CWS Market Review – September 12, 2023

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My Appearance on Bloomberg ETF IQ

Yesterday, I was invited on Bloomberg’s ETF show, ETF IQ, to discuss our ETF, the AdvisorShares Focused Equity ETF (CWS). I want to thank Eric Balchunas and the team at Bloomberg for having me on. It was a lot of fun.

Here’s the video. My segment starts at 15 minutes in:

Here’s the transcript:

Sonali Basak: We’re going to drill down into the equities market with Edward Elfenbein of AdvisorShares, up next. This is ETF IQ on Bloomberg.

Matt Miller: This is Bloomberg ETF IQ. I’m Matt Miller alongside Sonali Basak today.

Sonali Basak: And with us is Eric Balchunas from Bloomberg Intelligence. He’s back with today’s Drill Down where we focus on just one ETF. Eric?

Eric Balchunas: Sonali, today we look at CWS. It stands for Crossing Wall Street, which is a stock-picking blog that was converted. It still exists but now there’s an ETF based on it. As you can see, it’s actively managed. It’s a very concentrated portfolio of 25 stocks which tends to look at quality and value. It uses fundamentals so it tilts a little more toward mid-cap or smaller large-caps. It has $73 million in assets which is pretty good for an active fund. It has an expense ratio of 0.75%, but that’s a fulcrum fee. If they outperform, they take a little bonus. If they underperform, you get a little bit less of a fee.

Let’s look at the holdings here. You can see that this isn’t your typical active fund that’s loaded with Amazon and Apple. You can see just by looking at these stocks that you’re going to know some of these names, but as you can see, these are going to be a little less.

So, this has an average market cap that’s much less than the S&P and a slightly lower price/earnings ratio. Let’s look at the performance of this versus the S&P which is the benchmark. I threw in mid-caps because, again, this thing does tilt down a little bit.

You can see that it’s up 123% since its inception. It’s slightly underperforming the S&P but it’s blowing away mid-caps. It’s going to outperform when the Super Seven or these mega-caps take a break.

So, if you see that coming, this ETF is probably is in a good position to have some outperformance which, again, should draw more looks.

Sonali Basak: Thank you, Eric. And joining us to talk about this ETF is Edward Elfenbein. He’s the portfolio manager at AdvisorShares Investments. What are you looking at when you’re thinking about the direction of this market and what can outperform in the world that you’re in?

Edward Elfenbein: Right now, it looks like the Fed is going to pause next week. Maybe – it’s about 50/50 – we’ll get a rate hike coming in November. But I think right now, there’s been a concern that if we’re going to cut rates right now, the Federal Reserve is going to bring us right back to the playbook of 2020/2021.

Back then we saw Zoom and Moderna. Now that’s being replaced by the Super Seven and the Artificial Intelligence-kind of stocks. That’s just going to replace that. We’re going right back to that. I think the market is assuming too much. I’m looking at a lot of these high-quality, low-beta names that I think look very good right now.

Matt Miller: So, I guess I could say that Trex Co. is your favorite, but what do I take as your favorite considering all the names that we just saw there?

Edward Elfenbein: I’ll tell you one that you might like, and that’s Miller Industries. This is a wonderful company, and it’s not followed by a single Wall Street analyst. I love this – it’s a tow truck company based in Chattanooga, Tennessee.

Matt Miller: Nice!

Edward Elfenbein: It’s a wonderful little company and they just had a blowout earnings report. I can’t say if it beat expectations or not because no one follows it.

Matt Miller: So, there were no expectations?

Edward Elfenbein: There were no expectations.

Matt Miller: That we know of…

Eric Balchunas: I was looking through your holdings historically just to see what you’re buying and selling, and I did see the move to Industrials. One stock you sold out of – I mean this is like a perfect trade – you had Disney for many years. You crushed it. You sold it exactly two years ago. Since then, it’s down 56%. What alarmed you? What got you to get out of that company at that time?

Edward Elfenbein: I’ve got to tell you – that was a really difficult one because it was a company that I had a strong conviction in. But I really didn’t like the culture that I saw forming at Disney. I don’t like when companies treat their customers, particularly their core customers, like an ATM. And I got that feeling that this is how Disney was behaving with very high prices across the board. Of course, there was a leadership change, so that made me make the decision to pull the plug on Disney.

Matt Miller: That’s the furthest thing from an orphan stock that there is.

Edward Elfenbein: That is true.

Matt Miller: Miller Industries and Disney are like two ends of the spectrum. Everybody on the Street follows Disney and no one follows Miller. Does that matter to you?

Edward Elfenbein: Not at all. I go wherever there is a bargain.

Sonali Basak: Now, if you’re taking a look and you think that there’s either a soft landing or a harder recession, what would you trade out of today that you’re still in if you think that things are going to get worse than the market currently thinks they are?

Edward Elfenbein: The obvious choice is a lot of these Super Seven stocks. They really have run so far. Even if you don’t have to exit your position, it’s a good time to take profits on those. That’s the number one concern I would have.

Eric Balchunas: Just a little bit about positioning this fund in a portfolio, we do a lot of work on how actives should move forward. You’re concentrated, which I think is a viable lane because you can complement cheap beta rather than competing with it.

How do you position this to advisors? Are they looking for performance, mainly, or does that active share – which is 96% in your case – does that matter to them because it can be used as a satellite position?

Edward Elfenbein: I think they really do like the concept of it, the idea that we don’t do any trading. No trades are made during the entire year. We focus on just the high-quality names and we stick with them. We have a 20% turnover each year. Five new ones of the 25 stocks come in, and five go out.

