Best Performing ETF Group is Not What You Think

With just two months to go in 2022, the best-performing group of Exchange Traded Funds year-to-date may not be what you would have expected it to be when we started the year.

After a strong bull market rally coming off the march 2020 Covid-19 dip, most investors would have assumed stocks, mainly big technology stocks, would again be the market leaders in 2022.

However, the market never ceases to surprise, and as hindsight is always in 20-20 vision, it feels like we all should have seen the signs that 2022 wasn't going to be a good year for stocks and another asset class was going to dominate.

What asset class are we speaking of? Bonds! Well, to be more specific, shorting Treasury Bonds.

Shorting longer-dated Treasury bonds has been, hands down, the best trade of 2022. Whether you use leveraged and-or inverse products or not, shorting Treasury Bills has produced great results in 2022.

For example, the ProShares UltraPro Short 20+ Year Treasury ETF (TTT) is up 176% year-to-date and more than 50% over the last three months. Direxion's version of the same ETF, the Direxion Daily 20+ Year Treasury Bear 3X Shares ETF (TMV), is also up 176% year-to-date. The ProShares UltraShort 20+ Year Treasury ETF (TBT), which is a 2X leveraged inverse fund, is up more than 100% year-to-date.

Even the funds that short the shorter term Treasury bills, the 7-10 year term bills, like the Direxion Daily 7-10 Year Treasury Bear 3X Share ETF (TYO) and the ProShares UltraShort 7-10 Year Treasury ETF (PST) are up 66% and 42% respectively.

If you had run a screener at the beginning of the year for non-leveraged and non-inverse funds because the risk involved with those products are not necessarily in your comfort zone, you still could have bought the Simplify Interest Rate Hedge ETF (PFIX). PFIX holds over-the-counter interest rate options and US Treasury Inflation-Protected Securities or TIPS, and still produced a return of around 100% year-to-date.

So you may be asking how and why shorting longer-dated Treasury bills produce solid results when interest rates, Treasury bills, and bond yields are climbing higher. Well, it is a little complicated on the surface but pretty simple once you understand how it all works. Continue reading "Best Performing ETF Group is Not What You Think"

Sugar-Coating the Likelihood of a Recession

Does anyone remember when then President Donald Trump told the American population that the Covid-19 lockdowns and spread of the virus that caused the pandemic would all be over by Easter? Or when referring to Covid-19, that it was “the flu”?

During the first few weeks of the pandemic, President Donald Trump downplayed the severity of the virus to not panic the American population. In hindsight, perhaps the early days, especially when the country was in lockdown, it would have been more beneficial to not sugar-coat the virus and the timeline of when the government would lift the lockdown restrictions.

Had President Donald Trump told people the virus would kill hundreds of thousands of people, perhaps we could have stopped the virus from spreading during the lockdowns.

If President Trump hadn’t given a timeline for the lockdowns and the pandemic seeing brighter days, perhaps the government wouldn’t have lost its creditability with so many Americans during the summer of 2020 and its continued response to the pandemic.

Our current situation with the Federal Reserve and its chairman Jerome Powell, is very reminiscent of the early days of the Covid-19 pandemic.

Back in the winter and early spring, Powell told us that inflation was “transitory” and wouldn’t last. He even said current inflation wouldn’t need aggressive monetary policy changes to fall. Then, even when Powell began to raise interest rates, he told Americans that there was a high probability of a soft landing, referring to the idea that the Fed could bring down inflation slowly and gently.

Powell continued to tell us this summer that raising interest rates gradually and methodically would lower inflation but not put the economy in a recession.

Fast forward to just a week ago, and Powell tells us that the “chances of a soft landing are likely to diminish.” Inflation has hardly moved even though the Fed has raised interest rates five times, starting in March 2022. At that time, the Fed increased rates by 0.25%, 0.50% in May, then a 0.75% bump in June, July, and September.

Powell also said at the most recent Fed press conference following its announcement of the September rate hike that “we have to get inflation behind us. I wish there were a painless way to do that. There isn’t." Continue reading "Sugar-Coating the Likelihood of a Recession"

ETFs - How They Help Build Wealth

The idea of pooling investment assets has been around for centuries. Mutual Funds first appeared in the 1920s. But it wasn’t until the 1980s that mutual funds became widely popular with mainstream investors.

In recent years, ETFs have taken off as an alternative to mutual funds.

An exchange-traded fund (ETF) is a “basket” of stocks, bonds, or other financial instruments that gives convenient exposure to a diverse range of assets. ETFs are an incredibly versatile tool that can track anything from a particular index, sector, or region to an individual commodity, a specific investment strategy, currencies, interest rates, volatility, or even another fund.

You can do about anything with them — hold a diversified portfolio, hedge, focus on a particular sector, or even profit in a bear market.

The most significant practical difference between mutual funds and ETFs is that ETFs can be bought and sold like individual stocks — and mutual funds cannot. Mutual funds can only be exchanged after the market closes and their Net Asset Value (NAV) is calculated. Shares of ETFs can be traded throughout regular market hours, like shares of stock.

Both mutual funds and ETFs have expense fees that can range from low to high. Mutual funds can have front or backend loads or redemption fees in addition to management fees.

ETFs that trade like shares have commissions to buy and sell. But some ETFs are so popular that brokers offer commission-free trading in them.

So Many Choices

The sheer number and variety of ETFs can be a bit mind-boggling. Over the last 20 years, we’ve seen just a couple hundred ETF offerings grow to more than 8,000 worldwide, encompassing more than 10 trillion in assets.

A surprising number of ETFs have failed. They started with an interesting focus (well, “interesting” to somebody) but failed to attract enough interest to remain viable. For this very reason, I avoid narrow niche ETFs that trade with low volume.

