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Nontraditional Funds Took the Stage at World’s Biggest ETF Conference

Summary:
When Derek Jeter speaks, people listen. After all, the former Yankees shortstop’s talents and successes, on and off the field, seem otherworldly. Drafted straight out of high school in 1992, Jeter went on to become the first ever Yankee to record 3,000 hits—an achievement reached by only 27 other players in baseball history. He also holds records in doubles and stolen bases. The five-time World Series champion was recently inducted into the National Baseball Hall of Fame—in his first year of eligibility, no less—and when casting their votes, the Baseball Writers’ Association of America (BBWAA) gave Jeter the second-highest plurality in the group’s 112-year history. Jeter stopped by at this year’s Inside ETFs in Hollywood, Florida, drawing larger crowds of attendees than any other speaker

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When Derek Jeter speaks, people listen. After all, the former Yankees shortstop’s talents and successes, on and off the field, seem otherworldly.

Drafted straight out of high school in 1992, Jeter went on to become the first ever Yankee to record 3,000 hits—an achievement reached by only 27 other players in baseball history. He also holds records in doubles and stolen bases.

The five-time World Series champion was recently inducted into the National Baseball Hall of Fame—in his first year of eligibility, no less—and when casting their votes, the Baseball Writers’ Association of America (BBWAA) gave Jeter the second-highest plurality in the group’s 112-year history.

Jeter stopped by at this year’s Inside ETFs in Hollywood, Florida, drawing larger crowds of attendees than any other speaker at the four-day conference. He answered questions on a wide range of topics, from the recent tragic death of NBA star Kobe Bryant—“he was such a great family man,” Jeter lamented—to his move to the front office with the Miami Marlins.

Two of his comments in particular stuck with me.

“I play to win,” he said, “and anyone who claims they do otherwise is lying.”

I’m confident everyone reading this right now feels the same level of competitiveness when investing. There’s no greater feeling than to win in the financial markets—and the reverse is also true. That brings me to the second thing:

“Every time you take the field is a new opportunity.”

One of the great certainties of life is that we all have the same 1,440 minutes in a day. If one day comes up short of your expectations, tomorrow will inevitably bring you a whole new set of opportunities. That’s the case not just in investing but also in our careers, outside interests, friendships and romances.

For now, though, let’s focus on investing—particularly ETFs.

Top Two ETF Trends to Watch: ESG and Nontransparent

U.S.-based ETFs had a red-hot 2019, ending the year with $4.4 trillion in assets, a 30 percent increase from 2018.

Even bigger changes could be headed our way, if some of the discussions at this year’s Inside ETFs are any indication. Two topics seemed to dominate the conference: the rise of ESG investing, and the emergence of so-called “nontransparent” ETFs.

I’ve talked before about ESG—or “environmental, social and corporate governance.” Such ETFs strategically limit their exposure to companies that produce lots of carbon, for example, while boosting those that may have greater diversity on their boards and in the C-suite.

For many years now, ESG has been a niche focus, seeing muted flows by only the most “green”-minded investors. A tipping point seems to have occurred in 2019, though, with net flows into open-end and exchange-traded ESG funds topping $20.6 billion, according to Morningstar data. That’s four times the amount that such funds attracted the previous year. ESG appears to have gone mainstream.

Nontraditional Funds Took the Stage at World’s Biggest ETF Conference

And yet this may only be the beginning. A January survey conducted by the deVere Group found that a whopping eight out of 10 millennial investors around the globe cited ESG as a top priority when considering investment opportunities, trumping even anticipated returns and past performance. Millennials are now the largest living generation, having surpassed baby boomers, so this change in investor appetite is expected to transform world markets.

As for nontransparent ETFs, these are a new-ish breed of funds that take the best from both mutual funds and ETFs and combine them into one 40 Act investment vehicle. Also called “semitransparent” ETFs or “exchange-traded managed funds (ETMFs),” these lower-cost products can be traded throughout the day on an exchange like typical ETFs. They also have all of their tax efficiency. Where they differ from ETFs, however, is they don’t have to disclose all of their positions and weightings on a daily basis—hence, “nontransparent.” Such a structure will allow active managers to tap into the popular ETF market without having to give away their intellectual property (IP).

Like ESG strategies, nontransparent funds are among the fastest growing segments of the ETF industry. Expect to read more about them in the coming weeks and months.

Bullish on Domestic Equities? Proceed With Caution

Also top of mind among several presenters was the longevity of the U.S. stock bull market. One of the biggest long-term risks continues to be runaway federal spending. The Congressional Budget Office (CBO) this week released its projection that the federal deficit—or the difference between tax revenues and spending—will exceed $1 trillion in 2020 and all subsequent years if nothing changes. That’s unprecedented in times of peace and economic growth. It also threatens to curb additional expansion, as debt service will increasingly grow as a percent of federal expenditures, siphoning away funds that could instead be spent on infrastructure, defense and more.

