An Interesting New Sector Rotation ETN From Barclay’s

| October 15, 2012 | 0 Comments

Barclay’s introduced its first new fund in about a year last week.  It’s called the Barclay’s ETN+ Shiller CAPE ETN (CAPE).  And it’s designed to outperform the S&P 500 over the long run using Professor Robert Shiller’s Cyclically Adjusted Price Earnings (CAPE) ratio.

I’ll explain exactly how the fund is supposed to work in just a moment.

But first, a few words about Dr. Shiller…

Robert James Shiller is an American economist, author, and Professor of Economics at Yale University.  He’s ranked among the top 100 economists in the world.  And he’s considered a contender for the 2012 Nobel Prize in Economics.

Shiller is widely known for developing a repeat-sales index with economist Karl Case using American home sales price data.  It was developed as a method for studying home pricing trends in the US.

The index was later acquired by Standard & Poor’s and is now published monthly as the S&P/Case-Shiller US National Home Price Index.  It’s considered to be the leading measure today of changes in the value of housing prices in the US.

Shiller is also well known as a pioneer of the behavioral finance school of economics. 

Back in 1981, Shiller published an article challenging the efficient market hypothesis, which was the dominant view in the economics profession at the time.  And following the 1987 market crash, he published research showing stock traders often made trading decisions based on emotion rather than purely rational calculation.

Shiller later gained fame when he published his New York Times bestselling book, Irrational Exuberance, in March 2000.  You may recall this was the top of the tech stock boom driven market.

In the book, Shiller warned the stock market had become a bubble which could lead to a sharp decline.

Of course, he was absolutely right.

From March 24, 2000 to July 24, 2002, the S&P 500 dropped by 778 points for a loss of 50%.  And the tech heavy Nasdaq plunged by a whopping 4,024 points for a mind-boggling 78% trouncing.

One of Shiller’s less well-known creations among the masses is his Cyclically Adjusted PE Ratio or CAPE Ratio. 

The CAPE Ratio is calculated by taking a stock’s current price and dividing it by the average inflation-adjusted earnings over the prior 10 years.  By taking 10 years of earnings into account, the CAPE Ratio is designed to provide a more accurate measure of a stock’s valuation.

One of the biggest criticisms of the classic PE Ratio is that it only accounts for one year of earnings.

And according to Shiller, the CAPE Ratio is a reliable indicator. 

His research shows a strong inverse correlation between the CAPE Ratio on the S&P 500 and long term S&P 500 returns.

In other words, if you buy the S&P 500 when its CAPE Ratio is low, you’re more likely to get high returns over the next 10 years. And if you buy the S&P 500 when its CAPE Ratio is high, you’re more likely to get low or even negative returns over the next decade.

Making investment decisions using the CAPE Ratio has been difficult for the average investor because you have to do the work yourself.  That is… it was difficult until last week.

Now, thanks to the Barclay’s ETN+ Shiller CAPE ETN (CAPE), investing in the stock market using Shiller’s CAPE Ratio is simple.  Just buy the fund and let Barclay’s make all the decisions for you.

Here’s how it works…

Each month the fund will invest in four sectors of the US stock market that are undervalued on a CAPE Ratio basis.  But it won’t always be the four most undervalued sectors.

You see, some undervalued sectors actually deserve a low valuation and are “value traps” to be avoided.  CAPE will seek to eliminate these sectors by focusing on those with positive price momentum over the prior 12 months.

So, how would this strategy have worked over the past 10 years?

According to Barclay’s, it would have outperformed the S&P 500 with less volatility. 

They claim the strategy would have gained 11.3% annually compared to just a 7.2% annual gain for the S&P 500.  And the strategy’s annualized volatility would have been just 19.6% compared to 21.2% for the S&P 500.

Not too shabby.

If you’re looking for a cruise control strategy to invest in the stock market for the long run, CAPE could be right for you.  Take a closer look at it for your own portfolio.

Profitably Yours,

Robert Morris

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Category: ETFs

About the Author ()

Robert Morris is the editor of Penny Stock All-Stars, an investment advisory focused on discovering small-cap and micro-cap stocks that are destined to become the market’s next Blue Chips. The Wall Street veteran and small-cap stock specialist is also a regular contributor to Penny Stock Research. Every week, Robert shares his thoughts with our readers on a variety of penny stock-related topics. In addition to Penny Stock Research, Robert also writes frequently for two other free financial e-letters, ETF Trading Research and the Dynamic Wealth Report. He’s also the editor of two highly successful and popular investment advisories, Biotech SuperTrader and China Stock Insider.

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