AdvisorShares

By David Young, chief investment of officer of Partnervest Advisory Services, the portfolio manager of the AdvisorShares STAR Global Buy-Write ETF (Ticker: VEGA)

The U.S. economy continued to expand thanks in part to ever-solid payroll growth, a revival of consumer spending, buoyant sentiment surveys and advanced purchases of items marked for tariffs should trade skirmishes assume more destructive escalations. Despite warnings by the International Monetary Fund that a trade war could cost the global economy some $430 billion, U.S. companies continued to report robust earnings reports even as European economies and markets extended their retrenchment. China turned to currency devaluation to warm over its economy as well as to protect its flank should it find itself in a serious confrontation with Washington over trade.

Markets

In the wake of the Fed’s July Federal Open Market Committee meeting, Morgan Stanley anticipated an additional hike in September followed by a pause in December “as policy hits neutral territory and concerns over financial conditions grow.” It also forecast a more hawkish posture next year with three additional hikes in response to low unemployment rate and above-potential GDP. The Fed expressed a bias toward “continued gradually raising the target range for the federal funds rate to a setting … above their estimates of its longer-run level by 2019 or 2020,” according to Morgan Stanley.

The New York and Atlanta Feds reported that its Underlying Inflation Gauge (UIG) is diverging significantly from traditional indexes this year. According to the UIG’s most recent measure, broad inflation came in at a sizzling 3.27%, the highest reading since September 2005. That compares with just 2.8% annual inflation, according to the Labor Department’s CPI, and the more modest 2.0% as measured by the preferred Personal Consumption Expenditure gauge of Fed policy makers.

Stocks held up well in July amid a robust earnings season and despite a rout of tech shares late in the month. FactSet reported that enough S&P companies were poised to log positive EPS to constitute the largest percentage on a quarterly basis since the data house began tracking this metric in Q3 2008. Overall, companies beat robust analyst estimates by an average of 2.5% and nearly three-quarters of listed companies reported sales above estimates. Meanwhile, profit margins among S&P companies for the quarter, at nearly 12.0%, tied net profit margin growth for the previous three-month period, itself the highest net profit margin for the S&P since FactSet began tracking this data in Q3 2008.

A FactSet industry analyst concluded that the S&P 500 would rise by 13.0% in price over the next 12 months – in stark contrast to Guggenheim CIO Scott Minerd’s July 10 Twitter declaration that “Markets are crazy to ignore the risks and consequences of a trade war,” adding “the stock rally is the last hurrah!” His warning followed a similar Cassandra cry by Morgan Stanley strategist Michael Zezas. Asserting that Trump administration standoffs are not bluffs but an expression of policy, Zezas disparaged what he wrote was the opening salvo of “an escalatory cycle of protectionist actions, that shouldn’t be ignored.”

Morgan Stanley forecasts a significant market correction. “The bottom line for us is that we think the selling has just begun and this correction will be the biggest since the one we experienced in February,” the investment bank wrote to clients July 30. The investment bank also predicted the yield curve will invert by the middle of next year, though it stopped short of forecasting a recession, MarketWatch reported.

Investors and policy makers watched with trepidation in mid-June as the Treasury yield curve from 5 to 30 years flattened to levels last seen in August 2007. The New York Times, citing research from the San Francisco Fed, noted that every recession of the past 60 years has been preceded by an inverted yield curve.

Undaunted, Fed officials committed themselves to four interest rate increases in 2018, up one from their March outlook. Investors took it in stride, scooping up some $14 billion worth of 30-month bonds at a yield of 3.10%. As ZeroHedge put it, “Overall, a quick and relatively painless sale in just 48 hours, to a market which despite rising rates, continues to be quite receptive to all the issuance the US government can throw at it.”

According to Bank of America Merrill Lynch however, this may be the calm before the storm. The market, it argued in a note, is still in an orderly “intermediate phase” as interest rates, credit spreads and volatility pivot to reflect a tighter credit environment. “If quantitative easing created an era of lower interest rates, tighter credit spreads and suppressed volatility, the bank warned, quantitative tightening … will lead to the opposite – i.e. higher interest rates, wider credit spreads and very volatile market conditions.” The bank added that global QE has rapidly declined on a year-over-year basis, a trend accelerated by a strong dollar it regards as “destructive to asset values that thrive on liquidity expansion.”

Speaking of trade, The Wall Street Journal implied that U.S. small-cap stocks, having over-performed for months on the strength of perceived insulation from trade tensions, may have peaked. Having sucked up $4 billion in investment capital in May and June, the sector has recently been cited for overstretched valuations and unearthed negative exposure to trade.

Bloomberg noted that the CBOE Skew Index, which tracks the cost of tail-risk equity protection, has jumped to the highest level since October. The rise signals that options traders are growing wary of wild swings, just as the International Monetary Fund warned that financial markets seem complacent to mounting risks in the global economy.

Inspired by a dramatic sell-off of tech stocks led by Facebook, Zero Hedge published the most memorable financial-press headline so far this year: TECH WRECK PUKES $350 BILLION IN 3 DAYS AS FANGOVER BITES.

U.S. Economy

The economy grew at a robust 4.1% rate in the second quarter, the fastest pace in almost four years, while first-quarter growth was revised upward, to 2.2% from 2.0%. Economists cited the continued stimulative impact of tax cuts, as well as forward purchases of goods considered exposed to tariffs in the event of a trade war.

According to the WSJ, U.S. laborers are choosing to leave their jobs at the fastest rate since the internet boom 17 years ago and are getting rewarded for it with higher salaries and/or more satisfying work. The WSJ reported workers have been made more confident by a strong economy and historically low unemployment, currently at 3.8% in May, the lowest since 2000.

Retail sales surged ahead in June, by 0.5%, while sales in May were revised higher to 1.3%, the largest monthly advance since September 2017. In another indicator of buoyant consumption, the Freight Transportation Services Index rose by 6.4%, its third new high in the past four months.

The American Association of Individual Investors weighed in with a widely positive sentiment survey, notching individual investor sentiment up 15% percentage points to 43.1%. The survey results followed the near-record high in the National Federation of Independent Business (NFIB) Small Business Optimism Index as well as the University of Michigan Sentiment Index, which posted a record high among pre-financial crisis readings.

