Bloomberg writes over 1000 ETFs have been closed with 97 closing thus far in 2019.  The reason…small size and the lack of fees.  It is generally accepted an ETF has to broach $50 million to become solvent.  According to Bloomberg, the average ETF charges 0.5% in management fees.    The largest ETFs charge about 0.2% in management fees.

Several leading Democratic presidential candidates are campaigning for a securities transaction tax amounting to 0.5% on equity trades to fund their progressive agenda.  Fixed income trades would be charged 0.25%.

Wow!  As widely discussed passive ETFs have more assets than actively managed funds partially the result of lower fees and indexing.  According to the SEC 90% of equity trading volume is now the result of passive investing and algorithmic trading.  If a transaction tax becomes policy, the impact on the markets could be exponential.

Speaking of exponential, according to Bloomberg technology is trading at 125% of historical valuation, eclipsing its previous 2000 peak. On the other hand, energy and the financials are trading at 18% and 38% of their norm valuations.  As percentage of the S & P oil is trading at a record low 3.9% of the S & P capitalization, down from 12% in 2012.  Bloomberg reports technology is at a record high 27%.

I will argue this huge disparity is partially the result of passive and algorithmic trading which has created an unbalanced market where according to FINRA price discovery could be absent.

It is not a question as to if this imbalance will change but it is more of question as to when and how much damage such a change will inflict.

Commenting about yesterday’s market activity, equity markets were bifurcated with the NASDAQ rising about 0.25% and the Dow falling about 0.40%. Treasuries were up about ¾ of point.

Last night the foreign markets were down.  London was down 1.15%, Paris down 0.43%  and Frankfurt down 0.77%.  China was down 0.78%, Japan down 0.62%  and Hang Sang down 0.75%.

The Dow should open moderately lower on trade tensions following the passage of legislation supporting Hong Kong protestors.  The 10-year is up 10/32 to yield 1.76%.


The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. 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. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.