The U.S. unemployment surged to hit its highest level in more than 26 years as employers cut more jobs in October. The myvoiceoflife.blog reported that the unemployment rate rose by 0.4 percentage point to 10.2%, a sign the labor market continues to struggle as the economy emerges from its deep recession. The unemployment rate of 10.2% was the highest since April 1983.
The economy lost another 190,000 in October, bringing to total number of jobs lost in the recession to 7.3 million.
Despite the apparent end of the Great Recession, economic expansion has yet to translate into jobs, leaving tens of millions of people still struggling.
The pace of job loss continued to taper off in October, the precursor to eventual growth. Amid the paralyzing fear between November 2008 and April 2009 the economy shed an average of 645,000 jobs a month. The pace dropped to an average monthly loss of 357,000 jobs between May and July. And over the last three reports, average monthly job losses have slipped to 188,000.
Some experts see that as the economy expands, companies will use fresh profits to add to payrolls as they reach for increased sales. As workers spend their paychecks, they will create opportunities for other businesses, generating more jobs. But some doubt whether recent trends of a 3.5 percent annualized rate economy grew can continue, absent another dose of government spending.
News that the nation's unemployment rate rose above 10 percent last month didn't derail the stock market's strong gains in the week, which lifted major indexes more than 3 percent. The bad economic news reassured some investors that the Federal Reserve will have to hold interest rates low for some time.
Low interest rates tend to weaken demand for the dollar, which in turn gives a boost to stocks. When the dollar is weaker, U.S. goods are cheaper for buyers overseas. Companies that do business overseas also get a profit gain when their earnings are translated back into dollars.
The prices of U.S. homes in 20 metropolitan cities continued to rise for the fourth-straight month in August, according to the Case-Shiller home price index. The home price stabilization added to signs of housing market improvement and economic stability in the United States.
In August the price index climbed by a seasonally adjusted 1% compared with July. Prices rose in 16 of 20 cities, reported myvoiceoflife blog.
In the past year, the composite index is down 11.3% in the 20 cities. Prices are down 29.3% from the peak. Prices are where they were in the fall of 2003.
The Case-Shiller index lags behind the National Association of Realtors’ report on existing home sales, which have been issued for September. That number also showed improvement. Low prices and mortgage rates combined with the first-time buyers’ tax credit have spurred home sales. Congress is considering extending the tax credit that saves first-time buyers 10 percent of the sales price, up to $8,000.
Some investors have become concerned that such signs of improvement could prompt central banks to withdraw stimulus measures sooner than expected. Another factor likely to obstruct the market in the coming months is an increase in interest rates, as the Federal Reserve ceases its buying mortgage-backed securities.
More institutional investors, especially pension funds, are applying index-investing strategy by shifting their assets from active managers to index funds.
SmartInMoney reported, there are four major attractions of indexing that motivate investors to track market performance, rather than try to outperform it.
1. They offer a remarkably simple, convenient way to create a diversified portfolio.
2. Index funds typically cost less to manage than actively managed funds.
3. Their performance track record has been impressive, even during bear markets.
4. Index funds are fully invested strategy that keeps investor staying in the game during market recover
Simple
Indexing is a very simple way of gaining exposure to an investment style or the broad market. Index funds can help investors to build a portfolio that's appropriately diversified to meet investors’ goals, time horizon, and tolerance for risk in a convenient way.
Low Cost
Index funds’ main advantage is lower cost than investors would get from an actively managed mutual fund. Index funds win in all three components of investment cost.
Index funds charge low expense ratio, which is the cost of managing the fund. An average non-index fund has an expense ratio of around 1.5%; whereas many index funds have an expense ratio somewhere between 0.15% to 0.5%. Index funds are not actively managed; they are managed largely using computer programs. There are no expensive analysts required to try to figure out what bets to take.
Index funds transaction costs are generally much lower. The costs are incurred as the portfolio manager is managing the portfolio. Indexing is a very low-turnover strategy, relatively low compared to active management. While active strategy involves relatively frequent buying and selling securities, index fund managers only need to maintain the appropriate weightings to match the index performance; the technique is known as passive management.
