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Thursday, September 30, 2010

The Vulcan Report 162 HAPPY BIRTHDAY TO ME JOIN ME LIVE TONIGHT ON WID...

9/30/2010 - InPlay (Happy Birthday to me) TODAY IS MY BIRTHDAY



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Risk Disclosure


General Advice Disclosure: Please note that the advice contained herein is general advice and is for the purposes of education only. The risk of loss in trading futures contracts, commodity options, stocks, stock options and forex currencies can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results. You are reminded that past performance is no guarantee or reliable indication of future results. It has not been prepared taking into account your particular investment objectives, financial situation and particular needs.You should therefore assess whether the advice is appropriate to your individual investment objectives, financial situation and particular needs. You should do this before making an investment decision based on this general advice. You can either make the assessment yourself or seek the help of a professional adviser. This commentary is not a recommendation to buy or sell, but rather a guideline to interpreting the specified indicators. This information should only be used by investors who are aware of the risk inherent in securities trading. The Vulcan Report accepts no liability whatsoever for any loss arising from any use of this expert or its contents.liability whatsoever for any loss arising from any use of this expert or its contents.


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Wednesday, September 29, 2010

The Vulcan Report 161 How to Use the Vulcan Report SpreadSheet to turn...

The Vulcan Report (160) - October 2010 FALSE FLAG FLASH CRASH 2.0 - How ...

9/29/2010 - Reasons USDA predicts food shortage; artificial scarcity to blame

artificial scarcity fruit stand empty

Food staples like rice nearly tripled in six months and at times increased 50% in just two weeks, primarily because of record oil prices and a weak dollar in 2008.

Presumably the rise in cost is due to the balance of supply and demand. Presumably too, the rise in production of biological fuels and other non-food uses of foodstuffs has been contributing to lack of supply, but the current biofuels craze alone does not account for all the rise in hunger. There’s also a rising population (70 million more mouths to feed annually); rate of increase of meat consumption rising faster than population growth; declining productivity of some highly productive farm lands; lack of new advances in agricultural science; due to all the easy advances having been already made; declines in production due to rising cost of fertilizers and fuels; declines in production due to increasing disruptions, notably warfare and climate change.
Ethanol production requires a relatively small part of our total production, perhaps 1- 5% in selected markets. What it has done is bring to light the growing pressure on food production. Those who have been involved in Agriculture for the past 20 years will tell you about the reports of demand out stripping supply, but until the food for energy debate no one in the mainstream noticed the fundamentals: land productivity and usage (which didn’t really matter until recently). Today, food prices are soaring not just because of corn going into ethanol but, because of drought, manipulation of energy supplies by OPEC (artificial scarcity), more protein-rich diets in developing countries, and a planet that’s adding more than 70 million people a year.
While we focus on the energy side of the supply constraint another what many consider to be the “right” thing gets ignored: organic farming. Organic farming is spreading fast, despite its lower crop yields. Among the 30 countries in the Organization for Economic Co-operation and Development, on average, organic farmland accounted for slightly less than 2% of the land under cultivation during the years 2002 to 2004. What others also manage to ignore is the fact that countries have subscribed to the Malthusian ideology of “artificial scarcity” of the food supply through the control of energy prices as set out by the Club of Rome.
According to Activist Post, several recent headlines indicate that food prices will continue their swift climb upward. These troubling new reports show that agriculture production and stored grains are critically low and experts are now predicting food shortages on a grand scale.
Look at a few mainstream headlines: Drought threatens global rice supply in the India Times; VA farmers say heat taking toll on crops, Associated Press; Severe food shortage follows lack of rainfall in Syria; and, finally, Corn prices bolt as USDA downsizes crop estimates, which states that, “Commodity professionals were caught off guard Wednesday by a U.S. Department of Agriculture report showing 1 million fewer acres of corn planted this year than earlier projected, and almost 300 million fewer bushels of corn in storage.” And these articles don’t begin to address crops being damaged by the toxic rain from the Gulf oil disaster.
food prices on rise usda
We are back to recession economics and rapidly heading toward a deeper, longer “Third Depression.” With all recent economic indicators setting new record lows and deficits at record highs, this ship is only going one way folks, down, down to Chinatown. This WTC-Building 7-style-controlled-demolition of the U.S. economy has long been engineered by the borderless banksters and has been set in the same way to collapse at a free-fall rate. With all of the manufactured confusion it may be difficult to know where best to invest your limited assets, but it seems to be clear that Food is on the march.

