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SPDR S&P MidCap 400 ETF: MDY’s 2014 And Fourth-Quarter Performance And Seasonality

Summary The SPDR S&P MidCap 400 ETF ranked No. 2 in 2014 among the three most popular exchange traded funds based on the S&P 1500’s constituent indexes. Most recently, the ETF’s adjusted closing daily share price last month expanded to $263.97 from $261.79, an increase of $2.18, or 0.83 percent. Seasonality analysis shows the fund’s price accelerates in the fourth quarter of an average year, but decelerated in Q4 of last year. The SPDR S&P MidCap 400 Trust ETF (NYSEARCA: MDY ) ranked second by return during 2014 among the three most popular ETFs based on the S&P 1500’s constituent indexes, as it behaved worse than the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) and better than the iShares Core S&P Small-Cap ETF (NYSEARCA: IJR ). Measured by adjusted closing daily share prices, MDY climbed to $263.97 from $241.29, a hike of $22.68, or 9.40 percent. Accordingly, the middle-capitalization ETF underperformed the large-cap SPY by -4.06 percentage points and overperformed the small-cap IJR by 3.55 percentage points. Both seasonality and U.S Federal Reserve policy appear likely to be headwinds for MDY over the coming quarter. The Fed announced the end of asset purchases under its third formal quantitative easing program on October 29, 2014, and may announce the beginning of its next round of federal funds rate increases on April 29, 2015. The Fed’s conclusion of purchases under its first two formal QE programs this century is associated with bear markets in MDY , with the ETF slipping -21.16 percent in 2010 and -28.13 percent in 2011. Figure 1: MDY Monthly Change, 2014 Vs. 1996-2013 Mean (click to enlarge) Source: This J.J.’s Risky Business chart is based on analyses of adjusted closing monthly share prices at Yahoo Finance . MDY behaved a little worse in 2014 than it did during its initial 18 full years of existence, based on the monthly means calculated by employing data associated with that historical time frame (Figure 1). The same data set shows the average year’s weakest quarter was the third, with a relatively small negative return, and its strongest quarter was the fourth, with an absolutely large positive return. The ETF ran true to form overall in Q4 last year, but its share price decelerated rather than accelerated into 2015. Figure 2: MDY Monthly Change, 2014 Vs. 1996-2013 Median (click to enlarge) Source: This J.J.’s Risky Business chart is based on analyses of adjusted closing monthly share prices at Yahoo Finance. MDY performed much worse in 2014 than it did over its initial 18 full years of existence, based on the monthly medians calculated by using data associated with that historical time frame (Figure 2). The same data set shows the average year’s weakest quarter was the third, with a relatively small negative return, and its strongest quarter was the fourth, with an absolutely large positive return. Meanwhile, the latest figure generated by my proprietary U.S. Economic Index methodology and other multivariate analyses continue to indicate the metric may have hit either a long- or a short-term high level in August. As a result, I suspect American economic performance could soon join seasonality and Fed policy as a headwind for the equity market in general and for MDY in particular. Disclaimer: The opinions expressed herein by the author do not constitute an investment recommendation, and they are unsuitable for employment in the making of investment decisions. The opinions expressed herein address only certain aspects of potential investment in any securities and cannot substitute for comprehensive investment analysis. The opinions expressed herein are based on an incomplete set of information, illustrative in nature, and limited in scope. In addition, the opinions expressed herein reflect the author’s best judgment as of the date of publication, and they are subject to change without notice.

