BCA Indicators/Model

In a February <i>Special Report</i> titled "Assessing Fair Value In FX Markets" we introduced a set of long-term valuation models based on various fundamentals. We have updated the results and added KRW, INR, PHP, HKD, CLP and COP to our analysis. The dollar still remains expensive, albeit with no signs of a dangerous overvaluation. The yuan is now at its cheapest level since 2009.

In September, the model outperformed the S&P 500, while it underperformed global equities in both USD and local-currency terms. For October, the model trimmed its allocation to stocks and boosted its weightings in bonds and cash.

We are proud to introduce Global ETF Strategy, the newest BCA service developed to meet client requests to apply our macro tools to micro portfolio decisions. ETFs aren't just for individuals anymore. Institutional investors increasingly rely on them to execute key aspects of their asset-allocation and hedging strategies efficiently and inexpensively. While there will be many more ETFs, the existing universe cries out to be pruned. Investors need to watch their step in a landscape strewn with illiquid funds and funds that deliver attenuated versions of their promised exposures. Global ETF Strategy's mission is to deliver BCA from an ETF perspective. It is charged with communicating BCA's best ideas to its clients and guiding them through the clutter to the best ETFs to act upon these ideas. We have developed several ETF-specific analytics to carry out our mandate while leveraging the treasure trove of proprietary models and indicators developed across BCA's 67-year history. A Command Performance By far, the single most common BCA client inquiry runs something like this: "I really enjoyed the discussion of ________ (inflection points/divergences/leading indicators) in this week's report. I agree with your conclusion that ________ (Country X bond yields/stock prices/exchange rates) will follow soon. What ETF should I buy to benefit from the move?" Global ETF Strategy, the latest in the line of new services deepening BCA's relationship with investors, is our comprehensive response. BCA has traditionally provided macroeconomic and broad market analyses that clients used to inform their own security selection decisions. At their behest, we are now adjusting our focus to lend a hand throughout the entire process, from sussing out broad themes to identifying actionable investment ideas. All of our new services, from Equity Trading Strategy to our in-depth sector strategies, have been crafted to extend BCA's analytical framework all the way to the individual position level. Why ETFs? The popularity of ETFs has exploded since their 1993 introduction. Aggregate ETF assets under management (AUM) currently exceed $2.4 trillion, or more than 8% of all household and non-financial corporate debt and equity investments (Chart 1). The number of ETFs (Chart 2, top panel) and their AUM (Chart 2, bottom panel) have grown at a nearly 30% compound annual rate since 2000, when ETF development began to proceed at its modern-era pace (Box 1). Both growth measures have slowed in recent years from base effects, but cumulative AUM growth remains startling (Chart 3). Chart 1Still Taking Share bca.bcasr_sr_2016_09_23_c1 bca.bcasr_sr_2016_09_23_c1 Chart 2Growth Has Slowed, But Remains Robust bca.bcasr_sr_2016_09_23_c2 bca.bcasr_sr_2016_09_23_c2 BOX 1 A Brief History Of The ETF Pioneer Era Although ETFs have become synonymous with executing macro strategies, asset managers did not immediately embrace them. Fund distributors brought new vehicles to market at a deliberate pace throughout the 1990s, despite individual investors' eagerness to invest in them. Only 30 ETFs were introduced in the decade, in six separate launches. Together, the Pioneer 30 covered the basics, demonstrating how ETFs could be used to track headline indexes (the S&P 500, the Dow, the NASDAQ 100 and the S&P MidCap 400), gain sector exposure (the 9 sector SPDR funds) and provide hassle-free access to international equity markets (iShares' first 17 MSCI country index funds). All 30 pioneer funds remain in existence today. With the exception of some ancillary country funds, they are all leaders in terms of daily activity and 26 of them are constituents of the current BCA 200, typifying the first-mover advantage accruing to index ETFs (Table 1). They also highlight how ETF development has proceeded from the top down: funds providing niche exposures, smart-beta tilts and strategies applying varying degrees of active management appeared on the scene only after ETFs tracking essential benchmarks were solidly entrenched. It was not until the middle of last decade that fund sponsors began