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Drivers of Technology ETFs

Active Funds Win Battles But Lose Wars

Last Week’s Safety Trade Is Off, as Greece Charts a New Direction for Bonds

Upbeat Housing Reports

Uncertainty In Greece Causing Real Concern In European Government Bond Markets

Drivers of Technology ETFs

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Todd Rosenbluth

Director of ETF and Mutual Fund Research

S&P Capital IQ Equity Research

While S&P Capital IQ consensus forecasts for second quarter 2015 EPS has declined sharply since the beginning of 2015, we think that the information technology sector should be one of the bright spots. Meanwhile, the sector is trading at a discounted P/E multiple. We believe investors can gain exposure to a number of favorable trends in the broader sector through diversified technology focused ETFs.

Earnings forecasts have been falling for all S&P 500 index sectors. On January 2, analysts expected second quarter 2015 S&P 500 earnings would increase 4.2% from the prior year. However, driven in part by weakness in the energy and consumer staples sectors, the S&P 500 forecast is now for a 4.2% decrease as of June 23. While forecasts for the tech sector have fallen as well, analysts now project 2.1% growth. For all of 2015, consensus forecasts call for 4.4% growth, ahead of the S&P 500’s 0.3% gain. However, the S&P 500 Tech sector trades at a 2015 P/E of 16.8X, below that of the S&P 500’s 17.7 multiple.

Angelo Zino, an equity analyst at S&P Capital IQ, believes there are number of catalysts that should support sector growth. Within hardware and storage, he expects double-digit smartphone growth in 2015 and 2016 to be augmented by tripling in wearables, albeit off a smaller base. He adds that data centers usage for cloud adoption is providing robust growth prospects to offset traditional storage.

Meanwhile, Zino expects that semiconductor fundamentals will experience a stronger second half of 2015 as PC inventory builds and Chinese demand for smartphones and mobile infrastructure increases. In addition, while there has been recent merger announcements, but he thinks there will be further consolidation.

During the first five months of 2015, investors put approximately $300 million into technology sector ETFs, in contrast to other sectors such as financials and utilities that experienced outflows.

S&P Capital IQ has rankings and research on more than 800 equity ETFs based on a review of the underlying holdings and key cost factors.

Please follow me @ToddSPCAPIQ to keep up with the latest ETF Trends.

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S&P Capital IQ operates independently from S&P Dow Jones Indices.
The views and opinions of any contributor not an employee of S&P Dow Jones Indices are his/her own and do not necessarily represent the views or opinions of S&P Dow Jones Indices or any of its affiliates.  Information from third party contributors is presented as provided and has not been edited.  S&P Dow Jones Indices LLC and its affiliates make no representations or warranties of any kind, express or implied, regarding the completeness, accuracy, reliability, suitability or availability of such information, including any products and services described herein, for any purpose. 

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Active Funds Win Battles But Lose Wars

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Rick Ferri, CFA®

Author, Columnist and Managing Partner

Portfolio Solutions, LLC®

There have always been select actively managed funds that beat the cap-weighted indices market, and there always will be. But trying to find these funds before they outperform is exceedingly difficult, especially across multiple asset classes and styles. In addition, the outperformers may not pay well enough given the risk.  Active managers may claim victory in certain categories for certain periods of time, but poor performance in other categories drags down overall portfolio performance. These combined hurdles should make an all-index-fund portfolio particularly appealing to many investors.

Hurdle #1: Predicting Individual Active Winners
The success of index investing over actively managed funds in individual asset classes and styles has been widely documented. The S&P Dow Jones SPIVA® U.S. Scorecard is an extensive report that’s published semiannually at mid-year and year-end. SPIVA divides mutual fund return data into category tables covering different asset classes, styles, and time periods. There’s also a measure of survivorship bias and style drift for every category over each period. This accounts for funds that are no longer in existence or have had a change in investment style.

The SPIVA® U.S. Scorecard Year-End 2014 has data going back 10 years. Table 1 is a sampling of this data from a few popular equity asset classes and styles. The data represents the percentage of active funds that underperformed comparable indexes in each category for 5- and 10-year periods ended in 2014.