The third cost is associated with taxes, in the form of capital gains or taxes on dividends. Passive management generates realized capital gains from trading far less frequently than does active management. Consequently, more tax payments could be either deferred of avoided entirely.
What matters to investors are after-cost returns. A fund's return is the total return of the portfolio minus the fees an investor pays for the investment costs. If a fund charges 1.5%, then the portfolio manager have to outperform the fund’s benchmark by that amount just to be even. Anything less, and the fund's returns would lag its benchmark. Studies reveal main culprit for the failure of actively managed funds to beat the indexing is the high costs that they charge. The more you trade, the less you earn, because management fee, transaction costs, taxes and bad decisions always kill returns
Hard-to-Beat Performance
Historically, index funds have performed very competitively against actively managed funds, and frequently outperforming a majority of active funds whether it's a shorter time period, like a year, three years, five years, or extending out ten years.
Over the year 2008, which was a very difficult year in the marketplace, index funds still outperformed a majority of the actively managed portfolios. Over the same period of time, index fund performance was very competitive against the active investments in different segments within the marketplace. In the nine Morningstar "style boxes," such as large-cap value or large-cap growth, indexing outperformed active managers in three of those, according to Gus Sauter, Vanguard's chief investment officer. It underperformed in three, and matched the active managers in three.
Over longer time periods, index funds provided even more competitive performance because that's where the costs of active management get compounded over time. So investors tend to find that over a 10-year (or more) time horizons, most indexes have outperformed the active investments.
Recent studies provided more evidence that the failure of active management in beating their benchmark index is replicated across almost all categories, not only U.S. stock funds but also bond funds and even emerging-markets funds. What's more, a new study found that it is very hard, if not impossible, to justify active management for most individual, taxable investors over a long term. (Detail findings of the studies are elaborated in the "Index Investing Supremacy")
Investing in an index fund doesn't guarantee that you'll never lose money. Index funds will decline in a bear market and up in a bull market, right along with the market. Investors should really think long-term because indexing is a great way to capture the long-term returns of the marketplace with its low-cost benefit. If investors get nervous during a downturn and sell, they’ll probably miss the recovery.
Fully Invested
Index investing can be a great way to capture the typically fast burst that a market experiences when it's making the shift from a bear market to a bull market. A fully invested strategy of index investing positions investors very well to benefit from the large rate of return during the market recovery. It's designed to perform right in line with the market as it goes up. In the last five or six bear markets, particularly the very steep bear markets, the market typically had a very large increase in the first 12 months coming out of a bear market (read "One year after the bear").
Market just witnessed that after months of the most recent cruel bear market, which bottomed in March, the stock markets closed the third quarter ending Sept. 30. 2009 with huge gain and the Dow Jones Industrial Average reclaimed the 10,000 mark on Oct. 14, 2009.
As a bear market turns into a bull market, active managers may suffer from a couple of problems as a bear market turns into a bull market. First, the active managers tend to hold the most cash near market bottoms. Because of the cash drag in an actively managed portfolio, it won't fully benefit in the rebound.
U.S. stocks soared higher sparked by earnings news on Wednesday, Oct. 14, pushing the Dow Jones Industrial Average to close above 10,000 for the first time in more than year. The sharp rally signaled investors' confidence that the economy is recovering from the financial crisis and recession, according to SmarInMoney.
The Dow finished up 144.90 points, or 1.5%, to close at 10,015.86, its highest level since global markets plunge on Oct. 6, 2008, when the Dow fell below 10,000 amid the outbreak of financial crisis on Wall Street. The Dow first closed above 10,000 in May 1999 but retreated in the years after the dot-com bubble deflated. It then regained the 10,000 mark in late 2003 before peaking at 14,000 in October 2007.
Other indexes hit fresh one-year highs as well. The broader S&P 500 stock index gained 1.8% to end at 1,092.02, while the Nasdaq Composite rose 1.5% to 2,172.23.
