Category: ETF research and analysis

Insights from commission-free ETF research & analysis can be very helpful for ETF investors.  So, we hope you find these evidence-based insights educational.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.

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Value or Growth ETFs?

Investors continue to debate the benefits of value versus growth investing. The recent rotation into value stocks has only heightened this discussion. But, what is the difference between these two investment approaches when using ETFs?

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How a firm uses its earnings

While there can be many ways to categorize an ETF as a “growth”, one very simple approach is to look at what the firms in the ETF do with their earnings. Businesses like banks, utilities, and well-established firms like Disney or Johnson & Johnson generally pay a dividend. Back in the days of high-priced commissions to buy and sell an ETF, these dividends were very convenient, because they provided cash to investors without requiring them to sell a portion of their shares. Of course, with most brokers providing $0 commission trades, this aspect of dividends is less compelling. Perhaps more importantly though, firms issue dividends when they prefer to return some earnings to the shareholder, rather than reinvesting it into the business.

Growth companies and dividends

Alternatively, most growth companies see that their earnings could be better used if reinvested in the firm. Reinvestment can take the form of a new production facility, research & development, or others. Technology stocks are most often referred to as growth stocks due to their often relentless pursuit of innovation. Notable examples of growth companies are Apple Inc., Microsoft, and Tesla.

What is a better investment?

The debate between value and growth investing appears never-ending. Consider the last 3 years of investment in the Vanguard Large Cap Growth and Value ETFs (tickers: VUG and VTV). For reference, the S&P 500 ETF from iShares (ticker: IVV) also appears, which is a blend of both kinds of stocks.

Three year of total return of large cap growth, value and the S&P 500. Source: www.ETFReplay.com
Three year total return of large cap growth, large cap value and the S&P 500. Source: www.ETFReplay.com

From this chart, the growth ETF outperformed the value ETF over the last three years by greater than a factor of two, while producing little additional volatility. However, so far in 2021, this value ETF performed better than the growth ETF by about 5%, as shown below. Additionally, this value ETF achieved this outperformance with lower volatility.

2021 year to date total return of large cap growth, value and the S&P 500. Source: www.ETFReplay.com
2021 year to date total return of large cap growth, value and the S&P 500. Source: www.ETFReplay.com

Diversify the effect away

Not sure if value or growth is right for you? A simple way to avoid this debate is to diversify into both growth and value simultaneously. By investing in an S&P 500 index ETF, you also get access to a single investment that is extremely liquid and very cost-efficient.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
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Risk-seeking investors and the first quarter of 2021

There was plenty of risk-seeking in the first quarter of 2021. So, how did the stock and bond market respond?

A Unique Quarter

This recent Wall Street Journal article summarized this first quarter well. The author identified the following contributors to recent market behavior due to risk-seeking investors.

  1. Meme stocks
  2. Interest rates
  3. Tech rotation

Meme stocks and the Fear Of Missing Out (FOMO)

The most popular “meme” stock was GameStop Corp. for risk-seeking investors. But, what is a meme stock? This source describes it as a stock that exhibits rapid price growth that is popular among millennials. Meme stocks can also be categorized by high volatility, fueled by the so-called Fear Of Missing Out (FOMO) and panic selling. Time will tell if this category of stocks becomes more formalized, as many in the workforce return to their offices, thereby limiting their trading time. Of course, the effect of social media on stock trading isn’t likely to go away anytime soon.

A new trend in interest rates?

The other big news in the first quarter was the increase in interest rates. Long-term bond yields increased in February and March, after starting the year at 0.917%.

U.S. 10 Year Treasury Note Yield in First Quarter of 2021. Source: MarketWatch.com
U.S. 10 Year Treasury Note Yield in First Quarter of 2021. Source: MarketWatch.com

By the end of the first quarter of 2021, the U.S. 10 Year Treasury Note yield rose to 1.745%. As we wrote about before, the price of a bond decreases when yields rise. Consequently, the iShares Core Total US Bond ETF fell, to a year-to-date loss of 3.4%.

