It didn’t receive much in the way of attention, but last week the U.S. Securities and Exchange Commission (SEC) announced its intention to end the pilot program testing five-cent bid/ask spreads. The program mandated minimum quotations and trading increments for stocks of certain smaller companies. It was originally scheduled to expire on October 2, 2018. Since October 2 is a Tuesday, the program will effectively be terminated at the end of next week, on Friday, September 28, 2018.
I expect those of you who invest in smaller-company stocks will be happy to say good riddance to this program. It mandated wider spreads on certain stocks, up to a nickel. Specifically, and as we explained in the June 2015 AAII Journal, the pilot program put selected stocks into one of four groups. Group 1 mandated five-cent quotation spreads, but stocks in this group could trade different price increments. Group 2 stocks traded at five-cent minimum increments but could also trade at the midpoint of the five-cent bid/ask spread. Group 3 stocks had to trade at the quoted price. Stocks in the fourth group—the control group—were not subject to the pilot program’s rules.
The five-cent spread was incurred when transacting in certain stocks for AAII’s model portfolios. Those of you investing in smaller-company stocks likely incurred it too. It was an added transaction cost. It was also an example of legislative intentions not working out in the real world.
AAII Model Portfolio Update
Roadrunner Transportation Systems Inc. (RRTS) was removed from the Model Shadow Stock Portfolio. The company’s recently filed 10-K reports with the SEC—which had been delayed due to prior restatements—showed continuing losses for 2016 and 2017. The proceeds from the sale were not large enough to warrant a new addition to the portfolio, so a replacement stock has not been purchased.
The portfolio posted a strong gain in August, up 7.8% for the month and is now up 5.7% year to date as of August 31, 2018. The S&P 500 index, as measured through the Vanguard S&P 500 Index fund, gained 3.3% during August. The Vanguard Small Cap Index fund also added 3.3% on a total-return basis, while the DFA U.S. Micro Cap fund (DFSCX) gained 3.8%.
Since its inception in 1993, the AAII Model Shadow Stock Portfolio has a compound annual average return of 15.7% versus the Vanguard 500 Index fund’s gain of 9.7% per year. Over the same period, the Vanguard Small Cap Index fund posted an average annual gain of 10.5%.
More on AAII.com
- Panel Advises Against Mandated Spreads for Small-Cap Stocks – Opposition to the pilot program existed before it was implemented, as this 2014 AAII Journal Briefly Noted article shows.
- How Much Small Cap Should Be in Your Portfolio? – Even with the historically higher returns, there are reasons why some investors may not want to overweight small-cap stocks.
Highlights from this month’s AAII Journal
- Examining the Shadow Stock Value and Size Factors – Our model is one of the oldest real-money examples of how the value and size premiums can be combined into a single strategy.
- Identifying and Screening for Vice and Virtue Stocks – Using so-called sin stocks and environmental, social and governance (ESG) stocks as examples, we show how to use thematic approaches to identify potentially attractive stocks.
AAII Sentiment Survey
- Bullish: 32.0%, no change
- Neutral: 35.9%, up 0.8 points
- Bearish: 32%, down 0.8 points
- Bullish: 38.5%
- Neutral: 31.0%
- Bearish: 30.5%
Take the Sentiment Survey.
What’s Trending on AAII
The Week Ahead
We’ll get our initial look at third-quarter earnings with eight members of the S&P 500 scheduled to report. Included in this group is Dow Jones Industrial component Nike Inc. (NKE), which will report on Tuesday.
A shift in sector and industry classifications, including the renaming and expansion of the telecom sector into the communications services sector will take place as of the close of trading on September 28. The changes will affect many online, media and advertising companies as well as several sector funds. See Sector Classification Change Could Alter Some ETFs in the August AAII Journal for more information.
The Federal Open Market Committee (FOMC) will hold a two-day meeting starting on Tuesday. The FOMC is expected to announce its third quarter-point (0.25%) increase in interest rates for this year. The meeting statement and updated committee member forecasts will be released at approximately 2:00 p.m. Eastern Time on Wednesday. A quarterly press conference with Chairman Jerome (“Jay”) Powell will be held at 2:30 p.m.
Elsewhere on the economic calendar, the July S&P Corelogic Case-Shiller home price index and the Conference Board’s September consumer confidence survey will be released on Tuesday. Wednesday will feature August new homes sales. August durable goods orders, the final revision to second-quarter GDP, August international trade and August pending home sales will be released on Thursday. Friday will feature August personal income and outlays, the September Chicago Purchasing Managers’ Index (PMI) and the University of Michigan’s final September consumer sentiment survey.
One Federal Reserve official will make a public appearance: New York president John Williams on Friday.
The Treasury Department will auction $37 billion of two-year notes on Monday, $17 billion of two-year floating rate notes (FRNs) and $38 billion of five-year notes on Tuesday and $31 billion of seven-year notes on Thursday.
Local Chapter Meetings
AAII Local Chapter Meetings offer you a variety of presentations from expert speakers who will give you their view on the world of investing. A bonus of attending a Chapter Meeting near you is the opportunity to meet other AAII members who share your interest and enthusiasm for investing. You can even share the Chapter experience with your family and friends by inviting them to attend Chapter Meetings with you!