Monday, January 26, 2015

Central Banks Anxiety

With 3 major countries' Central Bank announcements last week, the differences in monetary policy between the U.S. and the rest of the world has only become more pronounced and is now creating anxiety for investors already nervous.  With some of the best performance in 2015 coming from traditional “safe havens” like U.S. Treasuries and Equity Precious metals, we decided it’s time to find out how investors have been reallocating their portfolio’s in January.  Using the ETFG Scanner to rank funds by fund flows over the last month, we found that there are only three broad equity funds in our list of the top 20 and two of those are internationally oriented.

When it comes to Europe, there’s no doubt that easing is finally here and that parity between the Euro and Dollar is only a matter of time.  With the Currency Shares Euro Trust (FXE) back to levels not seen since 2003, investors are taking advantage of currency-hedged funds to play Europe and have fixed their sights on the WisdomTree Europe Hedged Equity Fund (HEDJ) while investors with a broader focus have turned to the Deutsche X-trackers MSCI EAFE Hedged Equity ETF (DBEF).  Offering a strict EU investment focus and 100% hedged to the Euro, the performance of HEDJ reflects investor enthusiasm for European equities with a one month return of 6.35% compared to -1.35% for SPY and an positive inflows of over 20% of AUM in that same period.  Offering hedged EAFE rather than strictly European protection, newer and smaller DBEF is up a less earth shattering 1.35% as but has added nearly $741 million to increase AUM to $1.8 billion.

If you were to rank the top 20 funds by AUM growth, the only U.S. oriented broad equity fund making the list is the iShares MSCI USA Minimum Volatility ETF (USMV) which has seen its AUM rise nearly 10% in the last month.  After the first five trading days of the year erased most of the gains from the late December rally and Treasury yields broke below their 2014 downtrend channels, investors sought comfort (and yield) where they felt safest getting it; namely, Utilities, Consumer Staples, and REIT’s, all of which have trailing twelve month yields well above that for the S&P 500.  Over the last month, the SPDR Select Sector Utilities ETF (XLU) only lags behind its consumer discretionary counterpart with inflows of over $785m while the iShares Dow Jones US Real Estate Index Fund (IYR) has pulled in over $488 million.  Investors more concerned about growth than cash flow have either turned their eyes back to healthcare, where another $525 million flowed into the SPDR Select Sector Healthcare (XLV) fund.  Without repeating our concerns over rich valuations for defensive sectors, investors certainly have turned their positioning more defensive in 2015.

Some things are meant to go together, so for those U.S. investors who want European equity exposure, higher yields and aren’t afraid of a little country-specific risk might want to turn their focus to the Deutsche X-trackers MSCI Germany Hedged Equity ETF (DBGR) and the WisdomTree United Kingdom Hedged Equity ETF (DXPS).  With trailing yields of 9.64% and 7.41% respectively, both funds have already proven to be favorites with investors despite the anxiety that most investors may feel when taking on country-specific risk in their international allocations.  DBGR is just one of several German-oriented ETF’s that have seen significant gains in assets in 2015 with performance to match, up 9.54% YTD.

Thank you for reading ETF Global Perspectives!

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