Category Archives: State Street

Money Managers Lure Millennials With Low Minimums, Live Advice

The traditional financial advisor rarely takes on new clients with a nest egg smaller than $100,000.

But the financial advisory industry is coming up against two large speed bumps that could spark a paradigm shift: the rise of the robo-advisor and the fact that the second half of the millennial generation is entering the workforce and starting to invest.

This has led one registered investment advisor to rethink its strategy for acquiring clients. M&R Capital Management is a 24-year-old firm with $500 million under management. The New York-based RIA — which manages money for individuals, institutions and charities — typically requires $250,000 to open a separately managed account (SMA). Its average SMA rose 13.05% in the past year and for the past three and five years returned an average annual 2.89% and 6.26% respectively, M&R says.

However, the firm’s members realized their growth strategy needed to focus on the millennial generation. With many millennials still in their early to mid-20s, few have the nest egg to open an SMA. Most don’t even have savings.

But the few sophisticated enough to invest are looking at the same place where they do their shopping and banking — the computer — and opening accounts with robo-advisors.

So M&R Capital decided to lower its account minimum. It created Prime Funds, a set of ETF-based model portfolios in which people could open an account with as little as $500.

“This is our way to compete with the robo-advisor,” said Paul DeSisto, director and senior portfolio manager at M&R. “The idea was to get young workers. People who don’t have much money to invest and get them invested right away with some safety and growth.”

DeSisto said the idea is to make them clients when they are small investors, help them grow large portfolios, then 15 or 20 years later move them into an SMA.

“We feel that people still want to talk to somebody,” said DeSisto. “They can call at any time and have access to the portfolio managers.”

M&R is able to accept such small accounts by keeping costs low. Prime Funds clients only have a choice of three portfolios. M&R uses the Pershing FundVest ETF platform, which lets M&R trade ETFs commission-free. The clients can’t trade ETFs on their own. M&R charges each account an annual fee of 1%. That’s on top of the fees that the ETFs charge, which range from 0.15% to 0.57% of assets a year.

The three portfolios currently available are: growth, value, and equity income.

The growth portfolio consists of a 42.5% allocation of PowerShares Dynamic Large Cap Growth Portfolio (PWB), 15% SPDR S&P 400 Mid Cap Growth (MDYG), 32.5% SPDR S&P 600 Small Cap Growth (SLYG), and 10% PowerShares S&P International Developed Quality Portfolio (IDHQ).

The value portfolio consists of PowerShares Dynamic Large Cap Value Portfolio (PWV), Oppenheimer Mid Cap Revenue ETF (RWK), SPDR S&P 600 Small Cap Value (SLYV), and IDHQ.

The high-distribution equity-income portfolio is comprised of PowerShares S&P 500 High Dividend Low Volatility Portfolio (SPHD), SPDR S&P 400 Mid Cap Value (MDYV), PowerShares S&P SmallCap Low Volatility Portfolio (XSLV), and IDHQ.

The funds have been up and running since July 31. Through the end of September, the growth portfolio has a return of 6.1% and $95,000 in assets. The others don’t have assets yet.

While it’s not a full-blown trend, M&R isn’t alone in taking on clients with small accounts. Some, like Jeremy Torgerson, the founder of nVest Advisors, an RIA in Denver, has been taking on small accounts for two years because he sees how the robo-advisor technology is overrunning the industry. He offers his clients five ETF-based model portfolios.

“I’ve structured my practice to be a touch of robo and a touch of human to hold their hands,” said Torgerson. “If you get these people on the ground floor and be there for them, you will have a lifelong client.”

Hunter von Unschuld, the founder of Fractal Profile Wealth Management, an RIA in Albuquerque, N.M., retired as an attorney in 2013 and has been managing money since. He won’t turn anyone away — and offers eight ETF-based portfolios.

“We take small accounts because it’s my belief that everyone that needs help with their finances and retirement planning should be able to get help no matter their account size,” he said.

This was originally published in Investor’s Business Daily.

She is Belle of ETF.com Awards

Women might not have broken the ultimate glass ceiling in American politics, but they took the top prizes at the ETF.com Awards.

Yes, it’s awards time again for the ETF industry and starting off the festivities was ETF.com, a Web site full of stories, tools and fund analysis.

