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Deep-Value ETF Report: 21 May 2020

Deep-Value ETF Report: 21 May 2020

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3 years ago

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The coronavirus crisis has reordered expectations and valuations in global markets, but searching for the deepest discounts (based on negative return) delivers a familiar result: the commodities realm continues to offer the darkest shade of red.

The concept of value investing generally, thanks to weak results, has come under renewed scrutiny, again, in recent history. By some accounts, the notion of buying assets on the cheap and expecting to earn a relatively high risk premium for the effort has become null and void in the 21st century. Die-hard advocates of the value factor respond: Baloney! We’ve been here before and value’s dry spell will, once more, give way to its historical pattern of generating high absolute and relative returns to patient investors willing to tolerate short-term pain. By that reasoning, overweighting value, in one or more of its various guises, will continue to provide opportunities for portfolio design and asset allocation.

While we wait for Mr. Market to sort out this debate, let’s catch up with the numbers on the value front through a performance lens. But first, a quick refresher on the ranking system used below.

The metric of choice for “deep value” in this column is the 5-year return, which is based on an idea outlined in a paper by AQR Capital Management’s Cliff Asness and two co-authors:  “Value and Momentum Everywhere,” published in a 2013 issue of the Journal of Finance. There are numerous value metrics and so no one should confuse the 5-year-performance benchmark as the definitive measure of bargain-priced assets. But as a starting point in the process of identifying where the crowd’s expectations have stumbled, the 5-year change is a useful metric.

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One advantage of using a 5-year performance measure: It can be applied over a broad set of assets, thereby dispensing a level playing field for evaluating value (or the lack thereof). Another plus: this metric is simple and therefore immune to estimation risk, which can complicate accounting-based value gauges, such as price-to-book and price-to-earnings measures. In short, the 5-year return is a handy tool as a first approximation for identifying ETFs that appear to be deeply discounted by the crowd — and thereby seem to offer relatively high expected returns via the value proposition for investing.

But before you rush in this door, keep in mind that the standard caveat applies, namely: there are no guarantees that value, no matter the definition, will lead to superior performance anytime soon, if ever. Recent history suggests no less. All the more so when it comes to commodities– fossil-based energy investments in particular. As the world grapples with the risk of climate change, there are predictions that the glory days for oil companies and the like are behind us. In sum, traditional energy companies are deeply discounted for a reason and so investors should proceed with caution in this space.

The ranking below covers 135 exchange-traded products that run the gamut: US and foreign stocks, bonds, real estate, commodities and currencies. You can find the full list here, sorted in ascending order by annualized 5-year return — 1260 trading days — through yesterday’s close: May 20, 2020.

Keep in mind that the list is quite granular. In equities, for instance, the ETFs range from broad regional definitions (Asia, Latin America, etc,) to country funds, down to US sectors (energy, financials, for instance) and industries (e.g., oil & gas equipment & services). The only limitation is what’s available for US exchange-listed funds. Note, too, that just one representative ETF for each market niche is selected, albeit subjectively. For instance, there’s only one fund on the list for US real estate investment trusts. Otherwise, the search is broad and deep, as allowed by the current availability of US-listed ETFs.

Let’s start by ranking the major asset classes. Once again, a broad definition of commodities continues to post the deepest shade of red for 5-year results, echoing the results in CapitalSpectator.com’s previous value review in January. The iPath Bloomberg Commodity (DJP) – an exchange-trade note – has lost an annualized 10.1%. Foreign real estate shares, along with emerging-markets stocks and bonds, are also posting sub-zero returns, albeit mildly so.

Let’s drill down into the specifics and focus on the deepest 20 losses for all 135 ETFs. The biggest decline at the moment is in oil patch stocks via SPDR Oil & Gas Equipment & Services (XES), which has lost an astonishing 34.7% a year for the past five years.