The home-construction market continued to disappoint as the number of new permits in June dropped by 2.2% on a month-to-month and housing starts continued to slide, by 12.3% MoM. It was the 3rd month of declining permits in a row and biggest drop in starts since November 2016 as increasing interest rates impact markets

In a note, Investing Haven suggested that commodity prices are being influenced by a strong dollar – a process that could hasten inflation rates – though it allowed that it may be too early to regard this as a trend. “There are attempts of the USD to break out but there is also rejection at breakout,” according to its research. It is wise to wait for a confirmation of the next trend in the dollar.”

Reuters reported that U.S. loan funds in July posted outflows for the first time in nearly five months. The reversal of some $184 million was attributed to market volatility triggered by tensions in global trade that reduced investors’ appetite for risk assets, Reuters said.

International

The International Monetary Fund warned that rising trade tensions between the United States and many of its commercial partners could cost the global economy $430 billion with America “especially vulnerable” to an escalating tariff war. The Washington-based organization said the current threats made by the U.S. and its trading partners risked lowering global growth by as much as 0.5% by 2020, or about $430 billion in lost GDP worldwide.

On the data front, European PMIs were mixed, with the flash composite reading for July coming lighter than expected at 54.3.  “Although the rate of growth remained relatively robust in July,” Markit noted, “weakened new order inflows and reduced business expectations of future activity added to the downbeat picture.” Meanwhile, retail sales in Europe were unchanged in May at 0.1%, while sales were up 1.4% on a year-over-year basis. According to Eurostat, the highest gains by country were Portugal (+4.7%), Latvia (+3.4%) and Slovenia (3.1%).

In a media call, European Central Banker head Mario Draghi turned sharply dovish, according to Zero Hedge, acknowledging that the European Union headline inflation, now hovering at around 2.0%, may not be sustained. “If you look at inflation excluding oil and food, it’s now 0.9% from 1.1% last time. And the underlying inflation remains muted. So we are seeing encouraging signs here and there [but] it’s very early to call victory.” Both the euro and Bund yields tumbled in response.

Viktor Shvets, head of Asia strategy at Macquarie Commodities and Global Markets, expressed solidarity with troubled emerging markets in the face of the Fed’s Quantitative Easing. Shvets told Bloomberg TV the Fed’s program to reduce its debt stocks “is destroying money, destroying roughly $50 billion every month.” The Fed will ultimately back down, said Shvets, “because the global economy cannot withstand monetary tightening, and will in coming months force a halt to the campaign.”

Cantor Fitzgerald warned of a slide in the Chinese Yuan – “like a sword in the tariff fight” – as it can handily offset the impact of any tariffs imposed. Dismissing market talk China would hold the line at 6.70, Cantor admonished investors to “think back to 2015, when the Yuan was at the center of a storm of global market volatility into early 2016” as a reminder of Beijing’s staying power when it comes to currency depreciation.

 The information, statements, views and opinions included in this publication are based on sources (both internal and external sources) considered to be reliable, but not representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. Such information, statements, views and opinions are expressed as of the date of publication, are subject to change without further notice and do not constitute a solicitation for the purchase or sale of any investment referenced in the publication.

By Korea Investment Management, portfolio manager of the AdvisorShares KIM Korea Equity ETF (Ticker: KOR)

In July, global stock markets rebounded as US dollar (USD) appreciation, which caused emerging markets to plunge from May-June, wound down. However, the Korean market underperformed both developed and emerging, failing to join the global upturn. With the US and China bracing for a protracted trade war, Korea’s economic structure that features a heavy export weighting and companies relying much on overseas sales was exposed for its weakness. We believe the Korean market was also weighed down by investor sentiment souring due to the debate about semiconductors peaking and the Kosdaq’s sharp pullback led by pharmaceuticals/biotech stocks.

While the deepening US-China trade spat and China’s slowing economic indicators prompted the Chinese stock market to experience wilder swings, the intensified coupling of asset prices such as currencies and stocks between Korea and China also had an adverse effect on the Korean market. In addition, the KRW/USD (South Korean won to US dollar) witnessed heightened volatility by surpassing (won) W1,135 as the USD turned stronger and the China yuan renminbi (CNY) weaker due to concerns about the trade dispute.

In July, the Kospi retreated 1.33% while the Kosdaq tumbled 5.22%. By sector, the biggest gainers were telecom services (+6.5%), transport & storage (+2.8%) and banks (+2.8%) while the biggest losers were pharmaceuticals (-7.8%), medical & precision devices (-6.9%) and food & beverages (-6.4%). For the pharmaceuticals/biotech sector, investor sentiment soured substantially due to news of the Financial Supervisory Service conducting thematic reviews and a scandal involving fake vaccines in China, following Samsung Biologics’ accounting rule violations.

Several major events at home and abroad are in store for August as well. The US is preparing to impose tariffs on USD16 billion (bn) worth of Chinese goods and a public hearing will be held regarding extra tariffs on imports worth USD200bn. Although USD appreciation is easing, the CNY has yet to show a clear uptrend, and this is a risk factor. In terms of supply-demand, the possibility of a passive funds outflow following the second phase of China A-shares inclusion to the MSCI Emerging Markets Index in August is another burden.

However, there are clear signals suggesting that unfavorable factors have peaked. Above all, USD appreciation is easing due to a narrower gap in the economic momentum between the US and other countries and US President Donald Trump’s recent comments. Accordingly, we also focus on better liquidity conditions in emerging countries compared to May and June. Although it is difficult to present an accurate forecast due to the US-China trade war becoming lengthy affair, China still has room for policy momentum such as using fiscal tools and defending the CNY against additional depreciation. As such, unfavorable factors are unlikely to have a significant impact.

While concerns about the trade dispute would persist, the Kospi has limited downside considering the current valuation level. However, earnings momentum remains too weak to fuel a share price upswing. As such, we believe the color of the portfolio is more crucial than the magnitude of the index’s recovery. Given that cyclical sectors took a nosedive in the latest stock market correction, they could rebound just as fast, in our view. In particular, sectors that received a discount to the market such as semiconductors, banks, energy, construction, chemicals and steel have enough room to pick up.

Nonetheless, companies with growth potential are bound to enjoy a share price premium. As sales have limited room to grow due to concerns about slowing economic conditions and the trade war, factors such as higher commodity prices, rising interest rates and the minimum wage increase have an adverse effect on margins. As such, we recommend taking a mid to long-term approach to sectors guaranteed to grow such as IT, healthcare, media/content and Chinese consumer spending-driven stocks.