Total Return of iShares Core Total US Bond ETF, First Quarter of 2021. Source: ETFReplay.com
Total Return of iShares Core Total US Bond ETF, First Quarter of 2021. Source: ETFReplay.com

Tech Rotation

The first quarter was also characterized by about a 5% return difference between the Dow and Nasdaq indices. For instance, Exxon Mobil Corp. is up 35% this year, while Amazon and Apple have lost 5% and 7.9%, respectively. Of course, no one knows if this rotation out of tech and into energy is a new trend or just a reaction to markets anticipating a future with more energy consumption due to increased commuting. But, these recent changes have been incorporated into our portfolio construction process to produce an update to our free and premium portfolios. We encourage you to log in to see how these ETF portfolios changed due to the latest market dynamics.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
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Bond Markets Fell in February 2021

ETFMathGuy optimal portfolios are now available to free and premium subscribers. Please log-in to see them now. In this post, we discuss how the bond markets fell with rising interest rates this past month, and its effect on the stock market and our ETF portfolios.

Bond markets fell. What is happening with interest rates?

The recent reaction of the bond markets appears to be due to investors being less convinced that U.S. Government interest rates will remain low for the long-term. Based on recent Wall Street Journal reporting, demand for the 10-year U.S. Treasury note has been “tepid”. With lesser demand come lower prices to stimulate buying. And, when prices go down in a bond, its interest rate goes up. How so? One simple way to think about this relationship is from the bond seller’s perspective. If the demand for bonds goes up, the bond seller can set a lower fixed interest rate and still find a buyer. Conversely, the bond seller must provide higher fixed interest rates, thereby compensating the bond investor more, if demand is low. If all this sounds confusing, please take a look at the nice visual representation below.

The seesaw relationship between bond prices and interest rates. Source: Securities & Exchange Commission
The seesaw relationship between bond prices and interest rates. Source: Securities & Exchange Commission

Why is demand low for U.S. Government bonds?

The most obvious explanation for the low demand for bonds is the large amount of debt the U.S. Government is expected to sell to fund the ongoing stimulus efforts. One measurable effect of this stimulus is to continue to keep the U.S.’s debt-to-GDP ratio above 100%. Servicing this debt will slowly become more expensive as interest rates rise.

How did ETFMathGuy Premium Portfolios do in February 2021?

Our portfolios gave back some of their gains in January, in part due to the increased chance that interest rates may be on the rise, increasing corporate borrowing costs. The chart below shows the year-to-date returns of stocks, bonds, and ETFMathGuy premium portfolios held at Fidelity and Schwab. Notice how the low demand for bonds has reduced the total return for the iShares Core U.S. Aggregate Bond ETF (ticker: AGG).

Total returns for ETFMathGuy premium portfolios for January and Februrary, 2021

We hope this post provided you with some helpful perspectives on why the bond markets fell, and how the stock market, ETFs, and the overall economy are all dependent on one another.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
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Concentrated exposure with thematic ETFs

In our recent post about thematic ETFs, we discussed the growth of so-called “thematic ETFs”. These are ETFs that follow a theme. One of our favorite writers at the WSJ is Jason Zweig, and he also wrote about these ETFs recently. Today, they represent some of the market’s hottest funds by using concentrated exposure.

“Often called thematic ETFs, these funds cut across industries, trying to capitalize on ideas like alternative energy, cloud computing or 3-D printing. Others buy stocks that could benefit as more people work from home, demand gender or racial diversity, or lavish money on their pets.”

