A fellow money manager recently tweeted, "I'm praying for bad econ news so that the Fed will keep buying bonds. I don't know what else to pray for." I felt the writer's pseudo-pain and promptly bit down on my lower lip. After all, think about what we celebrate in the investment universe today. We want the economy to sputter or meander, just so our central bank will push interest rates into the proverbial basement. We're addicted.
On Friday, the U.S. Dow Jones Industrials rallied more than 200 points after learning that, for the third consecutive month, jobs increased by less than 200,000. The 175,000 new jobs in May beat watered down expectations, but job growth still remains far too anemic for the Federal Reserve to rein in its bond-buying program. In other words, rates will likely remain contained and U.S. stocks can continue to rally.
Or will they? At least three ETF categories are struggling mightily. And while ongoing rate manipulation might help turn one category back around (i.e., REITs), it isn't going to help the other two segments (i.e., Asia-Pacific and Natural Resources). Let's take a closer look at these three groupings:
1. REIT ETFs. Real estate investment trusts are required to distribute 90% of their taxable income. The certainty of a distribution is attractive to income investors in much the same way that master limited partnerships (MLPs) attract a legion of loyalists. By the same token, a 30-year fixed mortgage rising from 3.4% to 4%-plus has already hindered refinancing demand and might take a toll on home-buying itself. In turn, REIT ETFs became particularly vulnerable to Fed "tapering talk."
If funds like Vanguard REIT (VNQ) can discover support at a 100-day, intermediate average, however, the brutally quick correction may end as quickly as it began. Why? For one thing, the U.S. job market, as well as the economy as a whole, will remain sub-par. That will keep the Fed on its bond-buying binge whereby rate sensitive ETFs like VNQ could respond.
For the moment, though, the overwhelming majority of REIT ETFs are down more than 10% from a 52-week high. Additionally, they sit below their respective 100-day trendlines, which may make them "falling knives" rather than bargain buys. The list of sad-sacks include: First Trust S&P REIT (FRI), iShares FTSE NAREIT Residential (REZ), SPDR DJ REIT (RWR), SPDR DJ Global REIT (RWO) and iShares DJ Real Estate (IYR).
2. Asia Pacific ETFs. Having lived in the region on and off for a number of years in the 1980s and 1990s, few investment advocates have believed as strongly in China's economic rise as well as the Asian neighbor theme; that is, China's rapid internal growth benefits neighboring countries that can provide the 2nd largest economy with products and services.
More recently, the Asia Pacific investing theme has fallen on hard times. China's manufacturing sector has been slowing and its leaders have been less willing to "stimulate" through monetary easing. What's more, Japan's massive yen devaluation has made the products of other countries in the region less competitive.
It may take a while for Asia Pacific ETFs to recover their mojo. For now, it makes more sense to resist the urge to swing for the fences. Struggling country ETFs include: iShares MSCI Thaliand (THD), Market Vectors Indonesia (IDX), iShares MSCI Philippines (EPHE), iShares South Korea (EWY) and iShares Singapore (EWS).
3. Natural Resources ETFs. In the same manner that China's growth slowdown has adversely affected country ETFs in Asia, corporations involved in raw material production and distribution are hurting. Not only are fertilizer producers and metal miners having difficulty exporting to China, six consecutive quarters of recession in the eurozone is about as disturbing as it gets. Severe downtrends have occurred in funds like iShares Global Materials (MXI), Global X Fertilizer/Potash (SOIL), WisdomTree Global Natural Resources (GNAT) as well as SPDR S&P Global Natural Resources (GNR).
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Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.