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David Fabian
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David is a Managing Partner at FMD Capital Management, a fee-only registered investment advisory firm specializing in exchange-traded funds. He has years of experience constructing and implementing actively managed growth and income portfolios using ETFs, CEFs, and mutual funds. FMD Capital... More
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  • Growth Investing: Seasonality Favors Small Cap ETFs

    Seasonality is an anachronism that is derived from certain asset classes historical penchant for over or under performance during certain times of the year. While it doesn't always hold true in every instance, there is typically a trend towards strength in the fourth quarter that acts as a tailwind for certain stocks.

    Ryan Detrick recently detailed his thoughts on the market and noted that the next several months has shown a tendency to favor small cap outperformance. In his study of monthly returns between large-cap and small-cap indexes over the last 15 years, the months of December through February have favored the Russell 2000 Index.

    Side note: If you don't already follow Ryan on social media, I highly recommend that you do. His data-driven, no-nonsense approach provides an excellent perspective on the market. He is a former portfolio manager and CMT.

    Examining a chart of the SPDR S&P 500 ETF (NYSEARCA:SPY) versus the iShares Russell 2000 ETF (NYSEARCA:IWM) since the July 2015 high, it's obvious that small cap stocks have underperformed during this recovery. SPY is knocking at the door of its previous all-time high, while IWM is still languishing 6% below its prior peak.

    With this short-term lookback, it's easy to fall prey to the notion that now is the time to be bullish on large cap stocks and avoid the flagging small cap arena. However, I think that a counterintuitive approach will likely serve you much better.

    If you are looking to position your portfolio for a further extension of this rally, then small or mid-cap stocks may offer more attractive upside than a large-cap benchmark such as SPY. The seasonal data points towards small caps being a greater beneficiary from any type of "Santa Claus" rally effect over the next several months. In addition, portfolio managers that are underinvested from the summer correction may start to realize that small caps have greater technical potential from a relative price standpoint.

    Choosing a Small Cap ETF

    Most ETF investors default to IWM as their preferred small cap vehicle. After all, it is the biggest fund in this space with over $20 billion in assets, and the Russell 2000 Index is considered the most popular benchmark to track. However, I would point out that the broad-based iShares Core S&P Small Cap ETF (NYSEARCA:IJR) has actually had much better relative performance than IWM coming out of the hole in October.

    In addition, I am a fan of the Vanguard Small Cap ETF (NYSEARCA:VB), which I own for my opportunistic growth clients. This fund has an ultra-low expense ratio of 0.09% and like IJR, a more refined portfolio of stocks than the 2000 companies that make up IWM.

    The Bottom Line

    Those that are looking to put money to work in the stock market for further upside should have at least some small cap exposure to maintain diversification and enhance your growth potential. This asset class is known to have greater volatility than its large-cap peer group, however that same risk works on the upside as well and leads to periods of strong momentum.

    Nov 05 2:16 PM | Link | Comment!
  • The State Of The Market In 5 Charts

    I'm breaking from my traditional analysis of a specific segment of the market to focus on a more comprehensive overview using several charts. Sometimes it's nice to step away from individual sectors to monitor "big picture" trends along with some possible outcomes. Also, see my March 2015 Chart Review video for further analysis.

    Small Caps Taking The Lead

    The chart below shows the relationship between the iShares Russell 200 ETF (NYSEARCA:IWM) and SPDR S&P 500 ETF (NYSEARCA:SPY). More specifically, the big rounded bottom that you see is an indication small caps are starting to outperform their larger peers.

    We saw the exact opposite of this behavior last year, which may be indicating that portfolio managers are seeing value in under covered small companies. There is also some chatter that smaller companies may be less susceptible to a strengthening U.S. dollar because they don't have the global footprint that many multi-national large caps do.

    The Move In International Is All About Currencies

    All you have to do is take a look at a chart of the PowerShares U.S. Dollar Bullish Index Fund (NYSEARCA:UUP) to see why international stocks continue to experience headwinds. Unless you are positioned in a currency-hedged ETF, the persistent upward momentum in the dollar is working against Europe, Japan, and emerging markets.

    There are obviously a lot of factors at play here that include momentum, sentiment, central bank policy, and relative value. While it is natural to want to get bullish on this trend, I think that the vertical nature of the chart warrants some concern about jumping headlong into the dollar at this stage.

    No Bottom In Sight For Commodities

    A broad-based basket of commodities as measured by the PowerShares DB Commodity Index Tracking Fund (NYSEARCA:DBC) has continued to be an absolute disaster. Oil prices just hit new 52-week lows and gold bullion doesn't seem to be all that far behind. Even base metals such as aluminum, copper, and zinc have continued to consistently bleed lower.

    There is no denying that price is the ultimate arbiter of reality and commodities should be avoided until we see evidence of a long-term trend change. Many investors get sucked into the fundamental story of owning this asset class as an inflation hedge, but we are just not in that environment right now.

    No Fear Of Rising Rates

    Many investors are mentally preparing for a change in the interest rate environment, but the bond market isn't convinced that rising rates are a threat quite yet. A look at a chart of the Vanguard Total Bond Market (NYSEARCA:BND) shows a mild hiccup in February as stocks soared, but overall stable price action that isn't factoring in a major systemic shock.

