With all the commotion about Tilray and the very small group of cannabis related equities, I felt compelled to weigh in (above). Last November, I walked into the largest crypto investing conference in America and delivered the same remarks to the thousands of people who were about to get destroyed in coins. This week, in under two minutes, I explained why scarcity of options, as an investment thesis, is a big loser in th...
Gamco’s Gabelli: I wish the stock market would drop so I could get better bargains from CNBC. ...
Leading astronomers made a surprise ruling 12 years ago: Pluto, the smallest planet circling the sun, is not a planet at all.
The cosmic reclassification, giving Earth seven planetary neighbors instead of eight, had ripple effects. Stargazers quibbled over Plutoâs demotion. Grade-schoolers dropped the âPâ in jingles for memorizing the solar system. But for most people, Plutoâs revised status didnât change the way they see the heavens.
Celestial definitions came to mind ahead of a rare move by major index providers to change how more than 2,100 companies across the globe are classified. As with Pluto, fund investors will need to relearn some long-held assumptions as a result of the changes. Most index funds that track broad benchmarks such as the S&P 500 or the MSCI World wonât be affected, but many others geared toward specific business sectors and industries will be. For some, the shifts could prove an opportunity to rethink what they own.
What makes a âtechâ company?
Why change things? MSCI and S&P are updating their Global Industry Classification Standards (GICS), a framework developed in 1999, to reflect major changes to the global economy and capital markets, particularly in technology.
Take Google, a company long synonymous with âtechâ and internet software. Google parent Alphabet derives the bulk of its revenue from advertising, but also makes money from apps and hardware, and operates side ventures including Waymo, a unit that makes self-driving cars. Decisions about what makes a âtechâ giant are not as simple as they once were.
Explore iShares evolved sector ETFs.
The sector classification overhaul, set in motion last year, will begin in September and affect three of the 11 sector classifications that divide the global stock market. A newly created Communications Services sector will replace a grouping that is currently called Telecommunications Services. The new group will be populated by legacy Telecom stocks, as well as certain stocks from the Information Technology and Consumer Discretionary categories.
Some high-profile stocks will be assigned to new sectors after the reclassification. Facebook and Alphabet will move from Information Technology to Communications Services in GICS-tracking indexes. Meanwhile, Netflix will move from Consumer Discretionary to Communications Services. None of what the media has dubbed the FANG stocks (Facebook, Amazon.com, Netflix and Google parent Alphabet) will be classified as Information Technology after the GICS changes, perhaps a surprise to those who think of internet innovation as âtech.â The same applies to Chinaâs BAT stocks (Baidu, Alibaba Group and Tencent). All of these were Information Technology stocks before the changes; none will be after.
Implications for investors
Index changes present sector investors with new risks and considerations. In particular, revamped GICS-tracking sectors will be increasingly top-heavy with a few, big companies. That means sector performance will benefit more when shares of those companies outperform and suffer when they do poorly.
Read more about iSharesâ view on the GICS reclassification.
Apple and Microsoftâs representation in the S&P 500âs Information Technology sector is expected to rise to about 37% from roughly 28%, according to market capitalization estimates from BlackRock using Thomson Reuters data from Aug. 31, 2018. In the S&P 500âs Consumer Discretionary sector, Amazonâs index weighting will rise to roughly 35% from 28%. The new Communications Services sector in the S&P 500 will be highly concentrated as well, with Alphabet and Facebook expected to account for more than 50% of the index. Actual sector index fund weightings are likely to differ from BlackRock estimates in order to comply with diversification standards.
Not all index funds are changing, however, and investors have options if they wish to access the current âtechâ holdings in a single fund. The majority of iShares sector-focused ETFs do not follow GICS indexes, and so are not directly affected by the changes. For instance, the iShares U.S. Technology ETF (IYW), which seeks to track a non-GICS Dow Jones index, will continue to include Apple, Microsoft, Facebook and Alphabet.
The iShares North American Tech ETF (IGM) will maintain its exposure to securities in the S&P North American Technology Sector Index, including Amazon.com, Apple, Microsoft, Facebook and Alphabet.www.iShares.com or www.blackrock.com. Read the prospectus carefully before investing. Investing involves risk, including possible loss of principal. Information on non-iShares Fund securities is provided strictly for illustrative purposes and should not be deemed an offer to sell or a solicitation of an offer to buy shares of any security other than the iShares Funds, that are described in this material. For a complete list of holdings of iShares ETFs, please visit www.iShares.com Funds that concentrate investments in specific industries, sectors, markets or asset classes may underperform or be more volatile than other industries, sectors, markets or asset classes and than the general securities market. Technology companies may be subject to severe competition and product obsolescence. The information included in this material has been taken from trade and other sources considered to be reliable. We do not represent that this information is accurate and complete, and it should not be relied upon as such. Any opinions expressed in this material reflect our analysis at this date and are subject to change. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, but are not guaranteed as to accuracy. The iShares Funds are distributed by BlackRock Investments, LLC (together with its affiliates, âBlackRockâ). The iShares Funds are not sponsored, endorsed, issued, sold or promoted by MSCI Inc. or S&P Dow Jones Indices LLC. None of these companies make any representation regarding the advisability of investing in the Funds. BlackRock Investments, LLC is not affiliated with the companies listed above. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of September 2018 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain âforward-lookingâ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader. Â©2018 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners. ICR0918U-606089-1895845
Throughout the summer, various cartoon characters throughout the financial media have been relentlessly pointing out some divergences in the stock market between internals and price. The S&P 500’s price has been doing just fine, hanging around just below all-time highs hit during the winter and then finally bursting through, accompanied by a new record high for the Dow Jones yesterday. But beneath the surface, s...
“To hedge or not to hedge?” That is the question many investors are asking this year, given the dollar’s rally, which has eaten away at returns of international exposures for U.S. investors that did not hedge that currency impact.
For example, the MSCI Emerging Markets Index is down around 12% this year (as of 9/11/08, according to Bloomberg). However, the MSCI Emerging Markets 100% USD Hedged Index is down less than half of this number with a -5.9% return.
In short, 2018 has underscored that currency exposure matters when investing internationally. For U.S. investors, if the dollar gets stronger, that exchange rate translates into lower returns for the international holdings. If the dollar gets weaker, the opposite occurs, boosting returns. Given that the U.S. dollar on a trade-weighted basis is up more than 5% year-to-date against a basket of developed and emerging markets currencies, the currency move has impacted portfolios.
For emerging markets, large currency moves this year detracted from the performance of international indexes, a sharp contrast to the persistent rally in 2017 amidst a backdrop of little volatility. The Federal Reserve’s interest rate hikes in the U.S. have contributed to the tightening of global financial conditions. This, coupled with rising trade tensions have influenced a broad unloading of emerging market currencies. Chart 1 highlights how nearly all emerging and frontier markets’ currencies are down against the stronger dollar this year.
Where we go from here?
Looking ahead, the outlook for the U.S. dollar is dependent on fundamental economic growth as well geopolitical considerations. The dollar bulls continue to look for above-trend U.S. growth to support higher interest rates relative to the euro-zone, Japan, and China supporting the USD. Worries over escalating trade tensions could also prompt a risk-off move and flight to quality, which would also support the USD.
On the other hand, the dollar bears point to the fact that global growth ex-U.S. is stabilizing after decelerating in the first half of the year. Stronger international growth and a rebound in risk appetite would likely push the USD lower similar to the 2017 experience.
To hedge or not to hedge
Given the sell-off in foreign currencies against the dollar, US-based investors have benefited from hedging the currency effect this year. But that doesn’t mean it will going forward. When considering whether to implement a hedging strategy, it is important to keep three factors in mind:
First, foreign exchange markets are some of the most liquid markets in the world. Their responsiveness to changes in geopolitical risks, economic data, and monetary policy has tended to occur more rapidly than other asset classes. This makes currencies some of the most difficult assets to forecast, and potentially should not be a major consideration for long-term investors.
Second, developed market currencies tend to weaken after a strong rally–i.e. “mean revert”–in the long run, so betting on a continued multi-year move higher in the U.S. dollar may be difficult.
Third, as my colleagues in the BlackRock Investment Institute have noted, over the long run, currencies are more of a portfolio risk to manage, rather than an opportunity to boost returns. Hedging an international exposure where there is a long-term correlation between the local equity market and moves in the home country’s currency can lead to long-term portfolio diversification. Although the positive correlation means that the assets move in tandem, it can be a key tool in mitigating downside risk. This is intuitive as it diversifies the source of risk and return. Conversely, in a market with a negative equity to FX correlation, the relationship between the two assets are already diversifying.
In short, investors looking abroad need to consider the impact of currencies in the international portion of their investment portfolios across both stocks and bonds. With the rise of currency-hedged ETFs, investors now have the tools to express their view.
Funds to consider
Barry is away in Iceland this week for a conference. Maybe it’s like a Viking reenactment of some sort, who knows. Meanwhile, my founding partners and I wanted to say thanks to all the friends, employees, fans and clients who have made this firm what it is today. Includes the story of the first challenge we had to get past, losing our biggest client the day before launching! I hope you enjoy! And thank you for suppo...
Growth stocksâ extended dominance over value has captured the headlines of late. That said, since the end of 2016 it has really been about momentum. While investors have focused on earnings growth, an even better approach would have been to simply buy the stocks rising the fastest, otherwise known as momentum investing.
Year-to-date, momentum continues to outperform the rest of the market, but the regime may be shifting towards a different equity style. As I discussed last February, when uncertainty and volatility are rising, quality tends to outperform. As trade issues have escalated, this has once again proved the case. Since the early summer, companies in the MSCI Quality Index have outperformed other investment styles as well as the broader market (see Chart 1).
To review, quality companies generally include firms with high return-on-equity (ROE), earnings consistency and low leverage. These characteristics suggest safety, which investors put a premium on when volatility is moving higher.
Check out BlackRockâs Fixed Income Conference.
While volatility remains low by historic standards, it is on the rise. Last year volatility was anemic, with the VIX Index averaging just above 11, well below its long-term average of 20. However, during the past six months the VIX has averaged close to 15, a 34% increase. Assuming volatility continues to normalize, historically this has been the type of market when quality has been the most valuable.
Quality is most effective when the VIX spikes
As a refresher, it is generally a good idea to hold some quality in a portfolio. Since 1994 quality, measured by the MSCI U.S. Quality Index, has produced higher monthly average returns than the S&P 500. In addition, the relative performance of quality versus the S&P 500 tends to be highest when the VIX is rising.
In months when the VIX is higher quality beats the S&P 500 by approximately 40 basis points (bps, or 0.40%). This outperformance becomes more pronounced in months when the VIX rises by more than 25%. In those monthâs quality beats the market by approximately 0.90% on average.
Volatility likely to keep creeping higher
To the extent volatility has been a catalyst for qualityâs relative strength, what should investors expect going forward? My view is that volatility continues to rise into the end of the current cycle. Putting aside the wild card of an escalating trade dispute, it is important to note that volatility typically rises towards the latter stages of bull markets, when financial conditions are tightening. This is a fair description of where we are today.
Wider credit spreads would be a good reason to hold more quality in your portfolio. A credit spread is the difference between the yields of a U.S. Treasury and another bond of the same maturity. When they widen, it is typically of a sign of economic uncertainty, as investors buy âsafe harborâ Treasuries and sell riskier bonds.
To date, rising rates and a stronger dollar have contributed to tighter financial conditions. What has offset these trends is still tight credit spreads. Benign credit markets have reassured investors and helped to keep financial conditions easier than you would expect. A widening of spreads, particularly for high yield bonds, would confirm a higher volatility regime. When that happens, volatility is likely to jump rather than creep higher, exactly the type of regime when qualityâs relative performance has been strongest.
Bond investing has tended to keep a relatively low profileâthe alleged province of âbond geeks,â lacking the splashy media coverage of stocks. While the performance of the S&P and the Dow are avidly followed, when was the last time you overheard an elevator conversation about how âthe Aggâ did that day?
Yet for the past 40 years, some form of âthe Aggââthe Bloomberg Barclays U.S. Aggregate Bond Indexâhas served as the foundational benchmark for the bond portion of most U.S. portfolios. Itâs the first stop for financial advisors and other asset allocators, who look at the risk-return profile of the Agg to gauge the percentage and type of bonds they should hold.
A revolutionary idea
Exchange traded funds (ETFs) that track the S&P 500 and other broad stock market indexes have been in existence for a quarter century, but until 2003 there were few options for investors to gain exposure to the performance of the U.S. Aggregate Bond Index. Instead, most people bought individual bonds or looked to actively managed funds for the bond portion of their portfolios. While each approach has its uses, there can be downsides: bond buying can be cumbersome and costly, especially for smaller investors; active funds typically try to outperform the index by over-weighting higher-yielding sectors or adjusting duration (interest rate risk).
The launch of the iShares Core U.S. Aggregate Bond ETF (AGG) revolutionized and democratized bond investing. It was the first ETF to provide all investors with a low-cost, transparent way to âownâ the worldâs predominant fixed income benchmark. Just like stock ETFs, shares of AGG could be conveniently traded on exchangeâtapping into a ready market of buyers and sellers instead of being confined to the over-the-counter system for individual bonds. These innovations have helped AGG grow to over $56 billion in assets.
Read more from Karen.
Whatâs more, the fund was low cost. Originally, the expense ratio was 0.22%, which was about one-fifth the cost of the average active manager, according to Morningstar. Today, AGGâs net expense ratio is just 5 basis points (0.05%). And the average bid-ask spread of AGG is just 0.01%âa fraction of the cost of buying individual bonds, using data from NYSE ARCA as of 8/31/18.
The parts of its sum
The creation of AGG provided broad bond market exposure. Over the next few years, iShares launched ETFs designed to track the major components of the index. This made it possible to slice the Aggregate index into âsub-sectorâ ETFs: Treasuries, investment-grade corporates, mortgage- and asset-backed securities, and agency obligations. Like the broader index, these sub-sectors would be difficult for smaller investors to replicate on their own. Investors actively manage these index ETFs by over- or under-weighting sectors based on their goals or market views.
This, too, was revolutionary. The ability to break the index into smaller building blocks gave investors even more control over their bond portfolios, conveniently and cost effectively. It allowed them to adjust the interest rate risk, income potential and diversification properties of their fixed income portfolio based on their specific investment needs. Investors can also diversify outside the U.S. with the iShares Core International Aggregate Bond ETF (IAGG).
Fifteen years ago, there were only a handful of bond ETFs. Today, there are more 1,200 of them, trading in a market worth $840 billion globally (source: BlackRock, as of 8/31/2018). AGG opened the door toward a more modern and transparent bond market.
Learn more about investing with iShares bond ETFs. BlackRock Fund Advisors ("BFA"), the investment adviser to the Fund and an affiliate of BlackRock Investments, LLC, has contractually agreed to waive a portion of its management fees through June 30, 2026. Please see the Fundâs prospectus for additional details. Carefully consider the Fundsâ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Fundsâ prospectuses or, if available, the summary prospectuses which may be obtained by visiting www.iShares.comor www.blackrock.com. Read the prospectus carefully before investing. Investing involves risk, including possible loss of principal. Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets and in concentrations of single countries. For more information on the differences between ETFs and mutual funds, click here. Investment comparisons are for illustrative purposes only. To better understand the similarities and differences between investments, including investment objectives, risks, fees and expenses, it is important to read the products' prospectuses. When comparing stocks or bonds and iShares Funds, it should be remembered that management fees associated with fund investments, like iShares Funds, are not borne by investors in individual stocks or bonds. Transactions in shares of ETFs will result in brokerage commissions and will generate tax consequences. All regulated investment companies are obliged to distribute portfolio gains to shareholders. Diversification and asset allocation may not protect against market risk or loss of principal. There can be no assurance that an active trading market for shares of an ETF will develop or be maintained. The iShares Funds are not sponsored, endorsed, issued, sold or promoted by Barclays or Bloomberg Finance L.P., nor do these companies make any representation regarding the advisability of investing in the Funds. BlackRock is not affiliated with the companies listed above. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of July 2018 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain âforward-lookingâ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader. Â©2018 BlackRock. iSHARES and BLACKROCK are registered trademarks of BlackRock. All other marks are the property of their respective owners. ICR0918U-602448-1886070
I know only one person named Irma, and I think she’s a wonderful lady. Unfortunately, a namesake of hers (with a slightly different spelling) isn’t quite so wonderful. Most folks who’ve been introduced to this other IRMAA would agree.
IRMAA stands for Income Related Monthly Adjustment Amount. And if you’ve spent much time looking around at the various provisions related to Medicare, the word “adjustment” raises your “bet I’ve gotta pay more” antenna. Which is exactly right, you’re gonna pay more.
What is IRMAA?
When the Medicare Modernization Act was passed in 2003, one of the provisions in that law was to require a sort of means-testing to the premiums paid for Medicare Part B (physicians) and Part D (prescription drugs). It was determined that the subsidization of Medicare costs by the government should be in part borne by folks who have income above certain levels. The income used to determine your IRMAA adjustment is from your tax return 2 years prior to the current year. So ancient history can come back to surprise you when you least expect it.
In today’s world, the 2018 premium for Medicare Part B is $134. However, due to a provision in the law, many enrollees pay only $130 for this benefit. The provision that reduced this group’s premium is all about the annual cost of living adjustments (COLAs) that are added to Social Security benefits. Effectively, the provision says that the annual adjustment to the Medicare Part B premium cannot be more than the rate of the COLA for that year.
In some years, there is no COLA – specifically, in 2010, 2011 and again in 2016. When that happens, the Medicare Part B premium for folks who are collecting Social Security cannot increase. Also, if the COLA is very low (as we sometimes see as well as the zero years), the Medicare Part B premium can only increase by the COLA amount and no more. This is known as the “hold harmless” rule. Click the link for an excellent technical explanation of the hold harmless rule.
The people who were actively collecting Social Security and enrolled in Medicare Part B in the previous year are the ones who are potentially protected by the hold harmless rule. IRMAA then is also applied, such that if the individual’s income is above a certain limit, hold harmless does not protect them. So we have 3 groups that are not protected by the hold harmless rule:
Part of the law requires that 25% of the projected cost of Medicare Part B is paid for by premiums paid by enrollees. Since the hold harmless rule limits participation by roughly 70% of all Part B enrollees, the remainder of the cost must be picked up by the 30% who fit into the groups above.
All of the unprotected groups start out with the standard $134 per month premium (for 2018). Then the IRMAA earnings limits apply. To make things progressive (such that the more money you make, the higher percentage of the overall cost you bear), there are five levels of adjustment that IRMAA can make:
These levels of adjustment are adjusted for cost of living every year, and often are adjusted more than a standard COLA in order to keep the costs covered. The expectation is that the levels of income will cover expenses at the following rates:
To calculate these premiums in future years, given what we know about the rates are expected to cover and the fact that the “standard” Medicare Part B premium covers approximately 25%, you can multiply the standard Part B premium by the multiplier in the table to come up with the rate.
IRMAA for Part D
The IRMAA adjustment for Medicare Part D is a bit different, in that you only know how much additional premium you’ll have to pay if IRMAA impacts you.
The rules are the same, so we have the same group of roughly 70% of all enrollees who are held harmless for increased Medicare Part D premiums. And the income levels are the same as well (at least that part is kept the same!). Since Medicare Part D premiums vary by the plan you’ve chosen from independent insurers (and not a prescibed amount like Medicare Part B), at each IRMAA income level there is an increase, or surcharge, applied to whatever your monthly Part D premium is.
Appeal of IRMAA
If you have had certain changes to your income over the succeeding two years (since the IRMAA income level used for this year’s adjustments), you may have a case for reconsideration of the IRMAA adjusment. Specifically, if you have had one of these change of life factors:
– spouse death
Other than those factors, although it is your right to appeal an IRMAA determination (read that “increase”), there’s not a lot of hope that you’ll be able to fight IRMAA. Unless there’s an error of some type, such as an incorrect tax return, most other IRMAA determinations are upheld.
Keep in mind that these IRMAA adjustments are on top of any adjustments you’re subjected to because of late enrollment in either your Medicare Part B or Part D plan.
(Barry and I got our big closeup this week, see below for details!) Things are a bit slower in New York today because of the Jewish high holidays, so queued up this post with some stuff for you to catch up on. Michael and I both read A World Lit Only By Fire by William Manchester and were blown away. Our video review comes out on Sunday, which gives you plenty of time to read it and let us know what you think on Facebo...