Risk ETFs Buckle In The 11th Hour Of The 11th Week [Podcast]

by: Gary Gordon

Give all three of the U.S. large-cap benchmarks credit. They’ve been remarkably resilient in remaining within a stone’s throw of respective multi-year highs.

Nevertheless, a sensible money manager has to take the entire landscape of risk assets into account. If the environment for stocks is still so rosy, then why are small-caps and foreign stock ETFs faltering? And if the U.S. economy is nearing a self-sustaining recovery, then why are energy and materials ETFs below 50-day trendlines?

Throughout the week, I’ve highlighted several reasons why investors may wish to brace themselves for volatility, including:

1. 3-MONTH LIBOR RATES. They may not be rising anymore, but they have flattened out since the start of March. In fact, European Stock ETFs and Emerging Stock ETFs simply can’t gain any traction if inter-bank willingness to lend tightens up on reignited sovereign debt contagion fears.

2. FINANCIAL ETF MOMENTUM. Before the 2008 banking meltdown, strength in the financial sector of the economy often indicated an acceleration of the business cycle. Indeed, financials used to be a leader in the early stage of bull markets. In 2009, 2010 and 2011, however, Financial ETF outperformance preceded each of the corrections that occurred in those years.

It’s not that a pullback has to happen, nor am I suggesting that investors abandon stocks. In fact, pullbacks, particularly in SPDR S&P China ETF (NYSEARCA:GXC), are definitive buying opportunities. What other country has a government with trillions in cash reserves and a central bank with plenty of wiggle room to cut rates?

China will exercise stimulus in sensible steps throughout the year as warranted, bolstering China stocks with policies to expand its rapidly-growing economy. Those that fear a “hard landing” are wasting their emotionality. If you want to fret something, fret rising Spanish bond yields and European economic contraction. The European debt crisis is still the biggest threat to investors, in spite of a respite from Greek default discussions.

Month-over-month returns confirm that price gains for risk assets may be abating:

Popular Stock ETFs Begin To Buckle?

Month-Over Month %

iShares DJ Total Market (NYSEARCA:IYY)


iShares Russell MidCap (NYSEARCA:IWR)


iShares Russell 2000 (NYSEARCA:IWM)




iShares MSCI All-World Excluding U.S (NASDAQ:ACWX)


Vanguard Materials (NYSEARCA:VAW)


iShares MSCI All Country Asia Ecluding Japan (NASDAQ:AAXJ)


Vanguard Emerging Markets (NYSEARCA:VWO)


Vanguard Energy (NYSEARCA:VDE)


It follows that capital price appreciation may not be the best way to make money in Q2. In fact, it may be preferable to load up on the underperforming income producers, from Guggenheim Multi-Asset Income (NYSEARCA:CVY) to EG Shares Emerging Market Low Volatility (NYSEARCA:HILO) to Vanguard Dividend High Yield (NYSEARCA:VYM).

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.