5 Things Everyone Should Know About Dow 20,000

Dow 20,000 – an incredible milestone! The Dow Jones industrial average is nearing the 20,000 mark for the first time, and when the barrier is broken, Americans watching the evening news, tuning in to the radio or aimlessly browsing the internet will see the headline, whether they care about it or not.

Should investors really care? Should anyone? And the answer is: yes and no.

Regardless of what importance level you assign to Dow 20,000, here are five things everyone should know about Dow 20k.

1. The Economy is Improving and so are Expectations

This one may be obvious, but with the Dow and other stock market indices at all-time highs, things are getting better. Over the last 81 months the private sector has added an impressive 15.6 million jobs, and in November the unemployment rate hit 4.6 percent for the first time since August 2007.

On top of that, when the Federal Reserve raised interest rates interest rates on Dec. 14, Chair Janet Yellen said the hike was “a reflection of the confidence we have in the progress the economy has made and our judgment that progress will continue … the economy has proven to be remarkably resilient.”

Consumer confidence also improved in November, reaching pre-recession levels once again. As expectations improve, you can generally expect to see the stock market rise as well.

2. The Dow Actually Isn’t a Great Reflection of the Business Landscape

If the first point was a little straightforward, this one may be the most misunderstood: The Dow is definitely not the best measure of how American businesses are performing. That 20,000 figure? That’s only based on the share prices of 30 of the largest companies in the U.S.

“The Dow represents 30 large stocks. The S&P 500 represents nearly 17 times that number,” says Kevin Barr, head of investment management at SEI, an investment management firm headquartered in Oaks, Pennsylvania. “Both the Dow and S&P leave out the mid- and small-cap companies that form much of the stock market, which comprises thousands of stocks. While the Dow is commonly cited as a benchmark, investors need to keep its size and scope in mind.”

On top of that, the Dow is a price-weighted average, which means that stocks with higher share prices carry more influence. Nevermind that this is an entirely arbitrary way to do things. Currently, Goldman Sachs Group (GS) carries the heaviest weight in the blue-chip index at 8.38 percent, while Cisco Systems (CSCO) has the lowest weight at 1.06 percent.

Thus, if CSCO jumps 10 percent after a great earnings report, but GS falls just 1.3 percent, the two cancel each other out as far as the Dow is concerned. This despite the fact that at $153 billion, Cisco is actually worth about $56 billion more than Goldman Sachs.

While the S&P 500 is a better measure of how corporate America is doing, a better measure still is the Russell 3000 and Wilshire 5000, which track thousands of smaller stocks and represent essentially the entire U.S. stock market.

Unlike the Dow, the S&P 500, Russell 3000 and Wilshire 5000 are all market capitalization-weighted.

3. Put Dow 20,000 in Perspective

Due to the power of compound interest, 100-point – or even 1,000-point – swings in the Dow don’t mean what they used to.

Think about it this way: The Dow first crossed the 1,000 mark in November 1972. It would take more than 14 years for the Dow to gain the next 1,000 points, which it accomplished when it first broke 2,000 in 1987. In contrast, the Dow hit 19,000 on Nov. 22, and is approaching 20,000 less than a month later.

So if you hear that the Dow went up or down 100 points in a day, don’t put too much stock into it. In 1972, that was a 10 percent move. Today, it’s a half-percent.

4. A Few Minor Changes in the Index’s Constituents Make a Huge Difference

Further adding to the arbitrary nature of the Dow, the index’s 30 constituents aren’t set in stone like many people might think.

Every few years or so, if it’s necessary, the index committee will add some new member(s) to the index; the incoming stocks will often replace stocks or companies that have been faring poorly or are losing influence.

Sometimes, those decisions can seriously hamper the index’s returns.

The Dow, for instance, added Intel Corp. (INTC) and Microsoft Corp. (MSFT) in late 1999, near the height of the dot-com bubble, only to see both crater over the subsequent year. It would take until 2014 for MSFT and INTC to regain their debut Dow levels.

The most recent Dow addition is Apple (AAPL), which replaced AT&T (T) in March of 2015. Since then, Apple is down 6 percent and AT&T shares are up 24 percent.

David Blitzer, managing director and chairman of the index committee at S&P Dow Jones Indices, says companies aren’t added to the index because their stock looks attractive. “We’re not picking stocks that we think are definitely going to go up. I know one guy who can’t pick stocks, and that’s me,” Blitzer says.

“With the Dow we’re looking for large, solid, stable companies,” he says. “Most of them if not all of them are household names, people know who they are, and it’s traditionally blue-chip companies.”

5. Just a Psychological Level

Finally: traders just like to see big, round numbers with lots of zeros after them, and investors do too. Crossing a level like Dow 20,000 has no fundamental importance, but technical and short-term traders, as well as trading algorithms, may put some stock in it.

Over time, we’ll be hitting a lot of these psychological marks, says Jon Ulin, a certified financial planner and managing principal of Ulin & Co. Wealth Management, a branch office of LPL Financial in Boca Raton, Florida.

