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GMOM: Momentum Swings From Bonds Back To Stocks

Summary GMOM shifted from stocks to bonds in late August, but was too late to protect itself from the summer market plunge. GMOM missed the October snap-back relay in stocks, but has recently repositioned itself to be overweight in equities. The recent whipsaws has not been kind to GMOM, but it may regain its lustre in strongly trending markets. The Cambria Global Momentum ETF (NYSEARCA: GMOM ) is an actively managed ETF that seeks to exploit the momentum factor across different asset classes. Essentially, GMOM invests in the top 33% of a target universe of 50 ETFs based on measures of trailing momentum and trend. Assets include domestic and foreign stocks, bonds, real estate, commodities and currencies. The fund rebalances monthly into ETFs with strong momentum and are in an uptrend over the medium term of approximately 12 months with systematic rules for entry and exit. Seeking Alpha author Left Banker has penned an excellent pair of articles describing the construction of this ETF, and thus these details will not be rehashed here. Instead, this article seeks to highlight the fact that GMOM has just recently switched from a bond-heavy portfolio back into stocks. Locating the previous switch to bonds In his last feature article on GMOM in Feb. 2nd, 2015, Left Banker found that GMOM was broadly diversified across numerous asset classes, with about 46% in equity, 31% in bonds, 18% in real estate (including mREITs) and 6% in commodities. Fast-forward to Nov. 3rd, 2015, and the situation is drastically different. Nearly 94% of the portfolio was in bonds , with the remaining 6% or so in REITs. GMOM holdings on Nov. 3rd, 2015 iShares 7-10 Year Treasury Bond ETF (NYSEARCA: IEF ) 17.56% iShares 3-7 Year Treasury Bond ETF (NYSEARCA: IEI ) 17.12% Vanguard Short-Term Bond ETF (NYSEARCA: BSV ) 17.08% iShares 1-3 Year Treasury Bond ETF (NYSEARCA: SHY ) 12.11% Vanguard Total Bond Market ETF (NYSEARCA: BND ) 10.93% Vanguard Total International Bond ETF (NASDAQ: BNDX ) 6.44% iShares Residential Real Estate Capped ETF (NYSEARCA: REZ ) 6.22% Vanguard Short-Term Corporate Bond ETF (NASDAQ: VCSH ) 6.01% iShares MBS ETF (NYSEARCA: MBB ) 6.00% Total 99.47% As GMOM does not publish its historical holdings, I do not know the exact time that it made the switch from bonds to stocks. However, given the significant underperformance of both U.S. (the SPDR S&P 500 Trust ETF (NYSEARCA: SPY )) and international stocks (the iShares MSCI ACWI ex-U.S. Index ETF (NASDAQ: ACWX )) stocks compared to their respective bond counterparts, the Vanguard Total Bond Market ETF [BND] and the Vanguard Total International Bond ETF [BNDX] over the summer, I infer that change to the better-performing bond ETFs was made sometime during those months. To narrow down the precise timing of the switch further, I compared the total performance of GMOM with SPY and BND over the past three months. We can see that the stock market plunge in late August was acutely felt by GMOM, suggesting that GMOM was still heavily invested in equities at that time. However, GMOM did not track the market fluctuations experienced by SPY in the month of September, nor the snap-back rally in stocks in October. This suggests that the switch from equities to bonds took place sometime at the start of September. We can see from the graph above that while moving to a bond-heavy portfolio protected GMOM from the market gyrations experienced by SPY in September, it also caused GMOM to miss out on the fantastic rally in stocks the following month. This illustrates a general observation: momentum strategies tend to underperform in whipsaw situations. A similar set of circumstances was chronicled for the AlphaClone Alternative Alpha ETF (NYSEARCA: ALFA ), which uses the 200-day MA in order to time its hedges (which is a type of momentum strategy), in my recent article entitled ” ALFA Underwhelms As Hedge Fund Darlings Crater Plus An Untimely Hedge .” From bonds back to stocks Checking the holdings of GMOM a few days later, I discovered that a massive shift had taken place in the constituents of this ETF. The portfolio had shifted from 94% bonds to only 29%. REITs increased from 6% to 17%. Stocks increased from a measly 0% to 