Day 838

May 8th is day 838 since Trump's inauguration on January 20, 2017. There have been a number of tweets and news stories about a new Gallup poll showing Trump for the first time with a higher approval rating than Obama at the same time in his term.

Polling is an inexact science just as markets are an inexact science but I always like to see how the stock market averages fared when I read stories like this. Let's fully understand that one person IS NEVER responsible for market and economic performance.  So here goes, in my view, an objective comparison of two very different periods in recent history:

Market Data Source: Yahoo Finance Historical Adjusted Closes.

GDP Source:  https://apps.bea.gov/iTable/iTable.cfm?ReqID=19&step=4&isuri=1&1921=flatfiles

Unemployment Source: https://data.bls.gov/pdq/SurveyOutputServlet

All downloaded 5/9/2019.

First observation is these 16-month returns for the stock indexes are all fantastic. How fantastic for each period is obvious.

One COULD say we are not fair to Trump because the markets have been breaking the last few days, well even using the all time highs, 26828.93 for the Dow and 2945.83 for the S&P, Trump gains stand roughly the same at 30% and 26%, respectively.

Most recent quarterly GDP improved 7 points under Obama. Trump had much higher GDP. The unemployment rate got worse 16 months into Obama's term and is near record lows for Trump.

This post, like Mueller, will not make a verdict on any President. Either way we have to acknowledge that markets and economics are not dependent upon one person.

Feel free to post comments.

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

Option Write Strategies versus the S&P 500

A tweet today https://twitter.com/SeekingAlpha/status/1125749396069466112 posted some big "risk-adjusted" numbers for the CBOE CallWrite (BMX) and PutWrite (PUT) Indices versus the S&P 500. I think this tweet is misleading.

First of all, the concept of risk adjusted returns in my opinion does not really work for the great majority of investors. Only very few professional investors, if any, get paid on risk-adjusted returns. Risk-adjusted returns DO make underperforming investments look better!

Back to option writing. Let's compare the returns of call and put option writing to the S&P. Note that investors cannot own the BMX and PUT indexes. You CAN buy ETFs that track these indexes. Two "major" ETFs that do this are the Invesco S&P 500 BuyWrite ETF (symbol PBP) and the WisdomTree CBOE S&P 500 PutWrite Strategy Fund (PUTW). In fairness, I'll compare these to the SPDR S&P 500 ETF (SPY), an S&P 500 index you CAN buy.

In theory, call writing should beat the S&P during flat and slightly bearish periods. Put writing should beat the S&P during flat and slightly bullish periods.

This long-term chart compares the PBP from its 12/27/07 inception with the SPY:

The PUTW started trading 12/25/2016 and the shorter term comps are shown below:

Source: Yahoo Finance "Historical Prices" "Adj close" downloaded 5/7/2019.

Aside from the obvious long and short term outperformance of the SPY over the PBP and PUTW, we have to acknowledge the writes seem to have fewer drawdowns. Ok, but how do you cherry pick just those periods that have flat to near-flat returns? Short answer: you don't. You can't so I see no way to justify this admittedly peculiar investment strategy.

One last note. There are those who will say that professional money managers do not reflect their stated strategies and further claim that individual investors can easily beat mutual funds and ETFs. My answer: the reason pros apparently underperform individual investors is because pros report audited results!   

For the spreadsheets supporting this post just ask.  

Feel free to post comments.

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

Long Stock versus Synthetic Long Stock

Options give traders options. Suppose you want to buy a stock or ETF, your choices are buy for cash, buy on margin or, using options, enter a synthetic long position. Let's look at a recent example to see what I mean.

For this comparison, I'll randomly pick Planet Fitness stock (PLNT) which is a decent stock and has no dividend. This comparison omits commissions for simplicity.

Source: Yahoo Finance "Historical Prices" "Adj close".

Example 1: 12/28/2018 Buy 100 PLNT at $52.58 for $5,258 Cash
Example 2: 12/28/2018 Buy 100 PLNT on 50% margin. $2,629 Cash + $2629 Margin
Example 3: 12/28/2018 Buy 1 PLNT May 17, 2019 $52.50 Call at $6.15 and Sell 1 PLNT May 17, 2019 $52.50 put at $5.50. $65 Cost + $1575* margin required to short the put = $1640.