XES has been ailing for some time. The question is whether it will recover? Looking through value-corrected glasses leaves room for optimism. Stay tuned for Mr. Market’s verdict.

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Nigerian gov supports AI initiatives with $290K in grants

The recently introduced Nigeria Artificial Intelligence Research Scheme is designed to facilitate the widespread utilization of AI to drive economic advancement.
…

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2 hours ago

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October 15, 2023

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The recently introduced Nigeria Artificial Intelligence Research Scheme is designed to facilitate the widespread utilization of AI to drive economic advancement.

The Nigerian Minister of Communications, Innovation and Digital Economy, Dr. Bosun Tijani, revealed on Friday, Oct.13, that the Federal Government intends to grant a sum of $6,444 (5 million naira) each to 45 artificial intelligence (AI) focused startups and researchers. This figure makes a total of $289,980 (225 million naira) being given out for the purpose of AI.

This information was disclosed by the minister in a post on X. The recently introduced Nigeria Artificial Intelligence Research Scheme is designed to facilitate the widespread utilization of Artificial Intelligence to drive economic advancement.

As outlined on the scheme's official website, the focal areas encompass Agriculture, Education and Workforce, Finance, Governance, Healthcare, Utility and Sustainability. To be eligible for the grant, applicants are required to form a consortium, comprising a startup or tech company, a researcher from a Nigerian university, or a foreign researcher, as stated by the Ministry.

Applicants should present a research proposal in line with the Federal Ministry of Communications, Innovation and Digital Economy's AI focus areas. Furthermore, they must provide a comprehensive project proposal that highlights the project's potential economic impact in Nigeria.

In addition, a proven track record of excellence in research or entrepreneurship is a requirement. Finally, applicants are expected to publish at least one peer-reviewed article within one year of grant receipt.

In August, the Nigerian government extended an invitation to scientists of Nigerian heritage, as well as globally renowned experts who have worked within the Nigerian market, to collaborate in the formulation of its National Artificial Intelligence Strategy.

Related: China sets stricter rules for training generative AI models

The application period commences on Oct.13, 2023, and concludes on Nov. 15, 2023. All submissions should be made through the specified online platform. The Ministry has indicated that a panel of AI specialists will assess the proposals. Those who make it to the shortlist will receive email notifications and be invited for interviews.

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Inversions, Bear Steepening Dis-Inversions, and Recessions

Does it matter if spreads are dis-inverting because short yields are falling, or long yields are rising? MacKenzie and McCormick (Bloomberg) say yes. With…

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3 hours ago

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October 15, 2023

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Does it matter if spreads are dis-inverting because short yields are falling, or long yields are rising? MacKenzie and McCormick (Bloomberg) say yes. With long yields rising…

If it looked at first glance as though the shift in the yield curve was a solidly positive sign — one indicating that the economy is now at less risk of a recession than it was — that’s probably not the case. True, it shows traders aren’t expecting the Fed to shift into firefighting mode soon. Even so, it’s almost certain to further dampen the economy as it ripples through to mortgages, credit cards and business loans. That will tighten financial conditions further, which may be a welcome development to the Fed. The risk, though, is that it hits the brakes so hard that the economy stalls completely.

Does having a bull steepening prevent a recession? Figure 1, covering the Great Moderation, is somewhat conducive to that hypothesis, at least eyealling it. h

Figure 1: 10 year-3 month Treasury spread, % (blue, left scale), and 3 month change in 10yr-3mo spread, ppts (green, right scale). October observation for data through 10/13. NBER defined peak-to-trough recession dates shaded gray. Red arrows when 3 month change is positive during period when dis-inversion is occurring. Source: Treasury via FRED, NBER, and author’s calculations.

The evidence in favor of the bear steepening hypothesis is stronger when evaluating the proposition formally. I estimate probit models for (i) spread only, (ii) spread and short rate, and (iii) spread, short rate and 3 month change in spread. The 3 month change in spread is statistically significant and adds to the pseudo-R2.