The Dow is still more than 4,000 points off its all-time highs; while S&P 500, a broader measure of the market, are down 30 percent from their peaks.
The sharp rally was fueled by surprisingly better than expected results from two blue chips, Intel and J.P. Morgan Chase and a smaller decline than anticipated in U.S. retail sales.
Among 95 ETF providers, the trio of iShare, State Street Global Adviser (SSgA) and Vanguard control more than 71% of the worldwide asset under management and 85% of the U.S. assets at the end of August 2009, reports SmartInMoney.
As a the largest ETF provider in terms of both number of products and asset, iShare alone controls 48.2% global market and 52.9% U.S. market with $429.32 billion asset under management from 391 ETFs. SSgA is second with 15.6% market share followed by Vanguard with 15.6% market share.
SPDR (SPY) leads the ETF markets with $73.3 billion asset under management as of the end of August 2009. SPDR from the State Street Global Adviser tracks S&P 500 index, an index of 500 largest businesses in the U.S.
At the second place is iShares MSCI EAFE Index (EFA) that track MSCI EAFE index, an equity benchmark for its international stock performance, with $33.5 billion net assets. Tracking performance of the MSCI Emerging Markets index, iShares MSCI Emerging Markets Index (EEM) trails closely at the third with 30.7 billion net assets. These three U.S. ETFs top the ranks in both U.S. and global markets.
This rank is not surprising as investors commonly use these three ETFs as vehicles to diversify their equity investment. Adding equity exposure of both developed nations outside of North America and emerging countries to equity of largest U.S. companies provides investor with a broad diversification covering global equities. This ability to offer exposure to such a wide variety markets and sectors with relative ease and cheap is EFTs’ main strength that is not offered by other investment vehicles. As a result, ETFs continue to enjoy considerable momentum.
Among ETF categories, large-cap equity ETF is the most popular in the U.S. with 21.7% of the total assets followed by international equity at the second with 13.6% and emerging markets equity at the third.
BGI also reported that the average total expense ratio for equity ETFs in the U.S. is 32 basis points versus 78 basis points per annum for the average equity index tracking fund and 141 basis points for the average active equity fund, according to the BGI report.
smartinmoney.com
::SMARTINMONEY:: Exchange traded funds (ETFs), which trade on exchanges like individual stocks, continue to enjoy considerable momentum as an investment vehicle given their ability to offer exposure to such a wide variety of asset classes, regional markets, and sectors with relative ease on a real-time basis during the trading day at a lower cost than many other forms of investment vehicles.
The ETF benefits have attracted many institutional investors and retail investors since the first launch in U.S. in 1993. In contrast with regular mutual funds that have been around for more than 80 years, the U.S. ETFs enjoyed $47.4 billion inflow in the first seven months of 2009 while regular mutual funds suffered an outflow of $50.6 billion.
During the first seven month of 2009 global net sales of ETFs was $65.7 billion, which was still lower than the net sales of mutual funds of $97.5 billion, according to Strategic Insight.
A worldwide trend has seen global ETF assets hit an all time high of $891 billion at the end of August 2009 according to the September 2009 edition report from Barclays Global Investors (BGI). The new high of global ETF assets is 3.9% above the previous all time high of $858 billion set in July 2009. Year-to-date assets have risen by 25.3% which is more than the 18.0% rise in the MSCI World Index in US dollar terms. The universal ETF industry had 1,773 ETFs with 3,137 listings from 95 providers on 41 exchanges at the end of August 2009.
The U.S. ETF assets also hit an all time high of $607 billion at the end of August 2009, a 4.3% increase from the previous all time high of $582 billion set in July 2009. Meanwhile, the U.S. ETF industry had 710 ETFs, from 22 providers on 3 exchanges.
Although the impressive growth, the dollars invested in ETFs is still only about 5.8% of the total of $10,431 billion in the U.S. traditional mutual fund industry at the end of August 2009.
