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The Turnover in ETFs is About 870% Per Year, Which is More Than Four Times the Turnover for US Stocks.

The NYSE states that in the past 12 months investors traded $18.2 trillion worth of ETF shares.  This is a 17% increase from the 12 months prior and more than triple it was 10 years ago.

The NYSE further states US ETFs only have $2.1 trillion in assets.  In other words, the turnover in ETFs is about 870% per year which is more than four times the turnover for US stocks which comes in about 200 percent.

Moreover many ETFs have morphed into extremely complex cross correlated vehicles where few understand their composition and intricacies where volume is a major parameter.

What does this data suggest?  Are many duped into some type of complacency regarding liquidity and safety?

We are expected to know and understand the products/issues recommended.  What will happen if a crisis unfolds where massive selling of ETFs occurs?  As noted the other day there are now more ETFs than hedge funds.

I can draw many parallels to the proliferation of CDOs and CMOs 10 years ago vividly recalling comments made to me by large firm sponsors are similar to the comments today about ETFs.

A major reason for the 2008 financial crisis few understood the composition and intricacies of the newly formed financial products hence firms were unwilling to submit bids when selling commenced.  I clearly recall asking the question—what is in this portfolio and how is it constructed?  The answer was “I don’t know.  I just need a bid!”

I can argue this proliferation of ETFs is a contributory reason to the narrowness of the market, a view partially shared by the Treasury and the Fed as these entities remarked that technology based trading is having an overwhelming influence upon the markets.

Commenting upon yesterday’s markets, averages were relatively quiet digesting the first print of second quarter growth.  The headline number largely matched expectations—rising by 2.3%.  Consumer spending—led by autos–however rose by 2.9% versus 1.8% in the first.  Analysts were forecasting around a 2.2% rise.

Regarding inflation, prices ex food and energy rose by 1.8% during the period versus 1% in the prior two quarters.  Inventories also rose.  The data suggests inventories for the first two quarters of the year were the biggest on record.

Inventory builds can be viewed as positive or negative.  I typically view them negatively given these elevated stores have to be sold before new production can commence.

What will happen today?  Futures are pointing to a lower market opening as a social media company disappointed.  Bloomberg reports about 2/3 of the S & P 500 has posted results with 74% beating expectations and half exceeding sales expectations.  Profits are expected to drop by 4%, shallower than July 10 when a 6.4% decline was forecasted.

Last night the foreign markets were up. London was down 0.12%, Paris up 0.29% and Frankfurt up 0.02%.  Japan was up 0.30% and Hang Sang up 0.56%

The 10-year is off 1/32 to yield 2.26%.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.