In July, the Kospi finished down 1.33% month over month (MoM) due to several negatives such as 1) ongoing trade tensions between the US and China, 2) Korea’s tepid domestic economic indicators and 3) soured sentiment due to the FAANG stocks pullback. The Kosdaq plunged 5.22% MoM due to the financial authorities’ themed inspection of biotech stocks. While all sectors turned downward, utilities and telecom services fared relatively well due to their defensive nature.

Several events that could dampen the Korean stock market linger ahead in August such as the US and China each imposing further tariffs, uncertainties stemming from a volatile CNY and the potential capital flight of passive funds following the second phase of China A-shares inclusion to the MSCI Emerging Markets Index. However, we also detect signals of passing the trough with a narrowing gap between the economic conditions of the US and other regions, a slower rise for the USD after President Trump’s comments and the easing of US-EU trade tensions.

The economic indicators of major countries indicate that the world’s economy continues to expand despite uncertainties and the second quarter’s (2Q18) earnings at major Korean firms testified to solid profit growth. Taking into account the KRW’s depreciation in 2Q18, domestic companies are even more likely to bolster earnings in the second half of 2018 (2H18). As such, we believe the domestic stock market has entered a phase of excessive undervaluation and further downside risk is very limited.

Stocks in the pharmaceuticals/biotech, SI, advertising and logistics sectors and Kosdaq stocks that have been heavily sold still feature big growth potential and solid profits while accounting audits and the Fair Trade Commission’s investigation are almost over. The government remains committed to boost small and medium enterprises (SMEs) and the Kosdaq market. With sour investor sentiment nearing an end, we believe this is the right time for those small/mid-cap stocks from the mid to long-term perspectives.

The information, statements, views and opinions included in this publication are based on sources (both internal and external sources) considered to be reliable, but not representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. Such information, statements, views and opinions are expressed as of the date of publication, are subject to change without further notice and do not constitute a solicitation for the purchase or sale of any investment referenced in the publication.

By Noah Hamman

I had the opportunity to participate at a conference sponsored by the NYSE.  The entire conference was focused on active ETFs, which is a great milestone to have a fully dedicated event towards active ETFs.  One of the panels focused on the firms seeking approval for non-transparent ETFs (there are several each with different approaches).  While we don’t have anything against non-transparent ETFs, we are advocates of transparency.  I know some asset managers say they can’t offer their services in the current transparent approach that is approved by the SEC, but we have made many arguments as to why they should not be concerned – including the fact that many of these asset managers offer their investment management to large institutions which also provide a high level of transparency, and with model programs where trades are sent to a platform to implement in retail separate accounts.  I hope that investors will demand transparency, but I know for some investors, they will not care.  If they can finally access someone they believe to be a talented investment manager, in an efficient ETF structure, they will likely not be concerned about the level of transparency provided.  What I was most interested to see at the conference, was the market making firms (a separate panel), were also excited about trading non-transparent ETFs.  On one hand, I was a bit surprised.  If there is one thing I have learned watching trading and volume and spreads on active ETF, is that the market makers hate surprises.  So, I had always been under the impression that market makers would not be excited about non-transparent ETFs, however hearing their interest and thinking about it a bit more, I realized how many assets will likely move from the mutual fund structure to the ETF structure, a structure that could greatly enhance their market making revenue.  Of course, it appears that whether it’s the custom/made up indexes designed to provide better performance over traditional indexes, or transparent active ETFs, the growing transition of assets from mutual funds to ETFs seems to be great for the market makers.  I still think spreads will be challenging, and there will be a need for educating investors on how to trade ETFs and understanding liquidity versus trading volume.  The great news is that all the participants from asset managers, to the exchanges, asset services and market makers seem to see a bright future ahead for actively managed ETFs.

Below is a Q&A with Nasdaq Dorsey Wright’s John Lewis, CMT, Senior Portfolio Manager and Charlie Coleman, Associate Portfolio Manager on a number of topics that may be top of mind for many investors. Their responses highlight where our research is showing opportunities and why we have confidence in our relative strength approach to investing.

(Ed. Note: this Q&A originally published on Nasdaq’s MarketInsite. John Lewis also serves as the portfolio manager of the AdvisorShares Dorsey Wright ADR ETF (Ticker: AADR))

Q: What impact do you think that rising interest rates may have on the allocations of our Systematic RS Portfolios?

John: Rising rates typically cause interest rate sensitive sectors like REIT’s and Utilities to lag. Rates also have a big effect on the Low Volatility factor. As a result, we would expect these areas to be underweighted in our SRS strategies if rates continue to rise and the current sector trends continue. We are not overweight in any of these areas now so for our portfolios specifically it should be more of a continuing theme rather than a trend change. Even though rates are rising, they remain low by historical standards so we believe the market can continue higher. We will probably see more volatility because of it, but our strategies have historically been able to handle a decent pickup in volatility. The lagging sectors and factors that come as a result of rising rates also create dispersion in our universes. There may be some areas of the market that just don’t perform well this year because of rates. We can avoid those areas because we run concentrated strategies. That sort of dispersion is actually a good thing for our strategies because it is easier for us to outperform when there are large range of outcomes from the underlying universe.

Charlie: Interest rates affect sectors and securities in a variety of different ways, some positive others negative. Companies that have historically use leverage to finance operations or buy back shares may be reluctant to do so or be put in a tough spot as floating debt continues to climb. Financials however have the opportunity to generate a larger spread on lending and brokerage accounts. This market dispersion not only gives active managers the chance to overweight strong sectors, but also underweight weak sectors that are a drag on the broad market cap index. While these longer term trends may not be visible as market volatility roars back into the markets and new trends emerge. The key is to remain flexible across asset classes and to take advantage of pockets of strength.

Q: What is your outlook for international equities?

John: International equities picked up in 2017 after several years of underperformance. I think that trend can continue for the next several years. From a valuation standpoint, both International Developed and Emerging Markets are cheaper than the U.S. market (when looking at index level P/E ratios). While we are not valuation based, it does provide a good fundamental base to support outperformance. The dollar has also weakened, which benefits international markets. There is some disagreement as to why the dollar is falling, and whether it should be, but the fact of the matter is that the dollar has moved lower and has taken out some key support levels. That sort of environment is also supportive of international equity outperformance. International versus Domestic and Developed versus Emerging Markets cycles can last for years so even though International outperformed last year there is no reason to assume that automatically means it can’t happen again.