Table 1: Percentage of active funds that underperformed their comparison index

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Hurdle #2: Building a Portfolio with Active Funds
Investors typically use multiple funds in their portfolios spanning several asset classes and styles. Although the underperformance of active funds in each individual category is well understood in the passive versus active debate, less well known is how portfolios of index funds have performed against portfolios of similarly structured active funds. Comparing these two types of portfolios is a relatively new area of research.

A Case for Index Fund Portfolios,  a White Paper by this author and Alex Benke, CFP®, of Betterment looked into this question. We created portfolios using only index funds and compared them to portfolios using only actively managed funds from a database free from survivorship bias.

As expected, index fund portfolios outperformed comparable active fund portfolios because index funds outperformed the average active fund in each investment category. Interestingly, we also found an all-index-fund portfolio went further than expected. It had a greater probability for beating portfolios of active funds than we would have expected from using a simple weighted average of the active versus passive performance in each category.

Why were portfolios of index funds beating more active fund portfolios than expected?

Hurdle #3: Good Outperformance, Greater Underperformance
The reason all-index-fund portfolios outperformed active fund portfolios in greater numbers than expected comes from a second dimension of active fund underperformance. It’s not only the percentage of funds that underperform that matters, it’s the amount by which they underperform. Figure 1 is the magnitude of over- and underperformance of the median active fund in the primary equity asset classes in Table 1.

Figure 1: Magnitude of Active Funds’ Over- and Underperformance vs. Their Index

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As shown in Table 1, the probability of an active fund’s outperformance was low in every investment category. To make matters worse, the funds that underperformed did so by a magnitude significantly greater than the alpha from funds that outperformed. The median over- and underperforming results are shown in Figure 1.

This is a double-whammy for active fund investors. It’s difficult to find active funds that will outperform, and when these funds do outperform, there’s not enough relative alpha to adequately compensate investors for taking active manager risk.

This risk is multiplied in an active fund portfolio. It may only take one or two underperforming active funds to drive the entire active fund portfolio under, because the magnitude of underperformance in the losing funds is expected to be higher than the magnitude of outperformance by the winning funds.

Too Many Hurdles to Win the War
It’s widely known that, over time, index investing has typically outperformed actively managed funds across every investment category. What’s less known is the benefit achieved from using a diversified portfolio of only index funds over a comparable portfolio of actively managed funds. The median alpha from the winning funds is low relative to the median underperformance from the losing funds, and this makes it tough to beat an all-index-fund portfolio, all the time.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Last Week’s Safety Trade Is Off, as Greece Charts a New Direction for Bonds

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Kevin Horan

Former Director, Fixed Income Indices

S&P Dow Jones Indices

The yield-to-worst of the S&P/BGCantor Current 10 Year U.S. Treasury Index ended the week on Friday, June 19, 2015, 12 bps lower, at 2.26%.  Concerns over Greek debt financing with the European Union led investors to the safety of U.S. Treasuries.  Up to that Friday, the index had returned -1.11% MTD, recovering a bit after losing as much as 3.13% MTD as of June 10, 2015.   Year-to-date, the index has returned 0.48%.  The U.S. 10-year Treasury bond yield started this week higher (on June 22, 2015) at 2.3%, as a new proposal by Greek Prime Minister Alexis Tsipras has put the negotiations back on track and given optimism to an eventual settlement before the June 30, 2015, deadline.

The pickup in Treasuries last week also helped corporate bonds, as the yield-to-worst of the S&P U.S. Investment Grade Corporate Bond Index moved lower last week by 6 bps, half of the movement by Treasuries.  The pace of issuance has increased since May, as issuance continued throughout the week, with notable names such as Baxalta (USD 5 billion), Cardinal Health (USD 1.5 billion), Energy Transfer (USD 3 billion), IBRD (USD 3.5 billion), SoCal Gas (USD 600 million), and Union Pacific (USD 700 million) coming to market.  The index recouped its losses throughout the week and closed June 19, 2015, returning -1.2% MTD and -0.11% YTD.

