ETF Wrap: ETF Wrap: Great quarter, guys

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What just happened?

It’s been another one of those weeks that felt like a job guarantee for journalists who write the first draft of history. But this time, it wasn’t an entire decade flashing by in seven days. This week brought the ghosts of decades past returning for a visit. There was a life before lockdown, they remind us. You are here now because of what happened back then. Remember?

Do you remember where were you when you realized the future was here? Was it your first cell phone, or more likely your first smart phone? Watching Coinbase

make its debut, did you remember Amazon Dot Com — or Worldcom?

Where were you on that beautiful almost-fall morning in 2001? What changed for you afterwards? Could you — could any of us — have imagined it would take two decades to disentangle ourselves from Afghanistan?

Did Bernie Madoff’s crimes and punishment impact you? Are you sure? 2008 may have been the last big inflection point in American financial history, before the one we just went through, and it has a long tail.

“I’ve long been convinced that there is a link between the end of Madoff’s scheme and the overwhelming popularity of index-fund investing in the aftermath of the financial crisis” wrote Washington Post columnist Helaine Olen on Wednesday, when Madoff’s death was reported. “Madoff demonstrated the lie that almost any savvy individual investor could produce steady gains in a way that nothing else could. By destroying the retirements and dreams of so many, he inadvertently performed a much-needed service.”

Of course, the Madoff reveal and the rupture in the financial markets that autumn also exposed the inability of active managers to see what was going on, and the failure of regulators to rein in bad behavior, Olen acknowledges.

“One could think of Madoff as an evil twin of John Bogle, the Vanguard Group founder,” she concludes. “Both men sensed that typical investors weren’t looking to score the Next Big Thing (today’s Amazon or Apple), but that they didn’t want their investments to keep them awake at night, fearful they would or could lose it all. Bogle met demand the honest way, founding Vanguard in 1974 and demonstrating that there was a way to keep up with the Dow Joneses — win, lose or draw — by putting money in an index fund that would passively imitate a stock market measurement. Madoff, by contrast, chose fraud.”

Most of us have had tunnel vision over the past year, understandably. (What day is it again? How many times have I worn these sweatpants?) That may be why the ghosts of crises past are back. Don’t forget them.

Thanks for reading.

A hunk, a hunk of earnings love

With earnings season upon us, ETF investors have a variety of options for playing along at home. For this edition, Wrap turned to Todd Rosenbluth, currently head of mutual fund and ETF research for CFRA, and a stock analyst in a former life.

Rosenbluth’s recommendations range from the turn-key (how about the ticker “EPS”?) to the somewhat more DIY. Read on for a nice spectrum of ETF options.

The ETF that boasts the EPS ticker is more formally known as the WisdomTree U.S. LargeCap Fund
It “seeks to track the investment results of earnings-generating large-cap companies in the U.S. equity market,” according to WisdomTree’s web site. (A version for small- and midcaps is the WisdomTree U.S. SmallCap Fund

Companies tracked by the ETF “have generated positive cumulative earnings over their most recent four fiscal quarters prior to the index measurement date,” WisdomTree’s materials say. “Companies with greater earnings generally have larger weights in the index.”

That methodology has resulted in a very FANMAG-like weighting. Apple Inc.,

Microsoft Corp.
and Alphabet Inc.

are the top holdings, and information technology is the biggest sector weighting, by far, at 24.4%.

EPS has been around since 2007 and charges only 8 basis points for a management fee. It has gained 48.1% over the past 12 months, exactly the same as the S&P 500

Investors who want a broader approach might consider relying on funds like the Sector SPDR lineup from State Street, Rosenbluth suggests. The funds make it easy to express a view on market shifts that may be confirmed by earnings reports.

For example, UBS Chief Investment Officer Mark Haefele wrote recently that he expects cyclical corners of the market to outperform throughout the year. “We recommend investors to tilt their stock exposure to sectors that are likely to benefit from faster economic growth and a steeper yield curve, including financials
and energy stocks

For a middle ground, Rosenbluth suggests investigating funds that use a quality factor strategy. (Here’s a refresher on factor investing; as a reminder, quality is the factor most sensitive to earnings, rather than price action.)

