The “Good Friday” Jobs Report may be one of the most
anticlimactic in memory as the sharp slowdown in the jobs growth rate ran smack
into a market closed for the holiday weekend and while it truly was a good
Friday for anyone still long the PowerShares DB US Dollar Index Bullish Fund
(UUP), what sort of situation will investors face at this morning’s opening?
The lack of trading on Friday meant that reporters had
more time than usual to debate how a weakening economy might impact the Fed’s
plans to raise rates and giving investors of all stripes time to debate how to
position themselves. But at ETF Global,
it provided us a chance to peruse our ETFG Quant movers report to learn how
investors have already been positioning themselves for a potentially softer
rate hike cycle.
Starting with the weekly changes in the ETFG Behavioral
Quant Movers Report, 8 of the 10 biggest % gainers for the week have some
degree of negative correlation to changes in the dollar that could help propel them
higher in the event that dollar sell-off continues into next week. The biggest percentage gainer was the FlexShares
Morningstar Emerging Markets Factor Tilt Index Fund (TLTE) whose Behavioral
Quant score rose by over 106% as the fund continues to outperform vastly larger
rival iShares MSCI Emerging Markets Index ETF (EEM) by over 150 bps
year-to-date. With over 2000 holdings,
investors might be more than a little curious how this fund differs from
average EM ETF and for that, you need to lift the hood a little. Compared to the average EM fund, TLTE is
weighted towards smaller cap stocks with over 15% in small cap positions
compared to a meager .47% for EEM and giving the fund an average market cap of
$8.5 billion compared to $20 billion for EEM.
A tilt towards small caps isn’t the only defining feature of the fund as
the portfolio is also skewed towards value stocks that have seen weaker
earnings growth than those found in EEM leaving investors with a portfolio
heavily exposed to those stocks that could potentially see strong price
appreciation as the dollar liftoff continues to falter.
TLTE isn’t the only fund with small cap EM exposure to
see a strong pick-up in momentum last week as the EGShares Beyond BRICs ETF
(BBRC) and the WisdomTree Emerging Markets Small Cap Dividend ETF (DGS) both
saw their behavioral quant scores rise by more than 50% last week. Like TLTE, both funds are intentionally bent
towards a focus on smaller companies than are found in EEM although investors
should consider BBRC a more “conservative option” as it has an overall higher
average market cap ($13.7 billion) than TLTE.
BBRC also eschews a focus on value stocks, favoring a more balanced
approach built around gaining exposure to a more diverse range of nations than
are currently found in EEM. BBRC has no
exposure to more developed Asian markets like China, Taiwan or South Korea
instead focusing on markets like Indonesia, Malaysia and Qatar that were up 2%,
2.45% and 5.2% respectively last week.
Prospective investors also need to come prepared with an opinion on the
South African Rand as one of last year’s biggest losers against the dollar
makes up the single largest currency exposure of the fund. Investors looking for a more “aggressive”
fund like TLTE have found DGS more to their liking as the fund concentrates
almost exclusively on small and micro-cap names leaving the fund with an
average market cap of a mere $1.3 billion compared to $8.5 billion for TLTE
although it carries a much higher ETFG volatility ranking as a result.
So if an emerging market flavor permeates some our
biggest behavioral winners for last week was there anything that defined the
biggest losers? So far the only clear
trend has been one that might be best called “the first shall be last” as the
healthcare rally that began in late February continues to run on fumes with two
healthcare funds among the biggest losers last week. Leading the advance in the opposite direction
were the PowerShares Dynamic Pharmaceuticals Portfolio (PJP) and the Market Vectors
Biotech ETF (BBH) where the serious loss of momentum has left many wondering
whether the end has come. The Healthcare
Select SPDR (XLV) has underperformed but the worst of the pain has been saved
for biotech sector with the iShares NASDAQ Biotechnology Index (IBB) down an
astounding 7.32% in the last two weeks compared to a negative 3.89% for XLV and
a 1.95% loss for the S&P 500. PJP
and BBH merit special mention for their heavily concentrated portfolios with
both funds holding a mere 26 positions compared to 149 holdings for IBB while
PJP’s use of ‘Pharmaceuticals’ in its name can’t obscure the fact that its
allocation to biotechnology is larger than BBH’s. With one of the biggest leaders of the bull
market losing steam while long despised emerging market stocks continue to gain
favor, this might be the last “good Friday” for investors with a U.S. only
focus for some time to come.
Thank you for reading ETF Global Perspectives!
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