53% (70% if you include REITs as stocks). GMOM holdings on Nov. 6th, 2015 iShares Global Tech ETF (NYSEARCA: IXN ) 10.61% iShares Global Consumer Discretionary ETF (NYSEARCA: RXI ) 10.60% Vanguard REIT ETF (NYSEARCA: VNQ ) 10.60% Cambria Shareholder Yield ETF (NYSEARCA: SYLD ) 10.59% iShares Global Consumer Staples ETF (NYSEARCA: KXI ) 10.59% Vanguard Total Stock Market ETF (NYSEARCA: VTI ) 10.57% PowerShares Emerging Markets Sovereign Debt Portfolio ETF (NYSEARCA: PCY ) 10.56% Vanguard Total International Bond ETF BNDX 6.43% iShares Residential Real Estate Capped ETF REZ 6.17% Vanguard Short-Term Corporate Bond ETF VCSH 6.02% iShares MBS ETF MBB 6.00% Total 98.73% The recent change in the portfolio is also shown graphically below. Obviously, the recent move back into equities is a direct consequence of the ferocious rally in the stock market over the past month and a half. With stocks knocking again on the door of all-time highs, one has to ask the question, is this really the best time to be overweight equities? If you answered “yes” to that question, then you are likely a momentum investor, and GMOM might be an ideal fund for you. If you answered “no,” you would do well to sell GMOM now that it has shifted again back into stocks (and you should also ask yourself why you were invested in this fund in the first place?). Summary The recent whipsaws in the stocks, and to a lesser extend bond, market has not been kind to a momentum fund such as GMOM. Indeed, while having performed comparably with U.S. and international stocks and bonds in the first six months or so of its lifetime since inception, it now trails all four major asset classes by a wide margin. If this whipsaw behavior were to continue, GMOM will likely continue to underperform. On the hand, strong trending markets (both bull and bear) in various asset classes should allow GMOM to focus on what it does best: exploiting the momentum premium. GMOM Total Return Price data by YCharts For more information about other momentum ETFs, see my previous articles ” Comparing 4 Tactical/Momentum ETFs ” and ” An Update On 4 Tactical/Momentum ETFs “.

ALFA Underwhelms As Hedge Fund Darlings Crater Plus An Untimely Hedge

Summary ALFA’s hedge was triggered for the first time at the start of last September. Unfortunately, ALFA’s recent performance has been uninspiring. This analysis reveals two likely reasons for ALFA’s underperformance since the hedge was activated. In my Aug. 31, 2015 article entitled ” ALFA: A Market-Beating ETF About To Go Market-Neutral ” I reported that the AlphaClone Alternative Alpha ETF (NYSEARCA: ALFA ) was about to go market-neutral for the first time since its inception due to the S&P 500 closing below its 200-day moving average at month-end. I also commented on the fact that ALFA has had significant wire-to-wire outperformance vis-a-vis the SPDR S&P 500 Trust ETF ( SPY) since inception (see chart below), suggesting that investors in ALFA benefited from being able to “invest with the best.” Recall that ALFA uses a proprietary “Clone Score” methodology in order to aggregate the ideas of hedge funds which have strong historical performance. Alas, ALFA can no longer lay claim to this achievement. Its total return performance since inception now trails SPY by some 15% (55% vs. 70%). ALFA Total Return Price data by YCharts Zooming up to the time frame since the hedge was triggered at the start of September (it was actually activated at the market close on Sep. 2nd) reveals that most of the relative underperformance occurred over the last month. ALFA Total Return Price data by YCharts Reconstructing ALFA’s return without the hedge Recall that when the hedge is triggered (caused by the S&P 500 closing below its 200-day moving average at month-end), ALFA shorts the S&P 500 in an amount equal to the notional value of its long holdings. In other words, ALFA becomes market-neutral. Obviously, given that SPY has (as of last week) reclaimed its 200-day moving average in a brief span of two months, the hedge appears to be ill-timed. Nevertheless, investors in ALFA must be prepared to accept the fact that this hedging strategy will likely underperform in whipsaw situations, such as what was observed over the past two months, as part of the cost of protecting oneself from the worst of bear