06/21/2011

Recent market volatilities reminded investors that risk is heightened. For a long term retirement investor, diversification among assets is the first step. On the other hand, some long short strategies in alternative asset classes such as commodities and currencies can be used to further tame market fluctuation.

In the recent financial crisis investors took huge hits. During the financial crisis, some smart investors invested in alternative area such as Exchange traded funds (ETF's) that tap into managed-futures strategies popular with hedge funds and commodity-trading advisors. For these investors, they were rewarded as these managed futures based ETFs performed well during that period.

The managed futures strategy is nothing new; hedge funds and other large, sophisticated investors have been using quantitative methodologies to direct futures-based strategies for years.

Let's take a look at some of commodity and currency long short strategy based ETFs:  

For more information on ETFs in various asset classes, please refer to MyPlanIQ ETFs in Asset Classes page.

Clearly the best performer is LSC in the table with the return of 11.43% in a year followed by the ALT with a return of 2.24%. Although the LSC is down from the past week when the returns are 14.43% this is in line with the worldwide corrections in stoks. The expense ratio of LSC is 0.75% which is also the least as compare to the other ETF's. Please find below the May 2011 long/short positioning of the Index sectors as well as the long/short positioning of the prior month.

LSC is based on a well known S&P Commodity Trends Indicator - Total Return index. The Index is designed to apply a long/short strategy to six commodity sectors comprised of sixteen traditional, physical commodity futures contracts. The Index is a total return index designed to reflect the performance of a fully collateralized investment in the futures contracts. Readers can compare LSC with MyPlanIQ's P S and P Commodity Trend Indicators Strategy which models the same S&P CTI index using Powershares DB commodity ETFs such as (DBP), (DBB), (DBA) and (DBO).

ALT return on the securities is linked to the performance of portfolio foreign currency forward contract and exchange traded future contracts that may involve commodities, currencies, interest rate and certain eligible stocks or bonds indices while seeking to reduce the risks and volatility inherent in those investment by taking long and short positions in historically co-related assets.

WDTI employs a quantitative, rules-based strategy designed to provide returns that correspond to the performance of the Diversified Trends Indicator (DTI). The index is a composite of 24 highly liquid futures grouped into 14 sectors, with an even split between financials (i.e., currencies and interest rates) and physical commodities. The positions of each sector are either long or short (except for energy) based on price behaviour relative to a moving average (if energy is not positioned long, the sector weight is allocated to other sectors). Sector weights are determined by global production for commodities, and by GDP tiers for financials. Readers again can compare this fund with MyPlanIQ's P S and P Diversified Trend Indicators that, in addition to Powershares commodity ETFs, uses CurrencyShares ETFs such as (FXE), (FXY), (FXA), (FXF), (FXB), (FXC) to model the S&P DTI index.

The actively managed long short ETFs mentioned above can indeed provide some diversification benefits for a retirement investing portfolio. As these ETFs are relatively new, investors should monitor these ETFs and do their due diligence.

Disclaimer: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical. 

Symbols: LSC, ALT, WDTI, DBO, DBP, DBA, DBB, FXE, FXY, FXA, Portfolio Strategies, Managed Future ETFs

comments(0) 

03/21/2011

comments(0) 

03/16/2011

by Kevin Carr, A MyPlanIQ Expert User

On March 9, 2011, Charles Schwab announced the release of the ETF Select List.  The quarterly Schwab ETF Select List was created by Charles Schwab Investment Advisory, Inc. and is a filtered list of all of the ETFs in the marketplace, highlighting pre-screened, low-cost ETFs.  Schwab used quantitative and qualitative screens to filter each ETF and build the list, covering 6 major asset categories and 45 minor asset categories. All ETFs, including Schwab ETFs, are evaluated using the same criteria and broken into sectors for US Equity, Foreign Equity, Emerging Market Equity, Fixed Income, Commodity and REITs.

While the ETF Select List has only been out a few days, I constructed a plan on MyPlanIQ platform.  The Schwab ETF Select List  has no redemption periods, is commission efficient and offers low expenses. 

As of March 13, the Schwab ETF Select List Plan has a four star investment menu rating with a 99% diversification score and an overall above average investment choice based on MyPlanIQ Plan Rating methodology .  The Plan Rating methodology is designed to measure how effective a plan’s available funds are using key factors such as diversification, fund quality and portfolio building.

The chart and table below show the historical performance of moderate model portfolios employing strategic and tactical asset allocation strategies (SAA and TAA , both provided by MyPlanIQ). For comparison purpose, we also include the moderate model portfolios of a typical 6 asset SIB (Simpler Is Better) plan . This SIB plan has the following candidate index funds and their ETFs equivalent:

US Equity: SPY or VTI
Commodity: DBC
Foreign Equity: EFA or VEU
REITs: IYR or VNQ or ICF
Emerging Market Equity: EEM or VWO
Fixed Income: AGG or BND

Performance chart (as of Mar 15, 2011)

Performance table (as of Mar 15, 2011)

Currently Commodities, Real Estate and US Equity are doing well. These asset classes are available to Schwab ETF Select List participants.

To Summarize, Schwab ETF Select List Plan offers wide diversification, high quality funds with low expenses. compared with other brokerage supported ETF plans, it is very favorable. From time to time, we will review the plan.

