1. Volatility has been at an extreme low for several weeks it seems. I can hardly remember a period so lacking in days that are up or down 1% or more. A lot of times 1% days are common, but weeks have gone by with very few funds crossing that threshold in a day. What might be the reason for this, and what might it portend?
2. Vanguard Total Stock Market (VTSMX) and other broad market averages are putting in extremely high showings relative to other mutual funds for the year-to-date. What might be the reason for this, and what might this portend?
Your thoughts appreciated.
Comments
Hmmm.
I hear all the correction talk. And, maybe it will happen.
But I remain cautiously optimistic that things are continuing to improve, though I recognize stupid things can always set us back.
Mostly institutions drive the market.
And, if you are an institutional investor, do you really want to sell some top SP500 companies that may be healthier and perhaps better run than ever?
Do you really want to sell XOM, GE, BRK, AAPL, AA, BAC, DIS...?
To buy what?
Not so, obviously, with companies like SHLD (ouch).
Hard to see better investment options currently.
So, maybe that helps explain lack of volatility. Things are "fairly" priced. Economy continues to improve. Unless something dumb happens. Accommodative fed.
Translate: Let it ride.
I do not think it is apathy. Lots of folks still sensitive to another big drawdown.
On your 2nd point.
I think many funds today evolved during the 2008/9 crisis. All asset. Absolute return. All authority.
And all those funds, and even simple balanced funds, are struggling.
It's a bull market. And when that happens, all hedge strategies lag.
My 2 cents.
Hope all is well.
c
On point 1, I'm hoping we're seeing what's known as a "consolidation" stage, and that after a certain period of months stocks will continue higher. I've no scientific or other data to support this. But, where are we without hope?
On point 2, it seems to me like there are long stretches (years or even decades) when indexes outperform, and also long stretches when the opposite is true. I think it is partially due to investor psychology and money flows into and out of both categories - but can't nail it down for you in an intelligible way.
A 3rd point is that stock indexes will (almost by definition) outperform the aggregate of actively managed funds over very long stretches. That's baked in the cake. Not just the lower fees, but remember that managed funds are rarely 100% in equities like an index is. They have to hold some cash to facilitate inflows and redemptions. Unless it's a highly aggressive fund, it's also probably holding a significant "cushion" in fixed income for unexpected contingencies (5-15% is not uncommon).
I certainly don't have all the answers to this, but one issue is that small cap stocks are doing terribly this year, and the 2 indexes mentioned above are cap weighted......so they are invested in the large cap stocks that are outperforming, and underweighted in the small cap stocks that are underperforming.
That certainly is not the whole of it. Hank mentioned the cash balances of active funds, but that is more by choice. There are many active funds that have almost no cash. You don't have to have much cash sitting around for redemptions....you could just sell as redemptions come in. But a lot of funds have elected to hold larger than normal cash balances, some as a risk-reduction measure.
I guess a large part of it is expenses......the Vanguard Total Market Index ETF has a .05% expense ratio...as do the Admiral Share class of the mutual fund, which has a 10K minimum purchase. I guess if the market is up 9% and you have a 1.0%-1.25% expense ratio, and brokerage fees on top of that, some losses due to bid-ask spread and "market action" from your purchases [your buying makes the price go up, your selling makes the price go down], you can't compete.
Another reason may be the zero-sum game aspect of it all. If an active fund outperforms the index, some other guy has to underperform. The successful buyer on one end of the trade has an unsuccessful seller on the other end, and vice versa.
I agree with you, the index funds are trouncing the actively managed funds, and there may be some other reasons not given so far. I'd like to know too.
That plus the comments here add up and tell the story why index funds are ahead of the game at the moment.
I have some serious researching to do.
I think there will be consolidation before EOY and we may be experiencing that.
"
I do not think it is apathy. Lots of folks still sensitive to another big drawdown."
I do think that's the case, but I also think that a lot of people remain out of the market and while this is obviously not scientific, I do think that there's a smaller pool of retail investors than there was pre-2008. With buybacks still going pretty strong, you have a gradually smaller and smaller amount of available stock consolidated within a smaller pool of investors.
has beaten the pants off the Russell 2000, which are much lower quality names.
Quality means different things to different people of course. To me, the paramount data point would be earnings predictability. The etf QUAL uses 3 factors: high return on equity, low debt to equity, and low earnings variability. Its YTD return is 7.98%. Vanguard Dividend Appreciation VIG uses a rising dividend stream as a proxy for "quality". Its YTD return is 5.76%.
Both of these etfs falls short of the total index etf (VTI) which is currently up 9.54%
MY question is How does you portfolio(MUTUAL FUNDS) compare? NOW IS GONE TOMORROW...
http://news.morningstar.com/articlenet/article.aspx?id=665790
When Will Quality Bounce Back?
These funds' lackluster recent performance doesn't tell the whole story.
"Left behind the past few years have been many funds focusing on "quality" stocks, generally defined as those that are highly profitable, generate a lot of cash, and have strong balance sheets"
Which of those 2 are you trying to minimize?
"a rules-based, equal-weighted index intended to offer exposure to the 20 most attractively priced companies with sustainable competitive advantages according to Morningstar's equity research team."
This is more of a play on a very limited number of companies, actively selected by Morningstar's stock analysts. I might now consider it a 'proxy for this concept', mainly because there are too few stocks to represent the concept of quality.
http://news.morningstar.com/articlenet/article.aspx?id=665790
In the lists above, I see that GMO has a quality fund.
Yes, I've come to use stops and limits on all stock/EtF transactions, but especially those trading with low volume.
The reason why the number of stocks matters:
Let's say you are asking how small caps have done YTD. You would look at the entire Russell 2000 index, all 2000 stocks. You wouldn't look at an actively managed fund of 20 carefully selected small cap stocks.
If you were asking how the stock market has done YTD, or last year, or whatever: you would look at a Total Stock Market Index fund like VTI, or some people would look at the full S&P 500 index. But you wouldn't base it on how an actively managed fund of 20 or 30 carefully selected stocks did.
Same with the question of how is "quality" doing this year. If you look at a fund whose job is to pick the 20 most undervalued wide moat stocks, you are getting more information about how that specific fund did, rather than the entire universe of "quality" stocks.
Another example is that a lot of people think the Dow 30 is "the stock market", but it's only 30 stocks, even though it is chosen to be representative of the stock market as a whole. But there's over 3600 stocks in the U.S. total stock mkt index, so there's no way any 30 stocks can be representative. The Dow 30 is up 4.5% YTD, but the S&P 500 is up 8.85% YTD.