Example 1 is a simple buy for cash costing your account $5,258.
Example 2 saves cash by using borrowed funds to buy the stock.
Example 3 is called a synthetic long. It uses options to create the same result as a long position.

Lets see how it works out so far this year. Yesterday, 5/3/2019, PLNT closed at $72.67

Example 1 is up $2009 or +38.21% year-to-date.
Example 2 is also up $2009 but it incurred, for this example, a margin cost of $70.10** for a net profit of $1938.90. This net gain divided by the investment (1938.9/2629) equals a 73.75% return!
Example 3 closed at $2025 ($2035 call - $10 put). This was a return of 123.47%!!

Of course if PLNT were to fall, the results would be very different. Example 1 risks your total investment. Example 2 risks your investment plus interest plus margin calls. Example 3 risks your tiny investment plus the risk of being put the stock, i.e. buying the stock at a very unfavorable price, vastly increasing your investment.

*The margin to sell an at-the-money put is roughly 30% of the strike price. $5250 x .3 = $1575. See your broker for your margin requirement.
**Suppose the annual margin rate is 8%. $2629 x .08 /3 = $70.10 is the cost of the loan for 4 months.

Feel free to post comments.

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

Does Buying Puts Actually Work?

My last post looked at buying puts for portfolio insurance. The question remains, does put buying for portfolio insurance actually work? To answer this conclusively one needs to do exhaustive research on multiple market declines and associated put option behavior. Here, we can look at one example which can give us a clue to answer the larger question.

Let's consider an idealized example from last year. Suppose last year at this time, you owned 100 shares of the SPY on April 23, 2018 and you bought the at-the-money put for put insurance.

4/23/2018 SPY closing price: $266.56; SPY at-the-money 12/31/2018 266 put: $12.315 = 4.1906% of SPY share price.

12/31/2018  SPY closing price: $249.92.

Thus at year end, your put expired at an idealized value of $16.08 (266-249.92, assuming a perfect exercise and cover of the short stock position at $266).

How did the portfolio insurance work out? With NO insurance your SPY position lost $16.64 (excluding dividends) or 6.2425%. WITH insurance, you lost 56 cents (-16.64+16.08) or .21% of your capital. There is no coincidence that the loss equals the 56c difference between the stock and the strike price.

Feel free to post comments.

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

New S&P Highs and the Cost of Insurance

This past Friday, 4/26/2019, the S&P 500 stock index, SPX, closed shy of a new high at 2939.88, marking a year-to-date gain of 17.27% from its 2506.85 close at 2018's year-end.

Much is written about the whys and wherefores of this new high. Little has been written about the cost of portfolio insurance. One sensible way to hold your current positions and still protect yourself from a market decline is to buy a put option-one of the least expensive forms of portfolio insurance.

If, like many of us, your investment portfolio consists of an S&P index fund or similar holding, you have an excellent choice of ETFs to choose from: SPY, IVV, VOO and more. Put options are readily available. 

The SPY is the world's largest ETF and SPY options may be the most liquid and lowest cost. Suppose we own 100 shares of SPY which closed 4/26/19 at $293.41 per share and we wanted to "insure" our portfolio at this market high for the rest of the year.

Which put option should we buy? Short answer is the end of year "quarterly" 12/31/2019 "at-the-money" 293 puts which closed at $12.29 (as marked by my broker) or 4.188% of the SPY closing price. Basically between now and the year end, the most you could lose on your SPY position is the 4.19% paid for the insurance. Gains, of course, would be 4.19% lower than if you didn't have the insurance. 

The above charts the gains and losses of this example. The green line is the gain and loss of the entire portfolio of SPY at 293.41 and the Dec 31 293 put. Let's parse this in insurance terms:

The coverage is 100 Shares of SPY at $293.41 per share;
The the term is time until expiration;
The payout is the $293 per share strike price*;
The "deductible" is the difference between the $293.41 closing price and the $293 strike price or 41c per share.