The SPDR SSGA Gender Diversity Index ETF, with the ticker (SHE), swept the ceremony by walking away with four of the top awards, more than any other ETF has taken home in the history of this specific award ceremony. The fund won Best New ETF, Most Innovative New ETF, Best New U.S. Equity ETF and Thematic ETF of the Year.

girl-v-bull

Fearless girl courtesy of SSGA

Were the judges trying to soften the blow women took on the political plane this year? Possibly. State Street Global Advisors, the sponsor of the fund, is responsible for installing the “Fearless Girl” statue near Wall Street on International Women’s Day last month. The statue represents the lack of gender diversity on Wall Street and the executive suites of U.S. corporations in general.

State Street said it created SHE, as the Gender Diversity Fund is affectionately known, to “invest in large-capitalization companies that rank among the highest in their sector in achieving gender diversity across senior leadership. SHE offers a means to invest in companies that have demonstrated greater gender diversity within their sector, providing investors with a tool to inspire change and make an impact.”

According to a 2015 paper from MSCI ESG Research, companies in the MSCI World Index with strong female leadership saw a return on equity of 10.1% per year compared with 7.4% for companies lacking suck leadership. We would be remiss if we failed to point out that on State Street’s board of directors only three of the 11 are women.

It appears the “Fearless Girl” is creating a lot of buzz too, as she stands facing the famous “Charging Bull” statue of Wall Street. The Bull’s creator thinks the girl statue violates his artistic rights and changes the meaning of his statue, which represents the strength of America and the market.

The Best ETF of 2016 was actually the VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL). This award is given to a fund that did its job particularly well in a particular year. In 2016, this fund surged 25%, at least 10 percentage points more than its main competitors in a year when high-yield bonds were posting great returns.

I’ll just let ETF.com explain how the fund works: “Typically, investors hold bonds at different tranche levels, and as soon as a bond falls out of the investment-grade bucket, every insurance company must sell all of it, pushing these bonds into oversold territory, the result is that these downgraded bonds tend to outperform almost immediately after being downgraded – the very juice ANGL is extracting. What’s more these newly downgraded bonds don’t carry that much more default risk.”

For full list of ETF.com awards click here.

Emerging Market ETFs Rally in Spite of Trump Trade Threat

In the wake of Donald Trump’s election, emerging-market ETFs tumbled as investors feared that the new administration’s protectionist trade policies would hurt the countries in these markets. But then a funny thing happened. After ranking as one of the worst-performing sectors in the last quarter of 2016, emerging- market ETFs began the new year with a rally and are outperforming U.S. stocks.

So far this year, Vanguard FTSE Emerging Markets ETF (VWO) has jumped 10%, iShares Core MSCI Emerging Markets ETF (IEMG) leapt 10%, and the iShares MSCI Emerging Markets ETF (EEM) climbed 10% vs. 5% for the SPDR S&P 500 (SPY).

Part of the reason is that prior to the election, 2016 had been a pretty good year for emerging markets. Because many emerging markets are tied to commodities, the prior four years had been pretty bad because of falling commodity prices and slowing growth in China. But in 2016, commodity prices began to rise and China’s economic slowdown stabilized.

A big part of the postelection drop was out of concern for the economy of Mexico should Trump attempt to renegotiate Nafta and anxiety over trade barriers with China, according to Mitch Tuchman, chief investment officer at Rebalance IRA, a retirement investment advisor, in Palo Alto, Calif.

Robert Johnson, Morningstar’s director of economic analysis, said the recent performance is a continuation of last year’s rally. He also said companies and investors have begun to think that, in the wake of Trump’s mishandling of the immigration ban, he might not be able to implement his trade policies, especially as he gets pushback from industries hurt by trade bans and tariffs.

Also, since the trade policies haven’t yet been defined and investors think most emerging markets, besides Mexico and China, won’t be affected, they’re jumping back in.

“After five years of underperformance, emerging markets were oversold, and the election flushed out the remaining people hanging on,” said Gerald Laurain, chief investment officer with FTB Advisors, an RIA in Memphis, Tenn., with $4 billion in assets under management. “So now that they’ve established a low, the only place to go isup.”

J.J. Feldman, a portfolio manager at Miracle Mile Advisors, a Los Angeles-based RIA, said the valuations are much more compelling. The price/earnings ratio on the emerging markets is 12 vs. an expensive 18 on the S&P 500. He added that emerging- market stocks are yielding 2.25% vs. the S&P’s 2%.

