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Takeaway: In today's Macro Playbook, we show how central bank-induced asset price inflation is a MAJOR headwind to the active management industry.


Long Ideas/Overweight Recommendations

  1. iShares National AMT-Free Muni Bond ETF (MUB)
  2. iShares 20+ Year Treasury Bond ETF (TLT)
  3. Vanguard Extended Duration Treasury ETF (EDV)
  4. Health Care Select Sector SPDR Fund (XLV)
  5. Consumer Staples Select Sector SPDR Fund (XLP)

Short Ideas/Underweight Recommendations

  1. iShares Russell 2000 ETF (IWM)
  2. iShares MSCI European Monetary Union ETF (EZU)
  3. iShares MSCI France ETF (EWQ)
  4. SPDR S&P Regional Banking ETF (KRE)
  5. SPDR S&P Oil & Gas Exploration & Production ETF (XOP)


So Easy An ETF Can Do It: Since the end of October, one of the topics we’ve been hitting on fairly consistently is the slow-but-steady share shift away from active management in favor of passive management. From our perspective, this trend is primarily a function of incessant central bank intervention in markets, which tends to depress both the variance and volatility needed for active managers to outperform their benchmarks and justify their fees (click HERE and HERE for more details). Well, unfortunately for everyone involved (including us), recent data is supportive of this trend.


Per Jonathan Casteleyn of our financials team this AM: “In the most recent 5 day period, mutual fund activity was subdued with investors continuing to prefer exchange traded funds. All ETFs took in over +$12.7 billion (both fixed income and equity) versus the total take for all mutual fund products at  just +$1.5 billion. Year-to-date, running aggregate money flow also reflects this preference for passive products with equity ETFs more than doubling the production of equity mutual funds (with $122 billion netted by equity ETFs versus just $47 billion inserted into equity mutual funds).” To the extent you’d like to review his weekly deep dives on fund flows and their associated investment implications, please reply to this email and we’ll get you squared away with that...


Moving along, recent performance data also supports a continuation of the aforementioned trend. On the equity mutual fund side, only 9.3% of active managers are beating their benchmarks per Wharton Research Data Services; the previous annual low was 12.9% in 1995. On the equity hedge fund side, the YTD performance of the HFRX Equity Hedge Index is a mere +197bps, which remains on pace for the third-worst annual return ever (2008 and 2011). Again, the value proposition for active managers is being dramatically reduced amid central bank-induced asset price inflation, calling into question the perverse nature of investors broadly cheering on #GrowthSlowing data.

THE HEDGEYE MACRO PLAYBOOK - HFRX Equity Hedge Fund Index Annual Return


***CLICK HERE to download the full TACRM presentation.***


#Quad4 (introduced 10/2/14): Our models are forecasting a continued slowing in the pace of domestic economic growth, as well as a further deceleration in inflation here in Q4. The confluence of these two events is likely to perpetuate a rise in volatility across asset classes as broad-based expectations for a robust economic recovery and tighter monetary policy are met with bearish data that is counter to the consensus narrative.

Early Look: Golden Headfakes (12/2)


#EuropeSlowing (introduced 10/2/14): Is ECB President Mario Draghi Europe's savior? Despite his ability to wield a QE fire hose, our view is that inflation via currency debasement does not produce sustainable economic growth. We believe select member states will struggle to implement appropriate structural reforms and fiscal management to induce real growth.

QE Conundrums – Draghi’s Misguided Intervention? (11/26)

#Bubbles (introduced 10/2/14): The current economic cycle is cresting and the confluence of policy-induced yield-chasing and late-cycle speculation is inflating spread risk across asset classes. The clock is ticking on the value proposition of the latest policy to inflate as the prices many investors are paying for financial assets is significantly higher than the value they are receiving in return.

#Bubbles: S&P500 Levels, Refreshed (11/18)

Best of luck out there,


Darius Dale

Associate: Macro Team

About the Hedgeye Macro Playbook

The Hedgeye Macro Playbook aspires to present investors with the robust quantitative signals, well-researched investment themes and actionable ETF recommendations required to dynamically allocate assets and front-run regime changes across global financial markets. The securities highlighted above represent our top ten investment recommendations based on our active macro themes, which themselves stem from our proprietary four-quadrant Growth/Inflation/Policy (GIP) framework. The securities are ranked according to our calculus of the immediate-term risk/reward of going long or short at the prior closing price, which itself is based on our proprietary analysis of price, volume and volatility trends. Effectively, it is a dynamic ranking of the order in which we’d buy or sell the securities today.