launching the newer breeds of ETFs at an accelerated rate, sparking the explosive growth, the churn (more than 400 funds have been liquidated over the last eight years) and the downward pressure on fees that characterize today's ETF landscape. Table 1The ETF Pioneers Introducing Global ETF Strategy: Connecting The Dots From BCA To XLK Introducing Global ETF Strategy: Connecting The Dots From BCA To XLK Chart 3Blowing Away The Field bca.bcasr_sr_2016_09_23_c3 bca.bcasr_sr_2016_09_23_c3 Growth in the number of ETFs and their AUM has roughly mirrored growth in their range. U.S. equity-dedicated ETFs are no longer the only game in town, and their share of total ETFs (Chart 4, top panel) and aggregate ETF AUM (Chart 4, bottom panel) has steadily declined. Advisors and institutions have taken advantage of the expanding range of applications to increase their allocations to ETFs, and the trend is set to continue. Greenwich Associates' 2015 U.S. Exchange-Traded Funds Study indicated that ETFs have graduated in institutions' eyes from tactical parking places for cash to core long-term portfolio holdings, prized for their liquidity, cost-effectiveness and efficiency.1 Chart 4Going Beyond U.S. Equities bca.bcasr_sr_2016_09_23_c4 bca.bcasr_sr_2016_09_23_c4 Why Global ETF Strategy? Global ETF Strategy's mission is to deliver BCA from an ETF perspective. From the earliest stages of its development, it has always been meant to address our clients' most common question (Nice call, now how do I put it into play?). As the title of this report states, we are trying to connect the dots from BCA's macro views to individual tickers.2 Our mandate is to communicate BCA's best ideas to clients and point them to the optimal ETFs to express them. The pointing process revolves around our interactive database covering all U.S.-listed ETFs. The database unites far-flung public information with analytical measures developed by BCA. The latter include the BCA 200, a continuously evolving subset of core ETFs best suited for constructing balanced portfolios at any given moment in time; proprietary Risk Scores for every ETF and a proprietary BCA Score weighing every ETF wholly composed of U.S. equities. The net effect is to save our clients time by making it easy to access high-impact data and analytics in a single place. An ETF Koan There are not enough ETFs; there are too many ETFs. ETF coverage is still spotty outside of the U.S., especially in fixed income, where investors are sorely limited in the strategies they can execute via exchange-traded products. Within the U.S., there are plenty of meaningful GICS sub-industries without dedicated ETFs to provide precise equity exposure. Even with a steady drumbeat of new ETF issuance, several of the basics still have yet to be addressed. There is ample room for a greater range of exposures that investors can tap with a single instrument. On the other hand, half of the extant ETF universe would not be missed if it disappeared tomorrow. A significant proportion of funds are so illiquid that they are not worthy of professional managers' consideration. Among the rest are several funds with ill-suited benchmarks that render them unable to deliver anything other than an attenuated version of their promised exposures. All benchmarks are not alike, and it is essential that investors do their homework before choosing among similarly themed passive ETFs (Box 2). BOX 2 Looking Under The Hood Of U.S. Homebuilding ETFs The iShares U.S. Home Construction ETF (ITB) and the SPDR S&P Homebuilders ETF (XHB) dominate the U.S. homebuilder ETF space, together holding more than $2.5 billion of assets and accounting for well over $100 million of average daily turnover. XHB costs slightly less to hold (35 basis points ("bps") in annual fees) than ITB (43 bps) and offers a slightly higher yield (58 bps versus 40 bps). Neither fund has any difficulty tracking its designated benchmark (the S&P Homebuilders Select Industry Index for XHB, and the Dow Jones U.S. Select Home Construction Index for ITB), but the benchmarks themselves provide vastly different homebuilder exposure. While neither perfectly replicates the S&P 1500 Homebuilding sub-industry index (S15HOME), ITB's underlying index comes much closer than XHB's, which is stuffed with stocks from tangentially related sub-industries. XHB's #1 holding is a mattress maker, and only one of its top eight holdings builds houses. All told, homebuilders account for just 29% of XHB's market cap, well short of ITB's 64%. Relative performance data underline ITB's superiority as a homebuilder exposure vehicle. Chart 5 plots the distributions of each fund's weekly divergences from S15HOME since 2011. ITB generates a mean divergence