Friday was a big day in the world of indexes. It was also a costly one for index investors.
I’m referring to the annual reconstitution of the FTSE Russell indexes — the day that the index provider officially updates the components and allocations of its indexes, such as the popular Russell 1000 Index and Russell 2000 Index.
It’s also the day mutual funds and exchange-traded funds that track a FTSE Russell index revamp their portfolios to match it. The result is a torrent of trading. Roughly 1.9 billion shares of common stock traded on the New York Stock Exchange on Friday, according to volume calculated by Bloomberg. It was the second-busiest trading day of the year and nearly triple this year’s average daily volume of 712 million shares.
Continue reading “How Index Funds Can Combat This Hidden Cost”
The saber-rattling for a U.S.-China trade war is becoming louder, and many observers are speculating about which country will blink first. One important variable will be the resilience of each country’s stock market, given the potential for mayhem from a melting market. So it’s worth asking which one is more likely to stand its ground.
There are several considerations, most prominently quality, free float and valuation. Let’s see how they stack up for each country.
Continue reading “China Takes an Edge in Stocks to a Trade War”
President Donald Trump’s looming trade war is no friend of the U.S. stock market, and that’s bad news for U.S. investors who like to keep their money at home.
Free trade is under siege. The White House imposed $50 billion in tariffs on Chinese imports on Friday. China responded in kind. President Trump is now threatening up to $400 billion in additional tariffs, and China is vowing to retaliate again. Its Ministry of Commerce called for “comprehensive quantitative and qualitative measures” if the U.S. imposes additional tariffs.
The intensifying trade dispute should worry investors who are reluctant to venture overseas, and there are many of them. According to one estimate, U.S. investors, on average, allocate just 15 percent of their stocks to foreign markets. That’s a huge home bias given that the U.S. accounts for roughly half of global stocks by market value and a quarter of the world’s economic output.
Proponents of home bias argue that U.S. stocks provide plenty of exposure to foreign markets because large U.S. companies sell their wares all over the world. The percentage of S&P 500 sales from foreign countries was 43.2 percent in 2016, according to S&P’s most recent global sales report. That percentage has been reliably between 43 percent and 48 percent since 2006.
Continue reading “Trade War Would Cause Trouble on Home Front for U.S. Investors”
Apologists for high U.S. stock prices just lost their favorite defense.
Ten-year Treasury yields rose above 3 percent on Tuesday for the first time since 2014, and bond investors are hysterical. Chris Verrone, head of technical analysis at Strategas Research Partners, told Bloomberg Television on Monday that breaching 3 percent would ring in “a 35-year trend change in bonds” in which investors in long-term bonds would stop making money.
Let’s take a breath. For one thing, no one knows where interest rates are headed. Moreover, bond investors need not fear rising rates. Yes, bond prices decline when interest rates rise, but higher rates also mean higher yields on new bonds. Over time, those higher yields should more than offset lower prices.
Continue reading “Stock Buyers Lose Bond Foundation for Steep Valuations”
It’s time for financial professionals to become a profession in substance, not just in name.
The Securities and Exchange Commission proposed new rules for brokers and financial advisers last week. Observers have understandably focused on the big change, which requires brokers to disclose their conflicts and look after clients’ best interests.
But a more modest proposal deserves discussion. Namely, the SEC would subject financial advisers to continuing education requirements.
It’s a wise move. Financial innovation is happening at a dizzying pace. More investment options are available today than ever before, spanning many different types of assets, geographies and investing styles, and new products are coming to market all the time.
That’s a challenge for an aging industry. The average age of financial advisers is 50, according to Cerulli Associates, and just 11.7 percent of advisers are younger than 35. Whatever advisers learned when they were trained for the job decades ago is most likely outdated.
Continue reading “Financial Advisers Need Steady Learning to Keep Earning”
Watch volatility spike, and then watch investors scatter for safety. Only this time, they don’t seem to know where to hide.