Jason Zweig, The Intelligent Investor, Wall Street Journal, January 15, 2021

More Concentrated Exposure

By concentrating on a particular theme, like solar power, robotics or industrial innovation, many of these funds can have very high returns. For example, the Invesco Solar ETF (ticker: TAN) had a 234% return in 2020. Similarly, the ARK Innovation ETF (ticker: ARKK) returned 153%. Of course, these returns didn’t come without their own risks. The volatility of these two thematic ETFs were 55% and 49%, respectively. As a basis of comparison, our typical benchmark for stocks is the iShares Core S&P 500 ETF (ticker: IVV) and bonds is the iShares Core Total US Bond ETF (ticker: AGG). The 2020 return of these ETFs appears below at 18.4% and 7.5%, respectively. Also, note their lower volatility than the thematic ETFs mentioned here.

Risk and Return of Three popular thematic ETFs in 2020. Source: etfreplay.com/charts.aspx
Risk and return of three popular thematic ETFs and two broad-based ETFs in 2020. Source: etfreplay.com/charts.aspx

Higher expenses in thematic ETFs

Expense ratios are often much higher in thematic ETFs than broad-market ETFs like those that track the S&P 500. For instance, the three thematic ETFs from above have expense ratios of 0.69%, 0.95% and 0.75% according to ETF.com. In contrast, our stock and bond benchmark ETFs (tickers IVV and AGG) have expense ratios of 0.04% and 0.06%. So, investors must pay a premium to get unique exposure to these themes. And, until a thematic ETF grows sufficiently, the bid-ask spread on them could be much larger, further degrading returns when they are bought and sold frequently. Nevertheless, we found in 2020 that thematic ETFs, when built into a diversified portfolio, can both manage risk and boost returns.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
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2020 Year In Review

Happy New Year from ETFMathGuy! In this post, we conduct a 2020 year in review of stock, bond and ETFMathGuy premium portfolios.

For many, 2020 was an unusual year in the investing world. And, investing in ETFs was no exception. In our first post of 2020, we discussed how we adapted to the new normal of nearly all ETFs trading commission free. That opened our portfolio construction process to consider over 2,000 ETFs. But, as we noted in another post from 2020, we immediately exclude any ETF with under $50 M in assets, which helps an investor avoid ETFs that may soon close, as well as larger bid-ask spreads when traded.

So, how did ETFMathGuy portfolios fare in 2020?

In short, we have been very satisfied with our ETFMathGuy premium portfolios. Our goal was to achieve returns similar to the S&P 500, but at lower risk. We established this goal based on rigorous backtesting all ETFs that were previously commission-free from Fidelity, or slightly less than 500 ETFs. However, in 2020, we expanded into all commission-free ETFs, and the returns from two real accounts at Fidelity appear below.

Total returns for stock market, bond market and two ETFMathGuy portfolios for 2020
Total returns for stock market, bond market and two ETFMathGuy portfolios for 2020

Clearly, we achieved our 1st goal of generating returns “at least as good” as the stock market, which we assume as the S&P 500. These returns were possible thanks to our model’s ability to dynamically adjust to market conditions. For subscribers with free memberships, you can see what these ETFs were by logging into your account, and browsing the 2020 portfolios through June 2020. For example, PALL and ARKK have been consistent components of our optimal portfolios. If you are a current premium subscribers, your January 2021 portfolios and rebalancing calculator are now available for your consideration.

But, what about risk in our 2020 year in review?

The pandemic of 2020 had a substantial impact on market risk. When measured monthly, stock market volatility was 25.8%. Examining the monthly returns for our ETFMathGuy portfolios, we observed an 18.1% and 19.4% and volatility for our moderate and aggressive portfolios, respectively. So, we also achieved our 2nd goal of keeping volatility lower than the stock market. We also revisited our calculation of Alpha and Beta. For the 12-monthly returns in 2020, we found Alpha = 2.48% and Beta = 0.49. Their p-values were 0.09 and 0.02, respectively for the ETFMathGuy aggressive portfolio.  Recall from this post that the smaller the p-values, the greater confidence we have that these are the correct values and have minimal estimation error. So, for those of you “seeking alpha”, these statistics indicate our portfolios likely produced “alpha” in 2020.