Low Risk And Long-Term Success Portfolio Update 2015

2015 will be a year of minimal returns for broad S&P 500 funds, but will be a good year for international funds and gold. High yielding investments in vehicles such as REITs could see lots of volatility due to interest rate risks. Investors should consider taking some profit off of U.S. equities and diversifying internationally to take advantage of lower valuations and room for P/E expansion. The last few years have been fantastic for exchange-traded funds (ETFs), according to data accessed by ETF.com. In fact, U.S. stock ETFs have surpassed last year’s inflow records, and for the first time ever, U.S. ETFs have surpassed $2 trillion. A popular S&P 500 ETF, the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ), has seen the heaviest inflows at nearly $25 billion in 2014. In contrast, emerging market ETFs (NYSEARCA: EEM ) and gold ETFs (NYSEARCA: GLD ) have seen outflows. This marks a perfect opportunity for a trite quote from Warren Buffet, “Be fearful when others are greedy and greedy when others are fearful.” My theory is that many investors have missed out on the upswing of the market and are now “performance chasing” because they feel left out. I am taking the contrarian position and urging to shift some money out of direct investments in the U.S. equity market, and consider larger allocations to international markets, and even emerging market exposure. The original portfolio I created on April 9, 2013, can be accessed here . My portfolio has underperformed the S&P 500 by a significant extent; however, the portfolio I created also contained 18% allocation to bonds, 17% international exposure, emerging markets, and gold. This diversification has led to lackluster performance as the S&P has surged. Keep in mind this is not a portfolio built for everyone. Based on your tolerance for risk and your investment objectives, the amount of money you allocate to certain asset classes must make sense for your goals. In my asset allocation methodology for this year and beyond, I am making some key assumptions that are worth noting. Firstly, I believe the market is fairly valued to slightly overvalued based on historical price-to-earnings ratios. Due to the low interest rate environment, low inflation rate, and the quantitative easing actions of the Federal Reserve, I believe that inflated price-to-earnings ratios makes sense. With that being said, I feel that rates will increase to some extent in this year and that investors seeking high yield investments should be wary. Instead of riding out the high yield environment, my first action will be to remove the allocation to the Vanguard REIT Index ETF (NYSEARCA: VNQ ), and keep my position in the Vanguard High Dividend Yield ETF (NYSEARCA: VYM ). The reason that I am not recommending a reduction in VYM is because of the amount of high quality value stocks found in this fund. What I am certain many people hear all too often are obscure references to the stock market stating it is too high or too low. What I rarely hear are defined examples of why they believe the market is high or low, or by what measuring stick they are referencing. I tend to favor the simplistic. A quick answer to the “Why?” that many investors ask is an indicator of market valuation by economist and well-known author of Irrational Exuberance – Robert Shiller. The Shiller price-to-earnings ratio is calculated using the annual earnings of the S&P 500 over the past 10 years. The past earnings are adjusted for inflation using CPI, bringing them to today’s dollars. The regular price-to-earnings ratio is just shy of 20, which is right at the historical average. (click to enlarge) Based on this information, I believe the market is fully valued. Most agree with the contention that the price-to-earnings ratio of the S&P isn’t trading at a huge bargain. The actions of the Federal Reserve may push the S&P to further valuations above historical averages. My personal view is that while you cannot time the market, you also should avoid pouring into the market when it appears fully valued as many appear to be doing. In fact, at this point I would be doing the opposite of the crowd. Emerging markets and precious metals offer value, and I believe smart money is moving into these asset classes. Using the proceeds from my sale of VNQ, I would purchase the Schwab International Equity ETF (NYSEARCA: SCHF ). This is an international large blend style ETF, sector weighted in financials at an expense ratio of only .08% that will reward patient investors in the long run. I also like that their top holding is Nestle SA ( OTCPK:NSRGY ). The regional breakout provided by Morningstar is roughly 18% exposure to the United Kingdom, 37% exposure to Europe developed, 20% exposure to Japan, 7% Australia, 8% Asia developed, and 8% to the U.S. Gold and the U.S. dollar are inversely related, as you can see from the chart from Macrotrends . While I do not believe gold will experience incredible growth and I cannot promise grandeur, I do believe gold should be a part of your portfolio. I will trust my judgement to raise my portfolio bet in gold to 4% from 3% in my theoretical portfolio. (click to enlarge) Oil seems to be a hot topic today so I wouldn’t want to ignore it in my portfolio construction. While I cannot predict the future – I tend to bet that things “return to normalcy” over the long haul. Thus, my view is that oil will return to a pricing level around $75-$85. In the passive investing space, I am not making an actionable bet on the price action of oil. However, I do believe an opportunity exists for active investors who are diligent about researching quality businesses that are now discounted due to the fall in oil prices. One example I found was Schlumberger Limited (NYSE: SLB ). In another article , I discuss the benefits of individual selection in the oil and gas space. (click to enlarge) In my original portfolio, I made favorable S&P sector bets in the Utilities (NYSEARCA: XLU ) and Health Care (NYSEARCA: XLV ) sector ETFs. In the sector rotation model, it is clear that these two outperformed in the last year, signaling a potential business cycle decline. I do not live or die by sector rotation investing strategies; however, I do not think they should be ignored completely. I tend to look at the relative valuation of companies by sector and make my own judgments as to whether or not they are fairly valued. Interestingly, the financial sector does seem to be an unloved sector which could provide excess returns. Bill Nygren, a fund manager that I follow from Oakmark, is also overweight financials. With a belief that interest rates will rise, supporting sector rotation modeling, and the support of a successful value investing manager, I can remove the clouds and make a clear decision to shift my sector bet from Utilities to Financials (NYSEARCA: XLF ). I am holding onto Health Care because the long-term outlook remains positive. A close third would be the Technology sector (NYSEARCA: XLK ). In summary, I would sell my position in the high yield REIT ETF and use the sources to purchase SCHF to gain more international exposure. I would sell the Utilities sector ETF and purchase the Financials sector ETF with the proceeds. I would also sell a portion of my position in the Vanguard Short-Term Bond ETF (NYSEARCA: BSV ) and purchase additional amounts of the gold ETF until I reach the 4% of total portfolio allocation mark. Given the facts of today, I can only make what I feel is the best decision possible given a certain risk tolerance and investment objective. I hope you find this article useful as you too adjust your portfolio to the current market conditions. As always, best of luck in the new year!