Like the investment-grade index, the yield-to-worst of the S&P U.S. High Yield Corporate Bond Index moved lower by 5 bps to 6.41% for the week, as of June 19, 2015.  The slight improvement in performance did not curb the outflows from high-yield funds that continued, as the third week of June outpaced the prior two.  The past two weeks had seen a total of USD 5.5 billion of outflow.  The index was returning -0.92% MTD and 3.85% YTD this past Friday.

Following in the shadow of its credit cousin, the S&P/LSTA U.S. Leveraged Loan 100 Index had lost 0.63% MTD, while returning 2.0% YTD as of June 21, 2015.  Continued volatility and fund outflow in high-yield bonds and modest outflows from loan funds have contributed to the index’s current weakness.  The yield-to-maturity of the index was 4.96% on the same date, up 15 basis points from the beginning of the month’s 4.81%.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Upbeat Housing Reports

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David Blitzer

Former Managing Director and Chairman of the Index Committee

S&P Dow Jones Indices

Two recent data points – existing home sales and mortgage debt outstanding – point to continued strength in the housing recovery.

May total existing home sales, including single family homes, town houses and condominiums, were 5.35 million, up 5.1% and the highest figure since November 2009. Sales of single family homes were 4.73 million, 5.6% higher than April and 9.7% above a year earlier. Inventories crept up slight and months supply was 5.1.  While existing homes continue recent gains, sales of new homes picked up in April. Together these figures point to further gains in the summer months. New Home sales for May will be reported on tomorrow, June 23rd.  Pending home sales will be reported on June 29th, next Monday. The first chart shows sales of existing single family homes.

Prices have also been advancing. The S&P/Case-Shiller National Home Price index was up 4.1% in the 12 months to March, extending a pattern of gains 35 consecutive months. The next S&P/Case-Shiller report is due on Tuesday, June 30th. Median sales prices reported by the National Association of Realtors show gains as well.

Growth in mortgage debt outstanding has been on a long roller coaster ride, peaking in 2003 and then beginning a long slide into negative territory in 2006. In the last two quarters, growth has barley turned positive.  The peak level of outstanding mortgage debt was $10.69 trillion in the first quarter of 2008; the low point since then was $9.37 trillion in last year’s second quarter. Neither mortgage debt nor national home prices are about to surpass the bubble peaks, but they are headed in the right direction.  The second chart shows year-over-year growth in residential mortgages.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Uncertainty In Greece Causing Real Concern In European Government Bond Markets

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Heather Mcardle

Director, Fixed Income Indices

S&P Dow Jones Indices

Uncertainty is a four letter word in bond markets and can lead to significant volatility.  The Greek debt dilemma is becoming more and more dire each day.  European government bond markets are reacting with some significant swings.  Germany and the IMF offered Greece a deal last week that would require strict adherence to austerity reforms, only to be harshly criticized by Greek PM Tsipras on Tuesday.  Last Wednesday, Standard & Poor’s Ratings Agency cut Greece’s credit rating one notch to CCC, and indicated a default could happen in the next year if they cannot come to an agreement with their creditors.

The European government bond markets are reacting to the possibility that an agreement may not be made and are choosing to play it safe.   The riskier countries like Spain, Italy and Portugal took a hit on Monday. While the impact of a Greek exit from the Eurozone may be less than it would have been back in 2012, the fear of contagion is still very real. The S&P Spain Sovereign Bond Index yield saw an 11 bps move upward from last week’s close, the S&P Portugal Sovereign Bond Index yield rose 13 bps, and the S&P Italy Sovereign Bond Index yield increased by 13bps.  In contrary, the S&P Germany Sovereign Bond Index tightened 3bps during this time period, along with the flight to safety.  (See table below.)

Greek sovereign debt took the biggest hit and the S&P Greek Sovereign Bond Index widened 148 bps as of Tuesday’s close.  While June 30th is a deadline for Greece’s ultimate fate, European finance ministers are meeting this Thursday to try to resolve the crisis.  For now, the only thing that remains constant in this crisis is that four letter word.

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The posts on this blog are opinions, not advice. Please read our Disclaimers.