The put will pay you dollar for dollar if the SPY closes below 293 on expiration*. Anytime before expiration is less certain. Put prices can vary widely in the interim depending on the moves on the underlying. Of course, if SPY expires ABOVE 293, you don't have a loss and your insurance expires.

*The actual payout may require you to sell exercised stock and there's many more considerations with portfolio insurance including dividends, margin and commissions. Contact me for more information.

Feel free to post comments.

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

Stock vs Options Example

MSFT closed at $123.37 on the Easter holiday shortened weekend 4/18/19 close.

Suppose you bought 100 shares for $100 a share on 1/4/2019 and sold them on 4/18/19, a perfect trade indeed.

buy at $100
sell at $123.37
profit = $23.37 per share!

Now here are three MSFT options trades as of 1/4/2019 that expire on April 18, 2019:

The out-of-the-money $110 call:

buy at $3.35
sell at $13.37
profit=$10.02
or, you need 2.3 calls costing a total of $7.70 to equal the same profit as the stock.

The at-the-money $100 call:

buy at $7.925
sell at $23.37
profit = $15.425
or you need 1.51 calls for $11.96 to equal the same profit

and finally, the in-the money $90 call:

buy at $14.75
sell at $33.37
profit = $18.62
or you need 1.25 calls for $18.43 to equal the same profit.

Now this assumes perfect timing, perfect pricing and perfect quantities which of course doesn't happen. If you sold earlier your gains would be less. If you held on, your options would expire at the current stock price. Either way, you cannot buy option fractions, so there.

The problem with options for portfolio maximizers is that for a given stock move options leave money on the table. The problems are both the options delta and the extrinsic/time value or "juice". Option buyers must overcome the small participation from low deltas AND must burn off all of the extrinsic value before receiving any of the stock's gain.

If you want a high delta, the .78 delta 90 calls have huge $2.82 juice. Low juice $120 calls cost $1.095, all extrinsic value.

In theory if you are good enough you can get the same move as the stock but you need guesswork. Spend $10.05 for three 110 calls, $15.85 for two $100 calls or $29.50 for two $90 calls will get you your $23.37. All of the above beat the $100 spend for a share of MSFT.

Feel free to post comments.

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

First Post of a Reinstated Blog

This is my first post for my reinstated blog. I will be entering years of posts on investments and commodities in the archive but I have to figure out how first. Feel free to comment anytime.

Vanguard Active Management versus Vanguard Passive Management

A prominent Vanguard observer claims that certain of Vanguard's actively managed funds have sharply outperformed their passive index counterparts over ten year periods.I just found this out and sorry I didn't find it sooner.

Let's test this. The test will use published returns from Vanguard's website as follows:

Here are the funds:

Index	Vanguard Health Care Index Fund Admiral Shares (VHCIX)
Active	Vanguard Health Care Fund Admiral Shares (VGHAX)
Index	Vanguard Extended Market Index Fund Admiral Shares(VEXAX)
Active	Vanguard Capital Opportunity Fund Admiral Shares(VHCAX)
Index	500 Index Fund Admiral Shares (VFIAX)
Active	Vanguard PRIMECAP Fund Admiral Shares (VPMAX)
Index	Vanguard Dividend Appreciation Index Fund Admiral Shares (VDADX)
Active	Vanguard Dividend Growth Fund (VDIGX) CLOSED

Here are the returns as of January 31, 2018:

		1 Year	3 Year	5 Year	10 Year	Since	Inception
Index	VHCIX	28.18%	10.34%	17.84%	12.83%	10.27%	2/5/2004
Active	VGHAX	22.35%	8.12%	17.42%	12.74%	11.00%	11/12/2001
Index	VEXAX	19.52%	11.82%	13.84%	10.35%	8.44%	11/13/2000
Active	VHCAX	33.05%	16.52%	19.85%	12.34%	11.71%	11/12/2001
Index	VFIAX	26.36%	14.62%	15.87%	9.77%	6.43%	11/13/2000
Active	VPMAX	34.27%	16.91%	19.61%	12.35%	11.12%	11/12/2001
Index	VDADX	26.11%	13.39%	—	—	11.80%	12/19/2013
Active	VDIGX	23.65%	12.38%	14.05%	10.12%	8.72%	5/15/1992

Conclusion:

Well, how interesting. While this is an unscientific comparison (we would need to look at the universe of ALL active to index funds to do that), prima facie,Vanguard seems to be able to outdo itself. Three of the four actively managed funds beat their index: VHCAX, VPMAX and VDIGX (although this last one is closed to new investors). Good job, Vanguard!