Peter Schiff, CEO of Euro Pacific Capital, an asset manger in Westport, Conn., has a different angle. “When there is protectionism, America is the loser,” he said. “And tariffs will backfire. People are making the connection that it will weaken the dollar. Meanwhile, the euro is bottoming out and that is better for emerging markets.”

“Europe seems to be doing better, and it’s more important to China than the U.S.,” said Johnson. “There’s better growth there, no new rules and other markets they can sell into.”

So far through this year, the top country-specific ETFs are all in emerging markets. IShares MSCI Brazil Small-Cap (EWZS) has soared 30%, VanEck Vectors Brazil Small-Cap (BRF) surged 26%, iShares Brazil Capped (EWZ) is up 18%, Global X MSCI Argentina (ARGT) up 16%, and KraneShares CSI China Internet (KWEB) up 16%.

After a brutal two-year recession in Brazil, during which President Dilma Rousseff was impeached and replaced by Michel Temer, the country is finally expected to be on the road to recovery. Finance Minister Henrique Meirelles expects the Brazilian economy to return to a 2% annual growth pace by the last quarter of the year. Wall Street is forecasting a more realistic 0.2% growth rate in 2017 gross domestic product. Brazil’s economy is driven by resources and commodities. Its top commodity exports are oil, iron ore, soybeans, sugar cane and coffee.

While China is seeing its economy slowing, with GDP expected to post growth of 6.7% for 2016, that’s the kind of slowdown most country’s would kill for. Right now China is dealing with a cooling housing market, explosive growth in debt, and painful structural reforms instituted by President Xi Jinping.

“E-commerce is going well and that is tapping into a strong part of the economy,” said Rob Lutts, president and chief investment officer of Cabot Wealth Management, an RIA, in Salem, Mass. Lutts spends a lot of time traveling in China. “Investing in Alibaba is like investing in Amazon.com.”

Lutts said that China will have a big challenge over the next five years with a big debt bubble that will have to be distributed over the rest of the economy. This will bring the economic growth rate down to 5% by 2020. “They will have stress when the real estate bubble comes down in price, and that will hurt the smaller banks in the next six months.”

But Lutts is very bullish on India. For the fiscal year ended March 2016, India’s economy grew 7.9%, and Lutts said it could go higher. Indian Prime Minister Narendra Modi is instituting reforms to remove government obstacles to business and make the government more efficient. Lutts said his favorite way to invest in India is in the financial services sector.

He thinks HDFC Bank is one of the best-managed banks in the world. It’s also the top holding of iShares MSCI India ETF (INDA), No. 3 in WisdomTree India Earnings Fund (EPI), No. 2 in iShares India 50 ETF (INDY) and No. 3 in PowerShares India Portfolio (PIN). The ETFs’ year-to-date gains range from 8.8% to 9.8%.

Overall, all the experts think that because Europe is growing and Trump’s policies are still undefined, emerging markets should keep rising throughout the year.

Orginally published in Investor’s Business Daily.

Comparing ETFs? Don’t Just Look At Expense Ratios

The rule when buying ETFs is that when all things are equal, buy the one with the lowest expense ratio. But remember that similar sounding ETFs often aren’t equal. This means don’t let the expense ratio be the only factor in choosing an ETF.

“Our belief is expenses and past performance matter, but more important is understanding what’s inside the portfolio,” said Todd Rosenbluth, S&P Capital IQ director of ETF research.

SPDR S&P 500 ETF (SPY) tracks the S&P 500 stock index and charges a tiny expense ratio of 0.09%, commonly called nine basis points. One hundred basis points make up 1 percentage point. Guggenheim S&P 500 Equal Weight ETF (RSP) also tracks the S&P 500. But it charges a fee of 0.4% of assets.

Look At The Performance

“You might ask ‘Who in their right mind would pay 40 basis points vs. 9?'” said Ron Delegge, founder of ETFguide. “But then you take a look at the 10-year return.”

RSP returned an average annual 9.42% in the past 10 years, compared with 7.85% for SPY, according to Morningstar. In fact, RSP beats SPY in all periods reported on Morningstar.com, from one month on.

