I am frequently asked by clients about the Exchange Traded Funds (ETF’s) we use in our portfolio construction. In particular, some clients ask why we hold RSP for broad market exposure instead of the more-well-known SPY. I’d like to explain the difference between the two and why we would use one over the other.
SPY is the first and most well know ETF in U.S. markets. Commonly known as the Spider (SPDR) it was introduced in January, 1993. It corresponds to price movement in the S&P 500. As such, it is a cap-weighted index, meaning that the larger a company is the more weighting or exposure the company has in the index or ETF.
RSP, on the other hand, mirrors the same S&P 500 index but for one major difference; RSP is an equal-dollar-weighted ETF. This means that regardless of the size of a company, each one has an equal weighting in the ETF. In other words: one company, one vote.
When comparing these two ETF’s we look at their relative strength. How do their prices move in relation to each other?
Going back to 1994, if you were to buy and hold SPY you would have a gain of 208.58% not including dividends. If you had bought RSP, your gain would have been 313.85% without dividends. What’s more interesting is, if you followed the relative strength indicators for each of these ETF’s going back 18 years, and made the changes that the indicator recommended, your return would have been over 400%.
As we all know, past performance is no guarantee for future success. However, I feel it is important to pay attention to what the market is telling us and make prudent investment decisions. Following the relative strength indicators over time can help us do just that.
Source: Dorsey Wright & Associates, Inc.
Showing posts with label money management. Show all posts
Showing posts with label money management. Show all posts
Tuesday, October 23, 2012
Thursday, October 18, 2012
Markets and Economy Weekly Update
Alcoa kicked off earnings season last week by reporting a net loss of $143 million (13 cents a share) loss in the third quarter. The results included the cost of settling a four-year legal battle over bribery allegations but were still slightly better than Wall Street expected. This compares with a 15 cent a share profit a year earlier. Alcoa also cut its forecast for global aluminum demand growth from 7% to 6%. The market didn’t take kindly to the profit warning and the Dow shed 128 points on Wednesday.
Two of the nation’s largest banks, Wells Fargo and J.P. Morgan reported third quarter earnings last week. The improved results were most due to a rebound in the housing sector. Both banks said the housing market had “turned the corner”. Earnings are still under pressure from historically low interest rates.
The International Monetary Fund (IMF) World Economic Outlook report stated “Risks are alarmingly high,” for a slowdown in global growth. The IMF revised their expectations downward 0.2% to 3.3% this year and 0.3% to 3.6% in 2013. The stagnation of global growth is noted by its 5.1% advancement in 2010 and 3.8% in 2011.
Due to the reduction in global growth, Europe continued to be a drag on the domestic markets as France, Spain and other nations in the EU won’t hit budget deficit targets agreed to with EU authorities.
S&P Ratings Services downgraded Spain again in light that country’s deteriorating economy. This put the rating in line with Moody’s downgrade a few months ago.
The trade deficit widened by $2 billion in August to $44.2 billion. The drop was broad based and due to weakening demand from Europe.
The Producer Price Index (PPI) came in higher than expected with a 1.1% jump. Most of the increase came from the energy sector. The widely followed “core” PPI came in unchanged month over. This suggests that suppliers and manufacturers have not been able to pass on cost increases to consumers.
Applications for jobless benefits dropped 30,000 to 339,000 for the week ending Oct. 6th. That was the fewest since February, 2008 and shows the economy is still improving, although at a snail’s pace.
Two of the nation’s largest banks, Wells Fargo and J.P. Morgan reported third quarter earnings last week. The improved results were most due to a rebound in the housing sector. Both banks said the housing market had “turned the corner”. Earnings are still under pressure from historically low interest rates.
The International Monetary Fund (IMF) World Economic Outlook report stated “Risks are alarmingly high,” for a slowdown in global growth. The IMF revised their expectations downward 0.2% to 3.3% this year and 0.3% to 3.6% in 2013. The stagnation of global growth is noted by its 5.1% advancement in 2010 and 3.8% in 2011.
Due to the reduction in global growth, Europe continued to be a drag on the domestic markets as France, Spain and other nations in the EU won’t hit budget deficit targets agreed to with EU authorities.
S&P Ratings Services downgraded Spain again in light that country’s deteriorating economy. This put the rating in line with Moody’s downgrade a few months ago.
The trade deficit widened by $2 billion in August to $44.2 billion. The drop was broad based and due to weakening demand from Europe.
