ETF Market Vital Signs: October 30

Daily Performance:

• Vanguard FTSE Emerging Markets ETF (VWO):  +1.15%

• iShares Russell 2000 ETF (IWM): +0.85%

• iShares MSCI EAFE ETF (EFA): +0.72%

• SPDR S&P 500 ETF Trust (SPY): +0.64%

• PowerShares QQQ (QQQ): +0.21%

• iShares 20+ Year Treasury Bond ETF (TLT): +0.08%

• Vanguard Total Bond Market (BND): +0.07%

• SPDR Gold Shares (GLD): -1.05%

Daily Unusual ETF Volumes Versus 30-day Average

• iShares S&P Small-Cap 600 Value ETF (IJS)– 404%
• iShares Core High Dividend ETF (HDV) — 301%
• Direxion Daily Gold Miners Bull 3x Shares (NUGT) –- 293%
• Utilities Select Sector SPDR Fund (XLU) — 265%
• Market Vectors Gold Miners ETF (GDX) — 263%
• iShares Silver Trust (SLV) –- 214%

(Source: FactSet; ETFs with more than $500 million in assets)

Total Consolidated Volume in Dollar Terms

• Thursday: $273 billion
• Five-day average: $278 billion; month-to-date average: $328 billion

(Source: BATS Global Markets)

Japan ETFs Jump on Pension Headlines

Japan stock exchange-traded funds are zooming higher in afternoon trading as headlines circulate that Japan’s mammoth public pension fund will move billions of dollars into stocks, traders say.

The iShares MSCI Japan ETF (EWJ) jumps 1.1%, while the WidsomTree Japan Hedge Equity Fund (DXJ)

climbs 1.4% in recent trading. The S&P 500 also hit session highs after 1:00 p.m. Eastern, when the headlines started to circulate.

The headlines, though not confirmed, claim that Japan’s Government Pension Investment Fund, the world’s largest public pension with over $1 trillion in assets, will jump into the stock market with greater vigor than previously thought.

Barron’s observed the potential for the pension to give a shot in the arm to Japanese stocks back in June.

Reuters reported on Wednesday that the GPIF was active selling bonds during the third quarter, and that it had plans to do more, citing a person familiar with the the matter:

Japan’s $1.1-trillion public pension fund pulled back from Japanese bonds in the most recent quarter, allowing domestic bonds to fall below half of its portfolio for the first time

Reuters said that the pension fund held more than $628 billion in Japanese Government Bonds, about 52% of its portfolio, as of the end of June, but planned to reduce that holding to 40%. 

People familiar with that review of GPIF’s model portfolio have said the fund is likely to raise its allocation for domestic stocks to about 25 percent, up from 17 percent at end June.

Under its current guidelines, the fund is allowed to hold up to 18 percent of its assets in Japanese equities.

GPIF is also expected to cut its JGB weighting to 40 percent and increase its investment in foreign stocks, according to sources with knowledge of those discussions.

But today, headlines  claim that the GPIF plans to cut its debt allocation to 35% and ramp its Japanese stock allocation to 25%.

From one trader:

Earlier chatter was going from 60% to ~40% on bonds, so looks slightly more and supportive

Gross’ Pimco Exit Sets Up Bond ETFs for Record Monthly Inflow

Bill Gross’ abrupt departure from Pacific Investment Management Co. turned into a bonanza for U.S. bond exchange-traded funds, which are poised to net their biggest-ever monthly cash hoard.

U.S. listed fixed-income ETFs ended Wednesday with a monthly inflow of $17.4 billion for October, on course to top February’s previous record of $17 billion, according to data from BlackRock (BLK).

Investors, traders and industry insiders have said that a large chunk of the bond ETF inflows are a result of money migrating away from Pimco’s Total Return fund (PTTRX) following the departure of Bill Gross for Janus Capital Group (JNS) on Sept. 26.

After Mr. Gross’ exit, trading volumes surged in short-term government bond ETFs and broad-market trackers that can act like cash substitutes.

ETFs including the iShares 1-3 Year Treasury Bond (SHY), iShares Core U.S. Aggregate Bond ETF (AGG) and the Vanguard Total Bond Market ETF (BND) soaked up the bulk of the bond money in October.

For some managers, these ETFs can serve as placeholders until a decision is made about where to park money for the long haul.

Matt Tucker, head of fixed-income strategy at BlackRock’s iShares unit, said the firm has been talking with investors about using the Core U.S. Aggregate Bond ETF as a bridge position.

“They may stay there long term, or identify a manager down the road and then switch,” Mr. Tucker told this blogger earlier this month.