Matt Miller: You have this fulcrum fee that Eric was talking about. I’d never heard of it before now, and I don’t think it’s widely used in the industry. How has that worked out for you and for your investors?

Edward Elfenbein: I think it’s been great, personally, because I’ve been getting a nice bonus. So that’s good. We believe we were the first ones in the ETF space to use that. It does exist in the open-end community. I don’t know of any others that have used it, but I think it’s a great way to say to investors, “we are aligning with your interests; we have skin in the game.” I think it’s a way that Wall Street will be moving toward those sorts of qualities.

Sonali Basak: Double down on that, because on one hand, the ETFs have brought down the fee structure for the investing universe to begin with, but with all of these new actively-managed ETFs, that is getting a little more expensive. Do you think that this fulcrum idea might take more steam with those higher fees that we are starting to see?

Edward Elfenbein: I certainly hope so, because one of the problems is that a lot of these smaller ETF shops, I’m afraid, are getting pushed out. We turn seven years old next week. I don’t know if our kind of fund could launch in this type of atmosphere. Maybe we got in at the right time. But I think that things like the fulcrum fee and the tax-efficiency are going to gain steam and become larger as the years go on.

Matt Miller: All right. Fascinating story. Really glad to get you in here. Eddy, thanks so much for joining us. Eddy Elfenbein of AdvisorShares – his ETF turns seven.

That’s CWS, as he said. If you just can’t get enough of ETFs, a reminder that you can listen to Eric with Joel Webber, our editor of BusinessWeek, on Trillions. That’s their bi-weekly podcast that covers the industry and fascinating stories like CWS and Eddy as well.

Also, I recommend following Eddy on Twitter because he says some stuff that just sticks with you for a while. I think about you in bed a lot because you once tweeted that it’s too hot when both legs are under the covers and it’s too cold when both legs are out of the covers and that you need one under and one over in order to be ok. To me, that makes a lot of sense.

Eric Balchunas: That’s insightful!

Matt Miller: That does it for Bloomberg ETF IQ. I’m Matt Miller along with Eric Balchunas and Sonali Basak. This is Bloomberg.

The Golden Rule of Financial Markets

Also this week, I wanted to discuss the Golden Rule of Financial Markets which states that as interest rates go up, investors become more conservative. The corollary to the Golden Rule is that as interest rates fall, investors become open to shouldering more risk.

The Golden Rule makes perfect sense. When interest rates are at 0%, who cares what a P/E Ratio is? That certainly didn’t matter three years ago when the Fed snapped into action to fight the economic effects of the Covid lockdowns. But as interest rates creep higher, suddenly valuations are important.

We saw the Golden Rule in effect in 2021 and 2022 as the Fed started hiking and the market reversed course from the risk-happy Covid rally.

During the Covid rally, it seems that everyone just bought stocks and they didn’t care much what ones they were. I recall shares of ZOOM doing well even though that wasn’t the ticker of the video call service which is ZM.

Lately, however, investors have shied away from conservative stocks, and I think that’s a big mistake. My hunch is that investors think that if the economy hits a rough spot, the Federal Reserve will jump in, quickly lower rates to the floor and we’ll go back to the 2020 playbook. Traders currently think the Fed will start cutting rates by June of next year. Hmmm…I’m not too sure about that.

To gauge the market’s sentiment for risk, I like to track how Low Volatility stocks (meaning the conservative stocks) perform relative to High Beta stocks (riskier stocks). This is a simple, quick way of telling you the market’s mood. Since the start of this year, High Beta (black) has performed considerably better than Low Vol (blue).

If someone told me to guess the market return for a stock like Hershey (HSY), a perfect example of a defensive conservative stock, when the S&P 500 is up in the low teens and the Fed has been hiking rates, I would probably guess HSY would be something like to 10% to 15%. Instead, Hershey is down 10% this year.

No one wants steady and conservative. Instead, the market appears to be obsessed with the Super Seven stocks: Apple, Amazon, Alphabet, Meta, Tesla, Microsoft and Nvidia. What Zoom and Moderna were three years ago, artificial intelligence is today.

Tomorrow’s CPI Report Could Tip the Balance

Tomorrow we’re going to get the inflation report for August. Wall Street expects headline inflation of 0.6% and core inflation of 0.2%. If that’s right, it will bring the 12-month headline rate to 3.6% and the 12-month core rate to 4.3%.

The reason why there’s a big gap between the headline rate and the core rate is due to gasoline prices. Last month, gasoline prices probably rose by 6% to 8%.

Even though gasoline gets a lot of attention, the major focus at the Fed is on core services inflation. In fact, this is what the Fed has said is most important. We’re also running into simple base effects. That simply means that the 12-month may appear high because inflation was cooling off one year ago.

The Fed prefers to look at personal consumption expenditure prices (or PCE). The one advantage of the CPI report is that it’s earlier and tomorrow’s report will be ahead of next week’s Fed meeting.

It’s widely expected that the Fed will pause on any rate hikes next week, but the outlook for the November meeting is still up in the air. If tomorrow’s inflation report comes in high, that could tip the balance to a November hike. I don’t think the market will like that.

At next week’s meeting, the Fed will update its (usually very wrong) economic forecasts. Most Fed members still see another rate hike this year. I suspect that one more hike will still be predicted.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

P.S. If you want more info on our ETF, you can check out the ETF’s website.

Posted by on September 12th, 2023 at 8:52 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.