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The Financial Times – Look to history for profitable stockpicking
The growth, proliferation and popularity of exchange traded funds has had consequences not all of which are beneficial. Today investors need no longer discern and analyse the differences between Exxon and Chevron since the Energy Select Sector ETF provides an opportunity to own both. And while the Technology Select Sector ETF, the short-cut to own S&P tech stocks, gives you both Apple and Google, you also end up with some MasterCard stock. As might be expected, this has created more interest in group, sector and top-down approaches… One of the difficulties in analysing historical sector performance has been the lack of data. For one, the S&P had approximately 100 groups, 20 of which might have been considered consumer-orientated. In 2001 S&P introduced 10 economic sectors, which made analysis somewhat easier but their data were only backdated to 1989. My firm subsequently took the data back to 1962 and then beyond.

Source: Bianco Research

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The Financial Times – ETF glow fades for US investors

A record number of new US exchange traded funds failed to attract substantial investor demand last year, leaving fund operators facing losses in one of the first signs that the industry’s explosive growth may have peaked. ETFs allow investors to trade baskets of securities, such as the S&P 500 or precious metals, on exchanges with low management fees. Their popularity has surged in recent years, drawing investors away from mutual funds. The US ETF industry ended last year with more than $1tn in assets under management, compared with $540bn at the start of 2009. But that rapid growth has attracted scrutiny from regulators, and there are signs the market may be saturated. “There are a huge and growing number of ETFs out there that are truly sub-scale [uneconomic]” said Ogden Hammond, who tracks the industry for McKinsey, the consultancy. “Larger fund managers have more ability to absorb losses, but at some point operators will have to make a decision about pulling the plug.” Data prepared for the Financial Times by XTF, an ETF research firm, shows 79 per cent of the 190 exchange traded products launched in the first six months of last year failed to attract $30m in assets under management, an industry benchmark for profitability. In 2010 the corresponding figure was 62 per cent and in 2009 it was less than half.

Source: Arbor Research

Ever wonder what allows ETFs to be liquid? The answer is “creation and redemption,” the process that lets ETFs trade even when volume is low. Using simple illustrations and a metaphor about flowers, this seven-minute animation will change the way you look at ETFs.

Hat tip Themis Trading

GLD vs. SPY Relative Price

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Source: Solari Report, Yahoo Finance

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Here is an interesting observation: The value of the SPDR Gold Trust (GLD) is now worth more than the SPDR S&P 500 (SPY) representing the full index. (This refers to the ETFs and not the underlying value of the SPX and Gold).

Note that ETFs are not fully representative of the underlying indices valuation, and that can lead to some odd permutations. For example, Apple (AAPL), a member of the S&P500 Index (SPY) and Nasdaq100 (QQQ), is worth more than both ETFs combined.

Back to Gold: State Street Global Advisors, which administers the ETFs, puts the value of Gold ETF at $76,673.81M versus the S&P 500 ETF at $74,381.35 M.

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What might this mean?

Lets look at the two charts on this page: The one at top shows the relative moves of the two indices. They have diverged, heading in separate directions, and are now extremely far apart. That valuation difference is reflective of sentiment reaching an extreme. This is somewhat reminiscent of back in October 2002, when the Pimco Total Return Bond Fund surpassed the Vanguard S&P500 fund to become the largest mutual fund (See these Contrary Indicators 2000 – 2003 Bear), and could have some contrary value.

The second chart, at bottom, shows a simple ratio of SPY to GLD. It has now dropped below the March 2009 levels. That might also be constructive for a reversion (ie, bounce in SPY and drop in GLD)

It could be a contrary indicator, as the two indices have moved to extremes. Equity markets are now extremely oversold, while Gold has moved parabolically. Some mean reversion would appropriate around now.

One caveat: The MACD reading of this ratio was far more deeply into the red back at the 2009 market lows. That suggests this reading can get further oversold.

Perhaps this is supportive of (warning: selective perception ahead) an oversold bounce that ultimately rolls over, taking this ratio to greater extremes.

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SPY versus GLD Ratio

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Source: StockCharts

The S&P500 is one of the most widely held indices in the US. And yet, the Market Cap weighted version has a tendency to become dominated by a handful of big caps. This is especially likely towards the end of a major run, when a handful of megacaps dominate the trading action.