    U.S. bonds continue to be a "go to" hiding spot for foreign investors experiencing negative yields overseas along with a wide degree of support from the Federal Reserve. This will change at some point, but it's far too early to call for the death of bonds like so many have in the past.

    Volatility May Be Here To Stay

    Note the last six months of volatility in the CBOE VIX Volatility Index (VIX). We are seeing more consistent up and down price action in stocks that leads to brief bouts of fear and greed. The end result is that we have made mostly sideways progress in the stock markets this year.

    That sort of choppy price action may be here for a spell and makes things difficult for those with intermediate to long-term time horizons. The thing to remember is that patience will serve you well during this sideways trending market. You don't necessarily have to be doing something all the time in order to have a successful outcome.

    Those that prefer to be more active should focus on making strategic adjustments to your asset allocation to ensure your portfolio is aligned with your objectives and risk tolerance. You can also refine your watch list and start considering under what circumstances you would make changes to your holdings as market conditions evolves.

    Mar 18 1:40 PM | Link | Comment!
  • What To Do If You Are Deep In A Hole

    I recently had a shocking conversation with a gentleman who was evaluating our asset management services for what was left of his once sizeable investment portfolio. As I often do with new investors that I meet, I asked him to give me a brief synopsis of his recent investment history and financial acumen.

    What he told me was unbelievable…

    He started by relaying that he was wooed by a prominent asset manager on MarketWatch several years ago. A gentleman he described as being a tremendous salesman, but with very little regard for his clients' best interests. This was prior to the 32%+ run in the SPDR S&P 500 ETF (NYSEARCA:SPY) in 2013. That year he experienced double digit losses in his portfolio.

    I can't even make that up.

    He told me he actually tried to sue the advisor for gross negligence. Turns out that being bearish isn't a crime, it's just a really good way to ensure your marketing stays sharp and your profits remain elusive.

    So in early 2014 he switched to an advisor at Morgan Stanley. How could he go wrong there? They are one of the most prominent investment banking and asset management firms in the world.

    Well that year his returns were exactly zero, and the market once again gained over 13%. Even bonds, as measured by the iShares Core U.S. Aggregate Bond ETF (NYSEARCA:AGG) did 6% last year.

    The reason for that goose egg is they had him far too overweight international investments and commodities, which were some of the worst performing areas in the global investment landscape last year. Essentially, any gains in U.S. stocks and bonds were just cancelled out by losses in those weaker areas.

    By my back-of-the-napkin calculations, these steadfast advisers have now put him anywhere from 50-60% behind in terms of relative performance to the stock market in just two short years. Now certainly in a balanced portfolio of stocks and bonds he would not have received the full thrust of a 100% U.S. stock allocation, but suffice it to say he is now deep in a hole.

    The worst injustice is actually the time he lost that he will never be able to make up. There will always be an investment decision lurking out there that you wish you could have back, but you can often make that up through calculated adjustments and recovery time. In this case, he has now lost two important years of compounded growth opportunity.

    His major concern now is that he doesn't screw up on the next round. I mean you have to be gun shy after getting burned by two "professionals" and now sitting on a boatload of cash with both the stock and bond markets at unheard of levels.

    The margin for error is razor thin.

    So here are some thoughts that floated through my mind as I began to develop a plan for this individual on how they can navigate the next phase of their investment life:

    1. You have to put the past behind you and start fresh with a strategy that will achieve your objectives. While evaluating the missteps is important, constantly living in the past or chiding yourself will only lead to further bad decision making going forward.
    2. Don't try to swing for the fences. It's natural to want to stomp on the gas pedal to try and make up for lost time and money. However, putting all your eggs in biotechnology, cyber security, and Russian stocks is not the best way to make up those losses. Getting more aggressive in a late-stage bull market can have disastrous consequences for your money and compound your original problem.
    3. Focus on re-evaluating your goals and bringing your asset allocation in line with targets designed to maximize capital appreciation or minimize volatility. For most investors, that's a mix of stocks and bonds that you allocate to slowly over time to establish the best cost basis possible. There may be bumps along the way, but you can make adjustments as needed to enhance your odds of long-term success.
    4. Tune out the noise. It's instinctive to want to get more involved in learning this investment game by reading everyone and watching CNBC for 16 hours a day. Believe me - that will only make things more confusing as you start to absorb conflicting recommendations. Pick a few trusted sources to follow and make sure that you align yourself with professionals that share your same investment philosophy.

    I spend a lot of time on the phone with people that are looking for the next rock star portfolio manager or maverick investor with the secret to unbelievable profits. Believe me, if that were me, I wouldn't be on the phone with you discussing your Roth IRA. I would be on a beach somewhere trading from my iPhone and enjoying the good life.

    There aren't any shortcuts in this world when it comes to accumulating, investing, and preserving your wealth. It takes time, tools, and discipline to achieve a successful result, and even then nothing is guaranteed.

    The best deterrent to avoid falling in a hole is having a well-defined investment plan, monitoring your progress regularly, and not letting extraneous factors or opinions derail your strategy. The only thing that matters when it comes to your investments is price.

    Feb 27 11:47 AM | Link | Comment!
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