Charlie: International markets have continued to be a bright spot since they rebounded from a multi-year stretch of underperformance in 2017. Non-US markets as a whole seem to be in good shape with reasonable valuations and continued economic growth. Individual countries and companies however continue to offer a more compelling growth story rather than owning the whole global market. International markets are an area that continues to favor flexible active managers who are willing to make higher conviction investments and stray away from closet indexing.

Q: What is your outlook for U.S. equities?

John: I think U.S. equities can continue to move higher this year. I don’t think it will be as easy as last year when there was a tremendous lack of volatility and broad participation. We have already seen a pickup in volatility with the correction in February that has caused a rapid unwind of the leveraged short volatility trade that became so popular last year. As discussed above, the rising rate environment should cause some sector and individual stock dispersion. That should make active management more important as it will become increasingly important to focus on what is working. Large capitalization stocks continue to have solid momentum versus small caps which will make index investing easier. If that relationship should change and small caps begin to perform better versus large caps then getting away from market cap dominated strategies will become even more important as the trend unfolds.

Charlie: Overall, I think that U.S. equities are in a strong position based on the earnings and revenue numbers that have been released so far this season. While we are in the later stages of this long bull market, it is not over and does not seem to be losing steam. What I think will be important to watch is the areas of strength that emerge as the market fully digests the multitude of factors that are influencing the markets. Rather than coloring within a particular style or sector box, it will be increasingly important to be nimble when looking for investments. Large caps, particularly tech companies have been the strongest performers over the past few years, as rates increase, energy prices climb and new trade deals are inked this may change. Your investment portfolio needs to be ready to adjust to the new market leaders no matter the box they fit in.

Q: What do you see as the advantages of employing a systematic relative strength approach to active investing?

John: We can give you our best guess about what is going to happen in the market. We have a lot of experience and have been running these strategies for about 13 years. However, we are under no illusion that we know everything or we have a crystal ball to predict the future! Making market predictions is really a fool’s errand. It is incredibly difficult (dare we say impossible) to be able to continue to get things right time after time. Anyone can make a couple of good calls; that isn’t difficult. We believe there is no way we can be accurate enough with our predictions over 10 years or 30 years. Instead, we have focused on implementing a factor that has historically produced outperformance, and doing that in an incredibly disciplined matter. As the market changes over time we expect our strategies to adapt to those changes even if we don’t fully understand why the changes are taking place until much later. It is an incredibly difficult thing (both personally and professionally) to put our egos aside and focus on implementing our models, but we believe that is the best way for us to deliver outperformance over time.

Charlie: The markets are in an interesting place right now. It has been 30 years since we have seen a sustained interest rate increase, companies and consumers are digesting new tax legislation and the geo-political landscape continues to change across the globe. Throwing in historically high P/E ratios, strong earnings and changing consumer habits to the mix and you have an amazingly high number of moving pieces to follow. Utilizing a Systematic Relative Strength process helps to dull out some of the noise and find pockets of strength that may not be immediately visible with a macro look at the market. The key that we have found is utilizing the systematic portion of our process. By objectively reviewing and adjusting the companies in our strategies we remove emotional attachment that any one person has to a company, allowing us to exit positions in favor of companies with stronger relative strength characteristics.

Dorsey, Wright & Associates, LLC, a Nasdaq Company, is a registered investment advisory firm. Neither the information within this email nor any opinion expressed shall constitute an offer to sell or a solicitation or an offer to buy any securities, commodities or exchange traded products. This communication does not purport to be complete description of the securities or commodities, markets or developments to which reference is made. The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value. Relative Strength is a measure of price momentum based on historical price activity. Relative Strength is not predictive and there is no assurance that forecasts based on relative strength can be relied upon. In all securities trading there is a potential for loss as well as profit. It should not be assumed that recommendations made in the future will be profitable or will equal previous performance. Investors should have long-term financial objectives. There are risks inherent in international investments, which may make such investments unsuitable for certain clients. These include, for example, economic, political, currency exchange, rate fluctuations, and limited availability of information on international securities. Past performance, hypothetical or actual, does not guarantee future results. In all securities trading there is a potential for loss as well as profit. It should not be assumed that recommendations made in the future will be profitable or will equal the performance as shown. Investors should have long-term financial objectives. Advice from a financial professional is strongly advised

This Q&A is being re-distributed with permission from Nasdaq Dorsey Wright. 

The information, statements, views, and opinions included in this publication are based on sources (both internal and external sources) considered to be reliable, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. Such information, statements, views and opinions are expressed as of the date of publication, are subject to change without further notice and do not constitute a solicitation for the purchase or sale of any investment referenced in the publication.

  November 2, 2017   https://alphabaskets.com/wp-content/uploads/2017/11/AlphaCall-with-Adam-Warner-AC.mp3 Please listen to “Common Mistakes with Options and How to Avoid Them,” will feature options market guru and author, Adam Warner, who will share his do’s and don’ts of volatility investing and basic options strategies.

Hear from a former options market maker on how options pricing works.

Learn why products that track the VIX Index can be treacherous to investment portfolios.

Better understand the intricacies of call writing strategies.

By Dan Ahrens, chief operating officer of AdvisorShares

The question of social responsibility should be easy to answer for any normal, level-headed human being. On the surface, we should all want to be socially responsible. But what does that mean? In actuality, it’s quite complicated. Social responsibility can mean a lot of different things to different people. Socially Responsible Investing (SRI) is obviously only one small piece of overall social responsibility, but when it comes to investing, the term “socially responsible” can be a huge can of worms.

The Good: Thankfully, in recent years “impact investing” and “sustainable investing” have become more popular concepts. I am a big proponent of impact investing and sustainable investing, which involve positive screening – meaning they seek out investments that fit a certain investment mandate for potential financial performance AND for certain social aspects. Again, these can mean different things to different people, but it often means seeking out companies such as those involved in or practicing renewable energy, positive environmental practices, charitable or educational programs, healthy foods, employment practices that promote equality, and good corporate governance in general. Additionally, I believe people should always look to make an impact with time and money. Individuals and companies should donate money and goods to charitable organizations that they believe in. They should also spend time and effort on causes that can have a positive influence on areas of need.