SPDR S&P 500 ETF: SPY’s 2014 And Fourth-Quarter Performance And Seasonality

Summary The SPDR S&P 500 ETF ranked No. 1 in 2014 among the three most popular exchange-traded funds based on the S&P 1500’s constituent indexes. Most recently, the ETF’s adjusted closing daily share price last month declined to $205.54 from $206.06, a loss of -$0.52, or -0.25 percent. The last time the ETF had a negative return in the seasonally strong month of December was 2007. The SPDR S&P 500 ETF (NYSEARCA: SPY ) ranked first by return during 2014 among the three most popular ETFs based on the S&P 1500’s constituent indexes, which also encompass the SPDR S&P MidCap 400 ETF (NYSEARCA: MDY ) and the iShares Core S&P Small-Cap ETF (NYSEARCA: IJR ). SPY advanced to $205.54 from $181.15, a gain of $24.39, or 13.46 percent, in terms of adjusted closing daily share prices. Neither seasonality nor U.S Federal Reserve policy appears likely to be supportive of SPY at its current elevated level over the coming quarter. The Federal Open Market Committee announced the end of asset purchases under its third formal quantitative-easing program Oct. 29 and may announce the beginning of its next round of federal-funds-rate increases April 29. Figure 1: SPY Monthly Change, 2014 Vs. 1994-2013 Mean (click to enlarge) Source: This J.J.’s Risky Business chart is based on analyses of adjusted closing monthly share prices at Yahoo Finance . SPY behaved better in 2014 than it did over its initial 20 full years of existence based on the monthly means calculated by employing data associated with that historical time frame (Figure 1). The same data set shows the average year’s strongest quarter was the fourth, with an absolutely large positive return, and its weakest quarter was the third, with an absolutely small positive return. The last time the ETF had a negative return in the seasonally strong month of December was 2007. Figure 2: SPY Monthly Change, 2014 Vs. 1994-2013 Median (click to enlarge) Source: This J.J.’s Risky Business chart is based on analyses of adjusted closing monthly share prices at Yahoo Finance. SPY behaved worse in 2014 than it did over its initial 20 full years of existence based on the monthly medians calculated by using data associated with that historical time frame (Figure 2). The same data set shows the average year’s strongest quarter was the fourth, with an absolutely large positive return, and its weakest quarter was the third, with a relatively small positive return. Last year, the ETF performed best in the second quarter and worst in the third quarter. Disclaimer: The opinions expressed herein by the author do not constitute an investment recommendation, and they are unsuitable for employment in the making of investment decisions. The opinions expressed herein address only certain aspects of potential investment in any securities and cannot substitute for comprehensive investment analysis. The opinions expressed herein are based on an incomplete set of information, illustrative in nature, and limited in scope. In addition, the opinions expressed herein reflect the author’s best judgment as of the date of publication, and they are subject to change without notice. Now that you’ve read this, are you Bullish or Bearish on ? Bullish Bearish Sentiment on ( ) Thanks for sharing your thoughts. Why are you ? Submit & View Results Skip to results » Share this article with a colleague