Bob’s Journal for 8/15/19
There’s a lot happening in the exchange-traded fund (ETF) world, and investors should be aware of the changes.
ETFs are, by at least some counts, the fastest-growing investment vehicle ever. They were created only in the 1990s but rapidly became a favorite for many investors.
Thousands of ETFs were created. At one point, it was estimated that there were more ETFs available than individual stocks.
That’s more ETFs than the market can support, and many began to be referred to as “zombie ETFs.” These are ETFs that never attracted enough investor dollars to make the ETFs financially viable.
Often, large financial firms subsidize zombie ETFs, hoping that at some point they’ll attract enough investors to be profitable. It looks like 2019 is the year hope is being given up on many zombie ETFs.
In the first six months of 2019, 58 ETFs were liquidated. That’s the most liquidations in the first six months of a year, according to Bloomberg. The previous high was 44 liquidations in 2008.
Many of the 2019 ETF closings were from major sponsors of ETFs, such as Invesco and WisdomTree. Usually, the smaller ETF firms that can’t subsidize money-losing funds are the ones that liquidate ETFs.
At least 12 funds are expected to be closed in the second half of 2019, with six of them from industry leader BlackRock.
A common feature of the liquidated funds is above-average expense ratios. The large ETF sponsors are engaged in a fee war, and ETF investors tend to be sensitive about fees. Some ETFs now are offered without fees and expenses.
It looks like the rapid growth phase of ETFs is over. We’re likely to see fewer ETFs that invest solely in niche or exotic market sectors.
It also is going to be harder for small firms to compete. The domination of the ETF market by a few major firms will increase. I predict three firms collectively will hold the vast majority of the ETF market at some point in the future. The winners will be among the current major sponsors: Vanguard, BlackRock, Invesco, Schwab, State Street and WisdomTree.
Despite this trend, it appears at least a few firms believe there still is room for niche ETFs. There now are six ETFs that focus on cannabis or marijuana-related stocks. Three of them came to market in July. The latest, Cambria Cannabis (TOKE), recognizes the importance of fees in the ETF market. Its net expense ratio is only 0.42% (after waiving 0.17 points of its management fee). The other marijuana-related ETFs have net expense ratios 0f 0.70% or higher.
Another innovation in this ETF is that it will be actively managed. Most ETFs attempt to replicate a published index. Only a few are actively managed. There was a belief in the early days of ETFs that an actively managed fund wouldn’t work within the ETF structure.
But there are a few actively managed ETFs now, and it’s likely that some of the future growth will be in actively managed ETFs.
Another trend is that investors are pouring money into bond ETFs. Stock ETFs had dominated the market.
Recently, bond ETFs collectively had more than $1 trillion in assets for the first time. In June, a record $25 billion was added to bond ETFs. That’s 45% higher than the previous record in October 2014.
Another development was the Securities and Exchange Commission (SEC) again delaying a decision on whether to approve the listings of two bitcoin ETFs. Decisions on these two ETFs have been delayed several times, often without explanation. The SEC announced the decisions would be delayed until at least October.
There have been at least 25 applications for bitcoin-related ETFs, none of which have been approved by the SEC. The reasoning, said SEC Chairman Jay Clayton, is that agency officials are worried about the potential for theft of bitcoins and manipulation of bitcoin’s price on the cryptocurrency exchanges. He believes a bitcoin ETF won’t be approved until the SEC is satisfied the investors will be protected.
The Data
Small business owners continue to have a positive outlook. The NFIB Small Business Optimism Index rose to 104.7 from 103.3. This partly reverses the sharp decline in June’s Index. But it still leaves the Index below its 2019 high registered in May and the all-time high of 108.8 in August 2018. The July survey improved across all components of the index.
It is no wonder, given the recent strength in retail sales. In July, retail sales increased 0.7%, following a 0.3% increase in June. Excluding autos, sales were up 1.0%. Excluding autos and gas, sales were up 0.9%. Online sales increased 2.8%, the third straight month of strong sales growth in that category. Even so, department store sales increased 1.2% for the month.
The Philadelphia Fed Business Outlook Survey exceeded expectations at 16.8, though it is down from 21.8 last month. Most components of the survey were strong and contrast with some of the weaker manufacturing surveys released in recent weeks.
The Empire State Manufacturing Survey also exceeded expectations, coming in at 4.8 compared to 4.3 last month. New orders increased for the first time since May.
But we don’t see this strength in Industrial Production for July. Production overall declined 0.2%, and manufacturing production slid 0.4%. Business equipment production dipped 0.4%, signaling that businesses aren’t expanding their operations or planning for growth.
Productivity for the second quarter increased 2.3%. Unit labor costs rose 2.4%. Output jumped 1.9% for the quarter, but hours worked declined. The higher unit labor costs are good for workers, and the higher output despite lower hours worked is good for businesses.
Home builders still are optimistic. The Housing Market Index from the National Association of Home Builders (NAHB) for August increased to 66 from 65.
The Producer Price Index (PPI) increased 0.2% in July and 1.7% over 12 months. Excluding food and energy, the PPI declined 0.1% in July but increased 2.1% over 12 months.
The Consumer Price Index (CPI) increased 0.3% in July and 1.8% over 12 months. Excluding food and energy, the CPI increased 0.3% in July and 2.2% over 12 months. The July CPI numbers all were a little above expectations. Medical and housing costs combined make up about half the CPI, and prices in each of those categories are up at least 3.0% over the last 12 months.
New unemployment claims increased 9,000 to 220,000 in the latest week. That keeps both the weekly claims and the four-week average in the same range they’ve been in for some time.
The Markets
The S&P 500 fell 1.41% for the week ended with Wednesday’s close. The Dow Jones Industrial Average declined 1.98%. The Russell 2000 dropped 2.18%. The All-Country World Index (excluding U.S. stocks) lost 2.29%. Emerging market equities fell 2.64%.
Long-term treasuries rose 4.04% for the week. Investment-grade bonds increased 0.82%. Treasury Inflation-Protected Securities (TIPS) added 0.58%. High-yield bonds lost 0.55%.
The dollar increased 0.57%.
Energy-based commodities rose 1.37%. Broader-based commodities rose 0.61%, while gold climbed 1.26%.
Bob’s News & Updates
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