Riskier Assets Strong While Safe Assets Have Negative Trends

Includes: DBC, FRN, GLD, VWO
by: MyPlanIQ

Another week went by with risk assets being in much favor. This is especially true for the traditionally considered 'riskiest' assets including emerging market equities (NYSEARCA:VWO), commodities (NYSEARCA:DBC), frontier market equities (NYSEARCA:FRN) and gold (NYSEARCA:GLD). For the week, they were all up more than 1%. For more detailed performance, see here.

The following table shows the trend scores for all major asset ETFs:

Assets Class Symbols 03/04
Commodities DBC 16.8% 16.74% ^
US Stocks VTI 10.61% 13.06% v
Gold GLD 9.66% 9.84% v
International REITs RWX 9.33% 11.37% v
US Equity REITs VNQ 8.47% 12.41% v
Emerging Market Stks VWO 7.17% 7.07% ^
International Developed Stks EFA 7.15% 9.77% v
US High Yield Bonds JNK 4.99% 5.55% v
International Treasury Bonds BWX 3.49% 2.85% ^
Frontier Market Stks FRN 2.22% 1.08% ^
US Credit Bonds CFT 1.09% 0.76% ^
Emerging Mkt Bonds PCY 0.29% 0.07% ^
Total US Bonds BND 0.05% -0.04% ^
Treasury Bills SHV 0.01% 0.03% v
Intermediate Treasuries IEF -0.27% -0.52% ^
Mortgage Back Bonds MBB -0.55% -1.21% ^
Municipal Bonds MUB -1.24% -1.08% v

The trend score is defined as the average of 1,4,13,26 and 52 week total returns (including dividend reinvested).

From the above table, we can see the often considered 'safe' assets: Intermediate Treasuries (NYSEARCA:IEF), Morgage Back Bonds (NYSEARCA:MBB) and Municipal bonds (NYSEARCA:MUB) all have negative trends, meaning they under performed against even cash (NYSEARCA:SHV). We have seen this again and again this year. Risk appetite is high right now.

For the fixed incomre portion of a portfolio, at the moment, the international bonds (NYSEARCA:BWX) and investment grade corporate bonds (CFT) still offer some good value. International bonds (BWX) has been doing well amid the weakness of US dollars: Powershares US Bullish (NYSEARCA:UUP) is down more than 2% year to date.

As one can see from the table, commodity has ascended to the number one spot due to its strong performance. Year to date, the portfolio with commodity exposure is outperforming the one without commodity. The following table shows the comparison:

Portfolio Name YTD AR 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
Five Core Asset Index ETF Funds Strategic Asset Allocation Moderate 1.86% 16% 127% 6% 27% 8% 33%
Six Core Asset ETFs Strategic Asset Allocation Moderate 2.92% 16% 131% 5% 22% 7% 35%

As we pointed out in a separate article, simply adding commodity asset (DBC) to a strategic asset allocation portfolio does not necessarily enhance the risk adjusted return. For the moment, positioning in risk assets, especially in commodities and US stocks (NYSEARCA:VTI), has done well. One, however, needs a systematic way such as a tactical asset allocation strategy to manage risk.

Fundamentally, the top two trendy risk assets, commodities and US equities, are vulnerable for a reversal. Commodities benefit from the recent unrests in middle east: oil price skyrocketed due to the oil supply concern from Libya's standoff between the regime and the rebel. Gold and other precious metals usually shine in a period of uncertainty. However, one should be watchful for the fast development of these events. Once the concerns faded, commodity prices might be back to a more normal level.

US equities, on the other hand, are over valued: based on Shiller's CAPE10 (Cyclically Adjusted PE10), S&P 500 (NYSEARCA:SPY) is now 50% over valued, an extremely high number that should cause a long term investor to be highly alert. One should take the evidence as it emerges.

Disclosure: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.

Disclosure: I am long DBC, GLD and IYR.