"And The Beat Goes On" - Passive ETFs v Top 100 Mutual Funds

To see what happened in 2023, the year of hyperbolic predictions, lets start with 2020 (arbitrary, yes, but cherry picking? NO-it includes the disasterous covid market collapse). Below is the classic stock, bond and commodity performance normalized where 1000 = 12/31/2019:

SPY = SPDR S&P 500 ETF

DJP = BARCLAYS PLC Bloomberg Commodity ETF

AGG = iShares:Core US Aggregate Bond ETF

Source: Microsoft StockHistory

The exemplary performance of commodities, up 80% in mid-2022, fades and is then eclipsed by today's stock market close. Bonds, as usual, fail to disappoint, with their usual dismal performance-FED or no FED.

Looking at the numbers, with major stock index ETFs added for good measure:

Continuously Compounded returns.

QQQ = Invesco Nasdaq 100 ETF

IWM = iShares Russell 2000 ETF

Source: Microsoft StockHistory

Notice, how convenient of SPY and QQQ to mirror image the 2022 loss into a 2023 gain. It's like 2022 never happened, except for small caps, bonds and commodities. So much for "passive" returns. 

Active Manager Returns

So, how did "active" managers do in 2023? Its hard to tell. Who publishes or computes reliable, unbiased DAILY active manager returns? We have to rely upon reasonable proxies. Even that's hard to do. But let's try. 

Millions of people go to Yahoo Finance for investment information and Yahoo publishes THEIR listing of "Top Mutual Funds Today". 

Only FOUR funds out of the "TOP 100" beat the SPY in 2023! Here they are with the rest of the leaderboard added:

Source: Yahoo Finance

Actually, only two managers exceeded the 21.7% return of the SPY ETF, Artisan and Blair. Is one year fair? Look at the 4 year total return - this will show the superior ability of active managers/humans/algos to avoid losses that passive managers cannot:

Source: Microsoft StockHistory

The top managers DID avoid much of 2022's losses well, except for WESJX. But they also avoided lot's of gains. If you think you can do better than the largest most well funded fund managers in the world-more power to you. But relying on reported numbers we are left with the unavoidable conclusion:

For the major passive stock ETFs versus active management, it goes like Sonny and Cher say: "And The Beat Goes On". 

Why use  the Microsoft StockHistory function for historical prices? It's free and easier than Yahoo-but beware a few missing days. You might notice the difference between the funds returns computed from Microsoft Stockhistory and the return reported by Yahoo. I can't account for that but will give Yahoo, the higher numbers, the benefit of the doubt. Contact me at infor@VistaMktResearch.com. Copyright 2024.

"It's the BEST TIME of the Year" to Buy Stock Index ETFs!

Next week, Friday December 29th 2023 at 4 PM the NYSE will close and every listed security will be marked at it's closing price for the year! Maybe 3:59 PM, or close to it, will be THE BEST TIME OF THE YEAR to buy your selected stock index exchange traded fund (ETF) or better yet, if your broker allows it, a TAS order (Trade at Settlement). 

We don't know the future but we do know the past. So here are the normalized continuously compounded returns for the largest, most liquid index ETFs for the past 20 years (12/31/2003 = 1000):

SPY = SPDR S&P 500 ETF

QQQ = INVESCO QQQ NASD 100 TRUST

IWN = ISHARES RUSSELL 2000 ETF

Source: Yahoo Finance

The SPY averaged 7% per annum for the last 20 years. The QQQs, 12%, and IWM 5%. Of course, you can take your chances picking stocks or you can just stay long the index. The S&P beats over 70% of all active managers! The Nasdaq? Even more!

Why buy on the closing price of the year? For better or for worse, Wall Street is measured by annual calendar returns and this aligns YOUR investments with Wall Street. And, why ETFs? You can BUY ETFs! You can't buy indexes. But you don't need to, these major index ETFs have almost no tracking error, that is, they are virtually equivalent to buying the index itself with almost no costs of ownership. 