one-third the size of XHB's (-2 bps versus -6 bps) with roughly half of the standard deviation (89 bps to 187 bps3). Since the beginning of 2011, ITB's 15.46% compound annual growth rate has very nearly matched the index's 15.35%, while XHB's 13.68% is almost two percentage points lower. Chart 5Smart Shoppers Read The Ingredients Introducing Global ETF Strategy: Connecting The Dots From BCA To XLK Introducing Global ETF Strategy: Connecting The Dots From BCA To XLK The solution to the paradox is that the ETF universe will need to be steadily pruned, even as it grows. Fund liquidation will be as constant a feature as fund creation. Savvy investors will look before they leap and steer clear of funds at risk of being shuttered. The Database: Global ETF Strategy As Field Guide The most basic function of our database is to bring scattered information together in one place. Everything bearing on the decision of whether or not to use an individual ETF to gain desired exposure to a particular asset class, sector, sub-industry, country or factor is included (Figure 1). Extensive cross-referencing allows investors to sort the database on multiple dimensions, speeding self-directed research queries. With the data corralled, sifted and placed at their fingertips, investors are well prepared to navigate the noisy and ever-changing ETF universe. Figure 1Selected Data For U.S. Large-Cap Value Funds Introducing Global ETF Strategy: Connecting The Dots From BCA To XLK Introducing Global ETF Strategy: Connecting The Dots From BCA To XLK The database then adds an exclusive layer of value by acting as a conduit, bringing BCA's expert in-house views to bear on the ETF universe. Every active BCA view is mapped to relevant ETFs that could be used to express it4 (Figure 2). The individual services' views are supported by a wide range of models and proprietary indicators, but we have also developed custom analytics, discussed in detail in the following sections, to augment the database. Figure 2Mapping U.S. Fixed Income Views To ETFs Introducing Global ETF Strategy: Connecting The Dots From BCA To XLK Introducing Global ETF Strategy: Connecting The Dots From BCA To XLK Advanced Analytic #1: The BCA 200 There are currently more than 1,900 U.S.-listed ETFs and their number increases every few weeks. Most do not merit institutional investors' attention, however, because they trade too thinly, focus on too narrow a niche, rely on dubious strategies or cost too much for what they promise to deliver. The BCA 200 separates the wheat from the chaff, winnowing the ETF universe down to its core portfolio building blocks. It is meant to serve as a toolkit that opens the door to all asset classes and regions, and affords investors the ability to put a broad range of our house views into practice. We select the BCA 200 by applying a global liquidity filter to the ETF universe, cost filters at the group level and efficiency metrics at the individual fund level. Liquidity among ETFs is sharply skewed, with the most actively traded decile of funds accounting for more than 90% of aggregate daily turnover (Chart 6). Our liquidity filter screens out the very thinly traded majority of funds, though we reserve some space in the BCA 200 for less actively traded funds that provide access to important niches. Our cost filter compares fees among funds in the same group and favors those charging lower fees to deliver a given exposure. Chart 6The 94/10 Rule Introducing Global ETF Strategy: Connecting The Dots From BCA To XLK Introducing Global ETF Strategy: Connecting The Dots From BCA To XLK Our efficiency metric is two-pronged, assessing how well a fund tracks its benchmark and how well its benchmark proxies the exposure the fund should provide. Competition to license benchmark indexes can be fierce, leaving some funds to try to get by with lesser indexes or alternative ones of their own creation. An unwitting investor may wind up with a portfolio component bearing exposures that diverge sharply from expectations (Box 2, above). Investors often need to drill all the way down to the individual constituent level to identify the optimal ETF for expressing a given view (Box 3). BOX 3 Our Experts Like The E&P Space. Now What? According to our U.S. Equity Strategy and Energy Sector Strategy services, it is a better time to be getting crude oil and natural gas out of the ground than turning it into gasoline and other refined products. They recommend that investors overweight the S&P 500 Oil & Gas Exploration and Production ("E&P") sub-industry and underweight the refiners. The broad sector ETF (XLE) is an inefficient vehicle for gaining E&P exposure, given the split view and the E&P group's mere 30% share