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ETF’, ETF’s, ETF’s…..Everywhere

Flash a-ah
Savior of the Universe
Flash a-ah
He’ll save every one of us

(Seemingly there is no reason for these extraordinary intergalactical upsets)
(Ha Ha Ha Ha Ha Ha Ha)
(What’s happening Flash?)
(Only Doctor Hans Zarkhov, formerly at NASA, has provided any explanation)

Flash a-ah
He’s a miracle

(This morning’s unprecedented solar eclipse is no cause for alarm)

Flash a-ah
King of the impossible

He’s for every one of us
Stand for every one of us
He save with a mighty hand
Every man, every woman
Every child, with a mighty
Flash

Apologies to Queen fans and those of you old enough to remake the appalling 1980′s remake of Flash Gordon. My inbox of late has been awash with various people extolling the virtues of ETF’s and how they are going to save us all. These emails have offered various strategies for setting up a stress free retirement by gearing into ETF’s over various indices. I have nothing against ETF’s – they are simply another tool, although I am always amazed at the breathless enthusiasm of people who have just discovered them. In many ways they are reminiscent of those idiots who do Crossfit without realising that it is simply circuit training without the spinal injuries.

Part of my interest in the material I have received is the exhortation to invest in the S&P/ASX200 ETF (STW) and I have no problem with that as a basic premise. It has always been my contention that part of Australia’s growing retirement crisis could be alleviated by removing fund managers from the equation and simply dropping everyone into a low cost index ETF. The retirement pool available to investors would double because the majority of fund manager generate less than half the return of the index over the long term. However, there are some subtleties that everyone needs to be aware of. The first of these may be that the S&P/ASX 200 is not the best vehicle for taking advantage of the movement in the local market. Since the GFC Australia has had a two tiered market. The first tier is represented by the stocks in the S&P/ASX20, the second and lesser tier is the S&P/ASX200. I accept that the difference in performance of the these two is often minimal, but in trading small differences can produce very different outcomes.

Screen Shot 2015-07-06 at 8.31.50 am

In the table above I have looked at a few performance metrics for the S&P/ASX 20 ETF (ILC) and the S&P/ASX200 ETF (STW) ILC is a relatively recent listing so data only goes back few years so i have compared both from the same date. As you can see in terms of these basic metrics ILC is a better vehicle, it has a higher return and a lower drawdown. If these were two trading systems you would opt for ILC. To compensate for the short comparison period I also looked at the relative performance of the price only indices and this showed a more nuanced picture.

Screen Shot 2015-07-06 at 6.52.49 am

The S&P/ASX20 index has had historical periods of outperforming the S&P/ASX200 index. However, there have been periods when this has been reversed. So we are left with a conundrum as to which one we would pick. However, this question is no different to deciding which equity market to invest in at any given time. It is simply a matter of looking at relative performance over time and since the GFC the S&P/ASX20 has been the strongest performer.

To muddy the water a little bit I also looked at the performance of ASX – that is the listed entity that runs our equity markets and compared it to both indices.

Screen Shot 2015-07-06 at 8.47.39 am

If I drop in a dodgy long term performance comparison between the three, then the picture becomes much more interesting.

Screen Shot 2015-07-06 at 9.01.55 am

This raises the question of whether you should invest in the market or the people who run the market? Its strange how things are never as obvious as they first seem….

Charts Of Interest 03/07/2015

 

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Screen Shot 2015-07-05 at 12.06.55 pm

Well……This Seems Familar

As I watch my position in lean hogs gyrate in the wind I was reminded of these episode of the King of Queens. If you are not having a long breakfast skip to 15:20 for the most relevant piece and avoid the last few minutes since it is the usual childish American ending.

 

 

Sir Nicholas Winton

Sir Nicholas Winton died on 01/07/2015 – let Google be your friend.


 

The Mind


 

And Now Something About Volatility.

Here is a news flash for. Nobody in the financial media has any understanding of volatility at all – if you are surprised then you probably shouldn’t be trading.  Much of the talk surrounding the issues with Greece have centred around how volatile markets have become, these statements are made without even understanding what volatility is let along whether they have become more volatile. There is a presumption ( and this is made by traders too ) that price movement or trend is volatility – it is not, the two are very distinct and to confuse the two is to confirm your status as a peanut. Consider the chart below which is of the VIX – a default standard for volatility within the US market.

Screen Shot 2015-07-01 at 4.01.35 pm

The red line is the average volatility for the past decade – yep its a quick an dirty measure that is somewhat distorted by the GFC. However, excluding the GFC and just taking the last five years gives me a figure of 18.1%, so volatility at present is about average.

Before Everyone Drops Their Bundle….

It is always good to take a step back from media hype and bluster about the world ending and actually look at what is happening in the markets. I headed off to training this morning with some peanut on the radio jabbering on about how the Dow had collapsed some 350 points and I thought to myself so the f#4k what….

Context is everything when making decisions. Consider the chart below which is of the drawdowns in the S&P500 for this year.

Screen Shot 2015-06-30 at 12.08.47 pmAs you can see the largest drawdown this year occurred on March 11th. This slippage may eclipse that, but to date it has not. Even if it does it only means that the broader US market is off a few percentage from its all time high. The chart below shows the wider landscape of events.

Screen Shot 2015-06-30 at 12.09.22 pm

The largest drawdown in the S&P500 this century happened at the bottom of the GFC – the market lost over half of its value. You can see the current drawdown in the top right hand side of the chart – they barely register compared to some of the earlier drawdowns.

 

General Advice Warning

The Trading Game Pty Ltd (ACN: 099 576 253) is an AFSL holder (Licence no: 468163). This information is correct at the time of publishing and may not be reproduced without formal permission. It is of a general nature and does not take into account your objectives, financial situation or needs. Before acting on any of the information you should consider its appropriateness, having regard to your own objectives, financial situation and needs.