Tag: investing

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Will this stock market rally continue?

As recently discussed in this Wall Street Journal article, there is a deep suspicion on the future of this current stock market rally. In this article, we discuss what this rally looks like in various market segments. We will close on how our ETFMathGuy portfolios have performed so far this year.

The state of our economy

Most investors would agree that the economy is not doing well. Unemployment is high and our GDP (Gross Domestic Product) is shrinking at record levels. However, the Federal reserve has acted quickly and significantly. Also, congress has provided significant economic stimulus. Consequently, we have a stock market, as measured by the S&P 500 total return, up 3.5% year to date. But, not all segments of the market are behaving the same.

Below is a chart similar to the one we wrote about previously, where real estate was lagging the overall market. In that post, we also highlighted that the top 5 companies in the S&P 500 were focused on technology, helping the performance of the S&P 500.

Stock market total returns, year to date. Source: www.ETFreplay.com
Stock market total returns, year to date. Source: www.ETFreplay.com

As this chart shows, real estate is still down about 10% year to date, as measured by the iShares Dow Jones Real Estate REIT ETF. (ticker: IYR). However, the energy sector, as measured by U.S. Energy Sector SPDR ETF (ticker: XLE) is down nearly 38% for the year. Given few people are travelling much these days, we shouldn’t be surprised to see the energy sector prices behaving this way. Alternatively, the technology sector, as measured by the U.S. technology sector SPDR ETF (ticker: XLK) is doing very well, with a 21% total return year to date. Again, this is not surprising to many investors. The demand for many forms of technology is high in order to support workers in our economy working remotely.

ETFMathGuy Portfolios

We build ETFMathGuy portfolios to respond to market dynamics by analyzing daily price returns, variance and covariance over a historical period chosen from our backtesting. We build these portfolios from segments of the market not typically considered, but also exclude ETFs that are not sufficiently liquid. Our cumulative year to date total returns appear below.

Year to Date Total returns of ETFMathGuy Portfolios Through July 31, 2020.

As this chart shows total returns each month for this year, the ETFMathGuy portfolios are succeeding in reducing risk. These portfolios are also continuing to outperform the stock market. If you would like to see how this performance was possible, remember that we analyze over 2,000 ETFs to find assets that maximize returns for the levels of risk chosen. We encourage free subscribers to review the portfolios published earlier in the year, including April and May. Premium subscribers can now view the latest portfolios, based on market data through July 31, 2020.

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 Mid-year Review by ETFMathGuy

The coronavirus pandemic has made for an interesting year so far in the financial markets. So, we chose to focus this post on a 2020 mid-year review of market volatility and returns.

Let’s begin by looking at the stock (equity) and bond (debt) markets. The time series below shows the significant volatility in both markets. The green line is the total return of the iShares Core S&P 500 ETF (ticker: IVV). The blue line is the total return of the iShares Core U.S. Aggregate Bond ETF (ticker: AGG). Notable, for the second quarter of the year, the S&P 500 had its biggest return since 1998. Unfortunately, the S&P 500 total return (including dividends) is still down for the year.

Year-to-Date Returns

The year-to-date total returns for the stock and bond market appear in the next figure. Alongside them, you can see the total returns of the ETFMathGuy Moderate and Aggressive portfolios. We found these portfolio returns by reviewing my account balances, so they represent returns that include portfolio turnover and the bid-ask spread from actual trades. However, they do not include the effect of taxes. Like many individual investors, I won’t file my 2020 returns until early next year.

Both portfolios continued to outperform the total return of the S&P 500. Premium subscribers can now access the July 2020 portfolios. Free subscribers are invited to review previous month portfolios. We also encourage free subscribers to upgrade their subscriptions to enable access to the portfolios built from the latest market dynamics.

Year-to-date returns through June 2020 for the stock market, bond market and ETFMathGuy Portfolios

Market Volatility

Stock market volatility continues to trend down, but is still higher than historical norms. Current volatility is 27.7% using our market volatility calculator that updates daily. Thus, over the last month, the volatility has come down from the 96th percentile to the 90th percentile, based on historical norms.

Stock market volatility continues to trend down, but still higher than historical norms.

We interpret this lower volatility as the markets reaction to less uncertainty about future economic growth. But, as the chart shows, we are still in a time of elevated uncertainty.

We hope you find this 2020 mid-year review educational as your consider your investments in the second-half of 2020.

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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New Features in our Optimal Retirement Income Calculator

Recently, we discussed our free web-based calculator to help you better plan for your retirement. At that time, it offered answers to the many commonly posed questions for those nearing or currently in retirement.