Happy Holidays and Good Luck in 2024!

How to Buy the Vista Basket

Since 2009, I have been posting the returns of the Vista Basket of Commodity Futures Contracts.  And with a little bit of skill and lots of luck/good fortune, the Vista returns have outperformed the two major commodity indexes, the S&P GSCI and the Bloomberg Commodity Index, over the long term.

Commodity Index Returns

Commodity Index Performance at Vista Basket Inception Date 4/30/2009 = 1000

Vista = Vista Commodity Basket

S&P GSCI ER = S&P GSCI Excess Return Commodity Index

BCOM ER = Bloomberg Excess Return Commodity Index

Data Sources: Bloomberg.com, SPGlobal.com, Barchart.com.

The GSCI and Bloomberg have, due to performance and other shortcomings, many index variations (especially the GSCI) while only the basic and original "total return" versions are called "headline indexes" and usually quoted in the press. 

As such,  total return indexes are NOT pure commodity indexes. Total returns include the implied Treasury Bill interest received from the cash typically held as collateral in a commodity account. In some years, the TBill interest earned and counted as index return is greater than the return from the component futures contracts--in my view, how odd to include interest in commodity returns.

Both the GSCI and Bloomberg have "excess return" indexes too. These are the same as total return indexes but without the interest, just the futures returns which is what the Vista basket contains. The Vista basket contains and counts only returns from holding futures contracts. Vista beats both the total and excess return indexes.

Aside from this and other issues, the Vista basket has a simplicity that is not found in any other major commodity indexes.  FYI, I created the 15 component Vista Basket on 4/30/2009. The Vista Basket was created when I left Longview Funds Management, so I would not infringe on the Longview Commodity Index, which I created in May 2004. As early as the 1990s, I traded the CRB commodity index futures. 

If you want buy the Vista basket, it's an easy thing to do. The basket contains one contract of fifteen selected commodity futures. The basket buys and holds the December or nearest or shoulder month, if Dec is the peak month. All fifteen are rolled over on the last trading day of September! And that's it. 

Due to the selection criteria there is very little or no contract changes and no quantity changes either. This is the only conmodity trading method I know of that can tell you exactly what you own on any day of any year, past or present. It is a completely rules based mechanical system and, oddly enough, outperforms not just other passive indexes but in practice most actively managed commodity accounts, as well. (During our active years VistaCTA won numerous Barclay Hedge Top Ten CTA awards, including a 2010 Top Ten CTA of the Year award.)

Commodities, by some definitions, are ALL actively managed -- not so. Here for the first time in my blog is my Vista commodity basket (as of yesterday's close on October 3rd 2023):

Go long one contract of each and pay cash*, not exchange minimum.

Hold these long dated contracts until the last trading day of September 2024 and roll** them all on the close into same name/next year contracts. Paying cash means you never have a margin call, ever. You set it and forget it. 

That's it. Nothing more, nothing less. Happy trading!

*How do you pay cash for commodity futures? Example: you buy one Dec 24 crude oil contract for $88.00 a barrel. Notional value = 1000 bbls. X $88.00 = $88,000.00. Suppose the margin requirement is only $8000 per contract. Posting minimum margin means a 10% or $8 move to $80 wipes you out. Posting the full notional value, $88,000.00 means you will never be wiped out (unless it goes negative, aha!). 

The cash value of a full size contract basket is, today, roughly $1MM. Now you can and will earn tbill interest on your mil but I don't count that. Its gravy.

**What about rolls? If there is contango your new basket will cost more than the old. Do you need to add funds? In practice we don't.  The difference is usually not material and always way above requirements. Also, it is usually balanced out by the occasional backwardation where the new basket is less than the old.

***The methodology for the Vista Basket composition is rules based, somewhat complicated and my former CTA's pitchbook is available upon request. 

 

 

What happened to Crude Oil Zero?