9/29/2010 - Living standards compared & IMF predicts ’social explosion’

Living standards compared & IMF predicts ’social explosion’


“In the 50’s and 60’s anybody could walk into a job; there weren’t the armies of unemployed men living in their parents basements; they could easily walk into any number of jobs .. Young people today have plenty of work ethic, they are just not valued at all, treated as disposable bits of garbage to be thrown out at the first possible moment.” — Paul, North America

When people analyze the economy they should analyze what the trend has been and ask: is it easier for common people to make a living nowadays and feel more secure with a brighter future looking into retirement than 10 years ago ? or 20 years ago ? are we as a community and individual people better off than before or the other way around ?
A frequent reader (Paul, from Canada) provides some insight as to what times were like just a few decades ago:
“In the 50’s and 60’s anybody could walk into a job; there werent the armies of unemployed men living in their parents basements; they could easily walk into any number of jobs.. I started working in 1978 which was the tail end of the golden age. We used to work 9-5 with an hour break, no overtime. By the time I was outsourced to Bangalore in January of this year I was gone 60 hours a week and on-call 24-7 and was supposed to be grateful to have any job at all.   People older than 65 have absolutely no concept of today’s work environment where you are shown the door 10 years before your retirement date, expected to work huge amounts of free overtime and basically treated as a commodity. My father raised 5 kids and had a stay at home wife; today it would take 3 full-time incomes to buy the same house and accomplish the same thing. He used to work 1 day of overtime a year doing inventory and complained endlessly about it. Of course he retired to a fully indexed pension something, that I will never see. Young people today have plenty of work ethic, they are just not valued at all, treated as disposable bits of garbage to be thrown out at the first possible moment.”
Times have change drastically – look at the trend:
  • In the 1960s and 1920s, 1 full-time job provided income that was good enough to raise a family.
  • During the 80’s the whole workforce picture started to change.  Indeed, by that time families needed 2 full time incomes and part-time incomes were starting to replace full-times ( wages , benefits and job security started to drop)
  • During the 1990’s manufacturing and productive jobs started to dissapear, replaced by service and non-productive jobs. Incomes were stagnant since the 80’s and purchasing power diluted. Consumerism started to be fed with a debt economy pushed by our monetary system ( Banks ) and Corporatism.
During the last decade of 2000 people have been enslaved with debt ( some or many by their own doing ) , poverty levels have increased in the US to 15% of the population and 11.8% in Canada , less full-times being replaced by part-times and contract based jobs, at any time companies “re-structure” and give workers a pink slip no matter how well the job has been done or no matter the years of ” loyalty” or no matter your age … no matter if there is no reason other than the Company wanting to increase its “profits “.
IMF fears ’social explosion’ from world jobs crisis by Ambrose Prichard
“The labour market is in dire straits. The Great Recession has left behind a waste land of unemployment,” said Dominique Strauss-Kahn, the IMF’s chief, at an Oslo jobs summit with the International Labour Federation (ILO).
He said a double-dip recession remains unlikely but stressed that the world has not yet escaped a deeper social crisis. He called it a grave error to think the West was safe again after teetering so close to the abyss last year. “We are not safe,” he said.
A joint IMF-ILO report said 30m jobs had been lost since the crisis, three quarters in richer economies. Global unemployment has reached 210m. “The Great Recession has left gaping wounds. High and long-lasting unemployment represents a risk to the stability of existing democracies,” it said.

