Taking the Pulse & Healthcare

All eyes turn to the Fed this week as the FOMC gathers in Washington to decide whether the time has come to raise the Federal funds rate, something that hasn’t been seen in America in nearly eight years.  And while September remains the odds on favorite for the first rate hike, it was only a few weeks ago that money managers like Jeff Gundlach were speculating that there wouldn’t be a rate hike at all in 2015. However given the recent spate of positive economic news over the last two weeks, investor confidence has been shaken as concerns that the FOMCs day of financial reckoning might soon be upon us and so we at ETF Global decided it was time to check-in on our list of funds ranked by their behavioral scores to see how those anxious investors have been positioning their portfolios.

It should come as no surprise that international funds continue to dominate the list of top funds with 16 of the top 25 offering exposure to Europe, China or another emerging market.  What is surprising (or not if you’re being cynical) is that two funds that have absolutely dominated the asset flows in 2015, the WisdomTree Europe Hedged Equity (HEDJ) and the Deutsche X-trackers MSCI EAFE Hedged Equity ETF (DBEF) are far down the list with HEDJ coming in at #60 while DBEF clocks in at #255 thanks to shifting momentum that has brought unhedged currency exposure back in style.  UUP has shed nearly 4.9% since April 13th and dragged HEDJ and DBEF along for the ride with those funds down 6.92% and 3.56% respectively while every nation specific fund that iShares could whip together has been delivering solid mid-single digit returns except two, iShares MSCI Germany ETF (EWG) which is down 4.42% since April 13th and iShares MSCI Spain Capped ETF (EWP) which is up a mere .14% for the same period.  Besides lackluster performance both funds also share top billing on our behavioral quant list, coming in at #3 and #7, far ahead of better performing iShares MSCI Ireland (EIRL), which only ranks at #15 despite a strong 4.99% advance.  Could both funds be enjoying a late momentum push as investors hope the laggards finally catch up?

Our more regular readers might have noticed there’s one sector that’s conspicuously absent from our list of top ranked funds, healthcare, were the lack of any broad sector or even large sub-category funds makes the presence of several of this year’s high-flying biotech funds even more apparent.  The first non-biotech fund to make the list is the tiny RBS Global Big Pharma ETN (DRGS) at #29 while the sector heavyweight Health Care Select Sector SPDR Fund (XLV) doesn’t make an appearance until #58, behind the better trending banking and insurance ETF’s, small-cap agribusiness and even that must have for all well-balanced portfolio’s, the iShares MSCI Denmark (EDEN) fund.  The momentum downshifting since we last wrote about XLV at the start of the month has been remarkable; in terms of pure price momentum the fund now lags significantly below XLF and only high long-term momentum scores and short interest keep XLV at the top of the select sector pack.  Even more remarkable has been the shift in fund flows; on June 1st we wrote that XLV had pulled in more money in the first five months of the year than in all of 2014 but some of our faithful readers have been heading our words as the capital flows have started going the other way.  During the last two weeks while XLV has struggled to get above $75, approximately $60 million has left the fund in search of greener pastures.

With XLV ending Friday with what our chart watching friends might call a bearish “evening star” pattern, we’re left wondering how long before the rest of the capital finds a new home, but the more assertive investors aren’t waiting for the other shoe to drop and have been busily putting their assets to work in in a new entrant, the iShares U.S. Financial Services ETF (IYG), as the small fund heavy weighting towards its top ten holdings like J.P. Morgan and Goldman Sachs has helped it outperform the S&P 500 by over 400 bps in the last three months.  And while IYG might be feeling lonely in the top 25, several other funds have been climbing the list with two small offerings from Powershares in the 40’s, the PowerShares KBW Capital Markets Portfolio (KBWC) at #41 which like IYG has a focus on larger bank stocks while the PowerShares KBW Regional Bank Portfolio (KBWR) at #47 is similar to the funds we discussed last week with a focus on those smaller banks that stand to the benefit the most from rising net interest margins.  Price momentum has pulled these two funds far up the list, but for our more active traders using the ETFG Quant reports looking for momentum and simply screening on strong price action (and more than $10 million in assets) would land on the little First Trust NASDAQ ABA Community Bank Index Fund (QABA) who’s sizzling 2.7% performance last week left the rest of the financial pack in the dust.  Only a miniscule short interest ratio keeps the fund from making the top 50 and with performance like that, it’s probably only a matter of time before it does.

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