The Bad:  Let’s get back to the problem that I called “a can of worms.” I’ve talked to investors who put money into an SRI fund because they believe in social responsibility in general, or in recycling, or global warming or woman’s rights. I’ve also heard of people that invested in SRI just because they are against corporate greed, excessive executive pay, unfair labor practices or pollution. All of these things should be thought of as good and noble causes. But many of these same people enjoy having a good glass of wine, beer, or a cocktail. Some are smokers. They may also enjoy the occasional casino, racetrack, or simply the buying of lottery tickets. I propose that many SRI fund investors have no idea what they are actually investing in.

Most of the largest SRI funds are indexed-based funds that use a concept called negative screening. That means they screen out certain types of companies they’ve deemed as not socially responsible. That sounds kind of harsh. What are the main types of companies they screen out? Alcohol, tobacco, casinos and gaming, weapons manufacturers (defense contractors), and energy companies. But wait – don’t most Americans think it’s OK to drink (in moderation)? Don’t most people think it’s OK to have a weekend at the casino or to buy lottery tickets? Many SRI investors think they want to “do well by doing good” with their investing, without realizing they are simply doing nothing more than “boycotting” alcohol, gaming, tobacco and similar types of stocks – even though they enjoy life and sometimes drink and gamble (and some smoke). By the way, I think alcohol, tobacco and gaming make for very good investments. Simply look at virtually any 5, 10, or 20 year chart.

Another problem with that SRI fund? Once so-called “sin stocks” are removed, an investor will still own everything else – some big wall street banks, some companies that pollute, some companies that underpay women, some companies that discriminate, some companies that serve very unhealthy food. Should one feel socially responsible then?

By Paul Weisbruch, member of the AdvisorShares New Tech and Media ETF’s (Ticker: FNG) portfolio management team

We are waist deep in corporate earnings season now, with a number of the bellwether names in the Social Media, Commerce, and Content groups having already reported. Some of the stocks are in fact trading at new all-time highs post earnings, perhaps squeezing shorts and/or naysayers whom have been concerned about valuations that may be perceived to be “stretched,” and making dip-buying opportunities short-lived if they have even existed at all in the short-term. We continue to look forward on the calendar to earnings reports through mid-August, as a prominent graphic chip maker is still slated to report on August 10th. While followers of the VIX will likely perceive volatility in the marketplace as low, we are consistently seeing opportunities in higher beta names that populate the Social Media, Commerce, Content, and related industries such as the Chip makers as well as Software and Services in and around these summer earnings releases. It appears that analyst estimates have been “off” in the space in general, as several of these stocks have popped considerably in the aftermath of releasing their earnings, even those of the Large or “Mega-Cap” nature which we find notable given the considerable analyst coverage in such names.

While not every name in our space has exhibited the relative strength that we seek, the recent earnings-led volatility has provided opportunities to re-examine certain companies and those on the cusp of inclusion, and we expect these conditions to persist throughout the next several months even after corporate earnings season is fully digested.

The information, statements, views, and opinions included in this publication are based on sources (both internal and external sources) considered to be reliable, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. Such information, statements, views and opinions are expressed as of the date of publication, are subject to change without further notice and do not constitute a solicitation for the purchase or sale of any investment referenced in the publication.

  Newfleet Asset Management, is an affiliated manager of Virtus Investment Partners and sub-advisor of the AdvisorShares Newfleet Multi-Sector Income ETF (NYSE Arca: MINC)    MACRO ENVIRONMENT & MARKET CONDITIONS

Risk markets continued to grind higher in May as investors weighed healthy corporate earnings and the potential for corporate and individual tax cuts against looming Fed balance sheet normalization, rising geopolitical uncertainty, and slowing growth and inflation data.

The U.S. economy added 138,000 jobs in May, well below expectations for 182,000 jobs. The weak headline number was compounded by negative revisions to job growth in March and April. The unemployment rate ticked down to 4.3% as the labor force participation rate unexpectedly declined by 0.2% to 62.7%. Wage growth continues to be benign despite an unemployment rate near the structural floor.

Long-term inflation expectations have eased over the last several months on hawkish Fed commentary and lowered expectations for inflationary fiscal stimulus. Realized inflation measures had been trending higher for 18 months, but core PCE (personal consumption expenditures ex-food and energy) decelerated to 1.5% in April after reaching a multi-year high of 1.8% in January.

The market is currently pricing in a 91% probability of an interest rate hike announcement at the June 2017 FOMC meeting, with roughly even odds of an additional hike by year-end.

Q1 2017 GDP growth was 1.2% on the second reading, a slowdown the Fed dismissed as likely to be transitory.

The housing sector is stable. We anticipate any further appreciation to be in line with overall wage growth.

Economic data surprises, global developments, and the anticipated pace of rate hikes will drive further changes in the shape of the yield curve.

  Select Sector Highlights

Investment Grade Corporate Bonds

First quarter revenue and earnings growth were excellent, and improvement was broad-based. Expectations for fiscal stimulus to provide some upside to fundamentals have faded.

Technical conditions remain strong. Net supply is slightly lagging 2016’s pace while demand is higher.

Spreads are rich historically, but the U.S. yield advantage persists.

  High Yield Corporate Bonds

Fundamentals are adequate for the HY issuer universe. Although revenue growth has been elusive for many issuers, companies have implemented effective cost reductions as evidenced by more elevated EBITDA growth. May’s issuer-weighted default rate in the U.S. fell to 3.9%, from 4.7% in April. It is expected to end 2017 at 2.9% and level off at 2.7% by May 2018 (well below the historical average).

Fund flows (-$1.9B) reversed course in May, while net new issuance is on pace to be the lightest since 2011. Year to date, two-thirds of proceeds have been targeted for refinancing.

Spreads are rich in a historical context though high yield may yet benefit from the expectation of fewer defaults, accommodative global monetary policy should it persist, and the potential for stronger U.S. growth. Getting the industry calls correct and then picking the “right” credits is key to generating alpha going forward.

  Bank Loans

Credit pressures remain benign in a 2% U.S. GDP environment. With capital markets wide open, strong interest coverage (over 4x EBITDA/interest expense), and maturities extended (only 4.4% due in the next two years), the credit cycle may have been pushed out. The lagging 12-month default rate (1.29%) is well below the historical average (3.1%).