Trio ETF providers, State Street Global Adviser, iShare, and Vanguard, dominate the worldwide and domestic ETF industries. The trio control more than 71% of the worldwide asset under management and 85% of the U.S. assets. At the top list of the global and U.S. ETFs, SPDR S&P 500 (SPY) led the market with $73 billion asset under management.
BGI also provided data showing large-cap equity ETF, with 21.7% exposure, ranked the largest among the U.S. ETF assets type by exposure.
The average total expense ratio for equity ETFs in the U.S. is 32 basis points versus 78 basis points per annum for the average equity index tracking fund and 141 basis points for the average active equity fund, according to the BGI report.
Issues of structure and suitability have drawn ire from U.S. regulators in recent months. Commodity ETFs like United States Oil (USO) face a possible transformation as the Commodities Futures Trading Commission debates futures exchange position limits. A number of ETFs providing exposure to commodities have recently issued notices that they have suspended their creation process.
Leveraged and Inverse ETFs achieved unsavory reputation in 2009 as an influx of assets led to a scrutiny of suitability. The leveraged funds use futures and swaps to achieve investment goals on a daily basis. The Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) issued an alert about extra risks of these ETFs for buy-and-hold investors. Some investors might have erroneous expectation that the Leveraged and Inverse ETFs may meet their objectives over the long term.
::MYVOICEOFLIFE:: The economy shed another 263,000 jobs in September and the unemployment rate rose to a 26-year high of 9.8% with 15.1 million people unemployed. The unemployment rate edged up from 9.7 percent in August, according to the Labor Department, and continued to inch toward double digits, a level last seen in June 1983.
Thought the rate of job loss has tapered off compared to the early months of the year, the persistently weak labor market could undermine a promising economic recovery from the worst U.S. recession since the Great Depression.
The bleak report emphasized the risk that without jobs, consumers won't have income to spend and that will restrain growth and give employers little reason to resume hiring after 21 consecutive months of job losses. Without consumers, the economy can’t experience a really strong recovery.
::SMARTINMONEY:: After seventeenth months of cruel bear market, stock markets have rallied since the early spring and gained steam over the summer. The markets closed the third quarter with huge gain.
The Dow Jones Industrial Average index is up 48% from its March 9 low and up 11% this year, although still down 31% from its October 2007 record.
The Standard & Poor's 500-stock index is up 17% for the year and up 56% from its March low but off 32% from its October 2007 high.
The big gains followed a brutal bear market that hit hardest those companies with the shakiest balance sheets, heavy debt loads and high fixed costs. The Fed responded by cutting interest rates essentially to zero and flooded the credit markets with additional money, buying up Treasurys, government-backed mortgage securities and agency debt.
For the past seven months, it has been a beta-driven rally. As investors took advantage of the easy money and moved back into riskier assets, many of the biggest decliners during the crisis posted the largest gains. Buying volatile stocks is known as a beta trade. A financial statistic called beta is a measure of an individual stock's moves in relation to the market. A stock with a beta of two, it historically moves twice as much as the market.
A basket of the 20 highest beta stocks in the Russell 1000, as ranked by Nomura Securities International, gained 141% year to date after a 75% decline in 2008.
After seven months of big gains for stocks, investors are concerned about the underlying strength of those risky companies. The powerful rally came as the economy overall showed signs of stabilization. Corporate profits have come in above reduced expectations, in large part due to cost cutting. It steamrolled concerns that consumers remain suffered by debt, high unemployment and depressed home prices.
Last week, Fed governor Kevin Warsh cautioned that Fed policy could begin normalization. As the timing of the Fed's next steps become clearer, the best-performing stocks may move from more-speculative companies to those with better earnings quality
::SMARTINMONEY:: Recent studies provided more evidence that the failure of active management in beating their benchmark index is replicated across almost all categories, not only U.S. stock funds but also bond funds and even emerging-markets funds. What's more, those numbers are similar to the previous five-year cycle. The numbers come from S&P and are supported by research from Morningstar Inc.
