Final February Swings

Monday, February 26, 2018 - Through political turmoil, more fallout with the Russian interference of the Presidential election and continued grieving over the horrific mass shooting in Florida, markets still found a way to end Friday with a rally as investors poured money back into stocks after a slow start to the shortened work week. Major indices finished up for the week thanks to a 1.4% gain for the Dow Jones Industrial Average, a 1.6% gain in the S&P 500 and a 1.8% gain in the tech heavy Nasdaq Composite on Friday.

Stock and bonds have been going through a period of radical swings in February as investors are starting to worry about the uptick of inflation and the consequential rise in interest rates by the Federal Reserve. Some fear that the increase in rates can come as early as next month’s meeting which in turn has triggered redemptions throughout some of the major bond ETFs.

ETFG Fund Flow Summary - The SPDR Barclays High Yield Bond ETF (JNK) and iShares iBoxx Investment Grade Corporate Bond ETF (LQD) have suffered from major redemptions MTD in February both losing over $2.5B in AUM, according to the ETFG Fund Flow Summary. That net outflow makes up for almost 20% of JNK’s AUM which stands at a little over $11B and over 6% of LQD’s AUM which sits at about $36B.

Outflows haven’t only hit the bond ETFs this month. ETFs as a whole are actually on track for one of their worst months in recent years with net outflows already over $25B worth of AUM just in equity based products. The largest percent of that outflow comes from State Street’s S&P 500 ETF (SPY) which has lost over $19B of its AUM in February - this happening while the index is down just about 75 points for the month.

ETFG Quant Movers - In the ETFG Quant movers we saw non-US based ETFs take some largest hits to their overall scores with the iShares MSCI EAFE Small-Cap ETF (SCZ), SPDR S&P Emerging Markets Dividend (EDIV), and iShares Edge MSCI Min Vol Europe ETF (EUMV) losing 21.27%, 16.23% and 16.20% to their overall quant scores respectively.

The winners in our Quant model covered both the Preferred and Utilities sectors of the markets with PowerShares Preferred Portfolio ETF (PGX), John Hancock Multifactor Utilities ETF (JHMU) and the PowerShares S&P Small-Cap Utilities Portfolio (PSCU) seeing the largest % gain to their scores adding 32.05%, 28.89% and 17.25% to their overall grades respectively.

It will be interesting to watch how markets continue to play out over the next month if investors are guessing right and there is a rate increase in the near future. That along with the continued panic around government and gun control might cause the VIX to spike like it did earlier in the month but then again, the markets have seen to be quite resilient over this long running bull market.

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