Matt - the big stories are almost ALWAYS about sectors. Today, though, I'm thinking about ETF Trading and frontier markets.
Anytime there's volatility in the markets, or uncertainty or overconfidence in the markets, it's generally about sectors. The 2005 and 2008 weightings you show in your blog - and we're talking a 3-year swing there, which is amazing - underscore that the current state of affairs in the U.S. economy - and really the global economy - is all about energy and financials. In 1999 it was about tech, in 1987 it was about...uh, financials?
In any event, we're looking further into the research and playing around with some different portfolio mixes around here at Index Central.
What's been mostly on my mind this week though, has been frontier markets. We've got a whole issue of the Journal of Indexes full of frontier and emerging markets coverage, so I've really gotten a firsthand view of all of the latest thinking in the space. The big question is whether frontier markets are the next real asset class, or a mess of trouble.
We've got features from some of the recognized experts in the space, including S&P, FTSE and MSCI and a roundtable with contrasts that are enormously interesting...I love those JoI features where we ask the same questions to people with various perspectives and lay them side by side. In any event, the overwhelming consensus is that there IS a great deal more correlation benefit in the frontier markets than in emerging markets, though how the numbers of the various contributors show a WIDE range (from negative correlation all the way up to around .50 if I remember correctly. Even the hard research quoted shows from .20 to .40). That is somewhat reflective, perhaps of just how wide the definition of "frontier" varies.
In any event, I do think it's extraordinarily interesting, and that those markets ARE something worth looking at. My own intuitive sense is that 1) there's a lot of growth in those markets going forward and a ton of volatility too (though the MSCI research shows curiously LOWER volatility in the space - in direct contradiction of some of the other research and certainly conventional wisdom). 2) As with emerging markets, you can expect correlations to rise with developed markets as outside money enters those markets and 3) Looking at the regions and countries individually seems to me intuitively to make sense in that space. Who are you more bullish on? Nigeria or Vietnam?
Definitely check out that issue when it comes out. It was honestly an educational experience for me reading through all of that research.
Finally - I'm also thinking about ETF trading since I read the excellent article that Larry Carrel posted this week on this site. That feature may be a little too inside for some of you, but for an ETF geek like myself, I just found it fascinating to see the pricing dynamics going on among the exchanges. We normally do not drill in that deeply on the trading side...though we should. Those issues are fundamental to how ETFs trade, and the landscape is rapidly shifting in terms of market structure in the U.S. and globally.
And the critical issues around ETF trading (spreads and premiums/discounts) which are largely neglected in mainstream ETF analysis are critically important - they're effectively loads or transaction costs on your purchase of a fund. And again, it's not ALL about the underlying. In fact, it's quite the opposite if you take Matt's groundbreaking research on spreads at face value. Absolutely check out a version of his research if you have not already.
OK - Matt - birthday boy - it's been a slow week in blogland. There must be SOMETHING we can argue about. What have you got?