Feel free to post comments.

Disclaimer: The above is not investment advice, is for information purposes only, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors

2017 Commodity Index Returns

After a summer swoon, commodity indexes recovered and finished 2017 unchanged to slightly up on the year.

VISTA= the Vista Commodity Excess Return Index

BCOM = the Bloomberg Commodity Excess Return Index

GSCI = the S&P GSCI Commodity Excess Return Index

The annual returns and standard deviation of annual returns since the 4/30/2009 inception of the Vista Index are presented in the table below. Returns are all continuously compounded. 

Returns VISTA BCOM GSCI         *2009 23.1% 23.0% 24.7% 2010 22.9% 15.4% 8.5% 2011 -4.1% -14.4% -1.2% 2012 1.5% -1.2% 0.0% 2013 -12.3% -10.1% -1.3% 2014 -19.3% -18.7% -40.2% 2015 -21.2% -28.4% -39.9% 2016 10.8% 10.8% 10.4% 2017 2.8% 0.7% 4.7% 3 Year -2.5% -5.6% -8.3% 5 Year -7.8% -9.1% -13.3% Standard Deviation 3 Year 13.6% 16.6% 22.5% 5 Year 12.6% 13.8% 22.2%

Since inception, Vista has beaten the BCOM 6 out of 8 years and the GSCI for 5 out of 8 years.  Vista's 3 and 5 year average returns beat them again, with strong margins.  Of note, Vista shows considerably less risk than either the BCOM or the GSCI.

Commodity returns for 2017 are shown in the following chart:

Of the fifteen commodity components within the Vista Commodity Index, seven, nearly half, ended the year with gains. Soybeans were the strongest performer up over 20%, while Frozen Concentrated Orange Juice was the weakest with a +30% decline.  

Conclusion

With any luck, 2018 can be a turning point for the commodity market building on the gains of the last two years. As low interest rates and low inflation give way to stimulus and increasing worldwide demand, commodities should gain a bid. Considering the all-time highs of most other markets, commodities may now be a timely investment.

Feel free to post comments.

Disclaimer: The above is not investment advice, is for information purposes only, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors

Holding Period Returns

Stock indexes rising to new highs, again, in 2017 as they have since their inception, has somehow become controversial. Many voices, mainly by active managers on Wall St., have risen against stock indexes. The chorus is cautioning investors against index funds. This post will examine the returns and risks of stock indexes in more depth.

VFINX

As usual, let's start with the index you can buy, the Vanguard Investor Class S&P 500 Index Fund, VFINX:

Note there is a long history of new highs in the index, the Yahoo data begins in 1980. Note also there are ups and downs, its not a straight line up.

Holding Periods

This begs the question: what happens to investors when you buy the index? What is one's risk? What can one expect? To properly answer this question lets look at returns for a wide range of holding periods. A holding period assumes you buy the stock, hold it for the period, and then sell it.

What holding periods do we measure? Lets go with the standard set: 1 month, 3 month, 6 month, 1 year, 3 year, 10 year etc. etc. Here are the results:

The frequency chart above shows, for example, that VFINX had positive returns for a little over 60% of all 1 month holding periods. There are 9553 1 month holding periods since 1980, 6094 had gains, 3459 had losses.

Note that as we increase the holding period, the percentage of losses decline. This is expected in any bull market. Thus, historically, since 1980, 5529 3 month holding periods have had gains!

Below are the average ANNUALIZED returns for each holding period shown.

This data, we have to remember, starts with 1980 to present, an extraordinarily bullish period for equity markets. This includes the 300% gains of the Obama period and the +20% gains today. 

The table below shows the expected TOTAL RETURN and risk for short-term and long-term holding periods.