of S&P 500 Energy market cap. Investors wanting to act upon our bullish E&P view should instead choose from one of the several dedicated E&P ETFs (Table 2). Table 2Which E&P ETF? Introducing Global ETF Strategy: Connecting The Dots From BCA To XLK Introducing Global ETF Strategy: Connecting The Dots From BCA To XLK While a simple comparison of cost, yield5 and liquidity makes XOP look like the best option, an examination of constituent weightings shows it to be an also-ran, hobbled by an all-cap benchmark index that waters down its large-cap E&P exposure. FCG and PXE devote just one-half and one-third of their allocations, respectively, to the sub-industry index and exclude wide swaths of its constituents. IEO, which is two-thirds composed of S&P 500 E&P stocks, and holds all of them in line with their representation in the index, is the best vehicle for expressing our in-house strategists' view.6 Advanced Analytic #2: Proprietary Risk Scores Our proprietary Risk Scores are meant to help investors weigh potential portfolio components' risk. They are subject to a five-point scale with 1 representing the least risky funds and 5 the most risky. The same scale is applied to every ETF, regardless of asset class, and funds are assessed relative to the overall universe, not just their peer funds. The consistent holistic application will facilitate tailoring portfolios based on risk tolerance. Our Risk Scores evaluate ETF risk on five dimensions. The first, and most heavily weighted, is historical intra-day volatility. The outsize weighting reflects the fact that "risk," a term applied in multiple contexts, is most commonly viewed as the potential for loss of capital. Observed price volatility throughout the trading day is among the best metrics for assessing potential drawdowns and it forms the foundation of our ratings. Fund beta, which tracks the co-movement of the fund with the market benchmark, also informs the potential for future drawdowns. We assign a greater weight to fund standard deviation than fund beta because we are more concerned with absolute than relative moves, but investors must consider co-movement when constructing portfolios. We use a global balanced index as our market benchmark, weighted in line with our model portfolio benchmarks (60/37.5/2.5 for equities, fixed income and cash, respectively). The MSCI All-Country World Index (in USD terms) is our equity market proxy and the Barclays Global Aggregate and Global High Yield Total Return Indexes (in 95/5 proportions) are our fixed income proxies. Fund liquidity is our third risk factor. The less a fund trades, the wider its bid-ask spreads and the greater the potential for sudden drawdowns. To place funds on an apples-to-apples basis, we assess every fund's 30-day moving average of daily turnover (volume expressed in dollar terms). Lesser turnover is associated with higher liquidity risk and vice versa. We buttress the quantitative measures with two qualitative assessments. The first considers a fund's structural risks and bumps up its raw score to reflect them. Inverse and leveraged funds are subject to the highest upward adjustments. We also adjust scores higher, though by a lesser degree, to reflect ETNs' credit risk,7 and active funds' heightened potential for style drift. Our final input incorporates BCA views as they relate to asset classes, countries, sectors, sub-industries or any other germane groupings. ETFs with significant exposure to spaces that are viewed negatively by our chief strategists have their raw scores boosted. Since we prefer to err on the side of caution when making risk assessments, we do not lower raw scores for spaces that BCA strategists view favorably. The size of the raw score add-ons increases with the conviction of the negative calls. We standardize the raw scores before converting them to scaled scores. To make the risk ratings at the tails rarer and thus more meaningful, we assign the scaled scores to approximate a normal distribution instead of breaking them out ratably by quintile. If the population is approximately normally distributed, about 9% of funds will be in each of the 1 and 5 buckets, 25% in each of the 2 and 4 buckets and 32% in the 3 bucket. We are currently finalizing the variables' weights in conjunction with back-testing the various iterations of our algorithm. Advanced Analytic #3: Proprietary BCA Scores Our proprietary BCA Scores assess relative future return prospects for every ETF composed entirely of U.S. equities. They are derived from our Equity Trading Strategy's (ETS) 34-factor model that seeks to exploit persistent stock-level market anomalies.8 The model examines 32 individual company metrics before applying discretionary