The BIG Picture - May 2023
| Read Time: 2min
“When do markets get better?” is a question we continue to hear from investors.
The short answer is that they already have, especially compared to 2022’s awful returns for stocks, bonds, and just about everything else. Some may ask this question because navigating today’s markets are indeed more challenging and are wishing for a return to the days of when throwing darts worked as well as data-driven analysis. Unfortunately, those days are long gone and may not return until the next easing cycle. This hiking cycle is turning out to be no different than past ones, whereby weaker hands were flushed out of the market. It just may be that certain investors remain unconvinced of that reality, or have not had the benefit of managing through a normalization of monetary policy.
Of course, the reality is far more nuanced. Markets are complex systems, which require an ability to find the signal through the constant noise. However, it is important to remember that as investors we do not always need to be right. We need to be on the right side of the market.
So, as corporate earnings continue to roll in and are surprising to the upside on average, but are on pace for the second quarter of declines, what are we looking for to set the tone?
Due to increased interest rates, the cost of capital for even the highest quality companies is higher considerably today even as credit conditions remain benign. Until it comes down, it is likely prudent to stick with larger companies who can better manage through the muddle. Why? They generally have more diverse business lines creating more resilient revenues in addition to stronger balance sheets.
In fact, since the Global Financial Crisis in 2008, large cap companies have had considerably lower debt ratios than small caps. In fact, the net debt to EBITDA of small caps has increased at a much greater rate than that of large caps primarily due to sharp increases in the debt loads of smaller companies in what was an extraordinarily low rate environment.
So for now, bigger continues to look better. For example, the Roundhill BIG Bank ETF (NASDAQ: BIGB) has outperformed the KBW Bank Index by 6.62% and the S&P Regional Banks Select Industry Index by a remarkable 11.96% since its inception on March 21, 2023.
Why may that be?
As evidenced by their recent earnings reports, the larger banks benefited from a flight to quality by investors since many smaller financial institutions have shaky deposit bases, challenges with mark-to-market losses, and concerns with commercial real estate loans. Investors looking to avoid the potential continued stresses in smaller banks can confidently turn to BIGB, which offers exposure to only the 6 largest banks in the U.S. BIGB’s concentrated exposure makes it unique compared to every other financials ETF as they have exposure to a much wider range of financial services firms.
The Fund expects to have concentrated (i.e., invest more than 25% of its net assets) investment exposure in the Banking Industry. Further, the Fund expects to obtain such investment exposure by transacting primarily with a limited number of financial intermediaries conducting business in the same industry or group of related industries. As a result, the Fund is more vulnerable to adverse market, economic, regulatory, political or other developments affecting those industries or groups of related industries than a fund that invests its assets in a more diversified manner. The Financial sector (Banks and capital markets companies, in particular) may be significantly affected by changes in interest rates, catastrophic events, price and market competition, or other changes in government regulation or tax law and/or rate regulation, which may have an adverse impact on their profitability. In recent years, cyber- attacks and technology malfunctions and failures have become increasingly frequent in this sector and have caused significant losses. Please see the summary and full prospectuses for a more complete description of these and other risks of the Fund.
The BIG Funds are distributed by Foreside Fund Services, LLC.