	1mo	3mo	6mo	1 yr
Average	0.8%	2.5%	5.0%	9.9%
Std. Dev.	4.6%	7.6%	11.0%	16.1%
Maximum	21.3%	34.1%	40.6%	54.4%
Minimum	-35.5%	-51.4%	-61.2%	-64.4%

3 yr 5 yr 10 yr 15 yr 20 yr 30 yr Average 30.0% 49.5% 104.0% 153.1% 201.9% 298.6% Std. Dev.  27.6% 35.4% 50.6% 56.2% 31.8% 11.5% Maximum 86.2% 125.2% 196.6% 263.9% 289.1% 331.3% Minimum -58.1% -43.0% -24.2% 53.1% 140.2% 262.2% Conclusion In any give year, investors have roughly a 40% risk of loss and 60% chance of gain. Yearly losses can easily exceed 20% (2 standard deviations) with an extreme of -60% in any given year.  This is why short-term investing is so risky!  5 year holding periods cut the extreme to a 40% risk of loss and the numbers only get better with time. Feel free to post comments. Disclaimer: The above is not investment advice, is for information purposes only, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

How MANY New Highs since the election?

Stock market new highs have been touted in the political press. There have been claims of superior market performance under the current President. Lets examine this claim using the Yahoo adjusted closing prices of Vanguard's Investor Class S&P 500 Index Fund, VFINX.

Starting with election day to yesterday's close, we have the following results:

11/8/2016 Closing Price: 194.1598

12/14/2017 Closing Price: 245.8000

Number of Trading Days: 277

Number of New Highs: 76

Total Return: 23.5%

These look like great results and have been touted as such by the President and his supporters.

Let's look at, in fairness, the same period for the previous Presidential election.

11/7/2012 Closing Price: 116.9041

277 Trading Days After Election, 12/12/13 Closing Price: 152.2273

Number of New Highs: 69

Total Return: 24.09%

Another interesting comparison are the quarterly GDP growth rates.

If nothing else, these comps puts many claims in perspective. 

Feel free to post comments.

Disclaimer: The above is not investment advice, is for information purposes only, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

Commodity Indexes

The broad-based Vista Commodity Index™ of 15 diversified commodity futures was unchanged to 3 decimal places in November and to two decimal places for 11/30/2017 year-to-date. The Bloomberg  (BCOM, formerly Dow Jones-UBS) and S&P GSCI commodity indexes, down 2.09% and up 0.05%, respectively, were likewise mired in the low inflation, low demand world environment.

Returns of the 15 commodities composing the Vista Commodity index show the dismal results.

Copper was the leader as it benefitted from its traditional correlation to housing and the stock market, both sharply up for the period. Softs were down across the board, energy was lackluster and gold is up less than 10%. The rise in this year's demand was wholly offset by aggressive suppliers.  The outlook for commodities will rise and fall with world demand and the ability of suppliers and technology to keep up or fall off.

Feel free to post comments.

Disclaimer: All product names, logos, and brands are property of their respective owners. All company, product and service names used in this website are for identification purposes only. Use of these names, logos, and brands does not imply endorsement. The above is not investment advice, is for information purposes only, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

Russell 2000 IWM and TNA

After looking at the Nasdaq, lets jump right into the iShares Russell 2000 ETF (IWM) and its triple-leveraged cousin the Direxion Daily Small Cap Bull 3X ETF (TNA). We will compare these to the SPY.

TNA, like all the other leveraged broad-based ETFs, has been on fire for years. The 3X variety has been triple on fire.  As with the other 3X funds, TNA is marketed as a short term vehicle with the goal of delivering, for a day, 3X the return of the Russell 2000 index of small cap stocks. Brokers caution individual investors with higher margin requirements for these kind of ETFs.

IWM, the largest Russell 2000 ETF began trading 5/26/2000. The TNA inception date is 11/19/2008. For fair comparisons our analyses begin with the TNA start date. Here are the results.

