JP Morgan has plunged headlong into the ETF business since launching its first fund a few years ago. Now the asset manager has debuted a new broad equity tracker than undercuts the market on fees. JP Morgan’s new BetaBuilders US Equity ETF will track mid and large cap US stocks and will seek to track the results of the Morningstar US Target Market Exposure index. The fund costs just 0.02%, or $0.20 for every $1,000 invested per year, one basis point lower than its nearest competitor.
FINSUM: This is a good broad index tracker that costs next to nothing. We expect it will gobble up AUM nicely, but it remains to be seen how well its tracks the index versus competitors, as 1 bp is a tiny margin that could easily be eaten up by performance differences.
The market has hit a rough patch the last couple of days, falling almost 1% yesterday. Investors have once again grown anxious about slowing growth and trade tensions between the US and Mexico. Despite this renewed anxiety, Bank of America Merrill Lynch is encouraging investors to buy the dip. The bank has frustration about the “stubbornly flat” yield curve, but says that “The correct strategy in 2018 was ‘sell-the-rip’; Positioning, Policy, Profits and Populism argue the correct early 2019 trading strategy is to ‘buy-the-dip”.
FINSUM: The market has bounced back a long way from Xmas eve. In some ways it feels too much too fast, but then again, valuations are more sensible and the Fed has backed off.
One of the guiding mantras of small cap investing has always been that small caps tend to outperform their larger peers over the long-term. While always cyclical, small caps have outperformed large caps over the last several decades. However, in recent years that has all changed. In fact, since 2005, the relative performance between the two share classes has been trendless, with no discernible relationship. This is directly counter to the almost century-long trend that preceded it. One CIO explained the change this way, saying “Market-cap tilts have historically been about catching, and riding, strong and persistent performance waves … Over the last 13 years, in an unconventional fashion, the opportunities to add performance from cap tilts have been relatively small and have required frequent and expert timing”.
FINSUM: Interesting change for small caps. We suspect the change has to do with a combination of the pre-Crisis boom and the extraordinary liquidity thereafter.
If you are looking for the canary in the coal mine for the current market turbulence, look no further than a handful of stocks that should show investors where things are headed. Especially for the Dow. The index’s gains this year have largely come from three stocks: Apple, Boeing, and UnitedHealth Group. 16 stocks in the 30-stock index have losses this year, but because of the quirky way the Dow is calculated, some smaller market capitalization companies have much more weight than larger ones (weighting is done by share price not market cap). Accordingly, this trio has outsized importance to the index, and if they fall, the Dow is likely to get badly hurt.
FINSUM: The Dow is quite funky, but this story points out just how vulnerable the whole index looks right now.
Small cap stocks have been taking it on the chin. They have been getting hammered this week, and their performance (Russell 2000) has lagged the S&P 500 by almost 3% the last few days. That is a rare occurrence, which means there may be a buying opportunity. After such a bout of bad performance, the Russell 2000 has historically outperformed the S&P 500 by a percentage point over the next 20 days.
FINSUM: This could be a good short-term buying opportunity, but as ever, we struggle with these kinds of trade ideas because they seem to be based purely on historical precedent and lack any catalyst.