The study cited evidence that victims of recession in their early twenties suffer lifetime damage and lose faith in public institutions. A new twist is an apparent decline in the “employment intensity of growth” as rebounding output requires fewer extra workers. As such, it may be hard to re-absorb those laid off even if recovery gathers pace. The world must create 45m jobs a year for the next decade just to tread water.




 






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9/29/2010 - InPlay



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Risk Disclosure


General Advice Disclosure: Please note that the advice contained herein is general advice and is for the purposes of education only. The risk of loss in trading futures contracts, commodity options, stocks, stock options and forex currencies can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results. You are reminded that past performance is no guarantee or reliable indication of future results. It has not been prepared taking into account your particular investment objectives, financial situation and particular needs.You should therefore assess whether the advice is appropriate to your individual investment objectives, financial situation and particular needs. You should do this before making an investment decision based on this general advice. You can either make the assessment yourself or seek the help of a professional adviser. This commentary is not a recommendation to buy or sell, but rather a guideline to interpreting the specified indicators. This information should only be used by investors who are aware of the risk inherent in securities trading. The Vulcan Report accepts no liability whatsoever for any loss arising from any use of this expert or its contents.liability whatsoever for any loss arising from any use of this expert or its contents.


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Tuesday, September 28, 2010

9/28/2010 - Scientists, Secrets and Wall Street's Lost $4 Trillion

Scientists, Secrets and Wall Street's Lost $4 Trillion
Published on 09-27-2010


By PAM MARTENS- Counter Punch

Thanks to an ever growing influx of Ph.D.s from the Ivies and an insatiable demand for an algorithmic trading edge by secretive hedge funds and proprietary trading desks at the largest firms, Wall Street has become part physics lab, part casino, part black hole.
What Wall Street bears no relationship to any longer is its primary mission in the U.S. economy: to be a fair and efficient allocator of capital to worthy businesses and innovators to propel job growth while also providing a medium for allowing investors to buy or sell stocks and bonds of those businesses at a fair price.
Stock brokers who previously scoured over annual reports and price to earnings multiples and bond prospectuses to build individualized portfolios for clients based on the client’s investment time horizon and comfort level with risk are so yesterday.  The big firms lean on their brokers to turn their clients’ money over to impersonal “money managers” who use incomprehensible computerized risk modeling to manage the life savings of people they’ve never met.  The business motivation for this was that the earnings of the big firms would not be dependent on the brokers’ inconsistent commission streams from trading by replacing them with a steady annual stream of money management fees.   These huge pools of consolidated money have now joined the huge pools of hedge fund and proprietary trading monies, leaving small investors at the mercy of giant “pools,” the exact same word that dominated investigations after the 1929 crash.   (Those intensive Senate investigations of the early 30s that turned up corruption at the highest echelons of Wall Street are also so yesterday.)
Taking the human relationship, and human brain, out of investing for others and turning it over to computer formulas has produced stark results: a lost decade of retirement savings for most Americans; a multi-trillion dollar collapse of the financial system; a taxpayer bailout of the most incompetent and negligent firms in finance; the greatest wealth transfer to the top 1 percent in the history of the country -- which has contributed to  43.6 million people in America, including one in every five children, living below the poverty level. 
And despite all this, Wall Street’s top cop, the Securities and Exchange Commission (SEC), continues to treat Wall Street as an overly rambunctious adolescent that needs merely a little slap on the wrist from time to time. 
Consider the recent example of how Citigroup was punished by the SEC for willfully “scripting” announcements to investors to hide $39 billion of its exposure to subprime debt.   According to the SEC’s order of July 29, 2010, only Gary Crittenden, CFO during the period of the order, and Arthur Tildesley, head of Investor Relations at the time, were singled out and given fines of $100,000 and $80,000 respectively.  They were not barred from Wall Street; their collaborators in the debt deception, who were known to the SEC via emails obtained from the firm, were not named in the SEC order or fined.  The following is from the SEC order:
