Reallocation in the Air

As millions of Americans gathered around the holiday table to celebrate Thanksgiving, nearly all had something for which to be grateful.  For many, it was low gas prices to help stretch the holiday budget but for investors, it was Tuesday’s strong GDP report that many hope all but guaranteed a rate hike next month.  While millions of savers will be thrilled to finally see a one-year CD rate above 1%, our weekly ETFG Quant Movers report shows that many have more than just visions of higher interests rates dancing through their heads.

While most international equity fund sponsors continue to hope that Santa might refrain from loading them up with coal for another year, Christmas came early for the Deutsche X-trackers MSCI Germany Hedged Equity ETF (DBGR) that saw a more than seventy five percent increase in its ETFG Behavioral score last week and pushed the fund into the 60^th spot.  Hedged German funds have been quite the rage this year and last week’s GDP report certainly helped the cause as the dollar fought its way back to recent highs and accordingly sent the Euro back to the mat giving European exporters hope for a better new year.  DBGR won’t be lonely on our list as the 50^th ranked fund is the WisdomTree Germany Hedged Equity Fund (DXGE).  You might wonder how many German-equity funds the world needs and investors thinking these two might be carbon copies would be disappointed.  The automotive industry unfortunately makes up the single largest sub-industry for both funds although maybe some of DBGR’s recent success is due to a much smaller Volkswagen allocation at 1.69% versus 2.72% for DXGE.  But when it comes to international equities, not all funds are created equal.

One trend that even a casual observation will show is that, whatever the currency situation, investors have a marked preference for country specific funds over broad-market products.  Chinese funds continue to have a place on our list of top 100 behavioral funds although Friday’s dismal showing by the Deutsche X-trackers Harvest CSI 500 China-A Shares Small Cap ETF (ASHS) has taken some of the wind out of their sails.  Maybe it’s a sign of surging investor confidence (if only in themselves) but the two hedged funds we discussed last week that dominated asset flows at the start of 2015, the WisdomTree Europe Hedged Equity (HEDJ) and Deutsche X-trackers MSCI EAFE Hedged Equity ETF (DBEF), continue to see their ETFG Behavioral scores slip with HEDJ just barely making the top 100 where only one other international fund with a multinational focus, the iShares MSCI Europe Small-Cap ETF (IEUS), currently resides.  What’s taken their place is an international grab bag with both the iShares MSCI France ETF (EWQ) and the iShares MSCI South Korea Capped ETF (EWY) seeing their behavioral scores surge last week while the iShares MSCI Spain Capped ETF (EWP) was one of the biggest losers thanks to an over 30% drop as the nation was encircled by anxiety over the long-simmering Catalonian independence movement and the potential for more discontent after recent leftist victory in Portugal.

Even though our list of weekly ETFG Quant movers was dominated by international funds, their recent performance remains very much an emerging trend as our behavioral 100 list continues to be ruled over by domestic funds which have their formerly strong price momentum to thank for bringing them to their current station.  Even as we close in on the year-end reallocation, the behavioral list continues to be made-up largely of prior winners as investors wait for more guidance before getting serious about moving capital.  For those asset allocators looking for a quick way to sum up the rally of the last nine weeks (if only so they can think about how to position themselves over the next few weeks), you don’t have to look much farther than the #1 fund on our list, the massive Vanguard 500 Index Fund (VOO), which only helps focus on the large-cap dominance that even now has begun to wane.  The shortened trade week and light volume always make the holidays a hard time to take the market’s pulse but last week’s strong performance by small-cap funds like the iShares Russell 2000 ETF (IWM) whose 2.4% gain last week versus VOO’s .11% return could signal a potential bottoming-out in the relative underperformance by small-cap stocks.  The question isn’t whether small-caps can begin to catch up but when and now the question becomes what further signals do investors need to become comfortable with smaller names?  Last Wednesday’s economic releases included a strong improvement in personal income and durable goods orders that convinced some investors that the economic outlook was improving but with nearly every major Fed player speaking this week (including Chairwoman Yellen on Wednesday), investors might find themselves holding onto their current allocation for another few weeks.

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