Nontraditional Funds Took the Stage at World’s Biggest ETF Conference

As was pointed out numerous times during the conference, the S&P 500 Index is looking highly overvalued right now, with a cyclically adjusted price-to-earnings (CAPE) ratio of above 31 times earnings in January. That’s well above the 100-year average of 17.6 times earnings and 20-year average of 26.2 times earnings. It also puts valuations in a similarly elevated range as when stocks collapsed in 1929 and during the dotcom bubble of 1999-2000.

Nontraditional Funds Took the Stage at World’s Biggest ETF Conference

So what can investors do? In short, make sure you’re diversified, particularly in emerging markets (EM), Treasury bills and hard assets such as gold, precious metals and real estate.

That was the advice of Larry Swedroe, chief research officer of Buckingham Strategic Wealth and author of Your Complete Guide to a Successful and Secure Retirement,released just last year.

Granted, staying diversified is sometimes easier said than done, especially when the stock market has regularly been hitting new all-time highs—that is, before coronavirus fears began rattling investors. To illustrate his point, Swedroe shared with us a quote by portfolio manager James Gipson that I think many of you will find a lot of humor (and truth!) in:

“Diversification for investors, like celibacy for teenagers, is a concept both easy to understand and hard to practice.”

Negative-Yielding Debt Rises to $13 Trillion

Speaking of gold, the yellow metal ended the week up on market volatility and has now increased more than 4 percent so far in the new year. The pool of global government bonds trading with a negative yield rose $1.16 trillion last week to top approximately $13 trillion. That’s still below the record amount of $17 trillion, last seen in August of last year, but it’s just one of several risk factors investors should keep their eyes on.

Is now the time to invest in precious metals? Watch my recent interview from the sidelines of the Vancouver Resource Investment Conference (VRIC) by clicking here!

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Gold Market

This week spot gold closed at $1,589.16, up $17.63 per ounce, or 1.12 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week lower by 0.80 percent. The S&P/TSX Venture Index came in off 1.13 percent. The U.S. Trade-Weighted Dollar fell 0.50 percent.

Date Event Survey Actual Prior
Jan-27 New Homes Sales 730k 694k 697k
Jan-28 Durable Goods Orders 0.3% 2.4% -3.1%
Jan-28 Conf. Board Consumer Confidence 128.0 131.6 128.2
Jan-29 FOMC Rate Decision (Upper Bound) 1.75% 1.75% 1.75%
Jan-30 Hong Kong Exports YoY 2.7% 3.3% -1.4%
Jan-30 Germany CPI YoY 1.7% 1.7% 1.5%
Jan-30 GDP Annualized QoQ 2.0% 2.1% 2.1%
Jan-30 Initial Jobless Claims 215k 216k 223k
Jan-31 Eurozone CPI Core YoY 1.2% 1.1% 1.3%
Feb-2 Caixin China PMI Mfg 51.0 51.5
Feb-3 ISM Manufacturing 48.4 47.2
Feb-4 Durable Goods Orders 2.3% 2.4%
Feb-5 ADP Employment Change 150k 202k
Feb-6 Initial Jobless Claims 215k 216k
Feb-7 Change in Nonfarm Payrolls 160k 145k

Strengths

  • The best performing metal this week was gold, up 1.12 percent. The majority of gold traders and analysts were bullish in the weekly Bloomberg survey as concerns mount regarding the coronavirus spreading out of China. The yellow metal had a second monthly gain as investors flock to safe havens amid the global health emergency. China’s gold imports rose in December to the highest level since April, according to customs data. Total imports of non-monetary gold rose to 146,758 kilograms.

Nontraditional Funds Took the Stage at World’s Biggest ETF Conference

  • Gold ETFs hit a seven-year high this week and it’s not just because fears of the coronavirus spreading. Bloomberg’s Ranjeetha Pakiam writes that gold has been in favor because the Fed had signaled interest rates are likely to remain low for some time. With real rates negative, it cuts the opportunity cost of holding gold. Bullion is historically lower after Chinese New Year when buying spikes before celebrations, but it might skip that seasonal lull this year.
  • Saudi Arabia is set to pass a new mining law that will improve clarity and security for investors and include incentives, reports Bloomberg. The diamond industry has shown a glimmer of hope. De Beers reported that diamond sales jumped in January after a horrible 2019. Anglo American Plc said its unit sold $545 million of diamonds in its first sale of the year. AngloGold Ashanti Ltd reopened the century-old Obuasi gold mine in southern Ghana after operations were halted in 2016.

