Indexology^® Blog

The S&P GSCI has lost 13.6% month-to-date through July 27, 2015, bringing its level to the lowest since February 25, 2002. It has now exceeded the bottom of the 2008 global financial crisis. Please see the chart below:

Thus far, July 2015 is the seventh worst performing month in the history of the S&P GSCI that goes back to January 1970. It is one of the worst months in more than 45 years or 547 months. Please see the table below for the six months that fared worse:

Every single one of the 24 commodities is negative for the month except lean hogs, which is just barely positive by 18 basis points BUT only when taking into account the positive roll yield; otherwise that is negative too, by 14.5%. Throughout the history of the index, 23 commodities have been negative together in a month only once in September 2008 and all 24 were negative together only once in the following month of October 2008.  The single performer in September 2008 was gold, clearly different from today.

If the index were to fall back to the bottom before 2002, that happened on December 21, 1998, it has another 32% to fall. As the Wall Street Journal points out in this article, global growth is a major concern.

My last post summarized some of our notes from the recent S&P DJI ETF Masterclass conference in Toronto, on the topic “ETFs as a Catalyst for Canadian Advisory Growth”. We discussed some disruptive innovations that are changing the fabric of wealth management, and how some of Canada’s leading wealth management thought leaders propose to address them. This post will continue on the same theme, with a discussion of two more disruptive challenges on the horizon.

1. Relatively new robo-advisor and hybrid robo-human platforms are rapidly gaining traction in the U.S., and several smart Canadian offerings are popping up north of the border. The disciplined, diversified investment portfolios offered by these platforms, which automatically rebalance and alter portfolio composition in response to clients’ life phases, are already causing some clients to question the role of their traditional advisor. Someone mentioned the existence of ETFs that provide exposure to a globally diversified portfolio with zero management fee.  At the same time, it was widely recognized by panelists and thoughtful advisors in the audience that robo-solutions lack some important ‘soft’ qualities, which represent substantial benefits to clients. Of course, advisors can help clients develop comprehensive estate and financial plans, and perhaps better address client objectives that do not map directly to the ‘mean-variance plane’. In addition, advisors can help keep clients focused on the long-term during periods when clients are tempted to leap to a ‘faster horse’ during bull markets, or abandon their plan altogether at the depths of bear markets. Mark Yamada, President and Chief Executive Officer of PUR Investing, felt strongly that advisors must adapt to survive. In particular, advisors should think hard about their value proposition in an environment where clients are reluctant to pay fees for strategic asset allocation, manager selection, or rebalancing. He suggested advisors must decide whether they can add value with more dynamic asset allocation approaches, or else differentiate with highly personalized financial and estate planning services.

2. Michael Jones, Chief Investment Officer for RiverFront Investment Group in Richmond Virginia, closed the event with a compelling presentation about the growing importance of external ETF solutions for advisors who want to adapt to a rapidly changing wealth management landscape. The Registered Investment Advisor community in the U.S., analogous to Canadian independent Portfolio Managers, have embraced ETF mandates with a voracious appetite over the past five years. This segment has been one of the fastest growing channels in asset management, and several managed ETF mandates boast AUM in the tens of billions. As investors wake up to an increasingly complex, global risk environment with few easy solutions, we don’t expect this trend to reverse any time soon.

At root, the S&P DJI event offered advisors a clear mandate: success in the future must be founded on a model that puts clients first and adds services. Advisors who can learn to use all the new tools at their disposal to offer differentiated value have the opportunity to take a much larger share of the pie.

The yield-to-worst of the S&P/BGCantor Current 10 Year U.S. Treasury Index closed out the week of July 17, 2015, at 2.35%, which was 6 bps lower than the previous Friday’s 2.40% close. The 2.40% close on Friday, July 10, 2015, came in after a quick two-day increase, as the yield-to-worst jumped 10 bps on Thursday, July 9, 2015, and another 10 bps on that Friday. The jump up in yield was due the unwinding of safety trades after the Chinese stock market recouped losses, along with optimism about a Greek bailout.

Friday, July 17, 2015, saw prices increase, pushing yields lower. Slow growth in inflation, as evidenced by the June CPI number, which was 0.3% versus 0.4% in May, moved yields down. The Federal Reserve’s continued data-dependent approach to a possible rate increase has investors questioning the timing of any action, given that a rate increase is dependent on the economy meeting the Fed’s economic growth projections. The S&P/BGCantor Current 10 Year U.S. Treasury Index has returned 0.19% MTD and has lost 0.09% YTD as of Friday, July 17, 2015.