Our statistics on 2020 monthly returns indicated that we likely produced "alpha" in our ETFMathGuy aggressive portfolios.
Our statistics on 2020 monthly returns indicated that we likely produced “alpha” in our ETFMathGuy aggressive portfolios.

Forecasting 2021?

We won’t venture a guess at what the markets have in store for investors in 2021. Frankly, there are many, many articles already written on this topic. Instead, we will continue to pursue our goal to construct ETF portfolios that meet or exceed returns like the S&P 500 with lower volatility. If you are interested in accessing the January 2021 premium portfolios, please consider upgrading your membership now at 2020 subscription prices. In the coming weeks, we plan to increase our subscription prices for the new year. Please contact us if you would like a free sample of our latest premium portfolio.

We hope you found this 2020 year in review educational!

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
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Trading fractional shares of ETFs

Fractional shares are that latest innovation now available to individual investors. But, like many technical advances, there are upsides and downsides to it. In this post, we discuss this innovation in the context of Exchange Traded Funds (ETFs).

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Opportunities with fractional shares

One of our favorite writers is Jason Zweig, who recently wrote about fractional shares in the WSJ. His article was largely discussing how high priced stocks, like Alphabet and Amazon, trade at over $1,000 per share. Prior to trading fractional shares, there was no way to have direct ownership of these company stocks if you were investing a few hundred dollars. Or, if you had enough for a few shares, you were unable to diversify across a larger group of these high priced stocks. So, your investment could be more susceptible to market volatility.

Fractional trading has changed this. Whether you are trading with Robinhood, Fidelity, or many other discount brokers now offering fractional trading, access to high priced stocks is now possible. These brokers also permit fractional shares of ETFs. However, ETFs often contain hundreds, or even thousands, of underlying securities. Also, the ETF issuers generally don’t want to prevent access to their shares. Consequently, ETF share prices are typically in the tens to hundreds of dollars per share. For small account owners, fractional ownership of ETFs is more about investing every last dollar and cent. For stocks, fractional ownership is providing access.

Risks and limitations of fractional ownership

We looked at some of the details of fractional trading at Robinhood and Fidelity brokerages. The most obvious limitation is that these types of trades must be done from a mobile device. And, the Robinhood app appears to provide various “nudges” to encourage trading more frequently. Nevertheless, we think that fractional ownership, when used correctly, can provide individuals with better access to a wider variety of investments at a younger age.

You can’t invest without trading, but you can trade without investing.

Jason Zweig, The Intelligent Investor, WSJ, December 4, 2020

We think this quote says it all. We wish you and yours a safe and enjoyable holiday season!

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What are Model Portfolios?

Yesterday’s Wall Street Journal had a very interesting article about model portfolios. So, what are these, and why should an individual investor care about them?

A Wall Street Trend

This WSJ article stated that the use of model portfolios is a growing trend, since it helps take the emotion out of investing. So, these portfolios are based on scientific observations and analysis, rather than an investor’s “instincts” or emotional reaction to current market conditions. A growing number of financial advisors are embracing their use too.

Model portfolios take some of the human emotion out of investing. They provide the comfort of science.

Andrew Guillette, Research Director at Broadridge. source: WSJ, December 4, 2020

Thus, these model portfolios are ones that can “dynamically shift the funds it invests in as markets change”. We are advocates of this approach using commission-free ETFs. Our free and premium portfolios do exactly that, as we update them each month based on current market conditions. Please log in to see these portfolios now, which include the latest market shifts through Friday, December 4th. Premium subscribers also have access to a handy web calculator to assist in rebalancing their portfolio.

How have model portfolios performed this year?

Unfortunately, little is published about model portfolio performance. But, we report our model’s performance for ETFMathGuy portfolios on a regular basis. The image below shows the total returns from January through end of November from our investments at our Fidelity brokerage account.

Total returns from January through November of Stocks, Bonds and ETFMathGuy Portfolios

What about risk?

The performance over the last 11 months look very promising, suggesting a scientific approach to rebalancing an ETF portfolio can perform well in volatile markets. But, how much risk did we take with these investments? Using the monthly returns that led to the total returns shown above, the volatility of the stock market (ticker: IVV) was 26.9%. However, the volatility of the moderate risk ETFMathGuy portfolio was only 18.2%. Not surprisingly, the aggressive risk ETFMathGuy portfolio had a higher volatility of 19.0%, as expected for a portfolio seeking more risk. So, these portfolios continue to outperform the stock market, while also taking less risk as measured by volatility.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.

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Thematic ETFs continue to grow

Thematic ETFs continue to grow in popularity. But, how is this type of ETF different from the broad-based ETFs, like those that track the S&P 500? In this post, we discuss several points to consider when investing in thematic ETFs.

What is an ETF “theme”?

ETF themes can come from nearly anywhere in the investment world. As discussed in this recent WSJ article, themes are often found to hopefully align with “beliefs or interests” that investors may have. In the U.S., assets invested in thematic ETFs have doubled in the past three years. However, there have been quite a few closures along the way too. Closures are typically due to the ETF’s expense ratio failing to produce sufficient revenue to match the expense of running the ETF. This WSJ article suggests that ETFs without $50M in assets after three years are most vulnerable.

We agree. In fact, the initial evaluation of the ETFs we use in our portfolio construction process discards ETFs that haven’t existed for several years or have less than $50M under management. Our approach helps avoid the many issues associated with ETF closures.

Opportunities of Thematic ETFs

The obvious attraction of these ETFs is their opportunity to make more “concentrated” investments in companies within its theme. For example, investors interested in companies involved in automation could buy the ROBO Global Robotics and Automation Index ETF (ticker: ROBO). Or, if an investor wishes to make investments in solar companies, they can buy the Invesco Solar ETF (ticker: TAN). The image below shows the top ten holdings of this solar ETF.

Top 10 Holdings of the Invesco Solar ETF. Source: ETF.com
Top 10 Holdings of the Invesco Solar ETF. Source: ETF.com

However, theme-based ETFs also lack diversification inherent in broad-based ETFs like iShares Core S&P 500 ETF (ticker IVV). And, they are typically are less liquid. For instance, the average bid-ask spread of the Invesco Solar ETF was 0.11%. The iShares Core S&P 500 ETF bid-ask spread was much lower, at 0.01%, according to ETF.com.

Risks and Rewards of Thematic ETFs

Having more concentrated holdings than a broad-based index usually means higher risk. The chart below shows how the risk, measured by volatility, for the automation and solar ETFs compare to the S&P 500 ETF over the last three years. Clearly, these thematic ETFs exhibited greater risk. For the solar ETF, this higher risk level was compensated by a higher total return. However, the automation ETF’s higher risk levels didn’t produce returns higher than the S&P 500, lagging it by about 1% a year.

Three-year risk and return of the Invesco Solar ETF, ROBO Global Robotics and Automation Index ETF and the iShares Core S&P 500 ETF. source: www.etfreplay.com
Three-year risk and return of the Invesco Solar ETF, ROBO Global Robotics and Automation Index ETF and the iShares Core S&P 500 ETF. source: www.etfreplay.com
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
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Market uncertainty prior to next week’s election

The stock market, measured by the S&P 500, lost about 2.5% in October. But, earlier in the month, the stock market was up over 5%. The chart below shows the roller coaster ride for two ETFs that track the stock and bond markets: iShares Core S&P 500 ETF (ticker IVV), Vanguard Total Bond Market ETF (ticker: BND) So, what’s going on with this market volatility?

Stock and bond returns in October, 2020. Source: finance.yahoo.com

Markets don’t like uncertainty

There are many opinions to describe what caused the financial markets to move like they did in October 2020. We think that the combination of the upcoming election and spike in coronavirus cases is adding to uncertainty. But, this uncertainty, as measured by stock market volatility, is still well below where it was earlier in the year. We used our daily volatility monitor in the plot below.