Weaknesses

  • The worst performing metal this week was palladium, down 5.71 percent as hedge funds cut their net bullish view to a 16-month low. According to the World Gold Council (WGC), purchases of gold jewelry, bars and coins fell by 11 percent last year. However, most of that drop was offset by strong central bank and ETF buying. Total gold demand fell just 1 percent from 2018. The WGC also expects gold demand in India to slowly recover in 2020, with demand in the first half of the year likely not showing any significant growth. This follows the worst year for demand out of India in three years amid high bullion prices. Standard Chartered Bank’s Suki Cooper notes that gold jewelry sales out of China could take a hit from the coronavirus, just as it dropped following the SARS outbreak in 2003.
  • According to data from the National Association of Realtors, pending home sales unexpectedly decreased by 4.9 percent in December from the prior month. Norilsk Nickel, the world’s biggest palladium miner, said a bubble has been created and that it’s bad for the industry. The company plans to ease market tightness by shifting sales to more investment-grade bars, instead of the powdered form used by industrial consumers, reports Bloomberg.
  • Newcrest Mining said that production at its flagship Cadia operation in New South Wales, Australia could be impacted by the end of this year if the crippling drought continues in the region. The area has seen record low rainfall for the past two years.

Opportunities

  • Heraeus, a palladium refiner, said that the palladium market should remain in a deficit of more than 500,000 ounces in 2020 due to stricter emission legislation boosting demand for use in autos. Bank of America sees rhodium peaking at a record $12,000 an ounce this year and averaging $10,500. Bloomberg’s Sungwoo Park writes that silver may resume its rally as a cheaper alternative to gold. Park notes that silver is still trading 64 percent below its all-time high, while gold is trading just 18 percent lower than its record, which means silver should benefit disproportionatly from any sustained flight to safety.
  • Sibanye could finally pay a dividend for the first time in three years this August. The gold miner acquired Stillwater Mining Co. three years ago and critics said it overpaid for the palladium producer. However, the $2.2 billion investment could now pay off, reports Bloomberg. CEO Neal Froneman said in an interview that the company has almost entirely been de-risked. “I don’t want to be so bold as to say I told you so.”
  • Nano One Materials announced that it has arranged a private placement for gross proceeds of up to $5 million that will be used for fast tracking testing and co-development activities including those with existing collaborators Volkswagen, Pulead and Saint-Gobain. The company said in a press release that the placement “positions us very well to execute on our business plan.” Nano One has developed patented technology for the low-cost production of high performance lithium ion battery cathode materials used in electric vehicles, energy storage and consumer electronics. Roxgold announced an increase of 7 percent increase in mineral resources at its Seguela Gold Project in Cote d’Ivoire.

Threats

  • According to research released by the Harvard Joint Center for Housing Studies, the U.S. housing crisis is making its way to the heartland of the nation. Bloomberg reports that the study showed from 2011 to 2018, the proportion of households making $30,000 to $45,000 a year that were “cost-burdened” on rent rose the most in metros including Nashville, Greenville, McAllen and Austin. The data highlights the harsh reality of a decade-long expansion where there are fewer and fewer places to go for people who don’t make big salaries. The report also showed that about 48 percent of all renters were cost burdened in 2018.
  • Two of the biggest gold miners are taking different approaches to making shareholders happy. Newmont is focusing on high dividends and improving operations at some of the mines it acquired in its deal for GoldCorp, while Barrick is looking at expanding its copper holdings, which has some shareholders concerned. Barrick has outperformed Newmont in the time since both of their megamergers; however, it will be interesting to see which takes the lead with these different investment strategies.
  • Bloomberg’s Edward Bolingbroke reports that participants in the eurodollar market have been ponying up cash to buy options that hedge against the Federal Reserve cutting benchmark rates to zero, should a “doomsday” economic scenario occur in the next year. The gap between the yield on three-month and 10-year Treasuries inverted this week, which many see as a warning signing as it inverted before each of the past seven U.S. recessions.

Do You Know Which Countries Produce The Most Gold? Explore the Interactive Map

Index Summary

  • The major market indices finished down this week. The Dow Jones Industrial Average lost 2.53 percent. The S&P 500 Stock Index fell 2.12 percent, while the Nasdaq Composite fell 1.76 percent. The Russell 2000 small capitalization index lost 2.90 percent this week.
  • The Hang Seng Composite lost 6.06 percent this week; while Taiwan was down 5.15 percent and the KOSPI fell 5.66 percent.
  • The 10-year Treasury bond yield fell 17 basis points to 1.51 percent.

You can read the remainder of this article at http://www.usfunds.com/investor-library/investor-alert/nontraditional-funds-took-the-stage-at-worlds-biggest-etf-conference/

————–

January 31, 2020

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

 

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