The big difference between the funds is the way the indexes are weighted. SPY follows the S&P 500’s classic market-capitalization weighting, which multiplies the stock price by the number of shares outstanding to get a stock’s market value. The biggest companies get a larger weighting, comprising a greater percentage of the index than the smaller ones. Thus a $1 move in Apple (AAPL), with a 3.98% weighting, will lift or drag down the index much more than a $1 move in the shares of Diamond Offshore Drilling (DO), which has a weighting of just 0.01%.

But RSP gives every stock in the index an equal weighting of 0.2%. This means a $1 rise in Diamond Offshore’s stock moves the index just as much as a $1 increase in Apple’s shares. By giving greater weight to the smaller stocks in the index, this has a big effect on the fund’s performance. Year to date, RSP is up 2.25% vs. SPY’s 1.29%, 96 basis points more — after paying the expense ratio.

“Would I be willing to pay more for those returns?” asks Delegge. “Definitely.”

Of course, SPY could just as easily outperform RSP in periods when the market favors large-cap stocks or other factors that can be found in SPY but not RSP.

But S&P 500 trackers aren’t alone. “One example that is much maligned is PowerShares FTSE RAFI U.S. 1000 ETF (PRF), said Michael Krause, president of AltaVista Research in New York, which runs the ETF Research Center website. “I calculate that cumulative since its inception in 2006, PRF has outperformed iShares Russell 1000 ETF (IWB) by 14 percentage points.”

ETF Research Center pegs PRF’s average annual return since 2006 at 8.9% vs. 8.1% for IWB.

PRF’s expense ratio is 0.39%, while IWB charges 0.15% of assets.

Not Alone

This trend happens a lot among the industry ETFs. SPDR S&P Homebuilders ETF (XHB) and iShares U.S. Home Construction ETF (ITB) sound like they track the same industry, meaning they should post similar results. XHB charges 0.35%, while ITB charges 0.45%, so XHB seems like a better choice.

Yet only 35% of the XHB holdings are actual homebuilding companies, and 28% building products. The rest of the stocks are home furnishing producers and retailers, home improvement retailers and household appliance makers. However, homebuilding companies make up 71% of the ITB portfolio, with building products at 13%.

ITB has risen by an annual average of 25.72% in the past three years vs. 21.01% for XHB. Year to date, ITB is up 8.32% vs. XHB’s 6.74%. That more than compensates for the extra 10 basis points.

“Cheaper hasn’t been better as of late,” said Rosenbluth.

Originally published in Investor’s Business Daily.

DoubleLine Joins State Street On Active Bond ETF

ETF giant State Street Global Advisors teamed up with DoubleLine Capital, the firm of famed bond investor Jeffrey Gundlach, to launch SPDR DoubleLine Total Return Tactical ETF (TOTL) last week.

The actively managed ETF is DoubleLine’s first foray into the ETF space.

One of the most respected bond fund managers in the market, Gundlach ran $12 billion TCW Total Return Bond Fund until 2009. At the time, Morningstar said it was in the top 1% of all funds invested in intermediate-term bonds for the five years ended in 2009.

Gundlach left TCW after a management dust-up and formed DoubleLine in 2010. He’s DoubleLine’s CEO and chief investment officer.

“It’s not a clone of any existing strategies,” said Jeffrey Sherman, a DoubleLine portfolio manager, during a webcast this week. Sherman will co-manage the ETF with Gundlach and firm President Philip Barach. “It’s a new product created just for this offering, but it draws upon the views of Jeff Gundlach and the DoubleLine team.”

While not identical to the firm’s flagship DoubleLine Total Return Bond Fund , ETF investors will be getting a deal. The ETF charges an expense ratio of just 0.55%, compared with the fund’s 0.72% fee for retail investors.

By going with a name-brand fund manager, State Street (NYSE:STT) is making a calculated effort to take advantage of the problems at Pimco. It looks like it wants to become the leading bond ETF in the country by taking on $2 billion Pimco Total Return Bond ETF (BOND).

BOND has seen more than $1 billion in outflow since Bill Gross, Pimco’s bond maven, left the firm in September. This caused BOND to fall to second-largest active bond ETF.

TOTL’s investment objective contains elements of both DoubleLine’s total return and core fixed-income strategies. The ETF aims to have a low interest-rate risk profile.

