These ETFs Are Beating The Market

October 05, 2015

Regional Banks

Another group that had been leading the way is regional banks. Again, three names that stand out (with performance from Feb. 17, 2015 through Sept. 25, 2015) are:

All three names have tracked relatively closely since mid-February, with the community banks holding up a bit better since mid-June relative to the other two names. However, the group as a whole saw their performance (both absolute and relative) spike during the month of June and trade in line to slightly lagging the broad market since.

Some of this performance spike had to do with banks’ higher interest-rate correlation. The quick spike in rates at the beginning of June was a boon to the bank names. However, since then, interest rates have generally trended lower, as too has bank relative performance versus the broad market.

On the plus side, these regional banks appear to have a slightly lower interest-rate correlation as compared with the broader bank industry. Below, I have measured the correlation of the relative performance of each of the aforementioned names, in addition to a broad-bank ETF as measured by the SPDR S&P Bank (KBE | A-71), to the S&P 500 against the 10-year Treasury rate since Feb. 17, 2015:

  • QABA-SPX versus 10-year correlation: 0.30
  • KBWR-SPX versus 10-year correlation: 0.30
  • KRE-SPX versus 10-year correlation: 0.42
  • KBE-SPX versus 10-year correlation: 0.45

Buy-Write Strategies

Lastly, a strategy that has seen a very steady outperformance compared with the broad market since Feb. 17 is a buy-write strategy, available in ETF form: the PowerShares S&P 500 BuyWrite (PBP | A-78).

This strategy owns the S&P 500 constituents and sells a one-month at the money (or very slightly out of the money) call option monthly. So while the strategy may underperform in strong uptrending markets (as it essentially sold away its upside), the proceeds captured from selling the call can lead to outperformance in downtrending and sideways-trending markets (as it has a built-in performance “buffer” from the proceeds gained).

As I mentioned earlier, the S&P 500 traded essentially sideways from Feb. 17 to Aug. 17. This type of environment is beneficial for a buy-write strategy, as the strategy is able to take advantage of collecting time decay.

It will collect the proceeds from selling the monthly call, and as the month continues and the market trades sideways, the short call option value will deteriorate with time and expire with little to no value depending on how “sideways” the market truly was.

Another boon to a buy-write strategy is that as volatility rises, the price of the call option being sold is greater. If the market moves down, this additional value will add an additional bit of buffer. However, if the market moves sideways once again, the greater proceeds received will allow for even stronger relative performance.

Conclusion

During the recent market (down) moves, there have been some market segments, factors and/or strategies that have weathered the storm.

Only time will tell if this outperformance can continue, but at a minimum, there is currently some light in what is becoming a bit more of a darkening market environment.


At the time this article was written, Stadion held no positions in any of the securities mentioned. The above constitutes the personal, professional opinion of Clayton Fresk, CFA, and does not reflect the views of Stadion Money Management LLC. References to specific securities or market indexes are not intended as specific investment advice. Founded in 1993, Stadion Money Management is a privately owned money management firm based near Athens, Georgia. Via its unique approach and suite of nontraditional strategies with a defensive bias, Stadion seeks to help investors—through advisors or retirement plans—protect and grow their “serious money.” Contact Stadion at 800-222-7636 or www.stadionmoney.com.

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