As of the same date, the S&P 500^® Bond Index has been close to flat for the month, having returned -0.01% and -0.65% YTD. The index was launched on July 8, 2015, at which point it returned 0.73% MTD. The dramatic selling in bonds that occurred on July 9-10, 2015, took the return down to as low as -0.49% MTD before the index worked its way back up to be almost flat to close the week.

The investment-grade segment of the S&P 500 Bond Index (the S&P 500 Investment Grade Corporate Bond Index) experienced the same dip and recovery, as its returns went from 0.79% MTD on July 8, 2015, to -0.55% MTD on July 13, 2015. The index then recovered to -0.04% MTD on July 17, 2015, to close the week. Year-to-date, this index has returned -0.86% as of July 17, 2015.

The S&P 500 High Yield Corporate Bond Index, a subindex of the S&P 500 Bond Index, has 440 issues and a yield-to-worst of 4.98% as of July 17, 2015. The S&P 500 High Yield Corporate Bond Index has returned 0.28% MTD and 1.64% YTD as of the same date. Although it has not returned 3.41% YTD like the much broader S&P U.S. High Yield Corporate Bond Index, the S&P 500 High Yield Corporate Bond Index is beating the broader index’s 0.08% MTD as of July 17, 2015.

Source: S&P Dow Jones Indices LLC. Data as of July 17, 2015. Past performance is no guarantee of future results. Chart is provided for illustrative purposes.

Despite posting second quarter 44% earnings growth, Apple declined 4.3% on Wednesday July 22. According to S&P Capital IQ, 33% sales growth was more modest than expected and the company’s third-quarter revenue guidance was below Capital IQ consensus. Further, iPhone and iPad shipments were weaker than expected. As the largest company in the U.S., with a market cap of approximately $720 billion, Apple was a recent top-10 holding in 98 largely index based ETFs.

At the end of June 2015, Apple was a 4% weighting in the S&P 500 Index, nearly equal the size of Microsoft and Exxon Mobil, the two next largest constituents.

But Apple’s weighting was nearly five times as large in the market-cap weighted S&P 500 Information Technology Index and other leading technology indices that are tracked by some ETFs. Not surprisingly, those indices were dragged lower by Apple on Wednesday.

For investors that want to track more diversified technology index, an equal-weighted approach is worthy of consideration. The S&P 500 Equal Weight Technology Index is one of them. It consists of all the technology stocks in the S&P 500 in largely equal proportion regardless of market cap and rebalances quarterly. This means that Electronic Arts was recently a larger position at 1.8% than Apple 1.6%, despite having a market cap of just $23 billion or less than 5% of Apple.

Of course equal weighting approaches work both ways, and investors in such ETFs can miss out on gains achieved by some of the largest companies. For example, the two Google share classes (GOOG) and (GOOG) comprised 10% of the S&P 500 Information Technology sector.

Google jumped sharply last week after reporting stronger the expected results. Second quarter non-GAAP EPS was $6.99, up 15% from a year earlier and $0.31 above the S&P Capital IQ estimate. In contrast, Google is a similarly small 2% weighting in the S&P 500 Equal Weight Technology index.

A version of this article originally was published on MarketScope Advisor.

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

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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 Chinese Ministry of Finance (MoF) recently rolled out another muni replacement program of legacy local government debt, as the previous muni replacement quota of RMB 1 trillion only addresses about half of the local government debt that is due to expire in 2015. With the robust expansion plan, it is expected that the total supply of muni bonds will reach over RMB 2.77 trillion this year¹.

In fact, since Jiangsu’s debut issuance on May 18, 2015, the municipal bond market that is tracked by the S&P China Provincial Bond Index has expanded rapidly. In the June 2015 index rebalancing, the total number of muni bonds surged from 47 to 138, while the total par amount increased four times to CNY 847 billion (see Exhibit 1).

According to the S&P China Provincial Bond Index, the Jiangsu Province has the highest outstanding debt, at CNY 129 trillion, and it represents 15% of the index exposure, followed by the Zhejiang and Guangdong provinces (see Exhibit 2 for the provincial breakdown).

Of note, the new Chinese muni bonds were priced tight at issuance and they continue to trade at tight credit spreads above the sovereign bond yields. As of July 21, 2015, the yield-to-worst of the S&P China Provincial Bond Index was 3.49% (with a modified duration of 5.19), whereas the yield-to-worst of the S&P China Sovereign Bond Index was 3.15% (with a modified duration of 5.60).

Exhibit 1: Market Value tracked by the S&P China Provincial Bond Index

Exhibit 2: Total Par Amount by Provincial Breakdown

¹ Source: HBSC Global Research