$SPX EQUAL WEIGHT OUTPERFORM INDEX:SPXEW wicking hard at the 2008-9 crash zone. exposure to mag 7 is significant risk. If you're bullish US equities, consider equal weight or small caps. The rotation is happening. Also tagging monthly oversold.
Based on this TF, I might expect value to outperform over the next few years. This falls in line with our bullish asia international thesis as that sector tends to be centered around value, not necessarily tech.
Equalweight
Equal Weighted Nasdaq 100 Prepped to catch up with the Big CapsSo far it has been the big caps like Google, MSFT, AAPL, and NVDA that has carried the NASDAQ 100 up higher, but now we can see that the Equal Weighted NASDAQ 100 is getting ready to break through resistance after making a series of higher lows and it is likely going to target at least an 88.6% Fibonacci retrace. At this time, we may see the NASDAQ 100 itself trading at all-time highs.
S&P Equal Weight Index (RSP Daily analysis)The volume below is very thin (yellow highlight), and the chart trend is downward and weakening. The equal weight index actually performed a little better than the weighted index during the selloff, retracing only 42% versus SPY 50% during the period of Covid low in March 2020 to all time high in January 2022.
There are three lines of potential support, all at volume points of control as well as Gann lines:
138.96, or -1.8% from 5/12 close at 141.52
135.31, or -4.4% from 5/12 close
130.2, or 8.0 % from 5/12 close
I'm inclined to believe the 8% scenario is most probable, since typical corrections (which I believe is imminent) range around 7%.
Relative Momentum of Weighted vs Equal Weight Index ETFsRelative Momentum of Weighted vs Equal Weight Index ETFs
QQQE/QQQThis chart shows the equal-weighted QQQE versus QQQ. This relationship demonstrates that QQQ's performance is derived from few stocks
QQQE to close the gap with QQQQQQE (equal-weighted) looks like its relative strength versus QQQ (market-cap weighted) is about to turn around. There is close to a 5% gap between QQQ and QQQE.
I believe that gap closes and then QQQE begins to outperform. The big names have seen their day in the sun, it's time for the rest of the tech stocks to shine.
This also gives equal weight to the small-cap stocks that tend to perform very well in periods of high economic growth.
Six ETFs with an interesting thesisDiversifying your strategy
There are lots of ways to "win" at investing. For diversification, it can be useful to bet on a lot of different strategies, because often when one strategy starts to go wrong, another will start to go right.
But unless you're an expert coder with a lot of free time, you probably can't actively manage multiple different strategies yourself. That's where ETFs come in. ETFs can be great for diversifying your strategy without the hassle of actively managing your portfolio yourself.
In this post, I'll look at several different ETFs that have a novel and interesting investing thesis. I don't necessarily endorse all of these, but I think they're worth a look.
1. The Sparkline Intangible Value ETF
I've been following Sparkline for a while now, and they consistently put out some of the best investing research I've seen. Basically, Sparkline's thesis is that traditional metrics of value-- especially the price-to-book ratio-- don't work anymore in our technology-driven economy. More and more, what determines a company's value are "intangibles" like patents, talent, network effects, branding, and customer loyalty.
Sparkline has developed ways to "measure" each of these intangible categories. For instance, a good proxy for "talent" is how many PhDs and Ivy Leaguers are employed at a firm. Sparkline plugs these variables into a machine learning model to come up with a sense of which firms are a good "value" when you include intangibles in the calculation.
I've been reading this research for months and scratching my head trying to figure out how to implement it in my own investing, so I was pretty excited when they launched an ETF at the end of last month.
Top holdings of $ITAN include the FAANGM stocks, Nvidia, Intel, and Cisco. It's tech heavy, but you've also got other sectors well represented, from communications and pharmaceuticals to banks, retail stores, and automakers.
We only have a few days of data for $ITAN, so it's pretty meaningless to compare returns, but it has so far underperformed the index with a return of 1.7% vs. 3.1% for $SPY.
2. The iShares MSCI USA Momentum Factor ETF
In the scientific literature on technical analysis, one of the only indicators that seems to actually beat the market is momentum. The iShares Momentum Factor ETF buys large- and mid-cap stocks with high price momentum. Now, it may be that momentum will stop working at some point in the future, because market conditions change. But for now, it seems to work. $MTUM has returned 280% since its inception in 2013, compared to 235% for $SPY.
3. iShares MSCI USA Quality Factor ETF
Also a strong performer in the quantitative investing literature is the "quality" factor. Quality is defined as "high return on equity, stable year-over-year earnings growth, and low financial leverage." In other words, non-capital-intensive businesses with stable growth and low debt. The $QUAL ETF does a pretty decent job achieving sector-neutral exposure to the quality factor. To be honest, it tends to be a little expensive in terms of the price multiples of the stocks it buys. Maybe wait for a dip? $QUAL has returned 212% since inception, vs. 204% for $SPY.
4. Freedom 100 Emerging Markets ETF
Let's say you want exposure to emerging markets, but you're worried about exposure to China or other bad-actor governments. The Freedom 100 ETF may be what you're looking for. Heavily weighted toward Taiwan, South Korea, Chile, and Poland, $FRDM is based on quantitative econ research that shows that countries with higher "economic freedom" scores tend to experience greater prosperity and economic growth. Thus, $FRDM makes active "freedom-weighted" bets on emerging markets: "Country selection and weights are based on composite freedom scores derived from 76 quantitative variables measuring each country’s level of protection for both personal and economic freedoms."