Symbols:DBC,DBA,IAU,DBB,USL,PFF,VNQ,XLY,XLP,XLE,XLF,XLV,XLI,XLB,XLK,IYZ,XLU,BND,SCHO,SCHR,TLH,SCHP,CIU,JNK,BWX,MUB,SCHF,EFG,EFV,SCHC,SCHE,VEU,VT,VGK,VPL,EWJ,GXC,SCHX,SCHG,SCHV,VO,VOT,VOE,SCHA,VBK,VBR,SCHB,VYM,

Symbols (exchange): (DBC),(DBA),(IAU),(DBB),(USL),(PFF),(VNQ),(XLY),(XLP),(XLE),(XLF),(XLV),(XLI),(XLB),(XLK),(IYZ),(XLU),(BND),(SCHO),(SCHR),(TLH),(SCHP),(CIU),(JNK),(BWX),(MUB),(SCHF),(EFG),(EFV),(SCHC),(
SCHE),(VEU),(VT),(VGK),(VPL),(EWJ),(GXC),(SCHX),(SCHG),(SCHV),(VO),(VOT),(VOE),(SCHA),(VBK),(VBR),(SCHB),(VYM)

comments(0) 

03/13/2011

Last week's market volatility is a good reminder on how precarious it is in commodity investing. For the week, broadbase commodity index ETF (DBC) dropped 3.09% while Gold (GLD) fared better, dropping only 0.81%. Agriculture commodity (DBA) dropped even more: 3.71%. For more detailed information, please refer to here.

It is now generally recognized that adding commodity exposure in a long term portfolio that adopts a strategic asset allocation strategy can increase diversification effect and thus possibly improving risk adjusted returns. However, given the high volatitily (and risk) of commodities, it is important for an investor to understand the difference between a long only approach and long short approach in this asset investment. 

A long only approach is simply just buying a commodity index such as Powershares DB Commodity Index ETF (DBC) or GSCI commodity index (GSG)  (or sub index such as agriculture (DBA), precious metal (DBP)). A long short approach, on the other hand, can take long and/or short positions on mutliple commodity components simultaneously. It is mostly based on technical indicators such as moving averages, momentums and reversals. This approach has been adopted by professional CTAs (Commodity Trading Advisors). A simple and popular strategy is the S&P Diversified Commodity Trend Indicators. The following is a short description of the strategy: 

The strategy is a simplified variation of  S&P commodity trends indicator (CTI). It is a subset of the S&P DTI by simply eliminating half of the financial assets.

The following table compares the performance between such S&P Commodity Trend Indicators Portfolio (S&PCTI)  and a general broadbase commodity ETF (DBC):

Though S&PCTI under performed in 2009, 2010 and 2011, it out performed DBC in the last 3 years. This is because it had 23.8% return in 2008, compared with DBC's 31.6% loss in the same year. Furthermore,  S&PCTI has a standard deviation 16%, compared with DBC's 28%. In fact,  S&PCTI's standard deviation is consistent with that of an overall stock market index such as S&P 500 (SPY). 

It is perhaps even more important to pay attention to maximum drawdowns for S&PCTI:  since its inception 10/1/2007 (this is due to the short histories of commodity ETFs used in this portfolio), the maximum drawdown is about 19% vs. DBC's whopping 60% (during the 2008-2009 detacle). 

The takeaway from this article is that for active investors, one might want to consider adopting a more conservative approach in commodity exposures. Investors can find Element's ETN (LSC) or Direxion's Commodity Trend Strategy Inv (DXCTX) that implement the S&P  Commodity Trend Indicators strategy. Before you invest, however, you are encouraged to compare the portfolio S&PCTI, LSC and DXCTX.

comments(0) 

03/07/2011

Last week is another strong week that saw strong ascent of commodity ETFs across the board (other than natural gas ETF (UNG)). US Oil (USO) and Silver (SLV) shot up more than 6% while broadbase commodity ETF (DBC) gained 2.56%. For more detailed performance, see here. 

The unrest in middle east drove oil prices higher again: WTI crude oil reached $104 per barrel. According to an article by Jason Zweig on The Wall Street Journal, $1.4 billion new money was poured into energy related investments in just one week ended on last Wednesday. Speculation is abound. 

A broadbase commodity index ETF usually has adquate energy related exposure. For example, Powershares DB Commodity Index (DBC) has the following weights:

Energy exposure in DBC amounts to 57.63% as of 3/3/2011!  

In the article, Zweig questioned whether one needs to have energy stocks, especially energy company stocks made up 13% of S&P 500 index. We concur with him that investors should be cautious in the face of such a speculative rush. On the other hand, a portfolio that has commodity exposure can be more diversified and thus, reducing risk and enhancing return in general. This is not necessarily always the case. The following table compares the performance of a portfolio with 5 core assets: US Equities (VTI), Foreign Equities (VEU), Emerging Market Equities (VWO), REITs (VNQ) and Total Bond Index (BND) and a portfolio with an extra asset (DBC). 

The trend score is defined as the average of 1,4,13,26 and 52 week total returns (including dividend reinvested).

The takeaway is that one can gain energy exposure by investing in broadbase commodity ETF. Investing in a broadbase commodity does not automatically guarantee performance and risk improvement. One has to adopt a tactical (or dynamic) approach to achieve such a goal. 

Symbols:SLV,DBP,GLD,DBB,DBA,DBC,DBE,USO,UNG,VTI,VEU,VNQ,VWO,BND,AGG,SPY,EFA,EEM,IYR,

Disclosure: