FANG Goes Bang
“FAANG” stocks (Facebook, Amazon, Apple, Netflix and Google, now called Alphabet) were rising for most of the year. For investors who didn’t find that exciting enough, BMO Capital Markets Corp helpfully issued the MicroSectors FANG+ 3X Leveraged ETN (FNGU). As the name suggests, it gives you three times the daily return on these, plus another five for good measure (Alibaba, Baidu, NVIDIA, Tesla and Twitter). That I don’t personally know any buyers reveals more about the sedate company I keep, because there’s clearly a ready market for leveraged ETNs. Last week DGAZ, Credit Suisse’s ETN designed to provide 3X the downside to natural gas, collapsed as natgas soared, losing 81% of its value over the past month.
The Fact Sheet for FNGU warns it’s, “not suitable for investors with longer-term investment objectives.” What other investor types are there? Because such securities maintain constant market exposure, they have to rebalance every day. Leverage magnifies the effect of compounded returns. A stock that rises and falls by 1% on alternate days will lose half its value in 13,860 days. If it moves 2% this only requires 3,465 days, while 5% takes 553 days. You get the picture. One can think about the half-life of these leveraged products – how long would it take them to lose 50% given historic volatility. With daily moves in natgas of 1.2%, DGAZ had a half-life of 1,087 days. The recent spike in prices has hastened its demise.
It’s not only DGAZ buyers who lost big. The author of The Complete Guide to Option Selling posted a video on YouTube in which he tearfully explains why his hedge fund has just been wiped out by the “rogue wave” in natgas.
Leveraged ETFs and ETNs have their critics, and scarcely need one more. SEC officials have individually criticized them but stopped short of withholding approval.
The point is that the violent losses in FNGU highlight far more substantial recent losses for investors in the underlying stocks, and more broadly in growth-style investing. Since the 2016 Presidential election, equity returns have been dominated by a narrow group of growth stocks. At its peak in June, the FANG+ index had risen by 125% from its election-day level. Although the FANG+ group has been in retreat since then, the S&P500 Growth ETF (SPYG) continued to outperform. As recently as late September, SPYG had risen by 52% since the 2016 election, beating the S&P500 Value ETF (SPYV) by 22%.
Since then, SPYG’s lead over SPYV has been halved. We are approaching correction territory, defined as a 20% pullback from the highs. FANG+ is already there, at -23% from its June high. The Nasdaq Composite Index not far away, down 15% from its high set in August. while SPYG is -12%. The S&P500 has pulled back 10%, with SPYV falling a more modest 8%.
There’s a shift under way. With growth investors certainly having had the better of things in the past couple of years, there are still profits to protect. But it’s rarely easy valuing former highfliers when momentum is turning. Value stocks by definition have firmer valuation support. In addition, their investors are less likely to sell in a falling market. They own what they do because they like the valuation, and are less dependent on others liking it more to generate a return. Low volatility stocks, having lagged the S&P500 by 5% for the year through September, are now outperforming the S&P500 by 4%.
This leads to one of today’s great value opportunities – U.S. pipeline stocks. The names in the American Energy Independence Index offer a 10.9% yield on 2019E Distributable Cash Flow (DCF, which is free cash flow ex-growth capex), up 13% over 2018. This is analogous to the Funds From Operations (FFO) commonly used in real estate, as we showed in a recent blog (see Kinder Morgan: Still Paying for Broken Promises). The index has a current dividend yield of 6.25%, and we expect dividends to grow 8% next year.
Growth stocks may resume their upward trajectory, but the recent volatility has shown how quickly two years of outperformance versus value can quickly reverse.
SL Advisors is the sub-advisor to the Catalyst MLP & Infrastructure Fund. To learn more about the Fund, please click here.
SL Advisors is also the advisor to an ETF (USAIETF.com).
The information provided is for informational purposes only and investors should determine for themselves whether a particular service, security or product is suitable for their investment needs. The information contained herein is not complete, may not be current, is subject to change, and is subject to, and qualified in its entirety by, the more complete disclosures, risk factors and other terms that are contained in the disclosure, prospectus, and offering. Certain information herein has been obtained from third party sources and, although believed to be reliable, has not been independently verified and its accuracy or completeness cannot be guaranteed. No representation is made with respect to the accuracy, completeness or timeliness of this information. Nothing provided on this site constitutes tax advice. Individuals should seek the advice of their own tax advisor for specific information regarding tax consequences of investments. Investments in securities entail risk and are not suitable for all investors. This site is not a recommendation nor an offer to sell (or solicitation of an offer to buy) securities in the United States or in any other jurisdiction.
References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in an index and do not reflect the deduction of the advisor’s fees or other trading expenses. There can be no assurance that current investments will be profitable. Actual realized returns will depend on, among other factors, the value of assets and market conditions at the time of disposition, any related transaction costs, and the timing of the purchase. Indexes and benchmarks may not directly correlate or only partially relate to portfolios managed by SL Advisors as they have different underlying investments and may use different strategies or have different objectives than portfolios managed by SL Advisors (e.g. The Alerian index is a group MLP securities in the oil and gas industries. Portfolios may not include the same investments that are included in the Alerian Index. The S & P Index does not directly relate to investment strategies managed by SL Advisers.)
This site may contain forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involves a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of SL Advisors LLC or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made. r
Certain hyperlinks or referenced websites on the Site, if any, are for your convenience and forward you to third parties’ websites, which generally are recognized by their top level domain name. Any descriptions of, references to, or links to other products, publications or services does not constitute an endorsement, authorization, sponsorship by or affiliation with SL Advisors LLC with respect to any linked site or its sponsor, unless expressly stated by SL Advisors LLC. Any such information, products or sites have not necessarily been reviewed by SL Advisors LLC and are provided or maintained by third parties over whom SL Advisors LLC exercise no control. SL Advisors LLC expressly disclaim any responsibility for the content, the accuracy of the information, and/or quality of products or services provided by or advertised on these third-party sites.
All investment strategies have the potential for profit or loss. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be suitable or profitable for a client’s investment portfolio.
Past performance of the American Energy Independence Index is not indicative of future returns.
This is a gift to anyone retired or nearing retirement