Tag: stock market

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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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Circuit Breakers and ETFs

Two times in the past week, circuit breakers halted market trading for 15 minutes. But, what is a circuit breaker and why are they used? And, how are they relevant to your ETF investments? We explore this topic of circuit breakers and ETFs more here.

What is a circuit breaker and why are they used?

Circuit breakers are common in homes, apartments, or any dwelling that uses electricity. They stop the flow of electricity and protect the circuit from damage. Analogously, financial markets use circuit breakers to protect investors from excessive selling when few buyers are available.

“It’s working as it’s designed to function so that the market can absorb what news was out over night, how investors are reacting so they can make decisions and everyone gets a chance to see what’s happening.”

New York Stock Exchange President Stacey Cunningham

The NYSE has three levels of circuit breakers used to stop trading, based on the S&P 500 index.

When the NYSE halts trading using circuit breakers
Source: CNBC

The NYSE triggered Level 1 circuit breakers on Monday and Thursday of this past week.

What about ETFs and Circuit Breakers?

Since ETFs also trade on financial exchanges, trading ETFs stops when a circuit breaker trigger occurs. When markets reopened this week after their 15 minute halts, the circuit breaker showed its worth by reducing market volatility. Our opinion at ETFMathGuy is to avoid trading during times of like these, due to market volatility increasing the bid-ask spread.

Daily Spread of the S&P iShares Core S&P 500 ETF (ticker: IVV)

As you can see in the image above, trading ETFs are more expensive due to the impact of the coronavirus. This image shows daily spreads over the last 12 months for the highly liquid iShare Core S&P 500 ETF. Recently, spreads increased by a factor of 4-5 times. Investors would be well served to think about their long term stock allocation strategy and risk tolerance. If possible, avoid selling at times like these to avoid these higher transaction costs. But, if you must trade, avoid selling immediately after markets re-open. Give the the price discovery process a chance to catch up.

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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More ETFs trading commission-free

The year of 2019 has seen a dramatic shift in the costs to trade ETFs. There are now four discount brokers who offer nearly all ETFs commission-free, including Ameritrade, Fidelity, Schwab and Vanguard. But, as we’ve discussed previously, investment returns depend on another cost too. We discuss this other cost here, and suggest alternatives to help minimize it.

How many commission-free ETFs are there now?

There are many ETFs available today covering broad and narrow aspects of the market. According to my favorite screener at ETF.com, and excluding leveraged and inverse ETFs, there are 2,052. That is a lot of choices for any investor to consider. Here at ETFMathGuy, we prefer optimal portfolio construction. That is, selecting ETFs that compliment one another in a diversified portfolio. Prior to this construction, we also screen ETFs to ensure each portfolio avoids ETFs with (i) low volumes and (ii) short track records.

The other cost: the bid-ask spread

The hidden cost of buying and selling an ETF is the bid-ask spread. So, investors should conduct some due diligence to reduce this cost whenever possible. Based on the latest data from ETF.com, we constructed the chart below. As it shows, thinly traded ETFs or ETFs that have less-liquid underlying securities still persist in about 10% of ETFs available today. Fortunately, a little more than half of ETFs have a bid-ask spread under 0.15%.

Number of ETFs and their bid-ask spreads, as of November 2019.
Source: ETF.com’s ETF Screener & Database

Conclusions

Commission-free ETFs are good news, as they reduce the cost of investing in ETFs. However, care should be taken to avoid other costs, like the bid-ask spread. To help avoid this cost, investors should seek more liquid ETFs with lower bid-ask spreads, or find ways to trade less frequently. In any case, commission-free doesn’t mean there are no transaction costs, and investors would be wise to choose their ETFs with care.

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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November 2019 Portfolios and a Thank You to our Subscribers

The November 2019 optimal portfolios are now available to ETFMathGuy subscribers. So, please log in and select your discount broker to see the effect of current market conditions on your optimal portfolios. In this post, we will also discuss some changes to ETFMathGuy.com for 2020, and a special offer for current subscribers.