The Producer Price Index (PPI) came in higher than expected with a 1.1% jump. Most of the increase came from the energy sector. The widely followed “core” PPI came in unchanged month over. This suggests that suppliers and manufacturers have not been able to pass on cost increases to consumers.
Applications for jobless benefits dropped 30,000 to 339,000 for the week ending Oct. 6th. That was the fewest since February, 2008 and shows the economy is still improving, although at a snail’s pace.
Thursday, September 13, 2012
The Tax Man Cometh
The following is a synopsis of a recent Wall Street Journal editorial written in part by Dr. Arthur Laffer. In addition to being president of Laffer Associates, he is a founding member of the Congressional Policy Advisory Board and has worked with the 105th, 106th and 107th U. S. Congress. He was a member of President Reagan’s Economic Advisory Board for both terms and is best known for his belief in supply side economics to foster growth.
Among the numerous tax increases due to hit hard working Americans is the expiration of the temporary 2% payroll tax cut. This reduction was enacted last year and renewed again in January. The reduction applies to the first $110,100 of income and is set to expire on December 31. For a person making $50,000 a year, this results in $83 more a month in take home pay. Interestingly enough, this is the least painful of the many increases we will see beginning in 2013 if congress fails to act.
First on the slate is a huge increase in the estate tax. The current $5 million exemption goes all the way down to $1 million while the top estate tax bracket increases from 35% to 55%. Business owners and people with illiquid assets will be hit the hardest.
The top federal rate on personal income will increase to 39.6% from 35% with an additional 0.9% tacked on the payroll tax to help fund Medicare.
The highest tax rate on dividends will jump to 43.4% from the current maximum of 15%. Capital gains tax rate will go to 23.8% from 15%.
These are a result of the expiration of the Bush tax cuts and new taxes imposed by ObamaCare legislation.
Dr. Laffer points out that these increases will not only generate almost $500 billion a year in newly collected taxes, but will have a drastic affect on an already fragile recovery. He believes the drop in GDP we’ve been seeing for the last couple of years is due to businesses and consumers bracing for the storm. GDP was 4% at the end of 2010 and came in at an annualized rate of 1.5% in the last quarter.
In the end, he states that “…we cannot have a prosperous economy when government is overspending, raising tax rates, printing too much money, over-regulating and restricting the free flow of goods and services across national boundaries.”
Among the numerous tax increases due to hit hard working Americans is the expiration of the temporary 2% payroll tax cut. This reduction was enacted last year and renewed again in January. The reduction applies to the first $110,100 of income and is set to expire on December 31. For a person making $50,000 a year, this results in $83 more a month in take home pay. Interestingly enough, this is the least painful of the many increases we will see beginning in 2013 if congress fails to act.
First on the slate is a huge increase in the estate tax. The current $5 million exemption goes all the way down to $1 million while the top estate tax bracket increases from 35% to 55%. Business owners and people with illiquid assets will be hit the hardest.
The top federal rate on personal income will increase to 39.6% from 35% with an additional 0.9% tacked on the payroll tax to help fund Medicare.
The highest tax rate on dividends will jump to 43.4% from the current maximum of 15%. Capital gains tax rate will go to 23.8% from 15%.
These are a result of the expiration of the Bush tax cuts and new taxes imposed by ObamaCare legislation.
Dr. Laffer points out that these increases will not only generate almost $500 billion a year in newly collected taxes, but will have a drastic affect on an already fragile recovery. He believes the drop in GDP we’ve been seeing for the last couple of years is due to businesses and consumers bracing for the storm. GDP was 4% at the end of 2010 and came in at an annualized rate of 1.5% in the last quarter.
In the end, he states that “…we cannot have a prosperous economy when government is overspending, raising tax rates, printing too much money, over-regulating and restricting the free flow of goods and services across national boundaries.”
The Money Market Fund Controversy
Almost everyone knows of money markets; those readily available low-yielding funds that come with all brokerage and advisory accounts. However, not many investors really know how money market funds work.
Prior to the financial crisis of 2008, no one paid much attention to money market funds. Then, with the collapse of Lehman Brothers, a handful of investors learned a painful lesson.
A money market fund is a pool of investor money that is used to purchase short-term government and corporate debt. Historically, it has always kept its Net Asset Value (NAV) at $1.00; even though the debt in the portfolio fluctuates, the issuing firm assumes the short-term debt will mature at par or the typical $1,000 face value. So, no one loses, right? Well, not so fast.
The Reserve Primary Fund, a money market fund with decades of experience in managing short-term debt instruments had a position so large in Lehman Brothers debt (1.2% of its $63 billion size) that it officially “broke the buck”; a term meaning that the net asset value fell below the stated $1.00 a share.
While the fund only lost a few cents a share (it posted a value of 0.97) it was enough to cause a run on money market funds. In September of 2008 $310 billion or about 15% of all money market funds saw redemptions. To help stave off a continued run on funds, the government stepped in to shore up investor confidence by guaranteeing the assets of the remaining money market funds that remained and in 2010 the SEC imposed stringent new rules that restricted the kind of investments that money markets could hold as well as the amount of cash they need to have on hand to meet investor redemptions.
Recently, SEC chairwoman Mary Schapiro has been pushing for even more rules and regulations on money market funds. One of her main components was requiring investors to only receive a portion of their money in the event of someone cashing out completely. The balance would be paid in 30 days. Schapiro offered a second option in that the sacred $1.00 share value would have to fluctuate to show the value of the holdings in the portfolio. Neither one was well received by the industry. It obviously wasn’t well received by her own 5-member commission panel. They voted down her recommendations and stressed that more needs to be done to understand the possible ramifications of any significant changes.
Prior to the financial crisis of 2008, no one paid much attention to money market funds. Then, with the collapse of Lehman Brothers, a handful of investors learned a painful lesson.
A money market fund is a pool of investor money that is used to purchase short-term government and corporate debt. Historically, it has always kept its Net Asset Value (NAV) at $1.00; even though the debt in the portfolio fluctuates, the issuing firm assumes the short-term debt will mature at par or the typical $1,000 face value. So, no one loses, right? Well, not so fast.
The Reserve Primary Fund, a money market fund with decades of experience in managing short-term debt instruments had a position so large in Lehman Brothers debt (1.2% of its $63 billion size) that it officially “broke the buck”; a term meaning that the net asset value fell below the stated $1.00 a share.
While the fund only lost a few cents a share (it posted a value of 0.97) it was enough to cause a run on money market funds. In September of 2008 $310 billion or about 15% of all money market funds saw redemptions. To help stave off a continued run on funds, the government stepped in to shore up investor confidence by guaranteeing the assets of the remaining money market funds that remained and in 2010 the SEC imposed stringent new rules that restricted the kind of investments that money markets could hold as well as the amount of cash they need to have on hand to meet investor redemptions.
Recently, SEC chairwoman Mary Schapiro has been pushing for even more rules and regulations on money market funds. One of her main components was requiring investors to only receive a portion of their money in the event of someone cashing out completely. The balance would be paid in 30 days. Schapiro offered a second option in that the sacred $1.00 share value would have to fluctuate to show the value of the holdings in the portfolio. Neither one was well received by the industry. It obviously wasn’t well received by her own 5-member commission panel. They voted down her recommendations and stressed that more needs to be done to understand the possible ramifications of any significant changes.
Wednesday, September 1, 2010
The Markets
The Fed made some pretty bold statements last week. Speaking to world monetary policymakers at a meeting in Jackson Hole, Wyoming, Ben Bernanke told the group that "policy options are available to provide additional stimulus." Not only that, the Fed Chairman listed what those options might entail; more purchases of long term debt and possibly lowering the interest rate banks are paid for their reserves. Both of these options would have the effect of lowering even more the current historically low interest rates.
According to the Wall Street Journal, most analysts rule out the possibility of the U.S. slipping into another recession. Nonetheless, the fed has made it abundantly clear that it has no plans to raise interest rates for the foreseeable future. The hope is that by keeping the rate to borrow so low, companies will be more likely to put their capital to work by hiring and/or investing in capital improvements.
All of this came on the heels of second quarter GDP being revised downward from 2.4% to 1.6%. More signs that the economy is slowing down.
The markets had one of its best days recently on the news from Jackson Hole. Whether this will be the catalyst the market has been looking for to find higher ground or the sideways pattern we've seen for the last few months will continue remains to be seen.
According to the Wall Street Journal, most analysts rule out the possibility of the U.S. slipping into another recession. Nonetheless, the fed has made it abundantly clear that it has no plans to raise interest rates for the foreseeable future. The hope is that by keeping the rate to borrow so low, companies will be more likely to put their capital to work by hiring and/or investing in capital improvements.
All of this came on the heels of second quarter GDP being revised downward from 2.4% to 1.6%. More signs that the economy is slowing down.
The markets had one of its best days recently on the news from Jackson Hole. Whether this will be the catalyst the market has been looking for to find higher ground or the sideways pattern we've seen for the last few months will continue remains to be seen.
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