It seems like hardly a week can go by without the
Financial Times or the Wall Street Journal talking about investors continuing
unadulterated enthusiasm for European equity funds as the potential for fiscal
tightening here at home runs counter to the ECB’s quantitative easing program
to stimulate growth and fight the prospect of deflation. Hedged or unhedged doesn’t seem to matter as
the ETFG Fund Flows report shows over $4 billion has found its way into the
European Equity ETF market over the last 30 days compared to the nearly $12
billion that has leeched out of domestic equity ETF’s. But while the inflows into Europe have been impressive,
Europe continues to lag behind the Asian-Pacific markets that pulled in over
$5.32 billion in the same time period and perhaps even more surprisingly, the
bulk of the money isn’t finding its way to China.
Despite the hype surrounding the strong performance of
the China A-share market (or possibly because of it) the biggest asset gatherers
in ETFG’s “Asia-Pacific” category are about as far removed from the red-hot
Shanghai exchange as you can possibly be while still within a three-hour flight
time. Formerly most hated international
market Japan continues to be the biggest gatherer in 2015 with over $4.3 of the
$5.32 billion that’s flowed into the space going to just two funds, old
stalwart iShares MSCI Japan ETF (EWJ) and WisdomTree Japan Hedged Equity Fund
(DXJ.) DXJ’s hedged currency exposure is
one of the few differences between the funds although the impact on performance
has been negligible in 2015 with DXJ up 12.72% compared to 13.26% for slightly
larger rival EWJ as the U.S. dollar so far has held onto most of its 2014 gains
versus the yen. Investors doing a deeper
dive into the funds for clues on which way the “smart money” is leaning are
likely to be disappointed; both funds are focused on the large cap market with
DXJ having a more value/blend leaning towards EWJ’s solid large blend focus and
consequently leading to large cross holdings between the funds. Both funds also have among the lowest ETFG
Red Diamond Risk ratings thanks to low volatility and country risk and even the
inflows are nearly identical over the last month.
While the developed and larger emerging market nations in
Asia might be holding their own, the smaller frontier markets that saw massive
investor inflows during the QE era are quickly losing ground. Among the biggest losers in terms of
percentage of assets are the Market Vectors Vietnam ETF (VNM) and iShares MSCI
Thailand Capped ETF (THD) with outflows of $63 and $75 million
respectively. Both nations benefited
strongly from the “anywhere but Europe” mentality of the last few years with
THD outperforming the iShares Emerging Market ETF (EEM) five out of the last
six years while VNM became an investor darling after outperforming EEM by 700
basis points in 2012. But the potential
for Fed rate hikes later this year has put both nation’s currencies (and
consequently stock markets) under pressure as investors bring their capital
home. Vietnam has already devalued the
dong once this year as the rising dollar crimped the country’s strong export
growth although the depreciation risks raising inflation closer to the Central
Banks targeted rate of 5% and has led to a large outflow by foreign
investors. And while the Thai Baht was
one of the few currencies to hold its ground versus the dollar over the last
year, a surprise rate cut earlier this month led to serious outflows from the
Thai credit market.
The prospect of a rising dollar may continue to drag on
frontier performance, but one of the biggest winners in the war for investor
dollars (at least in percentage terms) is a small fund that offers investors
exposure to two of last year’s bigger losers in the currency wars. The relatively tiny Wisdom Tree Australia
& New Zealand Debt Fund (AUNZ) tsaw a remarkable inflow of 225% last month
to bring its AUM to over $78 million.
Initially launched in 2008 as the WisdomTree Dreyfus New Zealand Dollar
Fund (BNZ) and later refocused in 2011 to include Australian debt, the fund actively
rotates between what the managers consider to be three “sectors” or government
debt, semigovernment (state and local debt) and debt issued by supernational
agencies with a focus on generating income and most importantly to the new
investors, capital appreciation due to changes in exchange rates. With the Australian and New Zealand dollars
down 21.6% and 15.82% respectively since last July and only one fund currently
offering non-levered exposure to the Australian dollar, AUNZ has found a role
in the portfolios of investors looking for alternate means to express their
opinion that the U.S. dollar has risen too far too quickly.
Thank you for reading ETF Global Perspectives.
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