In late September and early October 2007, Crittenden, the chief financial officer (“CFO”) of Citigroup Inc. (“Citigroup”) and Tildesley, the head of Citigroup’s Investor Relations (“IR”) department, both helped draft and then approved, and Crittenden subsequently made, misstatements about the exposure to sub-prime mortgages of Citigroup’s investment bank. Citigroup then included a transcript of the misstatements in a Form 8-K that it filed with the Commission on October 1, 2007. The misstatements were made at a time of heightened investor and analyst interest in public company exposure to sub-prime mortgages and related to disclosures that the Citigroup investment bank had reduced its sub-prime exposure from $24 billion at the end of 2006 to slightly less than $13 billion. In fact, however, in addition to the approximately $13 billion in disclosed sub-prime exposure, the investment bank’s sub-prime exposure included more than $39 billion of “super senior” tranches of sub-prime collateralized debt obligations and related instruments called “liquidity puts” and thus exceeded $50 billion. Citigroup did not acknowledge that the investment bank’s sub-prime exposure exceeded $50 billion until November 4, 2007, when the company announced that the investment bank then had approximately $55 billion of sub-prime exposure.
There are systemic ramifications to secrets like the above which, still today, proliferate across Wall Street.  The SEC has assigned a former rocket physicist, Gregg Berman, to lead the investigation into the Flash Crash of May 6, 2010.  On that day the market lost a staggering 998 points intraday, sold off some blue chip stocks at 20 to 40 per cent below their opening price, knocked some S&P 500 stocks to a penny, then turned on a dime and shot upward in a bizarre financial bungee jump, with the Dow closing down 348 points.  It apparently hasn’t occurred to the SEC that the American people do not want their life savings in a venue that requires a rocket scientist to explain how it works. (A CNBC/Associated Press poll conducted between August 26 and September 8 of this year found that 86 percent of survey respondents view the stock market as unfair to small investors.  Half the respondents say they have little or no confidence in the ability of regulators to make the market fair for all investors.)
Dr. Berman holds a B.S. in Physics from M.I.T. and a Ph.D. in Physics from Princeton.   On September 24, 2009, the SEC announced that Dr. Berman had been named “a Senior Policy Advisor in its newly-established Division of Risk, Strategy, and Financial Innovation.”   Queried last week, a spokesman for the SEC says Dr. Berman is now working for the Division of Trading and Markets. 
Prior to joining the SEC, Dr. Berman served in various executive positions over 11 years  with RiskMetrics Group, a risk modeling firm incubated at JPMorgan in the early 90s, spun off as a separate firm in 1998, and became a publicly traded company on January 25, 2008, making a lot of instant multi millionaires among the ranks of senior executives.  According to the company’s web site, RiskMetrics serves 72 of the 100 largest investment managers, 35 of the 50 largest hedge funds, 16 central banks.
RiskMetrics is acknowledged as the firm that created a highly complex model called Value at Risk, or VaR, which attempts to express how much money a financial institution or trading desk can lose over a set period of time, such as the next 24 hours, week or month.  As can be seen by the SEC order against Citigroup officials, if the risk modelers are not aware of an extra $39 billion of risk hiding in an offshore vehicle, the risk model is worse than useless because it’s actually creating a false sense of security.  Or, as another example, you could run a computer calculation as to the probability of a $10 billion portfolio of AAA collateralized debt obligations blowing up over the next 3 months and find you had a 1 per cent probability of that happening.  But if you ran the same calculation through your brain, it might go like this: what is the probability that you can bundle $10 billion of loans from high risk borrowers who have low credit scores and get a legitimate AAA rating on that paper. (Brain: probability zero.)  What is the probability that if you go ahead and bundle junk bonds and get the credit rating agencies to rate them AAA, they will perform like a AAA bond . (Brain: probability zero.)  Across Wall Street, human questioning was getting in the way of taking those oversized, insanely leveraged risks that would lead to fat bonuses.  So the human brain was turned off and the VaR brain, or a proprietary clone of it, was turned on.  According to insiders, those highly complex Collateralized Debt Obligations (CDOs) that consisted of subprime loans stacked in convoluted tranches were plugged into the risk model as a simple AAA bond.  Garbage in, garbage out.
The risk models used computer methodology; the corruption that was human-inspired could not be adequately translated to binary code.  The risk models, for example, did not understand the ramifications of actions like the ones described by an Assistant Manager, Gail Kubiniec, at a unit of Citigroup, CitiFinancial:  
“I and other employees would often determine how much insurance could be sold to a borrower based on the borrower’s occupation, race, age, and education level.  If someone appeared uneducated, inarticulate, was a minority, or was particularly old or young, I would try to include all the coverages CitiFinancial offered.  The more gullible the consumer appeared, the more coverages I would try to include in the loan….”
