But if I knew how to manage my portfolio safer and smarter than most hedge fund managers, I could realistically grow my wealth.
The impact of inflated market cap on small-cap stocks
The small-caps have been diverging from broad market indices like the S&P 500 (SPY) (IVV), the Dow Jones Industrial Average Index (DIA), and NASDAQ (QQQ) in 2014. An impending correction would negatively impact the stocks.
When Russell Indexes issued its annual fund reconstitution for 2014, it made some key changes that investors might want to think about. Of particular note is the increased market capitalization threshold between the large-cap Russell 1000 (or IWB) and small-cap Russell 2000 (IWM) benchmarks.
The U.S. markets could be headed for a correction. The reasons for this include the increase in volatility (VXX), overvaluation of stocks, rising geopolitical tensions, and a five-year bull run coming to a close.
As leveraged ETFs focus on daily returns and not holding period returns, they’re not the best bet for long-term investors. Instead, they serve well for investors with short-term, typically one-day trading strategies.
Leveraged ETFs make extensive use of financial derivatives to amplify returns. Derivatives are inherently riskier than direct investment due to the leverage they offer. In addition to the counterparty risk that all ETFs face, leveraged funds are prone to derivative counterparty risks.
Leveraged ETFs seek to provide a certain multiple (generally 2x or 3x) of daily returns on the underlying index. The daily movements in the underlying index and subsequent changes in ETF exposure may mean the ETF manager needs to rebalance the portfolio daily.
If SPY rises 5% each on two consecutive days, SSO will rise 10% each day due to the 2x leverage achieved using derivative products and external borrowings. While the compounding works even for SPY, it’s magnified in SSO due to the 2x multiplier effect.
While traditional ETFs seek to mirror the performance of an underlying index, leveraged ETFs seek to deliver multiples of the daily returns of the benchmark index that they track. For example, the ProShares Ultra S&P500 (SSO) seeks to achieve twice the daily returns of the S&P 500, before fees and expenses.
While actively managed ETFs are more expensive than passively managed ETFs, they tend to be less expensive than mutual funds due to structural differences between these two products. In the case of mutual funds, the investor interacts with the company while buying and selling mutual fund units.
Traditionally, ETFs have been designed to track indices and so were managed passively. However, in 2008, the Securities Exchange Commission (or SEC) allowed ETFs to operate as actively managed funds. Actively managed ETFs don’t track any particular index.
The SPDR Financial Select Sector Fund (XLF) is an example of a sector ETF. XLF invests in banking, financial services, and insurance companies, with top holdings in Wells Fargo & Co. (WFC), Berkshire Hathaway, and JPMorgan Chase.
ETFs are an investment avenue that trades on exchanges and generally seeks to track the performance of an underlying exchange. For example, the SPDR S&P 500 (SPY) is an ETF listed on the NYSE Arca exchange that seeks to track the performance of the S&P 500 index.
Yields on the ten-year Spanish government bonds fell to 2.579% on June 9, 2014. This was lower than the 2.615% yield offered on the U.S. ten-year Treasury note on the same day. This was the first time, since the Eurozone tumbled into its debt crisis, that Spain’s yields went below the U.S. Treasury yields.
Spain’s potential rating upgrade rests largely on its debt ratio being brought to a declining trend within the forecast period, which ends in 2015. According to an export performance Organization of Economic Co-operation and Development (or OECD) indicator, Spain has gained market share for the past 20 years.
On Wednesday, July 9, Greece announced another bonds issue—a second since its international bailout four years ago. The move marks the country’s efforts to recover from a crippling debt crisis that left it on the brink of a Eurozone exit.
The strong export of goods and services enabled Greece to clock a high current account surplus of 2% last year. Other data including retail sales, car sales, industrial output, and construction and manufacturing activity indicates that the economy has probably bottomed out. The economy is expected to move out of recession this year.
Since the global economic recession, a combination of structural weaknesses in the Greek economy—and a decade of overly high structural deficits and debt-to-gross domestic product (or GDP) levels on public accounts—have raised investor concerns regarding Greece’s ability to meet its debt obligations.
Considering the improving and strengthening economic situation in Ireland, its Finance Minister Michael Noonan has said taxpayers could save up to $500 million per year if the state was able to pay-off a share of the International Monetary Fund (or IMF) portion of the $90 billion bailout.
The strength in Irish growth performance was confirmed in 1Q14 when the gross domestic product (or GDP) increased by 2.7% quarter-over-quarter. Although the growth was primarily driven by increasing net exports, domestic demand also made a positive contribution. Both private consumption and gross fixed capital formation increased in year-over-year (or YoY) terms.
The news of Italy entering into a recession for the third time in six years caused Italian stocks to fall more than 2%. Italy has the third-largest bond market in the world. It saw the risk premium on its ten-year government bonds widen by 12 basis points, over those of Germany, from the close on August 5.