Changes coming to ETFMathGuy.com for 2020

2019 has been a good year for ETFMathGuy.com. We have seen significant growth of investors interested in optimal portfolios using ETFs. Our subscriber base has also grown substantially, but so has our cost of running this service. So, beginning in January of 2020, we will be making changes to our subscription program. Subscription pricing will become as follows:

$9.95 / month or $79.95 / year for individuals

If you are a financial adviser and wish to continue using our portfolios to help guide investment decisions for your clients, please contact us for institutional pricing. This pricing will apply to portfolios we produce each month from the following brokers’ commission-free ETFs: Ameritrade, ETrade, Fidelity and Schwab

As a “thank you” for anyone who starts a free subscription before the end of the year, will will provide discounted subscription fees. So, please share this opportunity with other like-minded ETF investors you may know, and stay tuned for more details!

Continuing benefits of a free subscription

We realize that some of you may not want to pay for a subscription. So, for those who don’t upgrade, your free subscription will continue. Your free subscription will include access to the Vanguard optimal portfolios. It will also include email updates on our periodic commentary on market conditions and trends in ETFs.

Vanguard offers commission-free ETFs.
Optimal portfolios using Vanguard Commission-free ETFs will continue to be available without a monthly or annual subscription fee.

Thank you all for an amazing first year of ETFMathGuy!

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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Fundamentals of Fixed Income ETFs

A recent Wall Street Journal article nicely summarized the fundamentals that define fixed income ETFs. Understanding these fundamentals can be very helpful in using them in a portfolio seeking the stability of bonds.

Quality, maturity and pricing of Bond ETFs

Two fundamental components that define a fixed income ETF are credit quality and maturity. Remember that fixed income ETFs are a collection of individual bonds. Also, a bond is a loan with fixed payments. That is why bonds are often referred to as “fixed income” investments. Credit rating firms, like Moody’s or Standard & Poor’s, evaluate the riskiness of the loans. Maturity measures the time until the original loan amount is due.

So, there is a strong relationship between a bond’s yield and these two fundamental components. Generally speaking, when a bond is first created, yields are higher under either (i) a lower credit rating or (ii) longer maturity. Once a bond is issued and makes its way into a bond ETF, the price of the bond ETF can then change. But, the underlying bonds continue to issue a stream of constant payments. The only significant exception occurs when the corporation making the bond payments enters bankruptcy protection.

Consequently, prices tend to decrease when demand is low, and investors prefer riskier assets. Conversely, prices of fixed income ETFs generally go up when investors seek less risky assets.  Yields are then inversely related to bond prices, so higher prices lead to lower yields.

What else can affect a bond’s price?

Interest rates can also affect bond prices. Short term rates set by the federal funds rate appear in the image below. As this chart shows, short term rates continue to climb steadily. But, these rates remain below typical levels seen in the past 20 years.

Federal funds rate for the past 20 years.
Federal funds rate for the past 20 years.

So, are bonds a bad investment as short-term rates go up?

This is an important question with no easy answer. But, few would argue that a diversified portfolio benefits from having some bond investments. So, the question should be “what part of the bond market is most suitable to your goals? ” Given there are bond ETFs covering a wide range of maturities and riskiness, there is no shortage of fixed income ETFs for investors to pick from. To this end, we encourage you to subscribe to ETFMathGuy to see how we use a wide variety of commission-free bond ETFs in 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.
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July 2019 optimal portfolios are now available and discussed in terms of recent and long-term market trends

The July 2019 optimal portfolios are now available to subscribers of ETFMathGuy. So, please log in and select your discount broker. In this post, we will also discuss more about risk and return in an optimal ETF portfolio.

As we mentioned in our last post, there are benefits to having more ETFs to choose from during the portfolio construction process. We showed the potential to increase expected returns. In this post, we highlight another important element – risk.

Risk and Return

Risk and return are two fundamental issue that are important to consider when investing in an ETF portfolio. The chart below shows risk (horizontal axis) and return (vertical axis). Here, we define risk as the annual volatility, measured by the standard deviation of daily returns. We evaluate risk and return using a multi-year sample period selected from our rigorous backtesting process. As this chart shows, the optimal portfolios reside at risk levels between the bond market (ticker: AGG) and stock market (ticker:IVV). And, these portfolios are efficient, since they were selected to maximize the expected return.