After years of calm, market turbulence has returned. The annualized daily standard deviation of the S&P 500 Index — a common measure of volatility — has been 18.6 percent from 1928 through March. But the market was much quieter from 2012 through January, with a standard deviation of 12 percent.
That quiet ended abruptly in February. The S&P 500 tumbled 8.5 percent in just five trading days from Feb. 2 to Feb. 8, and its standard deviation has spiked to 23.4 percent since February.
Continue reading “Classic Safe Haven Hides in Plain Sight”
Facebook’s true value resides in its 2.1 billion users, and investors need to worry about what happens if enough of them decide that free social media isn’t worth the cost.
First, a disclosure: I’ve never used Facebook. I get that it’s an awesome way to keep in touch with family and friends, meet new people and get a personalized online experience. But I value my privacy, and it’s hard to reconcile that with the fact that Facebook is in the business of selling its users’ information.
And it’s a great business. Facebook generated earnings from continuing operations of $15.9 billion in 2017 on revenue of $40.7 billion, 98 percent of which came from advertising.
If it isn’t already obvious that Facebook is a money-making dynamo, consider how it stacks up with digital ad rival Alphabet Inc., the parent of Google. Facebook’s gross margin was 87 percent last year, and its net income margin was 39 percent. That compares with 59 percent and 11 percent, respectively, for Alphabet.
Continue reading “Users Built Facebook’s Empire, and They Can Crumble It”
Theranos did no favors for its investors, but it may have unwittingly helped the next generation of innovators.
The Securities and Exchange Commission last week accused the company and its CEO, Elizabeth Holmes, of misleading investors. According to the SEC’s complaint, Theranos lied about the capabilities of its blood-testing technology on its way to raising $700 million from 2013 to 2015.
As my Gadfly colleague Max Nisen rightly pointed out, “the sheer extent and audacity of the fraud perpetrated by Theranos’s leaders separates it from the pack.” But Theranos couldn’t have pulled off its elaborate fraud without the help of two larger forces.
The first is investors’ eagerness to throw money at startups on a scale that not long ago was available only to publicly traded companies. So-called unicorns — startups valued at $1 billion or more — raised $70 billion from 2014 to 2017, including a record $19.6 billion last year, according to financial data company PitchBook. To put that in perspective, that’s roughly three-quarters of the total net flow to all U.S. mutual funds over those four years, according to fund flows compiled by Bloomberg Intelligence.
Continue reading “Theranos Crackdown Offers Welcome Check on Tech Startup Frenzy”
If you want to know where cryptocurrencies are in their development, keep an eye on fees.
When a new “investment” comes along, investors are often too busy counting their anticipated bounty to care about cost. Shrewd purveyors predictably seize the opportunity to charge excessive fees. But reality inevitably falls short of investors’ expectations, and the focus eventually turns to how much they’re paying to invest.
That’s a short history of stock investing. Investors had little access to stock market data a century ago. They didn’t have the luxury of knowing, for example, that the S&P 500 Index would generate a real return of 7.1 percent annually from 1926 to 2017, including dividends. Or that the index’s real return would fall short of that long-term average 52 percent of the time over rolling 10-year periods.
Continue reading “Bitcoin Isn’t an Investment Until Buyers Sweat the Fees”
Marijuana stocks would be the ultimate growth play if investors weren’t already so fired up.
It just got easier for U.S. investors to bet on pot’s big plans. Toronto-based Cronos Group Inc., which invests in medical marijuana producers, on Tuesday became the first marijuana company listed on a major U.S. exchange. Analysts expect its revenue to reach $34 million this year, up from $400,000 in 2016.
Cronos’s debut follows that of ETFMG Alternative Harvest ETF on Dec. 26, the first U.S.-listed marijuana exchange-traded fund. If ETFMG’s popularity is any indication, Cronos will soon be awash with money. Investors have already poured $386 million into the ETF through Tuesday.
Continue reading “High Times for Marijuana Stocks”