  • How long will my portfolio support my discretionary and non-discretionary expenses?
  • How much will my heir or favorite charitable organization receive?
  • What will my future tax liabilities look like?

Now, our calculator includes many new features to address a broader group of retirees, especially those with a spouse or domestic partner with other sources of retirement assets or retirement income.

The Optimal Retirement Income Calculator by ETFMathGuy.com has many new features
The Optimal Retirement Income Calculator by ETFMathGuy.com has many new features

New Features

The newest version of our retirement calculator offers a better interface for inputs, by arranging them in logical groups. It also includes many new features relevant to many retirement plans.

  • A separate retirement horizon for a surviving spouse (or domestic partner) and their unique after-tax retirement income needs
  • New inputs for the spouse’s tax-deferred accounts, like Traditional IRAs, Rollover IRAs, 401(k)s, 403(b)s and 457 plans
  • New inputs for the spouse’s tax-exempt accounts, like Roth IRAs, Roth 401(k)s and Roth 403(b)s
  • An option to select your state of residence, so that the taxable brokerage account can be properly taxed whether (or not) the surviving spouse resides in a community property state
  • Added a starting age for social security and pensions for the retiree, and if applicable, their spouse, to delay these other sources of retirement income.
  • Input to choose whether (or not) to value the heir’s assets based on using the new 10-year inherited IRA stretch rules due to the SECURE Act.

Optimizing Retirement Income Withdrawal Decisions with a Spouse’s Contribution

Like the previous version, the calculator provides results using the Common Rule and our Optimal Rule. To develop a plan for a hypothetical couple, we used the default values in the calculator, but switched the input labeled “Do you have a spouse or domestic partner?” to “yes”. In this case, you would received the following summary of your plan.

Plan summary example when a spouse or domestic partner is included in the Optimal Retirement Calculator from ETFMathGuy.com
Plan summary example when a spouse or domestic partner is included in the Optimal Retirement Calculator from ETFMathGuy.com

Scrolling down the page, you will see the a forecast of withdrawals to meet this hypothetical couple’s after-tax retirement income needs. In this case, we assumed a 20-year retirement horizon for the retiree. Then, the surviving spouse lives an additional five years after the retiree passes away. Consequently, in years 21-25 of retirement, the surviving spouse is no longer filing their taxes as “married filing jointly“. Instead, their tax brackets are significantly lower in these later years with a filing status of “single“.

Our updated optimal retirement income calculator now includes results for a surviving spouse (or domestic partner)
Our updated optimal retirement income calculator now includes results for a surviving spouse or domestic partner .

The updated retirement calculator also tracks account balances, and now includes the spouse (or domestic partner) accounts as dashed lines.

Account balances now include spouse or domestic partner accounts.
Account balances now include spouse or domestic partner accounts.

We hope you find these new features helpful as you plan for your retirement! This new calculator continues to improve, and we welcome your suggestions.

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 Continues to Decline

Declining market volatility continued in the month of May. Also, the S&P 500 had a very good month, returning 4.8%. However, the broad-based index is still down 5.0% for the year, including dividends. The chart below updates the returns from last month for returns through May 29, 2020. As these results show, the ETFMathGuy Moderate and Aggressive portfolios continued to outperform the S&P 500. The premium portfolios for April and May 2020 are now available to all subscribers. The latest premium portfolios for June 2020 are available to paid subscribers.

Year-to-date returns through May 2020 for the stock market, bond market and ETFMathGuy Portfolios
Year-to-date returns through May 2020 for the stock market, bond market and ETFMathGuy Portfolios

Markets returning to normal?

The declining market volatility suggests that the fear in the markets continued to subside in May. However, they are still elevated above their long-term historical average. The image below shows the volatility from our daily monitor that tracks the S&P 500 ETF (ticker: IVV). We determine the standard deviation of daily returns over one, two and three month periods, and report an average to find a daily value. As of Friday, May 29th, volatility was 37.8%, as shown below.

Stock market volatility is still high, be is now well below its recent peak over 70%.
Stock market volatility is still high, be is now well below its recent peak over 70%.

Market Volatility Still Higher than Normal

Analyzing over 5,000 trading days since mid-June 2000, we can see how “out of the norm” current volatility really is. The table below shows the distribution of volatility over this nearly 20-year time period. As this table shows, we are still in the 96 percentile of volatility, meaning only 4% of the days since mid-June 2000 exhibited higher volatility then on May 29th, 2020.