At the same time it expects to maximize returns through active allocation and selection of securities its analysis determines to be mispriced in the market.

DoubleLine Total Return Bond Fund has focused on mortgage-backed securities. But the ETF can hold any bond, including U.S. Treasuries, investment grade corporate credit, high-yield bonds, collateralized loan obligations, asset-based securities, bank loans and sovereign debt from both developed and emerging markets.

The portfolio must contain a minimum of 20% in mortgages, but it isn’t required to hold anything else. While high-yield, emerging market and CLO securities can each only take up as much as 25% of the portfolio, as much as 85% can be held in government bonds.

The duration of a single bond can range from one to eight years and no security can have a bond rating below BBB-.

State Street Getting Active

State Street, which has a reputation for running passively managed funds, has slowly moved into the active ETF arena. The new fund is its third active bond ETF and 10th overall.

While active equity funds have a hard time beating their benchmarks, the less transparent bond market creates more opportunities for managers to beat their index.

“Passive does best in U.S. equities, but in investment grade fixed-income 65% of managers outperform their benchmark,” said Dave Mazza, head of research at SPDR ETFs. “A skilled fixed-income portfolio manager can find inefficiencies across the market because it is illiquid and opaque.”

Biotech ETFs Bounce Back After Three-Month Correction

Biotechnology exchange traded funds surged this week on news that drug giant Merck agreed to buy Idenix Pharmaceuticals for $3.85 billion, leading investors to believe the biotech sector has bottomed out after three months of misery.

On Monday, the big pharma drugmaker offered the tiny biotech $24.50 a share, a 239% premium to its closing price Friday, in order to acquire Idenix’s portfolio of three early-state hepatitis C drugs.

The news sparked a rally in the biotech sector and biotech ETFs. PowerShares Dynamic Biotechnology & Genome Portfolio ETF (PBE) jumped 8.4% Monday, to advance 11% for the week ending June 10. It now has about 9% of its assets in Idenix.

SPDR S&P Biotech ETF (ARCA:XBI), now with 4% in Idenix, leapt 6.8% Monday, for a 14.6% gain over the past five days. Overall, biotech sector ETFs rose an average of 5% over the past week.

Big 2013 Move, Then Pullback

Last year, the biotech sector was one of the best areas of the market, posting a bigger return than the S&P 500. But since February, the sector has undergone a significant retrenchment. First, it started out as a flight from risk in a sector many said was in bubble territory.

The timing was prescient. Over the next three months, a string of biotechs suddenly imploded. In early March, Geron, a biotech with no products, plunged 62% after U.S. regulators halted the trial of its only experimental drug.

In April, Cytokinetics’ shares lost more than 60% after its experimental treatment for Lou Gehrig’s disease failed to work better than a placebo in a clinical trial.

Then the first week of May saw three biotechs all report failures with their leading drug candidates.

“These unexpected blowups and the overall flight from risk hurt the small-cap biotech sector with valuations under $1 billion,” said Ron Garren, an oncologist and editor of BioTechInsight.com, an online biotech stock newsletter in Carmel, Calif.

“They got decimated and some lost more than half their value. Of course, some were overvalued to begin with.”

From late February to May 8, iShares Nasdaq Biotechnology ETF (NASDAQ:IBB), which tracks all the biotechs on the Nasdaq, and PBE each tumbled 18%. XBI sank 29%.

Over the past month, XBI climbed 21% for a year-to-date return of 15%. PBE is up 14% for an 18% gain this year. IBB, the biggest biotech ETF with $5.2 billion in assets, advanced 10% the last 30 days for a 10% return year-to-date.

ProShares Ultra Nasdaq Biotechnology ETF
(NASDAQ:BIB) is a leveraged fund that seeks to post a daily return twice the results of the Nasdaq Biotechnology Index.

It fell 35% during the biotech correction, but gained 21% over the past month. Year to date, BIB is up 16%, but its return over the past 12 months is 82% compared with the 32% return for the average biotech ETF.

Opportunity Seen

“As the yields on dividend stocks begin to dry up, risk stocks look more attractive, and after the biotech beat down, I think these stocks are a great opportunity,” said Garren.

“There has been an incredible amount of work in immunotherapies and cancer. Also, there are big opportunities involved in fatal diseases that need therapies.”