Institutional investors such as pensions have flooded into ETFs as an easy-to-trade alternative in a bond market that has grown increasingly illiquid.

Total assets of U.S.-listed bond ETFs have nearly tripled over to the past five years, to $294.8 billion, according to BlackRock. October’s flows put bond ETFs close to topping $300 billion in assets for the first time. For the year, bond ETFs have taken in $47 billion.

Bonjour Pimco; Au Revoir, Food Truck

Pimco is getting back their food-truck guy. And a Nobel Laureate.

Pacific Investment Management Co. has rehired two employees who left the company earlier in the year, reportedly amid tensions at Pimco that resulted in the departures of co-founder Bill Gross last month and former Chief Executive Mohamed El-Erian earlier this year.

Here’s Pimco’s press release. The Wall Street Journal’s Kirsten Grind characterized the rehires this way:

The move by Pimco demonstrates an effort to rebuild the firm after the departure of Mr. Gross, who left Sept. 26 to run a small mutual fund at rival Janus Capital Group Inc.

One of those returning is Jeremie Banet, a former portfolio manager specializing in Treasury inflation-protected securities and real-return strategies. The Financial Times reported that a frazzled Mr. Banet left Pimco earlier this year for a food truck business, Monsieur Madame — which focuses on Croque Monsieur sandwiches — after a falling out with Mr. Gross. 

Michael Spence, a Nobel Laureate economist, will also return. Mr. Spence worked with Pimco until earlier this year.

The WSJ notes that Pimco saw $23.5 billion in investor outflows in September from the Pimco Total Return fund (PMBIX).

Gold Slumps, Tests $1,200 Level

Gold prices slid toward 2014′s lows on Thursday in the wake of the Federal Reserve’s move to curtail its monthly bond-buying program.

Gold futures tumbled 1.9% to $1,201.90 a troy ounce recently, right near its psychologically significant $1,200 mark. Gold briefly dipped below that level earlier in October for the first time in 2014.

Silver prices were also in a tailspin, extending their drop to four-year lows earlier in the session.

The SPDR Gold Shares (GLD) sank 0.7%, while the iShares Silver Trust (SLV) dropped 3.1%.

Another symptom of falling demand: Holdings in exchange-traded funds backed by physical gold have also continued to slide. The GLD’s gold holdings fell to a six-year low on Wednesday, Reuters reports.

Recent selling precious metals accelerated after the Fed announced that it will end its monthly asset-purchase program this month. While expected, the move gave further support for the U.S. dollar. That’s bad news for gold prices since the yellow metal is traded in dollars and therefore becomes more expensive in other countries.

Traders on Wednesday also are circulating a report from Citigroup’s economists led by Willem Buiter, who cut their global inflation forecast for 2015 by 0.3 percentage points, “the sharpest monthly cut since 2009,” the report says.

“We expect that inflation in 2015 will undershoot central bank forecasts in a range of [advanced economies], including the US, euro area, Japan and UK”

Reduced expectations for inflation diminishes gold’s the appeal as a hedge against runaway prices.

There’s no quarter for shares of mining companies in the latest swoon. The Market Vectors Gold Miners ETF (GDX) extended Wednesday’s slide, down 3.9% on Thursday; the Market Vectors Junior Gold Miners ETF (GDXJ) slumped 2.7%.

ETF Market Vital Signs: October 29

Daily Performance:

• SPDR S&P 500 ETF Trust (SPY): -0.15%
• iShares Russell 2000 ETF (IWM): -0.24%
• PowerShares QQQ (QQQ): -0.37%
• iShares MSCI EAFE ETF (EFA): -0.76%
• Vanguard FTSE Emerging Markets ETF (VWO): -0.19%
• SPDR Gold Shares (GLD): -1.43%
• Vanguard Total Bond Market (BND): -0.17%
• iShares 20+ Year Treasury Bond ETF (TLT): +0.23%

Unusual ETF Volumes Versus 30-day Average (Source: FactSet)

• PowerShares DB Energy Fund (DBE) –- 438%

• Schwab U.S. Mid-Cap ETF (SCHM) –- 350%

• iShares 10+ Year Credit Bond ETF (CLY) — 290%

• Market Vectors EM Local Currency Bond ETF (EMLC) — 269%

• SPDR Retail ETF (XRT) — 287%

Wednesday’s Total Consolidated Volume in Dollar Terms: $304 billion (Five-Day Average: $277 billion; Month-to-Date Average: $329 Billion)

Miner ETFs Tumble to Multiyear Lows

The Federal Reserve’s move to end its long-running bond-purchase program is slamming gold prices and shares of companies that mine precious metals.

Wednesday’s 4.3% swoon to $19.64 in the Market Vectors Gold Miners ETF (GDX) drives the ETF under $20 a share for the first time since October 2008, during the depths of the financial crisis.

The Global X Silver Miners ETF (SIL), falls 3.5% to close at $9.67, its lowest finish since its launch in April 2010.

The Market Vectors Junior Gold Miners ETF (GDXJ) was battered for a loss of 7.2%.

Miner stocks and gold prices extended their losses after the Fed’s announcement that it will wind down its “QEIII” program at the end of the month.

The SPDR Gold Shares (GLD) dropped 1.4% to $116.41.

The Fed’s move, while expected, was paired with a more upbeat assessment of the U.S. labor market. Those factor at once damp gold’s appeal versus income-generating assets, as a hedge against inflation and as a haven from economic uncertainty.

The Wall Street Journal’s Ira Iosebashvili explains the relationship:

The prospect of tighter monetary policy has hurt prices for gold, which struggles to compete with yield-bearing investments when interest rates rise. At the same time, gold’s attractiveness as a shelter from economic uncertainty has been dulled as the U.S. recovery ramps up.

GDX started marched through the first 2 1/2 months of 2014 with big gains, but has fallen roughly 28% over the past two months.

Facebook Effect Weighs Heavily on Niche ETFs

The social network is mucking up the performance of a good many niche exchange-traded funds this morning.

Facebook (FB) and its $197 billion market capitalization has blossomed into the fourth-largest holding on the Nasdaq-100 index, behind only Apple (AAPL), Microsoft (MSFT) and Google (GOOG). Indeed, joining that index early was a requisite for Facebook’s infamous initial public offering to list on the Nasdaq Stock Market.

So a stock drop of 5.9% after Tuesday’s earnings report weighs heavily on a broad swath funds.

Nasdaq-100 tracking PowerShares QQQ (QQQ), which drops 0.4% on an otherwise flat day for the broader market.

It’s worse for social-media-focused funds, of course. Facebook is the top holding (13.35% weight) in the Global X Social Media ETF (SOCL) and the First Trust Dow Jones Internet Index Fund (FDN) (10.69%). Those ETFs are lower by 2.1% and 1.2%, respectively.

Facebook also takes the top slot in the First Trust US IPO Index Fund (FPX), which was able to sidestep Twitter’s post-earnings tumble on Tuesday. That ETF is down 1.1%.

Facebook was the sixth-largest holding (2.84%) a in the $108.5 billion Fidelity Contrafund (FCNTX) the last time the fund company lifted the curtain on its holdings.

RiverFront Adds to Stock ETF Holdings

RiverFront Investment Group, a leading player in the field of ETF managed portfolios, says it swapped bond ETFs for stock ETFs during the recent market plunge.

RiverFront, which recently claimed $4.7 billion in assets for its global ETF portfolios, published a question-and-answer-style report this week to address how the firm recently moved the dials on its investments.

RiverFront’s top holdings at the end of June were:

• WisdomTree LargeCap Dividend Fund (DLN)
• FTSE Europe ETF (VGK)
• SPDR Barclays Short Term High Yield Bond ETF (SJNK)

Below are select excerpts are from a note sent to clients earlier this week by Rod Smyth, RiverFront’s chief investment strategist; Bill Ryder, director of quantitative strategy; and Ken Liu, global macro strategist. Emphasis is mine.

Q: We look to RiverFront to manage both risk and returns. Why did you not raise cash recently?

A: We have had minimal amounts of cash since Sept. 30, 2012. Since then, the S&P 500 has risen 37%. Our short-term risk management tools have suggested pullbacks, but not of magnitude that would justify the turnover and challenges of successfully selling and buying back. That is still our view.

Q: What were the key messages of your recent trade? Are you changing your view on Europe/International?

A: After a successful test of key support for the S&P 500, we purchased approximately five percentage points of additional equity assets in most portfolios and reduced fixed income. We focused our buying on core U.S. stocks (i.e. dividend payers for our growth & income portfolios and large-cap stocks for our growth portfolios). Our “Global Growth” portfolio does not have fixed-income assets so we increased the portfolio’s risk profile by swapping un-hedged international stocks into U.S. micro and small-cap stocks.

We are not changing our view on Europe. … We see currency-hedged exposure to developed international markets as offering the best long-term return potential, but with higher short-term risk. … Longer time frame portfolios got more currency-hedged non-U.S. exposure, shorter time frame portfolios swapped un-hedged Europe for core U.S.

Small-Cap Stocks Take Control