IWM and SPY look like straight lines compared to TNA.
Continuously compounded returns follow:

Annualized Returns
as of 12/1/2017
	TNA	IWM	SPY
1 month	94.8%	34.3%	31.6%
3 month	99.0%	35.1%	27.9%
6 month	51.1%	19.3%	17.9%
1 year	43.3%	17.0%	20.6%
3 year	21.5%	10.6%	10.2%
5 year	32.3%	13.9%	14.5%
Since TNA Inception	26.1%	14.4%	13.7%

*Since TNA Inception 11/19/2008 to 12/31/2008 **Year-to-date 12/1/2017 TNA IWM SPY Avg. Ann'l Returns 26.1% 14.4% 13.7% St. Dev. of Ann'l Returns 37.4% 11.8% 7.9%

Risk and Reward
as of 12/1/2017
	TNA	IWM	SPY
3 year mean	21.5%	10.6%	10.2%
3 year standard deviation	42.2%	13.8%	9.6%
5 year mean	32.3%	13.9%	14.5%
5 year standard deviation	33.4%	10.8%	8.5%

Conclusions

First consider IWM versus SPY. They are comparable in returns. Note SPY beat IWM 5 of the 10 periods. IWM's average return is a little higher but the risk is significantly higher.

Now look at TNA. It comes up short of 3X in the gain department, though still a significant gain all around. Returns ARE spectacular. But look at that risk! TNA's risk is more than 3X the IWM risk and 4X greater than SPY.  Again, buckle your seat belt if you go for TNA's higher returns.

Feel free to post comments.

Disclaimer: The above is not investment advice, is for information purposes only, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

Now Consider TQQQ

The next logical step after considering the QQQ is to look at the ProShares UltraPro QQQ (TQQQ), that is the 3X leveraged Nasdaq 100 exchange traded fund. Leveraged ETFs get bad press because they supposedly carry hidden risks for small, unsophisticated investors. Brokers charge higher margin requirements for leveraged ETFs, especially 3X ETFs ,which are advertised to deliver three times the daily return of their underlying index-3X up OR down!

Here I will compare the TQQQ to its underlying fund, the QQQ. Two caveats: leveraged funds have higher fees and leveraged funds are marketed only as short term investments, that is, the 3X returns apply only to daily moves in the underlying, not for moves longer than one day.

Do the higher fees embedded in the TQQQ erase their supposed excess returns over the plain vanilla QQQ fund? And, what ARE the long term effects of TQQQ? Yahoo data for TQQQ begins 2/11/2010. Here are the results.

The below are continuously compounded rates of return.

Annualized Returns
as of 11/29/2017
	TQQQ	QQQ
1 month	107.8%	17.9%
3 month	90.2%	-30.4%
6 month	55.9%	-10.0%
1 year	81.9%	14.0%
3 year	32.7%	8.8%
5 year	47.3%	15.4%
Since TQQQ Inception	27.3%	9.8%

* 2010 return is for the period 2/11/2010 to 12/31/2010.
* 2017 return is for the period 1/01/2017 to 11/29/2017.

Risk and Return

	TQQQ	QQQ
3 year mean	32.7%	8.8%
3 year standard deviation	28.8%	8.9%
5 year mean	47.3%	15.4%
5 year standard deviation	30.5%	9.6%

Conclusion

WOW. TQQQ returns are enormous. The 3 and 5 year returns do deliver 3 times the QQQ. The risk is enormous too-in the 28 to 30% range.  The risk adjusted returns, that is, the return delivered per unit of risk is comparable for both funds but the 5 year QQQ return per unit of risk exceeds that of the TQQQ.

The question for most in investors is risk. 9%-10% risk looks reasonable and is found in the QQQs. 29% to 30% found in the TQQQs may be too much to stomach for most investors.

Feel free to post comments.

Disclaimer: The above is not investment advice, is for information purposes only, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

QQQ versus SPY

Fairness in Indexing

With all the research and talk about the superiority of indexing over active management, a major issue not yet addressed here is which index has the highest performance? Every index is just a portfolio. Indexes vary by their portfolio selection criteria. The S&P is based upon a sector neutral market capitalization criteria, size. The Nasdaq 100 although is based, in-effect, upon a technology sector specific criteria. The Nasdaq picks winners, the tech sector, which is a basic violation of modern portfolio theory (MPT).

As we approach 2017 year-end, the outperformance of the Nasdaq 100 Index over the S&P 500 just gets larger and larger. It's only fair to review the long-term performance of the Nasdaq and compare this to the S&P. The relevant symbols here are the SPDR S&P 500 ETF (SPY) and the PowerShares QQQ ETF (QQQ). Of course, there are other similar ETFs but SPY and QQQ are the largest, most active of the lot.