A patent application pending at the U.S. Patent and Trademark Office naming Dr. Berman and two others as inventors, and RiskMetrics as the assignee, suggests where the idea of risk modeling is heading next.  The patent, if approved, would enshrine a concept of allowing money managers such as hedge funds to keep the actual positions in their portfolio a secret while providing a risk analysis to investors.  (According to a spokesman at the patent office, the application has been pending since 2008 because their examiners are swamped with backlog.) 
One of the most outspoken critics of the risk modeling technique known as  VaR is Dr. Nassim Taleb,  who holds impressive academic credentials himself: a Wharton M.B.A., a B.S., M.S. and Ph.D. in Management Science from the University of Paris.  Dr. Taleb testified as follows on September 10, 2009 before the U.S. House Subcommittee on Investigations and Oversight of the Committee on Science and Technology.  (Despite this testimony, fourteen days later, the SEC hired Dr. Berman.)
“Thirteen years ago, I warned that ‘VaR encourages misdirected people to take risks with shareholders,’ and ultimately taxpayers’ money.’ I have since been begging for the suspension of these measurements of tail risks [fat tail or extreme events]. But this came a bit late. For the banking system has lost so far, according to the International Monetary Fund, in excess of 4 trillion dollars directly as a result of faulty risk management… My first encounter with the VaR was as a derivatives trader in the early 1990s when it was first introduced. I saw its underestimation of the risks of a portfolio by a factor of 100 --you set up your book to lose no more than $100,000 and you take a $10,000,000 hit.  Worse, there was no way to get a handle on how much its underestimation could be.  Using VaR after the crash of 1987 proved strangely gullible.  But the fact that its use was not suspended after the many subsequent major events, such as the Long-Term Capital Management blowup in 1998, requires some explanation. [Long Term Capital Management was a hedge fund blown up by a group of Ph.D.s using massive leverage.] Furthermore, regulators started promoting VaR (Basel 2) just as evidence was mounting against it.
VaR is ineffective and lacks in robustness…VaR encourages ‘low volatility, high blowup’ risk taking which can be gamed by the Wall Street bonus structure.  I have shown that operators like to engage in a ‘blow-up’ strategy, (switching risks from visible to hidden), which consists in producing steady profits for a long time, collecting bonuses, then losing everything in a single blowup.  Such trades pay extremely well for the trader –but not for society.  For instance, a member of Citicorp’s executive committee (and former government official) [former Treasury Secretary Robert Rubin] collected $120 million of bonuses over the years of hidden risks before the blowup; regular taxpayers are financing him retrospectively.” 
The comments in [brackets] above are mine.  I don’t know why Dr. Taleb is only picking on Mr. Rubin’s $120 million when Sanford Weill, former CEO of Citigroup, sucked $1 billion out of the firm in compensation under the same set of circumstances.  Dr. Taleb goes on to chronicle in Appendix 1 of his testimony just how long he has been sounding the warning.  His prior statements are as follows:
“1996-97:VaR is charlatanism because it tries to estimate something that is scientifically impossible to estimate, namely the risk of rare events. It gives people a misleading sense of precision… 2003: Fannie Mae’s models (for calibrating to the risks of rare events) are pseudoscience.  2007: Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. But not to worry: their large staff of scientists deems these events “unlikely.” [Fannie Mae is now a ward of the state.]… Banks are now more vulnerable to the Black Swan [high impact, rare event] than ever before with “scientists” among their staff taking care of exposures. The giant firm J. P. Morgan put the entire world at risk by introducing in the nineties RiskMetrics, a phony method aiming at managing people’s risks…”
One certainly does have to wonder why, if the RiskMetrics risk model was so accurate and valuable for trading, JPMorgan effectively gave it away to the street by publishing the methodology publicly in 1994.  Having read reams of lawsuits filed in Federal Court where Wall Street firms pound the table to keep their proprietary trading secrets under seal, this whole episode does raise a few eyebrows.  To add to the curiosity, RiskMetrics, the firm created inside an incubator at JPMorgan was acquired on June 1 of this year by MSCI, a firm created inside an incubator at Morgan Stanley.  In other words, two of the largest investment banks whose primary job is to allocate capital fairly to the marketplace frequently create their own finance-related firms, then proliferate the “science” masterminded by these firms by spinning them off to the marketplace. 
Within a few weeks, the SEC will be releasing its investigative report of the May 6, 2010 Flash Crash.  Gregg Berman, a key executive of RiskMetrics just one year ago, whose clients at that time are the same firms engaged in the questionable events of May 6, will serve up the results of that investigation to the American people.  In the book “How I Became a Quant: Insights from 25 of Wall Street’s Elite,” Dr. Berman shares this with us:  “…I learned that once the billion-dollar spacecraft I had worked on finally reached Mars, it exploded.”  Dr. Berman is now two for two.  Is he the right man for unraveling the events of May 6?

9/28/2010 - 6 Reasons to Consider Dumping SPY


6 Reasons to Consider Dumping SPY

author: Michael Johnston


The meteoric rise of the ETF industry – and to a smaller extent the introduction of index mutual funds some 20 years earlier – has had the effect of transforming indexes from hypothetical measures of performance into investable assets. As indexing strategies continue to gain more widespread acceptance with all levels of investors, the scrutiny of construction and maintenance methodologies underlying ETF-linked indexes has intensified considerably. And where potential pitfalls have been uncovered and explained, ETF issuers have been quick to provide investors with a number of alternatives.
Investors are creatures of habit, so it isn’t surprising that the majority of equity ETFs are linked to indexes that utilize long-standing, familiar construction strategies. The indexes underlying many of the most popular ETFs are market cap-weighted benchmarks, meaning that the companies with the largest equity value generally receive the largest weightings. But while the ETF industry has helped to reinforce the popularity of these indexes – such as the S&P 500, Russell 1000, and MSCI Emerging Markets – it has also given increased visibility to alternative weighting methodologies. A number of firms, including Rydex and State Street, offer ETFs linked to equal-weighted indexes. WisdomTree has carved out a niche in the earnings-weighted and dividend-weighted arena, while RevenueShares offers a suite of ETF products that determine individual security weightings based on top-line revenue. And in recent months the RAFI methodology utilized by several PowerShares funds has gained more widespread acceptance.
When allocating assets to equity ETFs, most advisors and investors focus primarily on the type of exposure desired: large cap domestics, small cap internationals, etc. Few give much, if any, consideration to the ideal weighting methodology to accompany the desired exposure. But the rules used to both select index components and allocate individual security weightings can actually account for a significant portion of the total return generated by an ETF.
YTD Performance
ETFWeightingReturn
SPYMarket Cap1.98%
RWLRevenue2.64%
EPSEarnings3.40%
DLNDividend4.30%
PRFRAFI4.51%
RSPEqual5.24%
EQLEqual Sector2.03%
*As of 9/23/2010
The adjacent table shows the year-to-date for the S&P 500 SPDR (SPY) and six other large cap equity ETFs that offer generally exposure, but put a unique twist on the weighting methodology afforded to component stocks. So far in 2010, SPY has lagged behind each of these alternatives, in many cases by a fairly wide margin. This table hopefully helps to highlight an important fact for ETF investors: the weighting methodology employed can have a major impact on bottom line returns, even when the components stocks are nearly identical.
The holdings of RSP and SPY are identical, but the lesser-known Rydex ETF gives each an equal weighting. That seemingly minor tweak is the primary reason for the more than 325 basis point gap in year-to-date returns. The same goes for RWL – its holdings are identical to SPY but weighted according to top line revenue–which has created a gap of nearly 70 bps. The overlap between SPY and the remaining funds isn’t perfect, but generally comes pretty close.
