Capital markets have had an extremely volatile start to 2018. While equities rocketed higher in January to record highs, the market fell even faster in the first few trading days of February and the key benchmarks are now negative year-to-date. We welcomed the correction as valuations have been over-stretched for several months and we have been carrying higher cash levels as a result.
Given that January has now become irrelevant, we have updated our performance figures to the end of trading on February 5, 2018 noting that the benchmark is now down -3.5% year-to-date. An overview of the performance of our actively-managed products is as follows:
As of February 5, 2018. All figures are net of fees and other expenses. Past performance is not indicative of future results. Refer to https://www.afinacapital.com/legal/ for full details and disclosures.
(1) The benchmark represents a 50% weighting of the S&P 500 Total Return Index in Canadian dollars and a 50% weighting of the S&P/TSX Composite Total Return Index in Canadian dollars.
The Correction Could Last Weeks
Volatility index spike leads to demise of ETF. Exchange-traded funds (ETFs) have gained popularity over the past decade mainly due to the their low fees. However, a number of ETF issuers have sold massively leveraged ETFs that tend to be only suitable for day traders in our view. With the VIX (US volatility index) spiking in the past few days, three inverse ETFs (that falls in value when the VIX rising, and rise in value when the VIX is falling) were halted after dropping over 75% (no, there is no decimal between the 7 and 5). Subsequently, the issuer Credit Suisse announced that the ETFs have been closed and liquidated.
Greed is not good. As of the last trade in Credit Suisse’s leveraged ETF (XIV), it is down over 95% from its January 2018 highs. In the popular discussion forum Reddit, one member commented: “I’ve lost $4 million, 3 years worth of work, and other people’s money.” With the leveraged volatility ETF being a tip of the iceberg, there will be more such stories as the crypto-currency bubble also continues to unwind. Remember: Investing should be simple and boring.
Liquidity issues can drag on. With the global economy still strengthening and short-term bond yields remaining favorable for continuing business investment, we believe that this is a typical late cycle correction. However, given the liquidity issues with the leveraged ETFs that may have caused the mini-flash-crash yesterday afternoon, equity markets will likely move lower in the coming weeks. This correction will also be exacerbated by margin debt levels in US stocks that are currently at 135% of GDP (the highest since 1999/2000). We look forward to putting our cash to work as lower stock prices lead to more favorable valuations.