Think of this like the ESG emerging markets fund. Since inception, $FRDM has returned 34% vs. 32% for $EEM.
5. Pacer 100 Cash Cows 100 ETF
Companies these days use a lot of fuzzy accounting: EBITDA and adjusted EBITDA in particular. Usually P/E ratios are calculated with non-GAAP earnings measures that have been heavily adjusted. This makes modeling and forecasting easier, because non-GAAP earnings are a lot less "lumpy" than GAAP earnings are. But if you want to invest based on "real" earnings and "real" value, you should really be using GAAP earnings or free cash flow. Free cash flow is the cash remaining after expenses, interest, taxes, and long-term investments. The companies that generate a lot of free cash flow are the ones that are genuinely profitable, and not just profitable on paper. Investing in free cash flow is the thesis behind the Pacer 100 Cash Cows ETF.
Free cash flow can be used for capital expenditures like R&D, for paying dividends, for buying back shares, or for acquiring other companies. Having lots of free cash flow is especially beneficial in a bear market, when asset prices are cheap and credit is tight. Why? Because a bear market is a great opportunity for a cash-rich company to buy back shares or snap up assets at an extremely low price. Just look at how the Pacer Cash Cows ETF outperformed the S&P 500 during the recovery from the Covid-19 pandemic:
M&A deals and cheap share buybacks helped propel the cash cows to stardom. But you can also see that during bull markets with high valuation multiples, the cash cows have lagged. $COWZ has returned just 93% vs. 112% for $SPY. I worry that $COWZ, like lots of value ETFs, is exiting stocks too quickly rather than holding them to maturity. Since it only holds the 100 cheapest FCF stocks at a time, it ends up only keeping the ones that stay cheap, which may be the lowest quality companies. You might do better to just buy some of $COWZ's higher-quality holdings and hold them forever.
6. Invesco S&P 500 Equal Weight ETF
Over the long run, the equal-weighted S&P 500 index has outperformed the cap-weighted S&P 500 index. There may be a few reasons for that.
First, base effects mean that small companies can grow faster in percentage terms than large ones.
Second, investors pay a premium for big companies because they perceive them as lower risk. But if you average the risk across a lot of small companies, it's a lot less risky and you end up getting a discounted price overall.
Third, cap-weighted indexes are kind of nuts, if you think about it. We're going to buy the most expensive companies, making them even more expensive. We're going to broadcast exactly what we intend to buy, and the basis on which we're making that decision. And literally everyone in the market is going to pile into this trade. Here's the problem: this system can be gamed . All you need is, for instance, a subreddit full of rowdy retail traders to realize that they can pump some tiny stock like GameStop up to an extremely high market cap, and then the indexes will be forced to buy it. Cap-weighted indexes probably get bullied into buying a lot of overpriced companies like Tesla that might not actually be good value for money. Buying equal weight avoids this exploit.
What are your favorite ETFs?
I'm always on the hunt for a good new strategy or investing thesis and would love to hear from you. What are your favorite ETFs? What's an ETF with an interesting thesis? What ETFs might be good for diversification, or might hold up well if market conditions change?
Value-Growth Rotation for the Long TermBack in September I posted about the rotation from value to growth, and I laid out three targets for the ratio of RSP (an equal-weighted S&P 500 ETF) to SPY (a cap-weighted S&P 500 ETF).
I updated the idea in November to note that the trade was playing out as planned and had hit my second target.
In January, we finally hit my Target #3, bringing the original trade idea to its fulfillment.
The market has pulled back a bit from Target 3, but it now looks to have established some support at the 20-week and 50-week moving averages after a bullish moving average cross. It's great that the original trade idea played out so beautifully, but ultimately this is a long-term trade for me rather than a short-term swing. Equal weight has underperformed cap weight for five our six years, but I believe the cycle has hit its bottom and it's time for equal weight to shine.
There are several reasons to think it might be value's time to shine. Firstly there's the matter of valuations. Judging from price ratios, large-cap tech is more expensive than it's ever been. A lot of these big tech firms still have 40-50% downside to their median valuations of the past 4 years. The big 5 stocks are about 25% of total S&P 500 market cap. Meanwhile, value is relatively the cheapest its ever been. There are lots of great charts about this in a post on the AQR blog titled "Is Systematic Value Investing Dead?" The author slices and dices the data all sorts of ways, but finds that pretty much no matter what ratio you use or how you test for robustness, the value discount is several standard deviations cheaper than normal right now.
www.aqr.com
In previous posts, I've laid out several other reasons to be bullish on value. For one, large-cap tech companies are being targeted by antitrust suits in Europe and the US. With Democrats having unified control of the US government, it's also likely that antitrust action will be on the legislative agenda. Furthermore, inflation and a weakened dollar have caused food and commodities prices to soar, and a lot of "value" companies have large commodities exposure. Assuming that the US dollar remains weak compared to other currencies, value should continue to outperform.
