Weekly Commentary – The Folly of Forecasting

A PDF version of this commentary can be downloaded here.

Market Recap

In our March 9, 2015 commentary, we introduced the concept of micro-correlation storms – short periods of time when major asset classes all move in the same direction. During the week preceding that commentary, ETF proxies for eleven major asset classes lost more than 28% in aggregate. Our analysis suggested that micro-correlation storms – while sure to cause quite a bit of heartburn – ultimately mean little for long-term investors.

Sure enough, just two weeks later the Fed induced a positive micro-correlation storm, reversing many of the losses experienced during the week ended March 6th.


To create this micro-correlation storm, all the Fed had to do was lower its target federal funds rate range to 0.65-0.90% compared to the range of 1.00-1.25% communicated after the December 2014 FOMC meeting.

weekly wrap

Webinar Discussing Recent Market Trends

We recently hosted a webinar to discuss some market trends over the past year and how these have manifested themselves in a few of our models. We specifically focused on our Newfound Risk Managed U.S. Sectors, Risk Managed Global Sectors, and Multi-Asset Income portfolios.  You can view the complete webinar here.

We hope to make these webinars a regular part of our advisor education initiative. We strive to provide intuitive strategies and believe that transparency is a key part in evaluating our outcome-oriented investment solutions.

If you would like more information or have a request for a future webinar topic, please email us or comment below.


Weekly Commentary – Arguing with Jeremy Schwartz about Currency Hedging

A PDF version of this commentary can be downloaded here.

Market Recap

It took less than 3 hours for Jeremy Schwartz – Director of Research at WisdomTree – to email me and tell me he thinks I am wrong.

On Friday night, I posted a brief article on Forbes.com titled The Ups and Downs of Currency Hedged ETFs, which was meant to address both the growing interest in currency hedged ETFs as well as the implications of currency hedging. With the U.S. dollar appreciating nearly 23% against the euro over the last year – requiring European stocks to return 23% just for a U.S. investor to break even – currency hedging has become a popular topic.

My view in the article was that currency hedging can cut both ways, and that without a particular view on where currencies are headed, there may be diversification benefits of remaining unhedged.

Figure 1 – 2015-03-16

The post went live at 6:18PM. Jeremy’s email was sitting in my inbox by 8:50PM. Now, Jeremy has been on the forefront of the currency-hedged movement for the last 5 years, so it comes as no surprise that he disagrees with my conclusion. But Jeremy is also an intellectual titan for whom I have a tremendous amount of respect: if he disagrees with me, I’m going to deeply consider his argument.


In Rising Rates, Should We "Stop, Drop, and Roll"?


In a prior blog post, I wrote about a simple formula that can be utilized to understand the impact that rising rates may have upon a constant maturity fixed-income index.  Emanuel Derman wrote a similar post about constant duration indices.  While most people are aware of duration and how to use it to estimate price changes in a bond for given rate changes, ETF investors commonly find themselves in constant maturity portfolios, which are slightly different.

The key difference is that a constant maturity portfolio is going to roll the portfolio over on a frequent basis, selling older bonds and buying newer ones to keep a constant maturity profile.  Rolling over in a rising rate environment will force the portfolio to realize losses – but it theoretically also moves the portfolio into bonds offering a higher yield, potentially a lower duration, and a higher expected return.  So depending on what duration is and how quickly rates rise, it may be advantageous to roll the portfolio.

So if we expect rates to rise in the near future, are we better off just buying and holding or are we better off holding a constant maturity index and trying to stop, drop our bonds, and roll our way out of trouble?


Weekly Commentary – Micro-Correlation Storms

Special Announcement

On Wednesday, March 11, 2015 at 2:00PM EST, Newfound Research will be holding a webinar to discuss recent market trends.

We will highlight our Risk Managed U.S. Sectors, Risk Managed Global Sectors, and Multi-Asset Income strategies.

You can join the webinar by going to https://join.me/166-655-563 or dial-in to listen at 1.860.970.0010 using the conference ID 794-438-065.

Market Recap

What was the old saying about March? “In like a lion...” You know it was a rough start when stocks were the asset of safety. While global equities were down only 1.84%, 20+ US Treasuries were down 4.47%, broad commodities were down 3.30% and US REITs were down 3.60%.

One bad week and we’re already seeing articles popping up saying “correction or bear Market?” However, the reality is that these micro-correlation storms happen from time to time, when suddenly the winds of global risk factors howl and every asset class moves in lock step.