Risk (Volatility) and Expected Return in the July 2019 optimal portfolios. Notice that at each risk level (conservative, moderate and aggressive), different ETFs offered by different discount brokers leads to different expected returns.
Risk (Volatility) and Expected Return in the July 2019 optimal portfolios. Notice that at each risk level (conservative, moderate and aggressive), different ETFs offered by different discount brokers leads to different expected returns.

As this chart shows, cash can be nearly risk-less, based on volatility, but offers returns that may not exceed long-term inflation. Bonds can offer more of a potential return, but with added risk. Even more return is possible from the stock market for those willing to accept additional risk.

What about the last 6 months?

Indeed, it is true that the first half of 2019 has been very good for both stocks and bonds. Based on a recent Wall Street Journal article, “… S&P 500 finished Friday up 17% this year, marking its best first half since 1997 “. According to the site ETFreplay.com, and including dividends, the stock and bond market are up 18.3% and 5.8%, respectively, this year. Will this trend continue? I personally doubt anyone really knows, as I believe that markets are generally very efficient. A better question may be “What level of risk” or “How much exposure” do you want your investments to have in various parts of the market. To end this post, I’ll leave you with one (of many) famous quotes by Warren Biuffet.

“The stock market is a device to transfer money from the impatient to the patient.”

Warren Buffett

We hope you found this post 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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Risks and Opportunities in Fixed-Income ETFs

Fixed-income ETFs (also known as bond ETFs) continue to grow at a rapid pace. Bond ETFs now exist across a wide spectrum of characteristics. Looking for shorter or longer maturity? Or, how about higher yield (aka junk bonds) versus investment grade or Treasury bonds? ETFs even cover the bond markets in both emerging and developed economies worldwide.

At this rate, State Street Global Advisers predicts that assets in bond ETFs could reach $1 trillion by the end of 2019.

What is driving demand?

Like stock-based ETFs, low cost is a big driver. Greater tax efficiency, as we discussed in detail in a post earlier this year, over bond mutual funds helps too. But, the biggest demand could be simply choice.

“Investors really have a lot of choices — more than they’ve had in the past five years. “

Noel Archard, State Street Global Advisors

Liquidity concerns?

Our opinion at ETFMathGuy is that liquidity concerns are minimal. In fact, real-time ETF price availability helps the price discovery process, and should improve liquidity.

“Fixed-income ETFs have been tested more than once over the past 10-11 years, without any major issues. “

Rich Powers, Vanguard

The current focus of fixed-income ETFs

The current focus of fixed-income ETFs is now in portfolio construction. Here at ETFMathGuy, we are helping to lead this initiative by building portfolios to take full advantage of what fixed-income ETFs have to offer. For instance, in the May taxable conservative portfolio for Vanguard, we show a portfolio with a a variety of fixed-income ETFs in it. We also seek to include higher volume alternative ETFs, to mitigate any possible liquidity issues and minimize the bid-ask spread trading costs.

May 2019 taxable optimal portfolio for risk conservative investors, by ETFMathGuy.
May 2019 taxable optimal portfolio for risk conservative investors, by ETFMathGuy

In conclusion, fixed-income ETFs are in important core component of an optimally diversified portfolio. We invite you to browse through the current month optimal portfolios to see the importance of bond ETFs.

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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Passive investment funds aren’t guaranteed to beat their active counterparts

In this week’s WSJ article, an excellent discussion on was given on active versus passive fund performance around the world. Fund performance over 5 and 10 year periods show that, while passive investments are superior in most of the world, there are some pockets where active management did better.

Excess performance is country specific.

As I’ve highlighted in this table, U.S. stock funds investing in small, medium and large companies consistently underperformed their passive counterparts. These results help explain why index funds, and ETFs in particular, have become so popular in recent years.

The article also highlights another sad reality of active fund investing.

“…most active managers exhibit little ability to consistently beat their peers over time. “

Derek Horstmeyer, Wall Street Journal, March 3, 2019

So, what can we learn from this article?

Passive investments using ETFs don’t guarantee excess performance over their active counterparts. But, more times than not, passive investing will outperform active investing. This fact may not always be true outside the U.S., but for investors that primarily consume with U.S. dollars, passive investments in ETFs appear to be a clear winner.

Thanks for reading!