 With crude oil futures on a non-stop tear since Aug 24 and, now, above $90 a barrel ...

Source Barchart.com

... What happened to the march to zero? In a way, similar to food prices, THIS WAR HAS TO END and Ukraine has to win! So far, after a good start, it's become a quagmire--a quagmire with inflationary consequences for energy and food prices and more. 

The demographics of the economy hasn't changed but the geopolitical consequences of a prolonged stalemate will catapault commodity prices and general inflation while eroding U.S. influence around the world. As a bad joke goes, Americans are ok with wars as long as WE start them. Iraq/Afghanistan lasted 20 years with little pushback. 

Americans are NOT ok with this war. If we have the might, can't we just crush Putin's forces? Or why do we hold back? Of course, its a delicate balance between supporting an ally and engaging U.S. forces in a war on Russia. Bush One actually did this. It was American forces that removed the Iraqi invader from Kuwait but left Iraq intact. Can we do this again?

So, the original call still stands. When this war ends, the leverage of OPEC+ diminishes and the real economiy will take over. 

Vista Commodity Basket Sharply Outperforms GSCI and Bloomberg

The Vista Commodity Basket has sharply outperformed the major commodity indexes since Vista's inception on 4/30/2009.

Below is Vista's normalized (4/30/2009 = 1000) comparative performance as of the close on August 9, 2023.

Continously compounded returns as of 8/9.2023

VISTA= Vista Commodity Basket

BCOM ER = Bloomberg Commodity Excess Return Index

GSCI ER = S&P GSCI Excess Return Commodity Index 

4/30/2009 = 1000 = VISTA inception date.

Sources: Bloomberg.com, SPGlobal.com, Vista Market Research

Let's first note that between 2015 to 2020, commodities went virtually nowhere! This is the period when crude oil was $25 a barrel for THREE years and the April 2020 WTI futures contract closed at a NEGATIVE $47! This was a continuation of negative real interest rates in the US and an extended period of ultra low inflation. Note also that while Vista is up almost 50% on this chart, Bloomberg and GSCI are below their 2009 levels-no net gains in 14 years.

Initiated by Covid supply disruptions and accelerated by Russia's invasion of Ukraine, commodity prices exploded higher. The energy based GSCI 3 year total return = 68%. Still today, commodities are elevated due to the after effects of Covid and the grinding war of Russian aggression. 

Next note that, since inception, the diversified and long-dated Vista basket rose ten times more than the diversified but nearby roll BCOM ER and four times more than the energy based and nearby roll GSCI ER. Finally, while profitability varied, Vista had no declines for the periods noted. 

OUTLOOK

Despite Vista's outperformance, the outlook for commodities, and inflation, is bearish with a caveat. Bearish because the fundamental demographics of aging population has not changed. The caveat is war. If the war of Russian aggression grinds on, or worse, spreads, commodities, especially energy and food, will catapault to new highs.  

Why compare Vista to the Excess Return indexes? Excess Return indexes do not include interest earned from treasury bill collateral and neither does the Vista basket. So-called total return indexes do. The basket and ER indexes only reflect the value of commodity price changes and are therefore comparable. Backup data is available upon request at VistaMktResearch@gmail.com.

© 2023 George Rahal

Crude Oil's March to Zero

Crude oil year-to-date:

Source: barchart.com

The crude oil rally is not lasting. The market is in disarray and today Prigozhin announced retreat from Bakhmut! As war winds down, as covid becomes a memory, crude oil, commodity prices and inflation will evaporate and we will return to our economic fundamentals of aging, shrinking populations and modern techonology. (Edit: the Wagner retreat was off and on while oil is still in disarray.)

Long-term crude oil:

Oil is overpriced, still holding premiums from war and covid. The long-term price of oil appears to be roughly $40. When markets give up huge rallies, they overshoot, so maybe the real price will be $25. But, three years ago CME rules were changed to permit WTI Crude Oil futures to go NEGATIVE, settling at -$47 a barrel. 

Markets TEND to return to prior levels (reversion to extremes vs the mean). In this way, crude is destined to go below ZERO.   THIS time and finally, the world will stop shovelling trillions in wealth to a few families in the Middle East-no matter what they do!

A major concern is how badly the Fed will hurt the real economy before prices give up their premiums and return to their economic levels. Perhaps the Fed's hapless run of rate hikes are over and the carnage will be no more. 

Disclaimer: Posts are for education only, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors. Send request to gdrahal@outlook.com to follow this blog and for additional information. 

© 2023 George Rahal

Why AI is Bull

 AI is just another computer program that dies when the power goes out. What makes people think that a bunch of bros, who create AI programs, know ANYTHING more than anyone else? We have history with "quant" investment funds-algos and hi freqs- that when put to the test and actually created mutual funds, couldn't beat the indexes!

Sure, people create better hammers-faster, bigger, more precise etc etc but they are still hammers. Tools are just tools even when controlled remotely. Uncontrolled tools are junk. So searches are better, faster, more precise-so what. A billion monkeys on typewriters will write Shakespere, so what, it's statistics. 

AI weapons ARE a danger. Killing faster, bigger, more precise etc. etc. is a threat to us all. Its a lot like crypto-only criminals, terrorists, tax cheats, etc. have a real use for it. 

Day vs Night trading

When I started my career in 1977 after-hours trading was an exotic specialty. Markets opened at their appointed time in the morning and closed in the afternoon. Commodities had their own special times. But, as far as I can remember, the NYSE opened at 9:30 AM and closed at 4:00 PM every trading day except for early closings before holidays like Christmas. 

I remember early 90s one night watching as crude oil exploded from $20 to $40 a barrel (on the Singapore exchange?) when the Gorbachev coup failed and then the market fell back to $20. The markets were never the same. Today crude oil and many other commodities trade nonstop from 6:00 PM Sunday to 5:00 PM Friday.

Some ETFs also trade after hours. The exact set of ETFs that trade 24 hours is set by your broker. Here's my broker's 24 hour ETF list today:

Source: Thinkorswim

It's a little bit of everything. The major stock indexes, SPY, QQQ, IWM, some bond ETFs, TLT, AGG, and an eclectic bunch of commodities and foreign ETFs apparently selected by popular demand. There are also a few hincky inverse and sector ETFs. Ok, so what does 24 hour trading give us? More profit or more loss?

I tested this using daily open, high, low, and closing prices with three measures: the portion of the daily return during day only trading hours (DO POR), the day only continuously compounded rate of return (DO CCROR) and the, usually quoted, daily CCROR. The first test looks at prices since ETF inception.

Data Source: Microsoft Stock History function.

How to read this? Look at SPY. The daily stock history starts with 1/29/1993. 

• DO POR = The Day Only Portion of Return = the "percentage of daily return from day only hours". Suppose on a given day SPY closed 35c higher than the morning's open and $1 higher than yesterday's close. The DO POR would equal .35/1.00 = 35%.SPY's AVERAGE DO POR since inception = 66.5%. So, yes, most of the action happened in the day session. 
• DO CCROR = the average continuously compounded rate of return for the day only hours since inception = 1.0%. This is what you get when you never hold overnight. 
• CCROR = the continuously compounded daily return since inception, i.e. for ALL hours = 2.1%

In this case, holding SPY overnight doubled the daily return. This is in contrast to the so-called risk averse investor who buys on the open and sells on the close, never taking a position overnight. These are stylized situations but you get the point.

For the QQQs and ILK, holding after hours is the a major difference between a gain and a loss in the position. Eight other ETFs had higher returns than the DO returns. Inverse ETFs, commodities and a few others have hinky results that may merit further investigation. 

One issue that may account for some of the hinkiness could be technology. In the early years few investors had access to technology the made after-hours trading easy. Since the widespread dawn of powerful and FREE trading platforms, such as TD Ameritrade'sThinkorsim, night trading by retail investors is enabled or even encouraged. So, lets look at the same table for this year only.

. 

Here we are looking at the measures for the most current data, this year's data. For instance, SPY's total return this year is 4%. IF we took day only positions our gain would have been 9%. in essence this is telling us that SPY was generally DOWN in the overnight. Look at UNG. Down 51%, your loss would only have been 16% in the day only positions.

Our conclusion here is what many market studies show, your mileage may vary. Choice of names and time periods create no clear trends. Buy and hold, over the long term, may be best for broad based stock indexes. 

Disclaimer: Posts are for education only, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors. Send request to gdrahal@outlook.com to follow this blog and for additional information. 

© 2023 George Rahal

Planet Money Podcast - It's a Wonderful Life

I just heard the NPR Planet Money Wonderful Life podcast which reviewed the famous Christmas movie "It's a Wonderful Life" from an economics perspective. Rather than present any ideological criticism, as commentators sometimes do, I feel this podcast did a decent job. 

The one area that could have been explained a little better was the podcast's description of the workings of the Building and Loan and the bank run in the film. A Building.& Loan is a Savings and Loan bank. Nothing more, nothing less.

People make deposits, but, unlike a typical bank of the time which records deposits in a bank book, depositors receive ownership shares equal to their deposit amount. Depositors own the bank. 

Also, in the movie, the shares had a provision where you have to wait 60 days to withdraw funds. This is very unlike the typical bank today. The 60 days wait gave the Building & Loan time to raise cash. As explained in the movie by George Bailey played by Jimmy Stewart, deposits are not in the bank vault, they were lent out for mortgages on homes. Only a fraction of the total deposits were in the vault to meet normal withdrawal needs. 

So, when Uncle Billy's $8,000 deposit is misplaced and stolen by evil banker Mr. Potter, the Building & Loan has almost nothing left for withdrawals. Potter, knowing this, calls the authorities accusing the bank of malfeasance and Bailey of embezzlement. Potter spreads rumors of the bank's problems precipitating the bank run seen in the movie. 

When depositors adamantly demand to withdraw their deposits, George Bailey accurately explains that their money is not in the vault. Instead, their money is in Bailey Park-all the houses built with their mortgage loans. He even asks if they want the bank to call in the loans to meet withdrawals. And finally, Mr. Potter, offers to buy shares for 50 cents on the dollar in order to gain control of the Building. & Loan, which is the thorn in his side and his nefarious goal throughout the movie. 

Of course, Ðonna Reed saves the day by offering up their $2,000 honeymoon cash to pay withdrawals. Just to clarify, the shares do not equal the mortgage loan amount, they equal the amount of the deposit. And typically, the borrower's loan was much larger than the borrower's deposits, if any. 

In the end, when the authorities come to arrest Jimmy Stewart on bank fraud, Donna Reed, brother Sam and the Bedford Falls townspeople save the day with their contributions to the Building & Loan.

In fact, this is a bit fictitious. When Uncle Billy lost the $8,000, a crime was committed.  Or maybe Potter committed the crime. In any case, restitution does not remove the crime. 

This is a great movie, great life lesson and a good banking lesson.

Disclaimer: Posts are for education only, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors. Send request to gdrahal@outlook.com to follow this blog and for additional information. 

© 2023 George Rahal

ETFs versus Stocks

In the battle of ETFs versus stocks, who wins? 

2022 Return = Continuously Compounded Annual Return = LN (2022 close/2021 close)

SPY = S&P 500 SPDR
DIA = Dow Industrials SPDR
QQQ = Nasdaq QQQ Invesco ETF (tracks the Nasdaq 100 index)
ONEQ = Nasdaq Composite ETF
IWV = Russell 3000 Ishares ETF
Data Source: barchart.com

What does this table tell us? First, the Dow Jones Industrial Average outperformed! It had the highest return in our list, a -7% single digit loss, and 12 of 30 names or 40% were positive in 2022-a spectacular performance in a dismal year. 

