Trillion Dollar Hats

A round up of new funds, milestones and a trade.

By virtue of closing above $207.05, Apple (AAPL) is now worth one billion trillion gazillion dollars.

There is some precedent for these milestones to coincide with market tops. Cisco (CSCO) today has a $200 billion market cap down from $500 billion in 2000 when it was briefly the largest company in the S&P 500. This is not about trying to predict anything but this sort of excitement is not a positive from a contrarian standpoint. There is always bull case and a bear case to be made for equities and I would add this to the bears' side but if somehow the market is topping I would say it is more of a coincident indicator bordering on curiosity, I will be interested to see if it matters or not but understanding the history is worthwhile.

The other day I mentioned owning Square (SQ) for clients and how it had a rough day, this was Monday. That post was about whether the market was on shaky ground and not selling into a mini-swoon. I decided that day however that I would sell on the next pop which came today. I sold kind of early in the day so didn't get a great price relative to the day but it was a huge gainer, I bought late last year around $40. An eight month hold is very short for me, I have quite a holdings for clients that go back to 2004/2005.

Clients have owned Mastercard (MA) for many years and I perceive a lot of overlap there. Both stocks are featured in the ETFMG Prime Mobile Payments ETF (IPAY). I've also been concerned that we are close to the equity market cycle ending and I am convinced that whenever the bear starts, Square will get pummeled which is a comment about the stock, not the company. Mark Yusko is fond of Tweeting that risk happens fast and I believe SQ is vulnerable to that idea. I would much rather regret selling it to early than regret holding on too long if risk does end up happening quickly in the name.

There was a wave of excitement in the part of Twitter where I hang out on Wednesday when Fidelity announced two new broad based, equity, traditional mutual funds that will have no expense ratio; Fidelity ZERO℠ Total Market Index Fund (FZROX) and Fidelity ZERO℠ International Index Fund (FZILX). Mike Venuto from Toroso shared some insight at ETF Trends on how Fidelity might still make money from them but I think what might be more interesting is that as traditional funds, Fidelity can have the assets be captive at their firm, Venuto mentioned that the Schwab U.S. Broad Market ETF (SCHB) only charges 0.03% with better tax efficiency. The idea that all of this is a race to zero in terms of expense ratios and commissions makes sense and even if not literally zero, a portfolio can be constructed for peanuts now which is a great and democratizing thing and if it gets cheaper or more funds, narrower funds, also drop to 5, 10, 15 basis points then all the better.

Speaking of democratization, WisdomTree has been doing some increasingly interesting things with strategic ETFs. A couple of weeks ago I wrote about ways to use and misuse leverage. WisdomTree's latest fund appears to take a stab at using leverage constructively. The WisdomTree 90/60 Balanced Fund (NTSX) is trying to enhance the 60/40 portfolio. From the literature, it tries to more efficiently capture a 60/40 portfolio by putting 90% in equities, and 10% into treasury bond futures such that the notional value works out to a 60% exposure. They make a point of saying that this then allows for some sort of alternative overlay, or really any alpha seeking overlay whether that be nominal or risk adjusted. If you just read that and you're thinking yewhatnow, Jake @EconomPic figured this out back in November when the concept was discussed on Twitter;

The idea is very interesting to me but I am not sure implementing a leveraged strategy like this one, constructive as it may be, nine and half years into a bull market is a great idea. Also the treasury futures currently in the fund expose it to interest rate risk. NTSX is actively managed and although the process is quantitative, perhaps they can actively manage the interest rate risk.

For now I think the type of leverage using the Salt truBeta High Exposure ETF (SLT) (linked above) might make more sense if we are in fact late in the cycle. The idea there was 40% in SLT and 60% in bond proxies (actually equates to 50/50) because SLT leverages up with beta not notional exposure. Play around with the numbers but some mix of SLT and fixed income favoring the fixed income would seem to more defensive. NTSX mixed with an effective market neutral strategy could be way to overcome the issue I am raising.

After a large equity decline, I think NTSX could make a lot of sense.

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