  • RevenueShares Large Cap ETF (RWL): This ETF is comprised of the same stocks in the S&P 500, but individual security weightings are determined based on top-line revenue. Revenue-weighting essentially overweights stocks with low price-to-revenue multiples and underweights those with high P/R metrics. That strategy has obvious appeal in certain environments, and delivered pretty solid returns in 2010.
  • WisdomTree Earnings 500 Fund (EPS): This ETF seeks to replicate the WisdomTree Earnings 500 Index, a benchmark that measures the performance of earnings-generating companies within the large-cap sector of the US equity market. Unlike RWL, this ETF doesn’t hold the exact same stocks as the S&P 500, but the overlap is significant. To understand the appeal of this strategy, consider two hypothetical companies with identical earnings but different market capitalizations. Earnings weighting would give the companies an equal allocation, while cap-weighting would have a bias towards the larger market cap (i.e., the company with a higher P/E ratio).
  • WisdomTree LargeCap Dividend Fund (DLN): This ETF is similar to the aforementioned EPS, but instead of utilizing earnings to determine components and weightings DLN relies on cash dividends. As such this fund has obvious appeal to investors looking to follow a value strategy, and may have the added bonus of steering clear of companies that have been “cooking the books” (since it’s difficult to fudge cash dividends paid).
  • PowerShares FTSE RAFI US 1000 Portfolio (PRF): Much like the S&P 500, the index underlying this ETF is designed to track the performance of the largest US companies. The difference is in the definition of “largest” utilized to determine components and individual weightings; whereas the S&P relies on market cap, the RAFI methodology developed by Rob Arnott uses a “fundamental score” to compute size. Stocks are selected and weighted based on four fundamental measures of size, including book value, cash flow, sales, and dividends – thereby incorporating some of the elements of revenue and dividend weighting.
  • Rydex Equal Weighted S&P ETF (RSP): This ETF from Rydex is relatively simple to understand; it holds each of the components of the S&P 500 ETF, but gives an equal weighting to each (i.e., each stocks makes up 0.20% of total assets upon rebalancing). That means that RSP maintains a significantly lower concentration of assets; the top 10 holdings of SPY make up about 19% of assets, compared ot just 2% for RSP.
  • ALPS Equal Weight Sector ETF (EQL): This ETF takes a different approach to equal weighting, giving equivalent allocations to each of the nine primary sectors of the US economy. That means that relative to SPY, EQL will maintain larger weights in materials and utilities, with smaller positions in tech and financials. There are some potential advantages to an equal-weighted sector approach: the potential adverse impact of a crash in any one industry is lessened somewhat, while the opportunity to participate in a rally in any sector is improved.
Of course, the period of time highlighted in the above table is relatively short–less than nine months. There have been stretches during which cap-weighted funds outperformed these alternatives, and there will no doubt be similar stretches in the future. Each methodology has both advantages and potential drawbacks. But the figures above should demonstrate very clearly that the weighting methodology selected has a material impact on bottom line return.