The Future Ain’t What It Used To Be

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The Future Ain’t What It Used To Be

“You can observe a lot by just watching.” That’s a famous Yogi Berra-ism, and we’ll use its wisdom today to highlight 3 items:

#1: Even-weighted S&P 500 performance versus the usual market cap-weighted measure of US equity returns:

  • The even-weighted basket (symbol RSP, an Invesco ETF) is up 22.1% YTD and +8.1% over the last year. Over the last month it is up 5.5%.
  • That compares with the S&P 500’s YTD return of 23.1% and 1-year advance of 9.6%. Over the last month it is up 5.0%.

What we observe: that the RSP is within 100 basis points of the S&P 500’s return YTD (and made a new high today) shows that the 2019 US equity rally is broader than just the super-cap names. Also, consider that the sector weights in RSP look nothing like the 500: Industrials (14% in RSP, 9% in the S&P), Technology (13% vs. 22%) and Communications (4% vs. 10%), for example. And Apple – one of this year’s big S&P winners – has just a 23 bp weighing in RSP.

#2: The big money flow winners in US listed exchange traded funds this year:

  • YTD inflows into ETFs total $233 billion.
  • Just 10 ETFs make up 40% of all those money flows, despite the fact that there are +2,300 ETFs listed in the US.
  • The big equity fund winners are low cost US stock plays like Vanguard’s Total Stock Market ETF (symbol VTI, $13 billion of inflows YTD, 3 bp expense ratio) or its S&P 500 tracker (symbol VOO, $11 billion inflows, 3 bp) or iShares S&P 500 tracker (symbol IVV, $10 billion inflows, 4 bp).
  • Also in the equity mix: US equity “min vol” strategies like iShares USMV ETF, with $12.5 billion of inflows YTD and a 15 bp expense ratio.
  • Also worth noting: half of the top 10 ETF names in terms of inflows are bond funds, and YTD fixed income funds have received more fresh money than equity products ($128 billion vs. $83 billion).

What we observe: all this year’s equity money flow champs charge meaningfully less than the average stock ETF expense ratio of 58 basis points. Investors are clearly the winners in the industry’s race to the bottom in terms of pricing. In past cycles, bull markets allowed for higher-priced investment products that offered the chance for better returns. Not this time, however…

#3: Shifts in investment style performance over the last month:

  • S&P 500 return: +5.0%
  • One month Russell 2000 return: 6.4%
  • S&P 500 Value: +7.2% (better)
  • S&P 500 Growth: +3.4% (worse)
  • Russell 2000 Value: +6.8% (better)
  • Russell 2000 Growth: +6.2% (worse)
  • MSCI US Momentum Index: +1.0% (much worse)
  • MSCI US Min Vol Index: -0.3% (awful)

What we observe: the sudden surge in bank stocks over the last month (S&P Bank Stock Index +10.3%) is the prime reason for this disparate performance. Both large and small cap value are heavily weighted to financials (21% and 19% respectively), while growth allocations are much smaller (5% each). Momentum is only 4% Financials. As for min vol, that strategy predominantly holds insurance companies rather than banks. Higher rates have, of course, hurt that group over the last month.

To conclude with another one of Yogi’s sayings: “It ain’t over til it’s over”. Yes, with 7 weeks left in the year, US stocks seem to have found their footing for one final push higher. We think that will continue, but take Berra’s cautious sentiment to heart.