Stock market volatility is still very high, by historical standards.

Stock markets returning to “normal” can be very subjective. The table above can provide a more objective perspective to such an assessment. However, if the downward trend continues, it may not take much longer before volatility returns to its long term historical norm.

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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The stock market and an economic recovery

What is the relationship between the stock market and an economic recovery? Matt Phillips at the NY Times recently wrote an excellent article on this topic. I’ll be discussing some of his key insights here, as well as how different segments of the market are doing.

A leading indicator for economic recovery?

The stock market can be thought of as a voting machine on the expected direction of the economy. So, given the continued stability of the stock market and recent lower volatility, I agree with his NY Times article’s sentiment on the economic recovery.

“…Investors have already accounted for what’s expected to be a cataclysmic drop in second-quarter activity and are forecasting a relatively rapid economic recovery afterward.”

Matt Phillips, New York Times, May 10, 2020

Here at ETFMathGuy, we use the S&P 500 as our proxy of the stock market. However, it is important to remember that the S&P 500 is a cap-weighted index, so larger companies contribute more to the index returns. The five largest companies in this index are technology companies, which market participants expect to be more resilient to the economic effects of the coronavirus. Consequently, through the end of April, these technology firms were up about 10% for the year, with the rest of the S&P 500 firms down 13%, according to Goldman Sachs analysts.

The largest components in the S&P 500 index are all technology companies. Source: etf.com/IVV
The five largest components in the S&P 500 index are all technology companies. Source: etf.com/IVV

What sectors are struggling?

So, if technology firms are doing well, what sectors are struggling the most? One obvious spot is the real estate sector. To this end, below is the total return this year of ETFs representing the S&P 500 and real estate. The green line shows the S&P 500 (ticker: IVV) and the blue line shows the iShares U.S. Real Estate ETF (ticker: IYR).

The real estate sector is not recovering like the S&P 500 index. Source: https://www.etfreplay.com/charts.aspx
The real estate sector is not recovering like the S&P 500 index. Source: https://www.etfreplay.com/charts.aspx

These returns indicate the real estate sector may not be recovering as quickly as the rest of the S&P 500. Thus, we believe that a simple explanation is that work places have fundamentally changed. Subsequently, there could be a change to the long-term demand for commercial real estate.

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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S&P 500 had a great month but market volatility remains

The S&P 500 had its best month since January 1987, returning 13%. However, investors in this stock index still have a long way to go before posting a gain for 2020 due to market volatility. Through the end of April, the year-to-date total return of the iShares Core S&P 500 ETF (ticker: IVV) is -9.4%. The portfolios from ETFMathGuy continued to outperform this index, as shown below. Free subscribers can now view both the April portfolios and the January through March portfolios. At this time, we only restrict current month portfolios to paid subscribers.

ETFMathGuy Moderate and Aggressive Portfolios continue to outperform total returns of the S&P 500
ETFMathGuy Moderate and Aggressive Portfolios continue to outperform total returns of the S&P 500

How is volatility doing?

This large return of the S&P 500 in April could be perceived as an indication of a new bull market. After all, the S&P 500 is up well over 20% from its lows in March. The chart below shows how a $100,000 investment in the S&P 500 would have performed since the beginning of the year. This chart clearly shows a “bounce”. But, it is not clear if this trend will lead to a recovery or more market volatility.

Year-to-date price changes of $100,000 investment in iShares Core S&P 500 ETF (ticker: IVV)
Year-to-date price changes of $100,000 investment in iShares Core S&P 500 ETF (ticker: IVV)

Updated Market Volatility

In a previous post, we discussed how market volatility is common during big market corrections, like the one we experienced this year. About a month ago, volatility was over 70%, and today it is 55.6%. You can keep track of volatility using our new market volatility monitor, which updates daily. Notice that while volatility is going down, it is still far from its long-term historical average of about 13%.

Market volatility remains high, relative to the long-term historical norm of 13%
Market volatility remains high, relative to the long-term historical norm of 13%

When will markets be “back to normal”?

What does this all this mean? We interpret this current high volatility, relative to historical norms, as an indication that markets are still struggling with the price discovery process. Consequently, we suspect it will take the markets more time to properly price the uncertainty of the economy recovering from the coronavirus. Ideally, we would like to see volatility below about the 95th percentile of those seen historically since 2001, which means a volatility below 40%. However, when that will occur is anyone’s best guess.