markets. I wanted to see whether the severe underperformance of ALFA was due to the hedge being triggered, or something else. Therefore, I reconstructed the total return of ALFA since the start of September to visualize what the return profile of ALFA would have been if the hedge had not been activated. We can see from the chart above that had the hedge not been activated, the hypothetical 100% long ALFA (denoted ALFA-L in the graph above) would have returned -1.95% since Sep. 1st, compared to -8.14% for the actual ALFA. While this alleviates the underperformance a bit, it is still far below that of SPY at 8.69%. So what can the rest of ALFA’s underperformance be attributed to? Hedge fund darlings crater In my previous article, I compared the top 10 holdings of ALFA and SPY. ALFA SPY Stock Ticker % Assets Stock Ticker % Assets Apple Inc. (NASDAQ: AAPL ) 7.25 Apple Inc. AAPL 3.75 Valeant Pharmaceuticals (NYSE: VRX ) 7.19 Microsoft Corporation (NASDAQ: MSFT ) 2.03 Celgene Corporation (NASDAQ: CELG ) 2.55 Exxon Mobil Corporation Common (NYSE: XOM ) 1.78 Horizon Pharma plc (NASDAQ: HZNP ) 2.53 Johnson & Johnson Common Stock (NYSE: JNJ ) 1.49 Allergan PLC (NYSE: AGN ) 2.41 Wells Fargo & Company Common St (NYSE: WFC ) 1.46 The Priceline Group Inc. (NASDAQ: PCLN ) 2.36 General Electric Company Common (NYSE: GE ) 1.41 Transdigm Group Incorporated Tr (NYSE: TDG ) 2.22 Berkshire Hathaway Inc. Class B (NYSE: BRK.B ) 1.4 Oracle Corporation Common Stock (NYSE: ORCL ) 2.05 JPMorgan Chase & Co. Common St (NYSE: JPM ) 1.37 Biogen Idec Inc. (NASDAQ: BIIB ) 1.79 Pfizer, Inc. Common Stock (NYSE: PFE ) 1.19 Skechers U.S.A., Inc. Common St (NYSE: SKX ) 1.5 AT&T Inc. (NYSE: T ) 1.15 How have the top 10 stocks of ALFA fared over the past two months? Answer: not pretty. AAPL Total Return Price data by YCharts As can be seen from the graph above, only 2 of ALFA’s top 10 holdings at the start of September, PCLN (+12.44%) and AAPL (+10.55%), have outperformed SPY. There are three massive losers: SKX (-30.5%), HZNP (-41.2%) and VRX (-48.2%). Assuming that the weightings of those three stocks did not change over this time period, they would have contributed a total of -6.24% to the total return of ALFA over this time period. That actually accounts for over half the entire difference between the hypothetical unhedged ALFA-L (-1.95%) and SPY (8.69%) during this time! Now, I am aware that ALFA’s holdings are not static, and hence the above calculation is merely an estimate. Nevertheless, it is clear that ALFA has been hit by a “doubly-whammy” of an untimely hedge, plus the underperformance of hedge fund darlings such as Valeant Pharmaceuticals (see this comically-timed Forbes article ” Hedge Fund Superstars Stocking Up On Valeant Pharmaceuticals ” that was published the day before VRX’s price came crashing down). This illustrates an important fact: even the best and brightest in the industry can sometimes get it (very) wrong. Due to ALFA’s heavy concentration in tech and biotech, one might say that SPY is not an appropriate benchmark for ALFA. The following chart therefore also shows the total return of the PowerShares QQQ Trust ETF (NASDAQ: QQQ ) and the iShares Nasdaq Biotechnology ETF (NASDAQ: IBB ) since the start of September, as well that of another hedge fund-following ETF, the Global X Guru Index ETF (NYSEARCA: GURU ). Unfortunately, ALFA still lags the other four ETFs, although the hypothetical ALFA-L (-1.95%) would have outperformed IBB (-5.12%) and closely trail GURU (-0.37%). ALFA Total Return Price data by YCharts Summary The last two months has not been kind to ALFA holders. Not only was the timing of the hedge unfortunate, but a number of the fund’s largest holdings have suffered tremendously, particularly VRX and HZNP, whose pricing practices have come under intense scrutiny. Will ALFA rebound in the future? I don’t know. As of today, VRX and HZNP are still two of ALFA’s top 10 holdings, at 3.30% and 2.00% weights, respectively, suggesting that ALFA’s future performance may still be somewhat tethered to the fates of those two specialty pharmaceutical companies. Moreover, note that while ALFA is currently in market-neutral mode, this will change if the S&P 500 manages to remain above its 200-day moving average for one more week, as the end of the month is near.

