The ETF in vogue right now is the ARK Innovation ETF (ARKK) which has outperformed the S&P 500 by 456% since launching in 2014 and by 134% in 2020. Volumes and flows into the ETF have exploded because of its great performance. However, there have been numerous examples of “hot” funds that raise a lot of money and subsequently underperform. An example is the CGM Focus Fund which was up around 32% annually from 1999 to it’s peak in 2008, while the S&P 500 was up only 0.4%. The fund peaked at around $9 billion in assets in June 2008. It then went on to lose 4.53% annually while the S&P 500 rose 11%. The fund now has $385 million.
Performance chasing is a natural human behavior. We always want to go with what has done well recently. However, mean reversion is a powerful force and if we simply chase performance we are bound to be disappointed. This is also a phenomenon with institutions which routinely fire managers who have done poorly and hire managers which have done well, only to see the fired managers do better than the ones they hired.
There are many people that bought or mined Bitcoin when it was in its infancy which have lost access to their Bitcoin wallets. They either forgot their computer password, formatted their hard drive, or simply threw an old hard drive away. There are hundreds of millions of dollars in Bitcoin that have been lost and will never be recovered.
The last time Bitcoin reached $15-20k back in 2017 we saw the same type of articles. Losing millions of dollars because someone forgot a password is one of the reasons why Bitcoin will not replace the Dollar, Euro, Yen etc. or traditional banks any time soon. Bitcoin right now is a speculative asset which is far from being a day-to-day payments mechanism. We will write more on this soon.
With the introduction of zero and negative rates, banks have started increasing the fees they charge customers. Banks make money from borrowing short-term (in the form of deposits) and lending long term (business loans, mortgages etc.). With negative yields, and flat yield curves the spread banks can earn is close to zero. We wrote about it here. Therefore, they have increased their fees for other services to make up lost revenue from lending.
Something similar happens with brokerages. With trading commissions going to zero at many brokerages, they now rely on other charges to make money. Brokerages make money by selling their order flow to high frequency traders, earning interest on idle cash balances and other account fees. Businesses have to make money; however, visible costs (like trading commissions) are low; and hidden costs (like payment for order flow, net interest income, etc.) are high. Therefore, brokerage clients falsely believe that their brokerage accounts are zero cost.
“The assumption of diminishing returns with falling rates is wrong.” As interest rates fall, bonds yield less. However, their duration and convexity increases. Basically, when interest rates are low, small changes in rates lead to large changes in price. A long duration Treasury at very low rates can be a great hedge to market downturns in the event of a market crash.
With low rates, increasing duration can lead to a better hedge. Short term bonds provide no income and very low room to increase in price. Longer duration bonds are more capital efficient in that we get more volatility per dollar invested. Therefore, we need to allocate less capital to bonds in order to offset the risk from stock positions.
The stimulus delivered because of the pandemic has left many governments in search for new revenue. Wealth taxes have been implemented in Argentina and Bolivia. California and Washington are starting to talk about some form of wealth tax.
Most past experiments with wealth taxes were abandoned. Previous attempts had structural flaws and led to an increase in tax avoidance strategies such as moving away from the country. Such proposals have also been mentioned here in Costa Rica.