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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S&P 500 down about 20% in the First Quarter of 2020

It was a difficult year so far for many investors. The total return of the iShares Core S&P 500 ETF (ticker: IVV) was -12.1% for the month of March. The total return of IVV in the first quarter 2020 was -19.6%. Such large losses often shake investor confidence. Also, the math is against you now. To recover from the 20% loss, a investor needs a 25% gain. If losses hit 40%, then an investor needs a 67% return to get back to where they started. And, if losses reach 50%, an investor needs a 100% return, or double their money, to recover all their losses. This is the unfortunate math behind compounded gains and losses.

The recovering from a large market loss can be challenging due to the effect of compounding
Recovering from a large market loss can be challenging due to the effect of compounding

How did the ETFMathGuy portfolios do in First Quarter 2020?

Using my account balances at the end of March, I measured my investment returns for the first quarter. For the Moderate Portfolio in my taxable account, my first quarter return was -5.0%. My Roth IRA used the Aggressive Portfolio and had a first quarter return of -2.1%. These returns far exceeded the S&P 500 in this first quarter. So, we are pleased with these results, which were supported by the backtesting we used to tune our optimization methodology.

Total Returns for the First Quarter Using Taxable and IRA Accounts
Total Returns for the First Quarter Using Taxable and IRA Accounts

Why is there such a large difference between the moderate and aggressive portfolios? The biggest driver was the moderate portfolio’s exposure to the municipal bond market. The aggressive portfolio did not include municipal bond ETFs, since it operated within an IRA. Please, look for yourself at the premium portfolios that produced these returns, which are now available to all free subscribers.

Measuring Volatility

We’ve added a new feature to the ETFMathGuy site to track the daily stock market volatility. Using the first ETF ever created, the SPDR S&P 500 ETF Trust, we developed an average of one, two and three month annualized volatility. At the end of this week, volatility was 70.6%, which is well above its median value of about 13% over the last 20 years.

Current stock market volatility hasn't been seen since the financial crisis of 2008.
Current stock market volatility hasn’t been seen since the financial crisis of 2008. Click this image to see the latest volatility, updated daily.

The last time volatility reached this level was the 2008 financial crisis. Then, volatility peaked at 77.8% on November 24, 2008.

In our next post, we will discuss using volatility to potentially detect market trends. Before then, you may want to read this article on on tips for investors in volatile markets.

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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Diversification and February 2020 returns

The stock market experienced a significant drop in the month of February 2020. But, the bond market had a positive total return for the month. In this post, we discuss the benefits of a diversified portfolio during times of market stress, like seen in the February 2020 returns.

A big economic shock

Market returns for the the month of February 2020 were significantly impacted by the corona virus outbreak affecting the global economy. The S&P 500 index ETF (ticker: IVV) lost 8.5% in the month, but the iShares Core U.S. Aggregate Bond ETF (ticker: AGG) gained 1.6%. The stock market appears to be pricing in reduced earnings growth, due to the virus outbreak. Consequently, stock market sellers have rotated their investments into the bond market. Increased demand for bonds is driving up prices, and consequently returns, from bond investments.

The graphic below shows the total returns for the stock market, bond market, and two other portfolios for February, 2020.

Stock, bond and other portfolio returns in February 2020

Using a diversified portfolio and February 2020 returns

In hindsight, the bond market offered a higher return in February 2020. But, exclusively investing in bonds eliminates the possibility of the significant upside potential of the stock market, such as the 31.3% of the stock market in 2019.

One approach to managing risk while realizing some additional return is to invest in a 50% stock and 50% bond portfolio. For February 2020, this would have led to a 3.4% loss. However, wider diversification beyond the mainstream stock and bond markets offered a more substantial benefit. Specifically, the ETFMathGuy’s moderate risk portfolio (shown in a previous post) appears below. It returned 0.1% in February 2020, and was designed to match the volatility of the 50% stock and 50% bond portfolio.

The January ETFMathGuy moderate risk portfolio for taxable accounts.

The additional return comes from our optimal portfolio construction. ETFMathGuy portfolios diversify across other asset and sub-asset classes beyond stocks and bonds using a quantitative methodology. For instance, the portfolio above contains municipal bonds, commodity and tech sector exposure, among others. This diversified exposure has been very favorable to returns so far in 2020. But, market conditions are very dynamic. So, if you are looking for ideas on how to improve your portfolio’s diversification, please check out our current free and premium portfolios, constructed using the latest market data.

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2019 ETF Returns

Where will the global economy take us in 2020? To consider this question, we thought it would be helpful to review 2019 ETF returns. So, we devoted this post to highlight the 2019 returns among the major ETF categories.

