Rocking the Boat

The momentum shift in the market last week was profound for those investors who spent the summer preparing their portfolios for the fallout from a tightening Fed.  While the powerful 3.26% surge by the S&P 500 sparked a debate among technicians that it was nothing more than short covering, maybe it wasn’t all that surprising when you consider that the summer rout brought us back to the lows of last October when concerns over the timeline for Fed tightening sent investors running for cover.  Our ETFG Behavioral Report shows new patterns that make sense when many are convinced the Fed’s plans to hike rates are on indefinite hold, but those who think the Fed might yet surprise us might want to study them carefully in case they plan to take the other tack.

Last week we were surprised to find two emerging market funds on our list of top 25 behavioral funds, so try imagining our amazement when we checked the list and discovered that 10 funds with an international focus were now crowding out the top spots that until just recently had been held by biotech funds.  Not surprisingly the top ranked fund is the iShares MSCI Emerging Markets ETF (EEM) which saw a 6.17% gain last week and whose behavioral score has surged by nearly 30% since late September as the possibility of a Fed rate hike began to dim.  While other EM funds appear on the list, the bigger surprise for us was that the weakening dollar has given a shot in the arm to those developed market economies so dependent on supplying commodities to the rest of the globe.  We first talked about the idea of using developed market ETF’s to gain exposure to resurgent commodities and a falling dollar last February (see “Dollar Doldrums) and while several of the funds we discussed including the iShares MSCI Australia Index Fund ETF (EWA) and the iShares MSCI South Africa ETF (EZA) rallied into the early part of spring; a stabilizing dollar and prospects for a Fed tightening led to a significant rout that sent them to scurrying back to support close to multiyear lows.

Even with three voting members of the FOMC saying a rate hike was still on the table last week, the lack of any bad news from China combined with a weakening dollar gave commodities a short in the arm and helped EWA and EZA manage serious gains (7.62% and 5.35% respectively).  That performance might have pushed EWA all the way to #43 on our list, but it was another Commonwealth country that was the true star last week with the iShares MSCI Canada ETF (EWC) surging up the ranks to come in at #9 thanks to a double whammy of strong price momentum and high short-interest despite slightly underperforming EWA with a “meager” 6.72% gain last week.  While the Australian dollar ETF (FXA) experienced a far more substantial surge of over 4% last week compared to a 1.8% gain the for the Loonie fund (FXC), consider the underlying holdings of the two iShares funds.  Both were intended to offer exposure to the broad equity markets of their respective nations and financial stocks make up the largest allocation in both funds, but EWA has a nearly 45% of its portfolio dedicated to that sector compared to EWC’s 31%.  And while EWA might have another 13.5% in materials, remember that Canada is just one big expensive oil well which has been hit hard by falling prices, so the resurgent price of oil has helped EWC’s 22% allocation to energy stocks (along with its 9% allocation to materials.)

Materials were on everyone’s mind last Friday as the start of the earnings season got underway Thursday night with a disappointing report from Aloca (AA) that sent the stock tumbling down 6.8% on Friday and weighed heavily on the SPDR S&P Metals and Mining ETF (XME) and Materials Select Sector SPDR Fund (XLB) although as .07% of the S&P 500, it barely made a dent on the broader equity markets.  But that worrisome start might be just the beginning of a difficult time for equities as the last Friday’s edition of the Factset Earnings Insight Report raises the possibility that earnings for the S&P 500 are likely to be negative for the third quarter (and for the first time since 2009, we could have two consecutive quarters of falling earnings) thanks largely to the energy and materials sectors.  Investors concerned about exposure to stocks with falling earnings should visit the ETFG Equity Grey Market Report as earnings are released to study the potential fallout for different funds and to reorient your portfolio accordingly.  According to Factset, the telecom sector should experience the strongest y-o-y earnings growth and typing Verizon’s ticker (VZ) into the search field brings up a long list of different products for your consideration from the heavily concentrated like the Vanguard Telecommunication Services Index Fund (VOX) to the more diverse WisdomTree High Dividend Fund (DHS).

Don’t let the Fed dictate every move in your portfolio this year.

Thank you for reading ETF Global Perspectives!

_______________________________________________________________

Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice.  ETF Global LLC (“ETFG”) and its affiliates and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively ETFG Parties) do not guarantee the accuracy, completeness, adequacy or timeliness of any information, including ratings and rankings and are not responsible for errors and omissions or for the results obtained from the use of such information and ETFG Parties shall have no liability for any errors, omissions, or interruptions therein, regardless of the cause, or for the results obtained from the use of such information. ETFG PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO ANY WARRANTIES OF MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE.  In no event shall ETFG Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of the information contained in this document even if advised of the possibility of such damages.

ETFG ratings and rankings are statements of opinion as of the date they are expressed and not statements of fact or recommendations to purchase, hold, or sell any securities or to make any investment decisions. ETFG ratings and rankings should not be relied on when making any investment or other business decision.  ETFG’s opinions and analyses do not address the suitability of any security.  ETFG does not act as a fiduciary or an investment advisor.  While ETFG has obtained information from sources they believe to be reliable, ETFG does not perform an audit or undertake any duty of due diligence or independent verification of any information it receives.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.  Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue.  Prices, values, or income from any securities or investments mentioned in this report may fall against the interests of the investor and the investor may get back less than the amount invested.  Where an investment is described as being likely to yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate.  Where an investment or security is denominated in a different currency to the investor's currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor.