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