Results

Yahoo data for the QQQ starts on 3/10/1999 and our results begin with this date to the present (11/27/2017).

The below are all continuously compounded rates of return.

Annualized Returns
as of 11/27/2017

	SPY	QQQ
1 month	11.7%	38.6%
3 month	26.8%	243.3%
6 month	21.4%	139.6%
1 year	18.6%	79.6%
3 year	9.6%	31.0%
5 year	14.2%	28.8%
10 year	7.8%	17.2%
15 year	8.8%	15.6%
Since QQQ Inception	5.6%	9.3%

Risk and Reward

	SPY	QQQ
3 year mean	8.7%	12.3%
3 year standard deviation	5.2%	7.6%
5 year mean	14.9%	17.4%
5 year standard deviation	8.9%	8.9%
10 year mean	6.8%	10.9%
10 year standard deviation	19.4%	23.9%

Conclusion

QQQ indeed sharply outperforms the SPY even after the disasterous three year tech collapse at the inception of the fund. As for risk, the QQQ is generally higher risk, but only the most recent 3 year period has a higher risk adjusted return for the SPY.

In spite of these results, the question for investors remains: how period dependent is the QQQ outperformance?  The recovery after the 2009 recession was a good long-term test and QQQ sharply outperformed once again.

Does this mean investors should abandon the SPY for the QQQ? In theory, no, because the QQQ implicitly means picking winners and MPT is cautionary against that approach. In practice, the nature and ubiquity of tech may offset the negatives of stock picking, and the results are a powerful testament.

Disclaimer: The above is not investment advice, is for information purposes only, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

Vanguard versus Vanguard: VFIAX versus VOO

My prior post comparing Vanguard's S&P 500 fund to their ETF did not address a simple head-to-head comparison USING VANGUARD's OWN DATA. It also did not compare the VFIAX Admiral fund to the VOO which invests in the Admiral fund, or at least has the same 0.04% expense ratio.

Well here are the results:

VFIAX (NAV)
as of 9/30/2017

Returns
Quarter-end   4.48%
Year-to-date  14.20%

Average Annual Returns
1 year    18.57%
3 year    10.78%
5 year    14.18%
10 year    7.43%

Risk and volatility

Standard deviation
3 year     10.07%
5 year      9.55%
10 year   15.14%

VOO (Market Price)
as of 9/30/2017

Returns
Quarter-end   4.46%
Year-to-date  14.11%

Average Annual Returns
1 year    18.59%
3 year    10.75%
5 year    14.18%
10 year    -

Risk and volatility

Standard deviation
3 year     10.07%
5 year      9.55%
10 year   15.14%

The results are virtually the same. Which is a triumph of ETF minimal tracking error.

Investors can receive ETF benefits of custody (keeping your money at one broker, if you want-a questionable benefit at best) and market hours trading (also questionable especially with index funds) without giving up return.

Disclaimer: The above is not investment advice, is for information purposes only, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

Morningstar Falling

The recent story in the Wall Street Journal,

The Morningstar Mirage

Investors everywhere think a 5-star rating from Morningstar means a mutual fund will be a top performer—it doesn’t ,

has created a stir in the mutual fund business and in Morningstar itself which issued forceful rebuttals: 

There’s No Morningstar Mirage - We Illuminate Investing‎

The Wall Street Journal’s Statistical Fog

Setting the Record Straight on Our Fund Ratings

In addition to claim and counterclaim there have been reviews from the peanut gallery:

Morningstar Versus The Wall Street Journal: Who Won?

WSJ vs Morningstar

The upshot of all this back and forth, including the numerous studies cited in the "Who Won?" story, is that Morningstar, as expected, offers very little benefit to investors.

In my opinion, the 5-star ratings serve the interests of the fund companies that pay for them. The extensive list of categories don't really exist except to create a grouping where a fund manager can claim higher ratings.

The details of this exercise leave us with the outcome we expected: the only useful result from investment theory for individual investors is that index funds outperform. Again, our quest comes up short.