Performance information conveyed on return charts from many financial sources is misleading. Investors reading these charts will be unfairly biased against income-producing assets.
Learn how total return better represents an asset performance and enables meaningful comparisons. [PDF version]
According to this study, most popular financial websites provide return data and charts that does not include dividends or capital gains. As a result, investors and advisors using these sites for their research may be biased against income-generating assets.
(note: Kwanti Portfolio Lab always reports total returns, inclusive of income).
In the past few years, the correlation between commodities and other asset classes has increased, calling into question the diversification benefits of commodity indexes.
An academic study suggest that the increased correlation is caused by the slew of ETFs and funds that now track commodities. With access these products, passive investors buy and sell commodities as a homogenous block, as opposed to individual future contracts. As a result, fundamental supply and demand characteristics of individual commodities no longer matters. Consistent with this theory, the correlation of non-indexed commodities has remained close to its long term average.
Read more in this research summary.
Equity prices tend to fall after ETFs rake in large sums of money. A study by TrimTabs Investment Research finds that monthly equity ETF flows and returns of the S&P500 one month later are negatively correlated to the tune of 21.4%.
The study concludes: “We have two explanations for the strongly negative correlation between equity ETF flows and future market returns. First, ETFs are traded mostly by retail investors and day traders. These are the least informed and most emotional market participants—the ones most likely to lose money over time. Second, we suspect hedge funds use ETFs when liquidity dries up. Hedge funds were forced to close individual stock positions during the credit crisis, so they bought equity ETFs instead. Equity ETFs posted large outflows in 2009, when liquidity improved”.
Research on leveraged ETFs has explained some important characteristics of these products:
- their negative exposure to volatility
- the resulting possible value erosion for long term buyers
However, the research also shows that the value erosion is not systematic. Shorting leveraged ETFs by pairs does not necessarily produce a positive return. In trending markets with low volatility, the power of compounded returns dominates the effect of value erosion (click on image to access calculator).