Economy
There is no hiding the huge influx in passive investing over the last couple of decades as a direct result of the ETF boom, but the rise in passive investing is causing more market volatility according to a new academic study. Theoretically with more passive investors active traders will become more aggressive and individual stock demand should be unchanged, but according to the study by UCLA it has increased market vitality and reduced efficiency. Even the skyrocketing number of algorithmic traders can’t offset the passive investors. Markets have far fewer signals and traders to rely on to gain underlying information about a stock, which creates an empty void that is filled up with volatility. Moreover, the paper speculates that as more ESG funds popup this will exacerbate the passive volatility problem.
Finsum: Passive investing has surely increased the average trader's utility, but it comes at the cost of a more efficient market and higher future volatility.
Environmental, social, and governance investing has morphed into a behemoth says, industry insiders, and is so far from its roots that a course correction is needed. Experts and pioneers in the field are disappointed by the amount of greenwashing and fudging in order to meet regulatory standards. ESG has ballooned to approximately $40 trillion and most of the gains have come in the last year. Those in the field want better oversight from the government or non-profit third parties rather than those incentivized to be more lenient. Original ESG was created to mitigate environmental risk and incentivize better behavior, but it’s so over bloated and bound to burst. If regulators in the Biden admin step up like they are signaling it could mean catastrophe for ESG investing.
Finsum: More stable guidelines to remove greenwashers are a must, but it will come at a cost.
Advisors know it intuitively: all stocks are not created equal, even those that look very similar on the surface. Yet, figuring out which to hold out of an ever-expanding assortment is a challenge. Enter an ideal solution: Nasdaq Dorsey Wright’s Technical Attribute Stock Ranking System.
Over its substantial history, Nasdaq Dorsey Wright has created many innovative technical indicators based on Point and Figure charting. One of their best is the “Technical Attribute” ranking, which applies a 0-5 score for every stock (5 being best) based on compiling multiple factors, such as relative strength versus the S&P 500 and relative strength versus an equal weighted index of the stock’s sector, among others. In total, each stock has five scored attributes, including two vs. the market and two vs. the sector, with one additional absolute attribute (trend). The best stocks succeed in all five measures.
Nasdaq Dorsey Wright has done extensive testing on the effectiveness of the system, and over multiple decades, high-scoring stocks have been proven to outperform lower-ranking stocks. The point of the Technical Attribute Stock Ranking System is to help advisors choose the best stocks they can, especially when making an intra-sector choice or picking between a few seemingly similar funds. By seeing which fund holds the highest concentration of 5s, advisors can be confident in the potential for outperformance.
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Hedge funds are one of the leading experts in volatility management, which is exactly why their latest moves might surprise people as they move into crypto and other digital assets. According to a report from PwC the number of hedge funds investing in digital assets is up to a third, and 11% higher than the previous year. It’s hedge funds' specialty and their namesake that they can utilize similar tactics in traditional markets in digital ones to mitigate risk in their digital exposure through derivatives trading. Specifically short positions are extremely useful in the highly volatile crypto markets. Over three-fifths of crypto specializing hedge funds are using these hedging strategies in their portfolio, and this has allowed them to edge out over traditional bitcoin returns. Another surprising finding in the report is that a vast majority of crypto hedge funds have high-net-worth clients and family office investors.
Finsum: Crypto hedging strategies might just be the key to unlocking the full power o digital assets.
PIMCO is a leader not only in the management of fixed income products but in the research around them as well. They are adding another active Fixed Income Fund to their suite of options for income investors. The Senior Loan Active Exchange-Traded Fund will give exposure to floating rates in senior loan markets which will seek to minimize the impact of rising rates on portfolios. PIMCO says their superior credit analyst team will help them mitigate and manage credit risk to better hit investor targets. PIMCOs active taxable options for fixed income are growing, and this addition nestles nicely in between their BOND fund and their short duration MINT fund.
Finsum: Active taxable fixed income has a great edge in these macro markets and funds are smart to capitalize because the gyrations are easier to spot.
Bond outflows are starting to slow as a response to rising rates and lower prices. The Fed’s hawkish policy stance has been elevating prices but now they are relatively attractive given the return. Previously bond prices were held purely as a safety net because yields on government debt generated no income, but rising rates are making them a competitive income option for those investors. In addition, more investors are looking for a way to mitigate volatility in these trying times, which has them shifting toward bonds and out of high-risk assets. Additionally, a whole new generation of investors are much more comfortable with ETFs and are thus turning to bond funds as their source of security.
Finsum: Bonds could make a comeback if inflows turn around they could be bottoming out price-wise.