Stocks opened in positive terrain this morning, but sentiment turned early on and the Dow (INDEX: ^DJI) and the broader S&P 500 (INDEX: ^GSPC) finished the day with losses of 0.2% and 0.5%, respectively.
In this morning's column, I warned investors in the SPDR Barclays High Yield Bond ETF (NYSEMKT: JNK) or the iShares iBoxx Corporate Bond ETF (NYSEMKT: HYG) that future junk bond returns are highly unlikely to mirror the performance of the past few years. A few hours later, the Financial Times' respected Lex column published a piece highlighting another risk associated with these ETFs. As Lex points out: "ETFs can work in a big liquid market like equities, the naysayers say, but they risk distorting prices in the illiquid over-the-counter arena where junk bonds trade... Since ETFs were still nascent in 2008, they have yet to be tested in a bear market. That is when we will really know if this change is, indeed, a good one." Caveat emptor.
The macro view
On Tuesday, Joseph Mecane, the head of U.S. equities at exchange operator NYSE Euronext (NYSE: NYX) told a Congressional committee that the current structure of U.S. equity markets puts individual investors at a disadvantage to -- perhaps even at the mercy of -- professional traders, including high-frequency trading firms. That's not something you hear every day from an exchange official.
It should be clear that individuals who try to take on hedge funds and other sophisticated investors at their own game will only end up shortchanged. Instead, they'd be better off identifying their natural advantages (a longer time horizon, for example) and playing their own game, with a friendlier set of rules.
In this month's edition of the Central Banking Journal, Paul Woolley and Dimitri Vayanos from the London School of Economics provide 10 concrete recommendations for "owners of capital" to "tame the finance monster." While the paper is aimed at pension fund managers and sovereign wealth funds that delegate the execution of their investment mandates to external fund managers, several of the recommendations are absolutely applicable to individuals, whether they're picking stocks or mutual fund managers. For example:
(1) Adopt a long-term approach to investing based on long-term dividend flows rather than momentum-based strategies that rely on short-term price changes. Value strategies need not be buy-and-hold, but do call for patience; (2) Cap annual turnover of portfolios at 30% per annum. Nothing betrays a closet momentum investor more than high and costly turnover [...] and (6) Be wary of new investment products and 'alternative investing' [...]