Rates, volatility and a broad market rally have contributed to the factor’s late-summer slump
Late summer has not been fruitful for the low volatility factor. From July 6 to Sept. 9, the S&P 500 Low Volatility Index has fallen by 4.67%, while the S&P 500 Index gained 1.70%.1 This is in sharp contrast to the second quarter, when the low volatility index returned 6.75%, and the broad-market index returned 2.46%.1 Naturally, some investors are wondering what’s behind the shift.
Looking at market conditions during this time, I see three headwinds that were working against the low volatility factor:Continue
Why these two sectors may be critical for value to outperform growth
The Russell 1000 Value Index has generally underperformed the Russell 1000 Growth Index for the past decade, on average.1 Naturally, this leads to questions about when the tide may turn back in favor of value. Below, I highlight two of the key factors that I believe will influence performance during the next few years.
Finding opportunity in energy and financialsContinue
Bond markets appear ready to absorb a December interest rate increase
The Federal Reserve (Fed) did not hike interest rates today. Growth and inflation conditions in the US certainly fit the Fed’s stated parameters for a hike; however, the Fed is not one to surprise markets, and markets would have been very surprised by a rate hike today. In the minds of Invesco Fixed Income, the most likely outcome was for a somewhat hawkish statement to prepare markets for a likely December hike. We think that message was delivered.
Bond markets are currently pricing in around a 60% chance of a rate increase in December.1 We believe markets should be able to absorb a December rate increase if it materializes — risk markets appeared to trade relatively well immediately following the Fed’s statement, and attaining a 100% probability of a rate hike in December would not entail too much in the way of bond market moves in the coming months, in our view. In other words, we believeContinue
A look back through time suggests otherwise — particularly when interest rates are taken into account
In recent months, questions about equity market valuations have flooded my desk. The rising price-to-earnings (P/E) ratio for the S&P 500 Index and the run-up in equity prices seem to have shaken investor confidence in future returns. With this in mind, it is worth considering equity valuations from a historical perspective.
A historical look at equity valuations shows wide variationContinue
Real estate’s new sector status uncovers key differences between REITs and financial stocks
As of Sept. 1, Standard & Poor’s and MSCI have established real estate as the 11th sector within the Global Industry Classification Standard (GICS) by separating it from the financials sector. Under this arrangement, real estate investment trusts (REITs) are now classified as follows:
- Mortgage REITs are a sub-industry of the financials sector.
- All other REITs are classified as equity REITs and are classified as an industry under the real estate sector.
This move is expected to increase investor focus on the new real estate sector, which offers unique return characteristics. As an example, REITs typically pay above-market dividend yields. As of Aug. 31, 2016, the S&P 500 Real Estate Investment Trusts REITS Industry Index offered a dividend yield of 3.91%, compared with 2.13% for the S&P 500 Index.1
Financial stocks and REITs tend to behave differently
Separating real estate from financials make sense when you considerContinue
Several assets rebound after down 2015, while others have continued to deliver strong results
It seems as if every day brings another article discussing how much difficulty hedge funds are experiencing — be it poor performance, redemptions or both. Despite the challenges at hedge funds, a number of strategies and funds in the alternatives space overall are performing well so far this year.
Before diving into the performance of alternatives, I’d like to provide a short refresher on how we at Invesco define these investments. Alternatives invest in things other than publicly traded, long-only equities and fixed income securities. We separate the alternatives universe into two baskets: alternative asset classes and alternative investment strategies.
Alternative asset classes definedContinue
Last year’s market turmoil created the impetus for much-needed changes to ETF trading mechanisms
How quickly a year goes by. Investors won’t soon forget Aug. 24, 2015. Sparked by concerns over an equity selloff in Asia, a “flash crash” quickly ensued, with the Dow Jones Industrial Average dropping 1,100 points in the first five minutes of trading.1
For investors in exchange-traded funds (ETFs), volatility was exacerbated by a rare lack of market liquidity. Given a thin secondary market and limited price visibility, stop orders became limit orders that didn’t always reflect the value of underlying securities — leading to significant ETF price dislocation. In addition, market makers lost their ability to hedge positions once “circuit breakers” were activated and trading in S&P futures — a commonly used hedge — was halted.
By the time the dust settled, stocks were deep in the red and US exchanges halted trading on more than 1,200 securities.
Have the lessons of last year spurred changes?Continue
GICS sector change may create short-term volatility with long-term opportunities as ETFs adapt
As noted in our previous blog, Real estate’s elevated sector status could be a catalyst for equity REITs, real estate will become the 11th Global Industry Classification Standard (GICS) sector beginning after market close on Aug. 31, 2016. Below, we examine the potential impact for investors as certain indexes, and the exchange-traded funds (ETFs) that follow them, realign to reflect this historic change.
As a result of real estate’s new sector status, S&P Dow Jones Indices announced in June that it would modify the index constituents of its Financial Select Sector Index. Accordingly, the Financial Select Sector SPDR Fund (ticker: XLF) will also make adjustments in order to continue to track that index. With $15.7 billion in assets under management as of Aug. 23, 2016, XLF is one of the largest ETFs available and makes up over 40% of the Lipper Financial Services Funds Category.1 Furthermore, XLF holds close to $3 billion in equity real estate investment trusts (REITs).2 While REITs were initially expected to remain in XLF, they will now be spun off into a separate ETF called the Real Estate Select SPDR Fund (ticker: XLRE) on Sept. 16, 2016.
In addition, we expect other ETFs that track a GICS-defined financial sector index to reduce real estate exposure at the end of August. (Indexes that use other classification systems besides GICS would not be affected.)
As indexes realign, will investors follow?Continue
We examine the cause of the recent rise and its likely beneficiaries
US dollar Libor (London Interbank Offered Rate denominated in US dollars) spiked recently to its highest level in seven years. Typically, US dollar Libor jumps during times of market stress, and/or when the US Federal Reserve tightens monetary policy. However, Invesco Fixed Income believes the recent increase in Libor is due to neither of those circumstances.
What’s going on with Libor?Continue
Governments could turn to fiscal stimulus rather than relying on central bank monetary policy
When contemplating the investment implications of Brexit, it’s worth considering the probability that it proves to be more significant than just the latest reason to become further concerned about the investment outlook. Clearly, this is the short-term perspective. In the longer term, however, it’s possible that Brexit could be seen as an inflection point in terms of policy strategy to address global economic travails. Specifically, fears of further populist rebellion could potentially lead governments to growth-enhancing fiscal policy instead of leaving the burden to central bank monetary policy, where the risk/reward arithmetic of zero and negative interest rate policies looks increasingly tenuous.