. VIG is the least exclusive, as it allows companies to join its benchmark after raising dividends each year for at least one decade. SDY is the next in line with a similar policy, but for two decades, while NOBL is the most exclusive, only holding companies that have raised dividends every year for at least a quarter century. As you might be able to guess, the higher the barrier to entry, the fewer the companies that pass the screen. As such, NOBL has the fewest number of securities at 50, followed by about 100 for SDY and roughly 175 for VIG. All three do a pretty good job of spreading out assets, but actually VIG is the most concentrated thanks to its cap-weighted focus. Meanwhile, NOBL is the least concentrated thanks to its equal weighted focus, which puts the same amount in each stock, while SDY takes a different approach, weighting by dividend yield. Either way, consumer and industrial stocks are top holdings in each of the three, while all of them have little in the energy sector, largely thanks to the recent sector downturn. And while all three are extremely tradable, there are some expense differences to note as well. VIG is the cheapest – as is usually the case with Vanguard products – and comes in at 10 basis points a year compared to 35 for the other two. While none are really that expensive, it is certainly a big difference on a relative basis, and something to consider for cost-focused investors out there. Key Caveat While all three might have a dividend focus, it is important to remember that they zero in on companies that are growing dividends at a constant rate, not necessarily those that are paying out the most in terms of yield. In fact, while all three beat out the broad market in terms of their 30-Day SEC yield, none top three percent either. So while they are modest income destinations, investors who are just seeking yield will likely be disappointed by the dividend aristocrat family. Bottom Line The dividend aristocrat space is often overlooked by investors in favor of ‘sexier’ or more enticing market segments. However, over the past few months, stability and rock solid companies have been in vogue instead. This trend has allowed the dividend aristocrat ETFs of VIG, SDY, and NOBL to beat out the market and provide investors with a bit more stability in this uncertain time too. Just remember, none of these aristocrat funds are going to pay you a huge yield, but in turbulent economic times their outperformance makes the aristocrat funds the nobility of the investing world, and definitely worth consideration for your portfolio. Original Post