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When Risk Goes Unrewarded

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Risk-based asset pricing theory suggests, simply, that assets bearing a higher risk should compensate investors with higher returns. While most papers investigating the risk-return relationship of assets are focused on equity markets, surprisingly few studies explore this phenomenon in currency markets (which are among the deepest and most liquid markets in the world). In fact,…

An Active Manager Strikes Out

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Bloomberg TV recently invited me on to their new show, Bloomberg GO, for a short debate with David Barse, CEO of Third Avenue Management, on active versus passive investing. After stating that funds offered by Third Avenue, which have more than $8 billion in assets under management, had been able to beat their index benchmark,…

Highest Expected Returns Not Always Best

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A regular reader of my articles contacted me recently to discuss current valuations and a value-oriented strategy. He observed: “It doesn’t matter which approach you like: a value investor doesn’t prefer U.S. stocks now.” He also pointed out that, while the MSCI World Index currently contains 58.6 percent U. S. stocks, the iShares MSCI World…

Dividends An Illogical Preference

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A large body of literature examines whether managers of actively managed funds add value to their investors by generating abnormal returns. Unfortunately, not only do the vast majority fail to do so, but the evidence, as presented in my book, “The Incredible Shrinking Alpha,” demonstrates that the already-small percentage of managers able to beat their…

Valuation Metrics In Perspective

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It’s well-established in the literature that valuation metrics—such as the dividend yield (D/P) and the earnings yield (E/P), as well as its cousin, the Shiller CAPE 10—provide important information in terms of future expected returns. In fact, these metrics are the best that investors have for predicting long-term equity results. For instance, the Shiller CAPE…

Required Reading for Investors

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Jane Bryant Quinn, a highly regarded and nationally syndicated columnist, once called much of the output of Wall Street and the trade publications that cover financial markets “investment porn.” She summed it up this way: “Americans are indulging themselves in investment porn. Shameless stories about performance tickle our prurient financial interest.” The roller-coaster swing of…

Europe Factors Parallel US

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The academic research has provided investors with strong evidence there’s a small group of investment factors—or sources of returns—that have delivered higher returns over the long term. To be considered among this small group of factors, the evidence should have the following characteristics: Persistence: It holds across long periods of time and various economic regimes….

Market Efficiency Doesn’t Matter

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In a recent discussion on the Advisor Perspectives website (it was in response to an article I wrote on the performance of Third Avenue Management’s actively managed funds), someone commented: “I am, for the most part, a proponent of passive investing, especially in asset classes (such as domestic equity) where the great majority of active…

Genes, Experience Affect Choices

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Are you a value investor or a growth investor? Could your preference be influenced by a biological predisposition partially ingrained from birth? Is it possible that your choice of investment could be explained by your personal experiences, both early on and later in life? The field of behavioral finance advances psychology-based theories to explain investor…

Index Funds Win Across Borders

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Thanks to Standard and Poor’s Indices Versus Active (SPIVA) scorecard, investors are becoming ever-more aware both of the persistent underperformance of the vast majority of actively managed funds as well the lack of evidence showing any persistence among the minority of winners beyond the randomly expected. This increasing awareness has led to an inexorable trend…

Keep Skewness In Perspective

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Diego Amaya, Peter Christoffersen, Kris Jacobs and Aurelio Vasquez, authors of the new paper, “Does Realized Skewness Predict the Cross-Section of Equity Returns?”, examined higher moments of volatility, skewness and kurtosis to determine if they have provided incremental explanatory power in the cross section of stock returns. Before reviewing the authors’ findings, which appear in…

Hedge Funds Dropping Like Flies

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Fortress Investment Group is closing its flagship hedge fund following heavy losses and investor withdrawals. The fund, which had managed more than $8 billion in 2007, saw its assets fall to $3.2 billion at the start of 2015 and then again to just $1.6 billion at the time of this week’s announcement. Fortress’s fund, which…

Hedge Funds Win With A Draw

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The third quarter of 2015 brought hedge funds a very small amount of relief from their historically poor performance. Keep in mind, however, that hedge funds entered January coming off their sixth-straight year of trailing U.S. stocks by significant margins. And for the 10-year period from 2005 through 2014, which includes the worst bear market…

Stock Volatility Moves Treasurys

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Understanding the volatility of Treasury bond returns, as well as the volatility of both the level and slope of the Treasury term-structure, are fundamental issues in finance. What’s more, they have important implications for investors and portfolio design. Researchers have offered both theory and empirical evidence that suggest important linkages between equity risk and the…

Correlations Can Be Predictive

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Academic researchers have presented theory, as well as empirical evidence, suggesting certain linkages between equity risk and the Treasury bond market, a relationship that clearly has important implications for investors’ understanding of markets and portfolio design. Studies, for example, have found that greater economic uncertainty leads both to higher equity volatility and increased motives for…

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