This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article is by Clayton Fresk, CFA, portfolio management analyst at Georgia-based Stadion Money Management.
Since mid-February, the broad market as measured by the S&P 500 traded essentially sideways for six months, followed by a sharp sell-off in mid-August, followed by a bit of choppy tumultuous trading since.
From Feb. 17 through Sept. 25, the S&P 500 is down nearly 7 percent. However, not all equity names are trading lower over the same period. This discrepancy could be from these names trading stronger in the six months leading up to the sell-off, experiencing a smaller drawdown than the broad market since, or a combination of both.
In the following, I will look at a few U.S. ETF names that have seen positive performance (first absolute, then relative) since Feb. 17, and what has driven said performance.
Scanning through the list of all ETFs and their individual performance since mid-February, one sector that stands out with strong performers is consumer staples.
Excluding leveraged and inverse funds, three names in particular that stand out (with performance from Feb. 17, 2015 through Sept. 25, 2015) are:
PowerShares S&P Small Cap Consumer Staples (PSCC | B-36), up 6.98 percent
PowerShares DWA Consumer Staples Momentum (PSL | B-59), up 5.95 percent
PowerShares Dynamic Food and Beverage (PBJ | B-55), up 5.56 percent
These three names use different methodologies and took slightly different paths to their performance.
PSCC focuses on small-cap names only, so it had the dual benefit of broad small-cap outperformance (measured by the S&P 600) over the S&P 500, particularly since the end of July, and broad consumer staples outperformance over the broad market, particularly since early June.
PBJ had the benefit over the period of focusing on food and beverage names only. As such, it has no exposure to the household and personal products industry, which has been a lagging industry within the consumer staples sector. It also has a small carryover into some strongly performing restaurant names that do not fall into the GICS Consumer Staples classification (i.e., Starbucks).
PSL follows a momentum-based index, and that factor in general has seen strong relative performance since the end of April (in this case, measuring via the MSCI USA and the MSCI USA Momentum indexes). The index providers classification also differs slightly from the GICS classification, as the portfolio only holds about 60 percent staples, as classified by GICS.
Another group that had been leading the way is regional banks. Again, three names that stand out (with performance from Feb. 17, 2015 through Sept. 25, 2015) are:
First Trust Nasdaq ABA Community Bank (QABA | B-51) up 7.45 percent
PowerShares KBW Regional Bank (KBWR | B-56) up 4.10 percent
SPDR S&P Regional Bank (KRE | B-60) up 2.45 percent
All three names have tracked relatively closely since mid-February, with the community banks holding up a bit better since mid-June relative to the other two names. However, the group as a whole saw their performance (both absolute and relative) spike during the month of June and trade in line to slightly lagging the broad market since.
Some of this performance spike had to do with banks’ higher interest-rate correlation. The quick spike in rates at the beginning of June was a boon to the bank names. However, since then, interest rates have generally trended lower, as too has bank relative performance versus the broad market.
On the plus side, these regional banks appear to have a slightly lower interest-rate correlation as compared with the broader bank industry. Below, I have measured the correlation of the relative performance of each of the aforementioned names, in addition to a broad-bank ETF as measured by the SPDR S&P Bank (KBE | A-71), to the S&P 500 against the 10-year Treasury rate since Feb. 17, 2015:
QABA-SPX versus 10-year correlation: 0.30
KBWR-SPX versus 10-year correlation: 0.30
KRE-SPX versus 10-year correlation: 0.42
KBE-SPX versus 10-year correlation: 0.45
Lastly, a strategy that has seen a very steady outperformance compared with the broad market since Feb. 17 is a buy-write strategy, available in ETF form: the PowerShares S&P 500 BuyWrite (PBP | A-78).
This strategy owns the S&P 500 constituents and sells a one-month at the money (or very slightly out of the money) call option monthly. So while the strategy may underperform in strong uptrending markets (as it essentially sold away its upside), the proceeds captured from selling the call can lead to outperformance in downtrending and sideways-trending markets (as it has a built-in performance “buffer” from the proceeds gained).
As I mentioned earlier, the S&P 500 traded essentially sideways from Feb. 17 to Aug. 17. This type of environment is beneficial for a buy-write strategy, as the strategy is able to take advantage of collecting time decay.
It will collect the proceeds from selling the monthly call, and as the month continues and the market trades sideways, the short call option value will deteriorate with time and expire with little to no value depending on how “sideways” the market truly was.
Another boon to a buy-write strategy is that as volatility rises, the price of the call option being sold is greater. If the market moves down, this additional value will add an additional bit of buffer. However, if the market moves sideways once again, the greater proceeds received will allow for even stronger relative performance.
During the recent market (down) moves, there have been some market segments, factors and/or strategies that have weathered the storm.
Only time will tell if this outperformance can continue, but at a minimum, there is currently some light in what is becoming a bit more of a darkening market environment.
At the time this article was written, Stadion held no positions in any of the securities mentioned. The above constitutes the personal, professional opinion of Clayton Fresk, CFA, and does not reflect the views of Stadion Money Management LLC. References to specific securities or market indexes are not intended as specific investment advice. Founded in 1993, Stadion Money Management is a privately owned money management firm based near Athens, Georgia. Via its unique approach and suite of nontraditional strategies with a defensive bias, Stadion seeks to help investors—through advisors or retirement plans—protect and grow their “serious money.” Contact Stadion at 800-222-7636 or www.stadionmoney.com.