“Since World War II, the Dow Jones index has averaged about 9 percent per year and will continue to do so hitting new highs over time. Just with a meager 7.2 percent annualized return, we should be ringing in a 40,000 Dow by 2027,” Ulin says.

It’s been 44 years since the Dow first hit 1,000 in 1972. If it takes 44 years for the next Dow 20-bagger, we’ll be ringing in Dow 400,000 in 2060 (which will be another election year).

 

 

 

 

Written by John Divine of U.S. News & World Report

Source: U.S. News & World Report

How a 29-Year-Old Grew a $1 Billion Tech Fund in 7 Months

© Courtesy of ISE
© Courtesy of ISE

Carpe diem! And in some cases carpe ETF may be a wise mantra. That is part of the story behind one rising star in the increasingly popular tech-fund universe.

The startup company behind an outfit named PureFunds is currently a one-man operation, but that hasn’t stopped the exchange-traded PureFunds ISE Cyber Security ETF from racking up $1.04 billion in investor money after launching a mere seven months ago.

Personal and corporate data is under siege, as evidenced by a fusillade of recent, high-profile data breaches. Those include a huge hack attack on Sony Pictures and a separate data breach that affected four million government employees. Even the Houston Astros baseball team has allegedly been among recent hacking victims.

The PureFunds ETF, which holds publicly traded companies selling security software and hardware, has benefited from all the hacking.

And the guy running the show? A 29-year-old wunderkind, who has shaken off early stumbles to success:

“Now, looking back, it seems obvious,” PureFunds CEO Andrew Chanin told MarketWatch, in an interview. “Smaller shops were maybe considering [focusing on cybersecurity], but a lot of times the bigger guys are looking for those much broader types of industries.”

Indeed, Chanin’s trajectory may offer a case study in trial and error. Before the success of the cybersecurity fund, his earlier ETF products didn’t fare nearly as well.

How the cybersecurity ETF was created

Chanin said he co-founded PureFunds after industry colleagues said: “Why do you keep giving us ETF ideas? You should try launching them on your own.” Those comments came as he worked at the Kellogg Group, an ETF specialist, right after graduating from Tulane University.

But the PureFunds’ first ETFs struggled. The PureFunds ISE Diamond/Gemstone ETF and PureFund ISE Mining Service ETF both closed down in early 2014. The PureFunds ISE Junior Silver ETF , which launched in 2012, is still up and running, but it has a comparatively meager $5 million in assets.

Chanin said the International Securities Exchange suggested launching a cybersecurity ETF after the two companies developed a good relationship while putting out PureFunds’ prior ETFs. ISE developed the index that the cybersecurity ETF tracks, but as an index provider and exchange, it wasn’t looking to run an actual fund.

Chanin said he was able to make PureFunds profitable in large part thanks to support from ISE, other business partners and industry colleagues, as well as from his parents, girlfriend and other family and friends. “Their support is absolutely what kept me—and my dreams of turning PureFunds into a profitable company—alive,” he said.

“It’s extremely unique that you see those narrow funds get that kind of traction,” said David Nadig, director of ETFs at financial-data provider FactSet.

He said other ETFs that have attracted investor money quickly include the iShares Exponential Technology ETF  and the SPDR DoubleLine Total Return Tactical ETF , but the first benefited from being a bespoke fund for well-known financial adviser Ric Edelman, while the latter comes from one of the investing world’s “superstar managers,” Jeffrey Gundlach.

Given its $1 billion in assets and expense ratio of 0.75%, the cybersecurity ETF generates revenue of $7.5 million. Chanin said the “majority” of that revenue goes to pay a wide range of partners and service providers, including index provider ISE. Still, with the recent success, he has been able to move his office to Manhattan from New Jersey, where he was raised.

But other ETF providers are threatening to grab a piece of the action, with First Trust and Direxion recently filing for cybersecurity-related ETFs.

Although launching the first cybersecurity ETF looks smart at this point, other ETF providers had reasons to hold back.

Concerns about the cybersecurity ETF

The PureFunds ETF isn’t as targeted a play on cybersecurity as many investors may think, said FactSet’s Nadig. He notes the fund holds some big tech companies that aren’t 100% focused on cybersecurity, such as Cisco and Juniper . It holds 31 tech stocks overall, according to ETF.com data.

The fund also sports a sky-high valuation, with a price-to-earnings ratio above 660, according to an ETF.com calculation that takes into account the components that are losing money. In addition, niche ETFs are by nature on the risky side. “You’re talking about a portfolio of 30-odd stocks with a lot of microcap exposure,” Nadig told MarketWatch.

Chanin counters that the ETF offers a diversified way to invest in a volatile, growing industry, as it helps people avoid having to bet on a single company. He also notes that cybersecurity spending can be on a different cycle than outlays for other areas. Even in a less profitable year, a customer can’t necessarily cut back on cybersecurity investments, he noted.

Meanwhile, Nadig also cautions that it is possible that an investor with a large stake in the cybersecurity ETF could find it difficult to exit. “Right now it is the hotness and everybody’s piling in, but the volume on something like that could dry up tomorrow,” he said.

Written by Victor Reklaitis of MarketWatch

(Source: MarketWatch)