Happy 1-Year Birthday HDLV And Quarterly Rebalance: Altria Out, CME In

Summary HDLV has recently turned one year old and its performance since inception appears adequate, though data sources have been conflicting. The quarterly rebalance removed blue-chip favorites MO, VTR and ED, while introducing newcomers CME, PPL and WY. HDLV currently yields 9.7% on a 2x leveraged portfolio. HDLV: a one year review The ETRACS Monthly Pay 2xLeveraged US High Dividend Low Volatility ETN (NYSEARCA: HDLV ), incepted on Sep. 30, 2014, has recently turned one year old. Since inception, it (12.43%) has slightly underperformed two other 2x dividend ETNs, the Monthly Pay 2xLeveraged Dow Jones Select Dividend ETN (NYSEARCA: DVYL ) (13.66%) and the Monthly Pay 2xLeveraged S&P Dividend ETN (NYSEARCA: SDYL ) (12.72%), while outperforming the Monthly Reset 2xLeveraged S&P 500 Total Return ETN (NYSEARCA: SPLX ) (7.48%). Note that all of the 2x funds mentioned above reset their leverage monthly, rather than daily. The total return performances of the aforementioned fund since the inception of HDLV in Sep. 2014 are shown below, with the unlevered SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) (4.96%) shown for comparison. HDLV Total Return Price data by YCharts In terms of volatility, HDLV appears to have done the worst out of all the 2x leveraged funds. This is disappointing because HDLV purports to hold stocks that show lower volatility than the broader market. Part of this could be due to HDLV’s heavy concentration in interest rate-sensitive sectors such as telecommunications and tobacco (refer to my HDLV update article ” 10%-Yielding HDLV May Be A Good Choice If Interest Rates Remain Low “), which moved together during the significant interest rate gyrations witnessed throughout this year. HDLV 30-Day Rolling Volatility data by YCharts Interestingly, InvestSpy gives different results on both total return and volatility. According to InvestSpy, HDLV has produced both the highest total return and lowest volatility out of the four 2x leveraged funds since inception (note that the high volatility of SPLX may be distorted by its lack of liquidity). Related to this, HDLV also shows the lowest beta and daily variation. Moreover, HDLV produced the lowest maximum drawdown out of the four 2x leveraged funds. Ticker Annualized Volatility Beta Daily VaR (99%) Max Drawdown Total Return HDLV 24.50% 1.19 3.60% -18.00% 17.10% SDYL 26.80% 1.39 3.90% -21.40% 14.10% DVYL 26.60% 1.5 3.90% -22.90% 14.70% SPLX 72.30% 1.46 10.60% -29.20% 10.20% I wanted to confirm the data using a third source of information, but unfortunately Morningstar does not give volatility data or Sharpe ratios on issues less than 3 years old. Therefore, depending on the source of data used, HDLV could either be ranked first or third out of the four 2x leveraged funds for total return, and either first or last in terms of volatility. This could be due to differences in the way that total return and volatility is calculated for the different data providers. HDLV has also recently just paid out its 12th dividend since inception, giving it a TTM yield of 9.7%. HDLV quarterly rebalance: Altria out, CME in As has been described in my previous article ” Higher Dividends With Less Risk (Part 2): A Second Look At ETRACS 2x US High Dividend Low Volatility ETN “, HDLV applies both dividend yield and volatility screens in selecting constituents. The selected constituents are then weighted according to average trading turnover, a factor that correlates closely with market capitalization. The result is a highly focused portfolio, with over 60% of the fund being concentrated in the Top 10 holdings. Given this high concentration of holdings, I believe that it is worthwhile to analyze individual additions and removals to the index when it is rebalanced each quarter in order to give some insight into the nature of the portfolio. The latest quarterly rebalance was performed last week, and allocates 60.21% of the index to the Top 10 holdings. The following table shows the Top 10 constituents of HDLV for the previous quarterly rebalance (Jul. 17, 2015) compared to the most recent rebalance (Oct. 16, 2015). Oct. 22, 2014 Jul. 17, 2015 Name Ticker Weighting / % Name Ticker Weighting Verizon Communications Inc. (NYSE: VZ ) 10.00 Verizon Communications Inc. VZ 10.00 AT&T Inc. (NYSE: T ) 10.00 AT&T Inc. T 10.00 Philip Morris International (NYSE: PM ) 8.87 Philip Morris International PM 9.60 Duke Energy Corp (NYSE: DUK ) 6.61 Altria Group Inc. MO 8.61 Southern Co (NYSE: SO ) 6.16 Duke Energy Corp DUK 6.82 Welltower (formerly Health Care REIT) (NYSE: HCN ) 4.11 Southern Co SO 5.87 CME Group Inc (NASDAQ: CME ) 4.11 Ventas Inc (NYSE: VTR ) 3.92 PPL Corp (NYSE: PPL ) 3.98 Health Care Reit Inc (now Welltower) HCN 3.72 HCP Inc (NYSE: HCP ) 3.51 Consolidated Edison Inc (NYSE: ED ) 3.44 Weyerhaeuser Co (NYSE: WY ) 2.86 HCP Inc 3.17 Top 10 total 60.21 65.15 What are the major changes in this rebalance? Key additions. CME, PPL and WY have entered the top 10, and were newly added to the fund this quarterly rebalancing review. Key removals. MO, VTR and ED were removed from the top 10, and from the fund altogether this quarterly rebalancing review. The removal of MO is particularly significant because this constituted 8.61% of the total weight of the fund. As an owner of HDLV, I was interested to find out why MO was removed while peer PM was not, why VTR was removed but peers HCN and HCP were not, and why ED was removed by peers DUK and SO were not. MO vs. PM Over the past 3 months, MO has significantly outpaced PM on a price basis. MO data by YCharts This has caused MO’s dividend yield to drop to around 3.5%. Thus, I believe that MO was excluded from the index because it was not among the top 80 names by dividend yield (amongst the top 200 largest US companies). MO Dividend Yield (TMM) data by YCharts VTR vs. HCN and HCP On a price only basis, VTR has performed comparably with HCN and HCP over the past 3 months. Its yield also sits between that of HCP and HCN. VTR Dividend Yield (TTM) data by YCharts Moreover, VTR’s volatility over the past 12 months has been similar to its peers – recall (from my previous article) that HDLV selects 40 of the lowest-volatility stocks out of the aforementioned 80. VTR 30-Day Rolling Volatility data by YCharts When considering market cap, VTR’s market cap is smaller than HCN’s, but larger than HCP’s, thus I do not think that this was the factor for exclusion. Therefore, I do not know why VTR was excluded from the newest edition of HDLV, while HCN and HCP were not. My suspicion is that Solactive, the index provider, did not account for VTR’s spin-off of Care Capital Properties (NYSE: CCP ) properly, leading to aberrant yield or volatility statistics that disqualified it for inclusion. If so, that is a disappointment because I feel that VTR deserves to be included in this fund, according to my analysis of the index guidelines. ED vs. DUK and SO ED has outperformed DUK and SO over the past 3 months. Similar to the situation with MO, ED could have been removed from its index due to its declining dividend yield. ED Dividend Yield (TMM) data by YCharts The new Top 10 additions, CME, PPL and WY have TTM yields of 4.3%, 4.3% and 4.1%, respectively, all higher than ED. Summary While the removal of blue-chip favorites such as MO and ED from the index can be disappointing to some, investors may be somewhat comforted by the fact that the fund is simply “selling high and buying low” as it removes companies whose price has appreciated to such an extent that their yield falls below the threshold, while replacing these with higher-yielding companies whose recent fortunes may not have been as auspicious. At the same time, the fact that only the top 200 U.S. companies by market cap are considered for selection may limit, but not entirely prevent, “falling knife” situations in which an incredibly high yield can be a predictor for an imminent dividend cut. While HDLV does not screen for dividend growers, it is noteworthy that all companies in their Top 10 have positive year-on-year dividend growth (PPL squeaks by with 0.3% 1-year DGR). Moreover, the decision to exclude MLPs from the index, in spite of the massive MLP bull market that occurred until collapse in late 2014, appears to be brilliant in hindsight. On the other hand, the removal of VTR appears, as far as I can tell, to be a mistake. In terms of portfolio concentration, I feel that this quarterly rebalance has improved the diversification of HDLV. The Top 10 holdings account for 60.21% of the portfolio, down from 65.15%. In the Top 10, there is now only 1 tobacco company instead of 2, and only 2 healthcare REITs instead of 3. This leaves room for the addition of CME, one of the largest options and futures exchanges, and WY, one of the world’s largest private owners of timberlands. Meanwhile, the addition of PPL to the Top 10 at the expense of ED would be considered a wash. In terms of performance since inception just over one year ago, HDLV has done either better or worse than two other 2x dividend ETNs, SDYL and DVYL, depending on whether YCharts or InvestSpy is used, while it has performed better than SPXL according to both data sources. Its volatility has either been the best or the worst among the four funds, depending again on which data is considered. Finally, HDLV’s TTM dividend yield is 9.7%, which is significantly higher than SDYL at 5.8% and DVYL at 7.6%.