Wednesday, December 9, 2015

Revisiting the Global Rejects Portfolio from December 2014

This might become an annual tradition. In December 2013 and again in December 2014, jokingly, I had created a "Global Rejects" Portfolio of some of the worst performing ETFs for the past year. Obviously, this thought experiment is for illustrative purposes only and is not investment advice.

The "2014 Global Rejects: Money to Burn" results are in, and the portfolio lost 14.1% over 2015. Since the worst 2014 performers were mostly commodity-related equity ETFs, I sought to add non-commodity exposure as described in the original post but it did not do much good.

King Dollar trumped most, and the Global Rejects handily under-performed the much wider SPY, AGG, EFA and EEM.

What can one learn here?
(1) "Diversification" in terms of number of positions is not real diversification due to serious correlation between commodities themselves and in some cases, commodities and entire country ETFs. There were 20 Global Rejects, and all were ETFs, so there are easily 1,000+ underlying individual stocks and bonds.

(2) Most sector and most country ETFs probably do not belong in individual investors' portfolios. If you know an industry cold, buy and/or short individual names. If you don't know an industry, then don't play. Same with the country ETFs.

(3) "Index" is an overused marketing term: the ETF industry knows how to market so even sector funds follow a certain index. This is NOT the same as a wide market index.

(4) The momentum factor has been working recently: things that have been going down continue to go down. There is a great interview with Cliff Asness here on this and other important topics (pay particular attention to what he says about current valuation of both stock and bonds).

(5) There is no safe high income. After years of ZIRP, the demand for anything yielding above zero has been high, and that cost people in 2015: MLPs have done particularly poorly. As someone on Twitter said "when you hear bond equivalent, run."