Going Long The Markets Vs. 'The Market'

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Includes: CBOE, CME, DBOEF, DIA, ICE, IWM, LDNXF, NDAQ, QQQ, SPY
by: FX Metrix, LLC

Summary

When people refer to a 'market recovery' over the past few years, they're probably referring to the recovery of broad market indices such as the S&P 500 or the DJIA.

However this 'market recovery' is about the market providers themselves including: ICE, CME, CBOE, NDAQ, DBOEF and LDNXF.

Our equal-weighted basket of market providers crushed the broader stock market over the last 5-years of recovery. Even market cap. weighted basket of market providers beat the broader market indices.

Lesson: Don't buy 'the market'. Buy the markets!

Introduction:

Over the last few years investors, reporters, and economists alike have looked on at the S&P 500 and other major indices to benchmark portfolio returns. As widely accepted measures of the broader U.S. stock market, their rise back to current levels from crisis lows was an indication that the market has been recovering nicely. As we can see below, the S&P 500 has risen roughly 48.61% over the last 5-year period.

Our question we had was: if the market has recovered so well, how have the markets themselves faired? We compiled a basket of 6 major exchange providers in a range of asset classes including equities, options, and futures. The basket consisted of (in no particular order):

  • Intercontinental Exchange Inc. (NYSE:ICE)
  • CBOE Holdings, Inc. (NASDAQ:CBOE)
  • CME Group Inc. (NASDAQ:CME)
  • Nasdaq Inc. (NASDAQ:NDAQ)
  • Deutsche Boerse AG (OTCPK:DBOEF)
  • London Stock Exchange (OTCPK:LDNXF)

ICE Chart Above, we have shown the 6 stocks' price performance over the last 5 years on a normalized % change scale. In addition, we included the S&P 500 (via the SPDR S&P 500 Trust ETF (NYSEARCA:SPY)) over the same time period for comparison. We found the results to be interesting, yet crystal clear.

Do not buy the market, buy the markets!

As seen on the chart, the S&P 500 has done arguably well on a standalone basis, rising close to 50% over the last 5 year period. When compared though, it is clear that some of the market providers have outperformed the S&P 500 by a long shot. However, this is not to say that the S&P 500 did not outperform some of the market providers such as the CME Group, and the Deutsche Boerse.

We have weighted our basket using 2 different methods to illustrate that investing in market providers themselves, has greatly outperformed the broad market indices no matter which of the two weighting methodologies we use.

Equal Weighted

Below is a table showing the weightings and performance of an equal weight basket of the 6 exchange provider stocks.

Stock Weight

5 Year Performance

(as of 1/15/16 close)

ICE 16.6667% 115.1%
CBOE 16.6667% 165.8%
CME 16.6667% 33.6%
NDAQ 16.6667% 135.9%
DBOEF 16.6667% 9.7%
LDNXF 16.6667% 167.5%
TOTAL 100% 104.6% (vs. 48.6% from the S&P 500)
Click to enlarge

Market Cap. Weighted

Stock Mkt. Cap Weight

5 Year Performance

(as of 1/15/16 close)

ICE $27.01 B 27.5107% 115.1%
CBOE $5.16 B 5.2557% 165.8%
CME $28.00 B 28.5190% 33.6%
NDAQ $9.26 B 9.4317% 135.9%
DBOEF $16.05 B 16.3475% 9.7%
LDNXF $12.70 B 12.9354% 167.5%
TOTAL $98.18 B 100% 86.0% (vs. 48.6% from the S&P 500)
Click to enlarge

As we can see, either basket would have outperformed the S&P 500, or any major U.S. broad market index over the same time period. The index that came closest was the NASDAQ 100 index, which has jumped 83.91% over the last 5 years. This is just over 2% less than our market cap. weighted market provider's basket.

^SPX Chart

Conclusion

Above, is a chart showing the 5 year performance of the NASDAQ 100, the Dow Jones Industrial Average, and the Russell 2000 compared to the S&P 500, showing that regardless of which benchmark you choose, it still fell short of our market provider baskets.

We conclude that this is due to the fact that whether markets go up or go down - exchanges win. They are cash cows! If the products that trade on their respective markets are changing hands, then they are making money. For example, every time a COMEX gold contract gets traded on CME Globex, the CME Group, Inc. makes money - whether gold is going up or down.

Overall, we have found that over the last 5-year period, a basket of market providers would have faired far better than an equal investment in a broad market index fund (ex. SPY, the PowerShares QQQ Trust ETF (QQQ), the SPDR Dow Jones Industrial Average ETF (DIA), the iShares Russell 2000 ETF (NYSEARCA:IWM), etc.).

We look forward to watching these market providers as we go forward for further inspire research.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.