One possible solution? Replace, at least in part, the cap weighted index with an equal weight S&P:  SPDR S&P 500 (SPY) with an equal weight ETF such as Rydex S&P 500 Equal Weight (RSP). See the Table below from The Chart Store:

DDD>
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See also: S&P 500 ETFs: Market Weight Vs. Equal Weight

Ari Weinberg is the WSJ Editor for Financial Tools; His perspective can also be seen on occasion at the Journal’s MarketBeat.

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PIMCO made a big splash in the small world of actively-managed exchange-traded funds by filing for an ETF version of its Total Return Fund.

As many have accurately noted, PIMCO’s filing makes a statement to the traditional mutual fund world that Bill Gross, who has $236 billion at his command, isn’t afraid to disclose the daily positions and valuations for thousands of assets.

Gross doesn’t need to fear front runners in his market. He is the market. (ht @retheauditors)

While the PIMCO Total Return ETF will not be a share class of the larger fund – due to Vanguard’s patent on the hub-spoke share class structure – the fund will no doubt see a huge influx of cash to feed Gross’s Total Return replication.

This is where you need to follow the money.

First, it’s important to understand the business of regulated asset managers and mutual funds. Whether you like it or not, all asset managers are asset gatherers. They have to be to stay afloat and get to scale.

Hedge funds, or unregulated asset managers, have created a model in which they are paid partly for the assets they manage but mostly for the returns they generate above a benchmark.

Most regulated funds do not operate this way. The portfolio managers and the asset management companies divide the rents generated by the expense ratio. They make more money by generating returns which attract more assets. (Sure, they reduce the expense ratio as the fund gets bigger, but they’ll gladly take a smaller percentage of a bigger pie. The numbers still work out fine. Just ask Bill Gross.)

But Gross didn’t become a billionaire by simply running his actively managed mutual fund. He followed the money.

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Continues at MarketBeat.

Interesting cover on Barron’s this week:

This is hardly a contrary view — I’ve heard from lots of people saying they are doing the same thing.

As mentioned previously, stick with the small cap funds (DFJ, SCJ, and JSC). The large market cap ETF (EWJ) is not the ideal investment for the bounce back (already underway)

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Source:
Invest in Japan
LESLIE P. NORTON
Barron’s MARCH 19, 2011
http://online.barrons.com/article/SB50001424052970203757604576204523501069008.html

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Chart courtesy of FusionIQ, Bloomberg

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I wanted to follow up a post from last year about EWJ. Back in December ’10, I mentioned 10 Reasons I Am Thinking About Japan. Regardless of your views going forward, if you owned or traded this, you should have had a plan in place, and executed your strategy on it.

I wrote than “Note how many times EWJ got turned back at $11. What would get me really excited was a high volume breakout over $10.90-11.”

EWJ did manage to get over $11, kissing $11.60 — but on rather mediocre volume.  If you were thinking about a big position, the lack of volume should have kept you small (or out altogether).

Regardless, you should have followed your discipline. It could have included such rules as:

• Buy the stock on a high volume breakout over $11 (1st chart here)
• Sell the stock when the uptrend is decisively broken (Red circle)
• Buy the stock when it falls back to support at $9 -9.50 (Green circle)

You will never know when an event(s) such as an Earthquake/Tsunami/Nuclear accident will occur, but you certainly can have a trading plan in place way before hand. Having a plan, and having the discipline to execute that plan is crucial to success as an investor or trader . . . .

NEW YORK (Big Picture Exclusive) – Gargantuan money manager Blackrock reported on Friday that assets in U.S.-listed exchange-traded funds and exchange-traded products have surpassed the $1 trillion milestone for the first time.  Combined assets in U.S.-listed ETFs and ETPs reached $1.027 trillion late Thursday, BlackRock said. That includes 894 ETFs with assets of $887.2 billion from 28 providers on two exchanges and 185 ETPs with assets of $115.5 billion from 20 providers on one exchange, it said.

There is growing speculation surrounding what is believed to be the next breakthrough product in the ETF marketplace:  Single stock tracking ETFs.  Unlike their index-based cousins, these new single stock trackers would, as the name implies, track only a single stock, trade at exactly the same price as the stock to which they’re linked and consequently eliminate the need for single stock ownership.  A top executive with a money management firm who is familiar with his company’s plans to launch such a product and was granted anonymity so he could speak freely, put it this way:  “Think about the prospect of, say, a GE tracking ETF — an investor could capture over 99% of the movement of GE while simultaneously forfeiting any claim to a dividend and paying us up to35 basis points to manage the ETF.  What’s not to like?  We think this product paves the way for the ETF marketplace to collect its next trillion in assets.”