' popularity continues to grow, as increasing number of retail
and institutional investors embrace them in view of their low
cost and convenience, among other reasons. A close look at
ETF fund flows can now fairly indicate market trends and investor
This year has been great so far for U.S. stocks with their
best first-half performance since 1998. However most of these
gains were recorded during the first quarter. While stocks did
manage to continue their uptrend, the second quarter was marked
by increased volatility.
Concerns about 'tapering' of the Fed's massive stimulus-which
had the main driving force behind the market's surge-led to a
spike in bond yields and sell-off in many emerging markets
This year has been bad for gold and the second quarter in
particular was terrible. The precious metal tumbled more than
25%--its biggest quarterly price decline in recent history-as a
rising US dollar and prospects of QE slowdown took off some of
its shine. As investors rushed for exits, once ultra-popular Gold
ETF (GLD) lost $11.6 billion in assets, making it the most
unpopular ETF during the quarter.
Below we take a look at the top
during the second quarter.
The Sun continues to shine on Japan ETFs
It appears that aggressive expansionary measures taken by
the Abe government, including "unlimited" easing in order to
weaken the currency, make exports competitive and pull the
country out of its deflationary spiral, are delivering results.
Japan's GDP grew at an annualized rate of 3.5% during the first
quarter of 2013, up sharply from 1% growth recorded during the
previous quarter and substantially stronger than estimates.
Recent economic numbers including industrial production and
consumer spending suggest that the growth momentum continued in
the second quarter too. (Read:
DXJ or DBJP-which is the better hedged Japan
Though long lasting results will depend on how policymakers
address the underlying structural problems that have been
affecting the economy for decades, investors have been positive
on Japan's turnaround.
Japan Hedged Equity Fund (
-which provides exposure to Japan's equity market but hedges the
currency risk-was the top asset gainer for the second quarter
too, after a very impressive performance in the first quarter. It
gained $4.2 billion in AUM during the quarter.
iShares Japan ETF (
came in at the second place, adding $3.5 billion to its asset
Financial ETFs gain assets as the sector outlook
Financials are expected to continue as one of the top
performing sectors in the coming months.
estimates, finance sector earnings are expected to increase
19.1% during the second quarter from the prior-year quarter.
Banks are in the best position to benefit in the current
environment of rising longer-term rates and steepening yield
curve. A steepening yield curve means that banks can borrow at
very low rates and lend at much higher rates so it improves
banks' net interest margin.
Higher interest rates also benefit insurance companies as they
are able to earn higher returns on their investment portfolio.
Buy these ETFs for improved insurance sector
Another reason to be bullish on the financial sector is its
potential for increasing dividends and buybacks.
It's thus no surprise that the most popular financial ETF-
Financial Sector Select SPDR ETF (
gathered about $2.1 billion during the quarter-making it the
third largest asset gainer.
Rate increase worries benefit Bank Loan and Short
Duration Bond ETFs
Due to concerns about the Fed finally scaling down its asset
purchases, interest rates have been going up in the past few
weeks. 10 year treasury yield touched 2.69% this
morning, the highest since August 2011.
As interest rates continued to inch up, investors have been
switching to shorter duration products or other products like
Senior Loans ETFs that provide protection against interest rate
Winning ETF Strategies for the second half
Senior loans are floating rate loans so they usually pay a
spread over some benchmark rate like LIBOR. Thus, in the
event of rise in interest rates, coupons on senior loans increase
while the value of the investment remains stable. On the other
hand, bonds lose value if the interest rates go up.
So, investors in senior loans or in senior loans ETFs get the
benefit of high yields with protection against any interest rate
rise. Further, they carry lower credit risk compared with most
other assets with similar level of yield. Additionally
senior loans have low correlations with other asset
PowerShares Senior Loan ETF (
increased its AUM by $1.6 billion during Q2-putting it in the
fourth spot from the top.
Many investors moved to shorter duration bond ETFs, which are
less sensitive to interest rate changes.
iShares 1-3 Treasury Bond ETF (
with an effective duration of just 0.47 has lost only 0.02%
year-to-date, which looks very respectable compared with about
8.5% loss for theBarclays 20+ years treasury bond ETF (
). SHV was the fifth most popular ETF during the quarter, judging
by its AUM gains of $1.5 billion.
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PWRSH-SNR LN PR (BKLN): ETF Research Reports
WISDMTR-J HEF (DXJ): ETF Research Reports
ISHARS-JAPAN (EWJ): ETF Research Reports
ISHARS-SH TB (SHV): ETF Research Reports
SPDR-FINL SELS (XLF): ETF Research Reports
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