(ii)   Pr(recession=1)t+12 = 0.813 – 76.11spreadt + 9.80itshort

Pseudo-R2 = 0.28, Nobs = 241, bold denotes significant at 5% msl.

(iii)  Pr(recession=1)t+12 = 0.736 – 98.37spreadt + 11.99itshort + 98.28Δ3spreadt

Pseudo-R2 = 0.34, Nobs = 241, bold denotes significant at 5% msl.

The recession probabilities are shown below.

Figure 2: Recession probability 12 month ahead estimated over the 1986-2023M10 period for spread (blue), for spread and short rate (tan), and spread, short rate, and 3 month change in spread (green). NBER defined peak-to-trough recession dates shaded gray. Source: NBER, and author’s calculations.

The bear-steepening specification implies 90% probability of recession in 2024M09, while it’s only 66.4% using the spread + short rate (peak probability for this specification is May 2024). Does this make me more pessimistic about avoiding a recession? Not really; the Ahmed-Chinn specification with the foreign term spread (but no steepening measure) was about 90.8% probability for September 2024.

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Uncategorized

Inversions, Bear Steepening Inversions, and Recessions

Does it matter if spreads are dis-inverting because short yields are falling, or long yields are rising? MacKenzie and McCormick (Bloomberg) say yes. With…

Published

4 hours ago

on

October 15, 2023

By

Does it matter if spreads are dis-inverting because short yields are falling, or long yields are rising? MacKenzie and McCormick (Bloomberg) say yes. With long yields rising…

If it looked at first glance as though the shift in the yield curve was a solidly positive sign — one indicating that the economy is now at less risk of a recession than it was — that’s probably not the case. True, it shows traders aren’t expecting the Fed to shift into firefighting mode soon. Even so, it’s almost certain to further dampen the economy as it ripples through to mortgages, credit cards and business loans. That will tighten financial conditions further, which may be a welcome development to the Fed. The risk, though, is that it hits the brakes so hard that the economy stalls completely.

Does having a bull steepening prevent a recession? Figure 1, covering the Great Moderation, is somewhat conducive to that hypothesis, at least eyealling it. h

Figure 1: 10 year-3 month Treasury spread, % (blue, left scale), and 3 month change in 10yr-3mo spread, ppts (green, right scale). October observation for data through 10/13. NBER defined peak-to-trough recession dates shaded gray. Red arrows when 3 month change is positive during period when dis-inversion is occurring. Source: Treasury via FRED, NBER, and author’s calculations.

The evidence in favor of the bear steepening hypothesis is stronger when evaluating the proposition formally. I estimate probit models for (i) spread only, (ii) spread and short rate, and (iii) spread, short rate and 3 month change in spread. The 3 month change in spread is statistically significant and adds to the pseudo-R2.

(ii)   Pr(recession=1)t+12 = 0.813 – 76.11spreadt + 9.80itshort

Pseudo-R2 = 0.28, Nobs = 241, bold denotes significant at 5% msl.

(iii)  Pr(recession=1)t+12 = 0.736 – 98.37spreadt + 11.99itshort + 98.28Δ3spreadt

Pseudo-R2 = 0.34, Nobs = 241, bold denotes significant at 5% msl.

The recession probabilities are shown below.

Figure 2: Recession probability 12 month ahead estimated over the 1986-2023M10 period for spread (blue), for spread and short rate (tan), and spread, short rate, and 3 month change in spread (green). NBER defined peak-to-trough recession dates shaded gray. Source: NBER, and author’s calculations.

The bear-steepening specification implies 90% probability of recession in 2024M09, while it’s only 66.4% using the spread + short rate (peak probability for this specification is May 2024). Does this make me more pessimistic about avoiding a recession? Not really; the Ahmed-Chinn specification with the foreign term spread (but no steepening measure) was about 90.8% probability for September 2024.

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