Increase in ETF trading gives rise to opportunities for stock pickers
An interesting article from Financial Analyst Journal, titled "The Revenge Of The Stock Pickers". The author said ETF trading now accounts for 30% of all trading volumes in US exchanges. This phenomenon created opportunities to stock pickers, especially when an ETF trades heavily around a theme/event, correlations among its constituents （index stock) increases significantly. As a result, even some constituents have minimal exposures to the theme/event, they are being traded on the same trend with other constituents - thus opportunities are created. That also said, ETF investors are blind to security-level information.
One simple example is Plantation sector in Southeast Asia where palm oil remains a revenue source for certain countries. Upstream and downstream operations are vulnerable to CPO price in the negative way, ie. CPO prices determine the upstream revenue and the raw material cost for the downstream. When CPO price decreases, generally the market perceives an overall negative impact to the sector therefore cutting exposures to the sector. However downstream operation could benefit from cheaper input cost. A sector-wide exposure movement thus creates inconsistent value for different businesses which fundamental analyst could identify the opportunities.
That is why we should always assess whether the business itself is either downstream, upstream or integrated so that we could position these companies along the comodity cycle.
Similar to other businesses that stay at different levels in the supply chain.
One simple example is Plantation sector in Southeast Asia where palm oil remains a revenue source for certain countries. Upstream and downstream operations are vulnerable to CPO price in the negative way, ie. CPO prices determine the upstream revenue and the raw material cost for the downstream. When CPO price decreases, generally the market perceives an overall negative impact to the sector therefore cutting exposures to the sector. However downstream operation could benefit from cheaper input cost. A sector-wide exposure movement thus creates inconsistent value for different businesses which fundamental analyst could identify the opportunities.
That is why we should always assess whether the business itself is either downstream, upstream or integrated so that we could position these companies along the comodity cycle.
Similar to other businesses that stay at different levels in the supply chain.
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