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ETF Consumer Cyclicals

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Presentation on theme: "ETF Consumer Cyclicals"— Presentation transcript:

1 ETF Consumer Cyclicals
CHUA GUI FENG THUN JIE REN JAREN WONG JIN QIAN DARYL XI ZICHAO YOU ZHIRUN

2 Consumer Cyclicals A category of stocks that rely heavily on the business cycle and economic conditions Include many industries, such as retail, auto, construction, restaurants and entertainment. Comprised of companies that produce goods and services that people want to buy but are not essential. This sector tends to underperform most other sectors when the economy is weak, and vice versa. Top holdings in consumer cyclical ETFs include Targetm Home Depot, Amazon and Walt Disney. trend market share to economics fluctuations

3 Consumer Cyclicals vs. Non-cyclicals
Blue line: Ford Motor co (cyclical) Red line: Florida Public Utilities co (non-cyc) Demostrates how each share price reacts to down turns the economy ( )

4 Brief Descriptions of 7 ETFS
TICKER Assets AD$V Average Spread Expense Ratio FDIS 259.93M 2.65M 0.12% 0.08% IYC 791.43M 6.33M 0.04% 0.44% JHMC 28.45M 49.26K 0.01% 0.50% FXD 433.19M 5.31M 0.61% RCD 81.77M 726.94K 0.27% 0.4% VCR 2.13b 11.83M 0.1% XLY 12.09B 350.19M 0.05% 0.14% ADTV = average daily trading volume

5 RECENT TRENDS On March 11th, PGA Group, the French carmaker was buying Opel, the European operation of America’s General Motors (GM). The White House is expected to announce plans to scrap an agreement with the auto industry that sets fuel-economy standards for the nation’s cars and trucks.

6 Method of Ranking Weighted average system based on: 1) Sharpe Ratio 2) Information Ratio 3) Variance Ratio 4) Fama-French Coefficient

7 Sharpe Ratio Sharpe ratio is a measure for calculating risk-adjusted return. Sharpe Ratio Rank FDIS-US 0.9608 5 FXD-US 0.6902 1 IYC-US 0.9728 7 JHMC-US 0.7699 3 RCD-US 0.7075 2 VCR-US 0.9645 6 XLY-US 0.8482 4

8 Information Ratio Info Ratio Rank 0.4870 7 -0.02118 5 -0.5115 1
FDIS-US 0.4870 7 FXD-US 5 IYC-US 1 JHMC-US 6 RCD-US 4 VCR-US 2 XLY-US 3 ·The information ratio is a ratio of portfolio returns above the returns of a benchmark to the volatility of these returns. ·The IR measures a portfolio manager's ability to generate excess returns relative to a benchmark but also attempts to identify the consistency of the investor. The higher the IR, the more consistent a manager, with consistency being an ideal trait. Conversely, the lower the IR, the less consistency.

9 Reasons for low Info Ratio
Tracking Error caused by: Market capitalization weight adjustments. Imperfect timing to adjust stocks in the ETF Transaction costs

10 Sharpe vs Info

11 Fama-French model fit Fama-French model not a good fit in general
Adjusted R-squared FDIS-US 0.3402 FXD-US 0.1620 IYC-US 0.3711 JHMC-US 0.3132 RCD-US 0.1992 VCR-US 0.3419 XLY-US 0.3443 Fama-French model not a good fit in general Important to look at the significance of individual factors

12 Fama-French coefficients
Mkt-rf t-stat SMB HML intercept FDIS-US 1.6326 2.8279 0.5521 0.8335 0.0019 0.4229 FXD-US 1.4872 1.9668 0.6529 0.7525 0.0011 0.1826 IYC-US 1.6070 3.0561 0.4920 0.8154 0.0018 0.4404 JHMC-US 1.4270 2.5670 0.8207 1.2868 0.0002 0.0542 RCD-US 1.4876 2.0104 0.6989 0.8232 0.0010 0.1790 VCR-US 1.6282 2.8578 0.5336 0.8163 0.4322 XLY-US 1.6164 2.7778 0.4531 0.6787 0.0016 0.3618 Portfolio is predominantly/has correlation with small-cap stocks and growth stocks SMB and HML betas are not statistically significant

13 Fama-French beta ranking
Mkt-rf Rank FDIS-US 1.6326 7 FXD-US 1.4872 2 IYC-US 1.6070 4 JHMC-US 1.4270 1 RCD-US 1.4876 3 VCR-US 1.6282 6 XLY-US 1.6164 5 High beta stocks provides potentially higher returns due to greater volatility relative to the market We will favour those with high beta during a bull market Consumer cyclicals is a category of stocks that rely heavily on the business cycle and economic conditions.

14 Variance Ratio Random Walk Rejection Times Ranking FXD-US 1 JHMC-US
1 JHMC-US VCR-US 3 4 IYC-US 7 FDIS-US 2 XLY-US RCD-US Variance ratio (q from 2 to 10) is used to test random walk and martingale hypothesis. The VR test statistics are based on a ratio of variance estimates of simple returns and period q return horizons. Overlapping horizons increase the efficiency of the estimator and add power to the test. The variance of the ratio depends on the degree of heteroscedasticity. If the Variance Ratio is 1, the price series is a pure random walk. No predictions are possible and hence any trial to craete a profitable trading system on such a price series will fail. If the Variance Ratio is larger than 1, the price series shows a tendency to form trends, i.e. changes in one direction are more often followed by changes in the same direction. If the Variance Ratio is below 1, the price series shows some degree of mean reversion. Changes in one direction are more often followed by changes in the opposite direction.

15 OVERALL RANK TICKER Random Walk Test Sharpe Ratio
Intercept of Fama-French Beta (Mkt-Rf) Average FXD-US 1 3 2 1.75 JHMC-US 1.5 VCR-US 4 6 7 5.75 XLY-US 5 FDIS-US 5.5 IYC-US RCD-US 3.5

16 Our L/s strategy TICKER Beta (Mkt-Rf) Average L/S Strategy
Capital Allocation FXD-US 2 1.75 Short 1.5M JHMC-US 1 1.5 VCR-US 6 5.75 Long 1M XLY-US 5 FDIS-US 7 5.5 IYC-US 4 RCD-US 3 3.5

17 Performance evaluation
TICKER L/S Strategy Capital Allocation (M) Price (15 Mar) Price (28 Mar) P&L (M) FXD-US Short 1.5 36.90 36.48 +0.63 JHMC-US 27.35 27.38 -0.045 VCR-US Long 1 137.66 137.72 +0.06 XLY-US 87.52 87.19 -0.33 FDIS-US 34.45 34.38 -0.07 IYC-US 159.76 159.42 -0.34 RCD-US 92.50 92.23 +0.27 Total P&L: +0.175M

18 Thank you!


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