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ETF Wrap: ETF Wrap: The long and short of it, and ETFs are assimilating mutual funds


Of all the indignities wrought by 2020, the constant up-ending of our investing expectations deserves a mention. Just when you think you’ve got it figured out, the on-again, off-again cyclical rotation vanishes through your fingers.

So it was this past week, as financial markets bounced between vaccine euphoria and the cold reality of the next few months.

Energy and energy services caught a bid during the week, reflecting guarded optimism the economy would reopen. So did bitcoin, perhaps emblematic of the reality central banks will play an outsize role in supporting that recovery for the foreseeable future.

Also in the past week, in a small confirmation of the trend we’ve called “the ETF-ication of everything,” Dimensional Fund Advisors announced it would convert six of its existing mutual funds to ETFs.

We’ll publish on Wednesday next week, rather than Thursday. Stay tuned, and thanks for reading.

Long story short…

Are you looking for a way to pick up some income? How about
some capital appreciation? What about exposure to alternatives?

A new fund, the Leatherback Long/Short Alternative Yield ETF
LBAY,
+0.10%
,
wants to give you all three in one. Leatherback — named for a distinctive species of sea turtle — was founded by Michael Winter, who has extensive hedge fund industry experience, including in long/short strategies.

The new ETF combines long exposure to 30 common stocks that have high “shareholder yield,” in Winter’s words. That’s not just high dividends. It might also include companies that are buying back a lot of stock, for example. And then there are what he calls “opportunistic income producers,” such as corporate bonds, preferred stocks, high-yield ETFs. A final feature is its short exposure, equally weighted across 20 names.

Winter’s aim is for the fund to yield “at least twice the S&P dividend yield,” currently 1.62%, and to pay out monthly. As an actively-managed fund, LBAY will charge a 95-basis-point fee. It launched Tuesday, and Winter expects the first distribution in December.

In an interview, Winter said he’s “been fascinated with the ETF wrapper. I think it’s great to drop an alpha-producing strategy into a tax-efficient wrapper.”

“I liken what we’re doing now to delivering an investment solution in a disruptive format,” he said. “The mutual fund almost seems to me like a dinosaur, like getting the news from a newspaper as opposed to the internet.”

Winter also sees himself distanced from money managers excited by the opportunity to hide their strategy via new actively-managed non-transparent products. “That really frustrates me,” he said. “The ETF wrapper was created for transparency. I’m excited to show all our positions. We welcome feedback and quite frankly I think it might turn up some different ideas on the portfolio. I expect our short book might get eyeballs.”

ETF fans might recognize the notion of crowd-sourcing ideas about a particular strategy. It’s one famously used by ARK Invest’s Cathie Wood.  

Is there an ETF for that?

ETFs can help, as you probably already know, in navigating the cyclical rotation, with the presidential election mostly in the rearview, the business cycle beginning anew and the possibility of a vaccine rollout in the not-too-distant future.

There can be a catch, of course: When exactly is the time for rotation? How far in we are? What might be lurking around the corner?

Richard Daskin, who’s managed money for over 25 years, including on his own for the past decade as owner of RSD Advisors, believes he has you covered no matter your thesis. Daskin uses ETFs tactically in his client portfolios and shared some of his thoughts with MarketWatch.

For an overall value ETF, he recommends the iShares Core S&P U.S. Value ETF
IUSV,
-0.51%

for its 4-basis point fee and broad reach. For small-cap exposure, he recommends the iShares Core S&P Small-Cap ETF
IJR,
-0.10%
,
because it tracks the S&P 600, rather than the very broad Russell 2000. “It’s a superior way of playing it,” Daskin. “The S&P 600 screens out very small names that are hard to trade. That gives the fund a risk-adjusted performance edge.” A few other issuers offer an S&P 600 index ETF, he noted, including SPDR and Vanguard.

If you believe that from here on the economy will “bounce back quickly,” as Daskin puts it, his best idea is the SPDR S&P Regional Banking ETF
KRE,
-1.10%
.
That’s a slightly riskier bet, he thinks, because the Fed is likely to continue to buy bonds, depressing rates overall and keeping the yield curve from steepening.

Finally, for industrials, which are both early-cycle and have the advantage of containing airlines, one of the biggest likely beneficiaries of the “re-opening trade,” Daskin likes the Industrial Select Sector SPDR Fund
XLI,
-0.90%
.

Perhaps more important than any specific securities, however, may be his advice on investing in a changing landscape.

“A lot of times, the worst thing you can do is sit there and
say, is this the perfect time? If you sit and wait to find the perfect time,
you’ll never find it and you’ll miss it.”

Still, years of investing has taught Daskin that his
inclination is to be too early to a trade. That’s made him cautious this year,
he said.

“I’ve been scaling into these positions, not taking big bites,” he said. “There’s a decent chance we’ll get a market correction because of the spread of COVID and I’m not ready to go whole-hog on this idea. There will be other good entry points along the way.”

Visual of the week

See if you can spot the moment when the S&P 500 index committee announced it would add Tesla Inc.TSLA to the widely-tracked benchmark.

Weekly rap
Top 5 gainers of the past week

SPDR S&P Oil & Gas Equipment & Services ETFXES

12%

iShares U.S. Oil Equipment & Services ETF
IEZ,
-1.12%
11.9%

Invesco Dynamic Oil & Gas Services ETF
PXJ,
-0.77%
9.8%

Invesco S&P 500 Equal Weight Energy ETF
RYE,
-0.67%
9.3%

iShares U.S. Oil & Gas Exploration & Production ETF
IEO,
-0.63%
9%

Source: FactSet, through close of trading Wednesday, November 18, excluding ETNs and leveraged products

Top 5 losers of the past week

Vanguard Utilities ETF
VPU,
+0.11%
-1.6%

Utilities Select Sector SPDR Fund
XLU,
+0.01%
-1.6%

Fidelity MSCI Utilities Index ETF
FUTY,
+0.14%
-1.4%

iShares U.S. Utilities ETF
IDU,
-0.01%
-1.3%

Virtus Reaves Utilities ETF
UTES,
+0.62%
-1.1%

Source: FactSet, through close of trading Wednesday, November 18, excluding ETNs and leveraged products

Top 5 biggest inflows of the past week

Vanguard Total Stock Market ETFVTI

$2.4 billion

Vanguard Value ETF
VTV,
-0.47%
$807.1 million

Vanguard S&P 500 ETF
VOO,
-0.66%
$692.3 million

iShares Russell 2000 ETF
IWM,
+0.10%
$674.2 million

Energy Select Sector SPDR Fund
XLE,
-0.52%
$659.8 million

Source: FactSet, through close of trading Wednesday, November 18, excluding ETNs and leveraged products

MarketWatch has launched ETF Wrap, a weekly newsletter that brings you everything you need to know about the exchange-traded sector: new fund debuts, how to use ETFs to express an investing idea, regulations and industry changes, inflows and performance, and more. Sign up at this link to receive it right in your inbox every Thursday.



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