CLO creation ($9.8B in May) and SMA mandates continue to support a favorable technical for loans despite softer retail flows ($842M in May) and alongside minimal new loan issuance supply.

At month-end, 72% of the loan market was trading at par or higher, limiting future price appreciation. Valuations nonetheless remain attractive on a risk-adjusted relative basis (especially compared to high yield) and warrant a strategic allocation, especially in a rising rate environment.

  Emerging Markets Debt

Fundamental data points continue to favor the thesis that growth has bottomed, but this remains contingent on a supportive global backdrop. Ongoing drivers of sector performance include the U.S. rate path, Chinese economic data, commodity prices, and U.S. dollar movements.

Market technicals are sound with the asset class the beneficiary of fund inflows and a steady calendar of coupons and amortizations in the near term that will likely be reinvested.

Valuations are generally fair in our view despite spreads trading through longer-term averages as they are well supported by improving fundamentals and a solid technical backdrop. Credit selection remains critical.

  Non-US Dollar

Currency and interest rate fundamentals and market technicals remain mixed across both developed and emerging markets. Global markets remain volatile, sensitive to macroeconomic data (U.S., China, EU), U.S. monetary policy, and commodity prices.

Valuations are mixed and heavily influenced by directional U.S. dollar views.

  Municipal Bonds

Fundamentals continue to be challenged by high fixed cost burdens, pension liabilities, and healthcare expenses. State and local tax collections have improved, helping to reduce some of the stress.

Technicals have strengthened as net negative supply and continued mutual fund inflows should bode well for the municipal market over the coming months.

Municipal bonds remain stable despite unknown details on tax reform and Fed action. Credit spreads remain historically tight.

  The information, statements, views, and opinions included in this publication are based on sources (both internal and external sources) considered to be reliable, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. Such information, statements, views and opinions are expressed as of the date of publication, are subject to change without further notice and do not constitute a solicitation for the purchase or sale of any investment referenced in the publication.

By Roger Nusbaum, AdvisorShares ETF Strategist

  Over the weekend I found this article from Bloomberg about art as an alternative asset class in the portfolios of wealthy investors. Included in there was a link to a private fund only available to accredited investors. Ten years ago or so I wrote about a fund publicly traded in Europe (I think Switzerland) that offered access to art.

If you look, I am sure you can find plenty of private funds and other research making the claim that art does not correlate to the more common asset classes and I don’t doubt those claims. It is a good bet that investing in art will become more popular and someone will then figure a way to make access a little easier than a hedge fund-like vehicle as described above.

One crucial concept to investing that I should write about more is the extent to which simpler is better. While “simple” is relative to the individual’s experience, an art fund won’t be relatively simple for too many people.

I might also question the suitability for an art fund for most folks in terms of potential utility. Assuming the 4% rule, someone with $1.5 million of investible could generate $60,000 from their portfolio. That amount plus Social Security would hopefully make for a fine lifestyle for most people but put yourself in that investor’s shoes. How much of your portfolio would you want in something that you knew wouldn’t pay an income stream and that would be difficult to mark to the market.

In a similar vein, in 2008 I wrote about a publicly traded fund of hedge funds that was available in London and also in the US on OTCXX market. That fund is no more. To be clear, it was not a replicator and did not track a hedge fund index, it was a fund of funds along the lines of what Skybridge does.

I am as big a proponent of using alternatives as anybody but always in the context of moderation to help manage volatility and correlation of what is mostly an equity and fixed income portfolio.

The allure of things like fund of funds, art funds or other exclusive investments are always enticing because in part they prey on people’s egos. There was a commercial recently for reverse mortgages that mentioned “savvy people…” which is intended to create an “I’m savvy too” reaction.

I’m a sucker for a good story in that they all sound great. If you are too and you know this about yourself it is a lot easier to move on with your money still in your wallet.

A small allocation to two or three exchange traded products or traditional mutual funds that provide a reasonable basis for you to believe they can do what they say they will do most of the time is enough to do the job where the job is trying to smooth out the ride.

If you really want to “invest” in art, set your expectations low and plan on owning it for a long time.

By Roger Nusbaum, AdvisorShares ETF Strategist

  The title of this post is a play on the bit in the movie Stripes when Bill Murray talks about dogs and cats living together.

You probably heard about the niche ETF (naming names is difficult for compliance reasons) that essentially grew too large in assets to track its niche. It isn’t just a niche fund it is the small cap version of that niche. It became the tail wagging the dog. Creations had to be suspended and the market price swung wildly from the fund’s NAV. There was similar havoc wrought on the 3x version of the fund as well.

The fund sponsor will be able to change the index later in the year to move up in cap size so the fund will skew larger but still be smaller than the large cap version of the fund. In the meantime, the small cap fund will have exposure to the large cap version to hopefully allow it to function as an ETF until the index can be altered.

Is that a big deal, the small cap niche fund owning shares of the large cap niche fund? In this case, probably not. According to ETFreplay.com the correlation between the two was at 0.92 as of the close yesterday. Over the last two years the correlation has usually been even tighter than 0.92 so someone feeling they must have small cap exposure to this niche can probably still accomplish that now, and then after the index is changed to go a little larger.

I don’t take this as a story about ETFs failing, I take it more to be that owning ETFs requiring work. There is no such thing as set and forget, there can be set and monitor with a willingness to take action when needed. Whether this is an instance where action is required is up to the end user but anyone owning this fund should at least be current with the story.

By Roger Nusbaum, AdvisorShares ETF Strategist

  Seeking Alpha had an interesting snippet the other day about retail stores closing in droves citing the WSJ that through April 6th, 2880 announced closings which is double the same measure for the same time frame from 2016.

This is of course a story about more and more shopping being done on the line (reference to the movie The Internship). You may not need to go to the mall to buy a pair of LeBrons for the aspiring basketball player in the house but for now you can’t print them illicitly in your house which might succinctly capture winners and losers for the time being.

As a bigger concept this is about creative destruction, a concept widely attributed to Joseph Schumpeter from the 1950’s. Creative destruction is what makes laptops and 60 inch televisions be dirt cheap (Moore’s Law is a derivative of creative destruction) and the list of industries that have been impacted is endless. People as consumers have mostly benefitted although it might be a different story for people as workers. Think about auto manufacturing which along with other forms of manufacturing are moving more to robotics and automation. We’ve all seen the posts on Facebook about fast food workers being replaced by kiosks as the minimum wage starts to move a lot higher.