Despite the largest loss in this table, down -32.6%, 31% of Nasdaq 100 stocks ended 2022 with a gain. Next in line, the benchmark S&P 500, was down a dismal -18.2% with only 28% or 142 of 502 stocks showing gains. Next in line, the broader Nasdaq Composite Index had 27% of its component stocks positive. And finally, the broadest index, the Russell 3000, posted 641 or 25% of its stocks with year-end gains. 

Before getting too excited, in ALL cases, partly by definition, nearly half of the component stocks had a lower return than their associated index. 52% of S&P500 names were below the SPY return, DIA-53%, QQQ-36%, ONEQ-40% and IWV-50%.

In conclusion, who wins in the battle between stocks and indexes? On a purely statistical basis the indexes and their tracking ETF wins. The odds of picking stock winners are stacked against you. 

Why conflate ETFs and indexes? Because index tracking ETFs are nearly perfect in matching their index return. Index and ETF names are used interchangeably in this post.

Disclaimer: Posts are for education only, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors. Send request to gdrahal@outlook.com to follow this blog and for additional information. 

© 2023 George Rahal

ETF Tracking Error

When asking What to Buy? investors have choices. 

For instance, when buying the S&P 500  or NASDAQ 100 indexes there are at least four major flavors (there are many more) of index funds/ETFs/futures contracts. There are at least three ways to buy and hold crude oil, gold, corn and more, even, bitcoin. Each asset has an ETF and also a more traditional way of ownership. 

Which way is best? Fund managers are all tracking the same asset so it's fairly easy to compare results. Here's the S&P 500. Source for all this data is Barchart.com. 

SPY = S&P 500 SPDR 

VOO = S&P 500 ETF Vanguard

VFINX = Vanguard Index Trust 500 Index Fund

ESH23 = S&P 500 E-Mini Mar '23

ESn = S&P 500 E-Mini Nearby Roll

Pretty boring stuff. The tracking is fantastically close.

Regardless of what the index is, which you cannot buy anyway, what your $1000 CAN buy had, at most, a $17 difference no matter HOW you buy it. Vanguard and SPDR, two separate management teams, were nearly identical! And this, in a very tough down year. 

Here's the Nasdaq:

QQQ = Nasdaq QQQ Invesco ETF

NQH23 = Nasdaq 100 E-Mini Mar '23 Futures Contract

NQn = Nasdaq 100 E-Mini Nearby Roll

Again, a very boring chart but a telling table in a more tough, more down year. There is less than $30 difference on a $1000 investment in the Nasdaq 100. 

Looking at the rest we see differences in your choice of poison. 

USO, the largest crude oil ETF, handily outperforms the crude oil futures contracts. With all the work involved in CLn rolling many times in 2022, the 6% added return over the crude March 23 buy and hold seems hardly worth it. The single buy of USO on the 12/31/21 close is a no brainer.

GLD did the same, as did the tiny Tecrium CORN ETF when compared to both futures contract returns. The notable difference, for good measure, was Bitcoin. 

Right off the bat, the GBTC ETF lagged the cash Bitcoin price. By midyear the ETF recovered but then consistently priced itself below the cash. Oddly enough, not shown, is the supposed GBTC NAV which is somewhere between 20% and 50% HIGHER than its market price. Let's not confuse Bitcoin as anything other than a gambling vehicle, it has with no intrinsic value-but still a popular trade with a segment of the market. 

Conclusion: Most ETFs do a great job of tracking their underlying asset! The numbers for 2022 are indicative of prior year returns. They provide a good answer for "What to Buy?"

Disclaimer: Posts are for education only, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors. Send request to gdrahal@outlook.com to follow this blog and for additional information including a copy of the excel spreadsheet with these results. 

© 2023 George Rahal