3 ETF Trends That Might Shock The 'Risk-On' Mindset

by: Gary Gordon

How long did investors fret the possible combination of employment weakness and the U.S. Federal Reserve staying the course of incremental tapering? One day. On Tuesday (1/14/2014), dip buyers gobbled up riskier assets and short-sellers covered their backsides as soon as a better-than expected retail sales report alleviated concerns.

A perusal of month-over-month data revealed remarkable performance gains for a variety of high-beta ETFs:

High Risk ETFs Remain Very Hot
5-Day % 1 Month %
SPDR Biotech (NYSEARCA:XBI) 13.5% 21.3%
iShares MSCI Spain (NYSEARCA:EWP) 3.1% 13.2%
Guggenheim Global Solar (NYSEARCA:TAN) 2.7% 22.3%
iShares MSCI Europe Financials (NASDAQ:EUFN) 2.4% 11.1%
iShares Russell Microcap (NYSEARCA:IWC) 1.5% 8.3%
S&P 500 SPDR Trust (NYSEARCA:SPY) 0.0% 3.5%

However, the idea that investors see "risk on" opportunity around every corner may be overstated. Here are three ETF trends that might shock the simplistic notion that stocks are the only asset in demand.

1. A Turnaround For Longer Maturity Bonds? The advice that many financial professionals have been giving has been to avoid the long end of the bond curve and embrace shorter maturity bonds for the fixed income portion of an allocation. Admittedly, that's the approach I have taken with my clients for the better part of a year. By the same token, I am watching to see when - and under what circumstances - a "flight to quality" trade returns.

Technical analysts would be hard-pressed to ignore a combination of factors that appear to favor iShares 20+ Year Treasury (NYSEARCA:TLT). First, this exchange-traded tracker appears to have strong support at 52-week lows set back in August. Second, TLT recently climbed above its intermediate-term trendline (100-day). And while the price of TLT may have crossed above its 100-day moving average back in October before faltering, this time the slope of the line itself appears as though it may turn positive. While I will not be investing in TLT at this time, a string of questionable economic data points and/or poor Q4 earnings could result in surprisingly robust demand for long bonds.

2. Safety Seekers Love China. In October of 2013, I recommended that currency ETF enthusiasts take a look at WisdomTree Chinese Yuan (NYSEARCA:CYB). The yuan/renminbi has risen steadily since 2006 against the U.S. dollar. Even though China monitors the extent that it will allow its currency to appreciate, there's little reason to expect any changes to the basic dynamic; that is, the U.S. is maintaining an incredibly loose monetary policy here in 2014 when compared with China's concern about inflation. In essence, even those who believe the dollar will strengthen against most developed world currencies in 2014, safe haven seekers believe that a portion of their cash should be in China's currency.

In November, I offered another compelling way to play China's currency as well as the safety of its government bonds. PowerShares Yuan Dim Sum Bond (NYSEARCA:DSUM) provides a reliable income stream on a fixed income portfolio with short-term maturing bonds. Funds like iShares 1-3 Year Treasury (NYSEARCA:SHY) may provide a measure of safety for its 0.3% annualized yield, yet DSUM serves up closer to 3.0% with probable capital appreciation.

3. Yield Curve Flatter, Not Steeper in 2014? In 2013, perceived economic well-being coupled with the Fed signaling an intent to slow its asset purchases sent 10-year and 30-year U.S. bonds down much faster than shorter-term bonds (e.g., 1 year, 5-year, etc.). This could be seen in a steeper yield curve. Some also profited from the trend via iPath Treasury Steepener (NASDAQ:STPP).

In 2014, however, a different picture may be developing. Money has been slowly creeping back into assets on both the long end of the yield curve as well rates-sensitive REITs. In contrast, demand for the shortest end of the treasury curve (e.g., 1-3 years) has been neutral at best. The consequence? The yield curve is stabilizing and may ultimately flatten as the year progresses; in other words, yields on shorter-term bonds may rise while yields on longer-term bonds run in place. Year-to-date, iPath Treasury Flattener ETN (NASDAQ:FLAT) may be signaling a changing of the guard.

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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.

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