sector and style overlays based on BCA's macro views to rank every U.S. stock. It has been back-tested to 1995 and has produced consistently stellar results over the entire 21-year period (Box 4). BOX 4 The ETS Model The ETS model is the brainchild of Global Investment Strategy chief strategist Peter Berezin. The culmination of a decade-and-a-half labor of love, it distills the academic literature examining stock market anomalies into a system for ranking U.S. equities9 on a daily basis. It is primarily driven by individual company metrics, though it includes a macro overlay reflecting BCA's sector and style views. The overlay operates like the strategist-view input to our risk-score model, except that it incorporates positive as well as negative views. The model's 32 individual factors cover six broad categories: Value, Quality, Technicals, Safety, Payout and Sentiment. The value factors run the gamut, considering P/E, forward P/E, price-to-tangible-book, price-to-sales and price-to-cash flow on both an absolute and relative (to sector peers) level. Quality factors dig into earnings quality, including an examination of balance sheet accruals, and the technical measures follow Richard Thaler's pioneering work on market overreaction and the persistence of momentum. Safety assesses bankruptcy risk as well as volatility measures, payout considers return of capital and secondary equity issuance in addition to dividends, and sentiment looks at insider actions along with analyst estimates and institutional investor positioning. We are delighted to be able to apply the model's insights to ETF selection, although it cannot be expected to deliver the same outperformance that it has with individual stocks. Any model geared to identifying individual differences will necessarily lose some acuity when applied to bundles of stocks. "Safety in numbers" means that there will be far fewer ETFs with 10- or 20-handle ratings (and 80 or 90 handles) than individual stocks. The dampening of individual differences narrows the gap between top and bottom ETF decile performance relative to the model's astonishing single-stock performance (Chart 7), but it still provides an edge in ETF selection. Chart 7Shooting The Lights Out Introducing Global ETF Strategy: Connecting The Dots From BCA To XLK Introducing Global ETF Strategy: Connecting The Dots From BCA To XLK We use the model's output to calculate daily weighted-average BCA Scores for every U.S. equity ETF. If constituents accounting for at least 90% of the ETF's market cap can be rated by the model, we publish the BCA Score on the Global ETF Strategy website. Preliminary analysis of the application to the ETF universe over the past year is encouraging. Additional back-testing of the model's ETF performance is proceeding in tandem with the buildout of our historical archive of ETF constituents. Model Portfolios: Global ETF Strategy As Last-Mile Partner Our model portfolios are the second pillar of the Global ETF Strategy service. They close the loop in a way that most macro research does not. Taken together with the rest of the service, they complete a soup-to-nuts spread illustrating an independent research house's approach to the entire process, from assessing economic and market conditions, to generating investment ideas, sourcing instruments to execute those ideas and assembling the optimal portfolio mix. The portfolios connect the dots from BCA themes to individual ticker symbols with real-time market expressions of our views. The model portfolios are balanced portfolios constructed entirely of U.S.-listed ETFs and we will maintain four of them: U.S. Long-Only and U.S. Long/Short, and Global Long-Only and Global Long/Short. There is no such thing as an ideal model portfolio any more than there is a one-size-fits-all investment. We nonetheless hope to touch on a broad range of investment objectives with our aggregate offerings. To ensure that our portfolio recommendations remain actionable for the greatest possible number of clients, we observe the following general guidelines: Our portfolios are balanced, blending equity, fixed income and alternative exposures as appropriate. Our benchmark weightings are 60% Equities, 37.5% Fixed Income and 2.5% Cash. Our asset class ranges are 45-75% Equities, 20-55% Fixed Income and 0-10% Cash. Our U.S. equity benchmark is the S&P 500 and our U.S. fixed income benchmarks are the Barclays U.S. Aggregate (95%) and High Yield (5%) Indexes. Our global equity benchmark is the MSCI All-Country World ("ACW") Index, in U.S. dollar terms, and our global fixed income benchmarks are the Barclays Global Aggregate (95%) and High Yield (5%) Indexes. We limit tilts from the benchmark to levels that