So many ETFs to pick from…

In 2019, there were over 2,000 ETFs available to investors. Unfortunately, thinly traded and limited return history ETFs represented many of these. Thus, to focus on only the most major asset classes represented by ETFs, we chose to only review the 59 ETFs currently managed by Vanguard. Then, we broke the list into two obvious groups.

  1. Equity or stock-based ETFs
  2. Fixed income or bond-based ETFs

Equity ETF Returns

Vanguard offered 41 equity-based ETFs in 2019. Including dividends, the image below sorts their total returns for 2019.

Total Returns of Vanguard's Equity ETFs in 2019
Total Returns of Vanguard’s Equity ETFs in 2019

As this image clearly shows, our benchmark S&P 500 index ETF had a total return of 31.4%, making for an excellent year. In fact, it was the best annual return for this ETF since its inception in 2010.

But, there were other broad-based equity ETFs that did even better. The best performing one was focused on information technology. Other top performers included growth ETFs distributed across, small-cap, mid-cap and mega cap indices. And, a newer investment trend we’ve written about before also emerged as a leader: Environmental, Social and Corporate Governance (ESG) in the U.S.

Returns from Information Technology Firms led the markets in 2019
Returns from Information Technology Firms led the markets in 2019

On the other end of the return spectrum, the energy sector lagged the S&P 500 by the greatest amount. Other noteworthy groups of ETFs tracked by Vanguard that also lagged the S&P 500 were as follows.

  1. Value and dividend-oriented ETFs
  2. International, both developed countries and emerging markets
  3. Many industry sectors (real estate, industrials, consumer discretionary and staples, utilities, materials health care)

Fixed Income ETF Returns

Fixed income ETFs also had a very good year in 2019. Using the total bond market ETF as a benchmark, fixed income ETFs returned 8.8%

Total Returns of Vanguard's Fixed Income ETFs in 2019
Total Returns of Vanguard’s Fixed Income ETFs in 2019

The leaders in the bond market in 2019 were those that held riskier bonds, like those from corporations vs. the U.S. government. Fixed income ETFs with longer maturities also led the bond markets in 2019.

Conclusions on 2019 ETF returns

We hope you found this review of stock and bond ETF returns from 2019 helpful. Interested in using the Vanguard ETFs in a 2020 diversified portfolio? If so, please check out our Free Optimal Portfolios for 2020 for some ideas. Or, if you are seeking a diversified portfolio that analyzes over 2,000 ETFs (including those from Vanguard), please review our Premium Optimal Portfolios for 2020.

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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Happy New Year from ETFMathGuy!

Happy New Year! To start this year, we made some significant updates to our services. Hopefully, you will find these updates useful as you evaluate your ETF investments.

New Menu Options To Access Optimal Portfolios for 2020

We have reorganized the menu at the top of ETFMathGuy.com to provide access to the 2019 and 2020 portfolios. You can still find them under the heading “Current Portfolios“.

We have also created two options for the 2020 portfolios. The first option is labeled “Free Optimal Portfolios for 2020”, and is accessible to all free subscribers of ETFMathGuy. It provides optimal portfolios generated each month using only Vanguard ETFs. So, please check out the January portfolios posted earlier today, and also now available to download for offline review. These portfolios are an excellent way to minimize expense ratios associated with ETFs, while keeping the number of ETFs in a portfolio to a minimum.

New menu options to access the 2019 and 2020 Optimal Portfolios
New menu options to access the 2019 and 2020 Optimal Portfolios

The other option is the “Premium Optimal Portfolios for 2020“. This option takes advantage of other parts of the financial market that Vanguard ETFs don’t reach, and analyzes over 2,000 commission-free ETFs. As a result, these portfolios are only accessible to premium subscribers. Like the free portfolios, they are also available for download.

All 2020 portfolios are available to download as PDF files.
All 2020 portfolios are now available to download as PDF files.

New Subscription Options

If you are interested in accessing the premium portfolios, we provide two payment options. As shown on the “Join Us” page, you can select either monthly or annual billing. Also, we accept credit card payments through our payment processor Stripe.

Price: $9.95 / month

Want to save over 30% on your monthly subscription each year? Then, consider paying once per year!

Price: $79.95 / year

Don’t want to upgrade your subscription? Well, that is not a problem. You can continue receiving our periodic commentary, access the free portfolios, and continue to test out our new interactive retirement income calculator.

Wishing you a wonderful 2020!

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.