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The Revenge of The Stock Pickers (In Practice)
The Revenge of The Stock Pickers (In Practice)
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The Revenge of the Stock Pickers (In Practice) https://www.cfainstitute.org/en/research/financial-analysts-journal/2019/i...
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The Revenge of the Stock Pickers (In Practice) https://www.cfainstitute.org/en/research/financial-analysts-journal/2019/i...
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1. CFA Institute
2. Research & Analysis
3. Financial Analysts Journal
3 of 6 5/29/2019, 10:47 PM
The Revenge of the Stock Pickers (In Practice) https://www.cfainstitute.org/en/research/financial-analysts-journal/2019/i...
Abstract
This In Practice piece gives a practitioner's perspective on the article "The Revenge of the Stock Pickers," by
Hailey Lynch, Sébastien Page, CFA, Robert A. Panariello, CFA, James A. Tzitzouris, Jr, and David Giroux,
CFA, published in the Second Quarter 2019 issue of the Financial Analysts Journal.
The authors analyse two broad market ETFs (the S&P 500 Index and small cap) and nine sector ETFs. Across
the 11 ETFs, a total of 240 volume spikes are noted over an eight-year period. After each volume spike that
results in falls in an ETF’s price, the methodology is to buy the “outsiders”—the ETF constituents with a low
beta to the overall ETF. That is, their prices move less in tandem with the ETF than its other constituents.
These outsiders are all held for 40 days, and the authors measure the alpha produced from the first to the 40th
day after the volume spike, with the results shown both before and after trading costs.
For example, after a September 2015 tweet by then presidential candidate Hillary Clinton in which she
announced that she intended to cap prices of some pharmaceuticals, there was a rapid sell-off in health care
ETFs. Although the prices of health care ETFs plummeted after her announcement, the stocks of some non-
pharmaceutical companies rebounded strongly in the 40 days thereafter.
If investors buy ETF “outsiders,” immediately after a spike in volume and lever them to the same beta as the
ETF, they are likely to benefit from reversion of the prices for a full 40 days. Although the average alpha on the
first day after a surge in ETF sales volumes is slightly negative, over the next 39 days the average daily alpha is
generally positive.
This strategy is profitable in the S&P 500 ETF and in the small-cap ETF, as well as in eight of the nine sector
strategies—consumer discretionary, consumer staples, energy, financials, health care, industrials, materials, and
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The Revenge of the Stock Pickers (In Practice) https://www.cfainstitute.org/en/research/financial-analysts-journal/2019/i...
The highest returns after 40 days are found in the financials ETF, which produced alpha of nearly 8%. Applying
the strategy to the S&P 500 ETF creates returns of around 6%. The technology ETF produces losses of around
3% 40 days after the market panic and subsequent spike in ETF trading volumes.
The strategy requires only the ability to measure a stock’s beta relative to its ETF and lever a portfolio of
outsider stocks to the same beta as the ETF. Stock pickers with greater insight into fundamental valuations may
be able to obtain even higher returns than this simple strategy presents.
For ETF investors, the mispricing during volume spikes of the companies that comprise an ETF may represent a
hitherto unknown cost of ETF investing. But the authors note that it takes many types of investors with different
motivations to provide liquidity to capital markets, which in turn provides more appropriate pricing.
ETFs enable investors to express top-down views on markets and sectors without paying attention to the relative
merits of the stock fundamentals within each market or sector. This may create opportunities for stock pickers
when ETF constituents are rapidly oversold.
The authors investigate what happens to the prices of the constituent stocks of an ETF after a strong sell-off in
the ETF.
They reason that ETF investors are agnostic to stock-specific information, so they “throw the baby out with the
bathwater,” effectively handing returns on less correlated constituents to stock pickers.
Related
0.25 CE
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The Revenge of the Stock Pickers (In Practice) https://www.cfainstitute.org/en/research/financial-analysts-journal/2019/i...
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