moderate-risk investors can plausibly follow. Small benchmark components will generally be no more than double-weighted. The largest portfolio components, like U.S. equities within the MSCI ACW, will be limited to ten-percentage-point over and underweights. We seek liquid portfolio components. Our rule of thumb for constituent positions is sufficient turnover to allow the manager of a $500 million portfolio to enter/exit a 1% position in a day without exceeding a third of the volume.10 We are not traders. Limited portfolio turnover is preferred, except at perceived economic and/or market inflection points. We do not communicate with our clients on a daily basis. Leveraged or inverse funds meant to provide some multiple of daily exposure to an underlying index are ineligible. We recognize that borrowing securities is not costless, and the cost to borrow ETFs can be higher than the cost to borrow plain-vanilla equities. Even so, the long/short versions of our U.S. and Global portfolios allow us to provide a complete market picture. We believe that our high-conviction negative views merit the same attention as our positive views, even when they come with non-negligible transaction costs. We will roll out our model portfolios in two weeks in a stand-alone Special Report fully explaining their composition. Original Research: Global ETF Strategy As A Trailblazer Research is the third pillar of the Global ETF Strategy service. Our ongoing research analyzing the major economies and financial markets will be familiar to all BCA clients, but it will be presented from an ETF perspective. Research into the major economies and markets will be supplemented by Special Reports conducting deep dives into specific ETF topics. Global ETF Strategy will be published bi-weekly and will include at least eight Special Reports each year. Special Report topics currently under consideration include: Constructing Our Model Portfolios; A Primer on ETF Mechanics; Assessing The Factor ETFs: Dividends; Assessing The Factor ETFs: Low-Beta, Low-Vol and Downside-Hedged; Assessing The Multi-Factor ETFs; and Income Options In A Low-Yield World. The common theme linking the first wave of Special Reports is ETF selection. We want to help investors distinguish between similarly themed ETFs and the red-hot factor/smart-beta subset offers a rich vein for study. We also want to de-mystify the mechanics of ETFs to help investors reach an informed conclusion about their safety, stability and appropriate use. At Your Service: Global ETF Strategy As An Outsourced CIO BCA clients run the gamut of institutional investors, financial advisors, business owners and high-net-worth individuals. Their needs are no more the same than those of advisory clients or separately managed accounts. We therefore seek to offer our clients the same tailored services they offer theirs. Global ETF Strategy has been designed to allow investors to access it on a continuum from complete self-direction to frequent consultation with our team. We're here if you need us once in a while, once in a quarter or once a month, and we're happy to serve as anything from a silent check on your thinking to an outsourced CIO. A Final Note On Process The construction of our model portfolios provides an apt illustration of how the Global ETF Strategy service is meant to function. Global ETF Strategy sits in the middle of BCA, and is ideally positioned to filter our various services' views and ideas (Figure 3). Because ETFs are not an asset class in themselves - they simply bundle together securities from existing asset classes - and because our teams' recommendations are backed by the extensive archive of time-tested indicators and proprietary models built up over BCA's 67-year history, there is no need to reinvent the wheel with another layer of models before making our portfolio selections. Our work in funneling the other research teams' calls into the final portfolios is a matter of judgment, focused on assessing their timeliness, conviction, co-movement and relevance for the broad majority of investors. Figure 3At The Center Of It All Introducing Global ETF Strategy: Connecting The Dots From BCA To XLK Introducing Global ETF Strategy: Connecting The Dots From BCA To XLK Even the soundest quantitative processes do not ensure success. No model has yet been developed that can fully capture the dynamism of markets, or perfectly anticipate their continuous real-time adjustments. The relationships between variables evolve; correlations weaken; pricing discontinuities explode the normal distribution; models break. Investment history is replete with failed geniuses and their ruined machines. But investors can't successfully steer by pure intuition, either. It would be malpractice for a manager not to avail him/herself of the insights and simple evaluation techniques facilitated by the ready availability of inexpensive data. Intuitive investing also confounds repeatability and negates track records. No manager could raise assets without convincing investors that s/he has a fixed decision-making process in place. Global ETF Strategy, like BCA as a whole, squares the circle by overlaying judgment on top of a rigorous quantitative process. As our Global Asset Allocation service has written, we use science as a check on art and art as a check on science. Just as diversity in a portfolio can boost expected returns while reining in expected risk, some diversity of approach can improve the service we provide to our clients. We intend to apply the lessons of careers devoted to investing and research to optimize the signals issued by our trove of analytic measures. Doug Peta, Managing Editor dougp@bcaresearch.com 1 Institutional Investment in ETFs: Versatility Fuels Growth, Greenwich Associates, LLC, April 2016. Study sponsored by BlackRock, distributor of iShares Funds, and accessed on August 26th from the iShares website at https://www.ishares.com/us/literature/brochure/2015-greenwich-associates.pdf. 2 XLK is the ticker symbol for the Technology Select Sector SPDR Fund. 3 ITB's annualized mean error and standard deviation are -0.13% and 6.41%, respectively, and XHB's are -0.45% and 13.47%. Each series contains 290 weekly observations. 4 The existing stock of ETFs does not offer the means to express every view at BCA, but multiple ETFs are available to express views involving mainstream assets like large-cap U.S. equities. 5 Assuming PXE's outsize trailing yield will not be repeated over the next twelve months 6 IEO offers the purest S&P 500 E&P exposure, but it also is 21% composed of refiners. (XOP is 18% refiners and PXE is 38%, or more of a refining than an E&P play.) Long/short investors may want to pair IEO with a short refining position. 7 Shares in an ETF, like shares in a mutual fund, represent a pro rata share in the underlying pool of assets held by the fund. An ETN is an unsecured claim, typically on a global investment bank, with interest and principal payments tied to the performance of an underlying reference index. ETNs thereby overlay credit risk onto the base exchange-traded product structure. 8 Please see the Equity Trading Strategy Special Report, "Introducing ETS: A Top-Down Approach To Bottom-Up Stock Picking," published October 14, 2015, available at ets.bcaresearch.com. 9 An expansion of the ETS model to European and Canadian stocks is currently under development. 10 A careful trader can account for a third of daily volume without affecting an issue's price. A $500 million fund with a 1% position would then be able to get in and out of it with $15 million of turnover. ($500 million x .01) ÷ 1/3 = $15 million. This is only a general guide, however, and the model portfolios are not restricted to ETFs with at least $15 million of average daily turnover.

This week, we are introducing a new investment benchmark index that includes all the countries and sectors that we regularly cover in our research, and a detailed recommended portfolio that fully reflects our market views.

EM corporate credit spreads are too tight according to our fair value model. Such expensive valuations in conjunction with a strong sell signal from our Corporate Financial Health (CFH) Monitor signify that the EM corporate credit market is very vulnerable. The CFH Monitor currently heralds a major relapse in EM risk assets. A new relative value recommendation: long Russian and Chilean / short off-shore China corporate credit.

The DM Country Model favored Italy again at the expense of Spain mostly on liquidity change. Japan and the U.K. remain the largest two underweights.

We reveal what our most-trusted leading indicators are predicting about the major economies, and end with a provocative conclusion.

In August, the model outperformed the S&P 500 and global equities in both USD and local-currency terms. For September, the model increased its allocation to cash and trimmed its exposure to equities.

Investors are being forced into riskier asset classes by the TINA effect, but the gaping macro disequilibria makes it difficult for investors to see how we move back to equilibrium in a benign way. Monetary policy on its own is limited in its ability to soften the adjustment, but the good news is that the political pendulum is swinging toward fiscal stimulus.

The lack of inflation makes a Fed rate hike before December unlikely. In the interim, the continued flow of liquidity could sustain the high-risk rally.