Stock market volatility as of October 30, 2020. Source: ETFMathGuy.com
Stock market volatility as of October 30, 2020. Source: ETFMathGuy.com

As this chart shows, volatility has crept a little higher in October. But, based on the long-term historical norm, this volatility is still slightly elevated in the 75% percentile. Of course, if you are a believer in efficient markets, then you simply don’t know what the future of the market will hold. In more positive news, the WSJ recently reported that the U.S. economy recovered significantly in the 3rd quarter of 2020. Consumer spending for online retail items continue to stay strong, while the travel sector still lags.

How about the ETFMathGuy portfolios and market uncertainty?

Thanks to wide diversification from over 2,000 ETFs we analyze each month, our portfolios continue to perform well. Consequently, the moderate risk portfolio lost 0.6% and the aggressive risk portfolio lost 0.5% in October. The year to date cumulative return of the ETFMathGuy aggressive risk portfolio appears below, along with the S&P 500 and Aggregate Bond Market total return.

ETFMathGuy year to date cumulative returns, versus the S&P 500 and Aggregate Bond Market returns.

Premium subscribers can now access the backtested portfolios for November 2020. Not a premium subscriber yet? Then, just visit the bottom of our “Join Us” page to upgrade your subscription and get immediate access!

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
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Market Volatility is Back?

Market volatility returned in September 2020. In this post, we discuss this recent surge in the context of long-term historical volatility. We also show how our ETFMathGuy portfolio performed, and elaborate on a source of that performance.

Market Volatility returned, but will it persist?

Earlier this year, we developed an app to automatically measure stock market volatility. This app updates daily, and the figure below shows the latest result.

Stock Market Volatility was 19.7% on Friday, slightly above its long-term historical norm.
Stock Market Volatility was 19.7% on Friday, slightly above its long-term historical norm.

We also provided a table showing the distribution of long-term historical volatility, as observed over more than 20 years. Current volatility is 19.7% as of October 2nd, which corresponds to the upper limit of the third-quartile. So, while market volatility returned, it is still well below the volatility seen in early 2020.

Market Performance through the 3rd Quarter

The higher volatility occurring in September did indeed correspond to a loss in the stock and bond markets. The stock market lost 3.7% and the bond market lost 0.1%, based on the ETFs with ticker symbols IVV and AGG. The year to date return of these stock and bond index ETFs were 5.5% and 6.7%, respectively, including dividends. The year to date return of the ETFMathGuy Aggressive Risk Portfolio was 20.8%. This return is the result of trades conducted in a brokerage account at Fidelity Investments, and so includes the bid-ask spread.

Stock and Bond Market YTD Returns compared to the ETFMathGuy Aggressive Risk Portfolio
Stock and Bond Market YTD Returns compared to the ETFMathGuy Aggressive Risk Portfolio

Premium subscribers now have access to the October 2020 premium portfolios, as well as a handy rebalancing calculator. Free subscribers are welcome to log in to review older premium portfolios through May 2020, or upgrade their account to enable premium access.

Sources of Excess Performance

One ETF that our portfolios have consistently included throughout this year is the Aberdeen Standard Physical Palladium Shares ETF (ticker: PALL). Its 12 month return and volatility appear below next to the S&P 500 ETF (ticker IVV).

The Palladium ETF has higher volatility than the S&P 500, but also has a higher return over the last 12 months. Source: www.ETFreplay.com
The Palladium ETF has higher volatility than the S&P 500, but also has a higher return over the last 12 months. Source: www.ETFreplay.com

Examining these results for PALL confirms the expectation that higher risk can lead to a higher return. Our optimal portfolio construction process creates a portfolio that, along with PALL, finds other ETFs that maximize expected return. This process also keeps the portfolio’s expected risk between the stock and bond markets. Additionally, we backtested this process over a full market cycle. We hope you will consider upgrading your subscription to gain insights into a wider variety of ETFs that appear in our efficient portfolios.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.