A new study by Mark Kritzman found that it is very hard, if not impossible, to justify active management for most individual, taxable investors over a long term. To break even with the index fund, net of all expenses, the actively managed fund would have to outperform it by an average of 4.3 percentage points a year on a pre-expense basis. Only miniscule percentage of domestic equity mutual funds in the Morningstar database beat the Standard & Poor’s 500-stock index by at least four percentage points a year, on average.
Study by S&P
A new study from Standard & Poor's finds that majority of large-cap fund managers who use the S&P 500 as a benchmark for comparison have failed to match the performance of the index over the last five years ending Dec. 31, 2008. The S&P 500 beat 71.9% of U.S. actively managed large cap funds although the index dropped 18.8%, according to S&P Index Services. This recent calculation signifies the previous five-year result that showed 53% of large-cap funds lagged the index.
Things were even worse for small-cap active managers. The S&P Small-Cap 600 outperformed 85.5% of small-cap funds. That index was down 0.6% over the five years to Dec. 31. The small-cap finding questions a prevailing myth that small cap is more of an active managers' market because the small-cap market is inefficient and needs active management.
Even most emerging-markets funds lagged their comparable S&P index. The S&P/IFC Emerging Markets Index bested 89.8% of actively managed emerging-markets stock funds in the past five years.
Actively managed bond funds also struggled. Except for high-yield funds, at least 80% of bond funds lagged their comparable benchmarks across all categories. Bond benchmarks are not as easy to replicate by index funds due to liquidity issues.
Research from Morningstar Inc
Morningstar found that across its nine U.S. stock styles, the average mutual funds fail to beat its respective S&P index in seven style categories over the five years through Mar.31, 2009.
The average mutual funds also underperformed Russell indexes and Morningstar indexes in six style categories over the same timeframe.
Over 10 years the average funds beat the S&P indexes in five of the nine categories. They also won all but one of its category Russell and Morningstar indexes.
Study by Mark Kritzman
A new study by Mark Kritzman, a president and chief executive of Windham Capital Management of Boston, measured the long-term impact (20 years) of transaction costs, taxes and management and performance fees in investing in a mutual fund or hedge fund. “It is very hard, if not impossible, to justify active management for most individual, taxable investors, if their goal is to grow wealth”, he wrote in his study presented in the Feb. 1 issue of Economics & Portfolio Strategy.
Mr. Kritzman’s study found that just to break even with the index fund, net of all expenses, the actively managed fund would have to outperform it by an average of 4.3 percentage points a year on a pre-expense basis. For the hedge fund, that margin would have to be 10 points a year.
Morningstar database for the 20 years period through January 2009 shows that just 13 out of 452 domestic equity mutual funds beat the Standard & Poor’s 500-stock index by at least four percentage points a year, on average. It’s less than 3 out of every 100 funds. Therefore, the chances of finding superior funds that can best index funds are minuscule, according to Russell Wermers, a finance professor at the University of Maryland, as quoted from The New York Times.
::MyVoiceOfLife:: U.S. consumer prices index was up 0.4% from July, the Labor Department said Wednesday. The rising gasoline prices by 9.1% pushed overall consumer prices higher in August even as prices for most other goods and services remained in check. Energy prices rose 4.6 percent last month even though they were nearly one-fourth lower than the same period a year ago, when oil prices began to tumble from their record highs of around $145 a barrel.
Core CPI, which excludes food and energy prices, increased 0.1%, suggesting that most costs of living were not following the upward arc of oil and gasoline prices.
Many on Wall Street have warned that the government's immense stimulus measures will eventually lead to inflation, pushing commodity prices sharply higher and further eroding the value of the dollar. These inflation hawks have helped push the price of gold above $1,000 recently, and they point to rising oil and commodities prices as a harbinger.
The Fed officials have insisted that the economic recovery will be too slow to spark a rise in prices. The data is unlikely to change expectations that the Federal Reserve will remain on hold into next year given that core prices remain soft. Unemployment is still high, consumer demand for credit and goods and services is still subdued, and there is enormous slack in the economy.
Investors were happy with the news, as the stocks saw strong gains at the closing bell.