I eliminate many ETFs on poor liquidity alone. I’m not interested if there’s not much volume in a product. I don’t want to suffer high slippage from wide bid/ask spreads. I want to get in and out quickly and at fair prices. Continue reading "ETFs - How They Help Build Wealth"

ETFs That Track Retail Investing Trends

Over the past few years, retail investors have shown they have the power (money) to take stock prices to 'the moon' if they operate as a group.

Last year it was GameStop (GME) and AMC (AMC).

Just a few weeks ago, it was AMTD Digital Inc (HKD), which was IPO'd in July and has had a trading range of $13.52 per share up to $2,555.30 per share since the initial public offer. HKD is currently trading in the low $200 range.

But just because retail investors can do something, does that mean they should? Are the retail crowd good stock pickers? And should you follow their lead?

At this time, we don't know the answer to these questions. That is because we don't have enough data on whether or not retail investors operating as a whole are good stock pickers. They have only really been flexing their muscle for a little more than a year.

Plus, when they started with GME and AMC, we were still in a bull market. But now, we are in a bear market. So it would be unfair to say the retail investor's recent performance shows their lack of sophistication and that they don't belong picking stocks.

A few Exchange Traded Funds track what retail investors are talking about on social media or buying in their brokerage accounts, and as of late, retail investor stock picks are not outperforming the market.

The VanEck Social Sentiment ETF (BUZZ), which tracks the top 75 companies with the most popular sentiment online based on a proprietary AI model to select stocks, is down 32% year-to-date.

The SoFi Social 50 ETF (SFYF), which tracks the 50 most widely held stocks in self-directed brokerage accounts of Sofi Securities, is down 25.55% year-to-date.

And the FOMO ETF (FOMO), which invests in the areas of the market that are currently in favor with retail and individual investors or currently 'trending,' is down 17.94% year-to-date. Continue reading "ETFs That Track Retail Investing Trends"

New Overnight Exposure ETFs

It's no secret that big moves happen during "extended" trading hours. These extended hours are those that come before and after the markets' standard hours.

During these hours, 4:00am until the market opens at 9:30am Eastern and after then again when regular trading ends at 4:00pm until 8:00pm Eastern, company earnings are reported, merger and acquisition news is posted, and a slew of other big newsworthy events trickle out to investors. Newer retail traders may not know about these ‘extended’ trading hours, but those who follow the markets closely understand the importance of this time.

These extra hours of trading are so important because, during the morning session, it more or less sets the tone for the overall trading day.

In the pre-market hours, we received a few earnings reports that make stocks move in one direction or another. But more importantly during the morning session, investors receive a lot of the economic data that will dictate what is occurring in the economy and thus cause the market to move one way or the other.

During the after-hours trading period, from 4:00pm until 8:00pm Eastern, investors are hit with more company-specific news, such as the bulk of earnings reports, conference calls, company-specific ‘material’ or special information, and mergers and acquisitions.

These more company-specific news events cause individual stocks to make massive moves either higher or lower, but typically won't effect the overall markets the same as the economic data and reports that are released pre-market.

And then, of course, we also have the none stock market or economic data news, such as bombings, terrorist attacks, weather events, etc. These news stories are unpredictable but can push and pull the prices of individual stocks or the broader market. Even those that occur during non-regular trading hours, and perhaps don’t directly relate to businesses that trade on the market could still have an overall effect on the price of stocks (both positively or negatively).

How can we take advantage of these pre and postmarket moves?. The fund managers of two new exchange-traded funds (ETFs), the NightShares 500 ETF (NSPY) and the NightShares 2000 ETF (NIWM) believe they have a strategy to leverage these times of volatility. The back-tested theory behind these ETFs has found that by owning stocks during the non-regular trading period and then selling them during regular trading times, you would have performed better than the overall market.

Just this year, for example, the S&P 500 is down 18%, but during the non-regular trading hours, it's only down 10%. The Russell 2000 has a similar story, down 21% during regular trading hours and only 7% if you where just invested overnight according to AlphaTrAI.

The NSPY is a fund that will track the S&P 500 while the NIWM will track the Russell 2000. Both funds are intended to be held for just one day at a time, since they will be using futures, options, and derivatives to gain exposure to the markets. Furthermore, each fund will offer investors 1X exposure to their corresponding index during regular trading hours and 1.5X exposure during the overnight period. These exposure percentages are before fees and expenses.

Due to the methods being used to gain exposure and the fees and expenses, these products are not intended to be held for long periods of time and will lose value due to contango and other factors at play. Therefore, NSPY and NIWM are not necessarily intended for long-term buy-and-hold investors, although they can be. These ETFs will primarily be used to hedge against risk or purchased daily by traders whom want broad exposure to the overnight market.

Both funds went live the last week of June 2022, so performance data is not yet known. However, we do know that each fund has an expense ratio of 0.55%, which is much higher than index-tracking ETFs, but about in line with a niche fund offering very special exposure.

There are not currently any ‘overnight short’ ETFs available to investors, likely because Alphatrai Funds, the issuer of both NSPY and NIWN, believes the overnight market is more bullish. But, if you are insistent on being short overnight, you could always short these ETFs and buy put options contracts, if and when options become available for these funds.

If you are invested long term in stocks, you already have ‘overnight’ exposure, since you are not likely buying at the open and selling at the close each and every day. However, even for long term investors, having a way to ‘hedge’ risk when the market is not open each evening, or maybe even more importantly during the weekend, is always nice and may help you sleep better, especially during times when the market is abnormally turbulent.

Matt Thalman Contributor
Follow me on Twitter @mthalman5513

Disclosure: This contributor did not hold a position in any investment mentioned above at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from for their opinion.