This concept has become part of the argument supporting a living wage (paying everyone a stipend). Part of the theory is that netting everything out a living wage to everyone that replaced all other forms of welfare and Social Security would be cheaper and have the effect of being stimulative in terms of consumption and sales tax revenue.

The math either stands up or it doesn’t. Apparently, the number of people on disability has skyrocketed, with some of the reading I’ve done speculating that the state of the job market being a key factor. As a concept, I find a living wage difficult to swallow.

Part of how we develop as people is by learning about things that go against our beliefs. The result is either increased conviction in what you already believed in or you start to view the subject at hand differently. Over the course of time it is logical to hold firm on some beliefs and change others.

Who knows if we’ll ever get to the point where America confronts this (the Swiss overwhelmingly voted it down a couple of years ago) but where so many things that people believed to be true that turned out to be wrong in the last ten years makes this conversation very interesting.

Printing money and monetizing debt was supposed to lead rampant price inflation but the bigger threat by far was some sort of bad deflationary outcome.

Back to jobs, there is generally a mismatch between the skills that workers have and the technical skills that more and more jobs require. Technology is evolving at an ever-increasing rate. Individually, people are figuring out how to succeed against that reality but measures of underemployment combined with our collective inability to adequately save for the future (presumably retirement) suggest the country hasn’t yet figured out how to solve this.

It’s been a while since we quoted our friend Bill from here in Walker who a long time ago said “you can figure it out now or you can figure it out later but you’ll be a lot better off if you can figure it out now.” That sentiment fits here.

By Roger Nusbaum, AdvisorShares ETF Strategist

  Do you remember the movie Being John Malkovich, the one where John Cusack and his girlfriend go into Malkovich’s brain? Then along the way John Malkovich goes into his own brain? Yeah, it was a weird movie but it was funny too. The ETF business may be having its own Being John Malkovich-moment with the launch on April 20th of the ETF Industry Exposure & Financial Services ETF which is being sponsored by Toroso Investments and trades with symbol TETF.

It owns a good mix of companies including the parent companies of iShares and SPDRs but not Vanguard of course which is not publicly traded. It also owns a few publicly traded exchanges where ETFs trade, companies that make markets in ETFs, discount brokerages that offer their own ETFs, companies long known for traditional mutual funds but who are also getting into the ETF business as well as a couple of mega cap banks with tiny (for now?) ETF businesses and an index provider.

The bank exposure is big enough that the fund may not end up being immune from interest rate risk but that remains to be seen.

By Roger Nusbaum, AdvisorShares ETF Strategist

  Kopin Tan in Barron’s had some fascinating numbers about the flows into passive funds;

Over the past two years alone, investors have pulled $574 billion from actively managed U.S. funds and plowed $924 billion into passive vehicles, says Morningstar. Active U.S. managers oversee $9.7 trillion, but that haul hasn’t grown much in four years and is just seven times the 1993 total. In contrast, the $5.4 trillion in passive funds has doubled since 2012 and has grown 158 times since 1993.

A large dynamic in this flow is chasing heat (performance chasing). Additionally, the numbers don’t capture the extent to which passive funds are being used in active strategies whether that is professional investors going in and out of the largest indexed ETFs, advisors using an index ETF to equitize a new client portfolio for a few months while building the actual portfolio for that new client or even do-it-yourselfers, day trading MACD.

A common criticism of indexing is the extent to which the index tilts more and more toward growth as the bull market matures because the growthier, high fliers go on a run of outperformance later in the cycle (this is historically how it has worked). Those are the same types of names that stand to go down a lot, really a lot, during bear markets. It is a good bet that most of these types of stocks will bounce back to new highs in the subsequent bull market but it is at points of maximum pain the poor decisions are made.

If you knew that 20 years from now the S&P 500 would be up 200%, there would be no reason to sell out of fear yet people would (the example makes assumptions about asset allocation and time horizon but bear with me). Why do I pick 200%? Because over the last 20 years the S&P 500 is up 207% (per Google Finance). Twenty years from now the market will be much higher, maybe less than 207% or more but despite knowing this people will panic sell the next bear market/crisis because it will be “different.”

Look at the current top ten of the S&P 500. Five of the top ten are the types of tech stocks (or tech related in one case) that are likely to go down a lot in the next bear market (not a prediction, more of seen that move before situation). There is also one industrial stock and stocks in that sector are no stranger to cutting in during bear markets and recessions. Even though logic tells us that after the next bear market there will be a new high with the only variable being how long, there will be puhlenty of people that succumb to their own fear and sell at a point of maximum pain.

Indexing can absolutely work but it exposes investors to a higher risk of having to face maximum pain. A comment I’ve made many times before is that finding out you had too much of something after it just cut in half is a bad place to be. Another one from me; being disciplined 75% of the time won’t work and really, I should have said being disciplined 90% of the time won’t work.

By Roger Nusbaum, AdvisorShares ETF Strategist

  One of the building blocks to building a diversified portfolio is the understanding that if everything in a portfolio goes up together then they are likely to all go down together when the cycle ends. Diversification means owning assets with different attributes such that the assets respond differently to various market conditions. There were after all, things that went up during the financial crisis. Whenever the next bear market comes there will be things that go up then too but I wouldn’t expect those things to go up in a raging bull market like we’ve had…or are still having?

Last week a new ETF launched that will essentially just own index puts (a whole lot of cash and cash proxies and 1% in puts) to offer portfolio protection for large market declines. The fund sponsor is quite clear that the fund will lose value in most years.

This ties together with recent comments from Mark Yusko, the CEO of Morgan Creek Capital who lays out a compellingly dour case for broad domestic indexes, the power of holding cash ala Seth Klarman and Warren Buffet and looking to invest in segments (sectors, themes, countries) where pessimism reigns and avoid where euphoria exists. He said that bull markets begin with pessimism, rally on skepticism, peak with optimism and end with euphoria.

It is a very human behavior to focus on the very short term and to think that in an uptrend, everything owned must go up as much as, if not more than, the market. Early on in the Tour de France every year you will hear one of the announcers remind the audience that the Tour cannot be won on the first (or second or third) day but it can be lost on the first day.