One of the largest funds in the space is the iShares MSCI USA Quality Factor ETF
but it might be worth looking elsewhere, at least for now, he cautions. That’s because one of the fund’s three objectives is earnings variability. In such a fractured moment in market time, variability — that is, big advances compared to the pandemic period — might be exactly what investors want, Rosenbluth pointed out.

Another option is the Invesco S&P 500 Quality ETF,

which emphasizes firms with low non-cash or accrual-derived earnings relative to their cash flow. In plain English, that’s companies that report “cleaner” earnings, rather than those that actively manage what they present publicly.

Exchange-traded sundries

Global X on Monday launched the Global X Clean Water ETF
AQWA seeks to invest in companies advancing the provision of clean water through industrial water treatment, storage and distribution infrastructure, as well as purification and efficiency strategies, among others. It employs an Environmental, Social & Governance approach, and charges a 50-basis-point management fee.

The market for ESG ETFs “has the potential to contribute to sustainable development in developing countries, and to specific investments in sectors relevant to the attainment of the UN’s Sustainable Development Goals (SDGs), concludes a working paper published in March by the United Nations Conference on Trade and Development.

Is there an ETF for that?

Cyclicals are hot, and it’s time to jump on the value bandwagon.

Or is it?

If you’re looking for a corner of the market that’s demonstrated an ability to “deliver extended growth for a long period of time,” in the words of one investment professional, how about software?

That ETF-watcher is Will Geisdorf, senior research analyst with Allegiant Private Advisors. Geisdorf likes the iShares Expanded Tech-Software Sector ETF after it went through a small downturn earlier in the year, a victim of the rush to more beaten-down segments of the market.

“We have a really positive view on software over the next decade,” Geisdorf told MarketWatch — that is, enterprise software for corporate, more than individual, use. Companies are sitting on a lot of cash — roughly 25% higher than their 5-year average, he reckons, with the sectors having the most, relative to history, being traditional big spenders: consumer discretionary, financials, and communication services.”

There are a few competing ETFs, Geisdorf noted, but he likes IGV in particular because it offers “the purest play,” in his words, on the software theme.  The ETF’s portfolio has a lot of heavyweights: Microsoft, Oracle, and Intuit are some of its most concentrated holdings. It also has big stakes in several of the new-economy darlings, such as  Zoom Video
ServiceNow, and Activision Blizzard.

While some of the names in the portfolio ran up dramatically during the pandemic year, Geisdorf thinks there’s still room for growth — though he acknowledges the software space may still seem like a contrarian pick.

“I think that if anything, the pandemic showed the staying power of the cloud,” he said. Some of the stocks within IGV may also get a boost from President Joe Biden’s proposed infrastructure bill, which aims to expand broadband access, among other things.

One downside: IGV, which tracks an index, charges a higher fee, of 46 basis points, than many other funds. In the 12 months through Wednesday, it gained 61.4%, slightly lagging the Nasdaq
but beating the S&P 500’s 48% gain. In the year to date, it’s only gained 4.5%, in part because of the mid-February correction, which Geisdorf notes makes for a better entry point.

Visual of the Week

Weekly rap
Top 5 gainers of the past week

Amplify Transformational Data Sharing ETF

WisdomTree Cybersecurity Fund

ARK Next Generation Internet ETF

Sprott Junior Gold Miners ETF

ARK Innovation ETF

Source: FactSet, through close of trading Wednesday, April 14, excluding ETNs and leveraged products

Top 5 losers of the past week

First Trust Nasdaq Oil & Gas ETF

SPDR S&P Oil & Gas Exploration & Production ETF

Invesco S&P SmallCap Energy ETF

Aberdeen Standard Physical Platinum Shares ETF

NorthShore Global Uranium Mining ETF

Source: FactSet, through close of trading Wednesday, April 14, excluding ETNs and leveraged products

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