This idea relates here in that an investor cannot ensure financial plan success based on performance in some random year before they retire but they can lose the race in terms of doing something catastrophically stupid such that they dig a very deep hole for themselves.

A well thought out strategy focuses on longer time periods like an entire stock market cycle with goal of having enough money when it is needed. Someone who retires at 63 with enough money doesn’t say to themselves “while I am glad I have enough, those two quarters in a row that I lagged the market when I was 56 are going to haunt me forever.” As silly as that sounds, if the S&P 500 goes up 9% this year and someone is angry about only being up 6%, it is the same thing.

Over the course of an investing lifetime an average investor will have years that they outperform and years that they lag. An investor needs to accept this and an advisor needs to remind his clients of this. Financial plan success requires an adequate savings rate, suitable asset allocation, not repeating self-destructive behavior and just being relatively close to the market. Three of the four are within the control of the investor.

Please join Mark Yusko, CEO and CIO of Morgan Creek Capital Management and Portfolio Manager of the AdvisorShares Morgan Creek Global Tactical ETF (GTAA), on Thursday, April 20th at 1:00pm EST/10am PST for Morgan Creek’s latest session of the Around the World with Yusko webinar series. Be sure to attend this upcoming webinar titled, Around the World with Yusko: April Fools: Hope Is Not An Investment Strategy . Viewers may, and are encouraged to, submit questions during the event. If you would like to register for the webinar, please click here.

By Roger Nusbaum, AdvisorShares ETF Strategist

  There was news Tuesday that a one-time dividend investor favorite Seadrill (NYSE: SDRL) was warning shareholders that they should expect to “receive minimal recovery for their existing shares” as concerns have escalated to whether it can continue as a going concern.

A few years back, dividend and dividend growth investing dominated the content at Seeking Alpha. Seadrill was one of the favorites of this cohort. It has always been a debt heavy company with decent cash flow and it paid a very high dividend for many years. It ceased paying a dividend in 2014 just as the stock imploded, dropping by 2/3rds in a very short period of time.

Seeking Alpha shows that 80,000 of its members follow the stock. It is written about constantly even to this day despite the dividend being long gone. The debt load was always massive, currently Yahoo Finance shows $10 billion in debt, $1.5 billion in cash and cash flow of $1.18 billion.

In looking at the Seeking Alpha archive of articles for the stock you will see bullish posts all the way down (in price). Before the stock showed any sign of problems, bullish articles tended to explain away the debt concerns because it was part of its growth strategy of adding more rigs which would increase the cash flow and sustain or hopefully increase the dividend.

The groupthink on this probably stemmed from the yield and that it is an interesting story (Norwegian oil rigs).

The point isn’t to pick on people who were wrong on this as every investor will be very wrong a few times (at least) in their investing lifetimes. But this one falls into the behavior of yield chasing and it is important to recognize this and the risk that goes with it.

One ongoing theme here over the years has been that something with an 8% yield in a zero percent world (maybe a little more than zero now) carries a lot of risk and anyone thinking there isn’t a lot of risk probably doesn’t understand the risk they are taking.

The problem isn’t buying one of these and then that it ends badly, again over an investing lifetime there will be a few of these but there are a lot of these types of stocks like riskier MLPs and shipping stocks, even closed end funds (CEF) where over longer periods of time, or not that long, the charts move from the upper left to the lower right with a rather steep slope.

In the past when I have pointed this out, readers have commented that such and such CEF isn’t down 50% when you add back the dividend. I think there is a flaw in that thinking at least for people living off the income because the dividend (or distribution) comes in and they spend it. Half of their original investment is gone (sticking with the same example), spent on bills.

The need for yield of course is vital but there are many ways to get yield that will permanently impair capital and loading up on a bunch of 8-percenters is one of them.

By Roger Nusbaum, AdvisorShares ETF Strategist

  Jim Cramer had a lot to say about ETFs the other day as recapped by Todd Rosenbluth at ETF.com. The biggest point seemed to be that Cramer isn’t a fan of the diversification ETFs offer. “Cramer questioned ETFs’ diversification benefits, noting that even an ETF could own a stock like Enron, which subsequently went bankrupt due to corrupt accounting.” Of course, he just as easily could have been talking about Worldcom from those days.

He seems to be invoking some hindsight bias as both companies were very widely owned as individual stock holdings with massive market caps before going bust. I don’t know whether Cramer ever recommended either name but a lot of people were recommending them back then. Similarly, many professional investors were recommending all sorts of “safe” financial companies in 2007 before many of them disappeared.

Cramer of course has touted all sorts of stocks in his 25 years in the public spotlight (I go back with him to the old Smart Money Magazine which he wrote for back then) including The Winners Of The New World which was his top “10 stocks for who is going to make it in the New World” from February 29th, 2000. Most of the names disappeared very shortly thereafter as the article posted less than two weeks before the NASAQ peak during the tech bubble. He also had some unfortunate timing with a buy recommendation on Bear Stearns on June 22, 2007 which of course also disappeared.

The point is not to trash Cramer or to say using individual stocks is a bad idea but the notion that anyone is perfectly infallible avoiding stocks that go on to fail is simply wrong. A modest weighting in an individual stock like Baltimore Opera Hat Company (fictitious name owned by Mr. Burns on the Simpsons) that goes on to disappear either from obsolescence, mismanagement or something else will be a drag whether it is owned individually or as part of a fund and while Cramer seems to assert failures in the making can always be avoided his track record is proof that they cannot.

To the extent Cramer is making an anti-diversification pitch, that is a valid portfolio strategy. There are many funds with 25-35 holdings, so concentrated portfolios, with excellent track records. But then there are plenty of funds that own hundreds of names with excellent track records.

Part of what Cramer is selling is the idea that you can always make some huge percentage gain every year no matter what and while a few investors do (literally a few), it is not a realistic objective and more importantly it isn’t even a necessary objective. Depending on the time frame you look at the average annual return of the stock market at 7% or 10% or whatever, which includes all the bear markets and down years, when combined with proper asset allocation, an adequate savings rate as well as minimizing self-destructive behavior is enough to get the job done.

From there, it boils down to choosing the best strategy for your tolerances and other particulars and then the best tools given what you think is your best strategy. Many investors would probably tell you their idea of best strategy includes not taking outsized risks but Cramer does not seem to be cognizant of this.